NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REFERENCES TO THE COMPANY
Unless context otherwise indicates, the terms we, us, our, Comstock, or the Company mean Comstock Mining Inc., and its subsidiaries on a consolidated basis.
DESCRIPTION OF THE BUSINESS
Comstock innovates technologies that contribute to global decarbonization and circularity by efficiently converting massive supplies of under-utilized natural resources into renewable fuels and electrification products that contribute to balancing global uses and emissions of carbon. We intend to use our technologies to build, own, and operate a fleet of advanced carbon neutral extraction and refining facilities, to sell of complimentary process solutions and related services, and to provide license rights to qualified strategic partners.
Our strategic plan is based on innovating and using our technologies and the renewable energy products that they enable to reduce reliance on long cycle fossil fuels, to shift to and maximize throughput of short cycle fuels, and to lead and support the adoption and growth of a highly profitable, balanced worldwide short cycle ecosystem that continuously offsets, recycles, and contributes to neutralizing global carbon emissions by rapidly growing and replenishing vast quantities of feedstock for renewable circular fuels. We also make strategic and other investments that contribute to our mission of enabling systemic decarbonization and help to realize our vision of a net zero carbon world..
Comstock historically focused on natural resource exploration, development, and production, with an emphasis on mining gold and silver resources from its extensive contiguous property holdings in the historic Comstock and Silver City mining districts in Nevada (collectively, the “Comstock Estate”). Between 2012 and 2021, we mined and processed about 2.6 million tons of mineralized material from the Comstock Mineral Estate, producing 59,515 ounces of gold and 735,252 ounces of silver. During 2020 and 2021, we completed a series of transactions that were designed to build on our competencies and position us to address and capitalize on the global transition to clean energy. Those transactions primarily included (i) our sale of Comstock Mining LLC, the owner of our Lucerne resource area in Storey County, Nevada, and related permits, (ii) our acquisitions of 100% of Comstock Innovations Corporation (F/K/A Plain Sight Innovations Corporation), 100% of Comstock Engineering Corporation (F/K/A Renewable Process Solutions, Inc.), 100% of MANA Corporation, and 90% of LINICO Corporation, (iii) our acquisition of intellectual property assets from FLUX Photon Corporation, and (iv) our purchase of 48.19% of Quantum Generative Materials LLC, 25% of Mercury Clean Up LLC, 50% of MCU Philippines, Inc. and 25% of Pelen Limited Liability Company. Collectively, these transactions added the management, employees, facilities, intellectual properties, and other assets we needed to restructure and transform our Company and business into an emerging leader in the innovation and sustainable production of renewable energy products, including cellulosic fuels and electrification metals. Additional information on these transactions is provided in Note 2, Acquisitions and Investments.
CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements herein are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Comstock Mining Inc. and its wholly-owned subsidiaries which include the following:
•Comstock Innovations Corporation (formerly Plain Sight Innovations Corporation) ("Comstock Innovations") since its acquisition in September 2021;
•Comstock Fuels Corporation ("Comstock Fuels");
•Comstock Metals Corporation ("Comstock Metals"), owner of 90% of LINICO Corporation since its acquisition on December 30, 2021, fully included 100% in the consolidated financial statements ;
•Comstock Engineering Corporation (formerly Renewable Process Solutions, Inc.) ("Comstock Engineering") since its acquisition in June 2021;
•Comstock IP Holdings LLC (formerly Plain Sight Innovations LLC) (“Comstock IP Holdings”), since its acquisition in September 2021;
•Comstock Royalty Holdings LLC (“CRH”);
•Comstock Exploration and Development LLC (“CED”);
•Comstock Northern Exploration LLC (“CNE”);
•Comstock Processing LLC (“CP”);
•Comstock Real Estate, Inc. ("CRE");
• Downtown Silver Springs LLC (“DTSS”);
•Comstock Industrial LLC (“CI”);and
•MANA Corporation, since its acquisition in July 2021;
All significant intercompany balances and transactions have been eliminated on a consolidated basis for reporting purposes.
SEGMENT INFORMATION
We evaluate a reporting unit by first identifying its operating segments. The chief operating decision maker ("CODM") over the segments is the Executive Management Committee. We then evaluate each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, we evaluate those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, we determine if the segments are economically similar and, if so, the operating segments are aggregated. We have the following two segments and reporting units: production and sale of renewable energy products and strategic and other investments. While sales for our renewable energy products segment have just commenced with certain engineering services sales, we organize and operate each segment as a distinct business. Our renewable energy products segment will sell biomass-derived carbon neutral oil, ethanol, gasoline, renewable diesel, jet fuel, marine fuel, and other renewable replacements for long cycle fossil derivatives, intermediates and precursors thereto, and derivatives thereof; lithium, graphite, nickel, cobalt, copper, aluminum, and other metals, as well as derivative electrification products extracted from lithium ion batteries and other residues produced throughout the electrification supply chain; an array of design, engineering, fabrication, procurement, and construction solutions; and, rights to selected technologies to qualified, third-party licensees in exchange for license and royalty fees. Our strategic and other investments segment includes all other activities, including real estate, mining and our equity method investments, which will generate gains based on the extent to which we are successful in selling or otherwise monetizing invested assets for amounts which exceed our cost basis. Each segment will likewise have a distinct cost structure with dedicated management personnel with reporting responsibility to the Company’s senior management team. The Company accumulates discrete financial information for each segment, for review as distinct operating segments, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed on a segment specific basis. Discrete financial information is available for each operating segment (See Note 20, Segment Reporting).
BUSINESS COMBINATIONS
The Company applies the acquisition method of accounting for business combinations to all acquisitions where the Company gains a controlling interest, regardless of whether consideration was exchanged. With respect to business combinations, the Company (a) recognizes and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, (c) discloses the nature and financial effects of the business combination. Accounting for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of the fair value of consideration transferred and the net acquisition-date fair values of the assets acquired and liabilities assumed. While the Company uses our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates inherently are uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets, including intangible assets acquired and liabilities assumed with corresponding offsets to goodwill. Upon the conclusion of the measurement period or final determination of the values of
assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Deferred tax liabilities (“DTLs”) created in business combinations for the difference between the historical carryover basis of assets for tax purposes and the stepped-up fair value basis for book purposes are recognized as an increase to goodwill.
ASSET ACQUISITIONS
The cost of a group of assets acquired in an asset acquisition includes the carrying amount of any previously held equity interest, the fair value of any noncontrolling interests, and the fair value of any consideration transferred at the date of acquisition. The cost is allocated to the individual assets acquired or liabilities assumed based on their relative fair values and goodwill is not recognized. If it is determined that the cost of the acquisition exceeds the fair value of the assets acquired, the difference is allocated pro rata on the basis of relative fair values to increase certain of the assets acquired. All identifiable assets, including intangible assets, are identified and recognized. DTLs created in asset acquisitions for the difference between the historical carryover basis for tax purposes and the stepped-up fair value basis for book purposes are calculated using a simultaneous equation under the gross up approach and recognized as an increase to the assets to which they relate.
VARIABLE INTEREST ENTITIES
A variable interest entity (“VIE”) refers to a legal business structure wherein an investor has a controlling interest despite not having a majority of voting rights, including when the entity invested in is thinly capitalized and its equity is not sufficient to fund its activities without additional subordinated financial support. An investor in a VIE has a controlling interest if the investor is determined to be the primary beneficiary of the VIE, defined as having the (i) power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, or (ii) obligation to absorb losses of the VIE that could potentially be significant to the VIE, or (iii) right to receive benefits from the VIE that could be significant to the VIE. The Company has investments in Quantum Generative Materials LLC (“GenMat”) and Sierra Springs Opportunity Fund, Inc. (“SSOF”), that the Company has determined to be VIEs. The Company has also determined that the Company does not have a controlling interest in any of these companies, as the Company does not meet the definition of primary beneficiary cited above. Accordingly, the accounts of these companies are not included in our Consolidated Financial Statements. The Company has an investment in Sierra Springs Opportunity Fund, Inc. (“SSOF”), of which the Company's CEO is an executive (see Note 2, Acquisitions and Investments). Management concluded that SSOF is a VIE of the Company because the Company has both operational and equity risk related to SSOF, and SSOF currently has insufficient equity at risk. Management also concluded that the Company is not the primary beneficiary of SSOF because no one individual or entity has unilateral control over significant decisions and decisions require the consent of all investors. As the Company is not the primary beneficiary, SSOF is not consolidated. At December 31, 2021 and December 31, 2020, the Company’s investment in SSOF is presented on the consolidated balance sheets as a non-current investment. At December 31, 2021, the Company’s maximum exposure to loss as a result of its involvement with SSOF is limited to its investment of $335,000 and the advances of $4,935,000.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Financial Statements are prepared on the going concern basis of accounting that assumes the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has had recurring net losses from operations and had an accumulated deficit of $245.5 million at December 31, 2021. For the year ended December 31, 2021, the Company recognized a net loss of $24.6 million and cash and cash equivalents increased by $3.5 million from $2.4 million at December 31, 2020 to $5.9 million at December 31, 2021. The Company intends to fund our operations over the next twelve months from (i) existing cash and cash equivalents, (ii) sales of engineering services and technology licenses (iii) the repayment of advances from SSOF, (iv) planned sales of Tonogold Resources, Inc. ("Tonogold") common shares and other Tonogold reimbursements and (v) sales of equity securities. Based on these expected funding sources, management believes the Company will have sufficient funds to sustain our operations and meet our commitments under our investment agreements during the 12 months following the date of issuance of the Consolidated Financial Statements included herein. While the Company has been successful in the past in obtaining the necessary capital to support our operations, including registered equity financings from our existing shelf registration statement, borrowings and other means, there is no assurance the Company will be able to obtain additional equity capital or other financing, if needed. Risks to our liquidity include future operating expenditures above management’s expectations, including but not limited to exploration, pre-development, research and development, selling, general and administrative, and investment related expenditures in excess of planned proceeds from the sale of Tonogold securities, repayment of advances to SSOF, the sale of the Silver Springs Properties, and amounts to be raised from the issuance of equity under our existing shelf registration statement. Declines in the market value of properties held for sale, or declines in the share price of our common stock would also adversely affect our results of operations, financial condition and cash flows. If the Company is unable to obtain any necessary additional funds, this could have an immediate material adverse effect on liquidity and raise substantial doubt about our 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 investments, 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.
USE OF ESTIMATES
In preparing GAAP financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and related income, costs, expenses, receipts and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may pertain to:
•impairment of equity investments;
•notes receivable accounted for at fair value or amortized cost;
•discount rates on non-interest bearing notes receivable;
•derivative assets and liabilities;
•the useful lives and valuation of properties, plant and equipment;
•carrying values of assets held for sale and mineral rights;
•realization of net deferred tax assets;
•fair values of net assets acquired;
•useful lives of intangible assets;
•impairment of intangibles and goodwill;
•reclamation liabilities;
•contingent liabilities;
•revenue contract progress toward completion
•stock-based compensation;
•restricted stock.
CASH, CASH EQUIVALENTS
Cash and cash equivalents include bank deposits and highly liquid investments purchased with maturities of three months or less. Cash deposits with banks may exceed Federal Deposit Insurance Corporation insured limits. At December 31, 2021, the Company held $500,000 in an escrow account related to our investment in LPB and classified as restricted cash. This amount was written off at year-end (see Note 2, Acquisitions and Investments, and Note 22, Subsequent Events).
RECEIVABLES AND CREDIT CONCENTRATION
Accounts receivable are uncollateralized, non-interest-bearing customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Accounts receivable in excess of 90 days old are evaluated for delinquency. In addition, we consider historical bad debts and current economic trends in evaluating the allowance for doubtful accounts. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the oldest unpaid invoices. Management reviews valuation allowances on a quarterly basis.
INVESTMENTS
Investments in Debt and Equity Securities
From time to time, the Company holds investments in the form of debt securities and other instruments, and equity securities.
Investments in debt are classified as trading, available for sale or held to maturity. In certain cases we elect to record the investment under the fair value option. Upon sale of a debt security, the realized gain or loss is recognized in current earnings. At the end of each reporting period, the Company considers whether impairment indicators exist to evaluate if a debt investment security or loan is impaired and, if so, record an impairment loss (see Note 2, Acquisitions and Investments, and Note 15, Fair Value Measurements).
Investments in equity securities are generally measured at fair value. Gains and losses for equity securities resulting from changes in fair value are recognized in current earnings. If an equity security does not have a readily determinable fair value, the Company may elect to measure the security at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer. At the end of each reporting period, the Company reassesses whether an equity investment security without a readily determinable fair value
qualifies to be measured at cost less impairment, consider whether impairment indicators exist to evaluate if an equity investment security is impaired and, if so, record an impairment loss.
Investments in Joint Ventures and Other Companies
Investments in companies and joint ventures for which the Company has the ability to exercise significant influence, but do not control, are accounted for under the equity method. Under the equity method of accounting, our share of the net earnings or losses of the investee are included in other income (expense) in the consolidated statements of operations. Upon investment, the Company assesses whether a step up in the basis of the investee's net assets has occurred and, if so, adjust our share of net earnings or losses by related depreciation and amortization expense. At the end of each reporting period, the Company considers whether impairment indicators exist to evaluate whether an equity method investment is impaired and, if so, record an impairment loss. Investments are accounted for on a one-quarter lag.
INTANGIBLE ASSETS
Purchased intangible assets represent the estimated acquisition date fair value of acquired intangible assets used in our business. Intangible assets with definite lives are amortized over their estimated useful lives. We amortize definite-lived intangible assets on a straight-line basis, generally over periods ranging from one to ten years. Costs incurred to renew or extend the life of our intangible assets are capitalized.
We review purchased intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. We review indefinite-lived intangibles for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or asset group are expected to generate. If the carrying value of the assets or asset group are not recoverable, impairment is measured and recorded as the amount by which the carrying value exceeds its fair value.
GOODWILL
Goodwill represents the cost in excess of the consideration paid over the fair value of net assets acquired in a business combination. The Company allocates goodwill to reporting units based on the expected benefit from the business combination. The Company evaluates our reporting units periodically, as well as when changes in our operating segments occur. For changes in reporting units, the Company reassigns goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level on an annual basis, and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual goodwill impairment tests at December 31.
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 as follows:
| | | | | |
| Level 1 | quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives |
| |
| Level 2 | inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges |
| | | | | |
| |
| Level 3 | unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models |
The carrying values of the Company's reclamation bond deposits approximate its fair value. The carrying values of the Company’s long-term debt approximate their fair values based upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available.
DERIVATIVE INSTRUMENTS
Derivative instruments are recognized as either assets or liabilities on the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use. Changes in the fair value of derivative instruments are recorded in current earnings. The Company evaluates and accounts for embedded derivatives in its financial instruments based on three criteria that, if met, require bifurcation of embedded derivatives from their host instruments and accounting for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not required to be re-measured at fair value and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument, and is shown at its fair value at each balance sheet date and recorded as an asset or liability with the change in fair value recorded in current earnings.
PROPERTIES, PLANT AND EQUIPMENT
The Company records properties, plant and equipment at historical cost. The Company provides depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. The Company capitalizes expenditures for improvements that significantly extend the useful life of an asset. When an asset is sold, the Company recognizes a gain (loss) in the consolidated statements of operations based upon the proceeds received on the sale less the net carrying value of the asset. The Company charges 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 |
The Company reviews the carrying amount of our property, plant and equipment for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future undiscounted cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.
RECLAMATION LIABILITIES AND ASSET RETIREMENT OBLIGATIONS
Minimum standards for site reclamation and closure have been established for us by various government agencies and contractual obligations with lessors. Asset retirement obligations are recognized when an obligation is incurred, either through regulatory requirements in the jurisdictions in which we operate or by contractual obligation with one of our lessors, and recorded as liabilities when a reasonable estimate of fair value can be determined. An expected present value technique is used to estimate the fair value of the liability. This includes inflating the estimated costs in today’s dollars using a reasonable inflation rate up to the date of expected retirement, and discounting the inflated costs using a credit-adjusted risk-free rate. Upon initial recognition of the liability, the carrying amount of the related long-lived asset is increased by the same amount. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is amortized over the life of the related asset.
Changes resulting from revisions to the timing or amount of the original estimate of undiscounted cash flows are recognized as either an increase or a decrease in the carrying amount of the liability for an asset retirement obligation and the related asset
retirement cost capitalized as part of the carrying amount of the related long-lived asset. Upward revisions of the amount of undiscounted estimated cash flows are discounted using the current credit-adjusted risk-free rate. Downward revisions in the amount of undiscounted estimated cash flows are discounted using the credit-adjusted risk-free rate that existed when the original liability was recognized. When asset retirement costs change as a result of a revision to estimated cash flows, the amount of the asset retirement cost is adjusted and allocated to expense in the period of the change if the change affects that period only or in the period of change and future periods if the change affects more than one period. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligations. Separately, the Company accrues costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable.
MINERAL RIGHTS AND PROPERTIES
The Company capitalizes acquisition costs until the Company determines the economic viability of the property. Since the Company does not have proven and probable reserves as defined by Securities and Exchange Commission ("SEC") regulation S-K 1300, exploration expenditures are expensed as incurred. The Company expenses mineral lease costs and repair and maintenance costs as incurred. The Company reviews the carrying value of our properties for impairment, including mineral rights upon the occurrence of events or changes in circumstances that indicate the related carrying amounts may not be recoverable. Our estimate of precious metal prices, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in all of our properties. Although the Company has made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our properties and mineral claims, and possibly require future asset impairment write-downs. Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, the Company assesses recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. The Company uses the units-of-production method to deplete the mineral rights and mining properties when in operations.
TREASURY STOCK
When the Company’s stock is acquired for purposes it is initially valued at cost and presented as treasury stock. Other than formal or constructive retirement or when ultimate disposition has not yet been decided, the cost of the acquired stock is presented as treasury stock separately as a deduction from the total of common stock, additional paid-in capital and retained earnings. Gains on sales of treasury stock not previously accounted for as constructively retired are credited to additional paid-in capital, and losses are charged to additional paid-in capital to the extent that previous net gains from sales or retirements of the same class of stock are included therein, with the remainder charged to retained earnings. When the Company's stock is retired or purchased for constructive retirement, any excess purchase price over par value is allocated between additional paid-in capital to the extent that previous net gains from sales or retirements are included therein, and the remainder to retained earnings.
REVENUE RECOGNITION
Renewable Energy Products Segment
For the majority of our operations, services revenues are recognized when services are performed and are contractually billable. For service contracts, principally engineering and construction management service, we recognize revenue over a period of time based on estimated progress toward completion. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using an estimate of the stand-alone selling price of each distinct service in the contract. Revenue recognized on service contracts that has not been billed to clients is recorded as contract assets. Amounts billed to clients in excess of revenue recognized on service contracts to date are recorded as contract liabilities. Customer payments are typically due within 30 to 45 days of billing, depending on the contract.
Strategic and Other Investments
We generate rental revenues from tenants via long-term lease contracts in various forms, including lease and sublease agreements. Providing access to the leased land and facilities, and performing specified repair and maintenance services over the length of the tenant contract term represent our performance obligations under our tenant contracts. Tenant rental payments are typically due monthly or quarterly, depending on the contract.
STOCK-BASED COMPENSATION
All transactions in which goods or services are received for the issuance of shares of our common stock or options to purchase shares of our common stock are accounted for based on the fair value of the equity interest issued. The fair value of shares of common stock is determined based upon the closing price per share of our common stock on the date of issuance and other applicable inputs. The Company recognizes stock-based compensation for common stock grants evenly over the related vesting period. The fair value of market condition performance share awards is determined based on path-dependent valuation techniques and inputs including the closing price per share of our common stock at date of grant, volatility and the risk-free interest rate. The Company recognizes stock-based compensation for market condition performance share awards evenly over the derived service period resulting from the path-dependent valuation. The fair value of performance condition share awards is determined based on the closing price per share of our common stock at date of grant and the probability of achieving the performance condition during the term of the award agreement. The Company recognizes stock-based compensation for performance condition share awards evenly over the term of the award agreement. The Company recognizes forfeitures of unvested common stock, performance shares and stock option grants as they occur.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2021 financial statement presentation. Reclassifications had no effect on net income (loss), stockholders' equity, or cash flows as previously reported.
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 or refunded. Significant judgments and estimates are required in determining the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and the assumptions are consistent with the plans and estimates that the Company is using to manage its 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. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company evaluates its tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. No reserve for uncertain tax positions has been recorded.
INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Dilutive income (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.
RELATED PARTIES AND TRANSACTIONS
The Company identifies related parties, and accounts for and discloses related party transactions. Parties, which can be entities or individuals, are considered to be related if either party has the ability, directly or indirectly, to control or exercise significant influence over the other party in making financial and operational decisions. Entities and individuals are also considered to be related if they are subject to the common control or significant influence of another party (See Note 3, Notes Receivable and Advances, Net and Note 21, Related Party Transactions).
LEASES
The Company determines if a contract is or contains a lease at its inception and evaluates if a contract gives the right to obtain substantially all of the economic benefits from use of an identified asset and the right to direct the use of the asset, in order to determine if a contract contained a lease. The Company has two existing lease contracts one classified as an operating lease contract and one finance lease. For these leases, the Company recognized a right-of-use asset and a corresponding lease liability on its consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent obligations by the Company to make lease payments which arise from a lease. Lease right-
of-use assets and liabilities are recognized at the inception date based on the present value of lease payments over the lease term. As the Company’s lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the inception date in order to determine the present value of lease payments. For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial right-of-use asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less, lease payments are recognized on a straight-line basis over the lease term and are not recognized on the consolidated balance sheets.
COVID-19
The outbreak in 2020 of the novel coronavirus (“COVID-19”) resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, including the implementation of social distancing measures, quarantine periods and travel bans, have caused material disruptions to many businesses and negatively impacted economic activities. Global equity markets have experienced significant volatility. 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 interventions. For nearly two years in Nevada, local governments, state health officials, emergency managers, local health authorities and community partners have come together in a statewide response to COVID-19. Processes continue to be in place to support testing, contact tracing, disease investigation and vaccine rollout in communities throughout the state. On January 18, 2022, Nevada Health Response provided an update on county risk levels as posted by the Centers for Disease Control and Prevention (CDC). As of that date, all Nevada counties were listed as high risk of transmission. Cases continued to increase rapidly across the state with the recent omicron variant surge. According to Directive 045 signed by Nevada Governor Steve Sisolak, everyone, regardless of vaccination status, will be required to wear masks in indoor settings again. On February 10, 2022, after a marked decline in new omicron variant cases, Nevada Governor Steve Sisolak announced that the state was dropping its statewide mask mandate, "effective immediately". We are operating in alignment with these guidelines for protecting the health of our employees, partners and suppliers.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In March 2021, the FASB issued ASU 2021-07 (Topic 323), Investments – Equity Method and Joint Ventures. The new guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The guidance is effective for fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the possible impact of ASU 2021-07, but does not anticipate that it will have a material impact on the Company's consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
NOTE 2 ACQUISITIONS AND INVESTMENTS
Acquisition of Comstock Innovations Corporation (F/K/A Plain Sight Innovations Corporation)
On September 7, 2021, we acquired 100% of the issued and outstanding equity and voting shares of Comstock Innovations Corporation (F/K/A Plain Sight Innovations Corporation) (“Comstock Innovations”), in exchange for 8,500,000 restricted shares of our common stock with a fair value of $14,952,806 (see Note 15, Fair Values Measurements). We incurred $28,825 of legal expense in connection with the acquisition, that has been recognized as selling, general and administrative expense on the consolidated statements of operations for the year ended December 31, 2021.
The PSI acquisition brings an array of patented, patent-pending and proprietary process technologies that were designed to convert low cost, ubiquitous woody biomass feedstocks into renewable fuels and other carbon neutral alternatives for fossil fuel derivatives. Comstock Innovations operates a commercial pilot cellulosic fuel facility that converts woody biomass into cellulosic ethanol and co-product precursors for renewable diesel and other carbon neutral alternatives to fossil fuels.
In connection with the Comstock Innovations closing, the Company agreed to appoint a designee of one of the former shareholders of Comstock Innovations, Triple Point Asset Management LLC (“TPAM”), to the Company’s board of directors and as Comstock’s president and chief financial officer, and agreed to appoint a designee of another one of the former shareholders of Comstock Innovations, Global Catalytic Disruptor Fund LLC (“GCDF”), to serve as Comstock’s chief technology officer. TPAM’s appointee is Kevin Kreisler, the beneficial owner and sole manager, executive officer and director of TPAM. GCDF’s appointee is David Winsness, the beneficial owner and sole manager, executive officer and director of GCDF.
The Comstock Innovations purchase price consideration and provisional allocation to net assets acquired is presented below:
| | | | | |
| Fair value of consideration transferred: | |
| |
Comstock shares of common stock issued (8,500,000 at $1.76 per share) | $ | 14,952,806 | |
| Loans to Plain Sight Innovations LLC prior to acquisition | 1,423,328 | |
| Total fair value of consideration transferred | 16,376,134 | |
| |
| Recognized amounts of identifiable assets acquired | |
| |
| Cash and cash equivalents | $ | 100,147 | |
| Intangible assets - Intellectual property | |
| Developed technologies | 6,579,400 | |
| License agreements | 494,133 | |
| Deferred tax liability | (1,383,942) | |
| Total identifiable assets | 5,789,738 | |
| |
| Goodwill | $ | 10,586,396 | |
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise from the acquisition of PSI. The goodwill is not deductible for tax purposes. All of the $10,586,396 goodwill was assigned to the Renewable Energy Products segment.
From the acquisition date through December 31, 2021, Comstock Innovations recognized no revenue and incurred a loss before deferred income tax benefit of $1,303,969. There are no nonrecurring pro forma adjustments directly attributable to the business combination other than the deferred tax benefit included in the reported pro forma earnings.
The pro forma financial information below represents the combined results of operations for the year ended December 31, 2021 as if the acquisition had occurred as of Comstock Innovations' March 1, 2021 date of incorporation, with pro forma amortization expense related to acquired intangible assets included from January 1, 2021. The unaudited pro forma financial information is presented for informational purposes only and is neither indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the period presented nor indicative of future operating results.
| | | | | |
| (Unaudited) |
| |
| December 31, 2021 |
| |
| Revenue | $ | 868,165 | |
| |
| Net loss | $ | (25,777,145) | |
Acquisition of Assets from FLUX Photon Corporation
On September 7, 2021, we purchased all of the intellectual property assets of PSI’s affiliate, FLUX Photon Corporation (“FPC”), in exchange for performance-based cash payments equal to 20% of our future consolidated Net Cash Flow (as defined in the related Asset Purchase Agreement) up to $18,000,000. The acquired FPC intellectual property includes new approaches to carbon capture and utilization, atmospheric water harvesting, waste heat and energy recovery, industrial photosynthesis for mass scale decarbonization, and the sustainable production of very large agricultural outputs for fractional inputs. On December 10, 2021, the Asset Purchase Agreement was amended to provide for the payment by the Company of a $350,000 down payment against the purchase price, corresponding to a potential performance-based cash payment of $17,650,000 required under the Asset Purchase Agreement. The FPC intangible assets were valued at $9,771,750 at the acquisition date. We have not recorded the purchased assets or related contingent purchase consideration (other than the $350,000 down payment mentioned above), as we have determined the fair value of the intellectual property is not realizable in the foreseeable future, and the contingent purchase consideration is neither probable nor reasonably estimable. The FPC intangible assets will recognized as payments are made under the Asset Purchase Agreement or when payments become probable and reasonably estimable.
Acquisition of MANA Corporation
On July 23, 2021, we acquired 100% of the issued and outstanding equity and voting shares of MANA (“MANA”), an industrial hemp technology development, marketing, and management company, in exchange for 4,200,000 restricted shares of the our common stock with a fair value of $6,528,453 (See Note 15, Fair Value Measurements). Industrial hemp is a natural resource with numerous known applications, including food, feed, fuel, and fiber, and an array of emerging applications in batteries, bioplastics, and other renewable alternatives to fossil fuel derived products. We expect MANA to provide a suite of complementary technology, marketing and other management services, with a focus on acquiring and using pre-existing and new feedstock and offtake arrangements. Following the acquisition, Comstock transferred its ownership interests in LPB to MANA. The purchase consideration for MANA was based on part on MANA's contingent payment obligation equal to 20% of MANA's future Net Cash Flow (as defined in the related agreement) up to $8.6 million. We have not recorded the assumed contingent liability, as we have determined it is neither probable nor reasonably estimable.
The MANA purchase price consideration and provisional allocation to net assets acquired is presented below:
| | | | | |
| Fair value of consideration transferred: | |
| |
Comstock shares of common stock issued (4,200,000 at $1.55 per share) | $ | 6,528,453 | |
| Total fair value of consideration transferred | 6,528,453 | |
| |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| |
| Intangible assets - Customer agreements (Note 9) | $ | 461,528 | |
| Deferred tax liability | (96,921) | |
| Total identifiable net assets | 364,607 | |
| |
| Goodwill | $ | 6,163,846 | |
From the acquisition date through December 31, 2021, MANA recognized $100,000 of revenue and incurred a loss before deferred income tax benefit of $13,442,547 (including impairment of goodwill and intangible assets of $6,394,610 and a $6,300,000 decrease in the fair value of the LPB derivative asset). There are no nonrecurring pro forma adjustments directly attributable to the business combination other than the deferred tax benefit included in the reported pro forma earnings.
The pro forma financial information below represents the combined results of operations for the year ended December 31, 2021, as if the acquisition had occurred as of MANA’s February 16, 2021 date of incorporation, with pro forma amortization expense related to acquired intangible assets included from January 1, 2021. The unaudited pro forma financial information is presented for informational purposes only and is neither indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the period presented nor indicative of future operating results.
| | | | | |
| (Unaudited) |
| |
| December 31, 2021 |
| |
| Revenue | $ | 862,165 | |
| |
| Net loss | $ | (24,756,693) | |
The Company fully impaired the MANA intangible asset related to the LPB contract, which was terminated during the first quarter 2022 and recognized an impairment loss of $230,764 in other income (expenses) in the statement of operations during the year ended December 31, 2021 in the renewable energy products segment. The Company assessed the remaining value in the MANA reporting unit and determined the fair value to be nominal. The fundamental economic substance of the MANA acquisition was related to the management team’s ability to develop the hemp business through the LPB contract. With the loss of LPB, the assumptions underlying the value assigned in the purchase price allocation of MANA have changed significantly, resulting in a full loss in the value of goodwill totaling $6,163,846 related to the acquisition. The MANA organization has been redeployed, primarily into Comstock Fuels and other related corporate activities.
Acquisition of Assets in LINICO Corporation
On February 15, 2021, the Company, Aqua Metals, Inc. (“AQMS”) and LINICO entered into a Series A Preferred Stock Purchase Agreement (“February Agreement”). Judd Merrill, a member of the Company’s board of directors, is the chief financial officer of AQMS.
Pursuant to the February Agreement, we purchased 6,250 shares of LINICO Series A 8% Convertible Preferred Stock (“Series A Preferred”) and issued 3,000,000 shares of our restricted common stock with a fair value of $6,750,000 in payment of the purchase price; $6,250,000 of which was in connection with our investment and $500,000 of which was recognized as a related derivative asset (see Note 15, Fair Value Measurements). The Series A Preferred has a conversion price of $1.25 per share of LINICO common stock. Following the purchase of the Series A Preferred, we owned 45.45% of LINICO in substance common shares and 48.78% of voting shares. Our chief executive officer is a member and Chairman of the LINICO board of directors.
Under the February Agreement, we also agreed to make $4,500,000 in cash payments to LINICO (“Cash Commitment”), payable in a series of installments between February 26, 2021 and December 31, 2021. At December 30, 2021, $4,500,000 had been paid, and recorded as adjustment to the derivative asset related to LINICO on the consolidated balance sheets. We incurred $70,273 of legal expense in connection with the LINICO investment and recognized $1,282,336 in equity loss from affiliates for our investment in LINICO prior to December 30, 2021.
On December 30, 2021, the Company entered into an agreement to acquire 3,129,081 LINICO common shares from its former chief executive officer and director equating to 90% ownership. The former chief executive officer resigned from LINICO as a member of its board of directors and in all other capacities, effective as of such date. In connection with the acquisition of such LINICO shares, the Company issued 3,500,000 common shares of the Company (“Comstock Shares”) to the former chief executive officer. If and to the extent that the sale of the Comstock shares results in net proceeds greater than $7,258,162, then the former chief executive officer is required to pay all of such excess proceeds to the Company. If and to the extent that the sale of the Comstock Shares results in net proceeds less than $7,258,162, then the Company is required to pay cash to the former chief executive officer equal to such shortfall. The Company retained the right to purchase the Comstock Shares from the former chief executive officer for the purchase price of $7,258,162 less the amount of cash proceeds received by the former chief executive officer from any previous sale of the Comstock Shares by the former chief executive officer, at any time during or prior to his sale of the Comstock shares. At December 30, 2021, we owned 90% of LINICO's issued and outstanding equity and the remaining 10% was owned by Aqua Metals Inc. (“AQMS”). The fair value of the 1,700,000 shares held by AQMS at the date of acquisitions was $3,400,000, which was calculated at $2.00 per share.
The LINICO purchase price consideration and provisional allocation to net assets acquired is presented below:
| | | | | |
| Fair value of consideration transferred: | |
| |
| Previously held equity interest | $ | 8,140,725 | |
| Cash contributions | 6,025,034 | |
| Common shares | 7,258,162 | |
| Non-controlling interest - fair value | 3,400,000 | |
| Total fair value of consideration and non-controlling interest | $ | 24,823,921 | |
| |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| |
| Cash and cash equivalents | $ | 94,689 | |
| Other current assets | 222,568 | |
| Investment in Green Li-ion | 4,577,000 | |
| Investment in equity securities (Comstock common stock) | 3,870,000 | |
| Properties, plant and equipment, net | 64,000 | |
| Deposits | 3,897,526 | |
| Finance lease right of use asset | 15,033,000 | |
| Intangible assets | — | |
| Developed technologies | 11,803,000 | |
| Lease intangible | 3,622,488 | |
| Trademarks | 6,000 | |
| Accounts payable | (975,357) | |
| Accrued expenses and other liabilities | (97,268) | |
| Finance lease liability | (13,043,499) | |
| Deferred tax liability | (4,250,226) | |
| Total identifiable net assets | $ | 24,823,921 | |
Acquisition of Renewable Process Solutions, Inc.
On June 18, 2021, we acquired 100% of the issued and outstanding equity and voting shares of Comstock Engineering Corporation (F/K/A Renewable Process Solutions, Inc.), a process engineering and renewable technology development company, in exchange for 1,000,000 restricted shares of our common stock, with a fair value of $2,304,806. (See Note 15, Fair Value Measurements).
RPS was acquired to increase our core competencies in process engineering and renewable technology development necessary to facilitate the development and growth of our acquired companies and equity method investments.
The purchase price consideration and provisional allocation to net assets acquired is presented below:
| | | | | |
| Fair value of consideration transferred: | |
| |
Comstock shares of common stock issued (1,000,000 at $2.30 per share) | $ | 2,304,806 | |
| Total fair value of consideration transferred | 2,304,806 | |
| |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| |
| Cash and cash equivalents | 24,385 | |
| Notes receivable, net | 38,459 | |
| Prepaid expenses and other current assets | 4,072 | |
| Intangible assets | |
| License agreements | 16,619 | |
| Customer agreements | 122,885 | |
| Distribution agreements | 19,733 | |
| Accounts payable | (33,882) | |
| Deferred tax liability | (33,440) | |
| Accrued expenses and other liabilities | (56,300) | |
| Total identifiable net assets | 102,531 | |
| |
| Goodwill | $ | 2,202,275 | |
From the acquisition date through December 31, 2021, the Company's revenue and net income before deferred income tax benefit were $983,380 and $426,803, respectively. There are no nonrecurring pro forma adjustments directly attributable to the business combination other than the deferred income tax benefit included in the reported pro forma earnings.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise from the acquisition of RPS. The goodwill is not deductible for tax purposes. All of the $2,202,275 goodwill was assigned to the Renewable Energy Products segment.
The pro forma financial information below represents the combined results of operations for the year ended December 31, 2021 and 2020 as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is presented for informational purposes only and is neither indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the periods presented nor indicative of future operating results.
| | | | | | | | | | | |
| Unaudited | | Unaudited |
| | | |
| December 31, 2021 | | December 31, 2020 |
| | | |
| Revenue | $ | 983,380 | | | $ | 226,630 | |
| | | |
| Net income (loss) | $ | (24,720,177) | | | $ | 14,445,248 | |
Summary of Investments
Our investments are accounted for under the equity method, with one investment accounted for at cost less impairment.
At December 31, 2021 and 2020, our non-current investments include:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Investment | | Ownership % | | Investment | | Ownership % |
| Quantum Generative Materials LLC | $ | 13,645,946 | | | 48.19% | | $ | — | | | —% |
| LP Biosciences LLC | 4,227,587 | | | 50.00% | | — | | | —% |
| Green Li-ion | 4,577,000 | | | 20.00% | | — | | | —% |
| Mercury Clean Up, LLC | 1,975,026 | | | 25.00% | | 2,010,113 | | 15.00% |
| MCU Philippines, Inc. | 499,269 | | | 50.00% | | 323,770 | | | 50.00% |
| Pelen Limited Liability Company | 591,051 | | | 25.00% | | 603,714 | | | 25.00% |
| Total equity method investments | 25,515,879 | | | | | 2,937,597 | | | |
| Sierra Springs Opportunity Fund, Inc., at cost | 335,000 | | | | | 335,000 | | | |
| Total Investments | $ | 25,850,879 | | | | | $ | 3,272,597 | | | |
Summary financial information for affiliated companies (20% to 50%-owned) accounted for by the equity method is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 * | | December 31, 2020 | | | | |
| Current assets | $ | 8,336,962 | | | $ | 1,193,362 | | | | | |
| Non-current assets | 12,985,338 | | | 4,212,385 | | | | | |
| Current liabilities | 3,173,869 | | | 354,009 | | | | | |
| Non-current liabilities | 2,000,000 | | | 1,000,000 | | | | | |
| | | | | | | |
| Revenues | 352,263 | | | 562,500 | | | | | |
| Gross Profit | (74,048) | | | (111,064) | | | | | |
| | | | | | | |
| Net income (loss) and net income (loss) attributable to the entity | $ | (3,730,954) | | | $ | (580,346) | | | | | |
* Information presented as of and for the years ended September 30, 2021 and 2020. All equity method investments are
accounted for on a one-quarter lag.
The excess of our investment values over the net assets of the individual investees is primarily comprised of goodwill. We periodically assess the net assets of our equity method investees and confirm there are no other assets that may require additional adjustments. Significant amounts due to and from equity method investees included in the summarized financial information include the aggregate value of the Company's stock held by investees and any make-whole derivatives of $8 million, which is included in non-current assets and long-term debt due to the Company of $2 million, which is included in non-current liabilities as of December 31, 2021. Long-term debt due to the Company of $1 million is included in non-current liabilities as of December 31, 2020.
Investment in Quantum Generative Materials LLC
On June 24, 2021, we invested in the equity of GenMat, a developer of quantum computing technologies with the goal of accelerating material science discovery and development, and partnering in the commercialization of new quantum generated materials. GenMat is developing a proprietary quantum operating system to harness emerging quantum computing technologies and develop new materials for use in our strategically aligned fields of interest, including global mining, battery recycling, and carbon capture. We incurred $71,659 of legal expense in connection with the GenMat investment, which has been recorded to non-current investments on the consolidated balance sheets at December 31, 2021.
At closing, we received 465,000 membership units and committed $5,000,000 in cash and $10,000,000 in stock for a total of $15,000,000 for the initial seed investment and committed an additional $35,000,000 based upon GenMat’s realization of key development milestones, for up to 50% ownership of GenMat membership units. At December 31, 2021, we have paid $4,250,000 in cash toward the $5,000,000 in scheduled cash commitment, At closing, we issued 3,000,000 restricted shares of our common stock with a fair value of $10,530,000 toward the $10,000,000 required stock purchase price and recorded a $530,000 related derivative asset (see Note 14, Equity and Note 15, Fair Value Measurements). For the year ended December 31, 2021, the Company recorded $675,713 in equity loss from affiliates for the investment in GenMat.
At December 31, 2021, we hold 48.19% of GenMat membership units and 37.50% of voting membership units. We represent 50% of GenMat's governing body, through three of the six voting members of the management committee. Our chief executive officer is a member and chair of the GenMat management committee, along with our president and chief financial officer, and another company designee.
Investment in LP Biosciences LLC
On July 23, 2021, we executed a series of agreements with Lakeview Energy LLC (“Lakeview”) and its subsidiaries, including LP Nutrition LLC ("LPN"), pursuant to which we acquired 50% of the equity of Lakeview’s subsidiary, LPB, and agreed to provide the financing needed to retrofit LPB’s pre-existing industrial scale solvent extraction and valorization facility in Merrill, Iowa (“LPB Facility”), for the production of an array of wholesale products from up to 200,000 pounds per day of industrial hemp. The Company also purchased 500,000 Class A Units, representing 50% of the issued and outstanding voting equity of LP Biosciences LLC (“LPB”), from LPN, a subsidiary of Lakeview Energy LLC. In connection with the foregoing, the Company entered into a Note Purchase Agreement to purchase a secured note with a face value of $17,000,000 from LPB (the “LPB Note”) in exchange for a purchase price of $15,000,000 to fund the completion of the facility retrofit. The Company issued 3,500,000 restricted shares of its common stock with a fair value of $10,800,000, paid $1,076,258 in cash and agreed to pay an initial $1,500,000 in cash in connection with its foregoing equity purchase and financing commitments. The LPB Note was to mature on July 31, 2026, and the interest rate is 13.5% per annum. In connection with the LPB Note, LPB granted a leasehold security interest in the Facility to the Company, subject to a mortgage of approximately $4.6 million on the LPB Facility held by LPB’s landlord for the benefit of the landlord’s lender. The Company, LPN, and LPB simultaneously entered into a Partnership Interest Purchase Agreement and a Limited Liability Company Operating Agreement for LPB, pursuant to which, among other terms, LPB agreed to pay LPN the first $3,000,000 of cash proceeds received from the sale of the Company’s common stock, and a $5,000,000 preferred distribution at the same time and in the same proportion as principal prepayments on the LPB Note, with up to 20% of LPB’s after debt net cash flow commencing 20 days after LPB commences ordinary course operations.
The Company assigned its Class A Units in LPB to MANA upon completion of the LPB transaction. Subsequent to December 31, 2021, on February 28, 2022, the Company and Nutrition mutually agreed to terminate the LPB transaction documents. Upon termination, each of the parties were relieved of their respective rights, liabilities, expenses, and obligations. 3,500,000 restricted shares of the Company’s common stock were transferred back to the Company for cancellation upon receipt. In the first quarter of 2022, the Company incurred expenses of approximately $750,000 in connection with the termination of the transaction documents as of the filing date. As of December 31, 2021, the notes receivable, prepaid assets and other deposits associated with LP Biosciences of $1,076,258 were written off, including $500,000 of restricted cash held in escrow, which LPB had rights to under the termination agreement.
Transactions Involving Comstock Minerals, Sale of Comstock Mining LLC
On January 24, 2019, the Company entered into a membership interest purchase agreement, as amended and restated on September 8, 2020, to sell its interests in Comstock Mining LLC, a wholly-owned subsidiary with sole net assets of the Lucerne properties and related permits (“Comstock Lucerne”), to Tonogold Resources, Inc. ("Tonogold"). The Convertible Preferred Stock ("CPS") became convertible into Tonogold common shares commencing May 22, 2020, at a rate equal to the lower of (1) $0.18 cents per share, or (2) 85% of the 20-day volume weighted average closing price of Tonogold common shares. Tonogold could redeem the CPS prior to conversion, at a redemption price 120% of the face value of the CPS.
On November 18, 2019, 50% of Comstock Lucerne was transferred to Tonogold. The remaining 50% was transferred on September 8, 2020. The Company retained all management control and authority over Comstock Lucerne until Tonogold's membership interests totaled 100%. Accordingly, Tonogold’s membership interests in Comstock Mining LLC were accounted for as a noncontrolling interest in the Company’s Consolidated Financial Statements through September 8, 2020.
On September 8, 2020, the remaining membership interests of Comstock Mining LLC were purchased by Tonogold.
There are two agreements between the Company and Tonogold associated with the September 2020 sale of the membership interests of Comstock Mining LLC: the Membership Interest Purchase Agreement, the Mineral Exploration and Mining Lease, and a Lease Option Agreement for our American Flat processing facility.
Under the two agreements, Tonogold is required to reimburse certain payments made by Comstock including but not limited to all costs associated with owning certain properties, and certain option, interest expense and lease payments.
On March 3, 2021, we made a $812,500 accelerated payment to Northern Comstock pursuant to the Northern Comstock operating agreement. Primarily as a result of the Northern Comstock accelerated payment, the Tono Note was amended in March 2021, which included adding $812,500 for Tonogold’s Northern Comstock accelerated payment reimbursement obligation and an amendment fee of $262,500 to the principal amount of the Tono Note, increasing the principal amount to $5,550,000.
The Note was further amended in June 2021, to add $1.0 million for certain Tonogold, Northern Comstock and other reimbursement obligations and an amendment fee of $100,000 which were added to the principal amount of the Tono Note, increasing the principal amount to $6,650,000 and extending the maturity date to March 31, 2022. A total of $362,500 of amendment fees were recognized as other income in 2021.
The fair value of the consideration delivered by Tonogold in 2019 and 2020 for the membership interests in Comstock Lucerne was $18.8 million, and included cash, CPS, and the Tono Note. The Company's gain on the sale was $18.3 million, recorded during the year ended December 31, 2020 in the consolidated statements of operations. The total consideration received by the Company from Tonogold under the Lucerne Purchase Agreement is summarized in the following table:
| | | | | |
| Fair Value |
| |
| Cash | $ | 7,065,000 | |
| Non-cash items, fair value on date received | |
| CPS | 7,607,263 | |
| Tono Note | 6,141,497 | |
| Contingent forward asset, fair value on settlement date | (1,998,832) | |
| Total consideration | 18,814,928 | |
| Net carrying value of Comstock Lucerne | (539,082) | |
| Net gain on sale | $ | 18,275,846 | |
During 2020, Comstock Lucerne was deconsolidated as a result of completing the sale of the 100% membership interest, which resulted in a decrease in additional paid in capital of $20,499,141 and elimination of the non-controlling interest of $313,854.
The Company recognized a loss on the change in fair value of the CPS of $2,544,000 during the year ended December 31, 2020. During 2020, the Company elected to convert a portion of the CPS with a face value of $3.9 million at $0.18 per common share, for a total of 21.8 million Tonogold common shares. On October 2, 2020, Tonogold redeemed a $2.2 million portion of the CPS for $2.6 million in cash, representing 120% of face value. During the year ended December 31, 2020, the Company sold approximately 5.3 million Tonogold common shares at an average price of $0.3957 per share for gross proceeds of $2,944,929. During the year ended December 31, 2021, the Company sold approximately 4.3 million Tonogold common shares at an average price of $0.1865 per share for gross proceeds of $798,313.
The Tono Note had an outstanding principal balance of $6,650,000 and $4,475,000 at December 31, 2021 and 2020, respectively. The Tono Note bears interests 12% per annum, payable monthly in arrears, and matures on March 31, 2022, unless extended by the Company (see Note 15, Fair Value Measurements). The fair value of the Tono Note on December 31, 2021 and December 31, 2020 was $7,255,000 and $5,498,500, respectively. During the years ended December 31, 2021 and 2020, the Company recognized a loss on the change in fair value of the Tono Note of $418,500 and $642,997, respectively. As of the amendment date in March 2020, the Company concluded the Tono Note contained a contingent forward for the Company’s right to sell its membership interests in Comstock Lucerne to Tonogold at a future date in exchange for cash consideration or common stock of Tonogold if certain options were elected (the “Contingent Forward”). The Company identified the Contingent Forward as a derivative which was adjusted to fair value at the end of each reporting period. On March 20, 2020, the Company recorded the $1,232,952 initial fair value of the Contingent Forward asset in additional paid in capital on the consolidated balance sheets as Tonogold, a related party at the time, owned 50% of the membership interests of
Comstock Lucerne. The fair value of the Contingent Forward asset on September 8, 2020 was $1,998,832 and was an offset against the consideration received for the sale of Comstock Lucerne recorded on that date. Upon closing of the Lucerne Purchase Agreement, the contingencies were eliminated. During the year ended December 31, 2020, the Company recognized a gain for the change in fair value of the Contingent Forward of $765,880 (see Note 15, Fair Value Measurements). At December 31, 2021, the Company was in direct and continuing discussions with Tonogold management with the intention of exchanging the Note for Comstock Lucerne plus an option for Tonogold to acquire Comstock Lucerne in the future (see Note 22, Subsequent Events).
Investment in Mercury Clean Up LLC
On June 21, 2019, as amended July 3, 2019, April 10, 2020 and December 4, 2020, the Company entered into a Mercury Remediation Pilot, Investment and Joint Venture Agreement (the “MCU Agreement”) with MCU. Pursuant to the MCU Agreement, the Company committed $2.0 million of capital contributions that was payable in cash of $1.15 million and shares of the Company's common stock of $0.85 million, in exchange for 15% of the fully-diluted membership interest of MCU and the first right to participate in 50% of the equity of any future joint ventures formed with MCU (the “Joint Ventures”).
Upon successful proof of technical and commercial 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. Completing $2.0 million of such financing entitles the Company to an additional 10% of the fully-diluted membership interests of MCU. The Company has made cash payments to MCU of $1,150,000 in cash and satisfying the required cash contribution.
The MCU Agreement contained a provision whereby the Company is required to issue additional shares of its common stock for the make whole difference between the value of the Company's common shares received by MCU and the required stock-based investment of $850,000. On July 18, 2019, the Company issued 900,000 shares of restricted common stock with a fair value of $751,050 to fund the MCU capital contribution. During April and May 2020, MCU sold the 900,000 common shares for net proceeds of $465,127, reducing the remaining make whole liability to $384,873. On May 15, 2020, the Company issued MCU an additional 625,000 shares of restricted common stock with a fair value of $314,687.
On December 4, 2020, the remaining common shares became transferable, and the parties agreed that the make-whole obligation had been satisfied. On that date, MCU and the Company agreed that MCU received consideration in excess of the required $2.0 million, and the Company became the fully vested owner of 15% of the fully-diluted membership interest of MCU and became entitled to 50% participation in the Joint Ventures. As of December 31, 2021, the total purchase price of $2.0 million, paid in cash and stock, is accounted for as Investment in Mercury Clean Up, LLC, a non-current asset on the consolidated balance sheets. The investment is accounted for under the equity method. The Company’s chief executive officer is a member of the board of MCU.
The December 4, 2020 third amendment to the MCU Agreement clarified the provision that when MCU sells its remaining 625,000 shares of the Company’s common stock, the Company is entitled to the portion of the proceeds that is in excess of its original required contribution.
During January and February 2021, MCU sold the 625,000 common shares for net proceeds of $1.1 million, resulting in a $0.8 million excess contribution, which was paid to us in February 2021 (see Note 15, Fair Value Measurements). For the year ended December 31, 2021 and 2020, respectively, the Company recorded $35,086 and $1,767 in equity loss from affiliates for the investment in MCU.
Investment in MCU Philippines, Inc.
On April 10, 2020, the Company entered into a second amendment of the MCU Agreement, wherein MCU and the Company have identified an opportunity to remediate mercury in the Philippines, specifically in the province of Davao d' Oro (the “Philippine Opportunity”). In July 2020, MCU formed MCU-P to engage in the Philippine Opportunity. The Company’s chief executive officer is a director of MCU-P.
On December 4, 2020, the Company became fully entitled to 50% participation in the Joint Ventures and was issued 50% of the common stock of MCU-P.
During 2020, the Company made cash loans of $1,180,000, in the form of senior secured interest free loans, and committed up to another $1.8 million in secured loans. When the Company's loans to MCU-P reach $2.0 million, the Company will receive an additional 10% membership interest in MCU. The loans are secured by all equipment owned by MCU-P.
Prior to December 4, 2020, the Company considered these advances to be a receivable. Based on the third amendment to the MCU agreement on December 4, 2020, the Company was granted 50% participation in the Joint Ventures, including 50% of the common stock of MCU-P. On that date, the advances were recognized as a non-interest bearing note receivable due December 31, 2024. At December 4, 2020 the fair value of the note receivable from MCU-P, based on the discounted present value of future payments, was $755,866, which was comprised of the $1,080,000 face amount less implied interest of $324,134, and was recognized as consideration for the Company's December 4, 2020 investment in MCU-P. The discounted present value is based on the alternative borrowing cost of MCU-P, considering market data for companies with comparable credit ratings. As of December 31, 2020, the net balance of the note receivable was $860,940.
As of December 31, 2021, the MCU-P investment of $499,269 is accounted for as investment in MCU Philippines, Inc, a non-current asset on the consolidated balance sheets. The investment is accounted for under the equity method.
At December 31, 2020, the net balance of the note receivable was $860,940. On March 5, 2021, we loaned an additional $820,000 to MCU-P, increasing the face value of the non-interest-bearing note receivable to $2,000,000. Implied interest of $189,337 for the additional loan increased the value of our investment in MCU-P. The discounted present value was calculated using a rate of 7.1%, which was based on the alternative borrowing cost of MCU-P, considering market data for companies with comparable credit ratings. The additional loan amount resulted in our ownership interest in MCU increasing from 15% to 25%. At December 31, 2021, the net balance of the note receivable is $1,598,841 which is recorded on the consolidated balance sheets in notes receivable and advances, net. For the years ended December 31, 2021 and 2020, we recognized implied interest income of $107,239 and $5,074, respectively. The note receivable matures on December 31, 2024. For the year ended December 31, 2021 and 2020, respectively, the Company recorded $13,838 and $364 in equity loss from affiliates for the investment in MCU-P.
Investment in Sierra Springs Opportunity Fund, Inc.
During 2019, the Company invested $335,000 into a qualified opportunity zone fund, Sierra Springs Opportunity Fund ("SSOF") which owns Sierra Springs Enterprises, Inc. ("SSE"), a qualified opportunity zone business. We expect to own 9% of SSOF upon issuance by SSOF of all 75 million authorized shares to investors. At December 31, 2021, our $335,000 investment in SSOF and 6,700,000 voting shares represent 12% of total as converted SSOF common shares .
The SSOF investment is accounted for at cost less impairment because there is no ready market for the investment units and is recorded to non-current investments on the consolidated balance sheets. Management identified no events or changes in circumstances that might have had a significant adverse effect on the carrying value of the investment. Management concluded it was impractical to estimate fair value due to the early stages of the fund and the absence of a public market for its stock.
The Company additionally provided SSOF with a total of $4,935,000 (“SSOF Advances”), including $3,285,000 and $1,650,000 provided during the years ended December 31, 2021, and 2020, respectively to be used by SSOF for deposits and payments on land and other facilities related to investments in qualified businesses in the opportunity zone. The advances are non-interest-bearing and are expected to be repaid on or before the sale of our Silver Springs Properties to SSE during the first half of 2022 ( see Note 4, Assets Held for Sale). The $4,935,000 of advances are recorded on the consolidated balance sheets at December 31, 2021 in notes receivable and advances, net.
The Company’s executive chairman and chief executive officer co-founded SSOF and SSE, and serves as the chief executive officer of SSOF and as an executive of SSE along with a diverse team of qualified financial, capital markets, real estate and operational professionals that together govern, lead and manage SSOF and SSE. The $450,000 investment and 9,000,000 voting shares of our CEO and two of our directors represent 16.4% of total as converted SSOF common shares. The Company's executive chairman and chief executive officer has not received compensation of any kind from either SSOF or SSE.
NOTE 3 NOTES RECEIVABLE AND ADVANCES, NET
Notes receivable and advances, net at December 31, 2021 and 2020 include:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Current portion | | | |
| Tonogold note receivable, face value | $ | — | | | $ | 4,475,000 | |
| Unrealized gain | — | | | 1,023,500 | |
| Tonogold note receivable, fair value | — | | | 5,498,500 | |
| Sierra Springs advances receivable | 4,935,000 | | | 1,650,000 | |
| Other notes receivable | 29,545 | | | — | |
| Total notes receivable and advances, current portion | $ | 4,964,545 | | | $ | 7,148,500 | |
| | | |
| Non-current portion | | | |
| Tonogold note receivable, face value | 6,650,000 | | | — | |
| Unrealized gain | 605,000 | | | — | |
| Tonogold note receivable, fair value | 7,255,000 | | | — | |
| MCU-P note receivable, face value | 2,000,000 | | | 1,180,000 | |
Unamortized discount for implied interest | (401,159) | | | (319,060) | |
| MCU-Philippines note receivable, non-current portion, net | 8,853,841 | | | 860,940 | |
| Total notes receivable and advances, net | $ | 13,818,386 | | | $ | 8,009,440 | |
We expect the Tonogold Note to be cancelled in exchange for the membership interests of Comstock Mining LLC (see Note 22, Subsequent Events), which investment is classified as a non-current asset at December 31, 2021.
NOTE 4 ASSETS HELD FOR SALE
The Company had classified the Silver Springs Properties as assets held for sale at December 31, 2020. We previously committed to a plan to sell certain land and water rights. On September 26, 2019, we entered into the Silver Springs Purchase Agreement with SSE, which calls for the sale by the Company to SSE of 98 acres of industrial land with senior water rights for $6,500,000 (“SSP Tract I”), and 160 acres of commercial land with Downtown Silver Springs LLC (“DTSS”) membership interest rights for $3,600,000 (“SSP Tract II”), for a total purchase price of $10,100,000. At December 31, 2021, we have received deposits in cash and escrow from SSE totaling $400,000 towards the purchase of the Silver Springs Properties, which is recorded in deposits under current liabilities on the Company’s consolidated balance sheets. As a result of the delay in sale of the Silver Springs Properties, the Company was not certain the sale would occur within the next year, and the assets were reclassified to assets held for use and are included in properties, plant and equipment on the consolidated balance sheets at December 31, 2021.
Assets held for sale at December 31, 2021 and 2020 include:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Silver Springs Properties | | | |
| SSP Tract 1 | $ | — | | | $ | 3,589,876 | |
| SSP Tract II | — | | | 2,738,462 | |
| Total assets held for sale | $ | — | | | $ | 6,328,338 | |
NOTE 5 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| | 12/31/21 | | 12/31/20 |
| Accounts receivable - service income | $ | 25,944 | | | $ | — | |
| Accounts receivable - Tonogold reimbursements | 407,127 | | | — | |
| Accrued interest receivable | 487,651 | | | |
| Surety bond and insurance | 229,124 | | | 139,527 | |
| Receivable on sale of equity securities | — | | | 200,000 | |
| Other | 187,137 | | | 195,951 | |
| Total prepaid expenses and other current assets | $ | 1,336,983 | | | $ | 535,478 | |
On December 16, 2020, the Company entered into a securities purchase agreement with Wingfield Tono, LP (“Wingfield”), and agreed to sell 15,666,667 Tonogold common shares at $0.33 per share in three closings. On December 23, 2020, the Company transferred 3,333,333 Tonogold common shares to Wingfield for total proceeds of $1.1 million. At December 31, 2020, the Company had received $0.9 million in connection with the securities purchase agreement. The remaining $200,000 was a receivable as of December 31, 2020. On April 13, 2021, Wingfield returned 606,601 of the Tonogold common shares previously transferred under the Wingfield securities purchase agreement. The return of the shares eliminated a $200,000 receivable from Wingfield and terminated the securities purchase agreement.
DEPOSITS
Deposits at December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Security deposits | $ | 5,399 | | | $ | — | |
| Land and property deposits | 40,100 | | | 42,600 | |
| Pelen option | 200,000 | | | 100,000 | |
| Vendor deposits | 101,955 | | | 3,000 | |
| Total deposits, current | 347,454 | | | 145,600 | |
| | | |
| Vendor deposits, non-current | 3,219,607 | | | — | |
| Total | $ | 3,567,061 | | | $ | 145,600 | |
At December 31, 2021, LINICO had $3,219,607 in deposits with various vendors for the plant and equipment which have been classed as non-current deposits on the consolidated balance sheet.
On September 1, 2020, we paid $100,000 for a one-year option to purchase 75% of the membership interests of Pelen LLC ("Pelen") not owned by the Company for a purchase price of $3,750,000. On August 26, 2021, we paid an additional $100,000 for a one-year extension of the option increasing the purchase price to $4,400,000.
NOTE 6 PROPERTY, PLANT AND EQUIPMENT, NET AND MINERAL RIGHTS
Properties, plant and equipment at December 31, 2021 and 2020, respectively, include the following:
| | | | | | | | | | | |
| | 12/31/21 | | 12/31/20 |
| Land | $ | 6,328,338 | | | $ | — | |
| Real property leased to third parties | 3,298,311 | | | 3,298,311 | |
| Property, plant and equipment for mineral processing | 27,644,745 | | | 27,644,744 | |
| Other property and equipment | 4,438,657 | | | 4,367,229 | |
| Accumulated depreciation | (27,146,379) | | | (26,685,584) | |
| Total property, plant and equipment, net | $ | 14,563,672 | | | $ | 8,624,700 | |
During the years ended December 31, 2021 and 2020, the Company recognized depreciation expense of $0.5 million and $1.2 million, respectively.
Mineral Rights and Properties
Comstock and its subsidiaries own, control, or retain an interest in 9,358 acres located in Storey and Lyon Counties, Nevada, just south of Virginia City, Nevada (referred to collectively herein as the “Comstock Mineral Estate”), including 2,396 acres of patented claims and surface parcels, approximately 6,962 acres of unpatented claims administered by the BLM, five mineral leases, one joint venture (providing exclusive rights to exploration, development, mining and production), royalty interests, and fee ownership of real property, including 126 patented and 392 unpatented mineral lode claims, as well as 39 unpatented placer claims. Our properties at December 31, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Comstock Mineral Estate | $ | 6,261,706 | | | $ | 6,190,239 | |
| Other mineral properties | 317,405 | | | 317,405 | |
| Water rights | 90,000 | | | 90,000 | |
| Total mineral rights and properties | $ | 6,669,111 | | | $ | 6,597,644 | |
The Comstock Mineral Estate is partitioned for management purposes based on identified resource areas and exploration targets. During the years ended December 31, 2021 and 2020, we did not record any depletion expense, as none of the properties are in production. All of our mineral exploration and mining lease payments are classified as mining and mining claims costs and expenses in the consolidated statements of operations.
NOTE 7 RECLAMATION BOND DEPOSIT
The Nevada Revised Statutes and Regulations require a surety bond to be posted for mining projects so that after the completion of such mining projects the sites are left safe, stable and capable of productive post-mining uses. The bond is intended to cover the estimated costs required to safely reclaim the natural environment to the regulatory standards established by the State of Nevada’s Division of Environmental Protection. Accordingly, the Company has a $6.8 million reclamation surety bond through the Lexon Surety Group (“Lexon”) with the State of Nevada’s Bureau of Mining Regulation and Reclamation at December 31, 2021. The Company also has a $0.5 million surety bond with Storey County for mine reclamation at December 31, 2021. 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 $2.6 million at December 31, 2021, and 2020.
The reclamation bond deposit at December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Lexon surety bond cash collateral | 2,589,008 | | | 2,588,768 | |
| Other cash reclamation bond deposits | 106,936 | | | 106,936 | |
| Total reclamation bond deposit | $ | 2,695,944 | | | $ | 2,695,704 | |
The Lexon collateral at December 31, 2021 and 2020 includes earned income of $89,009 and $88,768 respectively, which has been left on deposit at BNY Mellon. The total cash collateral is a component of the reclamation bond deposit on the consolidated balance sheets at the years ended December 31, 2021 and 2020.
NOTE 8 INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at December 31, 2021 and 2020 include the following:
| | | | | | | | | | | | | | | | | | | | |
| Description | | Estimated Economic Life | | December 31, 2021 | | December 31, 2020 |
| | | | | | |
| Developed technologies | | 10 years | | $ | 18,882,401 | | | $ | — | |
| Lease intangible | | 30 years | | 3,621,488 | | |
| License agreements | | 10 years | | 510,752 | | — | |
| In-process research and development | | 10 years | | 350,000 | | |
| Customer agreements | | 1 year | | 122,885 | | — | |
| Distribution agreements | | 8 years | | 19,733 | | — | |
| Trademarks | | 10 years | | 7,000 | | | |
| Accumulated amortization | | | | (338,958) | | | — | |
| Intangible assets, net | | | | $ | 23,175,301 | | | $ | — | |
Accumulated amortization as of December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Developed technologies | $ | 231,920 | | | $ | — | |
| License agreements | 20,625 | | | — | |
| In-process research and development | 2,991 | | | — | |
| Customer agreements | 81,923 | | | — | |
| Distribution agreements | 1,499 | | | — | |
| Accumulated amortization | $ | 338,958 | | | $ | — | |
Amortization expense related to intangible assets of $569,721 was recorded for the year ended December 31, 2021. Accumulated amortization of $230,763 was written off as part of the impairment of the MANA customer agreement intangible asset during the year ended December 31, 2021.
The estimated economic lives shown above were at the closing dates of the respective acquisitions. The estimated economic lives of license agreements and developed technologies are based on the midpoint of the indicated lives derived from the related valuation analyses. The estimated economic lives of customer and distribution agreements are based on the specified terms of the respective agreements.
The Company is party to three license agreements with American Science and Technology Corporation (“AST”), pursuant to which Comstock Innovations agreed to license AST’s intellectual properties for use at three facilities in exchange for three facility-specific license fees of $500,000 each, and a royalty fee equal to 1.0% of the gross revenue of each of the first three licensed facilities. Comstock IP Holdings is also party to a research agreement with Virginia Polytechnic Institute and State University (“Virginia Tech”), and an exclusive license agreement with Virginia Tech’s affiliate, Virginia Tech Intellectual Properties, Inc. (“VTIP”) pursuant to which Comstock IP Holdings agreed to (i) pay Virginia Tech $438,410 to conduct sponsored research; and (ii), license VTIP’s related intellectual property on a worldwide exclusive basis in exchange for a royalty fee equal to 1.0% of the applicable net sales, subject to a minimum annual royalty of $5,000 per year. The Company also has developed technologies valued at $18,882,401 (See Note 2, Acquisitions and Investments).
Amortization of intangible assets was $338,958 for the year ended December 31, 2021. Future minimum amortization expense is as follows at December 31, 2021:
| | | | | |
| 2022 | $ | 2,148,222 | |
| 2023 | 2,103,108 | |
| 2024 | 2,098,956 | |
| 2025 | 2,098,956 | |
| 2026 | 2,098,956 | |
| Thereafter | 12,627,103 | |
| $ | 23,175,301 | |
Changes in the intangible assets and goodwill balances for the year ended December 31, 2021 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | Acquisitions | | Additions | | Impairment | | Amortization | | As of December 31, 2021 |
| Intangible assets | | — | | | 23,125,786 | | | 850,000 | | | (461,527) | | | | | 23,514,259 | |
| Accumulated amortization | | — | | | — | | | | | 230,763 | | | (569,721) | | | (338,958) | |
| Goodwill | | — | | | 18,952,517 | | | — | | | (6,163,846) | | | — | | | 12,788,671 | |
| Total intangible assets and goodwill | | — | | | 42,078,303 | | | 850,000 | | | (6,394,610) | | | (569,721) | | | 35,963,972 | |
All intangibles and goodwill are associated with the Renewable Energy Products segment.
NOTE 9 ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 2021, and 2020, consisted of the following:
| | | | | | | | | | | |
| | 12/31/21 | | 12/31/20 |
| Accrued interest expense | 12,329 | | | — | |
| Accrued Northern Comstock LLC | — | | | 180,833 | |
| Accrued payroll costs | 817,062 | | | 153,615 | |
| Accrued directors fees | — | | | 60,000 | |
| Accrued vendor liabilities | 77,062 | | | 136,499 | |
| Other accrued expenses | 32,990 | | | 4,000 | |
| Total accrued expenses | $ | 939,443 | | | $ | 534,947 | |
NOTE 10 LEASES
The Company has the following lease balances recorded on the consolidated balance sheets as follows:
| | | | | | | | | | | |
| Lease Assets and Liabilities | Classification | December 31, 2021 | December 31, 2020 |
| Finance lease right-of-use asset | Right of use asset | $ | 15,033,000 | | $ | — | |
| Operating lease right-of-use asset | Other assets | 46,897 | | 51,294 | |
| Total right of use assets | | $ | 15,079,897 | | $ | 51,294 | |
| | | |
| Operating lease liability - current | Accrued expenses and other liabilities | $ | 4,388 | | $ | 3,650 | |
| Operating lease liability - long-term | Other liabilities | 45,403 | | 49,791 | |
| Finance lease liability | Lease liability | 13,043,499 | | $ | — | |
| Total lease liabilities | | $ | 13,093,290 | | $ | 53,441 | |
The Company has the following lease costs recorded in the consolidated statements of operations as follows:
| | | | | | | | |
| Year Ending December 31, |
| 2021 | 2020 |
| Finance lease cost: | | |
| Amortization of right-of-use assets | $ | — | | $ | — | |
| Interest on lease liabilities | — | | — | |
| Operating lease cost | 10,099 | | 10,099 | |
| Total lease cost | $ | 10,099 | | $ | 10,099 | |
| | |
| Other information | | |
| Cash paid for amounts included in the measurement of lease liabilities | $ | — | | $ | — | |
| Operating cash flows from finance leases | — | | — | |
| Operating cash flows from operating leases | 9,350 | | 9,050 | |
| Financing cash flows from finance leases | — | | — | |
| Right-of-use assets and finance lease liabilities acquired with LINICO transaction (Note 2) | 15,033,000 | | — | |
| Weighted-average remaining lease term - finance leases | 0.75 | — | |
| Weighted-average remaining lease term - operating leases | 6.75 | 7.75 |
| Weighted-average discount rate - finance leases | 6 | % | — | % |
| Weighted-average discount rate - operating leases | 11 | % | 11 | % |
Finance Lease
On February 15, 2021, LINICO Corporation (“LINICO”) and Aqua Metals Reno Inc. (the “Landlord”), a subsidiary of Aqua Metals Inc. (“AQMS”), entered into an industrial lease (the “AQMS Lease Agreement”), for the land, buildings and related improvements (the “Battery Recycling Facility”). The AQMS Lease Agreement is for a two-year term and commences on April 1, 2021, and provides for lease payments of $68,000 per month during months 1 to 12, $81,600 per month during months 13 to 18 and $100,640 per month during months 19 to 24. Pursuant to the AQMS Lease Agreement, LINICO also has the right to purchase the Battery Recycling Facility for (i) $14,250,000, if the purchase is made on or prior to October 1, 2022, or (ii) $15,250,000, if the purchase is made after October 1, 2022 (“Purchase Option”). LINICO paid the initial $1,250,000 nonrefundable deposit under the AQMS Lease Agreement that was due on or before October 15, 2021, which is included in deposits on the consolidated balance sheets as of December 31, 2021. The payment will be applied to the purchase price if the Purchase Option is exercised. The AQMS Lease Agreement also grants the Company the right to consummate the Purchase Option if LINICO and the Landlord agree that LINICO will not exercise the Purchase Option. We assumed we will exercise the option to purchase the Battery Recycling Facility on or before October 1, 2022.
We recognized the AQMS lease as a new finance lease as part of the asset acquisition of LINICO with an assumed lease term of ten months, total payments of $13,693,600 payable through the purchase option date of October 1, 2022, discounted at the Company's incremental borrowing rate of 6% and an estimated useful life of 30 years for the right-of-use asset. The value of the right-of-use asset and lease liability upon acquisition, including the pro rata allocation of excess value from the asset acquisition was $15,033,000. We acquired the lease on December 30, 2021 and no interest expense or amortization of the right-of-use asset was recorded during the year ended December 31, 2021. We used judgment in estimating the expected timing of exercise of the purchase option, the purchase option price and the discount rate applied in calculating the right-of-use asset and lease liability. Timing of exercise of the option and the related exercise price may differ from our estimates.
We recognized a lease intangible asset as part of the LINICO asset acquisition in the amount of $3,622,488 (see Note 2, Acquisitions and Investments), representing the value of the purchase option at the date of acquisition.
Operating Lease
The Company has an operating lease, as lessee, with Sutro as lessor, 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 years ended December 31, 2021 and 2020, the fixed operating lease expense was $10,099 and $10,099, respectively with a remaining term of 6.8 years.
Maturities of lease liabilities by fiscal year for the Company's operating lease is as follows:
| | | | | |
| 2022 | 9,650 | |
| 2023 | 9,950 | |
| 2024 | 10,250 | |
| 2025 | 10,550 | |
| Thereafter | 31,500 | |
| Total lease payments | 71,900 | |
Less: Imputed interest at 11% | (22,109) | |
| Present value of lease liabilities | $ | 49,791 | |
Maturities of lease liabilities for the Company's finance lease are $13,693,600, all payable in 2022, with imputed interest of $650,101.
Operating Lease Income
Revenues from operating leases on our land and building leased to others totaled $228,123 and $201,700 for the years ended December 31, 2021 and 2020, respectively.
Maturities of lease payments for operating leases to others are as follows:
| | | | | |
| 2021 | $ | 180,025 | |
| 2022 | 166,325 | |
| 2023 | 22,725 | |
| 2025 | 96,000 | |
| Thereafter | 384,000 | |
| Total Minimum Lease Income | $ | 849,075 | |
NOTE 11 DEBT OBLIGATIONS
Debt at December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
GHF Secured Promissory Note – 6% interest, due December 15, 2024 | $ | 5,000,000 | | | $ | — | |
Georges Trust Unsecured Promissory Notes - 12% interest, due September 2021 | — | | | 1,389,014 | |
Concorde Trust Unsecured Promissory Notes - 12% interest, due September 2021 | — | | | 683,263 | |
Bean Trust Unsecured Promissory Note - 12% interest, due September 2021 | — | | | 290,386 | |
GHF Inc Unsecured Promissory Note - 12% interest, due September 2021 | — | | | 916,712 | |
Note Payable (Caterpillar Financial Services) - 5.7% interest. | — | | | 404,373 | |
| Total debt | 5,000,000 | | | 3,683,748 | |
| Less: debt discounts and issuance costs | (513,744) | | | (126,043) | |
| Total debt, net of discounts | 4,486,256 | | | 3,557,705 | |
| Less: current maturities | — | | | (3,557,705) | |
| Long-term debt, net of discounts and issuance costs | $ | 4,486,256 | | | $ | — | |
Concorde Trust, Bean Trust, Georges Trust, GHF, Inc. & Scott H. Jolcover Unsecured Promissory Notes
We entered into a long-term promissory note ("GHF 2021 Note") with GHF, Inc. on December 15, 2021, with a principal amount of $5,000,000, of which $4,550,000 was funded and $450,000 was an original issue discount ("OID"). The full principal is due on December 15, 2024. Interest is payable monthly at a rate of 6% annually. Prepayment is allowed in full or in part at any time without premium or penalty. The loan is secured by all non-mining related assets of the Company, Silver Springs land and water rights, and the Daney Ranch, excluding the Lucerne and Dayton properties. The Company is required to prepay the promissory note with any net cash proceeds received in the sale of any collateral. If the promissory note has not been paid in full on or prior to December 15, 2022, the Company will issue warrants to GHF allowing them to purchase 1,000,000 shares of the Company’s common stock, half of which are exercisable at a price per share of 150% of the 20-day volume weighted average closing price (“VWAP”) of the Company’s common stock on its primary trading market for the 20 consecutive trading days preceding December 15, 2021, and the remainder at a price per share of 135% of the 20-day VWAP as determined on December 15, 2022. At December 31, 2021, the warrants were valued at $70,879. We recognized interest expense of $19,720 during the year ended December 31, 2021 in connection with the GHF 2021 Note.
On August 6, 2020, the Company entered into three unsecured promissory notes (together with the additional promissory notes with the Concorde Trust and GHF Inc. described below, the "Promissory Notes") with an original aggregate principal amount of $4,475,000, an original issue discount ("OID") of $225,000, and an interest rate of 12% per annum payable monthly, and a maturity date of September 20, 2021. On October 1, 2020, the Company revised and divided the Concorde Trust promissory note of $3.68 million into two separate Promissory Notes totaling the same amount, that is, a new promissory note to Georges Trust for $3.04 million and a revised promissory note to Concorde Trust for $0.64 million, representing entities under common control with one another but not with the Company. This note was paid in full during 2021.
On October 1, 2020, the Company paid the Scott H. Jolcover promissory notes in full, with a principal payment of $150,000 plus OID of $1,216. At December 31, 2020, the former employee had no outstanding Promissory Notes, and had received $2,876 in payments of interest and $151,216 in payments of principal during the year ended December 31, 2020. On October 5, 2020, the Company paid $1.7 million in principal for the Georges, Concorde, and Bean Promissory Notes, plus earned OID of $15,143. On October 9, 2020, the Company paid an additional $0.5 million in principal for the remaining Promissory Notes, plus earned OID of $4,716. These payments reduced the principal balance on the notes to approximately $1.9 million. This note was paid in full during 2021.
On December 4, 2020, the Company entered into two additional Promissory Notes with the Concorde Trust and GHF Inc., which had an original aggregate principal amount of $1,309,589, were issued at an original issue discount of $59,589, bore interest at a rate of 12% per annum payable monthly, and mature on September 20, 2021. This note was paid in full during 2021.
Interest expense on the Promissory Notes was $139,213 for the year ended December 31, 2021, including OID amortization of $71,289. Accrued interest of $31,700 was included in accounts payable on the consolidated balance sheets at December 31,
2021. Interest expense on the Promissory Notes was $223,543 for the year ended December 31, 2020 including OID amortization of $66,868.
GF Comstock 2 LP
On January 13, 2017, the Company issued a $10.7 million Debenture to GF Comstock 2 LP ("Debenture") due January 13, 2021. Interest was payable semi-annually. The Debenture was issued at a discount of approximately $0.6 million and with additional issuance costs of approximately $0.5 million. The Debenture also required an additional make whole obligation totaling approximately $0.7 million. The Company recorded the Debenture at face value on the consolidated balance sheets, net of the discount, issuance costs and make whole obligation, which approximated its estimated fair value. The discount, issuance costs and make whole obligation were amortized to interest expense during the term of the Debenture.
On August 11, 2020, the Company retired the Debenture by paying the remaining principal balance of $4.0 million, plus the remaining make whole obligation of $0.2 million and recognized a loss on early retirement of debt of $51,000. Interest expense on the Debenture was $0.4 million for the year ended December 31, 2020 of which Tonogold reimbursed $0.3 million for the year ended December 31, 2020, which was netted against interest expense in the consolidated statements of operations.
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 for equipment (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 monthly payments until the amounts have been paid in full. The note held an interest rate of 5.7% per annum. The obligations were recorded at face value on the consolidated balance sheets, which approximated fair value.
On June 29, 2020, Comstock and CAT modified the CAT Agreement allowing for four months of deferred payments, with no extension of terms, beginning with the May 1, 2020, payment and extending through August 1, 2020. Interest payable for the four deferred payments was added to principal, after which payment amounts were increased to $37,817 per month, beginning on September 1, 2020. On March 4, 2021, we retired the Caterpillar Financial Services loan by paying the remaining principal balance of $296,171.
NOTE 12 LONG-TERM RECLAMATION LIABILITY
We are required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of our sites after mining and mineral processing operations are completed. These reclamation actions are conducted in accordance with plans reviewed and approved by appropriate regulatory agencies.
At December 31, 2021 and 2020, we accrued an asset retirement obligation of $5,445,672, and $6,054,919. respectively, for our obligation to reclaim our mine facilities based on our most recent reclamation plan, as revised, submitted and approved by the Nevada State Environmental Commission and Division of Environmental Protection. Our total reclamation liability includes cost estimates for our American Flat processing facility, Dayton project and enhanced reclamation obligations in Storey County. Effective January 1, 2021, we updated the expected reclamation commencement date from December 31, 2022 to December 31, 2025. This resulted in a reduction in the liability of $926,434 using a discount rate of 6.02%. The adjustment in excess of the net retirement obligation asset of $57,963 was $868,471 at January 1, 2021 and was recorded in the consolidated statements of operations.
Following is a reconciliation of the mining retirement asset associated with our reclamation plan for the mining projects for the years ended December 31, 2021, and 2020:
| | | | | | | | | | | |
| | 12/31/21 | | 12/31/20 |
| Long-term reclamation liability — beginning of period | $ | 6,054,919 | | | $ | 6,034,208 | |
| Reduction of obligation due to extension of time | (926,434) | | | — | |
| Accretion of reclamation liability | 317,187 | | | 20,711 | |
| Long-term reclamation liability — end of period | $ | 5,445,672 | | | $ | 6,054,919 | |
NOTE 13 COMMITMENTS AND CONTINGENCIES
CONTINGENT PAYMENT OBLIGATIONS
FLUX Photon Corporation
The purchase price payable for the FPC Assets is $18,000,000 payable in cash to FPC with 20% of the future monthly consolidated sales, less total variable costs, less operating expenses, maintenance, tax payments, and debt service payments of the Company and its now and hereafter-existing subsidiaries, until the purchase price of $18,000,000 has been fully paid. On December 10, 2021, the Asset Purchase Agreement was amended to provide for the payment by the Company of a $350,000 down payment against the purchase price, which reduced the stated purchase price to $17,650,000 at December 31, 2021.
MANA Corporation
On July 23, 2021, the Company entered into a Securities Exchange Agreement to purchase 100% of the issued and outstanding equity of MANA Corporation. MANA provides industrial hemp origination, toll processing, sales, marketing, commodities, co-products management, and related products and services. MANA has a contingent payment obligation equal to 20% of MANA’s future net cash flow deriving from sales of industrial hemp and its derivatives, as defined in the applicable agreement, in an amount up to $8,600,000. This amount has not been recorded in our consolidated financial statements for the year ended December 31, 2021, as it has been determined to be neither probable nor reasonably estimable.
Comstock Innovations - Pilot Facility
Comstock Innovations, our wholly-owned technology research and development subsidiary, is subject to an asset purchase agreement with American Science and Technology Corporation (“AST”), pursuant to which the Company agreed to purchase substantially all of the real and personal property located at 6445 Packer Drive, Wausau, Wisconsin 54401 (“Pilot Facility”), including pilot scale processing equipment used in connection with some of our cellulosic fuels and electrification metals extraction and refining processes. The purchase agreement calls for a purchase price of $3,920,000 in installments of $35,000 per month from May 1, 2022 to April 30, 2023, $1,750,000 on April 30, 2023, and $1,750,000 on April 30, 2024. The costs associated with the Pilot Facility’s research and development support operations are allocated (on a time and materials basis at cost) to our cellulosic fuels, electrification metals, cleantech engineering, technology licensing, and strategic and other investments segments, as applicable.
LINICO Corporation
At December 31, 2021, LINICO had $3,219,607 in deposits with various vendors for the plant and equipment.
COMSTOCK MINERAL ESTATE LEASE PAYMENTS
We lease certain mineral rights and properties under leases expiring at various dates through 2040. Future minimum annual lease payments, including royalty and rental payments, under these existing lease agreements are as follows at December 31, 2021:
| | | | | |
| Year | Leases |
| 2022 | $ | 114,000 | |
| 2023 | 114,000 | |
| 2024 | 108,000 | |
| 2025 | 110,000 | |
| 2026 | 150,000 | |
| Thereafter | 1,536,250 | |
| Total minimum annual lease payments | $ | 2,132,250 | |
We have minimum royalty obligations with certain of its mineral properties and leases. For most of the mineral properties and leases, we are subject to a range of royalty obligations to the extent that production commences. These royalties range from 0.5% to 5% of Net Smelter Returns ("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 extracted metals.
Our 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 generally become 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.
Mineral and Mining Leases
The Company is party to lease agreements with Tonogold. On September 16, 2019, as amended and restated on December 23, 2019, the Company, as lessor, entered into a 10-year, renewable mineral exploration and mining lease with Tonogold for certain mineral properties owned or controlled by the Company (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 pays to the Company a quarterly lease fee of $10,000. The lease fee will escalate 10% each year on the anniversary date of the Exploration Lease. Tonogold also reimburses the Company for all costs associated with owning the properties, including, but not limited to, lease payments for underlying, third-party leases. The Exploration Lease also provides for royalty payments when mining operations commence.
On November 18, 2019, the Company, entered into an agreement 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 is required to reimburse the Company approximately $1,100,000 in expenses per year to maintain the option. The Lease Option Agreement remains in effect, but has not yet been exercised. The Lease Option Agreement expires in November 2025. Total reimbursements under the Tonogold agreements for the years ended December 31, 2021 and 2020 were approximately $2,800,000 and $2,600,000, respectively. Total reimbursements receivable under the Tonogold agreements for the years ended December 31, 2021 and 2020 were approximately $800,000 and $0.
On September 1, 2020, the Company entered into a new mineral exploration and mining lease with Sutro. The lease covers patented mining claims, exploration rights, and access over and through town lots in Gold Hill and Virginia City, Nevada. The lease also provides the right to explore the Sutro Tunnel.
LITIGATION
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 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. On January 11, 2021, the Nevada Supreme Court issued a final order affirming the District Court's judgment in favor of Lyon County and Comstock Mining. On January 29, 2021, the CRA filed a Petition for Rehearing to the Nevada Supreme Court. On February 25, 2021, the Nevada Supreme Court issued an order denying a rehearing. On March 8, 2021, the CRA filed a Petition for En Banc Reconsideration to the Nevada Supreme Court. On April 9, 2021, the Nevada Supreme Court responded to the petition by issuing an order denying en banc reconsideration, once again, in favor of Lyon County and Comstock Mining. On July 30, 2021 Judge Estes of the Third Judicial District Court in Lyon County, Nevada ruled in favor of Lyon County and the Company and awarded attorney fees and costs to be paid by the plaintiffs in the sum of $50,000 to Lyon County and $203,151 to the Company. On August 27, 2021 the CRA filed a notice of appeal to the Nevada Supreme Court.
On or about February 27, 2020, we received notice that three former employees had filed a complaint with OSHA regarding alleged wrongful termination of employment in 2019, seeking backpay, front pay and other compensatory damages as well as interest and legal fees and costs. On September 8, 2021, OSHA notified the three former employees that it was dismissing their complaint after OSHA was informed that the former employees were instead planning to file a complaint in federal court. On August 20, 2021, the former employees filed a lawsuit against the Company, its Board of Directors, its Audit and Finance Committee, its Chief Executive Officer and certain of its managers for the wrongful termination of their employment. We believe those terminations were lawful and we are vigorously defending the complaint. At December 31, 2021, the Company has accrued severance and related costs for this complaint in accrued expenses and other liabilities on the consolidated balance sheets (see Note 22, Subsequent Events).
From time to time, we are involved in claims 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.
NOTE 14 EQUITY
ISSUANCE OF REGISTERED SHARES OF COMMON STOCK
On February 8, 2021, we entered into an equity purchase agreement (“2021 Leviston Sales Agreement”) with Leviston to offer and sell registered shares of common stock at an aggregate offering price of up to $5.0 million from time to time, at our option, on terms we deem favorable. The term of the agreement was 24 months. We agreed to deliver to Leviston additional shares of common stock in payment of due diligence and commitment fees with a fair value of $250,003, for no additional consideration, on the first settlement date with respect to a put notice delivered by us. For the year ended December 31, 2021, we issued to Leviston 1,551,760 common shares under this agreement with an aggregate sales price of $5.0 million, at an average price per share of $3.22, and an additional 50,907 common shares in commitment and due diligence fees. At December 31, 2021, the 2021 Leviston Sales Agreement has no capacity.
On March 2, 2021, we entered into equity purchase agreements (“Equity Purchase Agreements”) with certain investors to issue and sell in a registered direct offering (“Offering”) 4.0 million shares of common stock at a price of $4.00 per share. The Equity Purchase Agreements contain customary representations, warranties and agreements of the Company, and customary conditions to closing, indemnification rights and obligations of the parties. The Offering of the shares closed on March 4, 2021. We paid Noble Capital Markets, Inc., the placement agent for the Offering, an aggregate cash fee of $960,000 (equal to 6% of the aggregate gross proceeds raised in the Offering), and $30,000 for other expenses, resulting in net proceeds of $15,010,000.
On September 28, 2021, we entered into an equity purchase agreement (“2021 Leviston Equity Agreement”) with Leviston Resources LLC (“Leviston”) to offer and sell registered shares of common stock at an aggregate offering price of up to $5.0 million from time to time, at our option, on terms we deem favorable. The term of the agreement is 24 months. We agreed to deliver to Leviston additional shares of common stock, for no additional consideration, with a fair value of $100,000 in due diligence fees, on the first settlement date with respect to a put notice delivered by us, and $150,000 in commitment fees upon the written request of Leviston. For the year ended December 31, 2021, we issued to Leviston 2,668,363 common shares under this agreement with an aggregate sales price of $5.0 million, at an average price per share of $1.87, and an additional 92,880 common shares in due diligence fees. At December 31, 2021, the 2021 Leviston Equity Agreement has no capacity.
On December 3, 2021, the Company sold 1,000,000 shares of unregistered securities at a price of $1.40 per common shares, for net proceeds of $1.4 million for the year ended December 31, 2021.
In July 2020, the Company entered into an equity purchase agreement (the "2020 Leviston Sales Agreement") with Leviston Resources LLC ("Leviston") to offer and sell registered shares of common stock at an aggregate offering price of up to
$2.5 million, from time to time, at the Company's option, and paid a commitment fee of $125,000 in shares of common stock and $52,500 of cash fees. From July through September 2020, the Company issued to Leviston 2,793,586 common shares with an aggregate sales price of $2.5 million at an average price per share of $0.89, and an additional 173,611 common shares in commitment fees. As of December 31, 2020, the 2020 Leviston Sales Agreement has no remaining capacity.
Gross proceeds from and cash fees related to the issuance of shares of the Company's common stock pursuant to registered equity issuance and exempt private placement agreements, are presented below for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Number of shares sold | 9,220,123 | | | 5,747,608 | |
| | | |
| Gross proceeds | $ | 27,399,999 | | | $ | 4,197,621 | |
| Cash fees | (1,064,498) | | | (130,070) | |
| Net proceeds | $ | 26,335,501 | | | $ | 4,067,551 | |
| | | |
| Average gross proceeds per share | $ | 2.97 | | | $ | 0.73 | |
ISSUANCE OF UNREGISTERED SHARES OF COMMON STOCK
Issuance of restricted shares of our common stock in connection with acquisitions, investments and other endeavors for the year ended December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
Issuance Date | Acquisition/Investment | | Common Shares Issued | | Restriction Period |
| | | | | |
February 16, 2021 | LINICO Corporation | | 3,000,000 | | B |
June 18, 2021 | Renewable Process Solutions, Inc. | | 1,000,000 | | A |
June 24, 2021 | Quantum Generative Materials LLC | | 3,000,000 | | B |
July 23, 2021 | MANA Corporation | | 4,200,000 | | A |
July 23, 2021 | LP Biosciences LLC | | 3,500,000 | | C |
August 27, 2021 | Northern Comstock LLC | | 163,156 | | B |
September 7, 2021 | Plain Sight Innovations Corporation | | 8,500,000 | | A |
December 30, 2021 | LINICO Corporation | | 3,500,000 | | D |
Total common shares issued | | | 26,863,156 | | | |
| | | | | |
| | | | | |
(A) | 28% six months from issuance date; additional 8% becomes unrestricted semi-annually through 5 years from issuance date. |
| |
(B) | Six months from issuance date. |
| |
(C) | Six months from issuance date. On December 31, 2021, we filed a prospectus on Form S-3 with the Securities and Exchange Commission to register the 3,500,000 shares of common stock issued to LPB for resale at a proposed maximum offering price per unit of $2.71. Effective February 28, 2022, these shares were transferred back to the Company for cancellation upon receipt (See Note 22, Subsequent Events). |
| |
(D) | Nine months from issuance date. Shares must be sold during the six-month period commencing nine months from the issuance date and ending 15 months from the issuance date pursuant to a Rule 10b5-1 plan. |
| |
Noncontrolling Interest
On December 30, 2021, we entered into an agreement with LINICO to purchase additional shares resulting in a 90% controlling interest (see Note 2, Acquisitions and Investments). The remaining 10% ownership is held by AQMS (see Note 21, Related Party) and is accounted for as a noncontrolling interest in our consolidated financial statements.
On January 24, 2019, we entered into an agreement, as amended on April 30, 2019, May 22, 2019, June 21, 2019, August 15, 2019, September 20, 2019, October 14, 2019, and November 17, 2019, to sell to Tonogold its interests in Comstock Mining LLC, a wholly-owned subsidiary of the Company, with sole assets of the Lucerne properties and related permits. At the initial closing on November 18, 2019, a 50% membership interest in Comstock Mining LLC was delivered to Tonogold with the Company retaining all management control and authority over Comstock Mining LLC until 100% of consideration for all membership interests was delivered. Accordingly, Tonogold’s membership interest in Comstock Mining LLC was accounted for as a noncontrolling interest shown in the consolidated financial statements of the Company. On September 8, 2020, 100% of the membership interests of Comstock Mining LLC were acquired by Tonogold and the noncontrolling interest was eliminated as part of the purchase (see Note 2, Acquisitions and Investments).
Treasury Stock
Our treasury stock consists of 3,000,000 shares held by our 90% owned subsidiary LINICO. We expect LINICO will sell the shares and we have presented the cost of the acquired stock as a deduction from equity. The fair value on the date of acquisition is $3,870,000 (See Note 2, Acquisitions and Investments).There were no gains on sales during the year ended December 31, 2021.
NOTE 15 FAIR VALUE MEASUREMENTS
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at |
| | | December 31, 2021 |
| Total | | Quoted
Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | |
| Tonogold common shares | $ | 910,558 | | | $ | 910,558 | | | $ | — | | | $ | — | |
| Tonogold note receivable | 7,255,000 | | | — | | | — | | | 7,255,000 | |
| LPB derivative asset | 342,000 | | | — | | | 342,000 | | | — | |
| Other equity securities | 15,260 | | | 15,260 | | | — | | | — | |
| Total assets measured at fair value | $ | 8,522,818 | | | $ | 925,818 | | | $ | 342,000 | | | $ | 7,255,000 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| LINICO acquisition derivative liability | $ | (2,743,162) | | | $ | (2,743,162) | | | $ | — | | | $ | — | |
| GenMat derivative | $ | (6,130,000) | | | $ | — | | | $ | (6,130,000) | | | $ | — | |
| Total liabilities measured at fair value | $ | (8,873,162) | | | $ | (2,743,162) | | | $ | (6,130,000) | | | $ | — | |
The following table presents our assets and liabilities at December 31, 2020, which are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at |
| | | December 31, 2020 |
| Total | | Quoted
Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | |
| Tonogold common shares | $ | 3,939,558 | | | $ | 3,939,558 | | | $ | — | | | $ | — | |
| Tonogold note receivable | 5,498,500 | | | — | | | — | | | 5,498,500 | |
| MCU derivative asset | 265,127 | | | — | | | 265,127 | | | — | |
| Other equity securities | 40,165 | | | — | | | 40,165 | | | — | |
| Total assets measured at fair value | $ | 9,743,350 | | | $ | 3,939,558 | | | $ | 305,292 | | | $ | 5,498,500 | |
During the year ended December 31, 2021, the common shares of Elevation Gold Mining Corporation, previously Northern Vertex ("Elevation") were transferred from Level 2 to Level 1 as a result of the restriction period expiring on March 1, 2021. During the year ended December 31, 2020, we converted Tonogold CPS to common shares, resulting in a transfer from Level 3 to Level 1. During the years ended December 31, 2021 and 2020, there were no other transfers of assets and liabilities between Level 1, Level 2 and Level 3.
The following table provides reconciliation between the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Beginning Balance | $ | 5,498,500 | | | $ | 9,080,000 | |
| Total change in fair value recognized in earnings | | | |
| Tonogold convertible preferred shares | — | | | (2,544,000) | |
| Tonogold contingent forward asset | — | | | 765,880 | |
| Tonogold note receivable | (418,500) | | | (642,997) | |
| (418,500) | | | (2,421,117) | |
| Additions | | | |
| Tonogold contingent forward asset | — | | | 1,232,952 | |
| Tonogold note receivable | 2,175,000 | | | 6,141,497 | |
| 2,175,000 | | | 7,374,449 | |
| Transfers | | | |
| Conversion of Tonogold convertible preferred shares to Tonogold common | — | | | (3,920,000) | |
| | | |
| Deductions: | | | |
| Redemption of Tonogold convertible preferred shares | — | | | (2,616,000) | |
| Settlement of Tonogold contingent forward asset | — | | | (1,998,832) | |
| — | | | (4,614,832) | |
| Ending balance | $ | 7,255,000 | | | $ | 5,498,500 | |
VALUATION METHODOLOGIES
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.
Tonogold Common Shares
The fair value of our investment in common shares of Tonogold is based on the closing price per share of the stock. At December 31, 2021 and December 31, 2020, we held 8,671,985 and 13,131,860 Tonogold common shares with fair values of $910,558 and $3,939,558, respectively. The fair values of the common shares are based on the $0.11 and $0.30 closing share prices (OTC: TNGL), respectively. We recorded a loss of $2,286,867 and a gain of $1,636,468 for the gain (loss) on investments in the consolidated statements of operations for the years ended December 31, 2021 and December 31, 2020.
Tonogold Note Receivable
The Tonogold Note may be converted into Tonogold common shares, at the sole discretion of the Company, at the Maturity Date, upon an event of default or upon a partial or whole prepayment by Tonogold. The Maturity Date may be extended at the Company’s option if an event of default has occurred or is expected to occur or a fundamental transaction (as defined by the Note) has been announced but not yet closed. Because of the embedded features, the Company made the irrevocable election to report the Note on a fair value basis. The Note principal was originally due and payable on September 20, 2021, and has been extended to March 31, 2022. The Note was amended on March 31, 2021 and June 1, 2021 to its current principal balance of $6,650,000. The Note includes the following features: 1) conversion feature allowing the Company, at the Company's sole option, to elect payment in Tonogold common shares upon certain events; 2) change of control redemption right allowing the Company to redeem the Note in cash at a 125% premium; 3) event of default redemption right allowing the Company the right to elect redemption of the Note in cash at a 118% premium; and 4) an option for the Company to extend the maturity date. On
September 8, 2020, the fair value of the Note was $6.1 million, based on a Monte Carlo model with various inputs, including the Tonogold common share price of $0.35, volatility of 96%, risk-free rate of 0.15%, cost of debt of 11.12%, required conversion premium of 30%, probability of prepayment of 5%, probability of change of control of 5% and probability of default of 27%.
At December 31, 2021, the fair value of the Tonogold Note was $7,255,000 based on probability weighted fair value with several scenarios, including a 10% probability of Tonogold repayment upon maturity, a 10% probability of Tonogold defaulting on the Note, a 75% probability of a swap of the collateral to us prior to maturity with exercise of an option to repurchase the assets, and a 5% probability of a swap of the collateral to us prior to maturity and assuming no exercise of the option to repurchase.
Under scenario 1, the value of $7,198,000 was derived from a Monte Carlo model with the following inputs: Tonogold common share price - $0.11; volatility – 61%; risk free rate – 0.06%; cost of debt – 20%; conversion premium – 30%; probability of prepayment – 5% at both March and June 2021; probability of change in control – 0% at December 2021; probability of default is considered separately in other scenarios at December 31, 2021. The Company recorded a loss of $418,500 for the change in fair value in other expense in the consolidated statements of operations for the year ended December 31, 2021.
Under scenario 2, we assumed default upon the March 2022 maturity date and a 24 month term for the settlement process, with an assumed settlement of $10,550,401 in March 2024. The settlement amount represents the outstanding principal and interest obligation on the note. A yield assumption of 20% was applied to the settlement amount. The value of scenario 2 was $7,000,000.
Under scenario 3, we assumed the Lucerne mine and related assets would be sold back to us, with Tonogold paying $750,000 at the maturity date of the Note (the "Swap") with a call option issued to Tonogold whereby the assets could be repurchased at the end of 2022 for $7,500,000. A discount rate of 25% was applied in this scenario, reflecting the rates of return on venture capital investments. We assumed Tonogold exercised the option in this scenario. The value of scenario 3 was $6,709,000.
Under scenario 4, we assumed the Swap in scenario 3 and no exercise of the option by Tonogold to repurchase the assets. We assumed a 24 month process to sell the assets to an investor for $30,000,000, which is similar to the purchase price of the assets to Tonogold in 2020. A discount rate of 25% was applied in this scenario, reflecting rates of return on venture capital investments. The value of scenario 4 was $16,069,000.
The probability factors were applied to each scenario and the resulting value of the Note at December 31, 2021 was $7,255,000.
The significant unobservable inputs used in the fair value measurement of the Tonogold Note are the probability factors applied to each scenario and the settlement amounts and timing. Significant increases or decreases in any of these inputs in isolation may have resulted in a significantly higher or lower fair value measurement.
At December 31, 2020, the fair value of the Tonogold Note was $5.5 million based on a Monte Carlo model with the following inputs: Tonogold common share price - $0.30; volatility – 89%; risk free rate – 0.09%; cost of debt – 7.62%; conversion premium – 30%; probability of prepayment – 5% at both March and June 2021; probability of change in control – 5% at June 2021; probability of default – 27% at September 2021. The Company recorded a loss of $0.6 million for the change in fair value in other expense in the consolidated statements of operations for the year ended December 31, 2020. The Tonogold Note was classified within Level 3 of the valuation hierarchy at the year ended December 31, 2020.
Tonogold Contingent Forward
On March 20, 2020, Tonogold issued to the Company a senior secured convertible note with a principal amount of $5,475,000 reflecting Tonogold’s intent to purchase additional membership interests in Comstock Mining LLC (see Note 2, Acquisitions and Investments) in the future at a specified price. The Contingent Forward included the following features: 1) conversion feature allowing Comstock, at our sole option, to elect payment in Tonogold common shares upon certain events; 2) change of control redemption right allowing Comstock, to redeem the note in cash at a 125% premium; 3) event of default redemption right allowing Comstock the right to redeem the note in cash at a 118% premium; and 4) a payment modification included in the Contingent Forward. The fair value of the Contingent Forward was based on a Monte Carlo model with various inputs. These inputs included the Tonogold common share price of $0.35 on September 8, 2020, volatility of 96.0%, risk-free rate of 0.15%, cost of debt of 11.12%, required conversion premium of 30.0%, probability of prepayment of 5%, probability of change in control of 5% and probability of default of 27%. We recorded a change in fair value of the Contingent Forward of $0.8 million in other income in the consolidated statements of operations for the year ended December 31, 2020. The contingent forward asset was netted against the gain on sale of Comstock Mining LLC recorded for the year ended December 31, 2020.
Tonogold Convertible Preferred Shares
The consideration received for Tonogold's acquisition of Comstock Mining LLC included shares of the Tonogold CPS. Since the CPS were not listed securities, and had no readily available market, we elected the fair value option for this instrument. The value of the CPS at December 31, 2020 was based on 120% of par value as a result of several factors, which made it likely that Tonogold would be able to apply the redemption provision of the CPS. We recorded $2,544,000 in gain (loss) on investments in other income and expense related to the changes in fair value of the CPS in the consolidated statements of operations year ended December 31, 2020.
LINICO Derivative Instruments
On February 15, 2021, we recorded a derivative asset on the consolidated balance sheets in connection with the LINICO Stock Purchase Agreement. On that date, the February 15, 2021, the fair value of the derivative asset was determined based on the excess of the fair value of 3,000,000 shares of our common stock issued to and held by LINICO over the $6,250,000 contractual consideration required under the agreement. The fair value of the shares was based on the $2.25 closing price per share of our common stock on that date. The increase in fair value of $2,049,966 was recognized as a change in fair value of the derivative instruments in the consolidated statements of operations for the year ended December 31, 2021.
On December 30, 2021, the Company entered into an agreement to acquire 3,129,081 LINICO common shares from its former chief executive officer and director in exchange for 3,500,000 Comstock Shares. If and to the extent that the sale of the LODE Shares results in net proceeds greater than $7,258,162, then former chief executive officer is required to pay all of such excess proceeds to the Company. If and to the extent that the sale of the Comstock Shares results in net proceeds less than $7,258,162, then the Company is required to pay the former chief executive officer equal to such shortfall. At December 31, 2021, the fair value of the shares was based on the closing price per share of our common stock of $1.29. The resulting shortfall of $2,743,162 was recognized as a derivative liability in the consolidated balance sheet and change in fair value of derivative instruments in the statement of operations at and for the year ended December 31, 2021.
GenMat Derivative Instruments
On June 24, 2021, we recorded a derivative asset on the consolidated balance sheets in connection with the GenMat Membership Interest Purchase Agreement. On that date, the $530,000 fair value of the derivative asset was determined based on the excess of the fair value of 3,000,000 shares of our common stock issued to and held by GenMat over the $10,000,000 contractual stock consideration required under the agreement. The value of the shares was based on the $3.51 closing price per share of our common stock on that date. At December 31, 2021, the $6,130,000 fair value of the derivative liability is based on the same number of shares and the $1.29 closing price per share of our common stock on that date. The decrease in fair value of $6,660,000 was recognized as a change in fair value of the derivative instruments in the consolidated statements of operations for the year ended December 31, 2021. The derivative liability is classified within Level 2 of the valuation hierarchy.
LPB Derivative Instrument
On July 23, 2021, we recorded a derivative asset on the consolidated balance sheets in connection with the LPB Contribution Agreement. On that date, the $6,642,000 fair value of the derivative asset was determined based on the excess of the fair value of 3,500,000 shares of our common stock issued to and held by LPB over the $4,173,000 fair value of our contractual consideration under the LPB Partnership Interest Purchase Agreement. The value of the shares was based on the $3.09 closing price per share of our common stock on that date. At December 31, 2021, the $342,000 fair value of the derivative asset is
based on the same number of shares and the $1.29 closing price per share of our common stock on that date. The decrease in fair value of $6,300,000 was recognized as a change in fair value of the derivative instruments in the consolidated statements of operations for the year ended December 31, 2021. The derivative liability is classified within Level 2 of the valuation hierarchy.
MCU Derivative Instrument
On December 4, 2020, the Company recorded a derivative asset on the consolidated balance sheets in connection with its $2.0 million purchase of 15% of MCU membership interests. At December 31, 2020, the $271,377 fair value of the derivative asset was based 625,000 shares of the our common stock issued as a portion of the purchase price, and the $1.04 closing price per share of our common stock. During the year ended December 31, 2021, MCU sold 625,000 shares, resulting in a final derivative asset fair value of $762,377 based on the excess of actual net proceeds and cash payments to MCU over the $2,000,000 purchase price. We received a cash payment of $762,377 from MCU in February 2021 in full satisfaction of any excess proceeds from the sale of the stock, which was applied to the derivative asset, resulting in no remaining fair value at December 31, 2021. The increase in fair value of $497,250 for the change in fair value of the derivative instruments in the consolidated statements of operations for the year ended December 31, 2021. The derivative liability is classified within Level 2 of the valuation hierarchy.
Other Financial Instruments
At December 31, 2021, the carrying amount of cash and cash equivalents and notes receivable carried at amortized costs, approximates fair value because of the short-term maturity of these financial debt.
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
Following is a description of the valuation methodologies used in determining the fair values of the nonrecurring stock purchase price consideration and intangible assets recorded in connection with the three acquisitions completed during the year ended December 31, 2021, all of which are classified within Level 3 of the valuation hierarchy
PSI Stock Purchase Price Consideration
On September 7, 2021, the Company entered into and closed under a Securities Exchange Agreement with the shareholders of Comstock Innovations Corporation (F/K/A Plain Sight Innovations Corporation) (“Comstock Innovations”), in order to acquire 100% of the issued and outstanding equity of the Company, in exchange for 8,500,000 restricted shares of the Company’s common stock with a fair value of $14,952,806. Such shares are subject to transfer restrictions, of which 28% will be released from the Lock-Up 180 days after closing, and the remaining 72% will be released in eight (8) equal installments of 9% every six months thereafter. In determining the fair value of the shares issued, we assessed the lack of marketability of the shares issued utilizing the European and Asian Protective Put Models and, in order to estimate the volatility for Comstock's future business, we evaluated selected guideline companies from the same industry to determine discounts for lack of marketability associated with the lockup restrictions of 18.2% for the six-month lockup and 54.0% for the longer-term lockups. Related inputs for the six-month lockup include stock price $1.00, exercise price $1.00, term 0.5 years, volatility 101.3%, risk free rate 0.05% and dividend yield 0.0%. Related inputs for the longer-term lockups include stock price $1.00, exercise price $1.00, term 2.5 years, volatility 130.5%, risk free rate 0.30% and dividend yield 0.0%. The purchase price consideration is classified within Level 2 of the valuation hierarchy.
Comstock Innovations Intangible Assets
The Company’s intangible assets acquired from PSI consist of technology-related assets, including third-party license agreements and internally developed technology. Because adequate information is not available to determine the fair value of one of the license agreements using income (economic benefit stream) or market (comparable assets) valuation approaches, the fair values are based on a cost approach (to replace the future service capability of the asset) and an 80.0% opportunity cost to negotiate the agreement over a one-month period, resulting in an estimated fair value of $10,800. The second license agreement has been recorded at the cost of the minimum license fee less amortization, resulting in an estimated fair value of $483,333. The estimated fair value of the internally developed technology is based on the relief from royalty approach, estimating the present value of related future cash flows after tax discounted at an estimated 80.0% per annum weighted average cost of capital, resulting in an estimated fair value of $6,579,400. All three intangible assets are being amortized on a straight line basis over their 10-year estimated useful lives. The intangible assets are classified within Level 3 of the valuation hierarchy.
MANA Stock Purchase Price Consideration
On July 23, 2021, we entered into a Securities Purchase Agreement to purchase 100% of MANA equity and voting shares from the former shareholders of MANA. Under the agreement, the purchase price was paid through the issuance of 4,200,000 restricted shares of our common stock to the former shareholders, with an estimated fair value of $6,528,453. The restricted shares issued are subject to lockup provisions wherein 28% of the restricted shares are released from resale restrictions $180 days, or six months, after the closing. The remaining 72% of the restricted shares are released from resale restrictions in eight equal installments of 9%% every six months thereafter. In determining the fair value of the shares issued, we assessed the lack of marketability of the shares issued utilizing the European and Asian Protective Put Models and, in order to estimate the volatility for Comstock's future business, we evaluated selected guideline companies from the same industry to determine discounts for lack of marketability associated with the lockup restrictions of 39.4% for the six-month lockup and 53.7% for the longer-term lockups. Related inputs for the six-month lockup include stock price $1.00, exercise price $1.00, term 0.5 years, volatility 209.9%, risk free rate 0.05% and dividend yield —%. Related inputs for the longer-term lockups include stock price $1.00, exercise price $1.00, term 2.5 years, volatility 129.6%, risk free rate 0.30% and dividend yield —%. The purchase price consideration is classified within Level 2 of the valuation hierarchy.
RPS Stock Purchase Price Consideration
On June 18, 2021, we entered into a Securities Purchase Agreement to purchase 100% of RPS equity and voting shares from the former shareholder of RPS. Under the agreement, the purchase price is paid through the issuance of 1,000,000 restricted shares of our common stock to the former shareholder, with an estimated fair value of $2,304,806. The restricted shares issued are subject to lockup provisions wherein 28.0% of the restricted shares are released from resale restrictions 180 days, or six months, after the closing. The remaining 72.0% of the restricted shares are released from resale restrictions in eight equal installments of 9.0% every six months thereafter. In determining the fair value of the shares issued, we assessed the lack of marketability of the shares issued utilizing the European and Asian Protective Put Models and, in order to estimate the volatility for Comstock's future business, we evaluated selected guideline companies from the same industry to determine discounts for lack of marketability associated with the lockup restrictions of 26.2% for the six-month lockup and 37.5% for the longer-term lockups. Related inputs for the six-month lockup include stock price $1.00, exercise price $1.00, term 0.5 years, volatility 142.4%, risk free rate 0.06% and dividend yield —%. Related inputs for the longer-term lockups include stock price $1.00, exercise price $1.00, term 2.49 years, volatility 90.8%, risk free rate 0.36% and dividend yield —%. The purchase price consideration is classified within Level 2 of the valuation hierarchy.
RPS Intangible Assets
RPS intangible assets acquired consist of technology-related and contract-related assets. The technology-related asset is a third-party license agreement with an estimated fair value of $16,619, and the contract-related assets include a third-party distribution agreement with an estimated fair value of $19,733, and a customer contract with an estimated fair value of $122,885. Because adequate information is not available to determine the fair values of the license and distribution agreements using income (economic benefit stream) or market (comparable assets) valuation approaches, their fair values are based on a cost approach (to replace the future service capability of the assets) and an 11.8% opportunity cost to negotiate the agreements over a six-month period. The fair values of the license and distribution agreements are being amortized on a straight line basis over their estimated 24 and 79 month estimated useful lives, respectively. The fair value of the customer contract is based on the income approach, estimating the present value of related future cash flows after tax discounted at an estimated 11.8% per annum weighted average cost of capital. The customer contract is being amortized on a straight line basis over the estimated nine-month period to complete the related services. The intangible assets are classified within Level 3 of the valuation hierarchy.
LINICO Intangible Assets
LINICO intangible assets acquired consist of internally developed technology with an estimated fair value of $11,803,000, a lease intangible related to a purchase option with an estimated fair value of $3,621,488, and a trademark with an estimated fair value of $7,000. The estimated fair value of the internally developed technology is based on a relief from royalty method, with estimated revenue over 12 years, attrition of 8.3%, gross royalty charges of 7% and a discount rate of 74.0%. The lease intangible is based on a Black Scholes model with an estimated fair value of the battery recycling facility of $17,130,000, a purchase option price of $14,250,000, a term of 0.8 years, a risk-free rate of 0.29% and volatility of 21.6%. The trademark is valued based on a cost model, which includes attorney advice and preparation of the trademark application, plus filing costs. The developed technology and trademark will be amortized on a straight line basis over their 10-year estimated useful lives and the lease intangible will be amortized on a straight-line basis over its 10-month estimated useful life. Intangible assets of $15,431,488 were recognized upon acquisition based on their relative fair value to the fair value of other net assets acquired. The intangible assets are classified within Level 3 of the valuation hierarchy.
NOTE 16 STOCK-BASED COMPENSATION
2020 EQUITY INCENTIVE PLAN
In 2020, the Company adopted the Comstock Mining Inc. 2020 Equity Incentive Plan (“2020 Plan”). The maximum number of shares of our common stock that may be delivered pursuant to awards granted under the 2020 Plan is 1,800,000. The plan provides for the grant of various types of grants, including but not limited to restricted stock (including performance awards), restricted stock units, stock options, and other types of stock-based compensation.
In December 2020, 540,000 shares were granted to non-executive directors under the 2020 Plan, which vest in three equal increments of 180,000 shares each on January 1, 2022, January 1, 2023 and January 1, 2024. The fair value of the common shares issued was $1.06 per share, based on the closing price of our common stock on December 30, 2020. Compensation expense for these grants totaling $572,400 and will be recognized on a straight-line basis over the three year vesting period. Compensation expense for these grants totaling $190,800 was recorded as a selling, general and administrative expense in the consolidated statements of operations for the year ended December 31, 2021. Unamortized stock-based compensation of $381,600 at December 31, 2021 will be amortized over the remaining 24 months vesting term.
In 2021, we granted, 1,170,000 performance shares to employees under the 2020 Plan. The vesting of 50% of the employee performance share awards is contingent on the achievement of performance goals over the next three years, and vesting of the remaining 50% is contingent on the achievement of our common stock market price goals over the next five years, defined on a per share basis. Vesting is dependent on the employee remaining with the Company from the grant date through the vesting date. The performance shares that vest based on the achievement of performance goals were valued using the Company's common stock price on the grant date, and stock-based compensation was determined based on the probability of achieving each goal.
The performance vesting based on the Company share price were valued using a path-dependent model with the following inputs:
| | | | | | | | | | | | | | | | | | | | | | | |
| January 4, 2021 | | June 8, 2021 | | July 12, 2021 | | August 30, 2021 |
| Total shares granted | 1,055,000 | | | 60,000 | | | 25,000 | | | 30,000 | |
| Performance condition valuation inputs: | | | | | | | |
| Performance condition shares | 527,500 | | | 30,000 | | | 12,500 | | | 15,000 | |
| Stock price at grant date | $ | 1.10 | | | $ | 3.51 | | | $ | 3.17 | | | $ | 3.04 | |
| Market condition valuation inputs: | | | | | | | |
| Market condition shares | 527,500 | | | 30,000 | | | 12,500 | | | 15,000 | |
| Beginning stock price | $ | 1.10 | | | $ | 3.51 | | | $ | 3.17 | | | $ | 3.04 | |
| Volatility | 77 | % | | 93 | % | | 93 | % | | 95 | % |
| Risk-free rate | 0.36 | % | | 0.79 | % | | 0.71 | % | | 0.65 | % |
| Number of iterations | 100,000 | | | 100,000 | | | 100,000 | | | 100,000 | |
| Fair value per share | $ | 0.41 | | | $ | 2.71 | | | $ | 2.38 | | | $ | 2.26 | |
| Term (in years) | 3.2 | | 1.7 | | 1.8 | | 1.8 |
Stock-based compensation for all employee performance share grants totaling $273,186 was recorded in the consolidated statements of operations for the year ended December 31, 2021. At December 31, 2021, unamortized stock-based compensation for performance goals-based grants of $605,451 will be amortized over the remaining 24 months vesting term, and the $253,363 associated with market price-based grants will be amortized over the remaining 26 months, 12 months and 15 months derived vesting terms, as applicable. No shares have vested at December 31, 2021.
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 could be delivered pursuant to awards granted under the 2011 Plan was 1,200,000. The plan provided 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. The 2011 Plan expired June 23, 2021. At December 31, 2021, there are no shares available to be issued under the plan.
In May 2020, non-executive board members were granted a total of 135,000 common shares for past services and 180,000 common shares for current services for a total of 315,000 common shares. The fair value of the common shares issued was $0.56 per share, based on the closing price of the Company's common shares on May 28, 2020. Compensation cost totaling $176,400 was recorded as a general and administrative expense in the consolidated statements of operations for the year ended December 31, 2020.
Also in May 2020, employees were granted 138,800 fully vested options to acquire common shares with an exercise price equal to the closing price of our common stock on the date of the grant and expiring on the second anniversary of the grants. Fair value of stock options was calculated using a Black-Scholes model with the following inputs: stock price on the grant date and exercise price of - $0.56 per share; expected term - 1 year; annualized risk-free rate - 0.17%; and annualized volatility - 92.91%. Based on these inputs, the fair-value option price is $0.20 per share. Compensation expense for the stock options issued totaled $27,849 and was recorded as additional paid in capital on the consolidated balance sheets for the year ended December 31, 2020. During 2021, 66,150 of the stock options have been repurchased and cancelled in lieu of being exercised. Cash paid for the stock options totaling $247,156 for the year ended December 31, 2021 was deemed to be the incremental fair value of the stock options at the repurchase date, and was recorded as a reduction in additional paid-in capital on the consolidated balance sheets. At December 31, 2021, the intrinsic value of the remaining 72,650 stock options outstanding was $53,035.
NOTE 17 OTHER INCOME AND EXPENSES
Other income (expense) net consisted of the following for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Impairment of LPB related assets | (1,076,258) | | | — | |
| Equity loss in affiliates | (2,049,070) | | | (2,131) | |
| Tonogold reimbursement of Pelen LLC acquisition costs | — | | | 234,944 | |
| Change in fair value of Tonogold preferred shares | — | | | (2,544,000) | |
| Change in fair value Tonogold note receivable | (418,500) | | | (642,997) | |
| Tonogold note receivable amendment fee income | 362,500 | | | — | |
| Writedown of uncollectible receivable | (300,000) | | | — | |
| Recognition of grant from CARES Act PPP loan | — | | | 261,170 | |
| LINICO dividend income | 426,763 | | | — | |
| Other | 75,202 | | | 425,185 | |
| Total other income (expense) | $ | (2,979,363) | | | $ | (2,267,829) | |
On April 30, 2020, the Company received a Paycheck Protection Program (“PPP”) grant of $261,170, as part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and the rules promulgated thereunder. The amounts received were used to fund payroll and other qualifying costs and the all proceeds received were forgiven during 2021 .
NOTE 18 INCOME TAXES
The results of the Company’s operations are included in a federal income tax return. The Company provides deferred income taxes on the net differences between the carrying amounts of assets and liabilities for financial and income tax reporting. The difference between the provision for income taxes reported in the consolidated financial statements and the provision for income taxes based on federal statutory rates results principally from 1) valuation allowance adjustments, 2) goodwill impairment and 3) certain other permanent differences.
The provision for income taxes for the years ended December 31, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | |
| Current provision: | | | |
| Federal | $ | — | | | $ | — | |
| State | — | | | — | |
| Total current provision | — | | | — | |
| | | |
| Deferred provision (benefit) for tax: | | | |
| Federal - due to acquisition of intangibles | (5,748,105) | | | — | |
| State | — | | | — | |
| Total deferred provision (benefit) for tax | (5,748,105) | | | — | |
| Total provision for tax | $ | (5,748,105) | | | $ | — | |
Reconciliation of the statutory federal income tax rates consist of the following :
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Federal statutory rate | (21.0) | % | | (21.0) | % |
| Goodwill impairment | 4.3 | % | | — | % |
| Change in valuation allowance | (1.6) | % | | 21.3 | % |
| Other | (0.7) | % | | (0.3) | % |
| Total | (19.0) | % | | — | % |
The Company’s total deferred income taxes at December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | |
| 12/31/21 | | 12/31/20 |
| Asset retirement obligation | $ | 1,143,591 | | | $ | 1,259,361 | |
| Mineral rights and properties, plant, and equipment | 1,172,407 | | | 1,233,374 | |
| Mining exploration, development, claims, and permit costs | 335,572 | | | 174,122 | |
| Lease liability | 2,739,135 | | | — | |
| Net operating loss carryforward | 41,897,036 | | | 40,316,072 | |
| Capital loss carryforward | — | | | 655,780 | |
| Mark-to-market adjustments | 3,697,424 | | | — | |
| Other | 453,712 | | | 88,841 | |
| Total deferred tax asset | 51,438,877 | | | 43,727,550 | |
| Valuation allowance | (43,102,265) | | | (43,579,484) | |
| Net deferred tax assets | 8,336,612 | | | 148,066 | |
| | | |
| Deferred tax liabilities: | | | |
| Right of use asset – leases | (2,739,135) | | | — | |
| Mark-to market adjustments | — | | | (148,066) | |
| Intangible assets | (5,597,477) | | | — | |
| Total deferred tax liabilities | (8,336,612) | | | — | |
| Net deferred tax assets and liabilities | $ | — | | | $ | 148,066 | |
The Company records a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A portion of the change is due to net operating losses released due to acquisitions. At December 31, 2021, and 2020, the Company has determined that a full valuation allowance is necessary against its net deferred tax assets based on the weight of all available evidence. The resulting valuation allowance recorded against the net deferred tax assets of the Company is $43.1 million and $43.6 million at December 31, 2021, and 2020, respectively.
At December 31, 2021, the Company has net operating loss carryforwards of approximately $168.2 million for federal income tax purposes which, if not utilized, will begin to expire in 2024 and could be subject to certain limitations under section 382 of the Internal Revenue Code. Additionally, at December 31, 2021, the Company has net operating loss carryforwards of approximately $31.3 million for federal income tax purposes with no expiration, but which are subject to 80% limitation upon utilization. At December 31, 2021, the Company had no capital loss carryforwards.
At December 31, 2021, and 2020, 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 2019 and forward. Tax returns for years prior to 2018 may remain open with respect to net operating loss carryforwards that are utilized in a later year, as tax attributes from prior years can be adjusted during an audit of a later year.
NOTE 19 NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if outstanding stock options were exercised into common stock. For the years ended December 31, 2021, and 2020, we had no common stock equivalent shares that were dilutive. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
| | | | | | | | | | | |
| | 12/31/21 | | 12/31/20 |
| Numerator: | | | |
| Net income (loss) attributable to Comstock Mining Inc. | $ | (24,583,620) | | | $ | 14,931,970 | |
| | | |
| Denominator: | | | |
| Basic weighted average shares outstanding | 50,417,979 | | | 30,526,895 | |
| Incremental shares - stock options | — | | | 34,273 | |
| Diluted weighted average shares outstanding | 50,417,979 | | | 30,561,168 | |
| | | |
| Net income (loss) per common share: | | | |
| Basic EPS | $ | (0.49) | | | $ | 0.49 | |
| Diluted EPS | $ | (0.49) | | | $ | 0.49 | |
The weighted average number of shares outstanding, for the purpose of calculating earnings per share, were reduced by 2,694,300, which is the number of shares deemed to be owned by us through our ownership in LINICO.
NOTE 20 SEGMENT REPORTING
We have the following segments and reporting units: production and sale of renewable energy products and strategic and other investments.
Summarized financial information relating to our reportable segments is provided below. Certain amounts have been reclassified to conform to the current period presentation, most notably to reclassify our historical activities to our all other segment. We have created a new operating segment, renewable energy products, which includes our new technologies and the resulting renewable energy products. Our strategic and other investments segment includes all other activities, including real estate, mining, equity method investments and general corporate costs. Strategic and other investments revenue is from real estate activities.
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021: | Renewable Energy Products: | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | |
| | | | | | | |
| Revenue from external customers | $ | 634,042 | | | 228,123 | | | $ | — | | | $ | 862,165 | |
| Inter-segment revenue | 371,900 | | | — | | | (371,900) | | | — | |
| Total segment revenue | 1,005,942 | | | 228,123 | | | (371,900) | | | 862,165 | |
| | | | | | | |
| Costs of goods sold: | | | | | | | |
| | | | | | | |
| Costs of goods sold | 257,351 | | | 14,731 | | | — | | | 272,082 | |
| Inter-segment eliminations | — | | | — | | | | | — | |
| Total costs of goods sold | 257,351 | | | 14,731 | | | — | | | 272,082 | |
| | | | | | | |
| Gross Profit | 748,591 | | | 213,392 | | | (371,900) | | | 590,083 | |
| | | | | | | |
| Operating expenses | | | | | | | |
| Depreciation and amortization | 567,520 | | | 466,966 | | | — | | | 1,034,486 | |
| Other operating expenses | 1,982,666 | | | 4,350,752 | | | (371,900) | | | 5,961,518 | |
| Total costs and expenses | 2,550,186 | | | 4,817,718 | | | (371,900) | | | 6,996,004 | |
| | | | | | | |
| Loss from Operations | (1,801,595) | | | (4,604,326) | | | — | | | (6,405,921) | |
| | | | | | | |
| Other income (expense) | | | | | | | |
| Gain (loss) on investments | — | | | (2,244,951) | | | — | | | (2,244,951) | |
| Interest expense | (72,194) | | | (163,651) | | | 66,964 | | | (168,881) | |
| Interest income | 3,897 | | | 1,081,014 | | | (66,964) | | | 1,017,947 | |
| Change in fair value of derivative instruments | — | | | (13,155,946) | | | — | | | (13,155,946) | |
| Equity loss in affiliates | — | | | (2,049,070) | | | — | | | (2,049,070) | |
| Impairment of goodwill and intangible assets | (6,394,610) | | | — | | | — | | | (6,394,610) | |
| Other income (expenses) | (6,328,429) | | | 5,398,136 | | | — | | | (930,293) | |
| Total other income (expense), net | (12,791,336) | | | (11,134,468) | | | — | | | (23,925,804) | |
| | | | | | | |
| Net income (loss) | (14,592,931) | | | (15,738,794) | | | — | | | (30,331,725) | |
| | | | | | | |
| Deferred income tax benefit | 1,514,303 | | | 4,233,802 | | | — | | | 5,748,105 | |
| | | | | | | |
| Net income (loss) attributable to Comstock Mining Inc | $ | (13,078,628) | | | $ | (11,504,992) | | | $ | — | | | $ | (24,583,620) | |
| | | | | | | |
| | | | | | | |
| Capital Expenditures: | $ | 78,467 | | | $ | — | | | $ | — | | | $ | 78,467 | |
| | | | | | | |
| Total Assets: | $ | 43,001,837 | | | $ | 83,952,795 | | | $ | — | | | $ | 126,954,632 | |
| | | | | | | |
| Investments | $ | 8,804,587 | | | $ | 17,046,292 | | | $ | — | | | $ | 25,850,879 | |
| | | | | | | |
| Goodwill | $ | 12,788,671 | | | $ | — | | | $ | — | | | $ | 12,788,671 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 | | Renewable Energy Products: | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | | |
| | | | | | | | |
| Revenue from external customers | | $ | — | | | $ | 201,700 | | | $ | — | | | $ | 201,700 | |
| Inter-segment revenue | | — | | | — | | | — | | | — | |
| Total segment revenue | | — | | | 201,700 | | | — | | | 201,700 | |
| | | | | | | | |
| Costs of Goods Sold: | | | | | | | | |
| | | | | | | | |
| Costs of Goods Sold | | — | | | 51,890 | | | — | | | 51,890 | |
| Inter-segment eliminations | | — | | | | | — | | | — | |
| Total costs of goods sold | | — | | | 51,890 | | | — | | | 51,890 | |
| | | | | | | | |
| Gross Profit | | — | | | 149,810 | | | — | | | 149,810 | |
| | | | | | | | |
| Operating expenses | | | | | | | | |
| Depreciation and amortization | | — | | | 1,222,438 | | — | | | 1,222,438 | |
| Other operating expenses | | — | | | 4,401,633 | | — | | | 4,401,633 | |
| Total costs and expenses | | — | | | 5,624,071 | | — | | | 5,624,071 | |
| | | | | | | | |
| Loss from Operations | | — | | | -5,474,261 | | — | | | (5,474,261) | |
| | | | | | | | |
| Other income (expense) | | | | | | | | |
| Gain (loss) on investments | | — | | | 3,152,702 | | — | | | 3,152,702 | |
| Gain on sale of membership interest in Comstock Mining LLC | | — | | | 18,275,846 | | — | | | 18,275,846 | |
| Changes in estimated fair value of contingent forward asset | | — | | | 765,880 | | — | | | 765,880 | |
| Interest expense | | — | | | (421,887) | | | — | | | (421,887) | |
| Interest income | | — | | | 473,681 | | — | | | 473,681 | |
| Change in fair value of derivative instruments | | — | | | 427,838 | | — | | | 427,838 | |
| Equity loss in affiliates | | — | | | (2,131) | | | — | | | (2,131) | |
| Impairment of goodwill and intangible assets | | — | | | — | | | — | | | — | |
| Other income (expenses) | | — | | | (2,265,698) | | | — | | | (2,265,698) | |
| Total other income (expense), net | | — | | | 20,406,231 | | | — | | | 20,406,231 | |
| | | | | | | | — | |
| Net income (loss) | | — | | | 14,931,970 | | | — | | | 14,931,970 | |
| | | | | | | | — | |
| Deferred income tax benefit | | — | | | 0 | | — | | | — | |
| | | | | | | | — | |
| Net income (loss) attributable to Comstock Mining Inc | | $ | — | | | $ | 14,931,970 | | | $ | — | | | $ | 14,931,970 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Capital Expenditures: | | $ | — | | | $ | 130,750 | | | $ | — | | | $ | 130,750 | |
| | | | | | | | |
| Total Assets: | | $ | — | | | $ | 43,123,562 | | | $ | — | | | $ | 43,123,562 | |
| | | | | | | | |
| Investments | | $ | — | | | $ | 3,272,597 | | | $ | — | | | $ | 3,272,597 | |
| | | | | | | | |
| Goodwill | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Prior to December 30, 2021, RPS other services revenue of $905,942 were recognized for LINICO prior to our acquisition. Of this amount, $371,900 was considered intersegment revenue and was eliminated in consolidation. RPS's revenue is included in the Renewable Energy Products segment.
NOTE 21 RELATED PARTY TRANSACTIONS
In addition to the related party disclosures included in Note 2, Acquisitions and Investments, the following related party transactions occurred during the years ended December 31, 2021 and 2020.
AMENDMENT TO ASSET PURCHASE AGREEMENT
On September 7, 2021, the Company entered and closed under an Asset Purchase Agreement with Flux Photon Corporation (“FPC”), in order to acquire certain intellectual property and related photovoltaic and photocatalysis laboratory equipment (the “FPC Assets”). The purchase price payable for the FPC Assets is $18,000,000 payable in cash to FPC with 20% of the future monthly consolidated sales, less total variable costs, less operating expenses, maintenance, tax payments, and debt service payments of the Company and its now and hereafter-existing subsidiaries, until the purchase price of $18,000,000 has been fully paid. The Company assigned the FPC Assets to its wholly-owned Comstock IP Holdings subsidiary immediately after closing. On December 10, 2021, the Asset Purchase Agreement was amended to provide for the payment by the Company of a $350,000 down payment against the purchase price, corresponding to a potential performance-based cash payment of $17,650,000 required under the Asset Purchase Agreement.. Kevin Kreisler, the Company’s president and chief financial officer, and David Winsness, the Company’s chief technology officer, are indirect beneficiaries of all payments made to FPC under the Asset Purchase Agreement. The Company additionally agreed to appoint Mr. Kreisler to the Company’s board of directors in connection with the Company’s acquisition of Comstock Innovations Corporation (F/K/A Plain Sight Innovations Corporation) (“Comstock Innovations”) on September 7, 2021 (see Note 2, Acquisitions and Investments).
ACQUISITION OF MAJORITY EQUITY INTEREST IN LINICO CORPORATION
During 2021, we executed and closed under a series of agreements under which we acquired 90% of the issued and outstanding equity of LINICO Corporation (“LINICO”), in exchange for aggregate consideration of $4,500,000 in cash and 6,500,000 shares of Company common stock.
On February 15, 2021, Comstock, Aqua Metals Inc. (“AQMS”), and LINICO entered into a Series A Preferred Stock Purchase Agreement (the “Stock Purchase Agreement”), pursuant to which (i) the Company purchased 6,250 shares of LINICO Series A Convertible Preferred Stock (“Series A Preferred”), corresponding to 45.45% of LINICO’s issued and outstanding capital stock, in exchange for 3,000,000 shares of Company restricted common stock (“Stock Consideration”) and $4.5 million in cash payments (“Cash Consideration” and, together with the Stock Consideration, the “Consideration”), subject to the satisfaction or waiver of specified conditions; and (ii), AQMS purchased 4,500,000 LINICO Series A Preferred shares, corresponding to 10.91% of LINICO’s issued and outstanding capital stock, in exchange for 375,000 shares of AQMS. The Company, AQMS, and LINICO additionally entered into warrant agreements in connection with the closing of the Stock Purchase Agreement, pursuant to which the Company has the right to purchase an additional 2,500 shares of LINICO Series A Preferred in exchange for $500,000, and AQMS has the right to purchase an additional 500 shares of LINICO Series A Preferred in exchange for $500,000. If the cash proceeds from the Consideration are less than $6,250,000, the Company agreed to provide LINICO with additional shares or cash to make up the shortfall. However, if cash proceeds from the Consideration exceed $10,750,000, the excess must be returned to the Company, after the $4,500,000 differential above $6,250,000 is applied to exercise of the
warrant ($2,500,000) and the additional deposit due under the AQMS Lease Agreement ($2,000,000) (see Note 2, Acquisitions and Investments, Note 6, Property, Plant and Equipment, Note 15, Fair Value Measurements). Similarly, if the cash proceeds from the sale of 75% of the AQMS shares is less than $1,500,000, AQMS is obligated to provide LINICO with additional cash to make up the shortfall. LINICO is obligated to hold the remaining 25% of AQMS shares for at least six months after the date of the Stock Purchase Agreement. After such date, the gross proceeds in excess of $2,000,000 from the sale of all AQMS shares must be returned to the AQMS (the February 15, 2021 differential is automatically applied to the exercise of the AQMS warrants).
On December 30, 2021, the Company entered into an agreement to acquire $3,129,081 LINICO common shares from its former chief executive officer and director equating to 90% ownership. The former chief executive officer resigned from LINICO as a member of its board of directors and in all other capacities, effective at such date. In connection with the acquisition of such LINICO shares, the Company issued 3,500,000 common shares of the Company (“Comstock Shares”) to the former chief executive officer. If and to the extent that the sale of the LODE Shares results in net proceeds greater than $7,258,162, then the former chief executive officer is required to pay all of such excess proceeds to the Company. If and to the extent that the sale of the Comstock Shares results in net proceeds less than $7,258,162, then the Company is required to pay cash to the former chief executive officer equal to such shortfall. The Company retained the right to purchase the Comstock Shares from the former chief executive officer for the purchase price of $7,258,162 (less the amount of cash proceeds received by the former chief executive officer from any previous sale of the Comstock Shares by the former chief executive officer), at any time during or prior to his sale of the Comstock Shares. At December 31, 2021, the remaining 10% of LINICO’s issued and outstanding equity was owned by Aqua Metals Inc. (“AQMS”). One of the members of the Company’s board of directors, is the chief financial officer of AQMS.
LEASE AND PURCHASE AGREEMENT FOR BATTERY RECYCLING FACILITY
On February 15, 2021, LINICO and Aqua Metals Reno Inc. (the “Landlord”), a subsidiary of AQMS, entered into an industrial lease (the “AQMS Lease Agreement”), for the 136,750 square foot facility, land, and related improvements located at 2500 Peru Drive, McCarran, Nevada 89343 (the “Battery Recycling Facility”). The AQMS Lease Agreement commences April 1, 2021 and expires on March 31, 2023. During the lease term, LINICO has the option to purchase the land and facilities at a purchase price of $14,250,000 if the option is exercised and the sale is completed by October 1, 2022, and $15,250,000 if the option is exercised and the sale is completed after October 1, 2022 and prior to March 31, 2023. The purchase option is subject to LINICO’s payment of a nonrefundable deposit of $1,250,000 by October 15, 2021, and a second nonrefundable deposit of $2,000,000 by November 22, 2022, both of which will be applied towards the purchase price. The lease agreement is a triple-net lease pursuant to which LINICO will be responsible for all fixed costs, including maintenance, utilities, insurance, and property taxes. The lease agreement provides for LINICO’s monthly lease payments starting at $68,000 per month and increasing to $100,640 in the last six months of the lease. The lease agreement allows AQMS to retain the use of a portion of the facility for ongoing research and development activities, including operation of the lab and the use of office space.
TRANSACTIONS INVOLVING SIERRA SPRINGS OPPORTUNITY FUND
The Company provided SSOF with a total of $4,935,000 in advances (“SSOF Advances”), including $3,285,000 and $1,650,000 provided during the years ended December 31, 2021 and 2020, respectively. SSOF was required to use the corresponding proceeds to pay deposits and other payments on land and other facilities related to investments in qualified businesses in the opportunity zone. The SSOF Advances are non-interest-bearing and are expected to be repaid on or before the closing of the Company’s sale of the Silver Springs Properties to SSE (see Note 2, Acquisitions and Investments). SSOF has assigned all assignable rights, title and interest in SSOF’s property purchases until such time as the SSOF Advances are repaid.
SSOF is currently raising additional equity financing, including sufficient proceeds to fully pay the $4,935,000 SSOF Advances and the $9,740,000 required to close under its pending purchase agreement for Comstock’s Silver Springs Properties. The Company expects that transaction to be completed during 2022, thereby providing the Company with $14,635,000 in estimated cash proceeds.
The Company’s executive chairman and chief executive officer co-founded SSOF and SSE, and serves as the chief executive officer of SSOF and as an executive of SSE along with a diverse team of qualified financial, capital markets, real estate and operational professionals that together govern, lead and manage SSOF and SSE. The $450,000 investment and 9,000,000 voting shares of our CEO and two of our directors represent 16.4% of total as converted SSOF common shares. The Company's chief executive officer has not received compensation of any kind from either SSOF or SSE.
NOTE 22 SUBSEQUENT EVENTS
On January 3, 2022, the Company made an additional SSOF Advance of $1,300,000, for use by SSE in paying deposits for contracted property purchases. SSE assigned all assignable rights, title and interest in SSE’s property purchases to the Company until such time as the SSOF Advances are repaid.
On January 20, 2022, the Compensation Committee of the Company’s Board of Directors authorized a special cash award of $150,000 to William McCarthy, the Company’s Chief Operating Officer, for superlative efforts.
LP Biosciences LLC
On February 28, 2022, the Company and the other parties to the LP Biosciences transactions mutually agreed to terminate the Transaction Documents. Upon termination of the transactions, each of the parties were relieved of their respective rights, liabilities, expenses, and obligations under the transactions except for payment obligations under the termination agreement and tax obligations in respect of their ownership of LPB through the date of termination. In connection with the termination, 3,500,000 restricted shares of the Company’s common stock were transferred back to the Company for cancellation upon receipt. The Company incurred additional expenses of approximately $250,000 in connection with the termination of the transaction.
Litigation
On August 20, 2021, the former employees filed a wrongful termination lawsuit against the Company, its Board of Directors, its Audit and Finance Committee, its Chief Executive Officer and certain of its managers for the termination of their employment. On March 4, 2022, the Company and the former employees agreed to a settlement, which will result in the litigation being dismissed. At December 31, 2021, the Company has accrued the agreed upon severance and related costs.
Tonogold Option Agreement, Reconveyance of Lucerne mine and related assets, and Tonogold Note Receivable
On March 26, 2022, the Company entered into an Option Agreement with Tonogold (the “Lucerne Option”). Subject to certain conditions under the Lucerne Option (including the obligation to complete certain capital raising thresholds and technical reports), Tonogold will re-convey 100% of the previously sold membership interests of Comstock Mining LLC, the entity that owns the Lucerne mine, to the Company, in exchange for the Company forgiving Tonogold’s payment obligations under secured note in the principal amount of $6,650,000 owed by Tonogold to the Company.
Under the Lucerne Option, Tonogold will pay the Company a non-refundable $750,000 option fee for the right to purchase the membership interests of Comstock Mining LLC for $7,750,000 on or prior to December 31, 2022. Tonogold will also be entitled to pay an additional $500,000 non-refundable extension fee to extend the last day of the option exercise period from December 31, 2022, to July 1, 2023. In order to maintain its right to exercise the option, Tonogold bears the responsibility for certain reclamation liabilities, assumes responsibility for the guarantee of the Company’s future payments of capital contributions required under the operating agreement of Northern Comstock and provide payment for all obligations that Tonogold would have otherwise been required to assume under the original purchase agreement and related documents, including the NSR royalty on the Lucerne properties, mineral exploration and mining lease payments, payments related to the Lease Option Agreement, and for certain other properties acquired by Tonogold.