NOTES TO CONDENSED 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 Inc., and its subsidiaries on a consolidated basis.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Comstock Inc. and its wholly-owned subsidiaries, Comstock Innovation Corporation (“Comstock Innovations”) and Comstock IP Holdings LLC ("Comstock IP Holdings") since their acquisition in September 2021, Comstock Engineering Corporation ("Comstock Engineering") since its acquisition in June 2021, MANA Corporation ("MANA") since its acquisition in July 2021, approximately 90% owned LINICO Corporation since its majority acquisition on December 30, 2021, Comstock Mining LLC, since its re-acquisition in March 2022, MCU Philippines, Inc., since its acquisition in June 2022, Comstock Processing LLC, Comstock Northern Exploration LLC, Comstock Exploration and Development LLC, Comstock Real Estate Inc., Comstock Industrial LLC, and Downtown Silver Springs LLC ("DTSS"). Intercompany transactions and balances have been eliminated. The condensed consolidated financial statements do not include all disclosures required of annual, consolidated financial statements and, accordingly, should be read in conjunction with our consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Operating results for the three and nine months ended September 30, 2022 may not be indicative of full year 2022 results.
In management's opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our financial position as of September 30, 2022, and our results of operations, and changes in equity for the three and nine months ended September 30, 2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021.
DESCRIPTION OF THE BUSINESS
Comstock innovates technologies that enable systemic decarbonization and circularity by efficiently converting under-utilized waste and renewable natural resources into fuels and electrification products that contribute to balancing global uses and emissions of carbon. Comstock plans to achieve financial, natural, and social gains by developing, enabling, and operating a fleet of advanced carbon neutral extraction and refining facilities, commercializing complimentary process solutions and related services, and licensing selected technologies to 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.
During 2021 and 2022, 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 option to sell 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.), 88.99% of LINICO Corporation, and (iii) our purchase of 48.19% of Quantum Generative Materials LLC ("GenMat") and other investments. 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.
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. We are currently focused, in conjunction with our investee GenMat, on developing technologies that enhance the efficacy and efficiency of mineral exploration and development activities, including advanced data collection capabilities, sensing and artificially intelligent interpretive and predictive technologies, while leveraging our extensive database of historical and current geologic data, for breakthrough mineral discovery.
LIQUIDITY AND CAPITAL RESOURCES
The Condensed 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 $270.8 million at September 30, 2022. For the nine months ended September 30, 2022, the Company recognized a net loss of $25.3 million. Cash and cash equivalents decreased by $4.8 million from $5.9 million at December 31, 2021 to $1.2 million at September 30, 2022. 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) proceeds from Tonogold Resources, Inc. ("Tonogold") reimbursements (v) the sale of the Silver Springs properties, and (vi) 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 Condensed 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 and other registration statements, 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 Tonogold reimbursement, repayments to us 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 and other registration statements. 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 2022 financial statement presentation. Reclassifications had no effect on net income (loss), stockholders' equity, or cash flows as previously reported.
NOTES RECEIVABLE
Notes receivable are collateralized, interest-bearing obligations and are classified as held for investment when we have the intent and ability to hold the note to maturity. At issuance, notes receivable are recorded at an amount that reasonably approximates their fair value, which is based on the present value of future cash flows discounted at the prevailing interest rate. Any difference between the face amount and fair value is recognized as a discount or premium and accounted for as an element of interest over the life of the note. When interest accrued under the interest method exceeds interest at the stated rate, the amount of periodic amortization recognized is limited to the amount at which the borrower could settle the obligation. Loans held for investment are subsequently measured on an amortized cost basis.
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. For more than 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 and vaccinations in communities throughout the state. We are operating in alignment with these guidelines for protecting the health of our employees, partners and suppliers.
On May 20, 2022, Nevada Governor Steve Sisolak proclaimed the end of the Declaration of Emergency related to the COVID-19 pandemic. The State of Emergency declaration had been in place since March 2020 and allowed the State to
respond to challenges brought forward by the unprecedented pandemic. Due to planning and collaboration across all levels of government in Nevada, the declaration of emergency was ended, and the state remains ready to prevent, treat and manage COVID-19 cases.
ADOPTION OF NEW ACCOUNTING STANDARDS
In August 2020, the Financial Accounting Standards Board ("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 updated ASU became effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The adoption of this updated ASU on January 1, 2022 did not have a material impact on our consolidated financial statements.
In March 2021, the FASB issued ASU 2021-07 (Topic 323), Investments – Equity Method and Joint Ventures. The new ASU eliminated 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 was held. The new ASU became effective for fiscal years, beginning after December 15, 2021. The adoption of this ASU on January 1, 2022 did not have a material impact on our consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2022, the FASB issued ASU 2022-03 (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The new ASU clarifies a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value, and an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments require certain disclosures for equity securities subject to contractual sale restrictions, including the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction, and the circumstances that could cause a lapse in the restriction. The new ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on our 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 voting equity of Comstock Innovations, in exchange for 8,500,000 restricted shares of our common stock with a fair value of $14,952,806.
The Comstock Innovations 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. TPAM’s appointee is the Company's Chief Technical Officer, the beneficial owner, executive officer and director of TPAM.
The pro forma financial information below represents the combined results of operations for the three and nine months ended September 30, 2021 as if the acquisition had occurred as of Comstock Innovations' date of incorporation of March 1, 2021, with pro forma amortization expense related to acquired intangible assets included from January 1, 2021. The 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.
| | | | | | | | |
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
| | |
| Revenue | $ | 368,713 | | $ | 471,838 | |
| | |
| Net income (loss) | (10,452,246) | | (8,938,683) | |
Acquisition of Assets from FLUX Photon Corporation
On September 7, 2021, we purchased all of the intellectual property assets of Comstock Innovations 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. 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, thereby decreasing the potential performance-based cash payment to $17,650,000. We have not recorded the purchased assets or related contingent purchase consideration. Based on historical and continuing losses and no current evidence that the value of the asset would be recoverable through the use of FPC's research activities, the intangible asset was deemed unrecoverable during the first quarter of 2022 and was fully impaired. We recognized an impairment loss of $338,035 (net of accumulated amortization) in the statement of operations during the nine months ended September 30, 2022 for the renewable energy products segment.
Acquisition of MANA Corporation
On July 23, 2021, we acquired 100% of the issued and outstanding equity and voting shares of MANA, an industrial agricultural technology development, marketing, and management company, in exchange for 4,200,000 restricted shares of our common stock with a fair value of $6,528,453.
The pro forma financial information below represents the combined results of operations for the three and nine months ended September 30, 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 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.
| | | | | | | | |
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
| | |
| Revenue | $ | 362,713 | | $ | 465,838 | |
| | |
| Net loss | $ | (9,494,506) | | $ | (7,858,033) | |
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”). The chief financial officer of AQMS is also a member of the Company’s board of directors.
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. 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 48.78% of LINICO's outstanding capital stock (on an as-converted basis) and voting shares. Our chief executive officer is a member and Executive Chairman of the LINICO board of directors.
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, which resulted in the Company owning approximately 90% of the capital stock of LINICO when combined with the Company's capital stock ownership prior to December 30, 2021. 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.
During the nine months ended September 30, 2022, the Company and AQMS made additional investments in LINICO of $3,276,472 and $500,000, respectively. As a result, as of September 30, 2022, we own 88.99% of LINICO's issued and outstanding equity and the remaining 11.01% is owned by AQMS.
Acquisition of Comstock Engineering Corporation
On June 18, 2021, we acquired 100% of the issued and outstanding equity and voting shares of Comstock Engineering Corporation ("Comstock Engineering"), 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.
The pro forma financial information below represents the combined results of operations for the three and nine months ended September 30, 2021 as if the acquisition had occurred at the beginning of the periods presented. The 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.
| | | | | | | | |
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
| | |
| Revenue | 362,713 | | $ | 587,053 | |
| | |
| Net income (loss) | $ | (9,494,506) | | $ | (7,621,176) | |
Summary of Noncurrent Investments
At September 30, 2022 and December 31, 2021, our non-current investments include:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Equity Method Investments: | Investment | | Ownership % | | Investment | | Ownership % |
| LP Biosciences LLC | $ | — | | | —% | | $ | 4,227,587 | | | 48.19% |
| Quantum Generative Materials LLC | 15,041,034 | | | 48.19% | | 13,645,946 | | | 48.19% |
| Green Li-ion | — | | | —% | | 4,577,000 | | 20.22% |
| Mercury Clean Up, LLC | — | | | —% | | 1,975,026 | | 25.00% |
| MCU Philippines, Inc. | — | | | —% | | 499,269 | | | 50.00% |
| Pelen Limited Liability Company | 615,503 | | | 25.00% | | 591,051 | | | 25.00% |
| Total equity method investments | 15,656,537 | | | | | 25,515,879 | | | |
| Cost Method Investments: | | | | | | | |
| Green Li-ion, at cost | 4,517,710 | | | 16.5% | | — | | | $ | — | |
| Sierra Springs Opportunity Fund, Inc., at cost | 335,000 | | | 11.65% | | 335,000 | | | |
| Total Investments | $ | 20,509,247 | | | | | $ | 25,850,879 | | | |
Summary financial information for affiliated companies (20% to 50%-owned) accounted for by the equity method is as follows:
| | | | | | | | | | | |
| 2022* | | 2021* |
| Current assets | $ | 404,210 | | | $ | 8,218,932 | |
| Non-current assets | 11,845,430 | | | 11,585,338 | |
| Current liabilities | 4,315 | | | 3,101,523 | |
| Non-current liabilities | — | | | 2,000,000 | |
| | | |
| | | |
| 2022* | | 2021* |
| Revenues | 52,675 | | | 279,666 | |
| Gross Profit | 52,675 | | | 125,046 | |
| | | |
| Net income (loss) and net income (loss) attributable to the entity | $ | (2,228,217) | | | $ | (791,006) | |
* The information is presented as of June 30, 2022 and September 30, 2021, and for the nine months ended June 30, 2022 and 2021, respectively. 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 comprised of goodwill. We periodically assess the net assets of our equity method investees and confirm there are no other assets that may require adjustments. Significant amounts due to and from equity method investees included in the summarized financial information include the aggregate value of the Company's common stock in the table above held by investees and make-whole derivatives, net of long-term debt of $10 million and $8 million, which is included in non-current assets and liabilities as of September 30, 2022 and December 31, 2021 in the table above, respectively.
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, battery metals, carbon capture and data accumulation, manipulation, interpretation and sensing for mineral discovery and mining.
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. In 2021, we 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. During the nine months ended September 30, 2022, we contributed $2,200,000 of which $750,000 fully satisfied the $5 million cash commitment obligation. For the three and nine months ended September 30, 2022, the Company recorded $283,367 and $804,912, respectively, in equity loss from affiliates for the investment in GenMat.
Investment in LP Biosciences LLC
On February 28, 2022, the Company and the other parties to the LP Biosciences LLC ("LPB") 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 carrying value of our investment as of the settlement date was $4,173,000, after an impairment loss of $54,587, and the derivative asset was valued at $937,000, a total combined value of $5,110,000, which was recorded directly to additional paid-in capital in the statement of equity. No gain or loss between the recorded amount at the disposition date and the original value recorded to equity in the July 2021 acquisition of $10,812,669 was recognized.
The Company incurred additional expenses of approximately $250,000 in connection with the termination of the transaction, which was recorded as other expense in the statement of operations for the nine months ended September 30, 2022.
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.
Investment in Green Li-ion Pte, Ltd.
As part of our acquisition of the LINICO assets on December 30, 2021, we acquired 20.22% of Green Li-ion Pte, Ltd., a Singaporean company ("Green Li-ion"). Prior to acquisition, LINICO purchased the investment and secured the rights to purchase Green Li-ion’s patented process equipment, with exclusive rights for the U.S. market, enabling the future production of 99.9% pure lithium-ion precursor cathodes active materials. The Green Li-ion technology is complementary to LINICO’s technology, which takes lithium-ion batteries to black mass and subsequently plans on extracting lithium from the black mass. The investment had a fair value of $4,577,000 at acquisition and was accounted for under the equity method through March 31, 2022.
On January 5, 2022 and April 11, 2022, Green Li-ion issued additional equity and decreased our ownership which decreased to 16.45%, resulting in the loss of our ability to exercise significant influence. Accordingly, we elected the measurement alternative for equity investments that do not have a readily determinable fair value and we are now accounting for the investment at cost, with all losses previously accrued under the equity method remaining as part of the carrying value of the investment. For the three and nine months ended September 30, 2022, we recognized $0 and $59,290, respectively, in equity loss from affiliates for the investment in Green Li-ion for the period the investment was still being accounted for under the equity method.
Transactions Involving Tonogold Resources, Inc. and 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 whose sole net asset is the Lucerne mine properties and related permit (“Comstock Lucerne”), to Tonogold Resources, Inc. ("Tonogold"). The transfer of 100% ownership of Comstock Mining LLC to Tonogold was completed in September 2020.
There were three 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 these 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.
We agreed to receive a portion of the purchase price through a note receivable issued by Tonogold in the principal amount of $4,475,000 in September 2020 (the "Tono Note"), which increased to $5,550,000 in March 2021 and to $6,650,000 in June 2021. The Tono Note bore interest at the rate of 12% per annum, payable monthly in arrears, and default interest at the rate of 18% per annum. Tonogold was in default for nonpayment of its interest and reimbursement obligations beginning on September 1, 2021.
On March 26, 2022, we entered into an Option Agreement with Tonogold, as modified on September 30, 2022 (the "Option Agreement") whereby we agreed to extinguish the Tono Note in exchange for 100% of the membership interests of Comstock Mining LLC. The agreement also allowed Tonogold to enter into an option, for an upfront fee of $750,000, to repurchase the Comstock Mining LLC membership interests from the Company by December 31, 2022, for $7,750,000, extendable to July 1, 2023 with a payment of an additional extension fee of $500,000 on or before December 31, 2022.
To maintain the option, Tonogold agreed to continue to reimburse all costs associated with owning the properties, as well as certain ongoing option and lease payments.
The acquisition of the membership interest was accounted for as an asset acquisition. The face value of the note at maturity of $6,650,000 approximated its fair value, and this amount plus acquisition costs of approximately $2,300 were netted with the $750,000 option payment received from Tonogold and applied to the net assets acquired as follows:
| | | | | |
| Fair value of consideration transferred: | |
| Tonogold note receivable | $ | 6,650,000 | |
| Direct costs of acquisition | 2,306 | |
| Less option payment received from Tonogold | (750,000) | |
| Total fair value of consideration | 5,902,306 | |
| |
| Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| Mineral properties | 6,844,474 | |
| Asset retirement obligation | (942,168) | |
| Total identifiable net assets | $ | 5,902,306 | |
Investment in Mercury Clean Up LLC and MCU Philippines, Inc.
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 with a value 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”).
In July 2020, MCU formed MCU Philippines, Inc. ("MCU-P") to remediate mercury in the Philippines, specifically in the province of Davao d' Oro. The Company’s chief executive officer was a director of MCU-P.
For the three and nine months ended September 30, 2022, the Company recorded $0 and $14,578 in equity loss from affiliates for the investment in MCU. For the three and nine months ended September 30, 2021, the Company recorded $11,467 and $20,964 in equity loss from affiliates for the investment in MCU.
For the three and nine months ended September 30, 2022, the Company recorded $0 and $4,384 in equity loss from affiliates for the investment in MCU-P. For the three and nine months ended September 30, 2021, the Company recorded $8,361 and $14,680 in equity loss from affiliates for the investment in MCU-P.
Based on the lack of a known, cash-generating operating sites for MCU-P operations, and the costs associated with relocating and deploying to a new site, there is no known reasonable possibility of future cash flows from MCU and MCU-P and we no longer expect to recover the investment. During the nine months ended September 30, 2022, the investment of $1,960,448 in
Mercury Clean Up LLC was deemed unrecoverable and was fully impaired. During the nine months ended September 30, 2022, the investment of $494,884 and notes receivable of $1,628,913 to MCU-P were both deemed unrecoverable and fully impaired.
On June 18, 2022, the members of MCU agreed to distribute 100% of MCU's assets to the Company, including the cash held by MCU and MCU-P of $895,204 and the remaining 50% of MCU-P common stock, in exchange for forgiveness of the debt owed by MCU-P to Comstock which was fully impaired in the three month period ended March 31, 2022. The cash and proceeds of assets liquidated of $895,204 were recognized as a recovery of impairment of assets in other income (expense) of the Company for the nine months ended September 30, 2022, with $590,000 from MCU and $305,204 from MCU-P.
As a result of the MCU asset distribution, we now own 100% of the stock of MCU-P and began consolidating the investment as of June 18, 2022. The carrying value of the investment on the acquisition date was $— and the net assets remaining after distributing the cash in repayment of the note receivable were insignificant. MCU-P holds equipment that was fully impaired prior to the asset acquisition, and the remaining net assets included insignificant amounts of cash and accounts payable. Mercury remediation operations at MCU-P had ceased prior to the distribution date.
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. At September 30, 2022, our $335,000 investment in SSOF and 6,700,000 voting shares represent 11.65% of total SSOF common shares on a fully diluted basis.
NOTE 3 NOTES RECEIVABLE AND ADVANCES, NET
Notes receivable and advances, net, at September 30, 2022 and December 31, 2021 include:
| | | | | | | | | | | |
| 09/30/22 | | 12/31/21 |
| Current portion | | | |
| Sierra Springs advances receivable | $ | 4,935,000 | | | $ | 4,935,000 | |
| Other notes receivable | 22,275 | | | 29,545 | |
| Total notes receivable and advances, current portion | $ | 4,957,275 | | | $ | 4,964,545 | |
| | | |
| Non-current portion | | | |
| Daney Ranch note receivable | $ | 993,000 | | | $ | — | |
| Unamortized discount for implied interest | (46,196) | | | — | |
| Daney Ranch note receivable, net of discount | 946,804 | | | — | |
| 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 | |
Unamortized discount for implied interest | — | | | (401,159) | |
| MCU-Philippines note receivable, non-current portion, net | — | | | 1,598,841 | |
| Total notes receivable and advances, net | $ | 5,904,079 | | | $ | 13,818,386 | |
Daney Ranch Sale
In August 2022, the Company sold the Daney Ranch and issued a 10-year $993,000 note receivable maturing in August 2032 to the former lessee and purchaser (see Note 7, Leases). The note bears interest at 2% for the first year and 7% for the remaining term. The note may be prepaid all or in part at any time without penalty. The note is secured by a second priority security interest in the property. The present value of the future interest and principal payments using a prevailing rate for similar loans of 7% was less than the face amount of the loan at issuance and we recognized a discount of $51,909. The discount will be amortized into interest income over the first year of the note and the note is measured on an amortized cost basis. During the three and nine months ended September 30, 2022, we recognized interest income of $7,998 on the Daney Ranch note receivable.
Tonogold Option Agreement, Reconveyance of Lucerne Mine and Related Assets, and Tonogold Note Receivable
We recognized a loss on the change in fair value of the note receivable of $— and $190,000 in other income and expense for the three months ended September 30, 2022 and 2021, respectively. We recognized losses on the change in fair value of $605,000 and $617,500 in other income and expense for the nine months ended September 30, 2022 and 2021, respectively. On March 31, 2022, we agreed to extinguish the Tonogold note receivable principal of $6,650,000 in exchange for 100% of the membership interests of Comstock Mining LLC under the Option Agreement (see Note 2, Acquisitions and Investments).
Advances to Sierra Springs Opportunity Fund, Inc.
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. This amount was fully repaid on January 26, 2022. 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.
NOTE 4 PROPERTY, PLANT AND EQUIPMENT, NET AND MINERAL RIGHTS
Properties, plant and equipment at September 30, 2022 and December 31, 2021, respectively, include the following:
| | | | | | | | | | | |
| | 09/30/22 | | 12/31/21 |
| Land | $ | 6,328,338 | | | $ | 6,328,338 | |
| Real property leased to third parties | 1,037,049 | | | 3,298,311 | |
| Property, plant and equipment for mineral processing | 27,644,745 | | | 27,644,745 | |
| Other property and equipment | 5,260,004 | | | 4,438,657 | |
| Accumulated depreciation | (26,628,132) | | | (27,146,379) | |
| Total property, plant and equipment, net | $ | 13,642,004 | | | $ | 14,563,672 | |
During the three months ended September 30, 2022 and 2021, the Company recognized depreciation expense of $126,877 and $115,020, respectively. During the nine months ended September 30, 2022 and 2021, the Company recognized depreciation expense of $409,784 and $344,557, respectively.
Daney Ranch
In August 2022, the lessee of the Daney Ranch property exercised the purchase option under the lease to purchase the property for a net purchase price of $2,441,090 and recognized a gain of $1,055,623 against the carrying value of the underlying land and buildings of $1,385,467 (see Note 7, Leases).
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. The Comstock Mineral Estate includes the Lucerne mineral properties with a carrying value of $6,844,474 as of September 30, 2022, which Tonogold has an option to purchase for $7,750,000. Our properties at September 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| 09/30/22 | | 12/31/21 |
| Comstock Mineral Estate | $ | 13,423,585 | | | $ | 6,579,111 | |
| Water rights | 90,000 | | | 90,000 | |
| Total mineral rights and properties | $ | 13,513,585 | | | $ | 6,669,111 | |
The Comstock Mineral Estate includes all of the Company's resource areas and exploration targets. During the nine months ended September 30, 2022 and 2021, we did not record any depletion expense, as none of the properties are currently in
production. All of our mineral exploration and mining lease payments are classified as selling, general and administrative expenses in the condensed consolidated statements of operations.
LINICO Construction in Progress
At September 30, 2022 and December 31, 2021, respectively, LINICO had $3,519,799 and $3,219,607 in construction in progress which included $3,126,308 and $3,219,607, respectively, in deposits with various vendors for the commercial scale battery recycling facility plant and equipment. Depreciation for the related assets will begin once they are placed in service. During the three and nine months ended September 30, 2022, we recognized $468,834 and $1,775,834, respectively of research and development expenses for LINICO.
NOTE 5 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 $6,751,950 reclamation surety bond through the Lexon Surety Group (“Lexon”) with the State of Nevada’s Bureau of Mining Regulation and Reclamation at September 30, 2022. The Company also has a $500,000 surety bond with Storey County for mine reclamation at September 30, 2022. 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 September 30, 2022, and December 31, 2021.
The reclamation bond deposit at September 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Lexon surety bond cash collateral | 2,600,691 | | | 2,589,008 | |
| Other cash reclamation bond deposits | 106,936 | | | 106,936 | |
| Total reclamation bond deposit | $ | 2,707,627 | | | $ | 2,695,944 | |
The Lexon collateral at September 30, 2022 and December 31, 2021 includes earned income of $100,692 and $89,008 respectively, which has been left on deposit at BNY Mellon. The total cash collateral is a component of the reclamation bond deposit on the condensed consolidated balance sheets at September 30, 2022 and December 31, 2021.
NOTE 6 INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets at September 30, 2022 and December 31, 2021 include the following:
| | | | | | | | | | | | | | | | | | | | |
| Description | | Estimated Economic Life | | September 30, 2022 | | December 31, 2021 |
| | | | | | |
| Developed technologies | | 10 years | | $ | 19,382,401 | | | $ | 18,882,401 | |
| Lease intangible | | 30 years | | 3,621,488 | | 3,621,488 | |
| License agreements | | 10 years | | 510,752 | | 510,752 | |
| In-process research and development | | 10 years | | — | | | 350,000 | |
| Customer agreements | | 1 year | | 122,885 | | 122,885 | |
| Distribution agreements | | 8 years | | 19,733 | | 19,733 | |
| Trademarks | | 10 years | | 7,000 | | | 7,000 | |
| Accumulated amortization | | | | (1,968,301) | | | (338,958) | |
| Intangible assets, net | | | | $ | 21,695,958 | | | $ | 23,175,301 | |
Accumulated amortization as of September 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Developed technologies | $ | 1,609,287 | | | $ | 231,920 | |
| Lease intangible | 90,975 | | | — | |
| License agreements | 136,541 | | | 20,625 | |
| In-process research and development | — | | | 2,991 | |
| Customer agreements | 122,884 | | | 81,923 | |
| Distribution agreements | 8,088 | | | 1,499 | |
| Trademarks | 526 | | | — | |
| Accumulated amortization | $ | 1,968,301 | | | $ | 338,958 | |
Amortization expense related to intangible assets of $530,338 and $218,387 was recorded for the three months ended September 30, 2022 and 2021, respectively. Amortization expense related to intangible assets of $1,641,308 and $218,387 was recorded for the nine months ended September 30, 2022 and 2021, respectively. Accumulated amortization of $11,965 was written off as part of the impairment of the Flux Photon intangible asset during the nine months ended September 30, 2022.
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. During the nine months ended September 30, 2022, the Company paid $500,000 toward the license fees.
Future amortization expense is as follows at September 30, 2022:
| | | | | |
| Remainder of 2022 | $ | 531,282 | |
| 2023 | 2,118,936 | |
| 2024 | 2,114,784 | |
| 2025 | 2,114,784 | |
| 2026 | 2,114,784 | |
| Thereafter | 12,701,388 | |
| $ | 21,695,958 | |
Changes in the intangible assets and goodwill balances for the nine months ended September 30, 2022 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | Additions | | Impairment | | Amortization | | As of September 30, 2022 |
| Intangible assets | | 23,514,259 | | | 500,000 | | | (350,000) | | | | | 23,664,259 | |
| Accumulated amortization | | (338,958) | | | | | 11,965 | | | (1,641,308) | | | (1,968,301) | |
| Goodwill | | 12,788,671 | | | — | | | — | | | — | | | 12,788,671 | |
| Total intangible assets and goodwill | | 35,963,972 | | | 500,000 | | | (338,035) | | | (1,641,308) | | | 34,484,629 | |
All intangibles and goodwill are associated with the Renewable Energy Products segment.
NOTE 7 LEASES
The Company has the following lease balances recorded on the condensed consolidated balance sheets as follows:
| | | | | | | | | | | |
| Lease Assets and Liabilities | Classification | September 30, 2022 | December 31, 2021 |
| Finance lease right-of-use asset, net | Right of use asset | $ | 18,726,794 | | $ | 15,033,000 | |
| Operating lease right-of-use asset, net | Other assets | 43,315 | | 46,897 | |
| Total right of use assets | | $ | 18,770,109 | | $ | 15,079,897 | |
| | | |
| Operating lease liability - current | Accrued expenses and other liabilities | $ | 4,996 | | $ | 4,388 | |
| Operating lease liability - long-term | Other liabilities | 41,587 | | 45,403 | |
| Finance lease liability | Lease liability | 14,907,994 | | 13,043,499 | |
| Total lease liabilities | | $ | 14,954,577 | | $ | 13,093,290 | |
The Company has the following lease costs recorded in the condensed consolidated statements of operations as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine Months Ended |
| September 30, 2022 | September 30, 2021 | | September 30, 2022 | September 30, 2021 |
| Finance lease cost: | | | | | |
| Amortization of right-of-use assets | $ | 135,768 | | $ | — | | | $ | 393,314 | | $ | — | |
| Interest on lease liabilities | 210,880 | | — | | | 612,762 | | — | |
| Operating lease cost | 2,525 | | 2,525 | | | 7,574 | | 7,575 | |
| Total lease cost | $ | 349,173 | | $ | 2,525 | | | $ | 1,013,650 | | $ | 7,575 | |
| | | | | |
| Other information | | | | | |
| Operating cash flows from operating leases | $ | 2,400 | | $ | 2,325 | | | $ | 7,200 | | $ | 6,975 | |
| Financing cash flows from finance leases | $ | 58,985 | | $ | — | | | $ | 122,613 | | $ | — | |
The Company has the following weighted average remaining lease terms and discount rates for our finance and operating leases:
| | | | | | | | | | | |
| Weighted-average remaining lease term - finance leases | | 0.48 | — | |
| Weighted-average remaining lease term - operating leases | | 6.00 | 6.50 |
| Weighted-average discount rate - finance leases | | 6.1 | % | 6.0 | % |
| Weighted-average discount rate - operating leases | | 11.0 | % | 11.0 | % |
Finance Lease
LINICO
LINICO has a finance lease, as lessee, with Aqua Metals Reno Inc., a subsidiary of AQMS, for an industrial lease, including the land, buildings and related improvements (the “Battery Recycling Facility”). AQMS is the non-controlling interest holder for LINICO. In September 2022, we changed the date we expect to exercise the purchase option from October 1, 2022 to March 1, 2023 and will make monthly lease payments of $100,640 from October 2022 to February 2023 and purchase the facility for an additional $14,000,000 (a total of $15,250,000 with deposits made to date) on or before March 1, 2023. The change in lease term and expected future lease payments resulted in a $1,147,669 increase to the lease liability and right of use asset.
AST Asset Purchase Agreement
On April 16, 2021, Comstock Innovations entered into three license agreements and an asset purchase agreement with AST. The license agreements provided for full use of the facility and all machinery and equipment located therein until April 30, 2022 (see Note 6, Intangible Assets and Goodwill). Under the Asset Purchase Agreement, Comstock Innovations agreed to acquire substantially all of AST’s assets in exchange for $3,920,000, payable $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. Beginning May 1, 2022, the Asset Purchase Agreement provides for full access and use of the AST assets until all payments are made and title transfers to the Company.
All of the assets purchased under the agreement are being used for research and development activities. The machinery and equipment acquired was built for a specific purpose and is being used in testing for development of the technology required to process woody biomass into intermediate materials that can be converted into paper products and fuels. These assets have no alternative future use. The facility purchased is an industrial property located in Wausau, Wisconsin with an alternative use.
The asset purchase agreement was accounted for as a finance lease with a purchase option which we are reasonably certain will be exercised. The consideration in the contract was allocated to the separate lease and non-lease components of the contract based on their relative standalone selling prices. The total of the lease payments was first allocated to the building, which has an observable price, and the remainder was allocated to the machinery and equipment.
The initial measurement of the right-of-use asset and lease liability was $839,439 using the allocated consideration in the contract of $935,759 for the building discounted using the Company’s incremental borrowing rate at lease commencement of 7.87% because there is no rate implicit in the lease contract. The incremental borrowing rate was determined based on debt
acquired by the Company at the end of 2021, adjusted for increases in the risk-free rate. The building is being depreciated over a 20-year useful life and the lease liability will be amortized over the two-year lease term.
Haywood Quarry Acquisition and Lease Agreement
On April 7, 2022, the Company contracted to purchase Haywood quarry and industrial property (“Haywood”) from Decommissioning Services LLC (“Decommissioning Services”) for $2.1 million, payable in $50,000 of cash and 1,500,000 common shares of Comstock with a value of $2,050,000. The Haywood property represents approximately 190 industrial acres in Lyon County, Nevada, and part of one of the larger industrial parks in Lyon County. The property has power, water and direct highway access. The Company plans to employ a portion of the property for used lithium ion battery storage, supporting LINICO's battery metal recycling.
The closing and purchase of the asset is contingent on liquidation of the shares and receipt of the full purchase price by the seller. The Company agreed to make up any shortfall if the proceeds from the sale of the shares plus the deposit are less than $2.1 million, and the seller agreed to refund any excess proceeds.
During the period between execution of the agreement and closing, the property is leased to us for no additional compensation, providing exclusive rights to access, use or sublease portions of the property, to obtain permits and prepare the property for its intended purpose, including improvements. If the conditions for closing are not satisfied within 12 months of signing, the agreement will terminate and Decommissioning Services will retain a total of $200,000 in rental fees for use of the property.
We agreed to pay Decommissioning Services a 2% royalty of the sales price of any gravel, aggregate, or rock products produced and sold from Haywood, excluding the removal of materials that have been pledged to a third-party for improvements made.
Operating Lease
Minimum lease payments by fiscal year for the Company's operating and finance leases are as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| For the remainder of 2022 | $ | 2,450 | | | $ | 326,985 | |
| 2023 | 9,950 | | | 14,652,450 | |
| 2024 | 10,250 | | | 417,750 | |
| 2025 | 10,550 | | | — | |
| 2026 | 10,850 | | | — | |
| Thereafter | 20,650 | | | — | |
| Total lease payments | 64,700 | | | 15,397,185 | |
Less: imputed interest at 11% | (18,117) | | | (489,191) | |
| Present value of lease liabilities | $ | 46,583 | | | $ | 14,907,994 | |
Daney Ranch
In September 2020, the Company, as lessor, leased real property and improvements located at 25 Daney Canyon Road, Dayton, Nevada (“Daney Ranch”) under a 36-month lease agreement commencing September 1, 2020, subject to early termination upon exercise of a purchase option. The option allowed the lessee to purchase the property for $2,700,000 less all rental payments made in the first 24 months if exercised within the first two years of the agreement. At lease inception, it was not reasonably certain the lessee would exercise the purchase option and the lease was classified as an operating lease. All lease payments were recognized as rental income and the property was classified as assets held for use in property, plant and equipment during the term of the lease. In August 2022, the lessee exercised the option and completed the purchase of the Daney Ranch property, which resulted in lease termination and derecognition of the underlying assets (see Note 4, Property, Plant and Equipment, Net and Mineral Rights).
Operating Lease Income
Revenues from operating leases on our land and building leased to others totaled $39,850 and $56,375 for the three months ended September 30, 2022 and 2021, respectively. Revenues from operating leases on our land and building leased to others totaled $138,350 and $159,500 for the nine months ended September 30, 2022 and 2021, respectively.
Minimum lease payments for operating leases to others are as follows:
| | | | | |
| For the remainder of 2022 | $ | 18,150 | |
| 2023 | 86,325 | |
| 2024 | 94,725 | |
| 2025 | 96,000 | |
| 2026 | 96,000 | |
| Thereafter | 288,000 | |
| Total minimum lease income | $ | 679,200 | |
NOTE 8 DEBT OBLIGATIONS
Debt at September 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| 09/30/22 | | 12/31/21 |
GHF Secured Promissory Note – 6% interest, due December 15, 2024 | $ | 4,290,000 | | | $ | 5,000,000 | |
| Less: debt discounts and issuance costs | (402,067) | | | (513,744) | |
| Total debt, net of discounts and issuance costs | $ | 3,887,933 | | | $ | 4,486,256 | |
GHF, Inc. 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.
On August 22, 2022, the Company amended the GHF promissory note’s prepayment provision to reduce the amount required to be paid from the Daney Ranch sale to $710,000 of the net cash proceeds. As consideration for the amendment, the Company issued GHF, Inc. warrants to purchase 200,000 common shares exercisable at a price of $1.00 per share for a two-year term. The warrants were valued at $18,975 on the date of issuance. During the three and nine months ended September 30, 2022, we recognized interest expense of $116,057 and $350,924, respectively, which includes OID amortization of $44,552 and $130,652, respectively, in connection with the GHF 2021 Note.
Concorde Trust, Bean Trust, Georges Trust, GHF, Inc. & Scott H. Jolcover Unsecured Promissory Notes
On March 4, 2021, we retired our unsecured promissory notes ("Promissory Notes") by paying the remaining principal balance of $3.1 million plus earned OID of $0.1 million. For the nine months ended September 30, 2021, interest expense on the promissory notes was $139,213, which includes OID amortization of $71,289.
NOTE 9 LONG-TERM RECLAMATION LIABILITY
At September 30, 2022 and December 31, 2021, we had asset retirement obligations of $6,679,053, and $5,445,672. 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 and Lucerne, 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 at January 1, 2021 which was recorded in selling, general and administrative expenses on the condensed consolidated statements of operations.
On March 31, 2022, the Company reacquired the membership interests of Comstock Mining LLC and recognized an asset retirement obligation associated with the Lucerne mine assets of $942,168 (see Note 2 Acquisitions and Investments). To calculate the estimated obligation, we used estimated reclamation costs of $1,159,236, an inflation rate of 2.94%, a credit-adjusted risk-free rate of 8.45% and an estimated reclamation date of December 31, 2025.
During the three months ended September 30, 2022 and 2021, we recognized accretion expense of $105,293 and $79,883, respectively. During the nine months ended September 30, 2022 and 2021, we recognized accretion expense of $291,212 and $236,097, respectively.
Following is a reconciliation of the mining retirement obligation associated with our reclamation plan for the mining projects at September 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Long-term reclamation liability — beginning of period | $ | 5,445,672 | | | $ | 6,054,919 | |
| Addition associated with the Lucerne mine | 942,168 | | | — | |
| Reduction of obligation due to extension of time | — | | | (926,434) | |
| Accretion of reclamation liability | 291,213 | | | 317,187 | |
| Long-term reclamation liability — end of period | $ | 6,679,053 | | | $ | 5,445,672 | |
NOTE 10 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. The intangible asset was deemed unrecoverable as of March 31, 2022 and was fully impaired (See Note 2, Acquisitions and Investments).
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 condensed consolidated financial statements for the nine months ended September 30, 2022, as it has been determined to be neither probable nor reasonably estimable.
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 September 30, 2022:
| | | | | |
| Year | Leases |
| Remainder of 2022 | $ | 20,000 | |
| 2023 | 114,000 | |
| 2024 | 108,000 | |
| 2025 | 110,000 | |
| 2026 | 150,000 | |
| Thereafter | 1,662,250 | |
| Total minimum annual lease payments | $ | 2,164,250 | |
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 $10,050. 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 Mineral Properties (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. Expense under leases for the three months ended September 30, 2022 and 2021 was $29,384 and $27,994, respectively. Expense under leases for the nine months ended September 30, 2022 and 2021 was $91,310 and $90,355, respectively. Tonogold reimbursements of lease costs for the three months ended September 30, 2022 and 2021 were $25,150 in both periods. Tonogold reimbursements of lease costs for the nine months ended September 30, 2022 and 2021 were $75,450 and $71,350, respectively.
OTHER
On August 20, 2021, former employees of the Company 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 $350,000 settlement, which will result in the litigation being dismissed. We paid the settlement in full during the nine months ended September 30, 2022.
On August 12, 2022, the Company entered into a termination agreement with a former employee. The Company and the former employee agreed to a $102,000 settlement which has been accrued during the nine months ended September 30, 2022.
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 11 EQUITY
Issuance of Registered Shares of Common Stock
On April 12, 2022, we entered into an equity purchase agreement ("2022 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 $10 million from time to time, at our option, on terms we deem favorable. In consideration of Leviston’s agreement to enter the Purchase Agreement, the Company agreed to deliver additional shares of common stock to Leviston, for no additional consideration, on the first settlement date with respect to a put notice delivered by us. For the nine months ended September 30, 2022, we issued to Leviston 9,141,642 common shares with an aggregate sales price of $5,862,000, at an average price per share of $0.64, and an additional 343,883 common shares at a fair value of $500,000 in commitment and due diligence fees. As of September 30, 2022, the 2022 Leviston Sales Agreement has $4,138,000 of remaining capacity.
On June 21, 2022, we entered into an agreement for the purchase of up to $10,000,000 worth of shares of the Company’s common stock from time to time, at the Company’s option. Any shares offered and sold to Tysadco will be registered for resale pursuant to a registration statement on Form S-1 filed with U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933 (the “Securities Act”). The Company will pay commissions equal to 5% of the offering proceeds to the placement agent in connection with any such sale. In consideration to enter the Purchase Agreement, the Company delivered 428,571 additional shares of common stock with a fair value of $300,000 to Tysadco.
Sales of common stock, if any, under the Purchase Agreement are made at a 10% discount to the volume weighted average sales price of the common stock on the date that Tysadco receives a capital call from the Company.
Issuance (Cancellation) of Unregistered Shares of Common Stock
On February 28, 2022, the Company and the other parties to the LP Biosciences transactions mutually agreed to terminate the Transaction Documents. 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.
On April 7, 2022, the Company issued 1,500,000 restricted shares of the Company's common shares to Decommissioning Services LLC for the purchase of the Haywood quarry and industrial property.
On May 20, 2022, the Company cancelled 720,000 common shares returned by a previous employee and former owner of MANA.
On June 21, 2022, the Company also entered into an equity purchase agreement (the “Purchase Agreement”) with Tysadco Partners, LLC (“Tysadco”) for the private placement of 3,076,923 common shares at a purchase price of $0.65 per share. The Company paid $140,000 in cash and delivered 57,143 common shares with a fair market value of $40,000 to the placement agent in connection with such sale.
On August 26, 2022, we issued 802,295 shares of unregistered restricted common stock with a fair value of $482,500 to Northern Comstock LLC as payment for obligations due under the Northern Comstock operating agreement.
Noncontrolling Interest
On December 30, 2021, we entered into an agreement with LINICO to purchase additional shares resulting in an 88.35% controlling interest (see Note 2, Acquisitions and Investments). The remaining 11.65% ownership was held by AQMS (see Note 17, Related Party) and is accounted for as a noncontrolling interest in our condensed consolidated financial statements. During the nine months ended September 30, 2022, the Company and AQMS made $3,276,472 and $500,000 in additional investments, respectively. As of September 30, 2022, we own 88.99% of LINICO and AQMS owns 11.01%. Losses attributable to the non-controlling interest for the three and nine months ended September 30, 2022 were $188,792 and $681,011, respectively.
Treasury Stock
At September 30, 2022, our treasury stock consists of 2,605,323 shares held by our LINICO subsidiary. We expect to sell the shares in 2022 and 2023. We have presented the cost of the acquired stock as a deduction from equity. We received proceeds on sales of 394,677 shares of treasury stock totaling $240,077, recognized as a decrease in additional paid-in capital of $269,056, representing the gain on sales of treasury stock, and a decrease in treasury stock of $509,133, representing the cost basis of shares sold during the nine months ended September 30, 2022.
Warrants
On August 22, 2022, the Company issued 200,000 warrants to GHF, Inc. in exchange for amending the terms of their note, which are exercisable at a price of $1.00 per common share and have a two-year term (see Note 8, Debt Obligations). The warrants were valued using a Black Scholes model with a price per common share of $0.54, an exercise price of $1.00, a term of 2 years, a risk-free rate of 3.32% and volatility of 61.82%. The resulting fair value of $18,975 was recorded as an additional debt discount with a corresponding increase in additional paid-in capital.
NOTE 12 FAIR VALUE MEASUREMENTS
The following table presents our assets and liabilities measured at fair value on a recurring basis at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at |
| | | September 30, 2022 |
| Total | | Quoted
Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets: | | | | | | | |
| Tonogold common shares | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Other equity securities | 1,999 | | | 1,999 | | | — | | | — | |
| Total assets measured at fair value | $ | 1,999 | | | $ | 1,999 | | | $ | — | | | $ | — | |
| | | | | | | |
| Liabilities: | | | | | | | |
| LINICO acquisition derivative liability | $ | (5,788,162) | | | $ | — | | | $ | (5,788,162) | | | $ | — | |
| Haywood acquisition | (1,420,000) | | | — | | | (1,420,000) | | | — | |
| GenMat derivative liability | (8,740,000) | | | — | | | (8,740,000) | | | — | |
| Total liabilities measured at fair value | $ | (15,948,162) | | | $ | — | | | $ | (15,948,162) | | | $ | — | |
The following table presents our assets and liabilities at December 31, 2021, which are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | $ | 910,559 | | | $ | 910,559 | | | $ | — | | | $ | — | |
| Tonogold note receivable | 7,255,000 | | | — | | | — | | | 7,255,000 | |
| MCU derivative asset | 342,000 | | | — | | | 342,000 | | | — | |
| Other equity securities | 15,260 | | | 15,260 | | | — | | | — | |
| Total assets measured at fair value | $ | 8,522,819 | | | $ | 925,819 | | | $ | 342,000 | | | $ | 7,255,000 | |
| | | | | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
| LINICO acquisition derivative liability | $ | (2,743,162) | | | $ | — | | | $ | (2,743,162) | | | $ | — | |
| GenMat derivative liability | (6,130,000) | | | — | | | (6,130,000) | | | — | |
| Total liabilities measured at fair value | $ | (8,873,162) | | | $ | — | | | $ | (8,873,162) | | -8873162 | $ | — | |
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).
| | | | | | | | | | | |
| 09/30/22 | | 12/31/21 |
| Beginning Balance | $ | 7,255,000 | | | $ | 5,498,500 | |
| Total change in fair value recognized in earnings | | | |
| Tonogold note receivable | (605,000) | | | (418,500) | |
| Additions | | | |
| Tonogold note receivable | — | | | 2,175,000 | |
| Deductions | | | |
| Exchange of note receivable associated with Tonogold agreement | (6,650,000) | | | — | |
| Ending balance | $ | — | | | $ | 7,255,000 | |
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 September 30, 2022 and December 31, 2021, we held 606,061 and 8,671,985 Tonogold common shares with fair values of $30,303 and $910,559, respectively. The fair values of the common shares are based on the $0.05 and $0.11 closing share prices (OTC: TNGL), at September 30, 2022 and December 31, 2021, respectively. We recorded unrealized losses of $42,424 and $259,044 on this investment in the condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021, respectively. We recorded an unrealized gain of $541,308 and an unrealized loss of $2,088,655 on this investment in the condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, we wrote off the remaining investment of $30,303 due to lack of marketability of the shares as Tonogold is not a current reporting company.
Tonogold Note Receivable
On March 26, 2022, as amended September 30, 2022, the Company entered into an Option Agreement with Tonogold (the “Lucerne Option”). Tonogold re-conveyed 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 exchanging Tonogold’s payment obligations under secured note in the principal amount owed of $6,650,000 to the Company. The Company recorded a loss of $— and $190,000 for the change in fair value in other expense in the condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021, respectively. The Company recorded a loss of $605,000 and $617,500 for the change in fair value in other expense in the condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021, respectively.
LINICO Derivative Instruments
On February 15, 2021, we recorded a derivative asset on the condensed consolidated balance sheets in connection with the LINICO Stock Purchase Agreement. On that date, 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 value of the shares was based on the $2.25 closing price per share of our common stock on that date. The derivative was settled in December 2021 when the Company purchased a majority interest in LINICO (see Note 2, Acquisitions and Investments). We recorded an unrealized loss of $2,880,000 and an unrealized gain of $1,260,000 for the change in fair value of the LINICO derivative asset in other income (expense) in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021, respectively.
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 Company's 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. At September 30, 2022, the fair value of the shares was based on the closing price per share of our common stock of $0.42. The fair value of the derivative liability as of September 30, 2022 was $5,788,162. We recorded an unrealized loss on the change in fair value of the derivative liability of $700,000 and $3,045,000 in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. The derivative liability is classified within Level 2 of the valuation hierarchy.
GenMat Derivative Instruments
On June 24, 2021, we recorded a derivative asset on the condensed 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 fair value of the shares was based on the closing price per share of our common stock of $1.29. At September 30, 2022, the fair value of the shares was based on the closing price per share of our common stock of $0.42. At September 30, 2022, the fair value of the derivative liability was $8,740,000. We recorded an unrealized loss on the change in fair value of the derivative liability of $600,000 and $2,610,000 in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. We recorded an unrealized loss of $2,880,000 and $2,520,000 for the three and nine months ended September 30, 2021. The derivative liability is classified within Level 2 of the valuation hierarchy.
Haywood Derivative Instruments
On April 7, 2022, we recorded a derivative asset on the condensed consolidated balance sheets in connection with the Haywood acquisition and lease from Decommissioning Services. On that date, the $245,000 fair value of the derivative asset was determined based on the excess of the fair value of 1,500,000 shares of our common stock issued to and held by Decommissioning Services and a deposit of $50,000 over the $2,100,000 contractual stock consideration required under the agreement. At September 30, 2022, the fair value of the shares was based on the closing price per share of our common stock of $0.42 and the fair value of the derivative liability was $1,420,000. We recorded an unrealized loss on the change in fair value of the derivative liability of $300,000 and $1,665,000 in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. 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 condensed 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. On February 28, 2022, the Company and the other parties to the LPB transactions mutually agreed to terminate the transaction documents. 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. Prior to settlement, the fair value of the shares was based on the closing price per share of our common stock of $1.46, and we recorded a gain on the change in fair value of the derivative liability of $595,000 in the condensed consolidated statements of operations for the nine months ended September 30, 2022. The fair value of the derivative as of the settlement date of $937,000 was derecognized, along with the value of the investment in LPB, and the fair value of the 3,500,000 shares was $5,110,000 and was recognized as a decrease first to the par value of the common stock returned, and the remainder to additional paid in capital.
Other Financial Instruments
At September 30, 2022, the carrying amount of cash and cash equivalents, notes receivable and note payable, approximates fair value because of the short-term maturity of these financial instruments.
NOTE 13 STOCK-BASED COMPENSATION
2020 EQUITY INCENTIVE PLAN
During the three months ended September 30, 2022 and 2021, the Company recognized $47,700 in both periods for the vesting of stock awards issued in 2020. During the nine months ended September 30, 2022 and 2021, the Company recognized $143,100 in both periods for the vesting of stock awards issued in 2020.
During 2021, we granted, 1,140,000 performance shares, net of 30,000 shares forfeited in the first quarter 2022, to employees under the 2020 Plan. During 2022, we granted 60,000 shares, net of 40,000 shares forfeited during the third quarter of 2022, to additional employees. 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 value 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 the estimated stock-based compensation expense is 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 | | | July 1, 2022 |
| Total shares granted | 1,055,000 | | | 30,000 | | | 25,000 | | | 30,000 | | | | 20,000 | |
| Performance condition valuation inputs: | | | | | | | | | | |
| Performance condition shares | 527,500 | | | 15,000 | | | 12,500 | | | 15,000 | | | | 10,000 | |
| Stock price at grant date | $ | 1.10 | | | $ | 3.51 | | | $ | 3.17 | | | $ | 3.04 | | | | $ | 0.62 | |
| Market condition valuation inputs: | | | | | | | | | | |
| Market condition shares | 527,500 | | | 15,000 | | | 12,500 | | | 15,000 | | | | 10,000 | |
| Beginning stock price | $ | 1.10 | | | $ | 3.51 | | | $ | 3.17 | | | $ | 3.04 | | | | $ | 0.62 | |
| Volatility | 77 | % | | 93 | % | | 93 | % | | 95 | % | | | 96 | % |
| Risk-free rate | 0.36 | % | | 0.79 | % | | 0.71 | % | | 0.65 | % | | | 2.82 | % |
| Number of iterations | 100,000 | | | 100,000 | | | 100,000 | | | 100,000 | | | | 100,000 | |
| Fair value per share | $ | 0.41 | | | $ | 2.71 | | | $ | 2.38 | | | $ | 2.26 | | | | $ | 0.17 | |
| Term (in years) | 3.2 | | 1.7 | | 1.8 | | 1.8 | | | 2.5 |
Stock-based compensation for employee performance share grants totaling $42,038 and $80,015 was recorded in the condensed consolidated statements of operations for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation for employee performance share grants totaling $168,817 and $186,584 was recorded in the condensed consolidated statements of operations for the nine months ended September 30, 2022 and 2021, respectively. No shares have vested at September 30, 2022. During the nine months ended September 30, 2022, 70,000 performance shares were forfeited totaling $41,124 in compensation that was reversed.
At September 30, 2022, unamortized stock-based compensation for the 2020 equity incentive plan was $596,059 and will be amortized over the remaining vesting terms.
NOTE 14 OTHER INCOME AND EXPENSES
Other income (expense) net consisted of the following for the three and nine months ended September 30, 2022 and September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | Nine Months Ended | | Nine Months Ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Change in fair value Tonogold note receivable | | $ | — | | | $ | (190,000) | | | (605,000) | | | (617,500) | |
| Tonogold amendment fee and charges | | — | | | — | | | 14,652 | | | 362,500 | |
| LPB settlement and related expenses | | — | | | — | | | (250,000) | | | — | |
| Equity loss in affiliates | | (279,892) | | | (320,834) | | | (858,712) | | | (511,601) | |
| All other | | (5,260) | | | 11,251 | | | (59,672) | | | 34,055 | |
| Total other income (expense) | | $ | (285,152) | | | $ | (499,583) | | | $ | (1,758,732) | | | $ | (732,546) | |
NOTE 15 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 and warrants were exercised into common stock. As of September 30, 2022, all common stock equivalent shares are antidilutive. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | September 30, 2021 | September 30, 2022 | | September 30, 2021 |
| Numerator: | | | | | | |
| Net income (loss) attributable to Comstock Inc. | $ | (5,126,252) | | | $ | (9,494,506) | | $ | (25,271,653) | | | $ | (7,627,267) | |
| | | | | | |
| Denominator: | | | | | | |
| Basic weighted average shares outstanding | 76,481,625 | | | 54,600,262 | | 70,866,854 | | | 45,213,469 | |
| Incremental shares - stock options | — | | | — | | — | | | — | |
| Diluted weighted average shares outstanding | 76,481,625 | | | 54,600,262 | | 70,866,854 | | | 45,213,469 | |
| | | | | | |
| Net income (loss) per common share: | | | | | | |
| Basic Earnings per Share | $ | (0.07) | | | $ | (0.17) | | $ | (0.36) | | | $ | (0.17) | |
| Diluted Earnings per Share | $ | (0.07) | | | $ | (0.17) | | $ | (0.36) | | | $ | (0.17) | |
The weighted average number of shares outstanding, for the purpose of calculating earnings per share, were reduced by 2,588,432 for the nine-month period ended September 30, 2022, which is the number of treasury shares deemed to be owned by us through our ownership in LINICO. The remaining 320,425 weighted average treasury shares are deemed to be owned by AQMS.
NOTE 16 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 strategic and other investments segment. Our renewable energy products segment 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022 | | Renewable Energy Products | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | | |
| | | | | | | | |
| Revenue from external customers | | $ | — | | | 39,850 | | | $ | — | | | $ | 39,850 | |
| Inter-segment revenue | | 397,490 | | | — | | | (397,490) | | | — | |
| Total segment revenue | | 397,490 | | | 39,850 | | | (397,490) | | | 39,850 | |
| | | | | | | | |
| Gross profit | | 232,256 | | | 39,850 | | | (232,256) | | | 39,850 | |
| | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | 494,496 | | | 1,400,004 | | | — | | | 1,894,500 | |
| Research and development | | 1,562,596 | | | — | | | (232,256) | | | 1,330,340 | |
| Depreciation and amortization | | 372,568 | | | 421,997 | | | — | | | 794,565 | |
| Gain on sale of Daney Ranch | | — | | | (1,055,623) | | | | | (1,055,623) | |
| Total operating expenses | | 2,429,660 | | | 766,378 | | | (232,256) | | | 2,963,782 | |
| | | | | | | | |
| Loss from operations | | (2,197,404) | | | (726,528) | | | — | | | (2,923,932) | |
| | | | | | | | |
| Other income (expense) | | | | | | | | |
| Gain (loss) on investments | | — | | | (43,514) | | | — | | | (43,514) | |
| Interest expense | | (282,730) | | | (116,058) | | | 71,851 | | | (326,937) | |
| Interest income | | 1,391 | | | 80,510 | | | (71,851) | | | 10,050 | |
| Change in fair value of derivative instruments | | — | | | (1,600,000) | | | — | | | (1,600,000) | |
| Equity loss in affiliates | | — | | | (279,891) | | | — | | | (279,891) | |
| Recovery (impairment) of investment and assets | | — | | | (145,559) | | | — | | | (145,559) | |
| Other expenses | | (409,347) | | | 404,086 | | | — | | | (5,261) | |
| Total other expense, net | | (690,686) | | | (1,700,426) | | | — | | | (2,391,112) | |
| | | | | | | | |
| Net loss | | $ | (2,888,090) | | | $ | (2,426,954) | | | $ | — | | | $ | (5,315,044) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | Renewable Energy Products | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | | |
| | | | | | | | |
| Revenue from external customers | | $ | 306,338 | | | $ | 56,375 | | | $ | — | | | $ | 362,713 | |
| | | | | | | | |
| Gross profit | | 306,338 | | | 56,375 | | | — | | | 362,713 | |
| | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative | | 531,960 | | | 1,050,731 | | | — | | | 1,582,691 | |
| Research and development | | 164,334 | | | — | | | — | | | 164,334 | |
| Depreciation and amortization | | 218,388 | | | 117,217 | | | — | | | 335,605 | |
| Total operating expenses | | 914,682 | | | 1,167,948 | | | — | | | 2,082,630 | |
| | | | | | | | |
| Loss from operations | | (608,344) | | | (1,111,573) | | | — | | | (1,719,917) | |
| | | | | | | | |
| Other income (expense) | | | | | | | | |
| Gain (loss) on investments | | — | | | (302,211) | | | — | | | (302,211) | |
| Interest expense | | (4,465) | | | 389 | | | — | | | (4,076) | |
| Interest income | | 2,101 | | | 259,180 | | — | | | 261,281 | |
| Change in fair value of derivative instruments | | (1,470,000) | | | (5,760,000) | | | — | | | (7,230,000) | |
| Equity loss in affiliates | | — | | | (320,834) | | | — | | | (320,834) | |
| Other (expense) income, net | | — | | | (178,749) | | | — | | | (178,749) | |
| Total other income, net | | (1,472,364) | | | (6,302,225) | | | — | | | (7,774,589) | |
| | | | | | | | — | |
| Net loss | | $ | (2,080,708) | | | $ | (7,413,798) | | | $ | — | | | $ | (9,494,506) | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022 | | Renewable Energy Products: | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | | |
| | | | | | | | |
| Revenue from external customers | | $ | — | | | 147,400 | | | $ | — | | | $ | 147,400 | |
| Inter-segment revenue | | 1,738,140 | | | — | | | (1,738,140) | | | — |
| Total segment revenue | | 1,738,140 | | | 147,400 | | | (1,738,140) | | | 147,400 | |
| | | | | | | | |
| Gross profit | | 533,510 | | | 147,400 | | | (533,510) | | | 147,400 | |
| | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative | | 1,368,317 | | | 5,437,522 | | | | | 6,805,839 | |
| Research and development | | 5,638,418 | | | — | | | (533,510) | | | 5,104,908 | |
| Depreciation and amortization | | 1,130,466 | | | 1,317,522 | | | — | | | 2,447,988 | |
| Gain on sale of assets | | — | | | (1,055,623) | | | — | | | (1,055,623) | |
| Total operating expenses | | 8,137,201 | | | 5,699,421 | | | (533,510) | | | 13,303,112 | |
| | | | | | | | |
| Loss from operations | | (7,603,691) | | | (5,552,021) | | — | | — | | | (13,155,712) | |
| | | | | | | | |
| Other income (expense) | | | | | | | | |
| Gain (loss) on investments | | — | | | 9,309 | | | — | | | 9,309 | |
| Interest expense | | (825,479) | | | (350,924) | | | 212,716 | | | (963,687) | |
| Interest income | | 4,496 | | | 576,621 | | | (212,716) | | | 368,401 | |
| Change in fair value of derivative instruments | | — | | | (6,725,000) | | | — | | | (6,725,000) | |
| Recovery (impairment) of investment and assets | | (54,587) | | | (3,672,656) | | | — | | | (3,727,243) | |
| Equity loss in affiliates | 0 | — | | | (858,712) | | | — | | (858,712) | | (858,712) | |
| Other expenses | | (876,142) | | | (23,878) | | | — | | | (900,020) | |
| Total other expense, net | | (1,751,712) | | | (11,045,240) | | | — | | | (12,796,952) | |
| | | | | | | | |
| Net loss | | $ | (9,355,403) | | | $ | (16,597,261) | | | $ | — | | | $ | (25,952,664) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures for nine months ended September 30, 2022 | | $ | 816,302 | | | $ | — | | | $ | — | | | $ | 816,302 | |
| | | | | | | | |
| Total assets at September 30, 2022 | | $ | 44,933,356 | | | $ | 71,565,656 | | | $ | — | | | $ | 116,499,012 | |
| | | | | | | | |
| Investments, non-current at September 30, 2022 | | $ | 4,517,710 | | | $ | 15,991,537 | | | $ | — | | | $ | 20,509,247 | |
| | | | | | | | |
| Goodwill at September 30, 2022 | | $ | 12,788,671 | | | $ | — | | | $ | — | | | $ | 12,788,671 | |
| | | | | | | | |
| Construction in progress at September 30, 2022 | | $ | 2,269,799 | | | $ | 1,250,000 | | | $ | — | | | $ | 3,519,799 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | Renewable Energy Products: | | Strategic and Other Investments | | Inter-segment Elimination | | Total |
| Revenue: | | | | | | | | |
| Revenue from external customers | | $ | 306,338 | | | $ | 159,500 | | | $ | — | | | $ | 465,838 | |
| Inter-segment revenue | | — | | | — | | | — | | | — | |
| Total segment revenue | | 306,338 | | | 159,500 | | | — | | | 465,838 | |
| | | | | | | | |
| Gross profit | | 306,338 | | | 159,500 | | | — | | | 465,838 | |
| | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative | | 531,960 | | | 2,235,216 | | | | | 2,767,176 | |
| Research and development | | 164,334 | | | — | | | | | 164,334 | |
| Depreciation and amortization | | 218,387 | | | 347,817 | | | — | | | 566,204 | |
| Total operating expenses | | 914,681 | | | 2,583,033 | | | — | | | 3,497,714 | |
| | | | | | | | |
| Loss from operations | | (608,343) | | | (2,423,533) | | | — | | | (3,031,876) | |
| | | | | | | | |
| Other income (expense) | | | | | | | | |
| Gain (loss) on investments | | — | | | (2,129,693) | | | — | | | (2,129,693) | |
| Interest expense | | (4,465) | | | (144,187) | | | — | | | (148,652) | |
| Interest income | | 2,101 | | | 646,149 | | | — | | | 648,250 | |
| Change in fair value of derivative instruments | | (1,470,000) | | | (762,750) | | | — | | | (2,232,750) | |
| Equity loss in affiliates | | — | | | (511,602) | | | — | | | (511,602) | |
| Impairment of investment and assets | | — | | | — | | | — | | | — | |
| Other income, net | | — | | | (220,944) | | | — | | | (220,944) | |
| Total other income, net | | (1,472,364) | | | (3,123,027) | | | — | | | (4,595,391) | |
| | | | | | | | |
| Net loss | | $ | (2,080,707) | | | $ | (5,546,560) | | | $ | — | | | $ | (7,627,267) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures for nine months ended September 30, 2021 | | $ | — | | | $ | 47,750 | | | $ | — | | | $ | 47,750 | |
| | | | | | | | |
| Total assets at December 31, 2021 | | $ | 43,001,837 | | | $ | 83,952,795 | | | $ | — | | | $ | 126,954,632 | |
| | | | | | | | |
| Investments, non-current at December 31, 2021 | | $ | 8,804,587 | | | $ | 17,046,292 | | | $ | — | | | $ | 25,850,879 | |
| | | | | | | | |
| Goodwill at December 31, 2021 | | $ | 12,788,671 | | | $ | — | | | $ | — | | | $ | 12,788,671 | |
| | | | | | | | |
NOTE 17 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 nine months ended September 30, 2022 and 2021.
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 performance-based 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 the potential remaining performance-based cash payments of 17,650,000 required under the Asset Purchase Agreement. The Company’s chief technology officer, and the president of Comstock Fuels, are the indirect beneficiaries of all payments made to FPC under the Asset Purchase Agreement. We recognized an impairment loss on the unrecoverable intangible asset of $338,035, in other income (expenses) in the statement of operations for the nine months ended September 30, 2022 in the renewable energy products segment.
LINICO CORPORATION
During the nine months ended September 30, 2022, the Company and AQMS invested $3,276,472 and $500,000 respectively, in cash investments to LINICO. As of September 30, 2022 we own 88.99% of LINICO's outstanding equity and the remaining 11.01% is owned by AQMS. One of the members of the Company’s board of directors, is the chief financial officer of AQMS.
LINICO purchased $782,500 in equipment from AQMS during the nine months ended September 30, 2022.
TRANSACTIONS INVOLVING SIERRA SPRINGS OPPORTUNITY FUND
The Company has funded a total of $4,935,000 in SSOF Advances. 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.
The Company's executive chairman and chief executive officer co-founded SSOF and SSE, and serves president of SSOF and as an executive of SSE along with a diverse board and team of qualified financial, capital markets, real estate and operational professionals that together govern, lead and manage SSOF and SSE. The $525,000 investment and 9,161,000 voting shares of our CEO and two of our directors represent 16.03% of total as converted SSOF common shares. SSOF and SSE are contractually obligated to pay the Company's chief executive officer for management services. To date, the chief executive officer has not received compensation of any kind from either SSOF or SSE.
NOTE 18 SUBSEQUENT EVENTS
On October 5, 2022, the Company amended the settlement with the former chief executive officer and director of LINICO to postpone the time period in which he is required to sell the 3,500,000 common shares of the Company that he received as part of settlement with LINICO and the Company. The amendment also provides for the Company to make certain minimum cash payments between October 2022 and May 2023 totaling $3,500,000 to minimize the cash payment that the Company might be required to make to true up the obligation at the completion of the sale of such shares. At September 30, 2022, the fair value of the shares was $5,788,162 (see Note 13, Fair Value Measurements, above). Under the amendment, the former employee agrees to not sell the Company's shares until April 1, 2023 and ending on September 30, 2023.
Issuance of Common Stock
On October 5, 2022, the Company issued 1,000,000 shares of restricted common stock to a single investor for $375,000.
From October 12, 2022 until October 28, 2022, the Company issued 2,394,249 registered shares of common stock to Leviston pursuant to the Company’s Form S-3 filed with the U.S. Securities and Exchange Commission, for an aggregate sales price of $900,000 at an average price per share of $0.3759. As of October 28, 2022, the 2022 Leviston Sales Agreement has $3,238,000 of remaining capacity.
On October 21, 2022, the Company issued 272,851 shares of common stock to Tydasco, for an aggregate sales price of $100,000 at an average price per share of $0.37.
Borrowings
On October 25, 2022 the Company entered into a promissory note in the principal amount of $2 million from Alvin Fund LLC. The promissory note matures on October 25, 2023 and bears interest at the rate of 9% per annum. The Company will use the proceeds for a $2 million payment toward the purchase of a battery metal recycling facility from LINICO.