Comstock Mining Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2021. Comstock Mining Inc. is transitioning from a primarily mining and real-estate business toward natural-resource renewal activities, including cellulosic fuels, lithium-ion battery recycling, mercury remediation, industrial hemp processing, advanced materials, and related engineering services. The company also manages approximately 9,358 acres in the Comstock and Silver City districts in Nevada and assets held for sale.
During 2021, Comstock acquired Renewable Process Solutions, MANA Corporation, and Plain Sight Innovations, and expanded investments in LINICO, Quantum Generative Materials, and LP Biosciences. These transactions materially increased assets, equity, goodwill, and the company’s share count.
Financial condition and results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0.36 million, versus $0.05 million | $0.47 million, versus $0.15 million |
| Loss from operations | $(1.72) million, versus $(1.48) million | $(3.03) million, versus $(3.91) million |
| Net income (loss) | $(9.49) million, versus $17.33 million | $(7.63) million, versus $18.34 million |
| Basic and diluted EPS | $(0.17), versus $0.54 | $(0.17), versus $0.63 |
| Cash used in operating activities | Not separately provided | $(4.99) million, versus $(2.41) million |
Revenue increased primarily because newly acquired RPS and MANA generated $306,338 of services revenue in the third quarter and year-to-date period. Real-estate revenue was $56,375 for the quarter and $159,500 year to date. Mining generated no revenue because the company’s mineral properties were not in production.
Approximate operating margins were negative 474% for the quarter and negative 651% year to date. Approximate net margins were negative 2,618% and negative 1,638%, respectively, reflecting low revenue and significant operating costs, investment losses, and derivative revaluations.
At September 30, 2021, total assets were $107.4 million, compared with $43.1 million at December 31, 2020. Cash and cash equivalents were $2.92 million, restricted cash was $0.50 million, and cash, cash equivalents, and restricted cash totaled $3.42 million. Total liabilities were $9.57 million, including $5.36 million of reclamation liabilities. All outstanding long-term debt was repaid in March 2021.
Investments increased to $27.1 million from $3.3 million, while notes receivable and advances increased to $13.4 million from $8.0 million. Assets included $7.5 million of acquired intangible assets and $17.7 million of goodwill. The accumulated deficit was $228.6 million.
Investing activities used $11.1 million year to date, principally for investments in GenMat and LINICO, advances to Sierra Springs Opportunity Fund, and funding associated with LPB and other notes receivable. Financing activities provided $17.1 million, including $22.0 million of gross common-stock proceeds, partially offset by debt repayments and issuance costs.
Material changes versus the prior comparable period
- Quarterly revenue increased by $313,288, and nine-month revenue increased by $319,613, primarily from acquired engineering and management services.
- Quarterly net income of $17.3 million in 2020 changed to a $9.5 million net loss in 2021. Nine-month net income of $18.3 million changed to a $7.6 million net loss.
- The prior-year results included an $18.3 million gain from the sale and deconsolidation of Comstock Mining LLC to Tonogold; no comparable gain occurred in 2021.
- 2021 other expense included significant fair-value losses on derivative instruments, including approximately $2.9 million related to LINICO, $2.9 million related to GenMat, and $1.5 million related to LPB during the third quarter.
- Selling, general and administrative expense increased to $1.72 million for the quarter and $3.63 million year to date, driven by higher personnel, professional, acquisition-related, and stock-compensation costs.
- Common shares outstanding increased from 35.0 million at December 31, 2020 to 64.4 million at September 30, 2021. The company issued approximately 23.4 million unregistered shares for acquisitions, investments, and mineral-rights payments, in addition to approximately 6.0 million registered shares for cash proceeds.
- Reclamation liabilities declined from $6.1 million to $5.4 million after the expected reclamation commencement date was extended to December 31, 2025, producing a $0.9 million reduction in expense during the first quarter.
Guidance, outlook, commentary, risks, and unusual items
Management’s three-year strategic plan targets commercialization of cellulosic fuels, battery recycling, mercury remediation, and material-science technologies. Management also plans to monetize more than $25 million of non-strategic assets. Planned 2021 operating expenditures, excluding depreciation and amortization, were approximately $8.0 million, with approximately $2.0 million expected to be reimbursed under Tonogold agreements.
Management expected the Silver Springs property sales to close in the first half of 2022 for total proceeds of approximately $10.1 million, with proceeds intended in part to fund LINICO, GenMat, and LPB. The company also expected to exercise its $2.5 million LINICO warrant before the first quarter of 2022, potentially resulting in a majority stake and consolidation of LINICO.
Management stated that existing cash, planned Tonogold share sales, repayment of the Tonogold note, expected SSOF advances, and Silver Springs property sales should fund operations and investment commitments for the following twelve months. However, the company reported recurring operating losses and acknowledged that failure to obtain additional funds, asset-sale proceeds, or financing could have a material adverse effect on liquidity and raise substantial doubt about its ability to continue as a going concern.
- The Tonogold note had a $6.65 million face value, a fair value of $7.06 million, and a maturity extended to March 31, 2022. Its collectability and valuation depend on Tonogold’s financial condition and market value.
- Contingent payment obligations to Red Wolf Agro and FLUX Photon could reach $8.6 million and $18.0 million, respectively, but were not recorded because they were not considered probable or reasonably estimable.
- Comstock had $4.7 million of non-interest-bearing advances to SSOF, expected to be repaid in connection with the planned Silver Springs property sale.
- The company faces risks related to early-stage technologies, acquisitions, permitting, environmental compliance, commodity and equity-market volatility, dilution, related-party transactions, and the ability of investees to commercialize their operations.
- Litigation includes an appeal concerning the Silver City zoning dispute and a wrongful-termination lawsuit by former employees. The company accrued $84,166 for severance related to the employment litigation and stated that it intends to defend the claims.
- The CEO received a special monetary award of $193,299, and his base salary was reinstated retroactively to $360,000 effective July 1, 2021.
Most important facts for an investor to verify
- Whether the planned $10.1 million Silver Springs property sale closed on schedule and whether SSOF repaid its advances.
- Whether Tonogold repaid or refinanced the $6.65 million note by the extended March 31, 2022 maturity date.
- Whether Comstock exercised the LINICO warrant and whether LINICO was subsequently consolidated.
- Progress toward commercial production, permitting, and cash generation at PSI, LINICO, LPB, MANA, and MCU.
- The basis and volatility of the $11.4 million of derivative assets and the $2.0 million GenMat derivative liability.
- Future dilution from registered equity facilities, restricted shares issued for acquisitions and investments, and potential resale of LPB shares.
- Liquidity after planned investments and operating expenditures, given only $3.42 million of cash and restricted cash at September 30, 2021 and recurring operating losses.
- Potential impairment of goodwill, acquired technology, investments, notes receivable, and assets held for sale.