Comstock Mining Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter report. The company, now Comstock Inc., is a Nevada-based gold and silver exploration, development and technology company with approximately 9,358 acres in the Comstock District. Mining ceased in 2015 and processing ended in 2016; therefore, the company had no mining production or mining revenue in 2019.
Business context and strategic changes
- Management implemented a 2019 Strategic Focus on precious-metal exploration, processing, environmentally enhancing technologies and cash-generating partnerships.
- The company reorganized its subsidiaries and pursued sales of non-mining assets, including Silver Springs land and water rights, Downtown Silver Springs interests, the Gold Hill Hotel and Daney Ranch.
- Tonogold acquired 50% of Comstock Mining LLC, which owns the Lucerne properties, at the November 18, 2019 closing. Tonogold is expected to acquire the remaining interest after completing cash payments; Comstock retained management control until full payment and a 1.5% Lucerne NSR royalty.
- Core company-controlled development efforts center on the Dayton and Spring Valley areas. Northern Comstock properties, including Occidental and Gold Hill, were leased to Tonogold for exploration.
- The company had 10 full-time employees at December 31, 2019.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $0.18 million | $0.15 million | +$0.03 million |
| Mining revenue | $0 | $0 | No change |
| Real estate revenue | $0.18 million | $0.15 million | Increase |
| Loss from operations | $(5.34) million | $(7.40) million | Improved by $2.06 million |
| Net loss | $(3.81) million | $(9.48) million | Improved by $5.67 million |
| Net loss per share | $(0.20) | $(0.79) | Improved |
| Cash used in operations | $(2.31) million | $(4.03) million | Improved by $1.72 million |
| Cash and cash equivalents | $1.02 million | $0.49 million | +$0.53 million |
| Total assets | $39.57 million | $28.61 million | +$10.96 million |
| Total debt, net of discounts | $5.41 million | $9.17 million | Reduced by $3.76 million |
| Accumulated deficit | $235.89 million | $232.09 million | Increased by $3.81 million |
Operating expenses declined primarily because of lower depreciation, exploration and environmental costs, increased Tonogold reimbursements and a $0.4 million reduction in the reclamation obligation. Other income included approximately $2.2 million from termination of a Tonogold option and approximately $1.5 million of mark-to-market gains on Tonogold preferred shares, partly offset by asset write-downs and preferred-stock issuance costs.
Net cash provided by investing activities was $2.64 million, mainly reflecting $5.93 million of Tonogold purchase payments, partly offset by $2.44 million spent on properties, $0.75 million invested in Mercury Clean Up LLC and $0.34 million invested in Sierra Springs Opportunity Fund. Financing activities provided $0.19 million, including $4.10 million of common-stock proceeds and $1.08 million of preferred-stock proceeds, offset by $4.72 million of debt principal payments.
Liquidity, debt and capital structure
- The company reported substantial doubt about its ability to continue as a going concern. It had recurring losses, a $235.9 million accumulated deficit, only $1.0 million of cash and $2.3 million of operating cash burn in 2019.
- Long-term debt, net of discounts and issuance costs, was $5.41 million at year-end. The senior secured debenture carried 11% interest, had approximately $4.93 million of principal outstanding and matured in January 2021. The company stated it did not currently have the ability to repay this debt.
- The company expected sale proceeds from Silver Springs assets to repay the senior secured debenture, including approximately $4.9 million of principal and make-whole obligations plus approximately $0.3 million of accrued interest.
- Assets held for sale totaled $10.51 million, with related liabilities held for sale of $1.02 million.
- The company issued 12.17 million common shares during 2019. Shares outstanding increased from 15.07 million at December 31, 2018 to 27.24 million at December 31, 2019, creating significant dilution risk.
- After a late Form 10-Q filing, the company could not use its Form S-3 shelf registration until July 1, 2020, subject to meeting applicable requirements. Although the shelf had $45.5 million of nominal unused capacity at year-end, the filing states that only approximately $2.1 million was unrestricted and available as of March 15, 2020.
Material changes versus the prior period
- Net loss narrowed from $9.48 million to $3.81 million, and operating loss narrowed from $7.40 million to $5.34 million.
- Cash used in operations declined from $4.03 million to $2.31 million.
- Debt declined substantially through approximately $4.72 million of principal repayments and lower average borrowings.
- The company recorded $9.08 million of Tonogold convertible preferred shares at December 31, 2019, including a $1.47 million fair-value gain during the year. The investment was classified as a Level 3 asset.
- The company invested $1.50 million in Mercury Clean Up LLC through $0.75 million of cash and $0.75 million of stock, with a remaining $0.4 million cash commitment and a $0.45 million make-whole liability at year-end.
- A five-for-one reverse stock split became effective for trading on November 29, 2019. All share and per-share information in the filing reflects the split.
- Reclamation liabilities declined from $7.44 million to $6.03 million, while the company maintained approximately $7.3 million of reclamation surety bonds supported by $2.6 million of cash collateral.
Guidance, outlook, risks and unusual items
- Management planned 2020 annual operating expenses of approximately $4.9 million, with approximately $2.3 million expected to be reimbursed under Tonogold agreements, implying net operating expenses of approximately $2.6 million before exploration spending.
- Management expected approximately $1.35 million of Tonogold expense reimbursements in the first quarter of 2020 and monthly interest payments of $54,750 during specified 2020 and 2021 periods. These amounts depend on Tonogold’s ability to perform.
- The company expected to close the Silver Springs transactions in the first half of 2020 for approximately $10.1 million of net proceeds, subject to closing conditions.
- Tonogold planned to begin exploration drilling on leased Storey County properties in the second quarter of 2020 and was required to spend at least $1.0 million annually on exploration under the restated lease.
- Management planned to advance Dayton permitting, exploration and resource modeling, publish an updated NI 43-101 resource estimate and develop the Mercury Clean Up pilot at the American Flat facility.
- COVID-19 restrictions could delay Dayton development, Tonogold drilling and Mercury Clean Up testing. The filing states that the duration and financial impact could not be reliably estimated.
- The auditor issued an unqualified opinion but included a going-concern emphasis citing recurring losses, operating cash outflows, accumulated deficit and debt due within twelve months of the financial-statement issuance date.
- The company has no proven or probable mineral reserves at Lucerne and cautions that mineralized-material estimates may not support commercially viable mining.
- Material risks include dependence on additional financing and asset sales, debt repayment, dilution, commodity-price volatility, permitting and environmental obligations, reclamation costs, water availability, title risks, litigation, reliance on Tonogold and the uncertain commercial viability of Mercury Clean Up technologies.
- The Comstock Residents Association appealed a July 2019 judgment favorable to Comstock. A separate royalty dispute was settled in January 2020 for a one-time $60,000 payment. Three former employees filed an OSHA complaint in February 2020 alleging wrongful termination; the company intends to defend the matter.
Most important facts for investors to verify
- Whether the company can close the planned Silver Springs asset sales and apply proceeds to repay the senior secured debenture.
- Whether Tonogold completes the remaining Lucerne purchase payments and performs its exploration, reimbursement and debt obligations.
- The realizable value and liquidity of the $9.08 million Tonogold preferred-stock investment and the subsequent $5.475 million secured convertible note issued in March 2020.
- Available cash, actual operating burn and access to equity financing after the S-3 eligibility restriction.
- Progress, permitting and economics of the Dayton and Spring Valley projects, including any updated NI 43-101 resource or feasibility work.
- Whether Mercury Clean Up’s pilot demonstrates commercially viable mercury recovery and remediation.
- The adequacy of reclamation reserves, surety collateral and potential Carson River Mercury Superfund Site obligations.
- The effect of the 2019 share issuances and future financing needs on dilution and per-share value.