Comstock Inc. quarterly report, Q1 FY2019

Comstock Mining Inc. — Q1 2019 Form 10-Q Summary

Reporting period: Three months ended March 31, 2019; filed June 20, 2019. The filing identifies the registrant as Comstock Mining Inc. and reports mining and real estate segments. Mining operations had ceased processing in December 2016, resulting in no mining revenue during the quarter.

Financial Results and Position

Metric	Q1 2019	Q1 2018	Change
Total revenue	$37,598	$22,850	+$14,748
Mining revenue	$0	$0	No change
Real estate revenue	$37,598	$22,850	+64.5%
Total costs and expenses	$1.61 million	$1.91 million	-$0.30 million
Loss from operations	$(1.57) million	$(1.89) million	Improved by $0.32 million
Net loss	$(1.84) million	$(2.48) million	Improved by $0.65 million
Basic and diluted loss per share	$(0.02)	$(0.05)	Improved
Operating cash flow	$(0.89) million	$(1.10) million	Use decreased by $0.21 million

Revenue was immaterial relative to operating expenses, and meaningful operating or profit margins were not applicable. Depreciation, amortization and depletion totaled $586,921, compared with $826,928 in the prior-year quarter.

Liquidity: Cash and cash equivalents were $310,596 at March 31, 2019, down from $488,657 at December 31, 2018. Current assets were $10.1 million and current liabilities were $3.9 million, producing reported working capital of approximately $6.2 million.
Debt: Debt, net of discounts and issuance costs, was $8.30 million, including an $8.0 million 11% senior secured debenture due 2021 and Caterpillar financing. The company paid $1.57 million of long-term debt principal during the quarter.
Other obligations: Long-term reclamation liabilities were $7.45 million. The senior debenture also had a remaining make-whole obligation of $418,765 at March 31, 2019.
Capital resources: The company reported approximately $9.5 million of unused borrowing capacity under an amended $10 million loan commitment, before borrowing-related fees, and up to $5 million available under a 2019 equity purchase agreement. It also filed a $50 million shelf registration statement.
Equity: The company issued 5.45 million common shares for gross proceeds of $813,561, or approximately $728,468 net of issuance costs. Shares outstanding increased to 80.8 million from 75.3 million at year-end 2018.

Material Changes Versus Q1 2018 and Year-End 2018

Total revenue increased $14,748, entirely from the real estate segment; mining revenue remained zero.
Total expenses declined 15.9%, primarily because certain mining assets became fully depreciated, reducing costs applicable to mining revenue, and because general and administrative expenses decreased.
Interest expense increased by $77,797 because of make-whole and related fees associated with debt repayments, despite lower outstanding debt.
Other income and expense improved by $408,890, primarily because the prior-year Pelen, LLC make-whole expense did not recur at the same level.
Net loss improved by $649,838, but the company continued to incur substantial operating losses and negative operating cash flow.
Assets held for sale increased to $6.9 million from $5.4 million at December 31, 2018, including Lucerne properties classified as held for sale in January 2019.
Current liabilities increased to $3.9 million from $2.4 million, primarily due to a $1.95 million deposit received under the Tonogold membership interest purchase agreement and other accrued liabilities.
The company adopted the new lease accounting standard on January 1, 2019 with no material impact on the financial statements.

Guidance, Outlook, Risks and Unusual Items

Tonogold transaction: The company agreed to sell its Lucerne Mine subsidiary for $15 million, consisting of $11.5 million in cash and $3.5 million in Tonogold convertible preferred shares, while retaining a 1.5% net smelter return royalty. As of June 7, 2019, Tonogold had provided $2.35 million of cash deposits and the $3.5 million of preferred shares. Closing was potentially extendable to August 30, 2019, subject to additional conditions and deposits.
The transaction was expected to fund repayment of the senior debenture, eliminate more than $1 million of annualized interest expense, relieve approximately $8 million of future Lucerne-related obligations, and reduce annual operating costs by approximately $2.2 million, including existing reimbursements.
Planned asset sales: Agreements were entered into to sell the Industrial Park and water rights for $7.2 million and the company’s DTSS interests for $2.5 million, plus potential residual carried-interest participation. Management expected the transactions to generate an approximate $5 million gain, but closing remained subject to transaction conditions.
Operating plan: Management planned annual operating expenses of approximately $3.8 million, continued development of the Dayton project, exploration in Spring Valley, technology commercialization, and preparation of an updated NI 43-101 resource estimate for Dayton.
Going concern: The company reported recurring operating losses, a $233.9 million accumulated deficit, only $0.3 million of cash, and $0.9 million of operating cash use in Q1. Management nevertheless believed available financing capacity, equity funding, asset sales and planned Tonogold proceeds would provide sufficient funds for the next 12 months. Failure to obtain funding or complete planned transactions could materially impair liquidity and raise substantial doubt about continued operations.
Litigation and contingencies: A court denied the Comstock Residents Association’s due-process claim, subject to a written order. Precious Royalties LLC refiled a claim seeking $510,000 concerning an alleged royalty underpayment; the company stated that it believes the claim lacks merit.
Listing compliance: The company received a low-selling-price noncompliance notice from NYSE American but reported that the issue was resolved on June 3, 2019. It also received a late-filing notice relating to this Form 10-Q.
Key risks include commodity-price volatility, permitting and environmental obligations, exploration and development uncertainty, debt repayment requirements, dependence on equity and asset-sale financing, potential dilution, litigation, and the risk that the Tonogold or real estate transactions may not close.

Important Facts for Investors to Verify

Whether the Tonogold transaction closed, including the timing and value of cash and preferred-share consideration actually received.
Whether proceeds from Tonogold and planned asset sales were sufficient to repay or extinguish the senior secured debenture and related make-whole obligation.
The company’s cash balance, operating cash burn, borrowing capacity and equity issuance activity after March 31, 2019.
Whether the Industrial Park, water-rights and DTSS transactions closed and whether the anticipated approximately $5 million gain was realized.
The status and valuation of the Tonogold preferred shares, retained royalties and assumed reclamation or lease obligations.
Progress, permitting status, updated resource estimates and required funding for the Dayton project.
The final disposition of the Precious Royalties litigation and any remaining reclamation, environmental or royalty liabilities.
NYSE American listing status and the consequences of the late-filing notice.