Business Context and Reporting Period
Comstock Mining Inc. (now identified in the request as Comstock Inc.) filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company operates mining and real estate segments in Nevada. Mining production ceased after leach-pad processing ended in December 2016; the company is pursuing exploration and development of the Dayton and Lucerne resource areas, including a potential Tonogold earn-in for Lucerne.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $32,281, versus $26,960 | $83,946, versus $73,624 |
| Mining revenue | $0 | $0 |
| Operating loss | $1.54 million, versus $2.04 million | $5.36 million, versus $7.03 million |
| Net loss | $2.05 million, versus $2.50 million | $6.95 million, versus $8.20 million |
| Loss per diluted share | $0.03 | $0.13 |
| Operating cash flow | Not separately provided | $(3.50) million, versus $(5.06) million |
Revenue consisted almost entirely of real estate revenue. Operating and net margins remained substantially negative because the company had no mining revenue; reported margin percentages are not meaningful at this revenue level. Depreciation, amortization and depletion were $2.47 million year to date, compared with $3.26 million in the prior-year period.
- Cash and cash equivalents were $1.24 million at September 30, 2018, down from $2.07 million at December 31, 2017.
- Current assets were $8.98 million and current liabilities were $1.81 million, producing working capital of approximately $7.16 million.
- Total debt, net of discounts and issuance costs, was $9.15 million, including $304,235 of current maturities. Gross debt was $9.90 million.
- The 11% senior secured debenture had principal of approximately $8.87 million and was due in January 2021, with a remaining make-whole obligation of $508,599. The company paid $437,852 of interest in additional debentures during June 2018.
- The company had approximately $7.0 million of unused capacity under a loan commitment agreement after fees and reported $1.4 million of unused capacity under its Leviston equity arrangement.
- Financing cash flow was $3.70 million year to date, including $2.0 million from Tonogold and net equity proceeds. Investing cash flow was $(1.03) million, primarily reflecting deposits related to the DTSS land and water-rights transaction.
- Shares outstanding increased to 70.85 million at October 24, 2018, from 47.24 million at December 31, 2017. Weighted-average diluted shares were 54.76 million year to date, versus 39.38 million.
Material Changes Versus the Prior Comparable Period
- Year-to-date revenue increased $10,322, but remained immaterial because mining revenue was zero.
- Operating loss improved by $1.67 million, primarily from lower depreciation, mining-related costs, environmental and reclamation costs, and Tonogold reimbursements.
- Net loss improved by $1.26 million, although other expense increased by $654,522 due mainly to Pelen make-whole accruals and the Debenture make-whole obligation.
- Operating cash use declined by $1.56 million, reflecting cost reductions and Tonogold reimbursements.
- Equity issuance increased shares materially: 15.76 million shares were sold year to date for gross proceeds of $3.33 million at an average price of $0.21, compared with 6.85 million shares and $5.86 million of gross proceeds in the prior-year period.
- Operating expenses declined approximately $1.7 million year over year. Management expected approximately $2.0 million of full-year 2018 savings versus 2017.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected full-year 2018 operating expenses of approximately $4.2 million, excluding $3.2 million of depreciation and $1.4 million of interest expense.
- Management targeted a Dayton resource update and preliminary economic and technical reporting in the first quarter of 2019. An updated Lucerne resource estimate prepared by Mine Development Associates was expected in the fourth quarter of 2018.
- Tonogold may earn a 51% interest in the Lucerne property by funding specified capital expenditures and making option payments. Approximately $3 million had been expended toward the program at the filing date.
- The company planned to monetize non-mining assets and apply proceeds to debt reduction. A subsequent agreement contemplated selling Daney Ranch for $3.25 million, subject to closing conditions. The company also stated that the Gold Hill Hotel and Daney Ranch were expected to generate aggregate proceeds of approximately $4 million.
- Although management believed available resources would fund operations for the next 12 months, the company reported recurring losses and warned that additional funding may be necessary. Failure to obtain financing, higher-than-expected expenditures, lower asset values or a lower share price could create substantial doubt about continuation as a going concern.
- The company held $5.36 million of assets classified as held for sale. Proceeds were required to be used to satisfy obligations under the senior secured debenture.
- The company had a $369,000 make-whole liability related to the uncompleted Pelen, LLC transaction and a $250,000 accrued payment related to the DTSS acquisition. The DTSS options and related deposits involved potential land, water-rights and sewer-rights purchases expiring March 31, 2019.
- Precious Royalties LLC filed a claim seeking $510,000 for an alleged unpaid royalty. Management stated that the claim was without merit and intended to defend it.
- A separate Comstock Residents Association due-process claim remained pending in Nevada state court; briefing was completed and the matter was submitted for a final ruling.
- Key risks include commodity-price volatility, permitting and environmental obligations, exploration and development uncertainty, debt repayment requirements, dilution from equity financing, asset-sale execution and reliance on Tonogold reimbursements and financing availability.
Investor Verification Items
- Verify whether the planned Daney Ranch and Gold Hill Hotel sales closed and whether proceeds were applied to the Debenture as required.
- Verify Tonogold’s continued funding, reimbursement payments and progress toward the Lucerne earn-in milestones.
- Reconcile debt principal, make-whole obligations, interest payments in kind and the timing of required 2021 repayment.
- Assess the company’s cash burn and financing needs given $1.24 million of cash and continued operating losses.
- Review dilution from equity issuances and the remaining availability under Leviston and other financing arrangements.
- Monitor the Precious Royalties litigation, the Comstock Residents Association claim and environmental reclamation obligations.
- Evaluate whether Dayton and Lucerne technical reports, permitting, metallurgical testing and future production plans support management’s stated growth objectives.