Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets at June 30, 2020, measured at fair value on a recurring basis:



			Fair Value Measurements at
			June 30, 2020
	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Convertible preferred shares of Tonogold (Note 19)	$	7,935,000	$	—	$	—	$	7,935,000
Common shares of Tonogold (Note 19)	2,461,656		2,461,656		—		—
Contingent forward asset	2,646,334		—		—		2,646,334
Total Assets	$	13,042,990	$	2,461,656	$	—	$	10,581,334

The following table presents our assets and liabilities at December 31, 2019, measured at fair value on a recurring basis:



			Fair Value Measurements at
			December 31, 2019
	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Convertible preferred shares of Tonogold (Note 19)	$	9,080,000	$	—	$	—	$	9,080,000
Total Assets	$	9,080,000	$	—	$	—	$	9,080,000

Liabilities:
Accrued make-whole for Pelen LLC (Note 18)	$	222,602	$	—	$	222,602	$	—
Accrued make-whole for Mercury Clean Up LLC (Note 18)	452,740		—		452,740		—
Total Liabilities	$	675,342	$	—	$	675,342	$	—

The following tables provide reconciliation between the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Beginning balance	$	11,090,243		$	—	$	9,080,000		$	—
Total gains or losses recognized in earnings	591,091			—		1,368,382			—
Additions				4,995,000		1,232,952			4,995,000
Transfers to Level 1	(1,100,000		)	—		(1,100,000		)	—
Ending balance	$	10,581,334		$	4,995,000	$	10,581,334		$	4,995,000

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.

Convertible preferred shares of Tonogold - The value of the Tonogold convertible preferred shares (CPS) is based on a Monte Carlo model with various inputs that include the Tonogold common share price of $0.41, volatility of 98%, risk-free rate of 0.18%, cost of debt of 14.44%, private placement conversion price ceiling of $0.18, redemption probability of 50%, and illiquidity discount of 5% - 15%. The convertible preferred shares are classified within Level 3 of the valuation hierarchy.

The CPS was convertible into Tonogold common stock on May 22, 2020, at the lowest of (1) $0.18 per share, or (2) 85% of Tonogold’s 20-day volume-weighted closing price prior to conversion. Under U.S. GAAP, the Company has the irrevocable option to elect to report certain financial assets and liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for the treatment of the CPS received on May 31, 2019 ($3.92 million), August 30, 2019 ($0.83 million), October 14, 2019 ($0.75 million), December 19, 2019 ($0.50 million), and December 30, 2019 ($0.10 million). The Company recorded the receipt of the CPS at a fair value of $7.6 million when received and recorded an additional $0.3 million in other income and $0.1 million in other expense, for the changes in fair market value, for the three months and six months ended June 30, 2020, respectively.

Common shares of Tonogold - On May 22, 2020, the Company converted $1.1 million of CPS (that is, 1,100 Tonogold preferred shares) into 6,111,111 Tonogold common shares. The fair value of the common shares (OTC: TNGL) is based on the $0.41 closing stock price on June 30, 2020.

Contingent forward - On March 20, 2020, Tonogold issued a senior secured convertible note with a principal amount of $5.475 million to the Company reflecting Tonogold’s intent to purchase additional membership interest in Comstock Mining LLC in the future at a specified price (the “Contingent Forward”.) The Contingent Forward includes the following features: 1) conversion feature allowing Comstock, at the Company’s sole option, to elect payment in Tonogold common shares upon certain events; 2) change of control redemption right allowing Comstock, to redeem the note in cash at a 125 percent premium; 3) event of default redemption right allowing Comstock the right to redeem the note in cash at a 118 percent premium; and 4) a payment modification included in the Contingent Forward. The value of the Contingent Forward is based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price of $0.41, volatility of 94.0%, risk-free rate of 0.16%, cost of debt of 14.44%, required conversion premium of 30.0%, probability of prepayment of 5%, probability of change in control of 5% and probability of default of 29%. Subsequent to the issuance of the Company's condensed consolidated financial statements for the period ended March 31, 2020, the Company determined the initial fair value of the Contingent Forward was $1.2 million rather than zero, and should have been recorded with a corresponding increase to additional paid in capital, as the transaction is deemed to be between related parties given the common ownership in CML. Additionally, the Company determined there was a $1.1 million change in fair value of the Contingent Forward for the period ended March 31, 2020 that should have been recorded. As a result, the accompanying condensed consolidated statement of changes in equity for the period ended March 31, 2020 has been corrected from amounts previously reported for this matter. The Company recorded an additional $0.4 million in other income for changes in the fair market value for the three months ended June 30, 2020.

Accrued make-whole for Pelen - The accrued make-whole is valued based on the difference between the valuation of the outstanding shares held by the seller of the membership interests at the volume-weighted price per share for five consecutive trading days preceding the date of determination of $0.47 at December 31, 2019, as compared to the remaining aggregate proceeds due. Because the inputs are observable market-based inputs, this instrument is classified within Level 2 of the valuation hierarchy. In April 2020, the Company purchased the membership interest in Pelen LLC, settling all amounts due.

Accrued make-whole for MCU - During the second quarter of 2020, MCU sold 900,000 Comstock shares for net proceeds of $465,127, reducing the remaining make-whole liability to $384,873 as of May 26, 2020. On May 15, 2020, the Company issued an additional 625,000 shares to MCU. The accrued make-whole is zero at June 30, 2020 because the value of Comstock shares held by MCU at the Company's closing stock price of $0.95 exceeds the remaining liability. The inputs are observable and market-based, so the instrument is classified within Level 2 of the valuation hierarchy.

The carrying amount of cash and cash equivalents and trade payables approximates fair value because of the short-term maturity of these financial instruments. At June 30, 2020, and December 31, 2019, the fair value of long-term debt approximated $5.2 million and $5.1 million, respectively, as determined by borrowing rates estimated to be available to the Company for debt with similar terms and conditions. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1).

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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