Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


			Fair Value Measurements at
			September 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 3)	$	2,616,000	$	—	$	—	$	2,616,000
Common shares of Tonogold (Note 3)	7,106,022		7,106,022		—		—
Tonogold note receivable (Note 3)	6,397,497		—		—		6,397,497
Total Assets	$	16,119,519	$	7,106,022	$	—	$	9,013,497

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 3)	$	9,080,000	$	—	$	—	$	9,080,000
Total Assets	$	9,080,000	$	—	$	—	$	9,080,000

Liabilities:
Accrued make-whole for Pelen LLC (Note 21)	$	222,602	$	—	$	222,602	$	—
Accrued make-whole for Mercury Clean Up LLC (Note 22)	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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Beginning balance	$	10,581,334	$	4,995,000	$	9,080,000	$	—
Total gains or losses recognized in earnings	(2,890,502)		(332,263)		(1,522,120)		(332,263)
Additions							—
Convertible preferred shares of Tonogold	—		987,263		—		5,982,263
Contingent forward asset	—		—		1,232,952
Tonogold note receivable	6,141,497		—		6,141,497		—
Transfers
Tonogold preferred shares converted to Tonogold common shares	(2,820,000)		—		(3,920,000)		—
Contingent forward asset	(1,998,832)		—		(1,998,832)		—
Ending balance	$	9,013,497	$	5,650,000	$	9,013,497	$	5,650,000

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 consideration received for Tonogold's acquisition of Comstock Mining LLC (Note 20) included shares of Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock ("CPS"). 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. Since the CPS shares are not listed securities, and have no readily available market, the Company elected the fair value option for this financial instrument. It was recorded at fair value when received, and is adjusted to fair value at the end of each reporting period, with changes in fair value reported in net earnings. The Company received CPS as follows: 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 $2.5 million in other expense and $2.5 million in other expense for the changes in fair value for the three and nine months ended September 30, 2020, respectively. The Company recorded $0.3 million in other expense and $0.3 million in other expense for the changes in fair value for the three and nine months ended September 30, 2019, respectively.

In previous quarters, the fair value of the Tonogold convertible preferred shares was based on a Monte Carlo model with various inputs including the Tonogold common share price, private placement conversion price ceiling of $0.18 per share and estimates of volatility, risk-free rate, cost of debt, redemption probability, and illiquidity discount. On September 14, 2020, it was announced that Tonogold's acquisition of Comstock Mining LLC, owner of the Lucerne properties, was complete (Note 20). Tonogold also completed an equity capital raise and experienced an increase in common share trading volume making it more likely that the redemption provision would be applied. Based on these considerations, the fair value of convertible preferred shares of Tonogold was estimated at 120% of par value at September 30, 2020. The convertible preferred shares are classified within Level 3 of the valuation hierarchy.

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. On September 29, 2020, the Company converted $2.82 million of CPS (that is, 2,820 Tonogold preferred shares) into 15,666,667 Tonogold common shares. The Company sold 3,557,209 of the shares, and held 18,220,569 Tonogold common shares with a fair value based on the $0.39 closing share price (OTC:TNGL) on September 30, 2020.

Tonogold Note Receivable

In connection with Tonogold's acquisition of Comstock Mining LLC (Note 20), on September 8, 2020, the Company recorded a senior secured convertible note (the "Note") due from Tonogold with a principal amount of $4,475,000 and a 12% annual interest rate. Interest is due and payable monthly with the principal due and payable on September 20, 2021 (the “Maturity Date”). The Note may be converted into Tonogold common shares, at the sole discretion of the Company, at the Maturity Date, upon an event of default or upon a partial or whole prepayment by Tonogold. The Maturity Date may be extended at the Company’s option if an event of default has occurred or is expected to occur or a fundamental transaction (as defined by the Note) has been announced but not yet closed. Because of the embedded features, the Company made the irrevocable election to report the Note on a fair value basis. Fair value of the Tonogold Note is based on a Monte Carlo model with the following inputs: Tonogold common share price - $0.39; volatility – 96%; risk free rate – 0.15%; cost of debt – 11.12%; conversion premium – 30%; probability of prepayment – 5% at both March and June 2021; probability of change in control – 5% at June 2021; probability of default – 27% at September 2021. The Company recorded the Tonogold Note at a fair value of $6.1 million as of September 8, 2020 and recorded an additional $0.3 million for the change in fair value as other income for the three and nine months ended September 30, 2020.

Contingent Forward

On March 20, 2020, Tonogold issued a senior secured convertible note with a principal amount of $5,475,000 to the Company, reflecting Tonogold’s intent to purchase additional membership interests in Comstock Mining LLC (Note 20) in the future at a specified price (the “Contingent Forward”). The Contingent Forward included 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% premium; 3) event of default redemption right allowing Comstock the right to redeem the note in cash at a 118% premium; and 4) a payment modification included in the Contingent Forward. The fair value of the Contingent Forward is based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price of $0.35 on September 8, 2020, volatility of 96.0%, risk-free rate of 0.15%, cost of debt of 11.12%, required conversion premium of 30.0%, probability of prepayment of 5%, probability of change in control of 5% and probability of default of 27%. The Company recorded $0.6 million in other expense and $0.8 million in other income for the three and nine months ended September 30, 2020, respectively. The contingent forward asset was netted against the gain on sale of Comstock Mining LLC recorded for the three months ended September 30, 2020.

Accrued Make-Whole for Pelen LLC

The Pelen make-whole was valued based on the difference between the valuation of the outstanding Comstock common shares held by the seller of the Pelen membership interests (Note 21) 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 25% membership interest in Pelen LLC, settling all amounts due. No make-whole accrual remains in the condensed consolidated balance sheets at September 30, 2020.

Accrued Make-Whole for Mercury Clean Up LLC

The MCU make-whole was valued based on the difference between the valuation of the Company's common shares received by MCU and the required stock-based investment of $850,000 (Note 22). For the three months ended June 30, 2020, MCU sold 900,000 Comstock common shares for net proceeds of $465,127, reducing the remaining make-whole liability to $384,873. On May 15, 2020, the Company issued an additional 625,000 shares of its common stock to MCU. The accrued make-whole is zero at September 30, 2020, because the value of the Company's common shares held by MCU at the Company's closing share price of $1.08 on that date exceeded the remaining liability. The inputs are observable and market-based, so the instrument is classified within Level 2 of the valuation hierarchy.

Other Financial Instruments

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these financial instruments. At September 30, 2020 and December 31, 2019, the fair value of the Company's debt obligations approximated $4.8 million and $5.4 million, respectively, as determined by borrowing rates estimated to be available to the Company for debt with similar terms and conditions.

- 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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