Comstock Inc. 10-K

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the Consolidated Financial Statements included herewith and the footnotes thereto and the risk factors contained herein. OVERVIEW Comstock innovates technologies that efficiently use wasted and under-utilized natural resources to produce renewable energy and other products that contribute to balancing global uses and emissions of carbon and enhance mineral and material discoveries. We plan on achieving exponential growth and extraordinary financial, natural and social returns by using our and other technologies to develop production projects, to license qualified clients, and to sell an array of complimentary process solutions and related products and services. Our Cellulosic Fuels technologies include proprietary processes that have the potential to convert vast quantities of historically wasted and unused but widely available and rapidly replenishable woody biomass supplies into advanced renewable fuels possibly capable of sustainably offsetting billions of metric tons of fossil fuel emissions worldwide. Our Electrification Metals technologies also include a two-stage lithium-ion battery (“LIB”) recycling process designed to crush, separate, and condition LIBs, for direct production of high purity black mass containing minerals available for extracting battery grade metals. We own and operate demonstration facilities for our Cellulosic Fuels and Electrification Metals technologies that we use in our ongoing technology development and commercialization efforts. We also hold a worldwide license to advanced new mineral discovery and mining technologies that will use machine learning and artificial intelligence algorithms, hyperspectral orbital imaging, and ultimately, quantum-enabled sensors to provide prospecting data for mineral discovery and mining applications. Our mining segment has consolidated the most significant portions of the historic Comstock mining district, amassed the single largest known repository of historical and current geological data on the Comstock region, secured permits, built an infrastructure and completed two phases of test production. Comstock and its mining subsidiaries own, control, or retain interest in twelve square miles of primarily mineralized properties, or 9,472 acres (and due to overlapping interests, the combined area is approximately 7,586 acres) located in Storey and Lyon Counties, Nevada, just south of Virginia City, Nevada (referred to collectively herein as the “Comstock Lode District”). Because of the Comstock Lode District’s historical significance, the geology is well known and has been extensively studied. The volume of geologic data is significant, particularly in the Lucerne and Dayton resource areas. We have completed extensive geological mapping, sampling and drilling on a limited portion of the Comstock Lode District’s property, particularly the Lucerne and Dayton resource areas, in order to characterize the mineralized material. We have performed metallurgical testing, mine planning and economic analysis, and have produced an SEC Regulation S-K Subpart 1300 (“S-K 1300”) compliant report for the Dayton resource area. We conducted extensive test mining operations from 2004 through 2006 and 2012 through 2016. Most of the remaining portion of the Comstock Mineral Estate is comprised of exploration stage properties that we intend to develop with our mining technologies. RECENT DEVELOPMENTS Comstock historically focused on natural resource exploration, development, and production, with an emphasis on mining gold and silver resources from its extensive contiguous property holdings in the historic Comstock and Silver City mining districts in Nevada (collectively, the “Comstock Mineral Estate”). Between 2012 and 2016, we mined and processed about 2.6 million tons of mineralized material from the Comstock Mineral Estate, producing 59,515 ounces of gold and 735,252 ounces of silver. We subsequently focused on diversification and during 2021 and 2022, we completed a series of transactions that were designed to build on our competencies and reposition us to capitalize on the global transition to clean energy. Those transactions primarily included our acquisitions of 100% of Comstock Innovations, 100% of Comstock Engineering Corporation, 88.21% of LINICO Corporation, our acquisition of 48.19% of Quantum Generative Materials LLC, and our acquisition of the intellectual property portfolio from FLUX Photon Corporation. These transactions added the management, employees, facilities, intellectual properties, and other assets needed to transform our company and business into an emerging leader in the innovation and sustainable production of renewable energy, primarily by commercializing two new lines of business, cellulosic fuels and electrification metals. Additional information on these transactions is provided in Note 2, Acquisitions and Investments, to our Consolidated Financial Statements. 57 SUMMARY RESULTS OF OPERATIONS Net loss for the year ended December 31, 2022, increased $22,154,639 to $46,738,259 from a net loss of $24,583,620 in 2021. The increase of $22.2 million was primarily the result of the higher operating expenses of $12.5 million, decrease in other income (expense), net $3.5 million, including the impairment of goodwill and investments, and reduction of the $5.7 million prior year 2021 benefit from the deferred income tax benefit. Below we set forth a summary of comparative financial information for the years ended December 31, 2022 and 2021: 2022 2021 Change Revenue $ 178,150 $ 862,165 $ (684,015) Cost of goods sold — 272,082 (272,082) Gross profit 178,150 590,083 (411,933) Selling, general and administrative expenses 10,243,353 5,546,767 4,696,586 Research and development 7,023,132 414,751 6,608,381 Depreciation and amortization 3,328,570 1,034,486 2,294,084 Gain on sale of Daney Ranch (1,055,623) — (1,055,623) Total operating expenses 19,539,432 6,996,004 12,543,428 Loss from operations (19,361,282) (6,405,921) (12,955,361) Other Income (Expense) Gain (loss) on investments 7,310 (2,244,951) 2,252,261 Interest expense (1,651,435) (168,881) (1,482,554) Interest income 387,608 1,017,947 (630,339) Change in fair value of derivative instruments (7,727,638) (13,155,946) 5,428,308 Impairment of intangibles (338,035) (230,764) (107,271) Impairment of investment, net recovery (2,204,715) — (2,204,715) Impairment of goodwill (12,788,671) (6,163,846) (6,624,825) Other income (expense) (3,061,401) (2,979,363) (82,038) Total other income (expense), net (27,376,977) (23,925,804) (3,451,173) Net loss before deferred income tax benefit (46,738,259) (30,331,725) (16,406,534) Deferred income tax benefit — 5,748,105 (5,748,105) Net loss (46,738,259) (24,583,620) (22,154,639) Net loss attributable to noncontrolling interest 789,515 — 789,515 Net loss attributable to Comstock Inc. $ (45,948,744) $ (24,583,620) $ (21,365,124) We had loss from operations of $10,619,429 and $1,801,595 per year for the years ended December 31, 2022 and 2021, respectively, in our renewable energy segment. We had loss from operations of $346,115 and $81,125 per year for the years ended December 31, 2022 and 2021, respectively, in our mining segment. We had loss from operations of $8,395,738 and $4,523,201 per year for the years ended December 31, 2022 and 2021, respectively, in our strategic and other investments segment. 58 We had total assets of $12,524,408 and $43,001,837 in our renewable energy segment at December 31, 2022 and 2021. We had total assets of $8,322,920 and $11,304,024 in our mining segment at December 31, 2022 and 2021. We had total assets of $79,206,431 and $72,648,771 in our strategic and other investments segment at December 31, 2022 and 2021. In 2022, the Company reestablished itself and its primary reporting segment as a renewable energy company. See Note 18, Segment Reporting , to the Consolidated Financial Statements. COMPONENTS OF REVENUES AND EXPENSES Our revenues are primarily derived from the sale of engineering and related services and real estate revenues generated by our investments. Our costs of goods sold primarily include allocable labor, materials and incidental expenses incurred in connection with our provision of services. Selling, general and administrative expenses consist of payroll, office expenses, insurance and professional fees for marketing, selling, legal, consulting, accounting and investor relations activities. Payroll, including employee compensation, and benefits, are the largest single category of expenditures in selling, general and administrative expenses. Other income (expense) includes interest income, interest expenses, income or expenses relating to equity income (losses) in affiliates, impairment losses of goodwill, investments and intangibles, change in fair value of derivative assets and notes receivable, gain (loss) on investments and other non-operating items. RESULTS OF OPERATIONS Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Revenues for the year ended December 31, 2022, decreased $684,015 to $178,150 in 2022 from $862,165 in 2021, primarily due to engineering services revenue recognized in 2021 related to LINICO, which was an investment until a majority stake was acquired in the fourth quarter 2021, when the Company then consolidated LINICO. Revenue, costs of sales and gross profit in future periods will vary significantly depending on a number of factors, including the amount of renewable energy technology solutions that we license and sell, the market prices for those services, the extent to which we secure and collect reasonable royalties, the degree to which we can provide event-driven engineering services, and the costs associated with each component of the aforementioned revenues. Selling, general and administrative expense for the year ended December 31, 2022 increased $4,696,586 to $10,243,353 in 2022 from $5,546,767 in 2021, primarily due to higher legal and professional fees of $1.2 million related to increased corporate activities, acquisitions, financing and other transactions, higher bad debt expense of $1.2 million attributed to the Tonogold accounts receivable impairment, $1.2 million increase in other costs, including payroll bonus accrual and other compensation related to the 2021 acquisitions and $0.4 million in higher insurance costs, and a $0.3 million increase due to a change in the estimate for reclamation liabilities. Research and development expenses for the year ended December 31, 2022 increased $6,608,381 to $7,023,132 in 2022 from $414,751 in 2021. The increase primarily related to costs for the development of two pilot-scale systems, one for processing woody biomass into bio-intermediate materials for low-carbon pulps, paper, cellulosic sugars and cellulosic fuels and the other for crushing, separating and conditioning black mass derived from lithium-ion batteries and, to a lesser extent, increased salaries and other compensation, including bonus accruals of $557,000 associated with these efforts. These systems are being used to validate the processes and develop parameters for upscaling and commercializing these renewable energy technologies. Our Comstock Innovations and Comstock Engineering subsidiaries, respectively, are leading the efforts for commercializing these technologies. Depreciation and amortization expense for the year ended December 31, 2022, increased $2,294,084 to $3,328,570 in 2022 from $1,034,486 in 2021, primarily due to increased amortization from intangible and right of use assets acquired during 2021. Gain on sale of Daney Ranch for the year ended December 31, 2022, was $1,055,623. Gain on investments of $7,310 in 2022, increased $2,252,261 as compared to a loss on investments in 2021 of $2,244,951. The 2022 gain was due to an increase in the fair value of Tonogold common shares during 2022, as compared to a more significant decrease in the fair value of the Tonogold common shares during 2021. 59 Interest expense for the year ended December 31, 2022, increased by $1,482,554 to $1,651,435 in 2022 from $168,881 in 2021, primarily due to higher interest on the AQMS lease liability incurred in conjunction with the LINICO acquisition during the 2021 fourth quarter, higher AST lease liability commencing during the 2022 second quarter, and interest and related amortization of the original issue discount ("OID") on the GHF promissory note that originated during the 2021 fourth quarter. Interest income for the year ended December 31, 2022, decreased by $630,339 to $387,608 in 2022, from $1,017,947 in 2021, primarily as a result of the transaction that extinguished the $6,650,000 Tonogold interest bearing note receivable in exchange for the 100% membership interest in Comstock LLC, the entity that owns the Lucerne mine properties and related permit, and the extinguishment of the MCU-P note receivable that was exchanged for the MCU assets, both no longer accruing interest income. The change in fair value of our derivative instruments changed by $5,428,308, to a loss of $7,727,638 in 2022 from a loss of $13,155,946, as a result of a lower impact from the decrease in the Company's share price and a settlement of the investment associated with LINICO, in connection with potential make-whole obligations for minimum value commitments on the Company's common shares. The 2022 loss primarily includes $3,535,000 for the acquisition of LINICO equity from the former founder, $3,030,000 for the investment in Quantum Generative Materials LLC ("GenMat"), and $1,875,000 associated with the acquisition of the Haywood Quarry. Impairment of intangible assets f or the year ended December 31, 2022, changed by $107,271 to $338,035 from an impairment of $230,764 in 2021, primarily from the $338,035 impairment of intangible assets related to Flux Carbon. The $230,764 impairment from 2021 was primarily due to the impairment of other intangibles associated with the full impairment of the MANA intangible asset related to the termination of the LP Biosciences contract. Impairment of investments was $2,204,715 in 2022 due to a $2,455,333 impairment of the MCU and MCU-P investments which was offset by $305,204 in cash and proceeds of MCU assets which were liquidated as well as a $54,587 impairment of the investment in LPB. There was no comparable loss in 2021. Impairment of goodwill for the year ended December 31, 2022, increased by $6,624,825 to $12,788,671 primarily from the 2022 impairment of $10.6 million of goodwill from the acquisition of Plain Sight Innovations and $2.2 million from the impairment of Renewable Process Solutions as compared to the 2021 impairment of $6.2 million for the impairment of goodwill associated with the full impairment of the MANA goodwill related to the termination of the LP Biosciences contract. Other income (expenses), net, for the year ended December 31, 2022, were $3,061,401 in 2022, primarily consisting of losses from our equity method investments of $1.1 million, a decrease in the value of the Tonogold note receivable of $0.6 million and an LPB settlement expense of $0.3 million. Other income (expenses), net, for the year ended December 31, 2021, were $2,979,363, primarily consisting of loss from our equity method investments of $2.0 million, $1.1 million in expenses associated with our withdrawal from the LP Biosciences transaction and a decrease in the value of the Tonogold note receivable of $0.4 million, partially offset by $0.8 million of other income, primarily consisting of $0.4 million from Tonogold amendment fees and $0.4 million of LINICO dividend income. Deferred income tax benefit for the year ended December 31, 2021, was $5,748,105, resulting from temporary differences between our accounting and tax treatment from our 2021 acquisitions. No deferred income tax benefit was recorded in 2022. LIQUIDITY AND CAPITAL RESOURCES Our financial position and liquidity is based on our net sources of capital from financing as generally compared to our net uses of capital from investing activities and ultimately, our ability to generate cash flows from our operations. Our cash balances at December 31, 2022 and 2021 were $2,521,772 and $5,912,188, respectively. The Company had current assets of $30,767,613 and current liabilities of $31,628,676, representing working capital deficit of $861,063 at December 31, 2022. Our primary source of liquidity during 2022 was cash from financing activities. During the year ended December 31, 2022, we generated $12,446,702 in cash from our financing activities and we used $12,105,169 and $3,731,949 in cash in our operating and investing activities, respectively. During the year ended December 31, 2021, we generated $27,070,131 from our financing activities and we used $7,492,402 and $16,097,485 in cash from our operating and investing activities, respectively. During 2022, we issued 20,666,674 common shares through equity issuance and private placement agreements, at an average price per share of $0.52 corresponding to proceeds of $10,488,180, net of cash issuance fees of $298,000. 60 During 2021, we issued 9,220,123 common shares through equity issuance and private placement agreements at an average price per share of $2.97 and proceeds of $26,335,501, net of cash issuance fees of $1,064,498. On June 21, 2022, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Tysadco Partners, LLC (“Tysadco”) for the private placement of 3,076,923 common shares at a purchase price of $0.65 per share. The Company paid $140,000 in cash and delivered 57,143 common shares with a fair value of $40,000 to the placement agent in connection with such sale. Such sale was exempt from registration pursuant to Section 4(a)(2) of the Securities Act. The Company also entered into an agreement with Tysadco for the purchase of up to $10,000,000 worth of shares of the Company’s common stock from time to time, at the Company’s option. Any shares offered and sold to Tysadco will be registered for resale pursuant to a registration statement on Form S-1 filed with U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933 (the “Securities Act”). The Company paid a commission of 428,571 additional shares of common stock with a fair value of $300,000 to Tysadco in connection with such sale. Sales of common stock, if any, under the Purchase Agreement are made at a 10% discount to the volume weighted average sales price of the common stock on the date that Tysadco receives such a capital call from the Company. On April 12, 2022, the Company entered into an equity purchase agreement (the “Leviston Agreement”) with Leviston Resources LLC (“Leviston”) for the purchase of up to $10,000,000 worth of shares of the Company’s common stock from time to time, at the Company’s option, on terms deemed favorable to the Company. Any shares offered and sold are issued pursuant to the Company’s shelf registration statement on Form S-3 and the related prospectus (File No. 333-263930) filed by the Company with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933 (the “Securities Act”). Sales of common stock, if any, under the Purchase Agreement may be made in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under the Securities Act, at a discount of 10% to the volume weighted average sales price of the common stock on the date that Leviston receives a capital call from the Company. For consideration to enter into the Leviston Agreement, the Company agreed to deliver additional shares of common stock to Leviston, for no additional consideration, on the first settlement date with respect to a put notice delivered by the Company. For the year ended December 31, 2022, we issued to Leviston 13,156,117 common shares with an aggregate sales price of $7,311,180, at an average price per share of $0.64, and an additional 206,897 common shares at a fair value of $300,000 in commitment fees. The Company issued 136,986 unregistered common shares with a fair value of $200,000 in due diligence fees. As of December 31, 2022, the 2022 Leviston Agreement has no remaining capacity, and the facility was closed. On December 16, 2022, the Company entered into a securities purchase agreement for an unsecured convertible promissory note ("Ionic 2022 Convertible Note") with Ionic Ventures, LLC. with a principal amount of $3,150,000, of which $2,975,000 was funded and $175,000 was an original issue discount ("OID") and issued with a 5% OID. The full principal is due on March 16, 2024. Interest is payable monthly at a rate of 8% annually. The Company can redeem up to $2,000,000 of the Convertible Note for cash 30-days following closing at 110% of the Face Value, plus accrued interest. The Ionic 2022 Convertible Note contains conversion terms that are based on percentages of trading price and volumes over defined measurement periods. The terms require the conversion option to be bifurcated as a derivative. As of December 31, 2022, the Company bifurcated the conversion feature and recorded a derivative liability of $420,000 reflected in our consolidated balance sheet. On October 25, 2022, we entered into a short-term promissory note ("Alvin Fund 2022 Note") with Alvin Fund LLC with a principal amount of $2,000,000. In consideration of the lender providing the financing, the Company issued $250,000 in shares to the lender. The full principal is due on October 25, 2023. Interest is payable monthly at a rate of 9% annually. Prepayment is allowed in full or in part at any time without premium or penalty. The loan is secured by all the property commonly referred to as the Dayton properties. On December 15, 2021, we entered into a long-term promissory note ("GHF 2021 Note") with GHF, Inc. (“GHF”) with a principal amount of $5,000,000, of which $4,550,000 was funded and $450,000 was an original issue discount ("OID"). The full principal is due on December 15, 2024. Interest is payable monthly at a rate of 6% annually. Prepayment is allowed in full or in part at any time without premium or penalty. The loan is secured by all non-mining related assets of the Company, Silver Springs land and water rights, and the Daney Ranch, excluding the Lucerne and Dayton properties. The Company is required to prepay the promissory note with any net cash proceeds received in the sale of any collateral. On March 4, 2021, we retired our existing unsecured promissory notes ("Promissory Notes") by paying the remaining principal balance of $3.1 million plus earned OID of $0.1 million. We intend to fund our operations over the next twelve months from existing cash and cash equivalents, planned sales of non-strategic assets and other investments, planned licensing, sales and profits from our cellulosic and battery metal recycling 61 technology and related engineering services, and previously funded capital into our LINICO subsidiary and Quantum investment. Based on these expected funding sources, management believes we will have sufficient funds to sustain our operations and meet our commitments under our investment agreements during the 12 months following the date of issuance of the consolidated financial statements included herein. While we have been successful in the past in obtaining the necessary capital to support our operations, including registered equity financings from our existing shelf registration statement, non-registered equity placements, borrowings and various other means. There is no assurance we will be able to obtain additional equity capital or other financing, if needed. Net cash used in operating activities for the year ended December 31, 2022 increased $4,612,767 to $12,105,169 in 2022 from $7,492,402 in 2021 primarily from an increase of $13.0 million in operating costs. Net cash used in investing activities for the year ended December 31, 2022, decreased by $12,365,536 to $3,731,949 from $16,097,485 in 2022 from 2021 almost solely due to a $15.5 million decrease in cash payments associated with our 2021 acquisitions, investments and advances, including $6.0 million investment in LINICO, $4.25 million investment in GenMat, $1.9 million investment in Plain Sight Innovations, and $3.3 million in advances to SSOF during 2021. Net cash provided by financing activities for the year ended December 31, 2022, decreased by $14,623,429 to $12,446,702 in 2022 from $27,070,131 in 2021, primarily as a result of reduced net proceeds from the issuance of common stock of $16.6 million, and the issuance convertible debentures of $3.0 million, partially offset by reduced principal payments on debt of $3.1 million, and a reduction in issuance of promissory notes of $2.6 million. Risks to our liquidity could result from future operating expenditures above management’s expectations, including but not limited to research and development, pre-development, exploration, selling, general and administrative, and investment related expenditures in excess of repayments of the advances to SSOF, and sale proceeds our non-strategic assets and other investments, amounts to be raised from the issuance of equity under our existing shelf registration statement, declines in the market value of properties planned for sale, or declines in the share price of our common stock that would adversely affect our results of operations, financial condition and cash flows. If we were unable to obtain any necessary additional funds, this could have an immediate material adverse effect on liquidity and raise substantial doubt about our ability to continue as a going concern. In such case, we could be required to limit or discontinue certain business plans, activities or operations, reduce or delay certain capital expenditures or investments, or sell certain assets or businesses. There can be no assurance that we would be able to take any such actions on favorable terms, in a timely manner, or at all. OUTLOOK The primary focus for 2023 is commercialization. The Company’s biorefining technologies are commercially ready and offer unprecedented performance for the Company’s prospective customers. The Company is actively pursuing revenue producing licensing opportunities with globally recognized renewable fuel producers. The Company’s metals and GenMat’s generative AI solutions have made significant technological advancements in the past two years with the 2023 goal of commercial readiness first followed by commercialization with early adopting customers. Commercialization Comstock’s team has decades of diverse technology development and commercialization experience. The Company uses a disciplined approach to devising, qualifying, and elevating innovations from conception through increasing degrees of commercial readiness. The Company has adopted a widely used Technology Readiness Level (“TRL”) measurement system for objectively assessing Comstock’s progress, risks, investment qualifications, and commercial maturity. There are nine readiness levels on the TRL scale, starting with TRL 1. Progression up the scale requires achievement of “SMART” milestones that are Specific, Measurable, Achievable, Relevant, and Timely. Proof of concept occurs at TRL 3. TRL 4 and 5 involve increasing degrees of process validation. TRL 6 is the first true demonstration of commercial readiness. TRL 7 and 8 involve various functional prototypes and pilots with increasing fidelity and sophistication. A TRL 9 technology is commercially mature and fully deployed. Depending on the technology and other applicable factors, revenue can commence at TRL 6 for early adopting and generally sophisticated commercial clients with continued development to TRL 7, 8, and 9. The following chart summarizes the change in TRL status over the past year, and the objectives for 2023: Line of Business Technology 12/2021 12/2022 12/2023 Goal 62 Cellulosic Fuels Conversion of under-utilized woody biomass into renewable fuels at high yield TRL 4 TRL 6 TRL 7 Artificial Intelligence Generative AI that simulates new materials at exponentially increased speed TRL 3 TRL 4 TRL 6 Metals Scalable extraction of purified black mass concentrate from lithium-ion batteries TRL 2 TRL 5 TRL 6 Mining Technology Dramatically reduced exploration costs with hyperspectral imaging and AI-based analytics TRL 0 TRL 2 TRL 3 Comstock’s SMART milestones and commercialization process involve meticulous planning that is informed by many factors, including the total addressable markets, their growth rates and the speed that the Company can initiate and increase revenue. Cellulosic Fuels Most current forms of renewable fuel draw from the same pool of conventional feedstocks, including corn and vegetable oils in the U.S., but the entire available supply of those feedstocks could only meet a small fraction of the demand for renewable fuels. Comstock's patented and patent-pending biorefining technologies unblock that constraint by converting abundant but underutilized lignocellulosic or "woody" biomass into biointermediates for refining drop-in and other renewable fuels. The Company’s objectives for 2023 include: • Executing one or more early adopter license agreements and commencing development on commercial scale projects for operationally experienced, technologically sophisticated and well capitalized customers . • Completion of full technical documentation and engineering submittal packages. • Completion of an independent lifecycle carbon analysis to prove the carbon emissions reduction benefits of the fuels produced with Comstock’s known processes. • Continuous operation of the integrated bio-intermediate production process at the Company’s demonstration plant for sufficient time to achieve and broadly demonstrate TRL 7. Each license agreement for a commercial production facility will create 15 to 20 years of recurring royalty revenue for the Company in addition to upfront fees for design and engineering. Artificial Intelligence Investment in artificial intelligence (“AI”) is a crucial component of Comstock’s technology innovation strategy. Quantum Generative Materials LLC ("GenMat"), develops and commercializes cutting-edge generative artificial intelligence models for the discovery and manipulation of matter. GenMat is a company in which Comstock has a 48.19% investment interest. This includes generative AI models that can be employed today, for commercial use on GenMat’s existing, high-performance computing platforms, well before quantum computers become mainstream. GenMat's AI operates similarly to the large language models widely discussed in the media today, but instead of words and language, it uses atoms and molecules to generate physical systems and harness math and science to discover new materials in an exponentially shorter time than traditional methods allow. To put this into perspective, new material discovery typically takes many years and many millions of dollars. GenMat's AI will simulate thousands of unique new materials in seconds. GenMat’s objectives for 2023 include: • Elevate new material simulation to TRL 6 by synthesizing and directly testing the AI’s simulated materials to confirm the precision and accuracy of those simulations. • Commercialize an enterprise-oriented API and other generative AI solutions to early adopter enterprise clients for advanced materials simulation and synthesis. • Launch and make operational a space-based hyperspectral imaging sensor for mineral discovery applications. While the Company can’t be precise about exactly when GenMat will initiate revenue, GenMat’s technologies are maturing much faster than anticipated when the Company invested in GenMat in 2021. 63 Mining and Minerals The Company has amassed the single largest known repository of historical and current geological data on the Comstock mineral district, including extensive geophysical surveys, geological mapping, sampling and drilling data and published updated SK-1300 technical reports on the Lucerne and Dayton resource areas. The Company’s objectives for 2023 include: • Publish preliminary economic assessments for both the Lucerne and Dayton resource areas. • Develop, in collaboration with GenMat, a next-generation geostatistical digital twin model of the Dayton resource area using the Company’s existing geologic and geophysical data. The Company’s 2023 efforts will enhance Comstock’s gold and silver resources progressing toward full economic feasibility. Metal Recycling Resource scarcity and supply are generally the main drivers presented when discussing battery recycling. From a market perspective what is often missed is that electric vehicle batteries are only one of many metals-based products that can cause a massive amount of pollution if simply landfilled at the end of life with no recovery of the underlying metal values. Comstock Metals objectives for 2023 include: • Physically reposition and broaden the addressable market for commercialization of our metals recycling. • Advancing the technology readiness for broader material recycling, including photovoltaics and more. The Company will provide additional, specific objectives for Comstock Metals during the second quarter of 2023. The Company has also made meaningful progress and expect to complete the monetization of up to $30 million in sales of our non-strategic assets during 2023, while funding our business developments and limiting our focus to the objectives above. CRITICAL ACCOUNTING ESTIMATES The SEC has requested that all registrants address their most critical accounting policies. The SEC has indicated that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ and may differ materially from these estimates under different assumptions or conditions. Changes in accounting estimates could occur in the future from period to period. Our management has discussed the development and selection of our most critical financial estimates with the Audit and Finance Committee of our Board of Directors. The following summarizes our most critical accounting policies: Derivatives We accounted for our convertible debt in accordance with ASC 815, Derivatives and Hedging as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of our common shares. The conversion feature on these debentures is variable and based on trailing market prices. It therefore contains an embedded derivative. The fair value of the conversion feature was calculated when the debentures were issued, and we recorded a note discount and derivative liability for the calculated value. We recognize interest expense for accretion of the note discount over the term of the note. The conversion liability is valued at the end of each reporting period and results in a gain or loss for the change in fair value. Due to the volatile nature of our stock, the change in the derivative liability and the resulting gain or loss will usually be material to our results. Determination of Fair Values Management determines the fair value of a financial instrument based on the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value 64 is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including the party’s own credit risk. The Company applies the acquisition method of accounting for business combinations to all acquisitions where the Company gains a controlling interest, regardless of whether consideration was exchanged. With respect to business combinations, the Company (a) recognizes and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, (c) discloses the nature and financial effects of the business combination. Accounting for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of the fair value of consideration transferred and the net acquisition-date fair values of the assets acquired and liabilities assumed. While the Company uses our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates inherently are uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets, including intangible assets acquired and liabilities assumed with corresponding offsets to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Deferred tax liabilities (“DTLs”) created in business combinations for the difference between the historical carryover basis of assets for tax purposes and the stepped-up fair value basis for book purposes are recognized as an increase to goodwill. All transactions in which goods or services are received for the issuance of shares of our common stock or options to purchase shares of our common stock are accounted for based on the fair value of the equity interest issued. The fair value of shares of common stock is determined based upon the closing price per share of our common stock on the date of issuance and other applicable inputs. The Company recognizes stock-based compensation for common stock grants evenly over the related vesting period. The fair value of market condition performance share awards is determined based on path-dependent valuation techniques and inputs including the closing price per share of our common stock at date of grant, volatility and the risk-free interest rate. The Company recognizes stock-based compensation for market condition performance share awards evenly over the derived service period resulting from the path-dependent valuation. The fair value of performance condition share awards is determined based on the closing price per share of our common stock at date of grant and the probability of achieving the performance condition during the term of the award agreement. The Company recognizes stock-based compensation for performance condition share awards evenly over the term of the award agreement. The Company recognizes forfeitures of unvested common stock, performance shares and stock option grants as they occur. Impairment of Mineral Rights, Properties, Plant and Equipment, Goodwill, Intangible Assets and Investments The Company assesses its mineral rights and properties, plant and equipment for possible impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Such indicators include changes in the Company’s business plans, changes in precious metal prices and significant downward revisions of estimated mineralization quantities. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, an impairment charge is recorded for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, and the outlook for global or regional demand conditions for gold and silver. However, the impairment reviews and calculations are based on assumptions that are consistent with the Company’s business plans and long-term investment decisions. Management does not believe there are impairments present in mineral rights and properties, plant, and equipment. At the end of each reporting period, management considers whether impairment indicators exist to evaluate if a debt investment security or loan is impaired and, if so, record an impairment loss. At the end of each reporting period, management reassesses whether an equity investment security without a readily determinable fair value qualifies to be measured at cost less impairment, consider whether impairment indicators exist to evaluate if an equity investment security is impaired and, if so, record an impairment loss. Management reviews purchased intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. We review indefinite-lived intangibles for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or asset group are 65 expected to generate. If the carrying value of the assets or asset group are not recoverable, impairment is measured and recorded as the amount by which the carrying value exceeds its fair value. Goodwill is tested for impairment at the reporting unit level on an annual basis, and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Management performs its annual goodwill impairment tests as of October 1. For the year ended December 31, 2021, the Company performed its annual goodwill impairment tests as of December 31, 2021. The Company accelerated the annual goodwill impairment assessment date to October in order to provide a timelier assessment of our goodwill impairment analysis. The change in the assessment date did not affect the impairment charge for the year ended December 31, 2021. Reclamation and Remediation Obligations Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and remediation costs. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at each mine site in accordance with guidance for accounting for asset retirement obligations. Reclamation obligations for inactive mines are accrued based on management’s best estimate of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation and remediation. Income Taxes Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying businesses. Valuation allowances are recorded as reserves against net deferred tax assets by the Company when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.