NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization, Basis of Presentation, and Nature
of Operations
Magellan Gold Corporation (“we”
“our”, “us”, the “Company” or “Magellan”) was incorporated on September 28, 2010,
under the laws of the State of Nevada. Our principal business is the acquisition and exploration of mineral resources. We have
not presently determined whether the properties to which we have mining rights contain mineral reserves that are economically recoverable.
On November 30, 2017, the Company purchased
from Rose Petroleum plc (“Rose”) a mineral processing mill operation located in the state of Navarit, Mexico (the “SDA
Mill”) as well as its associated assets, licenses and agreements.
On October 17, 2017, the Company amended
the agreement to include the acquisition of Minerales Vane Operaciones ("MVO") (the entity that provides labor to the
Mill) for $2,500. In January 2018 the Company paid the purchase price and obtained legal control of MVO. MVO is the sister entity
which was organized for the purpose of employing all personnel of the SDA mill. The acquisition of MVO did not result in the acquisition
of any additional assets or liabilities.
Our primary focus with the acquisition
of the SDA Mill in Mexico is to transform Magellan into a production company, to continue to advance our Arizona silver project
towards resource definition and eventual development, and possibly to acquire additional mineral rights and conduct additional
exploration, development and permitting activities. Our mineral lease payments, permitting applications and exploration and development
efforts will require additional capital. We rely upon the sale of our securities as well as advances and loans from executive management
and significant shareholders to fund our operations as we have not generated any significant revenue.
Basis of Presentation
We prepare our financial statements in
accordance with accounting principles generally accepted in the United States (“GAAP”). The accompanying unaudited
interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information in accordance
with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine-months ended September 30, 2018 are not necessarily indicative
of the results for the full year. While we believe that the disclosures presented herein are adequate and not misleading, these
interim financial statements should be read in conjunction with the audited financial statements and the footnotes thereto contained
in our annual report on Form 10-K for the year ended December 31, 2017.
Our consolidated financial statements include
our accounts and the accounts of our 100% owned subsidiaries, Gulf + Western Industries, Inc., Magellan Acquisition Corporation,
Minerales Vane 2, S.A. de C.V., and Minerales Vane Operaciones, S.A de C.V. All intercompany transactions and balances have been
eliminated. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Reclassification
Certain reclassifications have been made
to the prior periods to conform to the current period presentation.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU No.
2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities,” which addresses the recognition, measurement, presentation and disclosure of financial assets and liabilities.
This ASU primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation
and disclosure requirements for financial instruments. In addition, this ASU clarifies the valuation allowance assessment when
recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This standard became effective
on January 1, 2018. At the adoption of this standard the Company reclassified $8,518 from Accumulated Other Comprehensive Loss
to Accumulated Deficit which represented the cumulative impact of the new standard.
Accounting Standards Update No.
2014-09—Revenue from Contracts with Customers (Topic 606). On May 28, 2014, the FASB issued guidance that requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. This ASU was further amended by ASU No. 2015-14, No. 2016-08, No. 2016-10, No. 2016-12 and No.
2016-20. The guidance provides a five-step approach to be applied to all contracts with customers and also requires
expanded disclosures about revenue recognition. The Company has performed an assessment of the revised guidance and the
impacts on the Company’s Consolidated Financial Statements and disclosures and has determined that the adoption of this
guidance did not have an impact. The Company adopted the new guidance effective January 1, 2018 using the modified
retrospective approach.
Liquidity and Going Concern
Our unaudited consolidated financial statements
have been prepared on a going concern basis, which assumes that we will be able to meet our obligations and continue our operations
during the next fiscal year. Asset realization values may be significantly different from carrying values as shown in our consolidated
financial statements and do not give effect to adjustments that would be necessary to the carrying values of assets and liabilities
should we be unable to continue as a going concern. At September 30, 2018, we have not yet generated substantial revenues or achieved
profitable operations and we have accumulated losses of $5,437,052. We expect to incur further losses in the development of our
business, all of which raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going
concern depends on our ability to generate future profits and/or to obtain the necessary financing to meet our obligations arising
from normal business operations when they come due.
During the nine months ended September
30, 2018, we sold 17,000,000 units consisting of common stock and warrants and realized net proceeds of $340,000. Additionally,
6,000,000 warrants were exercised during the same period and net proceeds of $120,000 were realized. Proceeds from these transactions
were generally used to fund working capital.
Additionally through various transactions
with related parties during the year ended December 31, 2017, the Company realized approximately $1,075,000 which is primarily
reflected in a series of promissory notes ("Series 2017 Notes"). The proceeds were generally used to fund the purchase
of the SDA Mill in Mexico. The Series 2017 Notes are secured by a pledge of all the outstanding shares of Magellan Acquisition
Corporation, a wholly-owned subsidiary that owns the SDA Mill through Minerales Vane 2.
We anticipate that additional funding will
be in the form of additional loans from officers, directors or significant shareholders, or equity financing from the sale of our
common stock but cannot assure than any future financings will occur.
Note 2 – Mineral Rights and Properties
El Dorado
The Company entered into an agreement giving
it the right to acquire the El Dorado Gold-Silver Property, a 50 hectare mining concession located near the village of Las Minitas,
which lies 50 kilometers south of Magellan’s SDA Flotation Plant at Acaponeta, Nayarit State. The Company has initiated permitting
and is in the process of selecting an underground mining contractor. The Company plans to truck the ore from El Dorado to the SDA
Plant for processing.
Magellan has concluded an agreement with
Ingenieros Mineros, S.A. de C.V., the owner of the El Dorado mining concession giving the Company the right to acquire the concession
by making staged six-monthly option payments over two years towards an end purchase price of $800,000 (plus 16% IVA). No royalties
are payable. Magellan has the right to begin production during the term of the agreement. The Company has made the initial option
payment of $50,000 (plus 16% IVA).
In addition, the Company entered into an
agreement to purchase a comprehensive El Dorado data package including diamond drill core and technical information for a price
of $120,000, payable in cash and Magellan common stock. As of September 30, 2018, $10,000 of cash and 1,013,035 shares of common
stock, with an issuance day fair value of $18,235, have been issued.
Silver District
In August 2012, we entered into an option
agreement with Columbus Exploration f/k/a Columbus Silver Corporation, which granted us the right to acquire all of Columbus’
interest in its Silver District properties located in La Paz County, Arizona. The properties acquired from Columbus were assigned
into our subsidiary Gulf+Western Industries, Inc. and our total acquisition cost capitalized was $323,200.
The Silver District property consists of
110 unpatented lode and mill site mining claims, six patented lode claims, and an Arizona State Exploration Permit, all of which
are held directly or under lease agreements, totaling over 2,000 acres. Certain of the claims are subject to third party net smelter
royalties and/or net profits of varying percentages.
In August 2017, we renewed the BLM lode
and mill site claims in La Paz County, Arizona with the Bureau of Land Management and these claims will remain in good standing
through August 31, 2019. Additionally, in both 2017 and 2016, we made advance minimum royalty payments of $10,000 to a third party
landowner on the Red Cloud lease, which includes the Red Cloud Patented claim and two BLM lode claims. In 2018, we continued to
make such payments. We also expanded the Arizona State Exploration Permit to approximately 334.85 acres on the Arizona State section
that comprises part of our Silver District land package and are current on our obligations under this permit.
On July 9, 2015, G+W entered into two Lease
and Purchase Agreements (“Agreements”) with an individual that grant the Company certain exploration and mining rights
for two patented lode claims located in the Silver District, La Paz County, Arizona. The Agreements provide for scheduled variable
annual advance minimum royalty payments to the lessor. In addition, the Agreements have an initial term of 20 years, and provide
for the purchase of the properties for $125,000 each during the term of the lease, net of any advance royalty payments made up
to the date of the purchase. The Company paid the initial advance royalty payments totaling $3,000 and advance royalty payments
of $1,000 in July 2016 to maintain these Agreements. Due to an uncertainty associated with the clarification of the legal title
for these two patented lode claims, these payments have not been capitalized as mining rights, and therefore are included in exploration
costs during the period in which the obligation was due.
Note 3 – Mining Option Agreement
On June 30, 2016 the Company
signed a non-binding Letter of Intent (“LOI”) with Rio Silver Inc., and on October 24, 2016 the Company executed a
definitive Mining Option Agreement (“Option Agreement), pursuant to which Magellan is granted the option to earn an undivided
50% interest in the Niñobamba Silver-Gold Property (“Property”), located 330 kilometers southeast of Lima in
the Department of Ayacucho, Peru.
As a condition of the LOI, the
Company had paid a refundable $12,000 deposit. This payment was recorded as a deposit and was subsequently used to maintain certain
mining concessions on the property.
In addition to the deposit,
the Company was obliged to subscribe to two private placement unit financings in Rio Silver, each for aggregate proceeds of Cdn$75,000.
The Company completed the first unit private placement on August 23, 2016. The first placement included 1,500,000 units priced
at Cdn$0.05, which included one share of Rio Silver common stock and one warrant to purchase one share of Rio Silver common stock
for Cdn$0.05 preliminarily set to expire on February 23, 2018. The cost of the units in the first private placement totaled USD
$59,753. The second placement included 1,250,000 units priced at Cdn$0.06, which was completed on January 19, 2017, and included
one share of Rio Silver common stock and one warrant to purchase one share of Rio Silver common stock for Cdn$0.06 preliminarily
set to expire on July 19, 2018. The cost of the units in the second private placement totaled USD $58,297. Each of these transactions
were recorded as an investment in Rio Silver equity securities and included on the accompanying consolidated balance sheets at
September 30, 2018 and December 31, 2017. During the nine months ended September 30, 2018, we have recorded an unrealized loss
of $24,319 to write-down the investment. The shares of common stock and warrants of Rio Silver have been pledged by the Company
to John Power to secure repayment of a $125,000 loan.
Under the terms of the Agreement,
the Company had the right to earn an undivided 50% interest in the Niñobamba Silver/Gold Project in central Peru. To earn
its 50% interest, the Company was required to spend $2.0 million in exploration over three years. The Niñobamba project
is comprised of five concessions that total 36.5 square kilometers (9,026 acres). The concessions include the original Rio Silver
concession, three concessions recently acquired from a Peruvian company owned jointly by Newmont Mining Corporation and Southern
Peru Copper Corporation, and one concession for which application was made, and which was granted in 2017.
On January 5, 2018, Magellan entered into
a Termination Agreement, effective December 31, 2017, with Rio Silver Inc. to mutually terminate the Company’s option to
earn an interest in Rio Silver’s Niñobamba exploration property in Peru. In connection with the termination of the
agreement, Rio Silver agreed to apply to the TSX Venture Exchange for an 18-month extension of 2,750,000 warrants that Magellan
holds in Rio Silver stock, which otherwise would expire in February and July 2018. The TSX Venture Exchange subsequently approved
the extensions.
In connection with the termination of the
agreement, Magellan agreed to grant Rio Silver a right of first refusal on any sale of the 2,750,000 shares of Rio Silver stock
that Magellan currently holds.
Additionally effective in 2018, the Company
sold its interest in Magellan Gold Peru S.A.C. for consideration of $1.00. The Company realized a loss on disposition of $567.
Note 4 – Acquisition of SDA Mill
On March 3, 2017 the Company entered into
a Memorandum of Understanding (“MOU”) with Rose Petroleum plc (“Rose”), a multi-asset natural resource
business, to purchase an operating flotation plant that also includes a precious metals leach circuit and associated assets, licenses
and agreements (together, the “SDA Mill”) located in the State of Nayarit, Mexico.
Prior to closing, all of the assets and
operations related to the SDA Mill were transferred to a newly incorporated entity, Minerales Vane 2 S.A. de C.V. (“Minerales
Vane 2”). Effective November 30, 2017, the Company’s newly incorporated wholly-owned subsidiary, Magellan Acquisition
Corporation (“MAC”), acquired 100% of the issued and outstanding shares of Minerales Vane 2.
The total purchase price for the SDA Mill
was determined to be $1,476,025 which consisted of $850,000 cash, a $50,000 promissory note, the $50,000 non-refundable option
payment, the $100,000 paid for the option-to-purchase extension, and 14,200,834 shares of common stock (the “Shares”)
with a fair value of $426,025. The note was non-interest bearing and was paid in full April 12, 2018. This note was grouped with
Notes Payable Related Party due to Rose’s share ownership in the Company. The Shares will be held in escrow for a period
of 12 months and the Company has the option to repurchase the Shares from Rose for the sum of $500,000 in the first six months
and $550,000 in months 7 to 12.
On April 12, 2018, the Company satisfied
its note payable in the amount of $50,000 in favor of Rose Petroleum, plc in respect of the purchase of the SDA Mill, as required
under terms of the Stock Purchase Agreement.
Subsequent to the purchase of the SDA Mill,
the Company and Rose Petroleum executed an IVA Agreement which implemented the provisions of the Stock Purchase Agreement with
respect to the payment of the IVA Tax assessed by the Mexican taxing authorities on the sale and purchase of the IVA Mill. Under
the terms of the IVA Agreement, Rose Petroleum advanced the IVA tax, in Mexican Pesos, for the payment of the IVA tax, approximately
$260,000. The Company has agreed that all future tax credits or refunds that it receives from the Mexican taxing authority will
be paid over to Rose until such time as Rose has recouped the advance, in full. Mr. Carson executed a Guaranty of the Company's
obligations under the IVA Agreement effective March 8, 2018.
In March 2018, the Company and Rose Petroleum,
plc satisfied their respective obligations for payment of Mexican VAT on purchase of the SDA Mill, as required under terms of the
Stock Purchase Agreement.
Pro forma results of operations for the
nine months ended 2017 as though the Company had acquired the SDA Mill on the first day of the fiscal year of 2017 are set forth
below:
|
|
September 30,
|
|
|
|
2017
|
|
|
|
Pro Forma
|
|
|
|
|
|
Net Sales
|
|
$
|
234,856
|
|
|
|
|
|
|
Operating Expenses
|
|
|
2,238,594
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,003,738
|
)
|
Note 5 – Interim Toll Milling Agreement
On November 7, 2017 the Company and Rose
executed an Interim Milling Agreement (the “Agreement”), with an effective date of November 1, 2017, whereby, pending
closing of the SDA Mill acquisition, Rose shall cause its subsidiary, Minerales Vane S.A. de C.V., a Mexico corporation (“Vane”),
to reopen the SDA Mill and recommence operations on a toll milling basis for a third-party. Under the Agreement, the Company is
required to provide the working capital to fund the operations and is entitled to all the positive cash flow after covering the
related expenses.
The Agreement was completed and terminated
during November 2017. The Company has an outstanding receivable from Rose of $-0- as of September 30, 2018 and $27,147 as of December
31, 2017, respectively.
Note 6 - Fair Value of Financial Instruments
Financial assets and liabilities recorded
at fair value in our consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes
the inputs used to measure fair value into the following levels:
Level 1— Quoted market prices
in active markets for identical assets or liabilities at the measurement date.
Level 2— Quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable and can be corroborated by observable market data.
Level 3— Inputs reflecting management’s
best estimates and assumptions of what market participants would use in pricing assets or liabilities at the measurement date.
The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument's categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a
recurring basis are summarized below:
|
|
Fair Value at September 30, 2018
|
|
|
Fair Value Measurement at September 30, 2018
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Rio Silver equities
|
|
$
|
85,213
|
|
|
$
|
85,213
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value at December 31, 2017
|
|
|
Fair Value Measurement at December 31, 2017
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Rio Silver equities
|
|
$
|
109,532
|
|
|
$
|
109,532
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The carrying values for cash and cash equivalents,
prepaid assets, accounts payable and accrued liabilities, related party line of credit and notes payable approximate their fair
value due to their short-term maturities.
Note 7 – Line of Credit – Related Party
Effective December 31, 2012, we entered
into a line of credit arrangement with John D. Gibbs, a significant investor, to facilitate timely cash flows for the Company’s
operations. The line of credit originally provided for a maximum balance of $250,000, accrued interest at 6% annually, and matured
on December 31, 2014.
On December 31, 2013 we amended our credit
agreement with Mr. Gibbs to increase the borrowing limit under the line of credit to $750,000. All other terms of the credit agreement,
including the interest rate and maturity date remained unchanged.
On December 31, 2014, we again amended
the credit agreement to increase the borrowing limit to $900,000 and extend the maturity date to December 31, 2015. As part of
the 2014 amendment and the subsequent appointment of Dr. Pierce Carson as the President, CEO and Director of G+W effective June
1, 2015, we had pledged all of our 85% equity interest in G+W, which owns the Silver District properties, as security for all amounts
outstanding under the credit agreement. In July 2016, we completed a share exchange with Dr. Carson to reacquire the 15% interest
in G+W, and therefore at September 30, 2017 our entire 100% interest in G+W remains pledged as security for outstanding amounts
under this credit agreement.
On December 31, 2015 we again amended the
credit agreement to increase the borrowing limit to $1,000,000 and extended the maturity date to December 31, 2016. Finally, on
March 31, 2017 with an effective date of December 31, 2016 we again amended the credit agreement to extend the maturity date to
December 31, 2018. All other terms of the agreement were unchanged. At September 30, 2018 the Company has $167,500 available under
the credit line.
No draws were made during the nine
months ended September 30, 2018. During the same period Mr. Gibbs converted $100,000 of the outstanding balance on the line
of credit into 5,000,000 shares of common stock at $0.02 per share. The outstanding balance under the line of credit was
$832,500 and $932,500 at September 30, 2018 and December 31, 2017, respectively. In addition, a total of $253,285 and
$213,657 of interest has been accrued on this obligation and is included in Accrued interest - related parties on the
accompanying consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively.
Note 8 – Notes Payable – Related Parties
In August 2011, we entered into an unsecured
loan from John Power, the Company’s Director, evidenced by a $20,000 promissory note. The promissory note bears interest
at 6% per annum and is payable on demand with thirty days’ notice from the lender. During 2014, the Company made payments
totaling $5,000 to pay down the principal balance of the note. Effective December 31, 2017, the interest rate on the note increased
to 12% per annum. At both September 30, 2018 and December 31, 2017, the note balance was $15,000. At September 30, 2018 and December
31, 2017, interest totaling $1,346 and $1,576, respectively, was accrued on this note payable and is included in Accrued interest
– related parties on the accompanying consolidated balance sheets.
In January 2014, we entered into an additional
unsecured loan from Mr. Power, evidenced by a $50,000 promissory note. The promissory note bears interest at 6.75% per annum and
is payable on demand with thirty days’ notice from the lender. Effective December 31, 2017, the interest rate on the note
increased to 12% per annum. At September 30, 2018 and December 31, 2017, interest totaling $4,488 and $6,249, respectively, was
accrued on this note payable and is included in Accrued interest – related parties on the accompanying consolidated balance
sheets. At both September 30, 2018 and December 31, 2017, the note balance was $50,000.
On May 31, 2017 we entered into three short-term
notes with Mr. Gibbs, Dr. Carson and Mr. Power in the principal amounts of $100,000, $25,000 and $25,000, respectively. The notes
bear interest at 6% and matured on November 15, 2017. A total of $3,760 and $4,512 of interest is accrued on these notes as of
September 30, 2018 and December 31, 2017, respectively. The note balances were subsequently rolled into the Series 2017 Notes.
On June 30, 2017 we entered into an additional
secured loan for advances from Mr. Power and evidenced by a $125,000 promissory note. The promissory note bears interest at 6%
per annum and matured on December 31, 2017 and is currently in default. Effective December 31, 2017, the interest rate on the note
increased to 12% per annum. The note is collateralized by our investment in Rio Silver shares and warrants. At both September 30,
2018 and December 31, 2017, the note balance was $125,000. A total of $11,219 and $3,781 of interest is accrued on these notes
as of September 30, 2018 and December 31, 2017, respectively and is included in Accrued interest – related parties on the
accompanying consolidated balance sheets.
On November 30, 2017 we entered into a
series of secured promissory notes (“Series 2017 Notes”) with both related and unrelated parties in the aggregate amount
of $1,155,000, including financing fees of $105,000 recorded as a discount to the notes.
Net proceeds on the issuance after reducing
for the transfers previously listed total $900,000. The notes are secured by a stock pledge agreement covering 100% of the outstanding
common stock of Magellan Acquisition Corporation, bear interest at 10% and mature on December 31, 2018.
The total of portion of the Series 2017
Notes from related parties totaled $1,045,000, including financing fees of $95,000 recorded as discount to the notes. Mr. Gibbs,
Dr. Carson, and Mr. Power transferred $100,000, $25,000, and $25,000, respectively, from the May 31, 2017 short term related party
notes into the Series 2017 Notes. As of September 30, 2018 the balance on the Series 2017 Notes from related parties, net of unamortized
discount of $22,071, is $1,022,929 with accrued interest of $87,036. As of December 31, 2017, the balance on the Series 2017 Notes
from related parties, net of unamortized discount of $87,563, is $957,437 with accrued interest of $8,875.
During the nine months ended September
30, 2018 $65,492 of debt discount related to the above notes was amortized to interest expense.
Note 9 – Notes payable
As discussed in Note 8 – Notes Payable
– Related Parties, on November 30, 2017 we entered into a series of secured promissory notes (“Series 2017 Notes”)
with both related and unrelated parties in the aggregate amount of $1,155,000, including financing fees of $105,000 recorded as
a discount to the notes.
The total of portion of the Series 2017
Notes from non-related parties totaled $110,000, including financing fees of $10,000 recorded as discount to the notes. As of September
30, 2018 the balance on the notes from non-related parties, net of unamortized discount of $2,323, is $107,677 with accrued interest
of $9,161. As of December 31, 2017, the balance on the notes from non-related parties, net of unamortized discount of $9,217 is
$100,783 with accrued interest of $934.
During the nine months ended September
30, 2018 $6,894 of debt discount related to the above notes was amortized to interest expense.
Note 10 – Convertible Note Payable
On November 1, 2017, the Company sold a
10% Convertible Promissory Note (“Auctus Note”) in a principal amount of $170,000. After deducting the investor’s
discount and legal fees, net proceeds to the Company were $153,650. The Note matures on November 1, 2018 and can be converted into
the Company’s common stock after 180 days from the date the Note is issued. In early May 2018 when the note became convertible
at a variable price the conversion feature was valued and recorded as a derivative liability. The conversion option continued to
qualify for derivative treatment until the note was amended on June 8, 2018 (see below) and a minimum conversion price was added
to the instrument. The derivative was initially valued at $176,860 which was allocated $170,000 as a debt discount and $6,860 as
a loss on derivative liability. The debt discount was fully amortized and the derivative liability was adjusted to $0 as June 8,
2018 when the debt was amended. The result was $170,000 of amortization of debt discount included in interest expense and $176,860
of gain on change in derivative liability.
Effective June 8, 2018 the Company and
Auctus Fund, LLC (“Auctus”) signed an Amendment No. 1 to the Convertible Promissory Noted (the “Auctus Note”)
dated November 1, 2017 (the “Auctus Amendment”). Under the terms of the Auctus Amendment, the principal outstanding
balance of the Auctus Note has been increased from $170,000, to $212,500. Also, Auctus agreed to forbear from exercising rights
arising from certain Events of Default (as defined in the Note) unless a new Event of Default occurs or the Company fails to become
current in its required SEC filings by June 30, 2018. Auctus also agreed not to exercise its conversion privileges under the Auctus
Note at prices below $0.02 per share until September 30, 2018. The Company evaluated this conversion feature and determined that
it did not qualify for derivative accounting. It was then determined that no beneficial conversion feature existed at the time
of debt issuance. The Company recorded the change in the debt instrument as an extinguishment and recorded the increase in principal
balance of $42,500 as a loss on extinguishment of debt. On August 16, 2018 the Auctus Note was again amended to decrease the minimum
conversion price to $0.018. The amendment was not considered to be a substantial modification. The Company re-evaluated the conversion
feature and determined that no beneficial conversion feature existed at the time of the amendment.
During the nine months ended September
30, 2018, 6,000,000 shares were related to the conversion of $91,070 of notes and $19,330 of interest and fees. As of September
30, 2018, $121,430 remains outstanding on the Auctus Notes.
On November 2, 2017, the Company sold a
10% Convertible Promissory Note (“EMA Note”) in principal amount of $125,000. After deducting the investor’s
discount and legal fees, net proceeds to the Company were $113,500. The Note originally matured on November 2, 2018 but was amended
to be November 2, 2019 and can be converted into the Company’s common stock after 180 days from the date the Note is issued.
In early May 2018 when the note became convertible at a variable price the conversion feature was valued and recorded as a derivative
liability. The conversion option continued to qualify for derivative treatment until the note was amended on June 8, 2018 (see
below) and a minimum conversion price was added to the instrument. The derivative was initially valued at $225,711 which was allocated
$125,000 as a debt discount and $100,711 as a loss on derivative liability. The debt discount was fully amortized and the derivative
liability was adjusted to $0 as June 8, 2018 when the debt was amended. The result was $125,000 of amortization of debt discount
included in interest expense and $225,711 of gain on change in derivative liability.
Effective June 8, 2018 the Company and
EMA Financial, LLC (“EMA”) signed an Amendment No. 1 to the Convertible Promissory Noted (the “EMA Note”)
dated November 2, 2017 (the “EMA Amendment”). Under the terms of the EMA Amendment, the principal outstanding balance
of the EMA Note has been increased from $125,000, to $156,250. Also, EMA agreed to forbear from exercising rights arising from
certain Events of Default (as defined in the Note) unless a new Event of Default occurs or the Company fails to become current
in its required SEC filings by June 30, 2018. EMA also agreed not to exercise its conversion privileges under the EMA Note at prices
below $0.02 per share until September 30, 2018. The Company evaluated this conversion feature and determined that it did not qualify
for derivative accounting. It was then determined that no beneficial conversion feature existed at the time of debt issuance. The
Company recorded the change in the debt instrument as an extinguishment and recorded the increase in principal balance of $31,250
as a loss on extinguishment of debt. On August 16, 2018 the EMA Note was again amended to decrease the minimum conversion price
to $0.018. The amendment was not considered to be a substantial modification. The Company re-evaluated the conversion feature and
determined that no beneficial conversion feature existed at the time of the amendment.
The Company evaluated other convertible
instruments and determined that the outstanding common stock warrants were required to be treated as a derivative during the period
from May 1, 2018 through June 8, 2018 as a result of the variable conversion feature on the above notes. As a result an initial
derivative liability of $62,569 was recorded and reclassified out of equity and a final derivative liability of $70,650 was reclassified
back into equity at the point the common stock warrants no longer qualified as a derivative. The impact was the recording of a
loss on derivative liability of $8,081.
During the nine months ended September
30, 2018, 1,600,000 shares were related to the conversion of $26,550 of notes and $2,250 of interest and fees. As of September
30, 2018, $129,700 remains outstanding on the EMA Notes.
On July 26, 2018, the Company sold a 10%
Convertible Promissory Note to Power Up Lending Group Ltd. (“July Power Up Note”) in a principal amount of $63,000. After
deducting the investor’s discount and legal fees, net proceeds to the Company were $60,000. The Note matures on July 26,
2019 and can be converted into the Company’s common stock after 180 days from the date the Note is issued.
On August 20, 2018, the Company sold a
10% Convertible Promissory Note to Power Up Lending Group Ltd. (“August Power Up Note”) in a principal amount of $38,000. After
deducting the investor’s discount and legal fees, net proceeds to the Company were $35,000. The Note matures on August 20,
2019 and can be converted into the Company’s common stock after 180 days from the date the Note is issued.
As of September 30, 2018, the balance on
the convertible notes, net of unamortized discount of $5,121, is $347,010 with accrued interest of $13,902. As of December 31,
2017, the balance on the notes, net of unamortized discount of $23,303 is $271,697 with accrued interest of $4,815. During the
three and nine months ended September 30, 2018, $879 and $24,183 of debt discount related to the above notes, respectively, was
amortized to interest expense.
Note 11 – Stockholders’ Deficit
Sales of common stock and warrants:
During the nine months ended September
30, 2018, the Company raised $340,000 through the sale of 17,000,000 common stock and warrants (“Units”) at a price
of $0.02 per Unit, each Unit consisting of one share of common stock and one warrant to purchase one additional share of common
stock at an exercise price of $0.02 per share. The expiration date of the warrants varies from August 31, 2018 to December 31,
2018. Of this raise $330,000 was purchased by directors or significant shareholders. A price protection feature of the offering
provides that if at December 31, 2018, the Company has issued common stock at a price less than $0.02 per share, then the number
of Units issuable to each investor shall be increased so as to reduce the Unit price to the lower price. The allocation of relative
fair values of the equity instruments at the dates of the sale transactions was as follows: common stock at 63% and the warrants
at 37%.
During the nine months ended September
30, 2018, the Company received net proceeds of $120,000 from the exercise of 6,000,000 warrants at $0.02 per share.
During the nine months ended September
30, 2018, Convertible Note holders converted $21,580 of accrued interest and fees and $117,620 of principal into 7,600,000 shares
of common stock in accordance with the note agreements.
During the nine months ended September
30, 2018, the Company issued 1,013,035 shares of common stock as part of the acquisition of a data package related to the El Dorado
project. The shares were valued at $18,235 and recorded as an asset.
Effective July 24, 2018, the Company and
W. Pierce Carson, President, executed an Agreement to Convert Debt, pursuant to which Carson agreed to convert $90,000 in accrued
but unpaid executive compensation for the fiscal quarters ended December 31, 2017, March 31, 2018 and June 30, 2018 and a cash
advance of $8,100 made to the Company into an aggregate of 4,905,000 shares of Common Stock, valued at $0.02 per share.
Effective July 24, 2018, the Company
and W. Pierce Carson executed a Restricted Stock Award Agreement pursuant to which the Company granted to Carson a restricted
stock award consisting of 4,000,000 shares of Common Stock, valued at $0.02 per share. 1,000,000 of the shares will
vest upon the Company completing a milestone, and the remaining 3,000,000 shares are subject to ratable vesting over an
18-month period. During the nine months ended September 30, 2018 the Company recognized an expense of $26,667 related to this
issuance.
Stock Options and the 2017 Equity Incentive Plan:
Under the 2017 Equity Incentive Plan, the
Company is authorized to grant rights to acquire up to a maximum of 10,000,000 shares of common stock. The 2017 Plan provides for
the grant of (1) both incentive and nonstatutory stock options, (2) stock bonuses, (3) rights to purchase restricted stock and
(4) stock appreciation rights.
During the year ended December 31, 2017,
the Company granted ten-year options to purchase 3,600,000 shares of common stock at an option exercise price of $0.04 per share,
the closing price on the date of grant. As of September 30, 2018 the Company had 6,400,000 shares available for future grant.
Stock option activity within the 2017 Equity
Incentive Plan and warrant activity outside the plan, for the nine-months ended September 30, 2018 is as follows:
|
|
|
|
|
Stock Options
|
|
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Shares
|
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
|
Exercise Price
|
|
|
Outstanding at December 31, 2017
|
|
|
|
3,600,000
|
|
|
$
|
0.04
|
|
|
|
1,850,000
|
|
|
$
|
0.10
|
|
|
Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
17,000,000
|
|
|
$
|
0.02
|
|
|
Cancelled
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Expired
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(6,500,000
|
)
|
|
$
|
0.02
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(6,000,000
|
)
|
|
$
|
0.02
|
|
|
Outstanding at September 30, 2018
|
|
|
|
3,600,000
|
|
|
$
|
0.04
|
|
|
|
6,350,000
|
|
|
$
|
0.04
|
|
|
Exercisable at September 30, 2018
|
|
|
|
3,600,000
|
|
|
$
|
0.04
|
|
|
|
6,350,000
|
|
|
$
|
0.04
|
|
As of September 30, 2018 the outstanding
stock options have a weighted average remaining term of 9.08 years and no intrinsic value, and the outstanding stock warrants have
a weighted average remaining term of 0.25 years and no intrinsic value.
Note 12 - Commitments and Contingencies
Mining Claims
As part of our acquisition of the Silver
District properties from Columbus Exploration, we assumed the Red Cloud lease whose initial term expires in August 2026. The lease
requires annual advance minimum royalty payments of $10,000 through the term of the lease due on the annual anniversary of the
agreement. The lease is also subject to a 2% net production royalty to be paid to the lessor from the sale of precious metals extracted
from the leased property. In order to maintain the BLM lode and mill site claims, annual payments are required before the end of
August of each year. Payments are also due annually on two patented claims we leased in July 2015 and on our Arizona State Minerals
Exploration Permit. As of September 30, 2018, all of these claims and leases are in good standing except for the two patented claims
leased in 2015.
Leases
As part of our acquisition of MV2 in Mexico,
we assumed the following leases payable in local currency as follows:
|
a)
|
Ejido S.D.A, 10 year lease, 6 hectares, executed January 2016, expires December 2025. Annual payments
25,000 MX pesos. Renewable for 10 years.
|
|
b)
|
Silverio Medina Ozuna, 3 year lease, 1 hectare, executed May 2017, expires April 2020. Annual payments
15,000 MX pesos. Renewable for 3 year periods.
|
|
c)
|
Silverio Medina Ozuna, 10 year lease, 2 hectares, executed May 2010, expires April 2020. Payment
$100,000 MX pesos paid in advance at lease execution. Renewable for 10 years.
|
The minimum future payments due on these
leases are as follows for the next five years and thereafter and have been translated to US dollars using an exchange rate at September
30, 2018 of 18.72 MX pesos to US dollars:
|
Payment Due Date
|
|
|
Minimum Due ($)
|
|
|
|
|
|
|
|
|
2019
|
|
|
2,137
|
|
|
2020
|
|
|
1,336
|
|
|
2021
|
|
|
1,336
|
|
|
2022 and thereafter
|
|
|
9,349
|
|
Other contractual arrangements
On November 1, 2016 the Company executed
a Finder’s Agreement (“Agreement”), with a third party consultant to introduce the Company to potential investors
beginning with its November 2016 private placement offering. The term of the Agreement is six months, or until the Company informs
the consultant it has located investors to purchase the securities. The consultant is to be compensated for the services by cash
payments totaling $30,000, payable at or before the termination of the Agreement. As of September 30, 2018, the Company paid approximately
$23,500 in total to the consultant pursuant to the Agreement, including $12,500 paid during year ended December 31, 2017 and $11,000
during the year ended December 31, 2016.
On October 24, 2016, the Company entered
into an agreement with Rio Silver, discussed in Note 3 – Mining Option Agreement, requiring the Company to spend $2,000,000
in exploration costs over the three-year period commencing with the execution of the Agreement. Effective December 31, 2017, the
Company agreed with Rio Silver to terminate the option agreement, thereby terminating the requirement for exploration cost expenditures
and the Company’s option to earn an interest in the Niñobamba Silver/Gold Project.
Note 13 – Executive Employment Agreement
On June 1, 2016 we executed an employment
agreement with Dr. Carson in which he assumed the positions of President and Chief Executive Officer of Magellan Gold Corporation.
The agreement also provided that Dr. Carson be appointed a Director of Magellan Gold Corporation, and effective June 30, 2016,
Dr. Carson was appointed a Director of Magellan. The term of the agreement covered the period from June 1, 2016 to May 31, 2017
and is subject to annual renewal. The agreement has subsequently been renewed each year and is currently effective from June 1,
2018 to May 31, 2019, with all terms of the original agreement remaining unchanged.
During the term of the agreement, Magellan
agreed to pay Dr. Carson a base salary in equal semi-monthly installments less required withholding and other applicable taxes.
Dr. Carson’s salary was set at $6,667 per month during the three-month period from June 1, 2016 through August 31, 2016,
and thereafter at $10,000 per month. Until such time as Magellan is properly funded, Magellan may defer and accrue salary owed.
If not properly funded before the end of the term, Magellan may at its option issue shares of Magellan common stock as settlement
of the accrued salary liability.
Dr. Carson shall have the right to voluntarily
terminate his employment with Magellan during the term. To effect such voluntary termination, Dr. Carson shall provide Magellan
at least 60 days advanced written notice of such termination. Upon termination, Dr. Carson shall be paid his base salary through
the date of termination, including any amount that may have been deferred and accrued.
At September 30, 2018 a total of $30,000
and $11,110 of salary and associated payroll tax obligations, respectively, is accrued in connection with the agreement and included
in accrued liabilities on the accompanying consolidated balance sheets.
At December 31, 2017 a total of $30,000
and $2,796 of salary and associated payroll tax obligations, respectively, is accrued in connection with the agreement and included
in accrued liabilities on the accompanying consolidated balance sheets.
Note 14- Related Party Transactions
Conflicts of Interests
Athena Silver
Corporation (“Athena”) is a company under common control. Mr. Power is also a director and CEO of Athena. Mr. Gibbs
is a significant investor in both Magellan and Athena. Magellan and Athena are both exploration stage companies involved in the
business of acquisition and exploration of mineral resources.
Silver Saddle
Resources, LLC is also a company under common control. Mr. Power and Mr. Gibbs are significant investors and managing members of
Silver Saddle. Magellan and Silver Saddle are both exploration stage companies involved in the business of acquisition and exploration
of mineral resources.
The existence
of common ownership and common management could result in significantly different operating results or financial position from
those that could have resulted had Magellan, Athena and Silver Saddle been autonomous.
Management Fees
The Company previously
maintained a month-to-month management agreement with Mr. Power requiring a monthly payment, in advance, of $2,500 as consideration
for his services as CFO to Magellan. Effective August 31, 2017, Mr. Power resigned as CFO and Secretary of the Company and was
replaced by Michael P. Martinez on September 18, 2017 to serve as CFO, Secretary and Treasurer. Mr. Power continues to serve as
a member of the Board of Directors.
Management fees
to Mr. Power for the three months ended September 30, 2018 and 2017, are $-0- and $7,500, respectively. Management fees to Mr.
Power for the nine months ended September 30, 2018 and 2017, are $-0- and $15,000, respectively. These fees are included in general
and administrative expenses in our statement of operations. At September 30, 2018 and December 31, 2017, $27,500 of the fees had
not been paid and are included in accrued liabilities on the accompanying consolidated balance sheets.
Accrued Interest - Related Parties
Accrued interest due to related parties is included in our consolidated
balance sheets as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accrued interest payable - Mr. Gibbs
|
|
$
|
299,811
|
|
|
$
|
221,103
|
|
Accrued interest payable - Mr. Power
|
|
|
58,281
|
|
|
|
16,562
|
|
Accrued interest payable - Dr. Carson
|
|
|
3,042
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
361,134
|
|
|
$
|
238,651
|
|
During the nine months ended September
30, 2018, we paid a total of $12,357 to Mr. Power representing unpaid accrued interest on notes payable. During the year ended
December 31, 2017, we paid a total of $382 to Mr. Power representing unpaid accrued interest on notes payable.
Advances Payable – Related Party
We borrowed and repaid non-interest bearing advances from/to
related parties as follows:
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Advances
|
|
|
Repayments/Conversion
|
|
Mr. Power
|
|
$
|
116,185
|
|
|
$
|
71,037
|
|
Mr. Carson
|
|
|
–
|
|
|
|
8,100
|
|
Totals
|
|
$
|
116,185
|
|
|
$
|
79,137
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
Advances
|
|
|
|
Repayments
|
|
Mr. Power
|
|
$
|
26,050
|
|
|
$
|
26,050
|
|
Mr. Carson
|
|
|
8,100
|
|
|
|
–
|
|
Totals
|
|
$
|
34,150
|
|
|
$
|
26,050
|
|
At September 30, 2018 and December 31, 2017 a total of $45,148 and
$8,100 of short-term advances from related parties were outstanding and are included in advances payable, related party on the
accompanying consolidated balance sheets.
In addition to the above, during the year
ended December 31, 2017, Mr. Power loaned the Company $25,000 in a short term note that was subsequently transferred into the Series
2017 Notes.
Note 15 – Subsequent Events
Subsequent to September 30, 2018, the Auctus
Note holders converted $2,814 of accrued interest and fees and $45,234 of principal into 4,200,000 shares of common stock in accordance
with the note agreements. On October 31, 2018, the Company repaid in full the remaining balance of the Auctus note with a payment
of $86,217.
In October 2018, the Company sold $205,000
of Series 2018A 10% Unsecured Convertible Notes. The purchase price of the Note is equal to the principal amount of the Note.
The Notes are convertible into shares of Common Stock at a conversion price of $0.02 during the life of the Note. The Notes will
accrue interest at the rate of 10% per annum, payable quarterly in arrears. The Notes mature twelve (12) months from the Date
of Issue. Maturity Date can be extended at the option of the Company for an additional one (1) year. Within thirty (30) days following
the closing of the Offering, the Company has agreed to prepare and file a Registration Statement on Form S-1 registering the resale
of the shares of Common Stock issuable upon conversion of the Notes. Funds from this financing was used to repay in full the EMA
Note.
In October 2018 the Company sold $160,700
of Series 2018 36% Unsecured Promissory Notes (“Notes”) (“Bridge Note Offering”). The purchase price of
the Note is equal to the principal amount of the Note. The Maturity Date of the Notes is December 31, 2018.