NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Organization, Basis of Presentation, and Nature
of Operations
Organization 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 January 3, 2019, the Financial Industry Regulatory Authority
(“FINRA”) informed Magellan Gold Corporation, a Nevada corporation (the “Company”) that a 1-for-50 reverse
split of the Company’s common stock, previously disclosed in the Company’s Definitive Information Statement on Schedule
14C filed with the Securities and Exchange Commission (the “SEC”) on September 22, 2017, was effective at the market
open on January 7, 2019. The stock split has been retroactively adjusted throughout these financial statements and footnotes.
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. Magellan previously paid a $50,000 option payment, and an additional
$100,000 option-to-purchase extension. The $100,000 option extension payment was applied against the cash portion of the purchase
price.
The purchase price for the SDA Mill consisted of $850,000 cash,
a $50,000 promissory note, the $50,000 non-refundable option payment, the $100,000 previously paid for the option-to-purchase extension,
and 284,017 shares of common stock (the “Shares”) with a fair value of $426,025 at the closing date. The Shares were
held in escrow for a period of 12 months and the Company had 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. The company did not exercise its option to repurchase the Rose shares.
Rose owned 1 share of Series A capital stock of Minerales Vane
S.A. de C.V. (“Minerales Vane 1”) and Vane Minerals (UK) Limited (“Vane UK”) owned 49,999 shares of Series
A capital stock and 26,524,000 shares of Series B capital stock of Minerales Vane 1.
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”). Magellan
purchased 100% of the issued and outstanding shares of Minerales Vane 2. Effective November 30, 2017, the Company’s newly
incorporated wholly-owned subsidiary, Magellan Acquisition Corporation (“MAC”), acquired Minerales Vane 2.
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 as soon
as practicable following the closing of the acquisition of the SDA Mill. The purpose of acquiring MVO is that it is the sister
entity that employs all employees of the SDA mill. In January 2018 the Company paid the purchase price and obtained legal control
of MVO. 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 with its El Dorado concession and 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 months ended March 31, 2019 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, 2018.
Our consolidated financial statements include our accounts and
the accounts of our 100% owned subsidiaries, Gulf + Western Industries, Inc., Magellan Acquistion 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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842) (ASU 2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on its balance
sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee,
a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information
about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows
arising from leases. The Company adopted this standard on January 1, 2019 using the modified retrospective
method. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package
of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions about
lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical
expedients.
On adoption, the Company recognized additional operating liabilities
of $6,968, with corresponding Right of Use assets of approximately the same amount based on the present value of the remaining
minimum rental payments under current leasing standards for its existing operating leases.
The new standard also provides practical expedients for a company’s
ongoing accounting. The Company elected the short-term lease recognition exemption for its leases. For those leases with a lease
term of 12 months or less, the Company will not recognize ROU assets or lease liabilities. The Company also made an accounting
policy election to combine lease and non-lease components of operating leases for all asset classes.
On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock
Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based
payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee
share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance
related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor
had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term
in the option-pricing model for nonemployee awards. The Company adopted this standard in the first quarter of 2019. The adoption
had no impact on the Company’s historic financial statements.
Liquidity and Going Concern
Our 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 March 31, 2019 we had a working capital deficit, we had not yet generated any significant revenues
or achieved profitable operations and we have accumulated losses of $7,043,415. We expect to incur further losses in the development
of our business, all of which raises substantial doubt as to 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.
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) during the year ended December 31, 2018. An additional $25,000 was paid during the three months ended March
31, 2019.
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. During the year ended December 31, 2018, $10,000 of cash and 20,261 shares of common stock,
with an issuance day fair value of $18,235, have been issued. As of March 31, 2019, $40,000 in cash and $60,000 in stock is due
and payable under this agreement in 2019.
At March 31, 2019 and December 31, 2018, our mineral rights
and properties were $73,662 and $48,164 (after currency adjustment), respectively associated with our El Dorado project.
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. We paid Columbus an initial $63,200 on signing of the option and a further
$50,000 in December 2012. We paid other patented and unpatented mining claim purchase and lease obligations in 2013 and 2014 to
maintain the project claims and leases in good standing. On December 31, 2014, we paid an additional $100,000 to Columbus Exploration
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 2018, 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 August 2017 and 2018, 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. 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 $3,000 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.
During the year ended December 31, 2018 the Company fully impaired
its capitalized asset of $323,200 related to the Sliver District project.
Note 3 – 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
floatation 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.
The Company did not exercise this option to repurchase the shares from Rose and the option is now expired.
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. On March 8, 2018, Mr. Carson executed a Guaranty of the Company's obligations
under the IVA Agreement.
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.
In January 2019 the Company and Rose Petroleum entered into
an agreement whereby any and all obligations of Magellan or its subsidiaries to make truck installment purchase payments shall
be deemed satisfied in full, and Magellan shall be deemed released from any further liability therefor. The personal guaranty of
W. Pierce Carson under the provisions of the IVA Agreement dated November 30, 2017 was also released and discharged.
Note 4 - 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
|
|
|
Fair Value Measurement at March 31, 2019
|
|
|
|
March 31, 2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investment in Rio Silver equities
|
|
$
|
72,075
|
|
|
$
|
72,075
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value at
|
|
|
Fair Value Measurement at December 31, 2018
|
|
|
|
December 31, 2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investment in Rio Silver equities
|
|
$
|
70,609
|
|
|
$
|
70,609
|
|
|
$
|
–
|
|
|
$
|
–
|
|
A summary of the activity of the Investment in Rio Silver equities
is shown below:
Balance December 31, 2018
|
|
$
|
70,609
|
|
Change in fair value
|
|
|
1,466
|
|
Balance March 31, 2019
|
|
$
|
72,075
|
|
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 5 – 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 re-acquire the 15% interest in G+W, and therefore
at December 31, 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 and
later extended to March 31, 2019. In April 2019 this credit facility was extended until December 31, 2019 in exchange for a fee
equal to 2% of the outstanding balance. All other terms of the agreement were unchanged. At March 31, 2019 the Company has an additional
$147,500 available under the credit line.
During the year ended December 31, 2018, $20,000 was received
under this agreement. During the same period Mr. Gibbs converted $100,000 of the outstanding balance on the line of credit into
100,000 shares of common stock at $1.00 per share.
The outstanding balance under the line of credit was $852,500
at March 31, 2019 and December 31, 2018. In addition, a total of $278,488 and $265,876 of interest has been accrued on this obligation
and is included in Accrued interest - related parties on the accompanying consolidated balance sheets at March 31, 2019 and December
31, 2018, respectively.
Note 6 – 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 March 31, 2019 and December 31, 2018, the note balance was $15,000. At March 31, 2019 and December 31, 2018, accrued
interest totaling $2,244 and $1,800, respectively, 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 March 31, 2019 and December 31, 2018, accrued interest totaling $7,479 and $6,000, respectively, is included
in Accrued interest – related parties on the accompanying consolidated balance sheets. At both March 31, 2019 and December
31, 2018, 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. The note balances were subsequently rolled into the Series 2017 Notes. A total of $3,760
and $3,760 of interest is accrued on these notes as of March 31, 2019 and December 31, 2018, respectively.
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 March 31, 2019 and December
31, 2018, the note balance was $125,000. A total of $18,699 and $15,000 of interest is accrued on these notes as of March 31, 2019
and December 31, 2018, 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. During the three months ended March 31, 2019, a total of $57,750
of additional fees were added to the principal amount and recorded as a discount to the notes related of an extension of the maturity
date to December 31, 2019. Of the additional fees $52,250 was related to the related party portion of these notes and $5,500 was
related to their third party portion. The balance on these notes, net of discount of $54,018 was $1,158,732 as of March 31, 2019.
During the three months ended March 31, 2019, $3,732 of debt discount related to the above notes was amortized to interest expense.
The notes are secured by a stock pledge agreement covering 100% of the outstanding common stock of Magellan Acquisition Corporation,
bear interest at 10%.
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 March 31, 2019 the balance on the Series 2017 Notes from related parties, net of unamortized discount of $48,873,
is $1,048,377 with accrued interest of $139,414.
Bridge Note Offering
In October 2018, the Company sold $160,700 of Series 2018 36%
Unsecured Promissory Notes (“Notes”) (“Bridge Note Offering”) to Mr. Gibbs and Mr. Power. The purchase
price of the Note is equal to the principal amount of the Note. The Maturity Date of the Notes was December 31, 2018. During the
year ended December 31, 2018, $10,700 was repaid to Mr. Power leaving a balance of $0. As of March 31, 2019 and December 31, 2018,
the portion funded by Mr. Gibbs of $150,000 remained outstanding, with accrued interest of $24,263 outstanding. On January 18,
2019, the Note was extended until March 31, 2019 after which it was in default.
Advances – related parties
In the first quarter of 2019 Mr. Gibbs and Mr. Power advanced
$60,000 and $38,500 to the Company, respectively. Mr. Power also paid expenses using his personal credit card on behalf of the
Company of $46,066, and the Company made repayments to Mr. Power and/or his credit card of $18,350. Amounts due to Mr. Powers related
to expense paid on behalf of the Company was $52,480 and $24,764 as of March 31, 2019 and December 31, 2018, respectively.
Note 7 – Notes payable
During the three months ended March 31, 2019, $10,000 was received
from a third party with the intention to convert to a note payable of which the terms are still being finalized. These advances are included in the Notes Payable line on the Balance Sheet.
As discussed in Note 7 – 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. The note maturity date was extended
to December 31, 2019 in exchange for an increase in the principal balance of $5,500. As of March 31, 2019 the balance on the notes
from non-related parties, net of unamortized discount of $5,145, is $110,355 with accrued interest of $14,675. As of December 31,
2018, the balance on the notes from non-related parties, net of unamortized discount of $0 was $110,000 with accrued interest of
$11,934.
Note 8 – Convertible Notes Payable
Series 2018A and Series 2018B 10% Unsecured Convertible Note
In the year ended December 31, 2018, the Company sold $205,000
of Series 2018A and $150,000 of Series B 10% Unsecured Convertible Notes. The purchase price of the Note is equal to the principal
amount of the Note. The Series A and Series B Notes are convertible into shares of Common Stock at a conversion price of $1.00
and $1.25, respectively, during the life of the Note. The Company evaluated the conversion option and concluded it was not required
to be bifurcated as a derivative. The Company also concluded that no beneficial conversion feature was present at issuance. 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. The 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 an 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. Of the Series A issuance, $150,000
was sold to a related party, Mr. Gibbs.
As of March 31, 2019 and December 31, 2018, the balance due
under these notes is $355,000 in principal and $13,070 in accrued interest.
Note 9 – Shareholders’ Deficit
On January 3, 2019, the Financial Industry Regulatory Authority
(“FINRA”) informed Magellan Gold Corporation, a Nevada corporation (the “Company”) that a 1-for-50 reverse
split of the Company’s common stock, previously disclosed in the Company’s Definitive Information Statement on Schedule
14C filed with the Securities and Exchange Commission (the “SEC”) on September 22, 2017, would be effective at the
market open on January 7, 2019. The stock split has been retroactively adjusted throughout these financial statements and footnotes.
During the three months ended March 31, 2019, the Company raised
$30,000 through the sale of 30,000 Units at a price of $1.00 per Unit. Each unit consists of one share of common stock and four
common stock warrants. Two of the warrants expire on May 8, 2019 and are exercisable at $2.00. The other two warrants expire on
August 8, 2019 and are exercisable at $3.00. In April 2019 the warrants expiring on May 8, 2019 were extended until May 28, 2019
and the exercise price was reduced to $1.00 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 80,000
shares of Common Stock, valued at $1.00 per share. 20,000 of the shares vested upon closing of the El Dorado agreement and were
issued, and the remaining 60,000 shares are subject to ratable vesting over an 18-month period. During the three months ended March
31, 2019 the Company issued 20,000 of these shares and recognized expense of $10,000 related to this issuance.
In January 2019, 40,000 shares were issued for services rendered
pursuant to an investor relations agreement dated effective January 1, 2019. The shares were valued at $1.10, the closing price
of the Company’s stock on December 31, 2018. The services will be provided over a two year service period. During the three
months ended March 31, 2019 the Company recognized $5,500 of expense related to these shares.
In March 2019, the Company entered into an agreement to issue
5,000 shares for services. These shares were issued in April 2019. The Company recognized expense of $14,000 during the three months
ended March 31, 2019 related to this agreement.
The Company also agreed to issue 2,000 shares for services rendered
during the three months ended March 31, 2019. The Company recognized expense of $5,600 related to this commitment, and the shares
were issued in April 2019.
In January 2019 the Company issued Mr. Martinez 14,118 shares
in settlement of liabilities for services provided in 2018 of $24,000.
During the three months ended March 31, 2019, the Company also
issued 7,574 shares in settlement of other liabilities of $12,875 resulting in a loss on settlement of $758.
During the three months ended March 31, 2019 Mr. Gibbs was issued
30,594 and Mr. Powers was issued 14,965 shares of common stock related to the price protection feature which expired in 2018.
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 200,000 shares of common stock. The 2017 Plan provides for the grant of (1) both
incentive and non-statutory stock options, (2) stock bonuses, (3) rights to purchase restricted stock and (4) stock appreciation
rights. As of March 31, 2019 the Company had 128,000 shares available for future grant.
Stock option activity within the 2017 Equity Incentive Plan
and warrant activity outside the plan, for the three months ended March 31, 2019 is as follows:
As of March 31, 2019 the outstanding stock options have a weighted
average remaining term of 8.58 years and no intrinsic value, and the outstanding stock warrants have a weighted average remaining
term of 0.23 years and no intrinsic value.
In April 2019, the maturity date for 300,000 of the stock warrants
was extended to May 28, 2019 and the exercise price was reduced from $2.00 per share down to $1.00 per share.
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 March 31, 2019, all of these claims and leases are in good standing.
As part of our acquisition of MV2 in Mexico, we assumed the
following leases payable in local currency as follows:
For purposes of calculating operating lease liabilities, lease
terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options.
The Company does not currently believe leases are reasonably certain of being renewed. Some leasing arrangements may require variable
payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease
payments are not presented as part of the initial ROU asset or lease liability. The Company's lease agreements do not contain any
material restrictive covenants.
The Company recognized operating lease cost of $643 during the
three months ended March 31, 2019. The Company had right-of-use assets of $7,128 (included in long-term prepaid expenses and other
assets on the consolidated balance sheet) and right-of-use liabilities of $6,484 (included in accrued liabilities and other long
term liabilities on the consolidated balance sheet) as of March 31, 2019. The Company had operating cash flows related to these
leases of $1,287 for the three months ended March 31, 2019. The Company’s operating leases had a weighted average estimated
incremental borrowing rate of 15% and a weighted average remaining term of 5.7 years as of March 31, 2019.
The following table provides the maturities of lease liabilities
and have been translated to US dollars using an exchange rate at March 31, 2019 of 19.43 MX pesos to US dollars:
Future minimum lease payments for operating leases accounted
for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year at December 31, 2018 were as follows:
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 March 31, 2019 and December 31, 2018 a total of $90,000 and
$16,630 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.