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.
Our primary focus is to explore and develop mineral properties in
the United States. Effective March 31, 2020, we divested our subsidiary holding all of our international assets and plan to advance
our recently acquired Idaho Gold 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, 2020 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, 2019.
On July 1, 2020, the Company entered into a Stock Purchase Agreement
to acquire Clearwater Gold Mining Corporation (“Clearwater”) which owns certain unpatented mining claims in Idaho County,
Idaho. The Company will be evaluating the historic mine data to assess the potential to develop a gold resource at Center Star.
The project area is located 45 miles from Grangeville, Idaho and near the town of Elk City, Idaho.
On August
25, 2020, the Company, a new wholly owned subsidiary, M Gold Royalty (“M Gold”), to expand into the royalty business.
M Gold Royalty will engage in organically generating royalties derived from a portfolio of mineral property interests in North
America. Royalties from this portfolio will be complemented by royalties from selected acquisitions as well as income from other
strategic investments.
Our consolidated financial statements include our accounts and the
accounts of our 100% owned subsidiary, Clearwater and M Gold. 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 prior period amounts have been reclassified
to conform to the current period financial statement presentation, including the discontinued operations presentation resulting
from the disposition of the Company’s Mexico operations in March 2020 and Gulf + Western Industries, Inc. in September 2020.
See Note 3.
Recent Accounting Pronouncements
The Company does not believe that any recently
issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the
accompanying 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 September 30, 2020 we had a working capital deficit of $1,090,380, we had
not yet generated any significant revenues or achieved profitable operations and we have accumulated losses of $15,176,673. 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
Center Star Gold Mine
On
July 1, 2020, the Company entered into a Stock Purchase Agreement to acquire Clearwater Gold Mining Corporation (“Clearwater”)
which owns certain unpatented mining claims in Idaho County, Idaho that include the historic Center Star Gold Mine (“Center
Star”) near Elk City, Idaho. As a result of the Clearwater acquisition, Gregory Schifrin, the sole shareholder of Clearwater,
was appointed to serve as a member of the Company’s Board on July 1, 2020. In consideration for 100% of the issued and outstanding
shares of Clearwater, the Company has agreed to pay Clearwater’s sole shareholder 1,000,000 shares of Magellan common stock,
$125,000 convertible note and $25,000 in cash. The 1,000,000 shares are to be issued to the shareholder on and under the terms
as follows: 250,000 shares at the time of closing, 250,000 shares at the time the Center Mine receives its permit to reopen the
main portal of the mine, 250,000 shares at the point the main portal has been reopened and 250,000 shares two-years from closing
concurrent the pay-off of the $125,000 convertible note. As of September 30, 2020, the total purchase price for the Clearwater
was determined to be $1,000,000 which consisted of $12,500 cash paid, $12,500 accrued in accounts payable – related party,
a $125,000 convertible promissory note, and 1,000,000 shares of common stock with a fair value of $850,000. The Company concluded
the transaction qualified as an asset acquisition and all such acquisition costs have been capitalized.
During the nine months ended
September 30, 2020, the Company has paid $46,276 and accrued $11,640 in capitalized development cost to develop gold resources
at Center Star.
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.
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. The lease requires annual payments totaling $1,000 until the legal title can be perfected.
In January 2020, the Company
and NV Gold Corporation (“NVX”) and its wholly-owned subsidiary NV Gold Corporation (USA) (“NV Gold”) entered
into a binding letter of intent (“LOI”), whereby NV Gold has the exclusive right to purchase an undivided 100% right,
title and interest in and to the Silver District Property and the Property Data in consideration of NV Gold completing certain
payments and work commitments. In January 2020, NVX accepted the terms of the LOI and paid the Company $25,000. NVX had until May
11, 2020 to exercise their option to acquire the Silver District project under these terms. NVX did not exercise their option on
May 11, 2020 and Magellan retained the $25,000 payment as liquidated damages which was recorded in other income.
In July 2020 G + W was disposed
of as further discussed in Note 3.
Note 3 – Disposition of Business
Mexico Operations
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 (“MV2”).
Effective March 31, 2020 the Company entered into an Agreement to
Accept Collateral in Full Satisfaction of Obligations (the “Agreement”) with certain holders of Promissory Notes (the
“Lenders”) due December 31, 2019 (the “Notes”) in the aggregate principal amount of $1.05 million. The
Company is indebted under the Notes to the Lenders and the Company’s obligations to the Lenders are secured by a Stock Pledge
and Security Agreement covering 100 shares of common stock of Magellan Acquisition Corporation and one (1) share of MV2 (the “Collateral”)
held under a Collateral Agent Agreement. Magellan Acquisition Corp. and MV2 own the SDA Mill and El Dorado prospect in Nayarit,
Mexico. The Notes matured on December 31, 2019 and remain unpaid and in default. The Lenders have accelerated
the Company’s indebtedness. Pursuant to terms set forth in the Agreement, the Lenders have agreed to accept the Collateral
in full satisfaction of the Notes and unconditionally and irrevocably waive any entitlement or right to receive payment of (i)
the initial 10% Financing Fee included in the principal amount of the Notes, (ii) the 5% Rollover Fee agreed to in an Allonge and
Modification Agreement. The effective date of the Agreement was March 31, 2020.
Silver District
On July 21, 2020, the Company entered into a Stock Purchase agreement
with Tri Power Resources, LLC to sell 1,000 shares representing 100% ownership of Gulf+Western Industries, Inc (“Gulf+Western”)
to Tri Power in consideration for the return and cancellation of 50,000 shares of the Company’s Series A Preferred Stock
with a stated value of $10 per share. John Gibbs, a majority shareholder in the Company, is the Managing Member and Chief Executive
Officer of Tri Power Resources, LLC.
Due to the related party nature of the
above transactions, the gain of $206,860 associated with the disposals were recorded to additional paid in capital.
Summary
As a result of the agreements above, the assets and liabilities
of the Gulf+Western , MAC and MV2 operations have been reflected as assets and liabilities of discontinued operations in the Company’s
consolidated balance sheets as of September 30, 2020 and December 31, 2019 as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
–
|
|
|
$
|
5,165
|
|
Prepaid expenses and other current assets
|
|
|
–
|
|
|
|
37,214
|
|
Current assets of discontinued operations
|
|
|
–
|
|
|
|
42,379
|
|
Mineral rights, net of impairment
|
|
|
–
|
|
|
|
101,672
|
|
Property, plant and equipment, net
|
|
|
–
|
|
|
|
973,930
|
|
Prepaid expenses and other assets
|
|
|
–
|
|
|
|
388,468
|
|
Other assets of discontinued operations
|
|
|
–
|
|
|
|
1,464,070
|
|
Total assets of discontinued operations
|
|
$
|
–
|
|
|
|
1,506,449
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
–
|
|
|
$
|
338,231
|
|
Accrued liabilities
|
|
|
–
|
|
|
|
145,766
|
|
Accrued interest - related parties
|
|
|
–
|
|
|
|
29,160
|
|
Accrued interest
|
|
|
–
|
|
|
|
23,377
|
|
Notes payable, related party
|
|
|
–
|
|
|
|
953,876
|
|
Notes payable, third party
|
|
|
–
|
|
|
|
115,500
|
|
Current liabilities of discontinued operations
|
|
|
–
|
|
|
|
1,605,910
|
|
Other long-term liabilities
|
|
|
–
|
|
|
|
9,857
|
|
Asset retirement obligation
|
|
|
–
|
|
|
|
120,878
|
|
Long term liabilities of discontinued operations
|
|
|
–
|
|
|
|
130,735
|
|
Total liabilities of discontinued operations
|
|
$
|
–
|
|
|
$
|
1,736,645
|
|
The agreements qualify as a discontinued
operation in accordance with U.S. GAAP. As a result, operating results and cash flows related to the Gulf+Western, MAC and MV2
operations have been reflected as discontinued operations in the Company’s consolidated statements of operations and comprehensive
loss and consolidated statements of cash flows.
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
32,500
|
|
Cost of sales
|
|
|
–
|
|
|
|
(264,174
|
)
|
Exploration costs
|
|
|
–
|
|
|
|
(10,000
|
)
|
General and administrative expenses
|
|
|
(31,599
|
)
|
|
|
(160,279
|
)
|
Operating loss
|
|
|
(31,599
|
)
|
|
|
(401,953
|
)
|
Other expense
|
|
|
–
|
|
|
|
(1,939
|
)
|
Net loss from discontinued operations
|
|
$
|
(31,599
|
)
|
|
$
|
(403,892
|
)
|
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.
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.
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 – Notes Payable – Related Parties
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 $752
of interest is accrued on these notes as of September 30, 2020 and December 31, 2019, respectively.
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 year ended December 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 $0, was $1,069,376 as of December 31, 2019.
During the year ended December 31, 2019 $ 57,750 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.
The Series 2017 Notes were in default as of December 31, 2019. Consequently,
on March 31, 2020, the Company entered into an Agreement to Accept Collateral in Full Satisfaction of Obligations (the “Agreement”)
with the holders of the Series 2017 Notes (the “Lenders”) due December 31, 2019 in the aggregate principal amount of
$1.14 million. The Company is indebted under the Series 2017 Notes to the Lenders and the Company’s obligations to the Lenders
are secured by a Stock Pledge and Security Agreement covering 100 shares of common stock of MAC and one (1) share of MV2 (the “Collateral”)
held under a Collateral Agent Agreement. MAC and MV2 own the SDA Mill and El Dorado prospect in Nayarit, Mexico. The Series 2017
Notes matured on December 31, 2019 and remain unpaid and in default. The Lenders have accelerated the Company’s indebtedness.
Pursuant to terms set forth in the Agreement, the Lenders have agreed to accept the Collateral in full satisfaction of the Series
2017 Notes and unconditionally and irrevocably waive any entitlement or right to receive payment of (i) the initial 10% Financing
Fee included in the principal amount of the Notes, (ii) the 5% Rollover Fee agreed to in an Allonge and Modification Agreement.
The effective date of the Agreement was March 31, 2020.
Unsecured advances – related party
During the nine months
ended September 30, 2020, Mr. Gibbs advanced $20,000 to the Company. During the nine months ended, Mr. Power advanced $3,300 cash
and paid expenses using his personal credit card on behalf of the Company of $106,271 and the Company made repayments to Mr. Power
and/or his credit card of $143,528. On May 31, 2020, the Company issued 475,000 shares of common stock to Mr. Gibbs with a fair
value of $332,500 for the settlement of advances in the amount of $95,000, resulting in a loss on settlement of $237,500. In addition,
the Company issued 475,000 warrants exercisable for a period of twelve months at an exercise price of $0.20 per share. The Company
recognized an additional $288,046 loss related to the issuance of warrants for the settlement of liabilities. Amounts due
to Mr. Gibbs and Powers related to cash advances and expense paid on behalf of the Company was $25,602 and $134,559 as of September
30, 2020 and December 31, 2019, respectively.
Note 6 – Notes payable
During the nine months ended September 30, 2020, $10,000 was
received from third parties with the intention to convert to shares in the Company. On May 31, 2020, the Company converted $42,500
of advances from third parties into 212,500 shares of common stock. The common shares had a fair value of $153,750, resulting in
a loss on settlement of $111,250. In addition, the Company issued 212,500 warrants exercisable for a period of twelve months at
an exercise price of $0.20 per share. The Company recognized an additional $128,863 loss related to the issuance of warrants for
the settlement of liabilities.
As discussed in Note 5 – 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 December 31, 2019, the balance on the notes
from non-related parties, net of unamortized discount of $0, was $115,500 with accrued interest of $23,377. On March 31, 2020,
the Series 2017 Notes were settled. See Note 5.
Note 7 – Convertible Note Payable
Series 2018A and 2018B 10% Unsecured Convertible Notes
In 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 matured twelve (12) months from the date of issue but were 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. In December 2019,
$25,000 of Series 2018A 10% Unsecured Convertible Notes and $2,039 of accrued interest were converted into 27,039 shares of common
stock at a conversion price of $1.00 per share. On May 31, 2020, the Company converted $150,000
of principal and $22,412 of accrued interest into 862,055 shares of common stock. The common shares had a fair value of $603,439,
resulting in a loss on conversion of debt of $431,028. The Company issued 862,055 warrants exercisable for a period of twelve months
at an exercise price of $0.20 per share and recognized an additional $522,761 loss related to the issuance of warrants for the
conversion of debt. In September 2020, the Company converted the remaining $30,000 of principal and $4,897 of accrued interest
into 34,897 shares of common stock with a fair value of $34,897. The Company issued 30,000 warrants exercisable for a period of
thirty days at an exercise price of $0.20 per share and recognized an additional $34,800 loss related to the issuance of warrants
for the conversion of debt. As of September 30, 2020, the principal and interest balance due under the Series 2018A and
2018B notes were settled.
Series 2019A 10% Unsecured Convertible Notes
In 2019 the Company sold $135,000 of Series 2019A 10% Unsecured
Convertible Notes. The purchase price of the Note is equal to the principal amount of the Note. The Series 2019A Notes are convertible
into shares of Common Stock at a conversion price of $1.00 during the life of the Note. The lenders were issued 100,000 common
stock warrants with an exercise price of $2.00 per share. The Company evaluated the conversion option and concluded a beneficial
conversion feature was present at issuance. The Company recognized the beneficial conversion feature and relative fair value of
the warrants as a debt discount and additional paid in capital in August and December 2019. The $135,000 debt discount is amortized
over the term of the loan. 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. There are two Series 2019A 10% Unsecured Convertible Notes that were due and payable in August 2020 and are currently
past due. If a default notice is received the interest rate will be 12%. Amortization expense of $78,361 was recognized during
the nine months ended September 30, 2020. On May 31, 2020, the Company converted $60,000
of principal and $4,316 of accrued interest into 321,580 shares of common stock. The common shares had a fair value of $225,106,
resulting in a loss on conversion of debt of $160,790. In addition, the Company issued 321,580 warrants exercisable for a period
of twelve months at an exercise price of $0.20 per share. The Company recognized an additional $195,010 loss related to the issuance
of warrants for the conversion of debt. As of September 30, 2020, the balance due under these notes net of unamortized discount
of $0, is $75,000, with accrued interest of $6,611.
On October 1, 2019, the Company sold a 10% Unsecured Convertible
Note for $145,978 due on demand to settle accounts payable. The purchase price of the 10% Unsecured Convertible Note is equal to
the principal amount of the Note. The 10% Unsecured Convertible Note is convertible into shares of Common Stock at a conversion
price of $1.00 during the life of the Note. The Company evaluated the conversion option and concluded a beneficial conversion feature
was present at issuance. The Company recognized the beneficial conversion feature as a debt discount and additional paid in capital
in October 2019. The debt discount will be amortized over the term of the loan. The 10% Unsecured Convertible Note will accrue
interest at the rate of 10% per annum payable quarterly, accruing from the date of issuance. Amortization expense of $145,978 was
recognized during the year ended December 31, 2019. As of September 30, 2020, the balance due under these notes net of unamortized
discount of $0, is $145,978, with accrued interest of $14,598.
Series 2020A 8% Unsecured Convertible Notes
During the nine months ended
September 30, 2020, the Company sold $285,000 of Series 2020A 8% Unsecured Convertible Notes with a maturity date of November 30,
2020. The purchase price of the Note is equal to the principal amount of the Note. The Series 2020A Notes are convertible into
shares of Common Stock at a conversion price of $0.50 during the life of the Note. The lenders were issued 142,500 common stock
warrants with an exercise price of $0.50 per share for a term of 5 years. Two related parties purchased $60,000 of the 2020A notes.
The Company evaluated the conversion option and concluded a beneficial conversion feature was present at issuance. The Company
recognized the beneficial conversion feature as a debt discount and additional paid in capital as of September 30, 2020.
The $237,263 debt discount will be amortized over the term of the loan. The Notes will accrue
interest at the rate of 8% per annum, payable quarterly in arrears. In July 2020, $25,000 of Series 2020A 8% Unsecured Convertible
Notes were converted into 50,000 shares of common stock at a conversion price of $0.50 per share. Amortization expense of $140,412
was recognized during the nine months ended September 30, 2020. As of September 30,
2020, the balance due to a related party under these notes net of unamortized discount of $22,528, is $37,462, with accrued interest
of $1,628. As of September 30, 2020, the balance due to a third party under these notes net of unamortized discount of $74,323,
is $125,677, with accrued interest of $4,263.
3% Secured Convertible Note
On July 1, 2020, the Company issued a $125,000 Secured Convertible
Note to a related party for the as part of the purchase of Clearwater Mining Corporation. The secured convertible note matures
on July 1, 2022 and will accrue interest at the rate of 3% per annum, payable yearly in arrears beginning July 1, 2021. The Note
is convertible into shares of Common Stock at a conversion price of $0.50 during the life of the Note. The Company evaluated the
conversion option and concluded a beneficial conversion feature was present at issuance. The Company recognized the beneficial
conversion feature and relative fair value of the warrants as a debt discount and additional paid in capital in July 2019. The
$87,500 debt discount will be amortized over the term of the loan. Amortization expense of
$10,908 was recognized during the nine months ended September 30, 2020. As of September
30, 2020, the balance due to a related party under this note net of unamortized discount of $76,592, is $48,408, with accrued interest
of $935.
Note 8 – Stockholders’ Deficit
Common Stock
On May 31, 2020, the Company
agreed to issue 86,270 common shares to settle of accounts payable related to services provided in 2019 and 2020 of $17,254. The
common shares had a fair value of $60,389 resulting in a loss on settlement of accounts payable of $43,135.
On May 31, 2020, the Company
agreed to issue 687,500 common shares and warrants to settle advances from third parties of $42,500 and settle advances from related
parties of $95,000. Additionally, the Company issued 1,183,635 common shares and warrants to settle convertible notes payable of
$236,727 including accrued interest.
During the nine months ended
September 30, 2020, the Company received net proceeds of $22,500 from the exercise of 75,000 warrants.
On
July 15, 2020, the Company issued 500,000 shares for services rendered pursuant to two investor relations agreements:
200,000 shares under a Services Agreement and 300,000 shares under a Consulting Agreement. The shares were valued at $1.29,
the closing price of the Company’s stock on July 15, 2020. The Services Agreement is
$7,500 per month and has a term of twelve months The Consulting Agreement is $7,500 per month and has an initial term of six months.
If the Consulting Agreement is not terminated at least thirty days prior to the end of the initial term, the term will continue
for an additional six months. During the nine months ended September 30, 2020 the Company recognized $161,625 of expense
related to these shares.
On December 9, 2019, the Company entered into a three month consulting
agreement and paid $25,000. In addition, the Company issued 100,000 warrants with an exercise price of $1.00 per share that expire
on December 9, 2020. During the nine months ended September 30, 2020, the Company
recognized $76,650 of expense related to the warrants issued from this agreement.
In January 2019, 40,000 shares were issued
for services rendered pursuant to an investor relations agreement. 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 nine months ended September
30, 2020 and 2019 the Company recognized $16,500 of expense related to these shares.
Preferred Stock
During the nine months ended September 30, 2020, the Company accrued
$167,411 for the Series A preferred stock dividend.
In September 2020, the Company
established a Series B Convertible Preferred Stock (“Series B Preferred”) and authorized an aggregate of 5,000 shares
with a par value of $0.001 per share and a stated value of $1,250.00 per share. The holders of outstanding Series B Preferred shall
be entitled to receive dividends at the annual rate of 10% based on the stated value per share. Dividends on the share of Series
B Preferred shall be cumulative.
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 nonstatutory stock options, (2) stock bonuses, (3) rights to purchase restricted stock and (4) stock appreciation
rights. As of September 30, 2020, the Company had 128,000 shares available for future grant.
On September 15, 2020, John Gibbs, a related party, transferred
330,000 warrants to purchase common stock back to the Company. Deepak Malhotra, a member of the board, received 300,000 of the
transferred warrants as compensation for services to be performed over a one year term. The warrants were valued $386,764 and will
recognized over the one year service period. During the nine months ended September 30, 2020, the Company recognized $32,230 of
expense related to the issuance of these warrants. The remaining 30,000 warrants were transferred to three 2018A 10% Unsecured
Convertible noteholder as inducements to convert their notes. See Note 7 – Convertible Note Payable.
Stock option activity within the 2017 Equity Incentive Plan and
warrant activity outside the plan, for the nine months ended September 30, 2020 is as follows:
|
|
Stock Options
|
|
|
Stock Warrants
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2019
|
|
|
72,000
|
|
|
$
|
2.00
|
|
|
|
335,000
|
|
|
$
|
1.70
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
2,343,635
|
|
|
|
0.22
|
|
Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
(565,000)
|
|
|
|
0.95
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
(75,000)
|
|
|
|
0.30
|
|
Outstanding at September 30, 2020
|
|
|
72,000
|
|
|
$
|
2.00
|
|
|
|
2,038,635
|
|
|
$
|
0.26
|
|
Exercisable at September 30, 2020
|
|
|
72,000
|
|
|
$
|
2.00
|
|
|
|
2,038,635
|
|
|
$
|
0.26
|
|
The Company valued the warrants using the
Black-Scholes model with the following key assumptions ranging from: Stock price, $0.85 - $1.57, Exercise price, $0.20-$0.50,
Term 5 years, Volatility 195.66% - 225.13%, and Discount rate 0.12% - 0.36%.
As of September 30, 2020, the outstanding
stock options have a weighted average remaining term of 7.07 years and $0 intrinsic value, and the outstanding stock
warrants have a weighted average remaining term of 0.86 years and an intrinsic value of $1,780,681.
Note 9 – Commitments and
Contingencies
Mining Claims
As part of our acquisition of the Center Star
gold mine project, we acquire 15 Bureau of Land Management (“BLM”) unpatented mining claims and subsequently staked
another 16 unpatented mining claims. In order to maintain the BLM lode claims, annual payments are required before the end of
August of each year. As of September 30, 2020, all of these claims are in good standing.
On August 6, 2020, the Company entered
into a one-year investor relations consulting agreement. As consideration for its services under the Agreement, the Company
agreed to pay to the consultant 261,538 restricted shares of the Company’s common stock. The shares were valued at
$1.56, the closing price of the Company’s stock on August 6, 2020. As of September 30, 2020, the Company have not
issued the shares and has accrued $34,000 related to this agreement.
Note 10 – Executive Employment Agreement
Effective June 1, 2019, the Company and David E. Drips, executed
a Restricted Stock Unit Agreement pursuant to which the Company agreed to grant to Mr. Drips, in consideration of services to be
rendered as President, CEO and Director, restricted stock units consisting of 10,000 units for each month of service. The units
will vest upon successful completion of a $1.25 million financing on or before November 30, 2019. Upon settlement if the common
stock is less than $1.50 addition shares will be issued such that each month of service will have a value of $15,000. The agreement
was extended through May 31, 2020 and eliminated the $1.25 million in financing as a condition of vesting and clarified that a
total of 120,000 shares of stock will be issued to settle all services received. As of September 30, 2020, $78,000 has been accrued
under this arrangement. On June 2, 2020, the Company received the written resignation of
David E. Drips as President, CEO and Director of the Company, effective May 31, 2020.
Effective August 1, 2020, the Company and Michael Lavigne, executed
a Restricted Stock Unit Agreement pursuant to which the Company agreed to grant to Mr. Lavigne, in consideration of services to
be rendered as President, CEO and Director, restricted stock units consisting of 15,000 units for each month of service. The vested
stock units will be settled in shares of common stock upon or as soon as practicable (a) upon written request any time after December
31, 2020 or (b) following the termination date, whichever occurs first. As of September 30, 2020, 30,000 restricted stock units
may be settled in shares of common stock. During the nine months ended September 30, 2020, the Company recognized $38,250 of expense
related to the agreement.
Note 11 – 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.
Accrued Interest - Related Parties
Accrued interest due to related parties is included in our consolidated
balance sheets as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Accrued interest payable – Mr. Gibbs
|
|
$
|
1,589
|
|
|
$
|
11,973
|
|
Accrued interest payable – Mr. Power
|
|
|
–
|
|
|
|
11,342
|
|
Accrued interest payable – Dr. Carson
|
|
|
752
|
|
|
|
6,597
|
|
Accrued interest payable – Mr. Schifrin
|
|
|
935
|
|
|
|
–
|
|
Accrued interest payable – Mr. Malhotra
|
|
|
39
|
|
|
|
–
|
|
|
|
$
|
3,315
|
|
|
$
|
29,912
|
|
The accrued interest related to the Series 2017 Notes was settled
on March 31, 2020. See Note 5.
Note 12 – Subsequent Events
In October 2020, the Company
received net proceeds of $16,000 from the exercise of 80,000 warrants.
Subsequent to September 30, 2020, Mr. Power
has made advances of $10,750.
Effective November
1, 2020, the Company and William Luckman, executed a Restricted Stock Unit Agreement pursuant to which the Company agreed to grant
to Mr. Luckman, in consideration of services to be rendered as President, restricted stock units consisting of 42,000 units for
each month of service. The vested stock units will be settled in shares of common stock upon or as soon as practicable (a) upon
written request any time after June 30, 2021 or (b) following the termination date, whichever occurs first.