We use the terms "Magellan," "we," "our," and "us" to refer to Magellan Gold
Corporation.
The following discussion and analysis provides information that management
believes is relevant for an assessment and understanding of our results of
operations and financial condition. This information should be read in
conjunction with our audited financial statements, which are included in our
Annual Report on Form 10-K for the fiscal years ended December 31, 2019 and
2018.
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Forward-Looking Statements
Some of the information presented in this Form 10-K constitutes "forward-looking
statements". These forward-looking statements include, but are not limited to,
statements that include terms such as "may," "will," "intend," "anticipate,"
"estimate," "expect," "continue," "believe," "plan," or the like, as well as all
statements that are not historical facts. Forward-looking statements are
inherently subject to risks and uncertainties that could cause actual results to
differ materially from current expectations. Although we believe our
expectations are based on reasonable assumptions within the bounds of our
knowledge of our business and operations, there can be no assurance that actual
results will not differ materially from expectations.
All forward-looking statements speak only as of the date on which they are made.
We undertake no obligation to update such statements to reflect events that
occur or circumstances that exist after the date on which they are made.
Overview
We were incorporated on September 28, 2010, in Nevada. Our principal business is
the acquisition and exploration of mineral resources. We have not presently
determined whether the properties to which we have mineral rights contain
mineral reserves that are economically recoverable.
We have only had limited operations to date and we rely upon the sale of our
securities and borrowings from significant investors to fund our operations, as
we have not generated any revenue.
In August 2012, we entered into an option agreement and subsequently purchased
the "Silver District" project consisting of 85 unpatented lode mining claims, 4
patented lode claims, a Arizona State Exploration Permit of 154.66 acres and 23
unpatented mill site claims, totaling over 2,000 acres in La Paz County,
Arizona. Since our acquisition, we have increased our land position in the
Silver District by staking two unpatented lode mining claims, leased two
additional patented claims and have increased our Arizona State Exploration
Permit to 334.85 acres.
On September 30, 2014, we formed and organized a new wholly-owned subsidiary,
Gulf + Western Industries, Inc., a Nevada corporation ("Gulf+Western" or "G+W"),
to own our Silver District mining interests. On October 1, 2014 we completed the
transfer of those assets from Magellan to G+W. At the time of the transfer,
Magellan owned all the outstanding common stock of G+W. Effective December 31,
2014, Magellan pledged all its ownership interest in G+W to Mr. John D. Gibbs, a
significant shareholder in the Company, as security for outstanding amounts
under a line of credit agreement between Magellan and Mr. Gibbs. During the year
ended December 31, 2019, the total amount owed under the credit agreement was
$1,174,188, which includes $869,550 of principal and $304,638 of accrued
interest was settled with the issuance of Series A Preferred Stock.
On October 24, 2016, the Company entered into a Mining Option Agreement
("Agreement") between and among Rio Silver Inc., a Canadian company ("Rio
Silver"), Minera Rio Plata S.A.C., a Peruvian company and subsidiary of Rio
Silver ("Minera"), and Magellan Gold Peru S.A.C., a Peruvian company and wholly
owned subsidiary of the Company ("Magellan Peru") pursuant to which Rio Silver
through Minera, granted to the Company the sole and exclusive option to acquire
an undivided 50% interest in and to property located in central Peru. Under the
terms of the Agreement, the Company has the right to earn an undivided 50%
interest in the Niñobamba Silver/Gold Project in central Peru. To earn its 50%
interest, the Company must spend $2.0 million in exploration activities in the
project over three years. The Niñobamba project is comprised of five concessions
that total 36.5 square kilometers (9.026 acres). Effective December 31, 2017,
the Company agreed with Rio Silver to terminate the option agreement, thereby
terminating the Company's option to earn an interest in the Niñobamba
Silver/Gold Project. The Company retained its ownership of Rio Silver stock.
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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 for the
option-to-purchase payment, and 284,017 shares of common stock (the "Shares").
The note is non-interest bearing and has been paid in full. 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 seven to twelve.
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.
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 will not result in the acquisition of any additional assets
or liabilities.
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. Magellan intends to advance El
Dorado towards production as a matter of priority. The project has excellent
road and rail infrastructure, and the Company plans to truck the ore from El
Dorado to the SDA Plant for processing. El Dorado is situated within a district
of epithermal vein systems from which historic mining produced high grades.
Effective March 31, 2020 Magellan Gold Corporation, a Nevada corporation (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 Minerales Vane 2 S.A. de CV ("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 an 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.
Effective July 1, 2020, Magellan 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 near Elk City, Idaho. The Center Star Mine hosts high grade gold
mineralization that was discovered in the early 1900's. There was periodic
historic production and development work done under different ownership through
the 1980s. With the high-grade gold mineralization present, Magellan 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.
In consideration for 100% of the issued and outstanding shares of Clearwater,
Magellan has agreed to pay its sole shareholder 1,000,000 shares of Magellan
common stock and $150,000 in cash. Of the 1,000,000 shares, 750,000 have been
issued and 250,000 shares will be issued two years from the closing concurrent
with the pay-off of the secured promissory note. The cash consideration of
$25,000 was paid and the balance of $125,000 is evidenced by a secured
promissory note due in two years. The Note is secured by the Clearwater shares
and assets.
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Our primary focus is to advance our 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 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.
Results of Operations for the Years Ended December 31, 2020 and 2019
Years ended December 31,
2020 2019
Operating expenses:
General and administrative expenses $ 1,175,110 $ 1,008,917
Total operating expenses 1,175,110 1,008,917
Operating loss (1,175,110 ) (1,008,917 )
Other income (expense):
Interest expense (424,858 ) (526,273 )
Other income 26,980 -
Loss on extinguishment of debt - (3,151,314 )
Loss on settlement of liabilities (2,110,047 ) -
Change in derivative liability - 12,457
Total other income (expense) (2,507,925 ) (3,665,130 )
Net loss from continuing operation (3,683,035 ) (4,674,047 )
Net loss from discontinued operation (31,599 ) (461,753 )
Net loss $ (3,714,634 ) $ (5,135,800 )
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Operating expenses
During the year ended December 31, 2020, our total operating expenses included
general and administrative expenses of $1,175,110 as compared to $1,008,917
during the year ended December 31, 2019. The $166,193 increase is primarily
associated with increases in investor relations, stock based compensation and
legal fees offset with decreases in travel expenses
Other income (expenses)
Interest expense for the year ended December 31, 2020 and 2019 totaled $424,858
and $526,273, respectively. The decrease in interest expense is related to the
conversion of debt to equity during the year ended December 31, 2020.
Loss on settlement of liabilities for the year ended December 31, 2020 totaled
$2,110,047. The loss on settlement was a result of settlement of convertible
debt and advances for common shares and warrants during the year ended December
31, 2020.
Loss on extinguishment of debt for the year ended December 31, 2019 totaled
$3,151,314. The loss on extinguishment of debt was a result of settlement of
debt on September 30, 2019, which is discussed in detail in the footnotes.
Other income for the year ended December 31, 2020 of $26,980 was related to the
NVX option and Small Business Administration Economic Injury Disaster Loan
Grant.
Discontinued operations
The net loss from discontinued operations during the years ended December 31,
2020 and 2019 totaled $31,599 and $461,753, respectively. Net loss from
discontinued operations represent the Mexico operations and Gulf+Western that
were disposed of in March 2020 and July 2020, respectively. The $430,154 change
is due to the limited operations of the Mexico and Gulf+Western assets in 2020.
Liquidity and Capital Resources:
Our audited 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 December 31, 2020, we had not yet generated
any significant revenues or achieved profitable operations and we have
accumulated losses of $15,832,969. We expect to incur further losses in the
development of our business, all of which casts 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 year ended December 31, 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.
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During the year ended December 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. As of May 31, 2019 these warrants were extended to
July 31, 2019. On July 31, 2019, these warrants were extended to October 31,
2019 and expired unexercised.
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.
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
During the year ended December 31, 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.
Additionally, the Company received $514,955 of proceeds from advances from
related and third parties, of which $345,450 was settled with the issuance
Series A Preferred Stock in September 2019.
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 that any future financings will
occur.
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Cash Flows
A summary of our cash provided by and used in operating, investing and financing
activities is as follows:
Years ended December 31,
2020 2019
Net cash used in operating activities from continuing
operations
$ (136,803 ) $ (221,970 )
Net cash used in operating activities from discontinued
operations
(51,491 ) (207,034 )
Net cash used in operating activities (188,294 ) (429,004 )
Net cash used in investing activities from continuing
operations
(113,828 )
Net cash used in investing activities from discontinued
operations
- (75,000 )
Net cash used in investing activities (113,828 ) (75,000 )
Net cash provided by financing activities from
continuing operations 233,319 457,246
Net cash provided by financing activities from
discontinued operations - -
Net cash used in financing activities 233,319 457,246
Effect of foreign currency exchange 68,636 42,489
Net change in cash and cash equivalents (167 ) (4,269 )
Cash and cash equivalents beginning of period 167 4,436
Cash and cash equivalents end of period $ - $ 167
At December 31, 2020, we had a $1,476,062 working capital deficit. This
compares to cash of $167 and a working capital deficit of $2,494,426 at
December 31, 2019.
At December 31, 2020, we had $1 in cash and a $1,476,062 working capital
deficit. This compares to cash of $167 and a working capital deficit of
$2,494,426 at December 31, 2019.
Net cash used in operating activities from continuing operations during the year
ended December 31, 2020 was $136,802 and was mainly comprised of our $3,683,035
net loss during the year, adjusted by a non-cash charges of $2,153,183 for loss
on settlement of liabilities, $634,921 of stock compensation and accretion of
discounts on notes payable of $346,781. In addition, it reflects changes in
operating assets and liabilities of $411,348.
Net cash used in operating activities from continuing operations during the year
ended December 31, 2019 was $221,970 and was mainly comprised of our $4,674,047
net loss during the year, adjusted by a non-cash charges of $12,457 gain on
investment, $3,259,365 for loss on extinguishment of debt, $423,399 of stock
compensation and accretion of discounts on notes payable of $210,445. In
addition, it reflects changes in operating assets and liabilities of $571,325.
Net cash used in operating activities from discontinued operations of during the
years ended December 31, 2020 and 2019 of $51,491 and $207,034, respectively,
are related to the disposal of the Mexico and Gulf+Western operations.
35
Net cash used in investing activities from continuing operations during the year
ended December 31, 2020 was $113,828 and was comprised of cash payments of
$101,328 in development costs and $12,500 for mineral rights for Clearwater
Mining Corporation.
Net cash used in investing activities from discontinued operations during the
year ended December 31, 2019 was $75,000 related to the disposal of Mexico
operations.
Net cash provided by financing activities from continuing operations during the
year ended December 31, 2020 was $233,319 comprised $38,500 proceeds from the
sale of common stock and warrants, $235,000 proceeds from convertible debt from
third parties, $60,000 proceeds from convertible debt from related parties,
$45,830 proceeds from advances from related parties, $20,000 proceeds on
advances from third parties, offset by $10,000 payments on convertible notes
from third parties and $156,011 payments on advances from related parties.
Net cash provided by financing activities from continuing operations during the
year ended December 31, 2019 was $457,246 comprised $30,000 proceeds from the
sale of common stock and warrants, $135,000 proceeds from convertible debt from
third parties, $482,455 proceeds from advances from related parties, $32,500
proceeds on advances from third parties, offset by $222,709 payments on advances
from related parties.
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