MAGELLAN GOLD CORP - Form 10-K SEC filing
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[ X ]  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

 

[  ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

 

Commission file number 333-174287

 

             MAGELLAN GOLD CORPORATION             
(Name of Registrant in its Charter)

 

         Nevada       
(State or other jurisdiction
of incorporation or organization)

        273566922         
I.R.S. Employer
Identification Number

 

2010A Harbison Drive # 312, Vacaville, CA  95687
(Address of principal executive offices)                    (Zip Code)

 

Registrant's telephone number, including area code:   (707) 884-3766

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes [   ] No [ X ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [   ] No [ X ]

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X  ] No [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [  ]


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Indicate by check mark if disclosure of delinquent filers pursuant  to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,  to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  X  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated

filer

[  ]

Accelerated

filer

[  ]

Non-accelerated

filer

[  ]

Smaller reporting company[  ]

 

Emerging Growth Company

[X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          [    ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [   ] No [ X ]

 

The aggregate market value of the 43,747,607 shares of voting and non-voting common equity held by non-affiliates of the Company calculated by taking the last sales price of the Company's common stock of $0.11 on June 30, 2017 was $4,812,236.77.

 

The number of shares outstanding of the registrant’s common stock, as of May 14, 2018 is 105,581,382.

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes:

 

None.


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Forward-looking Statements

In General

 

This report contains statements that plan for or anticipate the future.  In this report, forward-looking statements are generally identified by the words "anticipate," "plan," "believe," "expect," "estimate," and the like.  

 

With respect to our mineral exploration business, these forward-looking statements include, but are not limited to, statements regarding the following:

 

 

*

the risk factors set forth below under “Risk Factors”;

 

 

 

 

*

risks and hazards inherent in the mining business (including environmental hazards, industrial accidents, weather or geologically related conditions);

 

 

 

 

*

uncertainties inherent in our exploratory and developmental activities, including risks relating to permitting and regulatory delays;

 

 

 

 

*

our future business plans and strategies;

 

 

 

 

*

our ability to commercially develop our mining interests.;

 

 

 

 

*

changes that could result from our future acquisition of new mining properties or businesses;

 

 

 

 

*

expectations regarding competition from other companies;

 

 

 

 

*

effects of environmental and other governmental regulations;

 

 

 

 

*

the worldwide economic downturn and difficult conditions in the global capital and credit markets; and

 

 

 

 

*

our ability to raise additional financing necessary to conduct our business.

 

Forward looking statements may include estimated mineral reserves and resources which could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include:

 

 

*

the risk factors set forth below under “Risk Factors”;

 

 

 

 

*

changes in the market prices of precious minerals, including gold; and

 

 

 

 

*

uncertainties inherent in the estimation of ore reserves.

 

Readers are cautioned not to put undue reliance on forward-looking statements. We disclaim any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

 

In light of the significant uncertainties inherent in the forward-looking statements made in this Report, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.


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PART I

 

ITEM 1.       DESCRIPTION OF BUSINESS

 

INTRODUCTION

 

About Our Company

 

Magellan Gold Corporation (“Magellan”, “the Company”, “our” or “we”) was formed and organized effective September 28, 2010, under the laws of the State of Nevada.  We are an exploration stage company and our principal business is the acquisition and exploration of mineral resources in Arizona, California, Nevada and Mexico. We have not presently determined whether the properties to which we have mining rights contain mineral deposits that are economically recoverable.

 

We were formed and organized by Athena Silver Corporation (“Athena”), a Delaware corporation, and by John C. Power and John D. Gibbs, two of the control persons and principal shareholders of Athena. Effective September 2010, we issued an aggregate of 33 million shares of common stock to our founders in consideration of $.0025 per share:  30 million shares were issued to Messrs. Power and Gibbs and 3 million shares were issued to Athena. During 2011, the majority of the shares issued to Athena were distributed, in the nature of a spin-off dividend of such shares, to the shareholders of Athena, as of a Record Date of December 31, 2010, pro rata.

 

Our focus is on projects in Arizona and Mexico.

 

Silver District, La Paz County, Arizona

 

In August 2012, we entered into an Option Agreement with Columbus Silver (US) Corporation (“Columbus”) to purchase  “The Silver District Claims” consisting of 85 unpatented lode mining claims, 4 patented lode claims, an Arizona State Exploration Permit of 154.66 acres and 23 unpatented mill site claims, totaling over 2,000 acres in La Paz County, Arizona.  The underlying claims are subject to third party lease and or purchase obligations and net smelter royalties of varying percentages. In June and July 2013, Magellan staked 9 additional unpatented lode mining claims in the Silver District adjacent to the land package under option from Columbus; the Company currently retains 2 of these original 9 claims.Effective September 29, 2014, we entered into a Purchase Agreement with Columbus Silver (US) Corporation, a wholly-owned subsidiary of Columbus Exploration Corporation (TSXV:CLX) to purchase the patented and unpatented mining claims that had been covered by the Option Agreement.   The Purchase Agreement superseded the Option Agreement and conveyed the Silver District Claims to the Company.  In consideration of the Silver District Claims, we made a one-time payment to Columbus in the amount of $100,000.   Following our purchase of the Silver District Claims, we formed a new wholly-owned subsidiary “Gulf + Western Industries, Inc.” (“Gulf + Western”) and transferred our interest in the Silver District Claims to Gulf + Western.

 

In November 2015 we were granted a new Arizona State Exploration Permit that effectively increases the size of our exploration permit in the Silver District from 154.66 acres to 334.85  acres.

 

In October 2012 Magellan staked fifty (50) unpatented lode mining claims known as the “Sacramento Mountains Project” totaling approximately 1,000 acres on Federal (BLM) land.    In 2015, we renewed 14 of these claims and let the balance of the claims lapse.  The Project was  located in the northwest corner of the Sacramento Mountains approximately 10 miles WNW of Needles, California. On February 12, 2016, the White House announced President Obama had designated three national monuments in southern California covering 1.8 million acres of federal lands.   Our Sacramento claims were within borders of one


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of these new monuments.  We determined this new designation would have an adverse effect on our ability to explore or develop mineral deposits on our Sacramento Mountains Project and as a result on September 1, 2016 allowed the claims to lapse, thereby terminating the project.

 

Reverse Triangular Merger with Gulf + Western Industries, Inc.

In June 2015, we assigned shares of Gulf + Western representing 15% of the total outstanding shares of Gulf + Western to W. Pierce Carson, as consideration of his agreeing to serve as President of Gulf + Western. In July 2016, we completed a reverse triangular merger pursuant to which a newly formed merger subsidiary was merged into Gulf + Western, and the 15% equity interest in Gulf + Western owned by Mr. Carson was converted into 8,623,957 shares of Magellan common stock.  As a result of the merger, Gulf + Western became a wholly-owned subsidiary of Magellan.

 

Rio Silver, Inc. Option Agreement

 

On October 24, 2016, Magellan entered into an option agreement with Rio Silver Inc., a Canadian company (“Rio Silver”), granting Magellan the right to earn an undivided 50% interest in the Niñobamba Silver/Gold Project in central Peru. To earn its 50% interest, Magellan was obligated to spend $2.0 million in exploration over three years. The Niñobamba project is comprised of five concessions that total 36.5 square kilometers (9,027 acres).

In connection with the option agreement, Magellan was obliged to subscribe to two private placement unit financings in Rio Silver, each for aggregate proceeds of Cdn$75,000. The Company completed the first unit private placement in August 2016 and the second in January 2017. The Company was issued 2,750,000 shares of Rio Silver stock (TSX.V: RYO) pursuant to the private placements.  

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. Also effective December 31, 2017, the Company sold its interest in Magellan Gold Peru S.A.C. in consideration of $1.00.

SDA Mill Acquisition

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 had paid a non-refundable $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 option-to-purchase payment, and 14,200,834 shares of common stock (the “Shares”) with a fair value of $426,026 on the date of acquisition. The note was 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.

 

Rose owned one 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.  


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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 SDA Mill) for $2,500 as soon as practicable following the Closing Date, rather than prior to the Closing Date.  At December 31, 2017, the Company had not obtained control of MVO.  Magellan subsequently acquired control of MVO in January 2018 and paid for it in April 2018.   

 

Our primary focus with the acquisition of the SDA Mill in Mexico is to transform Magellan into a production company, to continue to advance our Arizona silver project towards resource definition and eventual development, and possibly to acquire additional mineral rights and conduct additional exploration, development and permitting activities.  Our mineral lease payments, permitting applications and exploration and development efforts will require additional capital.

 

Subsequent to the closing, Rose and Magellan entered into an IVA Agreement pursuant to the provisions of the definitive Purchase Agreement.  Under the terms of the IVA Agreement, Rose advanced the sum of MXN 4,251,840 which was used to pay the IVA tax assessed by the Mexican taxing authorities on the acquisition transaction.  Magellan has agreed that Rose is entitled to any future credits or rebates of IVA tax that Magellan may be entitled to until the advance is fully recouped. On March 8, 2018, Pierce Carson, our CEO, executed a Guaranty of the Company's obligations under the IVA Agreement.

 

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.

 

Our principal executive offices are located at 2010A Harbison Drive # 312, Vacaville, CA  95687.  Our telephone number is (707) 884-3766, and our Internet website is www.magellangoldcorp.com.


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Conflicts of Interests

Athena Silver Corporation is a company under common control. Mr. Power is a director and is also a director and CEO of Athena. Mr. Power and Mr. Gibbs are significant investors in both Magellan and Athena.

Silver Saddle Resources, LLC (“Silver Saddle”) is a private company under common control. Mr. Power and Mr. Gibbs are significant investors and managing members of Silver Saddle.

 

Magellan, Athena and Silver Saddle are exploration stage companies and each is 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. In addition, the common ownership could result in significant conflicts of interest both in terms of the allocation of working capital as well as under the doctrine of corporate opportunity, inasmuch as all three entities are engaged in mineral exploration in the United States.  Messrs. Power and Gibbs have not adopted any policy or guidelines to mitigate the potential adverse effects of their conflicting interests between and among, Magellan, Athena and Silver Saddle.

 

Investors in Magellan should be cognizant that the interests of Magellan may, in the future, be in conflict with the other activities of Magellan’s control persons.

 

No Proven or Probable Mineral Reserves/Exploration Stage Company

 

We are considered an exploration stage company under SEC criteria since we have not demonstrated the existence of proven or probable mineral reserves at any of our properties. In Industry Guide 7, the SEC defines a “reserve” as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Proven or probable mineral reserves are those reserves for which (a) quantity is computed and (b) the sites for inspection, sampling, and measurement are spaced so closely that the geologic character is defined and size, shape and depth of mineral content can be established (proven) or the sites are farther apart or are otherwise less adequately spaced but high enough to assume continuity between observation points (probable). Mineral Reserves cannot be considered proven or probable unless and until they are supported by a feasibility study, indicating that the mineral reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable.

 

We have not completed a feasibility study with regard to all or a portion of any of our properties to date. Any mineralized material discovered or extracted by us should not be considered proven or probable mineral reserves. As of December 31, 2017, none of our mineralized material met the definition of proven or probable mineral reserves. We expect to remain an exploration stage company for the foreseeable future, even though we were extracting and processing mineralized material. We will not exit the exploration stage until such time, if ever, that we demonstrate the existence of proven or probable mineral reserves that meet the guidelines under SEC Industry Guide 7.

 

Our Properties

Our primary focus during the next twelve months, and depending on available resources, will be to acquire, explore, and if warranted and feasible, permit and develop our mineral properties.


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We have two material properties, namely the Silver District Project in southwest Arizona and the SDA Mill in Nayarit State, Mexico. We currently intend to engage in exploration activities on the Silver District Project and, if commercially recoverable deposits are found, to conduct mineral development activities.  We intend to assess and acquire mineral properties in the region of the SDA Mill with the objective of sourcing ore for processing at the mill. To date, we have only begun preliminary exploration work.   

 

SILVER DISTRICT PROJECT, LA PAZ CO., ARIZONA

 

The following map illustrates the location of our Silver District Project:

 

Picture 8 

Silver District,La Paz County, Arizona

 

Effective August 28, 2012, Magellan entered into an Option Agreement with Columbus Silver (US)  Corporation, a Nevada corporation (“Columbus”), which Option Agreement granted the Company the right to acquire all of Columbus’ interest in its Silver District properties located in La Paz County, Arizona. Magellan paid Columbus an initial $63,200 on signing the Option and an additional $50,000 before December 31, 2012.   An amendment was signed in August 2013 extending the payments to exercise the option.    

During February 2014 and January 2013, we paid the final two payments of $80,000 and $30,000, respectively, towards the purchase of the James Blaine-patented claim purchase obligation entered into between Columbus and a third party.  We also paid all of the costs to maintain all of the claims and leases in 2013 - 2017.


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Effective September 29, 2014, we entered into a Purchase Agreement with Columbus to purchase the patented and unpatented mining claims that had been covered by the Option Agreement.   The Purchase Agreement superseded the Option Agreement and conveyed the Silver District Claims to the Company.  In consideration of the Silver District Claims, we made a one-time payment to Columbus in the amount of $100,000.   Following our purchase of the Silver District Claims, we formed a new wholly-owned subsidiary “Gulf + Western Industries, Inc.” (“Gulf + Western”) and transferred our interest in the Silver District Claims to Gulf + Western.

 

The Silver District project area consists of 87 unpatented lode mining claims, 6 patented lode claims, an Arizona State Exploration Permit of 334.85 acres and 23 unpatented mill site claims, totaling over 2,000 acres. The project is located approximately 80 kilometers (50 miles) north of Yuma in southwest Arizona.  

 

2014 Drilling Program

 

In May 2014, we completed the drilling of three holes at our Silver District Project. The three holes were the initial holes of a permitted 12-hole exploratory program on Magellan’s unpatented claims near the Papago and Red Cloud Mines. The drilling program was permitted and bonded with the BLM and State of Arizona. Following the drilling program, our bond with the BLM in the amount of $21,457 was refunded.

 

Two of the three holes drilled (core holes PA-01 / 336 total depth & PA-02 / 380 total depth) were designed to test the Papago target, and one hole (RC-01/ 244 total depth) was directed at the Red Cloud target.  Our consulting geologist selected 52 samples that were delivered to ALS Labs in Reno, NV for analysis.

 

The highlights of the assay results include the following:

 

Excellent comparison of our core hole PA-01 with historic RC hole S242P.   Magellan PA-01 intercept of 90 feet grading 6.05 OPT Ag, (including 10 feet of 17.06 OPT Ag), compared very favorably with the historic result of 90 feet grading 5.78 OPT Ag (including 10 feet averaging 14.60 OPT Ag). 

Previously unreported significant zinc and lead assays from the mineralization in PA-01 4.71% Zn and 1.56% Pb over 90 feet, including 10 feet averaging 8.35% Zn and 4.02% Pb.   

PA-01 intercepted a previously unknown vein structure, about 15 feet wide and approximately 50 feet below the known mineralized structure, that includes 3 feet grading 3.64% Zn, 0.62% Pb and 0.15 OPT Ag. The significance of this occurrence relative to the Papago resource area is unknown. 

PA-02 was drilled 250 feet east of PA-01 to test for the down plunge extension of that intercept, but did not encounter any mineralization due to offset by a late fault. 

RC-01 was drilled just north of the Red Cloud open pit to intersect the extension of the Red Cloud vein beneath the Red Cloud Fault.  Although the vein was known to be partly cut off by that fault, the hole intersected over 10 feet of the footwall of the vein, which has never been mined, including five feet grading 3.2% Pb, 7.47% Zn, 0.6 OPT Ag and Trace Au. The granodiorite in the footwall of the vein was extensively altered with stockwork veins for over 50 feet, containing anomalous levels of Pb, Zn, Ag and Au.  

 

The 2014 drill results will be incorporated into the existing historic drill database for use in planning additional drilling.  Geologic evaluation of the entire district continues as Magellan develops additional drill targets in and around the multiple satellite deposits in the Silver District land package.   


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2015 Sampling Program

 

In 2015 the Company carried out a program of rock chip surface sampling. The samples were collected across seven of fourteen known deposits. Results were successful in validating the occurrence of silver values up to 13.0 ounces per ton and fluorspar values up to 25.7% over significant widths. Silver District deposits are localized along three major vein systems having a collective strike length of eight miles. Previous shallow drilling that partially tested these vein systems identified mineralized material containing silver and fluorite, with additional barite and lead-zinc mineralization.

 

The sample results are consistent with historical drilling results. In addition, with respect to any future mining development, ICP 33-element analysis returned low values for environmentally undesirable elements such as mercury, arsenic and uranium.

 

Following are highlights of sample results:

 

Clip (15 ft rock chip across vein):  13.0 opt Ag; 5.2% Fluorspar (CaF2);  

6.9% Barite (BaSO4)

Geronimo (12 ft rock chip across vein):  10.5 opt Ag; 5.7% Fluorspar; 1.5% Pb 

MP (20 ft rock chip across vein):  5.3 opt Ag 

Red Cloud (30 ft rock chip across vein):  4.1 opt Ag; 25.7% Fluorspar; 2.1% Zn 

Pacific (20 ft rock chip across vein):  1.0 opt Ag; 20.9% Fluorspar; 2.2% Pb;  

3.8%Zn

 

For locations of the deposits from which the samples were collected, refer to Magellan’s management presentation available on the Company’s website, www.magellangoldcorp.com.

 

Geochemical analyses were performed by ALS Minerals in Reno, NV and Vancouver, B.C. Silver analysis was by four acid digestion, HCl leach and atomic absorption finish. Fluorine analysis was by Na2O2 fusion, citric acid leach and ion selective electrode. Barium analysis was by fusion XRF. Lead and zinc analyses were by four acid digestion with ICP-AES finish. All samples were analyzed as part of a 33 element package by four acid digestion and ICP-AES finish. Gold analysis was by fire assay with atomic absorption finish.

 

2016 - 2017 Exploration Program

 

During 2016 and 2017 we conducted exploration in the vicinity of the Red Cloud Mine, one of two mines in the district that produced significant quantities of silver-lead ores during the ten-year period 1883-1893. Mineralization in the Red Cloud area is controlled by veins localized along fault structures. The vein targets, which in most places are poorly exposed, occur along a prospective fault zone passing through the Red Cloud Mine.  The zone and its possible continuation extends 1,000 meters to the north-northwest of the mine, and to the south-southeast continues for over 800 meters towards the Papago Prospect, where drilling in 2014 returned significant results.

 

Our exploration program in 2016 and 2017 consisted of a ground magnetic survey and a geochemical orientation survey. The work had several objectives, including gaining a better understanding of the geology and in particular the locations of major fault structures, testing the usefulness of geochemical techniques for locating buried mineralization, and delineating drill targets.

 

Zonge International performed a GPS-based 2 kilometer x 1 kilometer ground magnetic survey during May 2016. Ground magnetic/GPS data were acquired on 20 lines oriented N70 degrees East and spaced approximately 100 meters apart, for a total distance of 18 line-kilometers of data acquisition.  Total-field


10



magnetic measurements and GPS positions were acquired at 1-second intervals, which corresponds to a down-line station spacing of about 1 meter.

 

Picture 10 


11



Red Cloud Magnetic Survey Interpretation, Showing Rock Domains, Fault Structures, Mines and Prospects and Exploration Target Zones

 

The magnetic results suggest there are  four main magnetic domains  in the survey area:  1) relatively low susceptibility metamorphic and granitic basement rocks that occupy the western edge and southeast corner of the survey; 2) higher susceptibility volcanic rocks that bound the Red Cloud  in the central eastern part of the survey; 3) low to very low susceptibility volcanic rocks in the northeast corner of the survey that are essentially “non-magnetic or transparent” and reflect the rocks beneath them (probably older volcanic rocks); 4) high to very high susceptibility rocks in the extreme northwest corner of the survey and possibly in the extreme northeast corner.

 

Structurally, the Red Cloud Fault and probable extensions is evident for about 800 or more meters both north-northwest and south-southeast of the Red Cloud Mine. To the south-southeast it apparently extends toward Papago and the Pacific Patent. It may be cut off or offset on the north end by a significant east-west fault that also separates the two volcanic units. To the south, the andesitic volcanic rocks (and possibly the southern end of the Red Cloud Fault) are cut off by a northeast trending late fault that is obscured by valley fill sediments. Some northwest and west-northwest textures and breaks within the volcanic units are also highlighted. Structural complexity is evident around the Papago drilling area. Late post-mineral faults that juxtapose rocks of high susceptibility with those of low susceptibility are defined clearly, even at 100-meter line spacing.

 

In summary, the magnetic survey has helped to define major lithologic domains. It also has been especially useful in showing the location of major faults, some of which served as conduits for mineralization and some of which are post-mineral. Several locations along the major Red Cloud fault where poorly exposed constitute prospective exploration targets.

 

In 2016 and 2017, we performed a geochemical orientation survey over the Red Cloud ore body in an attempt to detect known deep mineralization through overlying barren volcanic rocks. This technique could be useful in identifying additional ore bodies beneath post-mineral cover. In the Silver District, all the known ore bodies crop out at surface. Exploration for extensions of known ore bodies and potentially blind ore bodies must rely on indirect methods such as geochemistry or geophysics.

 

Twenty-three soil samples were collected at 15-meter intervals along two parallel lines approximately 100 meters apart in the hanging wall of the Red Cloud Vein. The samples were prepared for analysis by MEG, Inc. of Reno, Nevada. A split of all 23 samples were analyzed for mercury (Hg) by MEG using their proprietary GAS’m method.  A second split of all 23 samples was submitted to ALS in Reno for Ionic Leach analysis for a 60-element suite of metals including silver, lead, zinc, molybdenum, gold and mercury, which are the primary and main secondary metals found in Red Cloud ore. Both of these methods measure metal ions that are loosely attached to the surfaces of clay minerals in the soil, having been mobilized from a deep mineralized source, traveled upward through barren overlying rock and been re-deposited on the clay minerals.

 

The orientation survey produced encouraging results. Samples collected from directly above the known, dipping ore body contain levels of silver, lead, molybdenum, zinc, mercury and gold that are ten to one hundred times background. Mercury analyses from the GAS’m survey agreed with mercury analyses from the Ionic Leach method. Those samples collected closest to the outcropping vein had the highest values, diminishing with distance by a factor of 10 as the dipping vein passed below the water table at a vertical depth of almost 400 feet. The mobilization process for the metals is only effective above the water table in oxidizing conditions, so this fall-off in values was expected.


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The orientation survey demonstrates that primary metals from the Red Cloud ore body can be detected through tens to hundreds of feet of barren overlying material as long as the mineralized source is above the water table. Expanding the sample grid along strike to the north and south is warranted to search for extensions of the Red Cloud vein and to explore for other deposits. The ALS Ionic Leach process is the best analytical tool for an expanded survey, as it adequately detects the principal metals (including mercury) from the known ore bodies.

 

Based on the initial encouraging results obtained from the orientation survey, in 2017 we conducted an additional program of  soil sampling along strike to the north and south of the Red Cloud ore body. Samples were collected on a grid with lines oriented across strike of the Red Cloud vein.

 

SILVER DISTRICT PATENTED MINING CLAIMS

 

RED CLOUD Patented Mining Claim – MS 749; Parcel #301-34-003 La Paz Co. Assessor

(Subject to lease agreement)

JAMES G. BLAINE Patented Mining Claim – MS 1258-A   Parcel #301-31-001 La Paz Co. Assessor

BLACK ROCK Patented Mining Claim – MS 291 Parcel #301-34-002 La Paz Co. Assessor

PACIFIC Patented Mining Claim – MS 292 Parcel #301-34-002 La Paz Co. Assessor

SILVER GLANCE Patented Mining Claim – MS 246 Parcel #301-34-001 La Paz Co. Assessor

(Subject to lease agreement; title to be perfected)

MENDIVIL Patented Mining Claim – MS 279 Parcel #301-33-002 La Paz Co. Assessor

(Subject to lease agreement; title to be perfected)

 

ARIZONA STATE EXPLORATION PERMIT

 

ARIZONA STATE EXPLORATION PERMIT #08-118475 - GRANTED December 2, 2015; 334.85 ACRES+/-

 

SILVER DISTRICT UNPATENTED MINING CLAIMS

 

Plata No. 1(3rd am.)

AMC# 44189 (subject to lease agreement)

Plata No. 2(2nd am.)  

AMC# 44190 (subject to lease agreement)

POP #1 (2dAm.)

AMC# 43990

POP #2 (2d Am.)

AMC# 43991

POP #3 (2d Am)

AMC# 43992

POP #4 (2d Am)

AMC# 43993

POP #5 (2d Am)

AMC# 43994

POP #6 (2d Am)

AMC# 43995

POP #7 (2d Am)

AMC# 43996

POP #8 (2d Am)

AMC# 43997

POP #9 (2d Am)

AMC# 43998

POP #10 (2d Am)

AMC# 43999

POP #11 (2d Am)

AMC# 44000

POP #13 (2dAm)

AMC# 44002

POP #14 (2dAm)

AMC# 44003

POP #15 (2dAm)

AMC# 44004


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POP #16 (2dAm)

AMC# 44005

POP #17 (Am)

AMC# 44006

POP #19 (Am)

AMC# 44008

POP #21 (Am)

AMC# 44010

POP #22 (Am)

AMC# 44011

POP #24 (2d Am

AMC# 44013

POP #25 (2d Am

AMC# 44014

POP #26 (2d Am

AMC# 44015

POP #27 (2d Am

AMC# 44016

POP #28 (2d Am

AMC# 44017

POP #29 (2d Am

AMC# 44018

POP #30 (Am)

AMC# 44019

POP #31 (Am)

AMC# 44020

POP #32 (Am)

AMC# 44021

POP #37 (2d Am)

AMC# 44026

POP #38 (2d Am)

AMC# 44027

POP #43 (Am)

AMC# 44032

POP #50 – POP #51

AMC# 207723-207724

POP #53 – POP #57

AMC# 207725-207729

POP #62

AMC# 207734

RUF #1

AMC # 129269

RUF #2

AMC # 129270

RUF #5

AMC # 129273

RUF #9

AMC # 129277

RUF #10

AMC# 129278

RUF #12

AMC# 129280

RUF #13

AMC# 129281

RUF #14

AMC# 129282

RUF #15

AMC# 129283

RUF #17

AMC# 129285

RUF #18

AMC# 129286

RUF #22

AMC# 129290

RUF #23

AMC# 129291

RUF #24

AMC# 129292

MIL #1

AMC # 129261

MIL #2

AMC# 129262

MIL #3

AMC# 129263

MIL #4

AMC# 129264

MIL #5

AMC# 129265

MIL #6

AMC# 129266

G + W #2

AMC # 129255

G + W #3

AMC # 129256

G + W #4

AMC # 129257

PL-1 – PL-2

AMC # 366944-366945

Arch

AMC # 366937

RU 1 – RU 3

AMC # 366947-366949

CH-1 – CH-6

AMC # 366938-366943

POP 39

AMC # 366946

A-1

AMC # 369924

RIHO

AMC # 369925

MAX 13-26

AMC # 386562-386575


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Ruth #1 Amended

AMC # 42216

Ruth #3 Amended

AMC# 44218

Ruth #5 Amended

AMC# 44220

Ruth #7 Amended

AMC# 44222

Plata No. 3 Amended

AMC# 44191

Plata No. 5 Amended

AMC# 44193

Plata No. 6 Amended

AMC# 44194

Plata No.10 Amended

AMC# 44195

Plata No.11 Amended

AMC# 44196

Plata No.12 Amended

AMC# 44197

Plata No.14

AMC# 44199

Plata No.15 Amended

AMC# 44200

Chuck No.5

AMC# 44208

Chuck No.7

AMC# 44210

Chuck No.9

AMC# 44212

 

STAKED BY MAGELLAN

SD 30   AMC424398 

SD 37   AMC424404 

 

Certain of the Silver District Claims are subject to third party lease and/or net smelter royalties of varying percentages.


15



SDA MILL, NAYARIT, MEXICO

Picture 11 

On March 3, 2017, Magellan acquired a 150-day option to purchase the SDA Mill from Rose Petroleum plc and its wholly-owned subsidiary Minerales Vane S,A. de C.V. (“Rose”) for consideration of $1.0 million in cash and $500,000 in restricted common stock of Magellan. The Company paid an intial $50,000 option fee on March 3, 2017, and on June 1, 2017 paid an additionl $100,000 option fee that also applied to the purchase price upon closing.

 

On July 31, 2017, Magellan and Rose agreed to extend the option period. Under terms of the extension, Magellan had the obligation by August 15, 2017, to deliver executed irrevocable bridge loan commitments representing not less than $900,000 in cash required to fund the transaction. Magellan delivered the loan commitments as required. Magellan also agreed to reimburse Rose for certain mill employee and maintenance costs for the months of August and September 2017. Magellan reimbursed Rose approximately $50,000 for the two months, as required under terms of the extension.

 

On September 9, 2017, Magellan and Rose executed a definitive and binding stock purchase agreement (“SPA”) pursuant to which Magellan would acquire 100% interest in Rose's wholly-owned Mexican subsidiary that owned the SDA Mill. The SPA provided that the purchase price for the SDA Mill would be US $1.5 million, consisting of $1.0 million in cash (of which $100,000 had been paid in the form of an option extension payment on June 1, 2017) and $500,000 in shares of Magellan’s restricted common stock. The SPA provided that closing of the transaction would be subject to the satisfaction of certain conditions, including Rose completing the split-off of its Mexican subsidiary that owned the SDA Mill and Rose obtaining the approval of its shareholders.  


16



On November 30, 2017, as disclosed above, the transaction closed for the agreed upon price of approximately US$1.5 million, consisting of $1,000,000 in cash, including the $100,000 option extenstion payment, and $500,000 in restricted common stock of Magellan. Based upon the volume weighted average price per share of Magellan Gold stock for the 30 calendar days preceeding the closing date, 14,200,834 shares of stock were issued.in connection with the transaction.

 

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 previously 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 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 7 to 12.

 

The SDA Mill is a fully operational flotation plant that also includes a precious metals leach circuit and associated assets, licenses and agreements. The mill has the capacity to process ore at a rate of up to 200 tons per day. The mill has a ten-year operating history. Historically its operation has been based on sales of flotation concentrates to smelters, and payment for precious metals content.  Until the month of November 2017 when the Company conducted limited toll milling operations, milling activity was on hold pending the completion of the purchase transaction.

 

Magellan acquired no ore reserves in connection with the SDA Mill purchase. Resumption of production will depend on the Company’s success in identifying and acquiring new sources of ore, for which there is no assurance.

 

Discontinued Mineral Interests

 

Niñobamba Project, Peru

 

On October 24, 2016, Magellan entered into an option agreement with Rio Silver Inc., a Canadian company (“Rio Silver”), granting Magellan the right to earn an undivided 50% interest in the Niñobamba Silver/Gold Project in central Peru. To earn its 50% interest, Magellan was obligated to spend $2.0 million in exploration over three years. The Niñobamba project is comprised of five concessions that total 36.5 square kilometers (9,027 acres).

 

Effective December 31, 2017, we terminated our option to earn a 50% interest in the Niñobamba silver-gold exploration project in Peru. We also sold our interest in Magellan Gold Peru S.A.C. for $1.00.

 

Sacramento Mountains Project, California

 

The Sacramento Mountains Project is located approximately 10 miles west-northwest of Needles, California in the northwest corner of the Sacramento Mountains. In October 2012 Magellan staked fifty unpatented lode mining claims on Federal (BLM) land.  In August 2015 we renewed fourteen core claims with the BLM and let the remaining claims lapse.   

In February 2016, the White House announced President Obama had designated three national monuments in southern California covering 1.8 million acres of federal lands.  Our Sacramento claims were within the borders of one of these new monuments.  We determined the designation would adversely affect our ability to explore for or develop mineral deposits on our claims and therefore in September 2016 allowed the claims to lapse, thereby terminating our Sacramento Mountains Project.


17



Unpatented Mining Claims:  The Mining Law of 1872

 

Except for the Arizona State Mineral Lease and patented claims held within the Silver District Claims, our mineral rights consist of leases covering "unpatented" mining claims created and maintained in accordance with the U.S. General Mining Law of 1872, or the “General Mining Law.” Unpatented mining claims are unique U.S. property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. The validity of an unpatented mining claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law that supplement the General Mining Law. Also, unpatented mining claims and related rights, including rights to use the surface, are subject to possible challenges by third parties or contests by the federal government. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining claims. We have not filed a patent application for any of our unpatented mining claims that are located on federal public lands in the United States and, under possible future legislation to change the General Mining Law, patents may be difficult to obtain.

 

Our exploration, development and mining rights relate to patented and unpatented mining claims covering federal and State lands in Arizona and California.  Most of our patented and unpatented claims are located in the Silver District in Arizona.

 

Location of mining claims under the General Mining Law, is a self-initiation system under which a person physically stakes an unpatented mining claim on public land that is open to location, posts a location notice and monuments the boundaries of the claim in compliance with federal laws and regulations and with state location laws, and files notice of that location in the county records and with the Bureau of Land Management (“BLM”). Mining claims can be located on land as to which the surface was patented into private ownership under the Stockraising Homestead Act of 1916, 43 U.S.C. §299, but the mining claimant cannot injure, damage or destroy the surface owner's permanent improvements and must pay for damage to crops caused by prospecting. Discovery of a valuable mineral deposit, as defined under federal law, is essential to the validity of an unpatented mining claim and is required on each mining claim individually. The location is made as a lode claim for mineral deposits found as veins or rock in place, or as a placer claim for other deposits. While the maximum size and shape of lode claims and placer claims are established by statute, there are no limits on the number of claims one person may locate or own. The General Mining Law also contains provision for acquiring five-acre claims of non-mineral land for mill site purposes. A mining operation typically is comprised of many mining claims.

 

The holder of a valid unpatented mining claim has possessory title to the land covered thereby, which gives the claimant exclusive possession of the surface for mining purposes and the right to mine and remove minerals from the claim. Legal title to land encompassed by an unpatented mining claim remains in the United States, and the government can contest the validity of a mining claim. The General Mining Law requires the performance of annual assessment work for each claim, and subsequent to enactment of the Federal Land Policy and Management Act of 1976, 43 U.S.C. §1201 et seq., mining claims are invalidated if evidence of assessment work is not timely filed with BLM. However, in 1993 Congress enacted a provision requiring payment of $140 per year (now $155 per year) claim maintenance fee in lieu of performing assessment work, subject to an exception for small miners having less than 10 claims. No royalty is paid to the United States with respect to minerals mined and sold from a mining claim.

 

The General Mining Law provides a procedure for a qualified claimant to obtain a mineral patent   (i.e., fee simple title to the mining claim) under certain conditions. It has become much more difficult in recent years to obtain a patent. Beginning in 1994, Congress imposed a funding moratorium on the processing of mineral patent applications which had not reached a designated stage in the patent process at the time the moratorium went into effect. Additionally, Congress has considered several bills in recent years to repeal


18



the General Mining Law or to amend it to provide for the payment of royalties to the United States and to eliminate or substantially limit the patent provisions of the law.

 

Mining claims are conveyed by deed, or leased by the claimant to the party seeking to develop the property. Such a deed or lease (or memorandum of it) needs to be recorded in the real property records of the county where the property is located, and evidence of such transfer needs to be filed with BLM. It is not unusual for the grantor or lessor to reserve a royalty, which as to precious metals often is expressed as a percentage of net smelter returns.

 

Patented Mining Claims

 

Patented mining claims, such as the ones located in our Silver District Project, are mining claims on federal lands that are held in fee simple by the owner.  No maintenance fees or royalties are payable to the BLM; however lease payments and royalties with third parties are applicable on some of these claims.


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LOCATION, HISTORY AND GEOLOGY OF OUR PROPERTIES

 

SILVER DISTRICT

 

The property covers the heart of the historic Silver District in La Paz County, approximately 80 kilometers (50 miles) north of Yuma in southwest Arizona.  This property is currently without known reserves and our proposed program is exploratory in nature.

 

Location, Access and Composition

 

The Silver District is located approximately 50 miles by road north of Yuma, Arizona on the southeast flank of the Trigo Mountains. Access to the property via a 4WD vehicle from Yuma is seasonally good, with 34 miles of paved or well-maintained gravel road and another 14 miles of seasonally maintained unimproved roads to the Red Cloud Mine, in the southwestern corner of the district.  

The Silver District Project consists of 87 unpatented lode mining claims, 6 patented lode claims, an Arizona State Exploration Permit of 334.85 acres and 23 unpatented mill site claims, totaling over 2,000 acres in La Paz County, Arizona.   

Certain of the underlying claims are subject to third party lease and or purchase obligations and net smelter royalties of varying percentages.

 

History

 

The Silver District was discovered in 1862 and supported small but significant silver-lead production, largely from underground operations at the Red Cloud and Clip (Blaine patented claim) mines, during the ten year period from 1883 to 1893.  Recorded production is estimated at 1.56 million ounces silver and 2.33 million pounds lead.  There have been occasional small scale development activities since that time and in recent years the area has been a site for collection of high value, specimen wulfenite crystals.

 

Modern exploration, principally shallow drilling, metallurgical test work and a number of scoping studies to evaluate development of the silver and fluorspar deposits, was carried out intermittently from 1973 through 1992, initially by Gulf + Western Industries (no relation to our recently-formed subsidiary) through its New Jersey Zinc subsidiary, and followed by Orbex Resources and its successor companies, Silver Glance Resources and Silverspar Minerals.  A total of 465 holes for an aggregate length of 62,866 feet were drilled during this period.  The project has been largely inactive since the early 1990’s.

 

Columbus Silver (US) Corporation acquired the project in 2004 and focused its efforts on re-consolidation of the property position, organization and compilation of technical records and limited field mapping and sampling.

 

Power and Water

 

There are no modern mine developments or equipment on the property. The Red Cloud Mine patented mining claim has a covered shop and full time watchman with living facilities. It also has a water well and a small diesel generator.   There is no commercial water or power available at the site and these would have to be developed with any mining development.


20



Geology

 

The Silver District deposits consist of variable silver and lead-zinc mineralization in massive quartz-calcite-fluorspar-barite veins and breccia zones that occur within three major north-northwest trending vein systems having a collective strike length of about eight miles.  The veins cut Tertiary volcanic and volcaniclastic rock formations, which overly an older, possibly Pre-Cambrian crystalline to metamorphic basement complex.  Potential ore-grade silver (lead-zinc), fluorspar and barite deposits occur as pod-like bodies within all three vein systems.  Various historic resource estimates, all pre-dating NI 43-101 reporting standards, have been carried out by past operators in the District.

 

Exploration Plans

 

Subject to available funding, the following outlines our exploration plans for the Silver District.

 

Past explorers identified a number of outcropping ore bodies (some of which saw production in the late 19th and early 20th centuries) and with shallow drilling defined new and larger deposits to open-pit depths.  These known occurrences are the exposed portions of three long, through-going district wide fault trends.  Potential for the discovery of additional mineralization is excellent at depth below known ore bodies and along the fault trends between known ore bodies. The best method for making new discoveries is by drilling at depth below known ore bodies. Geology, geophysics and geochemistry could prove useful in defining blind targets in non-outcropping areas.  We chose the known mineralization at the historic Red Cloud and Papago mines as our initial exploration targets in the exploration drilling carried out in 2014 and for our exploration program in 2016.

 

Geological mapping, with rock sampling and assaying, will help guide drilling and geophysical surveying over the next twelve months. Geophysical geochemical test surveys to detect sulfide mineralization below known resources at Red Cloud and Papago, if successful, will be used to delineate drill targets under other historic resources and along the unexplored sections of the major mineralized structures.  

 

Subject to securing the necessary funding, we have budgeted $500,000 for exploration work over the next 12 to 24 months, comprising $100,000 for geology, geochemistry and computer modeling, $50,000 for geophysical orientation surveys, and $350,000 for diamond drilling and assaying of approximately 6,000 feet of core.

 

We anticipate the exploration program will be supervised by Douglas R Bowden, a consulting geologist based in Sparks, Nevada. Mr. Bowden has over 35 years of experience in mining exploration in the United States, Canada and Mexico and is a licensed geologist in the State of Utah.

 

SDA MILL

 

Location and Access

 

The SDA Mill (“SDA”) is located in the town of San Dieguito de Arriba, within the municipality of Acaponeta, in the State of Nayarit, Mexico. It is approximately 15 km east of Acaponeta and easily assessible by paved road. The town, with a population of approximately 300 inhabitants, lies at an elevation of 38 meters asl and is within the ejido of the same name. Acaponeta is about 150 km southeast from Mazatlan, a 1.5 hours drive via a major paved highway. Mazatlan is served by direct flights from several cities in the US and Canada.

 

The SDA plant and tailings area includes approximately 9 hectares (21.6 acres) of land leased from the local ejido and an individual. The largest lease of 6 hectares (14.4 acres), on which the plant is located, was


21



renewed in 2016 and includes the supply of plant make-up water. The facility is fully permitted and the Operating License is valid until 2026.

 

Ore transport, operating supplies and concentrate shipments are by truck. The majority of employees live in the adjacent town of San Dieguito de Arriba and either walk or bicycle to work.

 

History

 

The SDA plant was built and began operating in 2007 by Minerales Vane S.A. de C.V. (“Vane”), and operated more or less continuously until 2017. The plant was originally designed to process ore from Vane’s El Diablito mine. Vane developed and exploited this mine as well as other mines through joint ventures until mining ceased in October 2015 due to lack of ore.

 

The mill continued to operate until April 2017, processing ore from various operators in the region on a toll basis. The toll ores were tested prior to processing to estimate recoveries and concentrate grades. Typical reported recoveries were in the range 85-92% for gold and 72-77% for silver. The stated objective of SDA was to produce a bulk gold-silver concentrate of the highest grade possible without detrimental impurities.

 

The SDA plant generally has been operated at the rate of 100 mtpd over the past ten years.

 

An agitated leach system and precious metals recovery plant (Merrill – Crowe) was installed and operated briefly processing concentrates. The leach system is not currently being operated.

 

Water and Power

 

Water is pumped from the Rio Acaponeta, 2.4 km distant to the west using a company owned portable pump and 4-inch piping. The fresh water make-up requirement is estimated at 4-5 m3 per hour. This is equivalent to approximately 1 tonne of fresh water per tonne of ore processed. The plant has two storage tanks totaling approximately 150 m3 of storage.

 

Power is supplied by an overland power line from the grid by Comision Federal de Electricidad (“CFE”). Rates are set by the CFE. Plant power is 440V with two transformers, one for the plant and a smaller unit for the laboratory.

 

Workforce

 

The SDA Mill is operated with a total of 36 employees, which incudes 3 in administration (I GM and 2 Engineers), 4 in the laboratory and and 29 operators. The technical support for metallurgy is provided through an external consultant. Overall the workforce is well trained to maintain current operating status, and open to process improvement given external support. Turnover is nil with the advantage of the local workforce, and community relations are in good standing.


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Process Plant

 

The main sections of the SDA process plant include:

 

Crushing – two stage crushing in closed circuit – capacity 25 mtph 

Grinding – ball mill in closed circuit with cyclone classifier – capacity 150 mtpd 

Flotation – including conditioner tank, roughers and cleaners – capacity + 150 mtpd 

Concentrate vats, drying and load out area 

Tailings facility – contains 250,000 mt – additional capacity 150,000 mt 

Analytical laboratory 

Office, warehouse and small maintenance shop 

Leaching – Merrill Crowe installation – not operating – capacity 300 mtpd concentrate leaching 

 

The plant historically has operated at 100 mtpd but has the capacity to operate at 150 mtpd or greater without additional capital expenditure.

 

Exploration Plans

 

Magellan acquired no ore reserves in connection with the SDA Mill purchase. Resumption of production will depend on the Company’s success in obtaining new sources of ore, for which there is no assurance.

 

The Company’s strategy is to acquire new sources of ore, to resume mining and processing operations, and to build production and increase cash flow. A key objective will be to secure high-grade feed sources. The mill lies within the rich Sierra Madre Occidental mineralized belt, which historically has yielded millions of ounces of precious metals and offers multiple high-grade gold and silver epithermal vein opportunities.

 

Subject to securing the necessary funding, we have budgeted $350,000 for exploration work over the next 12 months, comprising $100,000 for geologic mapping and geochemical sampling, and $250,000 for diamond drilling and assaying of approximately 2,000 meters of core.

 

If exploration and/or acquisition is successful in generating projects with potential for production, then additional funding would be required for mine development. The Company’s objective would be to achieve production as a matter of priority.

 

The exploration program will be supervised by Pierce Carson, the Company’s president, and by well qualified geologists based in Mexico.


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NIÑOBAMBA SILVER-GOLD PROJECT

 

Location and Access

 

This property is without known reserves and our proposed program was exploratory in nature.

 

Picture 4 

 

The Niñobamba property is located 330 km southeast of Lima in the Department of Ayacucho, south-central Peru. Access is via air to Ayacucho, a city of approximately 200,000 inhabitants, and then a 1.5-hour drive on paved roads to the property. Alternatively,  the property can be reached via an eight-hour drive from Lima on paved national highways.


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Picture 1 

 

The land package includes a large, contiguous property comprising five concessions totaling 36.5 square kilometers (9,027 acres).

 

History

 

Early mining in the area is known since colonial times, as early as the 16th century. In more recent times, significant historical exploration work was conducted on the Niñobamba concessions by Rio Silver and several major companies. This historical work provides the project with an an extensive database comprising geological, geochemical, geophysical and drilling data. The Company initiated compilation of the extensive data, which identified numerous gold, silver and combined silver-gold targets.

 

Power and Water

 

There are no mine developments or equipment on the property. Power is available nearby but would have to be upgraded for commercial use. Water is available locally but would need to be developed in larger quantities to support any proposed mining operation.


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Geology

 

The principal magmatic focus of the Niñobamba concessions and the surrounding mineral district is the Nevado Portugueza volcanic center, a Pliocene central volcano-collapse caldera complex with associated silver mineralization..

 

The host rock sequences of epithermal silver-gold mineralization consist of different lithologies including volcanoclastic sedimentary sequences, and andesitic and dacitic lavas. Alteration and mineralization commonly appears to be related to northeast-trending, subvertical, long extending structures.

 

Exploration Plans

 

The geologic environment is prospective for high sulfidation, epithermal precious metal deposits, and for high grade vein deposits.  We planned to focus first on the areas trenched earlier by Rio Silver on the Dorita Primera Concession. Two subparallel zones of anomalous silver-gold and silver mineralization; the “North Zone” and the “South Zone,” exhibit good continuity, substantial widths at surface and strike extents of 400+ meters as shown by the results of 17 trenches completed in 2012. Mineralization demonstrates the potential for an outcropping, bulk-tonnage, and disseminated-silver-gold deposit.

 

As part of the Option Agreement, Magellan committed to conduct a 700-meter diamond drilling program in 2017 to further test the Niñobamba North and South Zones. The goal of the planned drilling program was to progressively outline a silver-gold resource in these target areas. However, insufficient progress was made by Rio Silver towards obtaining community agreements or drilling pernits, precluding the carrying out of the planned drilling program.

 

In light of several factors, including the slow progress and long-term nature of the exploration process at Niñobamba, and the Company’s limited financial resources and its high priority focus on early production at the SDA Mill, the Company and Rio Silver agreed to terminate the Company’s interest in the Option Agreement.

 

SACRAMENTO MOUNTAINS PROJECT

 

The Sacramento Mountains Project is located in the northwest corner of the Sacramento Mountains, approximately 10 miles west-northwest of Needles, San Bernardino County, California.. In 2012, Magellan originally staked fifty mining lode claims on federal land. In August 2015, the Company renewed only fourteen core claims with the BLM, allowing the remainder of the claims to lapse. The fourteen claims covered 280 acres on which the Company controlled 100% unencumbered  interest..

In 2016, the White House announced President Obama had designated three national monuments in southern California covering 1.8 million acres of federal lands.  Our Sacramento claims were within borders of one of these new monuments.  We determined this new designation would have an adverse effect on our ability to explore or develop minerals on our Sacramento Mountains Project. In September 2016, we let our fourteen claims lapse, thereby terminating the Sacramento Mountains Project.


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OUR EXPLORATION PROCESS

 

Our exploration program is designed to acquire, explore and evaluate exploration properties in an economically efficient manner. We have not at this time identified or delineated any mineral reserves on any of our properties. 

 

Our current focus is primarily on the exploration of our Silver District (Arizona) and exploration opportunities nearby our SDA mill in Nayarit, Mexico. We plan to develop a formal sample collection and analysis process in due course; this process will include appropriate quality assurance and quality control procedures.

 

Subject to our ability to raise the necessary funds, we may acquire additional exploration properties near our existing properties or elsewhere and implement exploration programs that may cover these future properties.

 

We expect our exploration work on a given property to proceed generally in three phases. Decisions about proceeding to each successive phase will take into consideration the completion of the previous phases and our analysis of the results of those phases.

 

The first phase is intended to determine whether a prospect warrants further exploration and involves:

 

researching the available geologic literature; 

interviewing geologists, mining engineers and others familiar with the prospect sites; 

conducting geologic mapping, geophysical testing and geochemical testing; 

examining any existing workings, such as trenches, prospect pits, shafts or tunnels; 

digging trenches that allow for an examination of surface vein structures as well as for efficient reclamation, re-contouring and re-seeding of disturbed areas; and, 

analyzing samples for minerals that are known to have occurred in the test area. 

 

Subject to obtaining the necessary permits in a timely manner, the first phase can typically be completed on an individual property in several months at a cost of less than $200,000.

 

The second phase is intended to identify any mineral deposits of potential economic importance and would involve:

 

examining underground characteristics of mineralization that were previously identified; 

conducting more detailed geologic mapping; 

conducting more advanced geochemical and geophysical surveys; 

conducting more extensive trenching; and 

conducting exploratory drilling. 

 

Subject to obtaining the necessary permits in a timely manner, the second phase can typically be completed on an individual property in nine to twelve months at a cost of less than $1 million. Our Silver District Project has reached the second phase.

 

The third phase is intended to precisely define depth, width, length, tonnage and value per ton of any deposit that has been identified and would involve:

 

drilling to develop the mining site; 

conducting metallurgical testing; and 


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obtaining other pertinent technical information required to define an ore reserve and complete a feasibility study. 

 

Depending upon the nature of the particular deposit, the third phase on any one property could take one to five years or more and cost well in excess of $1 million.  None of our properties has reached the third phase. 

 

We intend to explore and develop our properties ourselves, although our plans could change depending on the terms and availability of financing and the terms or merits of any joint venture proposals.

 

PLAN OF EXPLORATION

 

We have two material properties, namely the Silver District Project in southwest Arizona and the SDA Mill in Nayarit State, Mexico.. We currently intend to engage in exploration activities on the Silver District Project and, if commercially recoverable deposits are found, to conduct mineral development activities.  

 

We intend to assess and acquire mineral propertis in the region of the SDA Mill with the objective of sourcing ore for resumption of processing at the mill. To date, we have only begun preliminary exploration work.   


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GOLD AND SILVER PRICES

  

Our operating results are substantially dependent upon the world market prices of gold and silver. We have no control over gold or silver prices, which can fluctuate widely. The volatility of such prices is illustrated by the following graphs, which respectively set forth the prices of gold and silver per ounce (as reported by www.kitco.com) during the periods indicated:

 

Picture 9 

Picture 7 

 

These historical prices are not indicative of future gold or silver prices. 


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MARKETING

  

All of our mining operations, if successful, will produce precious metals in doré form or contained in a concentrate.

 

We plan to refine and market our precious metals doré and concentrates using a geographically diverse group of third party smelters and refiners. The loss of any one smelter or refiner may have a material adverse effect if alternate smelters and refiners are not available. We believe there is sufficient global capacity available to address the loss of any one smelter or refiner.

 

HEDGING ACTIVITES

 

Our strategy is to provide shareholders with leverage to changes in gold and silver prices by selling precious metals production at market prices. We may sell precious metals from our future mines, if any, both pursuant to forward contracts and at spot prices prevailing at the time of sale. We may also enter into derivative contracts to protect the selling price for certain anticipated gold and silver production and to manage risks associated with commodities and foreign currencies.

 

GOVERNMENT REGULATION

 

General

 

Our activities are and will be subject to extensive federal, state and local laws governing the protection of the environment, prospecting, mine development, production, taxes, labor standards, occupational health, mine safety, toxic substances and other matters. The costs associated with compliance with such regulatory requirements are substantial and possible future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development and continued operation of our properties, the extent of which cannot be predicted. In the context of environmental permitting, including the approval of reclamation plans, we must comply with known standards and regulations which may entail significant costs and delays. Although we are committed to environmental responsibility and believe we are in substantial compliance with applicable laws and regulations, amendments to current laws and regulations, more stringent implementation of these laws and regulations through judicial review or administrative action or the adoption of new laws could have a materially adverse effect upon our results of operations.

 

Federal Environmental Laws

 

Certain mining wastes from extraction and beneficiation of ores are currently exempt from the extensive set of Environmental Protection Agency (“EPA”) regulations governing hazardous waste, although such wastes may be subject to regulation under state law as a solid or hazardous waste. The EPA has worked on a program to regulate these mining wastes pursuant to its solid waste management authority under the Resource Conservation and Recovery Act (“RCRA”). Certain ore processing and other wastes are currently regulated as hazardous wastes by the EPA under RCRA. If our future mine wastes, if any, were treated as hazardous waste or such wastes resulted in operations being designated as a “Superfund” site under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) for cleanup, material expenditures would be required for the construction of additional waste disposal facilities or for other remediation expenditures. Under CERCLA, any present owner or operator of a Superfund site or an owner or operator at the time of its contamination generally may be held liable and may be forced to undertake remedial cleanup action or to pay for the government’s cleanup efforts. Such owner or operator may also be liable to governmental entities for the cost of damages to natural resources, which may be substantial. Additional regulations or requirements may also be imposed upon our future


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tailings and waste disposal, if any, in Nevada under the Federal Clean Water Act (“CWA”) and state law counterparts. We have reviewed and considered current federal legislation relating to climate change and we do not believe it to have a material effect on our operations. Additional regulation or requirements under any of these laws and regulations could have a materially adverse effect upon our results of operations.

 

EMPLOYEES AND CONSULTANTS

 

Effective June 1, 2016, we entered into an Employment Agreement with Dr. Pierce Carson and engaged his services as President and CEO of Magellan for an initial term of one year.  Under the terms of the Employment Agreement, Mr. Carson was entitled to a salary of $6,667 per month for the first three months, and $10,000 per month for the following nine months.  Effective June 1, 2017, the Employment Agreement was extended for an additional year at a salary $10,000 per month. If the Company is unable to pay the salary, the Company has the right to satisfy its obligation with shares of common stock.  Through the date of this Report, the Company has not paid any compensation under the Employment Agreement.

 

Effective September 18, 2017, Michael P. Martinez was engaged on a consulting basis to serve as the Company’s Chief Financial Officer and Secretary. John C. Power stepped down from these positions, but continued in his role as a director of the Company.

 

We rely heavily on the services of our consulting geologist and other technical consultants.   


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ITEM 1A – RISK FACTORS.

 

An investment in our securities is speculative and involves a high degree of risk.  Please carefully consider the following risk factors, as well as the possibility of the loss of your entire investment, before deciding to invest in our securities.

 

Risks Related to our Business

 

Due to our history of operating losses our auditors are uncertain that we will be able to continue as a going concern.

 

Our financial statements have been prepared assuming that we will continue as a going concern. Due to our continuing operating losses and negative cash flows from our operations, the reports of our auditors issued in connection with our consolidated financial statements for the fiscal years ended December 31, 2017 and 2016, contain explanatory paragraphs indicating that the foregoing matters raised substantial doubt about our ability to continue as a going concern. We cannot provide any assurance that we will be able to continue as a going concern.

 

We have no history of or experience in mineral production.

 

We have no history of or experience in producing gold or other metals. In addition, our management lacks technical training and experience with exploring for, starting and/or operating a mine. With no direct training or experience in these areas, our management may not be fully aware of many of the specific requirements related to working within this industry. Their decisions and choices may not take into account standard engineering or managerial approaches mineral exploration companies commonly use.  Our operations, earnings and ultimate financial success could suffer due to our management’s lack of experience in this industry.  As a result, we would be subject to all of the risks associated with establishing a new mining operation and business enterprise. We may never successfully establish mining operations, and any such operations may not achieve profitability.

 

Our principal shareholders and control persons are also principal shareholders and control persons of Athena and Silver Saddle, which could result in conflicts with the interests of minority stockholders.

 

Messrs. Gibbs and Power are control persons and principal shareholders of Magellan, Athena and Silver Saddle.  Magellan, Athena and Silver Saddle are engaged in mineral exploration activities, although in different geographical regions. While the geographical focus of the companies is different, numerous conflicts could arise in the future.  For example, Messrs. Gibbs and Power have provided the majority of working capital for all three companies to date, and in the likely event that these companies require additional capital in the future their resources may be inadequate to finance the activities of all. In addition, if new prospects become available, a conflict may exist with respect to which company to offer those opportunities. Messrs. Gibbs and Power have not developed a conflict of interest policy to mitigate the potential adverse effects of these conflicts and as a result these conflicts represent a significant risk to the shareholders of the Company. Conflicts for access to limited resources and opportunities cannot be eliminated completely, and investors should be aware of their potential.

 

We have no proven or probable reserves.

 

We are currently in the exploration stage and have no proven or probable reserves, as those terms are defined by the Securities and Exchange Commission (“SEC”) on any of our properties.   


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In order to demonstrate the existence of proven or probable reserves under SEC guidelines, it would be necessary for us to advance the exploration of our Properties by significant additional delineation drilling to demonstrate the existence of sufficient mineralized material with satisfactory continuity which would provide the basis for a feasibility study which would demonstrate with reasonable certainty that the mineralized material can be economically extracted and produced. We do not have sufficient data to support a feasibility study with regard to the Properties, and in order to perform the drill work to support such feasibility study, we must obtain the necessary permits and funds to continue our exploration efforts. It is possible that, even after we have obtained sufficient geologic data to support a feasibility study on the Properties, such study will conclude that none of the identified mineral deposits can be economically and legally extracted or produced. If we cannot adequately confirm or discover any mineral reserves of precious metals on the Properties, we may not be able to generate any revenues. Even if we discover mineral reserves on the Properties in the future that can be economically developed, the initial capital costs associated with development and production of any reserves found is such that we might not be profitable for a significant time after the initiation of any development or production. The commercial viability of a mineral deposit once discovered is dependent on a number of factors beyond our control, including particular attributes of the deposit such as size, grade and proximity to infrastructure, as well as metal prices. In addition, development of a project as significant as the ones we might be planning will likely require significant debt financing, the terms of which could contribute to a delay of profitability.

 

The exploration of mineral properties is highly speculative in nature, involves substantial expenditures and is frequently non-productive.

 

Mineral exploration is highly speculative in nature and is frequently non-productive. Substantial expenditures are required to:

 

•  establish ore reserves through drilling and metallurgical and other testing techniques;

•  determine metal content and metallurgical recovery processes to extract metal from the ore;  and,

•  design mining and processing facilities.

 

If we discover ore at the Properties, we expect that it would be several additional years from the initial phases of exploration until production is possible. During this time, the economic feasibility of production could change. As a result of these uncertainties, there can be no assurance that our exploration programs will result in proven and probable reserves in sufficient quantities to justify commercial operations.

 

Even if our exploration efforts at the Properties are successful, we may not be able to raise the funds necessary to develop the Properties.

 

If our exploration efforts at the Properties are successful, our current estimates indicate that we may be required to raise $50 million or more in external financing to develop and construct the mines. Sources of external financing could include bank borrowings and debt and equity offerings, but financing has become significantly more difficult to obtain in the current market environment. The failure to obtain financing would have a material adverse effect on our growth strategy and our results of operations and financial condition. We currently have no specific plan to obtain the necessary funding and there exist no agreements, commitments or arrangements to provide us with the financing that we may need. There can be no assurance that we will commence production at any of our Properties or generate sufficient revenues to meet our obligations as they become due or obtain necessary financing on acceptable terms, if at all, and we may not be able to secure the financing necessary to begin or sustain production at the Properties. Our failure to raise needed funding could also result in our inability to meet our future royalty and work commitments under our mineral leases, which could result in a forfeiture of our mineral interest altogether and a default under other financial commitments. In addition, should we incur significant losses in future periods, we


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may be unable to continue as a going concern, and we may not be able to realize our assets and settle our liabilities in the normal course of business at amounts reflected in our financial statements included or incorporated herein by reference.

 

We may not be able to obtain permits required for development of the Properties.

 

In the ordinary course of business, mining companies are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. We will be required to obtain numerous permits for our Properties. Obtaining the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and costly undertakings.  Our efforts to develop the Properties may also be opposed by environmental groups.   In addition, mining projects require the evaluation of environmental impacts for air, water, vegetation, wildlife, cultural, historical, geological, geotechnical, geochemical, soil and socioeconomic conditions. An Environmental Impact Statement would be required before we could commence mine development or mining activities. Baseline environmental conditions are the basis on which direct and indirect impacts of the Properties are evaluated and based on which potential mitigation measures would be proposed. If the Properties were found to significantly adversely impact the baseline conditions, we could incur significant additional costs to avoid or mitigate the adverse impact, and delays in the development of Properties could result.

 

Permits would also be required for, among other things, storm-water discharge; air quality; wetland disturbance; dam safety (for water storage and/or tailing storage); septic and sewage; and water rights appropriation. In addition, compliance must be demonstrated with the Endangered Species Act and the National Historical Preservation Act.

 

The mining industry is intensely competitive.

 

The mining industry is intensely competitive. We may be at a competitive disadvantage because we must compete with other individuals and companies, many of which have greater financial resources, operational experience and technical capabilities than we do. Increased competition could adversely affect our ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future. We may also encounter increasing competition from other mining companies in our efforts to locate acquisition targets, hire experienced mining professionals and acquire exploration resources.

 

Our future success is subject to risks inherent in the mining industry.

 

Our future mining operations, if any, would be subject to all of the hazards and risks normally incident to developing and operating mining properties. These risks include:

 

•  insufficient ore reserves;

•  fluctuations in metal prices and increase in production costs that may make mining of reserves uneconomic;

•  significant environmental and other regulatory restrictions;

•  labor disputes; geological problems;

•  failure of underground stopes and/or surface dams;

•  force majeure events; and

•  the risk of injury to persons, property or the environment.


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Our future profitability will be affected by changes in the prices of metals.

 

If we establish reserves, and complete development of a mine, our profitability and long-term viability will depend, in large part, on the market price of gold. The market prices for metals are volatile and are affected by numerous factors beyond our control, including:

 

• global or regional consumption patterns;

• supply of, and demand for, gold and other metals;

• speculative activities;

• expectations for inflation; and,

• political and economic conditions.

 

The aggregate effect of these factors on metals prices is impossible for us to predict. Decreases in metals prices could adversely affect our ability to finance the exploration and development of our properties, which would have a material adverse effect on our financial condition and results of operations and cash flows. There can be no assurance that metals prices will not decline.

 

The price of gold may decline in the future. If the price of gold and silver is depressed for a sustained period, we may be forced to suspend operations until the prices increase, and to record asset impairment write-downs. Any continued or increased net losses or asset impairments would adversely affect our financial condition and results of operations. 

 

 We are subject to significant governmental regulations.

 

Our operations and exploration and development activities are subject to extensive federal, state, and local laws and regulations governing various matters, including:

 

•  environmental protection;

•  management and use of toxic substances and explosives;

•  management of natural resources;

•  exploration and development of mines, production and post-closure reclamation;

•  taxation;

•  labor standards and occupational health and safety, including mine safety; and

•  historic and cultural preservation.

 

Failure to comply with applicable laws and regulations may result in civil or criminal fines or penalties or enforcement actions, including orders issued by regulatory or judicial authorities enjoining or curtailing operations or requiring corrective measures, installation of additional equipment or remedial actions, any of which could result in us incurring significant expenditures. We may also be required to compensate private parties suffering loss or damage by reason of a breach of such laws, regulations or permitting requirements. It is also possible that future laws and regulations, or a more stringent enforcement of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of any future operations and delays in the exploration of our properties.

 

Changes in mining or environmental laws could increase costs and impair our ability to develop our properties.

 

From time to time the U.S. Congress, or the Executive Branch by decree, may determine to revise U.S. mining and environmental laws. It remains unclear to what extent new legislation or regulations may affect existing mining claims or operations. The effect of any such revisions on our operations cannot be determined conclusively until such revision is enacted; however, such legislation could materially increase


35



costs on properties located on federal lands, such as ours, and such revision could also impair our ability to develop the Properties and to explore and develop other mineral projects.

 

Mineral exploration and development inherently involves significant and irreducible financial risks. We may suffer from the failure to find and develop profitable mineral deposits.

 

The exploration for and development of mineral deposits involves significant financial risks, which even a combination of careful evaluation, experience and knowledge may not eliminate. Unprofitable efforts may result from the failure to discover mineral deposits. Even if mineral deposits are found, such deposits may be insufficient in quantity and quality to return a profit from production, or it may take a number of years until production is possible, during which time the economic viability of the project may change. Few properties which are explored are ultimately developed into producing mines. Mining companies rely on consultants and others for exploration, development, construction and operating expertise.

 

Substantial expenditures are required to establish ore reserves, extract metals from ores and, in the case of new properties, to construct mining and processing facilities. The economic feasibility of any development project is based upon, among other things, estimates of the size and grade of ore reserves, proximity to infrastructures and other resources (such as water and power), metallurgical recoveries, production rates and capital and operating costs of such development projects, and metals prices. Development projects are also subject to the completion of favorable feasibility studies, issuance and maintenance of necessary permits and receipt of adequate financing.

 

Once a mineral deposit is developed, whether it will be commercially viable depends on a number of factors, including: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; government regulations including taxes, royalties and land tenure; land use, importing and exporting of minerals and environmental protection; and mineral prices. Factors that affect adequacy of infrastructure include: reliability of roads, bridges, power sources and water supply; unusual or infrequent weather phenomena; sabotage; and government or other interference in the maintenance or provision of such infrastructure. All of these factors are highly cyclical. The exact effect of these factors cannot be accurately predicted, but the combination may result in not receiving an adequate return on invested capital.

 

Significant investment risks and operational costs are associated with our exploration activities. These risks and costs may result in lower economic returns and may adversely affect our business.

 

Mineral exploration, particularly for gold, involves many risks and is frequently unproductive. If mineralization is discovered, it may take a number of years until production is possible, during which time the economic viability of the project may change.

 

Development projects may have no operating history upon which to base estimates of future operating costs and capital requirements. Development project items such as estimates of reserves, metal recoveries and cash operating costs are to a large extent based upon the interpretation of geologic data, obtained from a limited number of drill holes and other sampling techniques, and feasibility studies. Estimates of cash operating costs are then derived based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, actual cash operating costs and economic returns of any and all development projects may materially differ from the costs and returns estimated, and accordingly, our financial condition and results of operations may be negatively affected.


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Our failure to satisfy the financial commitments under the agreements controlling our rights to explore on our current prospects could result in our loss of those potential opportunities.

 

We hold all of our mineral interests under agreements and commitments that require ongoing financial obligations, including work commitments.  Our failure to satisfy those obligations could result in a loss of those interests.    In such an event, we would be required to recognize an impairment of the assets currently reported in our financial statements.

 

We are required to obtain government permits to begin new operations. The acquisition of such permits can be materially impacted by third party litigation seeking to prevent the issuance of such permits. The costs and delays associated with such approvals could affect our operations, reduce our revenues, and negatively affect our business as a whole.

 

Mining companies are required to seek governmental permits for the commencement of new operations. Obtaining the necessary governmental permits is a complex and time-consuming process involving numerous jurisdictions and often involving public hearings and costly undertakings. The duration and success of permitting efforts are contingent on many factors that are out of our control. The governmental approval process may increase costs and cause delays depending on the nature of the activity to be permitted, and could cause us to not proceed with the development of a mine. Accordingly, this approval process could harm our results of operations.

 

Any of our future acquisitions may result in significant risks, which may adversely affect our business.

 

An important element of our business strategy is the opportunistic acquisition of operating mines, properties and businesses or interests therein within our geographical area of interest. While it is our practice to engage independent mining consultants to assist in evaluating and making acquisitions, any mining properties or interests therein we may acquire may not be developed profitably or, if profitable when acquired, that profitability might not be sustained. In connection with any future acquisitions, we may incur indebtedness or issue equity securities, resulting in increased interest expense, or dilution of the percentage ownership of existing shareholders. We cannot predict the impact of future acquisitions on the price of our business or our common stock. Unprofitable acquisitions, or additional indebtedness or issuances of securities in connection with such acquisitions, may impact the price of our common stock and negatively affect our results of operations.

 

Our ability to find and acquire new mineral properties is uncertain. Accordingly, our prospects are uncertain for the future growth of our business.

 

Because mines have limited lives based on proven and probable ore reserves, we may seek to replace and expand our future ore reserves, if any. Identifying promising mining properties is difficult and speculative. Furthermore, we encounter strong competition from other mining companies in connection with the acquisition of properties producing or capable of producing gold.  Many of these companies have greater financial resources than we do. Consequently, we may be unable to replace and expand future ore reserves through the acquisition of new mining properties or interests therein on terms we consider acceptable. As a result, our future revenues from the sale of gold or other precious metals, if any, may decline, resulting in lower income and reduced growth.

 

Changes in the corporate and securities laws and regulations are likely to increase our costs.

 

The Sarbanes-Oxley Act of 2002 (“SOX”), which became law in July 2002, has required changes that affect our corporate governance, securities disclosure and compliance practices. In response to the requirements


37



of SOX, the SEC and major stock exchanges have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards are likely to increase our general and administrative costs, and we expect these to continue to increase in the future. In particular, we are required to include the management report on internal control as part of this and future annual reports pursuant to Section 404 of SOX. We have evaluated our internal control systems in order (i) to allow management to report on our internal controls, as required by these laws, rules and regulations, (ii) to provide reasonable assurance that our public disclosure will be accurate and complete, and (iii) to comply with the other provisions of Section 404 of SOX.  We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact these may have on our operations.  Furthermore, there is no precedent available by which to measure compliance adequacy.  If we are not able to implement the requirements relating to internal controls and all other provisions of Section 404 in a timely fashion or achieve adequate compliance with these requirements or other requirements of SOX, we might become subject to sanctions or investigation by regulatory authorities such as the SEC or FINRA. Any such action may materially adversely affect our reputation, financial condition and the value of our securities, including our common stock. We expect that SOX and these other laws, rules and regulations will increase legal and financial compliance costs and will make our corporate governance activities more difficult, time-consuming and costly. We also expect that these new requirements will make it more difficult and expensive for us to obtain director and officer liability insurance.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, this would harm our business and the trading price of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide financial reports or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.


38



Nevada law and our by-laws protect our directors from certain types of lawsuits.

 

Nevada law provides that our directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as directors.  Our by-laws require us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law.  The exculpation provisions may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances.  The indemnification provisions may require us to use our assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.  

 

The Company is subject to extensive government regulations and permit requirements.

Operations, development and exploration on the Company’s properties are affected to varying degrees by political stability and government regulations relating to such matters as environmental protection, health, safety and labour, mining law reform, restrictions on production, price controls, tax increases, maintenance of claims, tenure, and expropriation of property. Failure to comply with applicable laws and regulations may result in fines or administrative penalties or enforcement actions, including orders issued by regulatory or judicial authorities enjoining or curtailing operations or requiring corrective measures, installation of additional equipment or remedial actions, any of which could result in the Company incurring significant expenditures.

The activities of the Company require licenses and permits from various governmental authorities. The Company currently has been granted the requisite licenses and permits to enable it to carry on its existing business and operations. There can be no assurance that the Company will be able to obtain all the necessary licenses and permits which may be required to carry out exploration, development and mining operations for its projects in the future. The Company might find itself in situations where the state of compliance with regulation and permits can be subject to interpretation and challenge from authorities that could carry risk of fines or temporary stoppage.

Opposition of the Company’s exploration, development and operational activities may adversely affect the Company’s reputation, its ability to receive mining rights or permits and its current or future activities.

Maintaining a positive relationship with the communities in which the Company operates  is critical to continuing successful exploration and development. Community support for operations is a key component of a successful exploration or development project. Various international and national laws, codes, resolutions, conventions, guidelines and other materials relating to corporate social responsibility (including rights with respect to health and safety and the environment) may also require government consultation with communities on a variety of issues affecting local stakeholders, including the approval of mining rights or permits.

The Company may come under pressure in the jurisdictions in which it explores or develops to demonstrate that other stakeholders benefit and will continue to benefit from its commercial activities. Local stakeholders and other groups may oppose the Company’s current and future exploration, development and operational activities through legal or administrative proceedings, protests, roadblocks or other forms of public expression against the Company’s activities. Opposition by such groups may have a negative impact on the Company’s reputation and its ability to receive necessary mining rights or permits. Opposition may also require the Company to modify its exploration, development or operational plans or enter into agreements with local stakeholders or governments with respect to its projects, in some cases causing considerable project delays. Any of these outcomes could have a material adverse effect on the Company’s business, financial condition, results of operations and Common Share price.


39



 

The title to the Company’s properties could be challenged or impugned.

Although the Company has or will receive title opinions for any properties in which it has a material interest, there is no guarantee that title to such properties will not be challenged or impugned. The Company has not conducted surveys of the claims in which it holds direct or indirect interests and, therefore the precise area and location of the properties may be in doubt. The Company’s properties may be subject to prior unregistered agreements or transfers or native land claims and title may be affected by unidentified or unknown defects. Title insurance is generally not available for mineral properties and the Company’s ability to ensure that it has obtained secure claims to individual mineral properties or mining concessions may be constrained. A successful challenge to the Company’s title to a property or to the precise area and location of a property could cause delays or stoppages to the Company’s exploration, development or operating activities without reimbursement to the Company. Any such delays or stoppages could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Risks Associated with Foreign Operations

The Company relies on local counsel and advisors and the experience of its management and board of directors in foreign jurisdictions.

The legal and regulatory requirements in Mexico with respect to mineral exploration and mining activities, as well as local business customs and practices are different from those in the United States. The officers and directors of the Company must rely, to a great extent, on the Company’s local legal counsel and local consultants retained by the Company in order to keep abreast of material legal, regulatory and governmental developments as they pertain to and affect the Company’s business operations, and to assist the Company with its governmental relations. The Company must rely, to some extent, on those members of management and the Company’s board of directors who have previous experience working and conducting business in these countries in order to enhance its understanding of and appreciation for the local business customs and practices. The Company also relies on the advice of local experts and professionals in connection with current and new regulations that develop in respect of banking, financing, labour, litigation and tax matters in these countries. There can be no guarantee that reliance on such local counsel and advisors and the Company’s management and board of directors will result in compliance at all times with such legal and regulatory requirements and business customs and practices. Any such violations could result in a material adverse effect on the Company’s business, financial condition and results of operations.

 

Our operating properties located in Mexico are subject to changes in political or economic conditions and regulations in that country. 

 

The risks with respect to Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy, mineral title irregularities and high rates of inflation. In addition, changes in mining or investment policies or shifts in political attitude in Mexico may adversely affect our business. We may be affected in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, opposition from non-governmental organizations, water use and mine safety. The effect of these factors cannot be accurately predicted and may adversely impact our operations.

 


40



Our ability to develop Mexican properties to provide ore to our SDA Mill  is subject to the rights of the Ejido (agrarian cooperatives) who use or own the surface for agricultural purposes

 

Our ability to mine minerals is subject to maintaining satisfactory arrangements and relationships with the Ejido for access and surface disturbances. Ejidos are groups of local inhabitants who were granted rights to conduct agricultural activities on the property. We must negotiate and maintain a satisfactory arrangement with these residents in order to disturb or discontinue their rights to farm.

 

Since a significant amount of our expenses in Mexico are paid in Mexican pesos, we are subject to changes in currency values that may adversely affect our results of operations. 

 

Our operations in the future could be affected by changes in the value of the Mexican peso against the United States dollar. The appreciation of non-U.S. dollar currencies such as the peso against the U.S. dollar increases expenses and the cost of purchasing capital assets in U.S. dollar terms in Mexico, which can adversely impact our operating results and cash flows. Conversely, depreciation of non-U.S. dollar currencies usually decreases operating costs and capital asset purchases in U.S. dollar terms. The value of cash and cash equivalents, and other monetary assets and liabilities denominated in foreign currencies also fluctuate with changes in currency exchange rates.

 

Our activities are subject to significant environmental regulations, which could raise the cost of doing business

 

Our operations in Mexico are subject to environmental regulation by SEMARNAT. Regulations governing advancement of new projects or significant changes to existing projects require an environmental impact statement, known in Mexico as a MIA. We may also be required to submit proof of local community support for a project to obtain final approval. If an environmental impact statement is adverse or if we cannot obtain community support, our ability to explore and develop our properties could be adversely affected. Significant environmental legislation exists in Mexico, including fines and penalties for spills, release of emissions into the air, and other environmental damage, which fines or penalties could adversely affect our financial condition or results of operations.

 

In addition, significant state and federal environmental protection laws in the U.S. may hinder our ability to explore at our Silver District prospect  and may also delay or prohibit us from developing properties where economic mineralization is found. Federal laws that govern mining claim location and maintenance and mining operations on federal lands are generally administered by the BLM.   Additional federallaws, governing mine safety and health, also apply. State laws also require various permits and approvals before exploration, development or production operations can begin. Among other things, a reclamation plan must typically be prepared and approved, with bonding in the amount of projected reclamation costs. The bond is used to ensure that proper reclamation takes place, and the bond will not be released until that time. Local jurisdictions may also impose permitting requirements (such as conditional use permits or zoning approvals). 

 

The Company may be responsible for corruption and anti-bribery law violations.

The Company’s business is subject to the Foreign Corrupt Practices Act (the “ FCPA ”) and the Corrupt Foreign Public Officials Act (the “ CFPOA ”), which generally prohibit companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The FCPA also requires companies to maintain accurate books and records and internal controls, including at foreign-controlled subsidiaries. There is a risk of potential FCPA violations. In addition, the Company is subject to the anti-bribery laws of Mexico and of any other countries in which it conducts business in the future. The Company’s employees or other agents may, without its


41



knowledge and despite its efforts, engage in prohibited conduct under the Company’s policies and procedures and the FCPA, the CFPOA or other anti-bribery laws for which the Company may be held responsible. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

 

The Company may be adversely affected by operating expense exchange rate fluctuations.

The Company’s activities and operations in Mexico make it subject to foreign currency fluctuations. Although the Company uses U.S. dollars as the currency for the presentation of its financial statements, the Company’s operating expenses are incurred in Mexican pesos in proportions that will typically range between 40% and 60% of total expenses, depending on the country. The fluctuation of these currencies in relation to the U.S. dollar will consequently have an impact upon the profitability of the Company’s mineral properties and therefore its ability to continue to finance its exploration, development and operations. Such fluctuations may also affect the value of the Company’s assets and shareholders’ equity. Future exploration, development and operational plans may need to be altered or abandoned if actual exchange rates for these currencies are less than or more than the rates estimated in any such future plans. To date, the Company has not entered into any agreements or purchased any instruments to hedge possible currency risks. The Company cannot be sure that any hedging techniques it may implement in the future will be successful or that its business, financial condition, and results of operations will not be materially adversely affected by exchange rate fluctuations.

 

Risks Related to Our Stock

 

Future issuances of our common stock could dilute current shareholders and adversely affect the market if it develops.

 

We have the authority to issue up to one billion shares of common stock and 25 million shares of preferred stock and to issue options and warrants to purchase shares of our common stock, without shareholder approval. Future share issuances are likely due to our need to raise additional working capital in the future.  Those future issuances will likely result in dilution to our shareholders.  In addition, we could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval, which would not only result in further dilution to investors in this offering but could also depress the market value of our common stock, if a public trading market develops.

 

We may issue preferred stock that would have rights that are preferential to the rights of our common stock that could discourage potentially beneficial transactions to our common shareholders.

 

An issuance of shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock.  Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.  The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.


42



There is currently an illiquid market for our common shares, and shareholders may be unable to sell their shares for an indefinite period of time.

 

There is presently an illiquid market for our common shares.  There is no assurance that a liquid market for our common shares will ever develop in the United States or elsewhere, or that if such a market does develop that it will continue.  

 

Over-the-counter stocks are subject to risks of high volatility and price fluctuation.

 

We have not applied to have our shares listed on any stock exchange or on the NASDAQ Capital Market, and we do not plan to do so in the foreseeable future.    The OTC market for securities has experienced extreme price and volume fluctuations during certain periods.  These broad market fluctuations and other factors, such as commodity prices and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock and make it more difficult for investors to sell their shares.

 

Trading in our securities is on an electronic bulletin board established for securities that do not meet NASDAQ listing requirements.  As a result, investors will find it substantially more difficult to dispose of our securities.  Investors may also find it difficult to obtain accurate information and quotations as to the price of, our common stock.  

 

Our stock price may be volatile and as a result, shareholders could lose all or part of their investment. The value of our shares could decline due to the impact of any of the following factors upon the market price of our common stock:

 

failure to meet operating budget; 

decline in demand for our common stock; 

operating results failing to meet the expectations of securities analysts or investors in any quarter; 

downward revisions in securities analysts' estimates or changes in general market conditions; 

investor perception of the mining industry or our prospects; and  

general economic trends. 

 

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile.  These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock.

 

Outstanding shares that are eligible for future sale could adversely impact a public trading market for our common stock.

 

All of the shares of common stock that were distributed under the Athena spin-off dividend are free-trading shares.  In addition, in the future, we may offer and sell shares without registration under the Securities Act. All of such shares will be "restricted securities" as defined by Rule 144 ("Rule 144") under the Securities Act and cannot be resold without registration except in reliance on Rule 144 or another applicable exemption from registration.  Under Rule 144, our non-affiliates can sell restricted shares held for at least six months, subject only to the restriction that we made available public information as required by Rule 144.  Our affiliates can sell restricted securities every ninety-days , subject to compliance with manner of sale, Form 144 filing and current public information requirements.  


43



No prediction can be made as to the effect, if any, that future sales of restricted shares of common stock, or the availability of such common stock for sale, will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of such common stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of the common stock.

 

Owners of our common stock are subject to the “penny stock” rules.  

 

Since our shares are not listed on a national stock exchange or quoted on the Nasdaq Market within the United States, trading in our shares on the OTC market is subject, to the extent the market price for our shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules".  The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the investor and receive the investor’s written agreement to the transaction.  To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for our shares and may severely and adversely affect the ability of broker-dealers to sell our shares, if a publicly traded market develops.

 

We do not expect to pay cash dividends in the foreseeable future.  Any return on investment may be limited to the value of our stock.

 

We have never paid any cash dividends on any shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion of our business.  Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time.  If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

Nevada law and our by-laws protect our directors from certain types of lawsuits.

 

Nevada law provides that our directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as directors.  Our by-laws require us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law.  The exculpation provisions may have the effect of preventing stockholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances.  The indemnification provisions may require us to use our assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

 

The Auctus Note and EMA Note have penalties if we default

 

As disclosed elsewhere in this Report, there exist Events of Default under both the Auctus Note and EMA Note.  On May 8, 2018,  EMA exercised its right to convert $27,225 of the EMA Note into 5.0 million shares of common stock, a conversion price of $0.005455 per share.  Further conversions under the Auctus and EMA Notes could be at conversion prices equal to or less than the $0.005455, which would have a material dilutive impact on our other shareholders.


44



Risks Related to Our Secured Debt

 

Our principal assets have been pledged as collateral to secure outstanding secured debt; and if we are unable to repay the debt, the creditors have the right to execute against our assets.

 

Pursuant to the terms of the Credit Agreement with Mr. Gibbs, at December 31, 2017 we were indebted in the amount of $1,146,157,  principal and interest. The Credit matures on December 31, 2018. This obligations is secured by a pledge of 100% of the issued and outstanding equity securities of Gulf + Western Industries, Inc., which owns all of the Company’s interest in the Silver District property.  Should we default under the Gibbs Credit Agreement, Mr. Gibbs would likely foreclose on the stock pledge and take ownership of Gulf + Western.

 

Likewise, the Series 2017 Notes in the principal amount of $1,155,000 are secured by a pledge of 100% of the issued and outstanding common stock of Magellan Acquisition Corporation,  which owns 100% of Minerales Vane2, which owns the SDA Mill.  The Series 2017 Notes mature on December 31, 2018.  If we are unable to repay the Series 2017 Notes, the holders thereof could exercise their rights under the pledge and take ownership of the SDA Mill.

 

Our note in favor of Mr. Power in the principl amount of $125,000 is secured by a pledge of the Company's portfolio of Rio Silver Common Stock and Warrants. That note matured on December 31, 2017.


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ITEM 1B. – UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.        PROPERTIES

 

Mining Properties

 

Descriptions of our mining properties are contained in the Business discussion in this Report.

 

ITEM 3.        LEGAL PROCEEDINGS

 

None

 

ITEM 4.REMOVED AND RESERVED 


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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 

 

Effective May 2012, our common stock was approved for quotation on the OTC Bulletin Board under the ticker symbol “MAGE.” The Company’s shares are now quoted on the OTC.QB of the OTC Markets Group, Inc.  The following sets forth the high and low trading prices for the periods shown:

 

 

 

2017

2016

 

 

 

 

 

 

High

Low

High

Low

First quarter ended March 31

$ 0.08   

$ 0.08   

$ 0.08   

$ 0.04   

Second quarter ended June 30

$ 0.13   

$ 0.11   

$ 0.35   

$ 0.05   

Third quarter ended September 30

$ 0.06   

$ 0.06   

$ 0.28   

$ 0.09   

Fourth quarter ended December 31

$ 0.03   

$ 0.03   

$ 0.28   

$ 0.07   

 

The closing bid and ask prices of the Company's common stock as of December 29, 2017 were $0.0261 and $0.03 respectively, as reported on the OTC.QB.  The OTC.QB prices are bid and ask prices which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commissions to the broker-dealer.  The prices do not reflect prices in actual transactions. As of April 16, 2018 there were approximately 65 record owners of the Company's common stock.

 

The OTC.QB is a registered quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities.  An OTC equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange.  The OTCQB is not an issuer listing service, market or exchange.  Although the OTCQB does not have any listing requirements, per se, to be eligible for quotation on the OTCQB, issuers must remain current in their filings with the SEC or applicable regulatory authority.

 

Our Board of Directors may declare and pay dividends on outstanding shares of common stock out of funds legally available therefore in its sole discretion; however, to date, no dividends have been paid on common stock and we do not anticipate the payment of dividends in the foreseeable future.

 

Trading in our common stock is subject to rules adopted by the SEC regulating broker dealer practices in connection with transactions in "penny stocks."  Those disclosure rules applicable to penny stocks require a broker dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC.  That disclosure document advises an investor that investment in penny stocks can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares.  The disclosure contains further warnings for the investor to exercise caution in connection with an investment in penny stocks, to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security.  The broker dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.  Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.


47



Recent Sales of Unregistered Securities

 

The Company is in the process of completing a private placement in the aggregate amount of $231,500,  at $0.02 per unit, each unit consisting of one share of common stock and one warrant to purchase an additional share of common stock for $0.02 until June 30, 2018.   The units have been subscribed by several accredited investors including two related parties.  5,000,000 shares of the 11,575,000 shares have been issued as of the date of this Report. The remaining units will be issued once all the subscription documents are completed.

 

INCENTIVE COMPENSATION

 

2017 Equity Incentive Plan

 

We have not adopted any equity compensation or stock option plans, except as follows:

 

The Board of Directors of the Company concluded, in order to attract and hire key technical personnel and management as our Company grows, it will be necessary to offer option packages in order to compete effectively with other companies seeking the support of these highly qualified individuals. After careful consideration, the Board recommended the approval of the Company’s 2017 Equity Incentive Plan as being in the best interests of Stockholders.

 

Effective September 1, 2017, the 2017 Equity Incentive Plan was approved by written consent of Stockholders holding 75% of the Company’s outstanding common stock, and was adopted by the Board of Directors. The Company is authorized to grant rights to acquire up to a maximum of 10,000,000 shares of common stock under the Plan. The Plan is authorized to grant incentive stock options that qualify under Section 422 of the Internal Revenue Code of 1986, as amended.

 

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 (collectively, "Stock Awards"). Incentive stock options granted under the 2017 Plan are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 2017 Plan are intended not to qualify as incentive stock options under the Code.

 

Arrangements with CEO

 

When he was first engaged as President, CEO and Director of G+W in June 2015,  W. Pierce Carson  was granted shares of G+W representing 15% of the total issued and outstanding shares of G+W.

 

In July 2016, we completed a reverse triangular merger pursuant to which a newly formed merger subsidiary was merged into Gulf + Western, and the 15% equity interest in Gulf + Western owned by Mr. Carson was converted into 8,623,957 shares of Magellan common stock.  As a result of the merger, Gulf + Western became a wholly-owned subsidiary of Magellan.

 

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.

 

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


48



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. The initial term of the agreement covered the period from June 1, 2016 to May 31, 2017. On June 1, 2017, Dr. Carson and the Company agreed to extend the term of the agreement to May 31, 2018, with all terms of the original agreement remaining unchanged.

 

Dr. Carson has 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.

 

On October 26, 2017, Dr. Carson agreed to waive payment of accrued but unpaid salary obligations from June 1, 2016 through September 30, 2017 in the aggregate amount of $150,000. The waiver of accrued wages was recorded as a capital contribution to the Company. Dr. Carson was subsequently issued 4,000,000 shares of the Company’s restricted common stock.

 

At December 31, 2017 a total of $30,000 and $2,796 of salary and associated payroll tax obligations, respectively, is accrued in connection with the agreement and included in accrued liabilities on the accompanying consolidated balance sheets.

 

 

ITEM 6.SELECTED FINANCIAL DATA  

 

We are a smaller reporting company as defined by the Exchange Act and are not required to provide the information required under this item.

 

 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

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, 2017 and 2016.

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.


49



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 December 31, 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.  As of December 31, 2017, the total amount owed under the credit agreement was $1,146,457, which includes $932,500 of principal and $213,657 of accrued interest.

On June 1, 2015, we transferred 15% of our ownership interest in G+W to Dr. W. Pierce Carson (Dr. Carson), in exchange for one year of service as President, Chief Executive Officer and Director of G+W.  As a result of the transaction, Magellan’s ownership interest in G+W was reduced to 85%.  The transaction was valued at $50,000 representing compensation for the one-year period from 2015 through May 2016. 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, effective June 30, 2016.  As a result, Mr. John Power resigned his positions as President and Chief Executive Officer and retained the position of Chief Financial Officer until December 31, 2017 upon his replacement by Michael P. Martinez as CFO. Mr. Power and Dr. Carson currently serve as a Directors of Magellan.

In July 2016, the Company completed a share exchange with Dr. Carson in which Dr. Carson surrendered his 15% interest in G+W in exchange for 8,623,957 shares of Magellan Gold Corporation. As a result of this transaction, G+W became a wholly owned subsidiary of Magellan Gold Corporation.

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


50



option to earn an interest in the Niñobamba Silver/Gold Project. The Company retained its ownership of Rio Silver stock.

 

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 14,200,834 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 eleven.

 

Rose owned one 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”).    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 as soon as practicable following the Closing Date, rather than prior to the Closing Date.  At December 31, 2017, the Company had not obtained control of MVO.  Magellan subsequently acquired control of MVO in January 2018 and paid for it in April 2018.

 

Our primary focus with the acquisition of the SDA Mill in Mexico is to transform Magellan into a production company, to continue to advance our Arizona silver project towards resource definition and eventual development, and possibly to acquire additional mineral rights and conduct additional exploration, development and permitting activities.  Our mineral lease payments, permitting applications and exploration and development efforts will require additional capital. We rely upon the sale of our securities as well as advances and loans from executive management and significant shareholders to fund our operations as we have not generated any significant revenue.


51



Results of Operations for the Years Ended December 31, 2017 and 2016

 

 

 

 

 

Years Ended December 31,

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Exploration costs

 

61,233   

 

70,599   

 

General and administrative expenses

 

964,302   

 

353,666   

 

Depreciation and amortization

 

12,104   

 

-   

 

Accretion of asset retirement obligation

 

367   

 

-   

 

Impairment loss

 

 

345,697   

 

-   

 

    Total operating expenses

 

 

1,383,703   

 

424,265   

 

 

 

 

 

 

 

Operating loss

 

(1,383,703)  

 

(424,265)  

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(96,480)  

 

(62,303)  

 

Loss on change in derivative liability

 

(657,776)  

 

(73,604)  

Net loss

 

 

$ (2,137,959)  

 

$ (560,172)  

 

 

Operating expenses

During the year ended December 31, 2017, our total operating expenses were $1,383,703 as compared to $424,265 during the year ended December 31, 2016.

During the year ended December 31, 2017 we incurred $61,233 of exploration costs as compared to $70,599 in 2016.  Exploration costs for the year ended December 31, 2017 are comprised of $24,188 for our consulting geologist, geochemical, lease payments and maintenance expenses associated with our Silver District claims, and $29,545 and $7,500 in various mining related expenses associated with our mining efforts in Peru and Mexico, respectively. Exploration costs for the year ended December 31, 2016 are primarily comprised of $32,270 in payments made to secure certain mining concessions and other start-up costs associated with our mining efforts in Peru, $11,860 of  royalty and lease payments and legal title work associated with our Silver District claims, as well as $26,469 of geologic related expenses including a contracted ground magnetic survey, laboratory soil analysis and geologist consulting fees associated with our Silver District project.

General and administrative expenses for the year ended December 31, 2017 total $964,302 as compared to $353,666 for the year ended December 31, 2016. The $610,636 increase is primarily associated with increases in officer compensation, investor relations and professional legal and accounting fees, and other costs associated with our acquisition efforts of the SDA Mill in Mexico.  For the year ended December 31, 2017, administrative expenses  comprised of investor relations fees of $147,754, officer compensation of $384,935, accounting and auditing fees of $63,128, legal fees of $106,651, management fees to Mr. Power of $20,000, other administrative costs including travel, office and facility rents, and other expenses associated with our acquisition efforts of the SDA Mill totaling $241,335, and a $499 gain on foreign currency translations associated with our operations in Peru. The Company also recorded a goodwill impairment of $345,697 on its SDA mill for the year ended December 31, 2017.


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On November 1, 2016 the Company executed a Finder’s Agreement (“Agreement”), with a third party consultant to introduce the Company to potential investors beginning with its November 2016 private placement offering. The term of the Agreement was nine months, or until the Company informs the consultant it has located investors to purchase the securities. The consultant is to be compensated for the services by cash payments totaling $30,000, payable at or before the termination of the Agreement. During the year ended December 31, 2017 the Company paid the consultant a total of $12,800, which is included in investor relations expenses for the year ended December 31, 2017. As of December 31, 2017 the Company had paid approximately $23,800 to the consultant pursuant to the Agreement.

 

On June 1, 2016 we executed an employment agreement with Dr. Pierce Carson in which Dr. Carson assumed the positions of President and Chief Executive Officer of Magellan Gold Corporation. The term of the agreement covered the period from June 1, 2016 to May 31, 2017. On June 1, 2017, Dr. Carson and the Company agreed to extend the agreement to May 31, 2018 under the same terms and conditions. During the term of the agreement, Dr. Carson was paid a base salary in equal semi-monthly installments. 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. A combined total of $280,000 representing stock compensation, waived salary, base salary and applicable payroll taxes was expensed and is included in general and administrative expenses for the year ended December 31, 2017.  As of December 31, 2017, salary and payroll expense totaling $32,796 was unpaid and is included in accrued liabilities on the accompanying consolidated balance sheets.

General and administrative expenses for the year ended December 31, 2016 totaling $353,669 were comprised professional fees including accounting and audit fees of $46,725, legal fees totaling $29,472, management fees to Mr. Power totaling $30,000, executive compensation expense of $86,425, other professional fees including investor relations and website fees of $110,022, and other expenses totaling $51,025 mainly comprised of travel expenses, rent, licenses, BLM renewal fees, and other administrative related expenses.

Interest expense for the year ended December 31, 2017 and 2016 totaled $96,480 and $62,303, respectively, and is primarily attributable to our related party line of credit, which accrues interest at the rate of 6.0% per year, our related party notes payable which accrue interest at a weighted average interest rate of 9.46%, and convertible notes which accrue interest at a weighted average of 10% per year.

On October 1, 2014, we issued a convertible promissory note to a provider of legal services in the original principal amount of $51,532.  The note was issued to evidence the Company’s indebtedness for legal services previously rendered. Interest accrues quarterly on the outstanding principal and interest balance of the Note at 6% per annum. The principal plus accrued and unpaid interest was due upon five days’ written demand of the note holder.  The note is unsecured.

 

The note principal and accrued interest was convertible at any time into shares of common stock at a conversion price of $0.039, which represented the closing bid price of the common stock on the OTC Bulletin Board on the date of issuance.

 

In April 2016 the note holder elected to convert a total of $23,400, consisting of $18,512 of principal and $4,888 of accrued interest. The conversion resulted in the issuance of 600,000 shares of the Company’s common stock.  At December 31, 2016 the remaining note balance was $33,020.

 

On April 14, 2017 the Company entered into a series of transactions in which the conversion rate was changed, the note holder elected to convert part of the principal and accept cash payment for part of the remaining principal and accrued interest, the sale of the remaining balance of the note to a third party, a


53



further reduction of the conversion rate, and finally the election by the new note holder to convert part of the remaining principal to shares of the Company’s common stock.

 

Finally, on August 3, 2017 the new note holder converted all remaining principal and accrued interest into shares of the Company’s common stock. These transactions are discussed in detail in Note 8 – Convertible Note Payable and Derivative Liability in the accompanying consolidated financial statements.

 

The following table summarizes the changes in the derivative liability and the gains and losses recognized upon changes in valuations and the pay down of principal and accrued interest:

 

Balance December 31, 2016

$119,500  

Total losses (unrealized, realized) included in net loss

657,776  

Reclassifications of derivative liability to APIC

(777,276) 

 

 

Balance December 31, 2017

$              —    

 

We estimate the fair value of the derivative using the Black-Scholes option pricing model, which includes assumptions for expected dividends, expected share price volatility, risk-free interest rate, and expected life of the note.  Our expected volatility assumption is based on our historical weekly closing price of our stock over a period equivalent to the expected remaining life of the note.

 

The following table summarizes the assumptions used to value the derivative liability on April 14 for each change in the conversion rate:

 

Fair value assumptions – derivative:

 

April 14, 2017

 

Risk free interest rate

 

1.03 %

 

Expected term (years)

 

1.0   

 

Expected volatility

 

154 %

 

Expected dividends

 

0 %

 

 

The following table summarizes the assumptions used to value the derivative liability at August 3, 2017:

 

Fair value assumptions – derivative:

 

August 3, 2017

 

Risk free interest rate

 

1.22 %

 

Expected term (years)

 

1.0   

 

Expected volatility

 

137 %

 

Expected dividends

 

0 %

 

 

We estimated the fair value of the derivative at December 31, 2016 using the Black-Scholes option pricing model, which includes assumptions for expected dividends, expected share price volatility, risk-free interest rate, and expected life of the Note.  Our expected volatility assumption is based on our historical weekly closing price of our stock over a period equivalent to the expected remaining life of the Note.  The quarterly valuations performed during the year ended December 31, 2016 resulted in an increase to the liability of $73,604, which was recognized as a loss on change in derivative liability for the year ended December 31, 2016.


54



The following table summarizes the assumptions used to value the derivative Note discount at December 31, 2016:

Fair value assumptions – derivative:

 

December 31, 2016

 

Risk free interest rate

 

0.59 %

 

Expected term (years)

 

1.0   

 

Expected volatility

 

134 %

 

Expected dividends

 

0 %

 

 

The following table summarizes the assumptions used to value the derivative liability at December 31, 2016:

 

Fair value assumptions – derivative:

 

December 31, 2016

 

Risk free interest rate

 

0.85 %

 

Expected term (years)

 

1.0   

 

Expected volatility

 

158 %

 

Expected dividends

 

0 %

 

 

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, 2017, we had not yet generated any significant revenues or achieved profitable operations and we have accumulated losses of $4,059,888. We expect to incur further losses in the development of our business, all of which raise 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.

 

On December 31, 2015 we amended our credit agreement with Mr. John Gibbs, a related party, to increase the borrowing limit to $1,000,000, which provides the Company an additional $67,500 available under the credit line at December 31, 2017.  Effective December 31, 2016 we amended the agreement to extend the maturity date to December 31, 2018.  As part of a 2014 amendment, we pledged our ownership interest in our subsidiary, G+W, which owns all our ownership interests in the Silver District properties, as security for all amounts outstanding under the credit agreement.

 

During the year ended December 31, 2017 we sold 1,250,000 units consisting of common stock and warrants and realized net proceeds of $125,000. Additionally, we realized $50,000 in net proceeds from the exercise of 500,000 warrants. The proceeds were generally used to fund certain investing activities and for general working capital.

 

On November 1, 2017, the Company sold a 10% Convertible Promissory Note (“Auctus Note”) in a principal amount of $170,000 . After deducting the investor’s discount and legal fees, net proceeds to the Company were $153,650. The proceeds were generally used to fund certain investing activities and for general working capital.


55



On November 2, 2017, the Company sold a 10% Convertible Promissory Note (“EMA Note”) in the principal amount of $125,000 . After deducting the investor’s discount and legal fees, net proceeds to the Company were $113,500. The proceeds were generally used to fund certain investing activities and for general working capital.

 

On November 30, 2017 we entered into a series of secured promissory notes (“Series 2017 Notes”) with related parties in the aggregate amount of $1,155,000, including financing fees of $105,000 recorded as a 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. Net proceeds on the issuance after reducing for the transfers total $900,000. The proceeds were generally used to fund the purchase of the SDA Mill in Mexico. The Series 2017 Notes are secured by a pledge of all the outstanding shares of Magellan Acquisition Corporation, a wholly-owned subsidiary that owns the SDA Mill through Minerales Vane2.

 

During the year ended December 31, 2017 we issued a total of $275,000 of related party promissory notes including three short-term notes executed on May 31, 2017 with Mr. Gibbs, significant shareholder, and our two executive officers, 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 at which time the amounts due were transferred into the Series 2017 Notes.  On June 30, 2017 we entered into an additional secured loan for advances from Mr. Power and evidenced by a $125,000 promissory note. The promissory note bears interest at 6% per annum and matured on December 31, 2017.  The proceeds were generally used to fund general working capital and the purchase of the SDA Mill in Mexico. The note is secured by a pledge of the Company's portfolio of Rio Silver Common Stock and Warrants.

 

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.

 

Cash Flows

 

A summary of our cash provided by and used in operating, investing and financing activities is as follows:

 

 

Year Ended December 31,

 

2017

 

2016

Net cash used in operating activities

$(465,926) 

 

$(199,417) 

Net cash used in investing activities

(1,058,297) 

 

(71,753) 

Net cash provided by financing activities

1,525,250  

 

274,325  

Effect of foreign currency exchange

(1,091) 

 

 

 

 

 

 

Net change in cash and cash equivalents

(64) 

 

3,155  

Cash and cash equivalents beginning of period

485  

 

867  

Cash and cash equivalents end of period

$421  

 

$4,022  

At December 31, 2017, we had $421 in cash and a $2,827,255 working capital deficit. This compares to cash of $485 and a working capital deficit of $1,353,468 at December 31, 2016.

Net cash used in operating activities during the year ended December 31, 2017 was $465,926 and was mainly comprised of our $2,137,959 net loss during the period, adjusted by non-cash charges of accretion of asset retirement obligation $367, accretion of discounts on notes payable $12,766, amortization of certain


56



service contracts $52,884, depreciation $12,104, loss due to an increase in our derivative liability of $657,776, impairment loss of $345,697, and stock based compensation $303,642.  In addition, it reflects an decrease in receivables from Rose Petroleum for toll milling, and prepaid expenses and other assets totaling $25,793, as well as increases in accounts payable and accrued expenses totaling $229,259, and increases in accrued interest totaling $83,331 representing accrued interest on our related party line of credit and related party and other notes payable.

Net cash used in operating activities during the year ended December 31, 2016 was $277,954 and was mainly comprised of our $560,172 net loss during the period, adjusted by non-cash charges of $20,833 representing the amortization of deferred compensation, amortization of service contracts paid common stock of $28,629, the loss on an increase in our derivative liability of $73,604, and the conversion of our deposit with Rio Silver, Inc. used to fund expenses for certain mining concessions associated with our Peru mining efforts.  In addition, it reflects a cash adjusted increase in prepaid expenses and other assets totaling $10,173, as well as increases in accounts payable and accrued expenses totaling $89,176, and increases in accrued interest totaling $59,803 representing accrued interest on our related party line of credit and related party and other notes payable.

During the year ended December 31, 2017, our net cash used in investing activities was $1,058,297, comprised mainly of $1,000,000 for the purchase of the SDA mill. Additionally during the period, we completed the second of two private placement unit financings in Rio Silver Inc. (“Rio”), associated with our mining option agreement with Rio. The private placement resulted in the Company obtaining an additional 1,250,000 units at a price of Cdn$0.06, which included one share of Rio Silver common stock and one warrant to purchase one share of Rio Silver common stock for Cdn$0.06 which expire on July 19, 2018. The cost of the units in the second private placement totaled USD $58,297.

On June 30, 2016 the Company signed a non-binding Letter of Intent (“LOI”) with Rio Silver Inc., ("Rio") and on October 24, 2016 the Company executed a definitive Mining Option Agreement (“Option Agreement), pursuant to which Magellan is granted the option to earn an undivided 50% interest in the Niñobamba Silver-Gold Property (“Property”), located 330 kilometers southeast of Lima in the Department of Ayacucho, Peru. As part of the agreement, the Company paid a refundable $12,000 deposit. This payment was recorded as a deposit and represents an investment activity during the year ended December 31, 2016. We also invested $59,753 in Rio securities during 2016. All Rio securities are pledged to secure Mr. Power's note in the principal amount of $125,000.

During the year ended December 31, 2017, net cash provided by financing activities was $1,525,250 including proceeds from related party notes payable of $1,075,000 and proceeds from convertible notes of $267,150. Mr. Power, an executive and director, advanced the Company a total of $26,050 of which $26,050 was repaid. Also during the period, Dr. Carson, an executive and director, advanced the Company $8,100 with no repayments. In addition, during the year ended December 31, 2017 we completed a private placement of equity securities with two investors in which we sold a total of 1,250,000 units priced at $0.10 per unit, resulting in total proceeds of $125,000. Each unit was comprised of one share of common stock, and one warrant entitling the holder to purchase one share of common stock at a price of $0.10 per share in cash. The warrants originally expired on December 30, 2017 but were extended until December 30, 2018.

 

On July 31, 2017 a holder of 1,000,000 warrants exercisable at $0.10 exercised 500,000 warrants for $50,000 resulting in the issuance of 500,000 shares of the Company’s common stock. Upon exercise, the Company agreed to extend the expiration date on his remaining 500,000 warrants from December 30, 2017 to December 30, 2018.


57



During the year ended December 31, 2017 we issued a total of $275,000 of related party promissory notes. On May 31, 2017 we executed three short-term notes with Mr. Gibbs, significant shareholder, and our two executive officers, 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 at which time the amounts due were transferred into the Series 2017 Notes.  In addition, 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 has not been extended and is in technical default.  The note is collateralized by our investment in Rio Silver shares and warrants.

During the year ended December 31, 2016, net cash provided by financing activities was $349,325, and included $45,000 of additional borrowings under our credit agreement with Mr. Gibbs.  And, $35,000 of cash was received from Mr. Power represented by a 6% note payable due December 31 2016, which was repaid prior to its maturity.  In addition, we received $16,200 in advances from Mr. Power, all of which were also repaid during the period.

Also, in June 2016, we completed a private placement of equity securities in which we sold 4,875,000 units priced at $0.04 per unit. Each unit was comprised of one share of common stock, one Class A warrant and one Class B warrant. Each Class A warrant entitles the holder to purchase one share of common stock at a price of $0.07 per share in cash. Each Class B warrant entitles the holder to purchase one share of common stock at a price of $0.10 per share, exercisable in either cash or pursuant to a cashless exercise. The sale was concluded on June 30, 2016 and resulted in net proceeds of $194,325, which were net of $675 of direct offering costs.  Both the Class A and Class B warrants had an original expiration date of December 30, 2016, but were both extended to February 28, 2017.  The Class B warrants were further extended to June 30, 2017 and subsequently no Class A or B warrants were exercised and they all expired in 2017.

 

In November 2016, we sold in a private placement of equity securities a total of 1,100,000 units comprised of one share of common stock and one warrant to purchase one share of common stock at a price of $0.10 per share in cash, and expire December 30, 2017.  Net proceeds of this private placement were $110,000.

Magellan Gold Peru (“MGP”), a wholly owned subsidiary of Magellan Gold Corporation (“MGC”), maintains its operations in the Peruvian Sol, its functional currency. The accounts of MGP are translated to US dollars upon consolidation for reporting purposes. Amounts representing funds owed to MGC for operating advances resulted in a currency translation difference of $412, which was recorded as a component of the consolidated comprehensive loss at December 31, 2017. We sold our interest in MGP effective December 31, 2017 for $1.00.

Additionally, Minerales Vane 2, S.A. de C.v. (“MV2”), a wholly owned subsidiary of Magellan Acquisition Corporation (“MAC”), maintains its operations in the Mexican Peso, its functional currency. The accounts of MV2 are translated to US dollars upon consolidation for reporting purposes. A translation adjustment of $78,640 was recorded as a component of the consolidated comprehensive loss at December 31, 2017.

Off Balance Sheet Arrangements


58



We do not have and have never had any off-balance sheet arrangements.

Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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 Magellan Gold Peru S.A.C. 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”).

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the period presented.

 

We make our estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. We believe that our significant estimates, assumptions and judgments are reasonable, based upon information available at the time they were made. Actual results could differ from these estimates, making it possible that a change in these estimates could occur in the near term.

 

Foreign Currency Translations

 

The Company maintains its accounting records in US Dollars. Our operating subsidiary, Minerales Vane 2, S.A. de C.V is located in Mexico and maintains its accounting records in the Mexican Peso, which is its functional currency. Magellan Gold Peru S.A.C., another of our operating subsidiaries, is located in Peru and maintains its accounting records in the Peruvian Sol, which is its functional currency. Assets and liabilities of the subsidiaries are translated into the U.S. dollars at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rate and revenues and expenses are translated by using the average exchange rates. Translation adjustments are reported as a separate component of other comprehensive income in the consolidated statements of operations and comprehensive loss. Foreign currency denominated transactions are translated at exchange rates approximating those ruling at the transaction dates. Exchange gains and losses are recognized in income.  

 

Fair Value of Financial Instruments

 

We value our financial assets and liabilities using fair value measurements. Our financial instruments primarily consist of cash and cash equivalents, investments in available-for-sale securities, accounts payable, accrued liabilities, derivative liabilities, amounts due to related parties and notes payable to related parties.  Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount of cash and cash equivalents, accounts payable, accrued liabilities, notes payable to related parties and other amounts due to related parties approximates fair value because of the short-term nature of these financial instruments.


59



Concentrations of Credit Risk

 

Our financial instruments which potentially subject us to credit risk are our cash and cash equivalents. We maintain our cash and cash equivalents at reputable financial institutions and currently, we are not exposed to significant credit risk.

 

Cash and Cash Equivalents

 

We consider all amounts on deposit with financial institutions and highly liquid investments with an original maturity of three months or less to be cash equivalents at the date of purchase.

 

Mineral Rights

 

We have determined that our mineral rights meet the definition of mineral rights, as defined by accounting standards, and are tangible assets. As a result, our direct costs to acquire or lease mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with: leasing or acquiring patented and unpatented mining claims; leasing mining rights including lease signature bonuses, lease rental payments and advance minimum royalty payments; and options to purchase or lease mineral properties.

 

If we establish proven and probable reserves for a mineral property and establish that the mineral property can be economically developed, mineral rights will be amortized over the estimated useful life of the property following the commencement of commercial production or expensed if it is determined that the mineral property has no future economic value or if the property is sold or abandoned. For mineral rights in which proven and probable reserves have not yet been established, we assess the carrying values for impairment at the end of each reporting period and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

The net carrying value of our mineral rights represents the fair value at the time the mineral rights were acquired less accumulated depletion and any abandonment or impairment losses. Proven and probable reserves have not been established for mineral rights as of December 31, 2017.  At December 31, 2017 mineral rights totaling $323,200 were net of $117,857 of impairment and abandonment charges.  No impairment charges were recognized for either the of the years ended December 31, 2017 or 2016.

 

Impairment of Long-lived Assets and Mining Rights

 

We continually monitor events and changes in circumstances that could indicate that our carrying amounts of long-lived assets, including mineral rights, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through their undiscounted expected future cash flow. If the future undiscounted cash flow is less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

Property and Equipment

 

Property and equipment is recorded at cost, less accumulated depreciation. Property and equipment is amortized on a straight-line basis over its estimated life:

 

SDA Mill – 10 years 

Mill equipment – 10 years 

Tailings Dam – 10 years 


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Office and Warehouse – 10 years 

 

Goodwill

 

Goodwill was generated through the acquisition of the SDA Mill in fiscal 2017 as the total consideration paid exceeded the fair value of the net assets acquired.  

 

The Company tests its goodwill for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results. There was impairment of goodwill of $345,697 during the year ended December 31, 2017.

 

Asset Retirement Obligations

 

The Company accounts for asset retirement obligations in accordance with ASC 410-20, Asset Retirement Obligations. ASC 410-20 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. Asset retirement obligations consists of estimated final mill closure and associated ground reclamation costs to be incurred by the Company in the future once the economical life of its SDA Mill is reached. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate.  This liability is capitalized as part of the cost of the related asset and amortized over its useful life.  The liability accretes until the Company settles the obligation.

 

Comprehensive Income/Loss

 

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive income/loss and its components in the financial statements. As of December 31, 2017 and 2016,

the Company’s only components of comprehensive income were foreign currency translation adjustments and unrealized gain or loss on available-for-sale securities.

 

Notes Payable – Related Parties

 

Notes payable to related parties are classified as current liabilities as either the note holders have the ability to control the repayment dates of the notes or maturity dates are within one year of the reported balance sheet date.

 

Exploration Costs    

 

Mineral exploration costs are expensed as incurred. When it has been determined that it is economically feasible to extract minerals and the permitting process has been initiated, exploration costs incurred to further delineate and develop the property are considered pre-commercial production costs and will be capitalized and included as mine development costs in our balance sheets.


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Income Taxes

 

We recognize deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements and the effect of net operating losses based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. At December 31, 2017 and 2016, the Company had no uncertain tax positions.

 

Net Income/Loss per Common Share

 

We compute basic net loss per common share by dividing our net loss attributable to common shareholders by our weighted-average number of common shares outstanding during the period. Computation of diluted net loss per common share adds the weighted-average number of potential common shares outstanding to the weighted-average common shares outstanding, as calculated for basic net loss per share, except for instances in which there is a net loss. For the years ended December 31, 2017 and 2016, potential common shares associated with convertible notes payable and outstanding warrants to purchase common stock have been omitted from the net loss per common share computation as they are anti-dilutive due to the net loss for these periods.  

 

Stock-based Compensation 

 

The Company determines the fair value of stock option awards granted to employees in accordance with FASB ASC Topic 718 – 10 and to non-employees in accordance with FASB ASC Topic 505 – 50. Compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

 

New Accounting Standards

 

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our financial statements upon adoption.

 

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, "Leases: Topic 842 (ASU 2016-02)", to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first quarter of our fiscal year ending December 31, 2019 using a modified retrospective approach with the option to elect certain practical expedients. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.

 

Recently Adopted Accounting Standards

 

Recently issued Financial Accounting Standards Board Accounting Standards Codification guidance has either been implemented or is not significant to us.

 

Subsequent Events

 

On January 5, 2018, Magellan entered into a Termination Agreement, effective December 31, 2017, with Rio Silver Inc. to mutually terminate the Company’s option to earn an interest in Rio Silver’s Niñobamba


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exploration property in Peru. In connection with the termination of the agreement, Rio Silver agreed to apply to the TSX Venture Exchange for an 18-month extension of 2,750,000 warrants that Magellan holds in Rio Silver stock, which otherwise would expire in February and July 2018. The TSX Venture Exchange subsequently approved the extensions.

 

In February, March and April 2018, the Company raised $231,500 through the sale of common stock and warrants (“Units”) at a price of $0.02 per Unit, each Unit consisting of one share of common stock and one warrant exercisable until June 30, 2018 to purchase one additional share of common stock at an exercise price of $0.02 per share.  A price protection feature of the offering provides that if at December 31, 2018, the Company has issued common stock at a price less than $0.02 per share, then the number of Units issuable to each investor shall be increased so as to reduce the Unit price to the lower price. The Company is obligated to issue 11,575,000 shares of common stock and 11,575,000 warrants pursuant to the offering, of which 5,000,000 shares of common stock have been issued as of the date of this Report. In light of the conversion by EMA of $27,225 into five million shares of common stock on May 8, 2018, a conversion price of $0.005455 per share, pursuant to a full ratchet anti-dilution covenant given to investors in the offering, investors in the Units are entitled to a repricing of their Units to the lower price paid by EMA, or some even lower price if there are further sales of common stock below that price on or before December 31, 2018.

 

Subsequent to the purchase of the SDA Mill, the Company and Rose Petroleum executed an IVA Agreement which implemented the provisions of the Stock Purchase Agreement with respect to the payment of the IVA Tax assessed by the Mexican taxing authorities on the sale and purchase of the IVA Mill. Under the terms of the IVA Agreement, Rose Petroleum advanced the IVA tax, in Mexican Pesos, for the payment of the IVA tax, approximately $260,000. The Company has agreed that all future tax credits or refunds that it receives from the Mexican taxing authority will be paid over to Rose until such time as Rose has recouped the advance, in full. Mr. Carson executed a Guaranty of the Company's obligations under the IVA Agreement effective March 8, 2018.

 

In March 2018, the Company and Rose Petroleum, plc satisfied their respective obligations for payment of Mexican VAT on purchase of the SDA Mill, as required under terms of the Stock Purchase Agreement.

 

On April 12, 2018, the Company made a final payment to Rose Petroleum, plc in respective of the purchase of the SDA Mill, as required under terms of the Stock Purchase Agreement.

 

There exist technical Events of Default under the Auctus and EMA Notes.  Under the terms of those Notes, the holders have the rights to accelerate the due date of the Notes and impose penalties. On May 8, 2018,  EMA exercised its right to convert $27,225 of the EMA Note into 5.0 million shares of common stock, a conversion price of $0.005455 per share.  Further conversions under the Auctus and EMA Notes could be at conversion prices equal to or less than the $0.005455, which would have a material dilutive impact on our other shareholders. We have communicated with both Auctus and EMA concerning this situation, the outcome of which is uncertain.  

 

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

 

The financial statements required by this item are located in Item 15 beginning on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 

 

None.


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ITEM 9A. CONTROLS AND PROCEDURES The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every company that files reports with the SEC to include a management report on the effectiveness of disclosure controls and procedures in its periodic reports and an annual assessment of the effectiveness of its internal control over financial reporting in its annual report.  

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives.

 

Our management, with the participation of our CEO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based upon this evaluation, our CEO concluded that our disclosure controls and procedures were not effective because of the identification of  material weaknesses in our internal control over financial reporting which are described below.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with U.S. GAAP.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this evaluation, management concluded that that our internal control over financial reporting was not effective as of December 31, 2017. Our CEO concluded we have a material weakness due to lack of


64



segregation of duties and a limited corporate governance structure. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our system of internal control. Therefore while there are some compensating controls in place, it is difficult to ensure effective segregation of accounting and financial reporting duties. Management reported a material weakness resulting from the combination of the following significant deficiencies:

 

Lack of segregation of duties in certain accounting and financial reporting processes including the initiation, processing, recording and approval of disbursements; 

 

Lack of a formal review process that includes multiple levels of review.  

 

Lack of independent directors. 

 

While we strive to segregate duties as much as practicable, there is an insufficient volume of transactions at this point in time to justify additional full time staff. We believe that this is typical in many exploration stage companies. We may not be able to fully remediate the material weakness until we commence mining operations at which time we would expect to hire more staff. We will continue to monitor and assess the costs and benefits of additional staffing.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to the SEC rules that permit us to provide only management's report in this Annual Report.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures:

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including Mr. Carson, our President, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

 

Our management, including our CFO Mr. Martinez, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, Mr. Martinez concluded that the design and operation of our disclosure controls and procedures were not effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures.


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Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION 

 

None.


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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 

 

Directors and Executive Officers

 

Our current executive officers and directors are:

 

Name

Age

Position

John C. Power

55

Director

W. Pierce Carson

75

President, CEO and Director

Michael P. Martinez

48

CFO

 

W. Pierce Carson has served as our President & CEO since June 1, 2016.   Mr. Carson has over 40 years of experience in the mining industry and has managed the discovery, financing, development and operation of precious metals, base metals and industrial minerals properties in the United States, Australia, Africa and Papua New Guinea. He has been responsible for or closely involved with a number of mineral deposits that have been developed into mines. Mr. Carson held the positions of Senior Geologist, Overseas Mineral Evaluation, and Exploration Manager, Australia for Exxon Minerals Company; Manager of Precious Metals Exploration, North America for Kennecott Copper Corporation; President and Director of Mining & Exploration Operations in Australia, Papua New Guinea, USA, Canada and Mexico for Nord Pacific Ltd.; President and Vice-President of Exploration for Nord Resources Corporation; and Chief Executive Officer for Santa Fe Gold Corporation. Mr. Carson holds a PhD in Economic and Structural Geology and an MS in Ore Deposits from Stanford University, and a Bachelor’s Degree in Geology from Princeton University.

 

John C. Power  served as President, CFO, Secretary and director from our inception in September 2010 until June 1, 2016 when Dr. Carson became President & CEO.   Mr. Power continued to serve as CFO and Secretary until September 2017 when Mr. Martinez was engaged to fulfill those roles.  Mr. Power continues  to serve as a director.  

 

Mr. Power also serves as a director of Athena Silver Corporation since its inception in December 2003 and has served as Athena’s President from December 2005 to December 2007 and from January 2009 to the present and has served as Athena’s Secretary since January 2007.

 

Mr. Power is also a co-managing member since 2011 of Silver Saddle Resources, LLC a private company that owns mining claims in Nevada.

 

From March 2010 to present, Mr. Power has served as co-Managing Member of Ryan Air Exposition, LLC, a private California holding company that invests in antique airplanes. Mr. Power served as President and director of Alta California Broadcasting, Inc., which operated radio stations, from December 1993 to March 2007; and President and director of Four Rivers Broadcasting, Inc., also a radio broadcaster, from May 1997 to March 2005 and Vice President from March 2005 until December 2013. Mr. Power also has served as Co-Managing Member of Wyoming Resorts, LLC, which owns and operates an historic hotel in Thermopolis, Wyoming, since June 1997; and Mr. Power has served as President of Power Curve, Inc., a private investment company, since 1986.   Mr. Power has also been the managing member of Best of Sea Ranch, LLC since December 2004 which operated through a joint venture a vacation home rental business in The Sea Ranch California.   Mr. Power has been a general partner of Power Vacaville, LP a real estate investment firm since January 2008.  Mr. Power also has served as the vice-president and director of The Tide Community Broadcasting, Inc. since July 2012.


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From September 2008 to March 2012, Mr. Power served as an officer and director of Hungry Hunter, Inc., a private California-based restaurant enterprise.  From March 2008 until February 2010, Mr. Power served as a director of Reserve Energy Corporation, a small private oil and gas exploration and production company; and was Managing Member of Montana Resorts, LLC, which is a holding company for Yellowstone Gateway Resorts, LLC, from May 2002 until May 2008; and was Managing Member of Yellowstone Gateway Resorts, LLC, which owned and operated the Gallatin Gateway Inn, from May 2002 until May 2008. On November 16, 2004, Yellowstone Gateway Resorts, LLC filed a voluntary petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in response to an adverse arbitration award in favor of a former employee.  Yellowstone Gateway Resorts, LLC was successfully reorganized under Chapter 11.

 

Mr. Power attended, but did not receive a degree from, Occidental College and University of California at Davis.

 

Michael P. Martinez has served as the Company’ Chief Financial Officer, Secretry and Treasurer since September 18, 2017.  

 

He also is employed as the Chief Financial Officer for a company that operates in heavy construction including excavation and earthwork.  Mr. Martinez served as  Financial Reporting Manager at Ernest Healthcare which operates twenty-six hospitals in 11 states for inpatient rehabilitation and long-term acute care.  At Ernest Healthcare Mr. Martinez was responsible for monitoring and providing oversight of financial reporting requirements and covenant compliance, and consolidation of financial statements for the twenty-six hospitals. Mr. Martinez was also a principal of Martinez Financial Group, providing merchant banking services including capital formation and corporate finance advisory functions for commercial enterprises.

 

Mr. Martinez graduated Cum Laude from the University of Arizona with a B.S. in Business Administration.  He is a certified public accountant and a member of the New Mexico Society of CPA’s

 

Mr. Martinez was paid $11,000 for the initial 3-month period of consultancy services.  Thereafter, Mr. Martinez’s status may change from a consultant to an employee at the sole discretion of the Company.  He will receive no additional compensation for his service as Secretary and Treasurer of the Company.

 

Involvement in Certain Legal Proceedings

 

During the last 10 years, except as disclosed herein, none of our directors or officers has:

 

a.had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; 

 

b.been convicted in a criminal proceeding or subject to a pending criminal proceeding; 

 

c.been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or 

 

d.been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. 


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Family Relationships

 

No family relationships exist among our directors.  Additionally, there do not exist any arrangements or understandings between any director and any other person pursuant to which any director was elected as such.

 

Conflicts of Interest

Athena Silver Corporation is a company under common control. Mr. Power is a director and is also a director and CEO of Athena. Mr. Power and Mr. Gibbs are significant investors in both Magellan and Athena.

Silver Saddle Resources, LLC (“Silver Saddle”) is a private company under common control. Mr. Power and Mr. Gibbs are significant investors and managing members of Silver Saddle.

 

Magellan, Athena and Silver Saddle are exploration stage companies and each is 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. In addition, the common ownership could result in significant conflicts of interest both in terms of the allocation of working capital as well as under the doctrine of corporate opportunity, inasmuch as all three entities are engaged in mineral exploration in the United States.  Messr. Power and Gibbs have not adopted any policy or guidelines to mitigate the potential adverse effects of their conflicting interests between and among, Magellan, Athena and Silver Saddle.

 

While the foregoing may mitigate the conflicts of interest inherent in the interlocking interests, it will not eliminate all potential future conflicts.  Investors in Magellan should be cognizant that the interests of Magellan may, in the future, be in conflict with the other activities of Magellan’s control persons.

 

Director Independence

 

Our common stock is listed on the OTC Bulletin Board’s inter-dealer quotation systems, which does not have director independence requirements. Nevertheless, for purposes of determining director independence, we have applied the definition set forth in NASDAQ Rule 4200(a)(15).  Our two directors are both officers of the corporation and are not  considered independent.

 

Board Meetings

 

During the year ended December 31, 2017, our Board held one [telephonic] meeting on April 12, 2017 but has taken numerous actions by unanimous written consent.

 

Committees of the Board of Directors

 

We currently do not have standing audit, compensation or nominating committees of the Board of Directors.  We plan to form audit, compensation and nominating committees when it is necessary to do so to comply with federal securities laws or to meet listing requirements of a stock exchange or the Nasdaq Capital Market.


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Compliance with Section 16(a), Beneficial Ownership

 

Under the Securities Laws of the United States, our directors, executive (and certain other) officers, and any persons holding more than ten percent (10%) of our common stock during any part of our most recent fiscal year are required to report their ownership of common stock and any changes in that ownership to the SEC.  Specific due dates for these reports have been established and we are required to report in this Report any failure to file by these dates.  During the year ended December 31, 2017, all of these filing requirements were satisfied by our officers, directors, and ten- percent holders.  In making these statements, we have relied on the written representation of our directors and officers or copies of the reports that they have filed with the Commission.

 

Code of Ethics

 

We have adopted a Code of Ethics that apples to, among other persons, our company’s principal executive officer, as well as persons performing similar functions. As adopted, our Code of Ethics sets forth written guidelines to promote:

 

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 

full, fair, accurate, timely and understandable disclosure in all reports and documents that we file with, or submit to, the SEC and in other public communications made by us that are within the executive officer’s area of responsibility; 

compliance with applicable governmental laws, rules and regulations; 

the prompt internal reporting of violations of the Code; and 

accountability for adherence to the Code. 

 

Our Code of Ethics is on file with the SEC.  We will provide a copy of the Code of Ethics to any person without charge, upon request. Requests can be sent to: Magellan Gold Corporation, 2010A Harbison Drive # 312, Vacaville, CA  95687.

 

ITEM 11.        EXECUTIVE COMPENSATION

 

Director Compensation

 

Our directors receive no compensation for their services as director.

 

Executive Compensation

 

The following table sets forth all compensation paid to our Named Executive Officers for the years ended December 31, 2017 and 2016:


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SUMMARY COMPENSATION TABLE

Name

and

Principal

Position

 

 

 

Year

 

 

Salary

($)

 

 

 

Bonus ($)

 

 

Stock

Awards

($)

 

 

Options

Awards ($)

 

Non equity

Incen-tive Plan

Comp-ensa-tion  ($)

Nonqualified

Deferred

Compen-sation

Earnings

($)

 

 

All Other

Compen-sation  ($)

 

 

 

Total

($)

John C. Power, President

2017

2016

0

0

0

0

0

0

39,901

0

0

0

0

0

20,000(2)

30,000

 

59,901

30,000

W. Pierce Carson, President

2017

2016 (partial)

120,000(1)

60,000

0

160,000(1)

79,801

0

0

0

359,801

60,000

Michael P. Martinez

2017 (partial)

 

 

 

9,975

 

 

11,000

20,975

(1)When he was first engaged as President, CEO and Director of G+W in June 2015,  W. Pierce Carson was granted shares of G+W representing 15% of the total issued and outstanding shares of G+W. 

In July 2016, we completed a reverse triangular merger pursuant to which a newly formed merger subsidiary was merged into Gulf + Western, and the 15% equity interest in Gulf + Western owned by Mr. Carson was converted into 8,623,957 shares of Magellan common stock.  As a result of the merger, Gulf + Western became a wholly-owned subsidiary of Magellan.

Effective June 1, 2016, we entered into an Employment Agreement with Mr. Carson and engaged his services as President and CEO of Magellan for an initial term of one year.  Under the terms of the Employment Agreement, Mr. Carson is entitled to a salary of $6,667 per month for the first three months, and $10,000 per month for the following nine months.  If the Company is unable to pay the salary, the Company has the right to satisfy its obligation with shares of common stock.  

The initial term of the agreement covered the period from June 1, 2016 to May 31, 2017. On June 1, 2017, Dr. Carson and the Company agreed to extend the term of the agreement to May 31, 2018, with all terms of the original agreement remaining unchanged.

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.

On October 26, 2017, Dr. Carson agreed to waive payment of accrued but unpaid salary obligations from June 1, 2016 through September 30, 2017 in the aggregate amount of $150,000, including $60,000 earned in 2016. The waiver of accrued wages is recorded as a capital contribution to the Company. Dr. Carson was subsequently issued 4,000,000 shares of the Company’s restricted common stock.


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(2)We entered into a consulting agreement with Mr. Power at the rate of $30,000 per year for his part-time service as our CFO. Mr. Power resigned as our CFO on August 31, 2017 and no longer receives consulting fees. 


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Employment Agreements

 

Gulf + Western entered into an employment agreement with W. Pierce Carson to serve as President and CEO for a period of one year ending May 31, 2016.  Mr. Carson’s compensation was in the form of a transfer of a 15% equity interest in Gulf + Western.

 

Effective June 1, 2016, we entered into an Employment Agreement with Mr. Carson and engaged his services as President and CEO of Magellan for an initial term of one year.  Under the terms of the Employment Agreement, Mr. Carson was entitled to a salary of $6,667 per month for the first three months, and $10,000 per month for the following nine months.  Effective June 1, 2017, the Employment Agreement was extended for an additional year at a salary of $10,000 per month. If the Company is unable to pay the salary, the Company has the right to satisfy its obligation with shares of common stock.

 

The initial term of the agreement covered the period from June 1, 2016 to May 31, 2017. On June 1, 2017, Dr. Carson and the Company agreed to extend the term of the agreement to May 31, 2018, with all terms of the original agreement remaining unchanged.

 

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.

 

On October 26, 2017, Dr. Carson agreed to waive payment of accrued but unpaid salary obligations from June 1, 2016 through September 30, 2017 in the aggregate amount of $150,000. The waiver of accrued wages was recorded as a capital contribution to the Company. Dr. Carson was subsequently issued 4,000,000 shares of the Company’s restricted common stock.

 

At December 31, 2017 a total of $30,000 and $2,796 of salary and associated payroll tax obligations, respectively, is accrued in connection with the agreement and included in accrued liabilities on the accompanying consolidated balance sheets.

 

2017 Equity Incentive Plan

 

We have not adopted any equity compensation or stock option plans, except as follows:

 

The Board of Directors of the Company concluded, in order to attract and hire key technical personnel and management as our Company grows, it will be necessary to offer option packages in order to compete effectively with other companies seeking the support of these highly qualified individuals. After careful consideration, the Board recommended the approval of the Company’s 2017 Equity Incentive Plan as being in the best interests of Stockholders.

 

Effective September 1, 2017, the 2017 Equity Incentive Plan was approved by written consent of stockholders holding 75% of the Company’s outstanding common stock, and was adopted by the Board of Directors. The Company is authorized to grant rights to acquire up to a maximum of 10,000,000 shares of common stock under the Plan. The Plan is authorized to grant incentive stock options that qualify under Section 422 of the Internal Revenue Code of 1986, as amended.

 

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 (collectively, "Stock Awards"). Incentive stock options granted under the 2017 Plan are intended to qualify as "incentive stock options"


73



within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 2017 Plan are intended not to qualify as incentive stock options under the Code.

 

Indemnification of Directors and Officers

 

Nevada Revised Statutes provide that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

 

Nevada Revised Statutes also provide that to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense.

 

Our Articles of Incorporation authorize us to indemnify our directors and officers to the fullest extent permitted under Nevada Revised Statutes.  Our bylaws set forth the procedures that must be followed in order for directors and officers to receive indemnity payments from us.


74



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 

 

The following table sets forth information with respect to beneficial ownership of our common stock by:

 

 

*

each person who beneficially owns more than 5% of our common stock;

 

*

each of our executive officers named in the Management section;

 

*

each of our directors; and

 

*

all executive officers and directors as a group.  

 

The following table shows the number of shares owned and the percentage of outstanding common stock owned as of April 25, 2018.  Each person has sole voting and investment power with respect to the shares shown, except as noted.

 

 

 

Name and Address of

Beneficial Owner(1)

Amount

and Nature of

Beneficial

Ownership (2)

 

Ownership as a

Percentage of

Outstanding

Common Shares(3)

 

 

 

 

John Gibbs

807 Wood N Creek

Ardmore, OK  73041

36,688,988

(4)

34.75%

 

 

 

 

John C. Power

8,037,330

(5)

7.61%

 

 

 

 

W. Pierce Carson

14,623,957

(6)

13.85%

 

 

 

 

Dennis Bell

47 Lisle Street, Mt Claremont

Western Australia 6010

14,000,000

(8)

13.26%

 

 

 

 

Michael P. Martinez

250,000

(7)

0.24%

 

 

 

 

Rose Petroleum, plc

1st Floor

Newmarket House, Market St.

Newbury, Berkshire

England  RG14 5DP

14,200,834

 

13.45%

 

 

 

 

All officers and directors as a group

(three persons)

22,911,287

 

21.70%

 

(1)

Unless otherwise stated, address is 2010A Harbison Drive # 312, Vacaville, CA  95687.

 

 

(2)

Under SEC Rules, we include in the number of shares owned by each person, the number of shares issuable under outstanding options or warrants if those options or warrants are exercisable within 60 days of the date of this Annual Report.  In calculating percentage ownership, we calculate the ownership of each person who owns exercisable options by adding (i) the number of exercisable options for that person only to (ii) the number of total shares outstanding and dividing that result into (iii) the total number of shares and exercisable options owned by that person.


75



 

 

(3)

Shares and percentages beneficially owned are based upon 105,581,382 shares outstanding on May 14, 2018.

 

 

(4)

Includes 516,500 shares owned by TriPower Resources, Inc., of which John D. Gibbs is President and controlling shareholder.

 

(5)

Includes options exercisable to purchase 1,000,000 shares at $0.04 per share.

 

 

(6)

Includes options exercisable to purchase 2,000,000 shares at $0.04 per share.

 

 

(7)

Mr. Martinez’s ownership consists entirely of options exercisable to purchase 250,000 shares at $0.04

 

(8)

Includes warrants exercisable to purchase 1,500,000 shares at $0.10 per share expiring December 30, 2018 and warrants exercisable to purchase 5,000,000 shares at $0.02 per share expiring June 30, 2018.  

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 

AND DIRECTOR INDEPENDENCE

 

Except as disclosed herein, there have been no transactions or proposed transactions in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years in which any of our directors, executive officers or beneficial holders of more than 5% of the outstanding shares of our common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest.

 

Related Parties

 

Athena Silver Corporation 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 a private company under common control. Mr. Power and Mr. Gibbs are significant investors and managing members of Silver Saddle. Magellan and Silver Saddle are both exploration stage companies involved in the business of acquisition and exploration of mineral resources.

 

The existence of common ownership and common management could result in significantly different operating results or financial position from those that could have resulted had Magellan, Athena and Silver Saddle been autonomous.

 

Management Fees

 

The Company maintained a month-to-month management agreement with Mr. Power requiring a monthly payment, in advance, of $2,500 as consideration for his services to Magellan that ended in August 2017 when Mr. Power resigned as our CFO.

 

Management fees to Mr. Power totaling $20,000 and $30,000 for both the years ended December 31, 2017 and 2016 are included in general and administrative expenses in our statement of operations.  At December


76



31, 2017 and 2016, $27,500 and $10,000, respectively, of the fees had not been paid and are included in Accrued liabilities on the accompanying balance sheets.

 

Line of Credit – Related Parties

 

Effective December 31, 2012, we entered into an unsecured credit agreement with Mr. Gibbs with a maximum line balance of $250,000.  The promissory notes bear interest at 6% per annum and the principal plus all accrued interest was due December 31, 2014.  On December 31, 2015 we amended our credit agreement with Mr. Gibbs to increase the borrowing limit under the line of credit to $1,000,000.  And effective December 31, 2016 we amended the agreement to extend the maturity date to December 31, 2018.  The current outstanding line balance is evidenced by $932,500 in credit notes.

 

Accrued Interest - Related Parties

 

Accrued interest due to related parties is included in our consolidated balance sheets as follows:

 

 

 

December 31, 2017

 

December 31, 2016

Accrued interest payable - Mr. Gibbs

 

$221,103 

 

$157,707 

Accrued interest payable - Mr. Power

 

16,562 

 

3,932 

Accrued interest payable - Dr. Carson

 

986 

 

- 

Accrued interest payable – Mr. Neuman

 

934 

 

- 

 

 

 

 

 

 

 

$239,585 

 

$161,639 

 

During the year ended December 31, 2017, we paid a total of $382 to Mr. Power representing unpaid accrued interest on a note payable. During the year ended December 31, 2016, we paid a total of $2,500 to Mr. Power representing unpaid accrued interest on notes payable.  

 

Advances Payable – Related Party

 

We borrowed and repaid non-interest bearing advances from/to related parties as follows:

 

 

Year Ended December 31, 2017

 

 

Advances

 

Repayments

Mr. Power

 

$26,050 

 

$26,050 

Mr. Carson

 

8,100 

 

- 

Totals

 

$34,150 

 

$26,050 

 

 

 

 

 

 

 

Year Ended December 31, 2016

 

 

Advances

 

Repayments

Mr. Power

 

$16,200 

 

$16,200 

 

At December 31, 2017 a total of $8,100 of short-term advances from related parties were outstanding and are included in advances payable, related party on the accompanying consolidated balance sheet. No related party advances were outstanding at December 31, 2016.

 

The Company also utilizes a credit card owned by Mr. Power to pay travel and other obligations when the availability of cash is limited or the timing of the payments is considered critical. No amounts were outstanding on this credit card at either December 31, 2017 or December 31, 2016.


77



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 notes were subsequently rolled into the Series 2017 Notes described below. As of December 31, 2017 a total of $4,512 of interest is accrued on these notes.

 

On June 30, 2017 we entered into an additional secured loan for advances from Mr. Power and evidenced by a $125,000 promissory note. The promissory note bears interest at 6% per annum and matured on December 31, 2017.  The maturity date of the promissory note was not extended and therefore the promissory note is currently in default.  The outstanding balance on the note at December 31, 2017 is $125,000. As of December 31, 2017, accrued interest on the note is $3,781. The note is secured by a pledge of the Company's portfolio of Rio Silver Common Stock and Warrants.

 

On November 30, 2017 we entered into a series of secured promissory notes (“Series 2017 Notes”) with related parties in the aggregate amount of $1,155,000, including financing fees of $105,000 recorded as a 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. Net proceeds on the issuance after reducing for the transfers listed total $900,000. The notes are secured by a stock pledge agreement covering 100% of the outstaning common stock of Magellan Acquisition Corporation, bear interest at 10% and mature on December 31, 2018. As of December 31, 2017 the balance on the notes, net of unamortized discount of $96,780, is $1,058,220 with accrued interest of $9,810.

 

Deferred Compensation

 

On June 1, 2015, the Company appointed W. Pierce Carson to the positions of President, Chief Executive Officer and a Director of G+W.  In connection with his appointment, the Company assigned to Mr. Carson restricted shares of G+W common stock representing 15% of the total issued and outstanding shares of G+W in return for one year of his services. The Company determined the value of the transaction at $50,000, which was recorded as deferred compensation to be amortized monthly over the initial one-year term of the employment agreement. As such, we have recognized $50,000 of compensation expense through December 31, 2016 in connection with this transaction.

 

Director Independence

 

Our common stock is not listed on a national securities exchange or inter-dealer quotation system. Under NASDAQ Rule 5605(a)(2) and Item 407(a) of Regulation S-K, a director is not considered to be independent if he or she is also an executive officer of the corporation. Our director is considered an executive officer under Rule 3b-7 of the Exchange Act. Therefore, our director is not independent.

 

As a result of our limited operating history and minimal resources, we believe that we will have difficulty in attracting independent directors. In addition, we would likely be required to obtain directors’ and officers’ insurance coverage in order to attract and retain independent directors. We believe that the costs associated with maintaining such insurance is prohibitive at this time.

 

 

ITEM 14. PRINCIPAL ACCOUNTANTING FEES AND SERVICES 

 

We understand the need for our principal accountants to maintain objectivity and independence in their audit of our financial statements. To minimize relationships that could appear to impair the objectivity of our principal accountants, our Board of Directors has restricted the non-audit services that our principal accountants may provide to us primarily to tax services and audit-related services. We are only to obtain non-audit services from our principal accountants when the services offered by our principal accountants


78



are more effective or economical than services available from other service providers, and, to the extent possible, only after competitive bidding. These determinations are among the key practices adopted by the Board of Directors. Our Board has adopted policies and procedures for pre-approving work performed by our principal accountants.

 

The aggregate fees billed for the fiscal years 2017 and 2016 for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by our accountants in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:

 

 

 

2017

 

2016

Audit fees - audit of annual financial statements and review of financial statements included in our quarterly reports, services normally provided by the accountant in connection with statutory and regulatory filings

  

$31,000 

 

$29,000 

 

Audit-related fees - related to the performance of audit or review of financial statements not reported under "audit fees"

 

0 

 

0 

 

Tax fees - tax compliance, tax advice and tax planning

 

0 

 

0 

 

All other fees - services provided by our principal accountants other than those identified above

 

0 

 

0 

 

Total fees

 

$_31,000__ 

 

$29,000 

 

After careful consideration, the Board of Directors has determined that payment of the audit fees is in conformance with the independent status of our principal independent accountants.

 

 

PART IV

 

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

Ex. No.

Title

(1)

3.1

Certificate of Incorporation filed September 28, 2010

(1)

3.2

Bylaws

(4)

3.3

Amended and Restated Bylaws

(6)

3.4

Second Amended and Restated Bylaws

(1)

4.1

Specimen Common Stock Certificate

(1)

10.1

Cowles’ Option and Mining Lease

(1)

10.2

Mining Lease – Randall Claims

(1)

10.3

Assignment of Randall Mining Lease Agreement

(1)

10.4

Mining Lease – Secret Claims

(1)

10.5

Consulting Agreement

(2)

10.6

Promissory Note Dated August 23, 2011, in favor of John C. Power

(2)

10.7

Promissory Note Dated August 23, 2011, in favor of John D. Gibbs

(3)

10.8

First Amendment to Mining Lease – Secret Claims

(3)

10.9

Second Amendment to Mining Lease – Randall Claims

(5)

10.10

Promissory Note Dated February 28,2012, in favor of John D. Gibbs


79



(7)

10.11

Third Amendment to Mining Lease – Randall Claims

(8)

10.12

Option Agreement – Columbus Silver

(9)

10.13

Amendment No. 1 to Promissory Note in favor of John C. Power

(10)

10.14

Credit Agreement dated December 31, 2012 in favor of John D. Gibbs

(11)

10.15

Amendment No. 1 to Silver District Option Agreement

(12)

10.16

Allonge and Modification Agreement with John D. Gibbs

(13)

10.17

Promissory Note in favor of John Power

(14)

10.18

Silver District / Columbus Silver Purchase Agreement

(14)

10.19

Promissory Note in favor of Clifford Neuman

(15)

10.20

Second Allonge and Modification Agreement with John D. Gibbs

(16)

10.21

Employment Agreement - W. Pierce Carson

(17)

10.22

Employment Agreement – W. Pierce Carson (Magellan)

(18)

10.23

Agreement and Plan of Merger

(19)

10.24

Mining Option Agreement

(19)

10.25

Lock-Up/Voting Trust Agreement

(19)

10.26

Intuitive Pty, Ltd. Agreement

(19)

10.27

Mining Clip LLC Agreement

(19)

10.28

Promissory Note

(20)

10.29

Memorandum of Understanding

(7)

14.1

Code of Ethics

(21)

10.30

Consuting Agreement

(21)

10.31

Promissory Note in favor of W. Pierce Carson

(21)

10.32

Promissory Note in favor of John Power

(21)

10.33

Promissory Note in favor of John Gibbs

(22)

10.34

Promissory Note in favor of John Power

(22)

10.35

Stock Pledge Agreement

(23)

10.36

Amendment No. 1 to Memorandum of Understanding

(24)

10.37

Stock Purchase Agreement

(25)

10.38

Confirmation Letter

(26)

10.39

Amendment to Stock Purchase Agreement

(27)

10.40

Certificate of Amendment

(28)

10.41

Securities Purchase Agreement

(28)

10.42

Promissory Note

(29)

10.43

Securities Purchase Agreement

(29)

10.44

Promissory Note

(30)

10.45

Interim Milling Agreement

(31)

10.46

Amendment No. 2 to Stock Purchase Agreement

(31)

10.47

Closing Escrow Agreement

(31)

10.48

Form of Secured Note

(31)

10.49

Form of Stock Pledge Agreement

(31)

10.50

Form of Security Agreement

(31)

10.51

Form of Collateral Agent Agreement

(32)

10.52

Termination Agreement

(33)

10.53

Combined financial statements of SDA Mill as of and for the periods ended November 30, 2017 and December 31, 2016

(33)

10.54

Magellan Gold Corporation Unaudited Pro Form Condensed Combined Financial Information

 

*

31

Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


80



*

32

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

XBRL Instance*

101.SCH

XBRL Taxonomy Extension Schema**

101.CAL

XBRL Taxonomy Extension Calculation**

101.DEF

XBRL Taxonomy Extension Definition**

101.LAB

XBRL Taxonomy Extension Labels**

101.PRE

XBRL Taxonomy Extension Presentation**

 

(1)Incorporated by reference as an Exhibit to Form S-1 as filed with the Commission on May 18, 2011. 

(2)Incorporated by reference to the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 23, 2011. 

(3)Incorporated by reference as an Exhibit to Quarterly Report on Form 10-Q as filed with the Commission on November 14, 2011. 

(4)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on February 7, 2012. 

(5)Incorporated by reference as an Exhibit to Current Report on Form 8-K/A-1 as filed with the Commission on March 29, 2012. 

(6)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on March 30, 2012. 

(7)Incorporated by reference as an Exhibit to Annual Report on Form 10-K as filed with the Commission on March 30, 2012. 

(8)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on August 30, 2012. 

(9)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on February 4, 2013. 

(10)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on February 4, 2013. 

(11)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on August 23, 2013. 

(12)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on January 2, 2014. 

(13)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on April 29, 2014. 

(14)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on October 2, 2014. 

(15)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on February 3, 2015. 

(16)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on June 11, 2015. 

(17)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on June 2, 2016. 

(18)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on July 27, 2016. 

(19)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on October 27, 2016. 

(20)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on March 7, 2017. 


81



(21)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on June 20, 2017. 

(22)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on July 21, 2017. 

(23)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on August 1, 2017. 

(24)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on September 12, 2017. 

(25)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on October 11, 2017. 

(26)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on October 18, 2017. 

(27)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on October 30, 2017. 

(28)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on November 6, 2017. 

(29)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on November 7, 2017. 

(30)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on November 8, 2017. 

(31)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on December 6, 2017. 

(32)Incorporated by reference as an Exhibit to Current Report on Form 8-K as filed with the Commission on January 10, 2018. 

(33)Incorporated by reference as an Exhibit to Current Report on Form 8-K/A as filed with the Commission on April 24, 2018*Filed herewith 

**Furnished, not filed. 


82



MAGELLAN GOLD CORPORATION

 

TABLE OF CONTENTS

 

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-1

 

 

Consolidated Balance Sheets

F-2

 

 

Consolidated Statements of Operations and Comprehensive Loss

F-4

 

 

Consolidated Statements of Shareholders’ Deficit  

F-5

 

 

Consolidated Statements of Cash Flows

F-6

 

 

Notes to Consolidated Financial Statements

F-8




Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Magellan Gold Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Magellan Gold Corporation and its subsidiaries (collectively, the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, shareholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company's auditor since 2011.

Houston, Texas

May 16, 2018


F-2



MAGELLAN GOLD CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

December 31, 2017

 

December 31, 2016

ASSETS

 

 

 

Current Assets

 

 

 

 

Cash

$421  

 

$485  

 

Due from Rose Petroleum

27,147  

 

-  

 

Investment in Rio Silver equities

109,532  

 

59,753  

 

Prepaid expenses & other current assets

121,283  

 

25,729  

 

 

 

Total current assets

258,383  

 

85,967  

Mineral Rights, Net of Impairment

323,200  

 

323,200  

Property, plant & equipment
net of accumulated depreciation
of $11,822 and $-0-, respectively

1,155,811  

 

-  

Other Assets:

 

 

 

 

Prepaid expenses and other assets

216,151  

 

29,792  

 

 

 

Total other assets

216,151  

 

29,792  

Total assets

$1,953,545  

 

$438,959  

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$270,424  

 

$50,868  

 

Accrued liabilities

60,296  

 

75,592  

 

Line of credit - related party

932,500  

 

932,500  

 

Notes payable - related parties

1,197,437  

 

65,000  

 

Note payable

100,783  

 

-  

 

Accrued interest - related parties

239,585  

 

161,639  

 

Convertible note payable

271,697  

 

33,020  

 

Accrued Interest

4,816  

 

1,316  

 

Advances payable, related party

8,100  

 

-  

 

Derivative liability

-  

 

119,500  

 

 

 

Total current liabilities

3,085,638  

 

1,439,435  

Long term liabilities:

 

 

 

 

 

Asset Retirement Obligation

115,914  

 

-  

Total liabilities

3,201,552  

 

1,439,435  

Shareholders' deficit:

 

 

 

 

Preferred shares, $0.001 par value,
25,000,000 shares authorized,
no shares issued and outstanding

-  

 

-  

 

Common shares - $0.001 par value;
1,000,000,000 shares authorized,
95,581,382 and 64,630,548 shares issued and outstanding

95,581  

 

64,631  

 

Additional paid-in capital

2,803,870  

 

856,822  

 

Accumulated other comprehensive loss

(87,570) 

 

-  

 

Accumulated deficit

(4,059,888) 

 

(1,921,929) 

Shareholders' deficit

(1,248,007) 

 

(1,000,476) 

Total liabilities and shareholders' deficit

$1,953,545  

 

$438,959  

 

 

See accompanying notes to financial statements


F-3



MAGELLAN GOLD CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

2017

 

2016

 

Operating expenses:

 

 

 

 

 

 

Exploration costs

 

61,233  

 

70,599  

 

 

General and administrative expenses

 

964,302  

 

353,666  

 

 

Depreciation and amortization

 

12,104  

 

-  

 

 

Accretion of asset retirement obligation

 

367  

 

-  

 

 

Impairment loss

 

345,697  

 

-  

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

1,383,703  

 

424,265  

 

 

 

 

 

 

 

 

 

Operating loss

 

(1,383,703) 

 

(424,265) 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

(96,480) 

 

(62,303) 

 

 

Loss on change in derivative liability

 

(657,776) 

 

(73,604) 

 

 

 

 

 

 

 

 

 

Net loss

 

(2,137,959) 

 

(560,172) 

 

 

 

 

 

 

 

 

 

Net loss attributable to noncontrolling interest

 

-  

 

(7,346) 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders

 

(2,137,959) 

 

(552,826) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$(0.03) 

 

$(0.01) 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted-average
common shares outstanding

 

73,262,126  

 

56,733,426  

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(2,137,959) 

 

(552,826) 

 

Other comprehensive loss

 

 

 

 

 

 

Foreign currency translation adjustments

 

(79,052) 

 

-  

 

 

Unrealized loss on available-for-sale securities

(8,518) 

 

-  

 

 

 

 

 

 

 

 

 

Net comprehensive loss

 

$(2,225,529) 

 

$(552,826) 

 

 

 

See accompanying notes to financial statements


F-4



MAGELLAN GOLD CORPORATION

Consolidated Statements of Shareholders' Deficit

For the years ended December 31, 2016 and December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

Shares

 

Amount

 

Shares

 

Par Value

 

Capital

 

Gain (Loss)

 

Deficit

 

Interest

 

Total

Balance, December 31, 2015

-   

 

-   

 

48,869,091   

 

48,869   

 

424,292   

 

-   

 

(1,369,103)  

 

34,744   

 

(861,198)  

Sales of common stock and warrants

-   

 

-   

 

5,975,000   

 

5,975   

 

298,350   

 

-   

 

-   

 

-   

 

304,325   

Conversion of notes payable

-   

 

-   

 

600,000   

 

600   

 

22,800   

 

-   

 

-   

 

-   

 

23,400   

Resolution of derivative liability

-   

 

-   

 

-   

 

-   

 

20,044   

 

-   

 

-   

 

-   

 

20,044   

Purchase of non-controlling interest

-   

 

-   

 

8,623,957   

 

8,624   

 

18,774   

 

-   

 

-   

 

(27,398)  

 

-   

Stock issued for consulting services

-   

 

-   

 

562,500   

 

563   

 

72,562   

 

-   

 

-   

 

-   

 

73,125   

Net loss

-   

 

-   

 

-   

 

-   

 

-   

 

-   

 

(552,826)  

 

(7,346)  

 

(560,172)  

Balance, December 31, 2016

-   

 

-   

 

64,630,548   

 

64,631   

 

856,822   

 

-   

 

$ (1,921,929)  

 

-   

 

$ (1,000,476)  

Sales of common stock and warrants

-   

 

-   

 

1,750,000   

 

1,750   

 

173,250   

 

-   

 

-   

 

-   

 

175,000   

Conversion of notes payable

-   

 

-   

 

8,000,000   

 

8,000   

 

18,055   

 

-   

 

-   

 

-   

 

26,055   

Reclassification of derivative liability

-   

 

-   

 

-   

 

-   

 

777,276   

 

-   

 

-   

 

-   

 

777,276   

Stock issued for prepaid services

-   

 

-   

 

3,000,000   

 

3,000   

 

117,000   

 

-   

 

-   

 

-   

 

120,000   

Stock Based Compensation

-   

 

-   

 

4,000,000   

 

4,000   

 

299,642   

 

-   

 

-   

 

-   

 

303,642   

Stock issued for acquisition of SDA Mill

-   

 

-   

 

14,200,834   

 

14,200   

 

411,825   

 

-   

 

-   

 

-   

 

426,025   

Capital contribution

-   

 

-   

 

-   

 

-   

 

150,000   

 

-   

 

-   

 

-   

 

150,000   

Net loss

-   

 

-   

 

 

 

-   

 

-   

 

-   

 

(2,137,959)  

 

-   

 

(2,137,959)  

Other comprehensive loss

-   

 

-   

 

-   

 

-   

 

-   

 

(87,570)  

 

-   

 

-   

 

(87,570)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

-   

 

-   

 

95,581,382   

 

95,581   

 

2,803,870   

 

$ (87,570)  

 

$ (4,059,888)  

 

-   

 

$ (1,248,007)  

 

 

See accompanying notes to financial statements


F-5



MAGELLAN GOLD CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2017

 

2016

 

Cash Flows from operating activities:

 

 

 

 

 

Net loss

$(2,137,959) 

 

$(560,172) 

 

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Accretion of asset retirement obligation

367  

 

-  

 

 

 

 

Accretion of discounts on notes payable

12,766  

 

-  

 

 

 

 

Amortization of deferred compensation

-  

 

20,833  

 

 

 

 

Amortization of service contracts

52,884  

 

28,629  

 

 

 

 

Depreciation and amortization

12,104  

 

-  

 

 

 

 

Loss on change in derivative liability

657,776  

 

73,604  

 

 

 

 

Stock based compensation

303,642  

 

-  

 

 

 

 

Impairment loss

345,697  

 

-  

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Due from Rose Petroleum

(27,147) 

 

-  

 

 

 

 

Prepaid expenses and other assets

1,354  

 

10,173  

 

 

 

 

Accounts payable and accrued expenses

229,259  

 

89,176  

 

 

 

 

Accrued interest

83,331  

 

59,803  

 

 

 

Net cash used in operating activities

(465,926) 

 

(277,954) 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of Rio Silver equity securities

(58,297) 

 

(59,753) 

 

 

Purchase of SDA mill

(1,000,000) 

 

-  

 

 

Payment of deposit on investment in mineral properties

-  

 

(12,000) 

 

 

 

Net cash used in investing activities

(1,058,297) 

 

(71,753) 

 

Cash flows from financing activities:

 

 

 

 

 

Advances on line of credit - related party

-  

 

45,000  

 

 

Proceeds on advances from related parties

34,150  

 

16,200  

 

 

Payments on advances from related parties

(26,050) 

 

(16,200) 

 

 

Proceeds from notes payable - related parties

1,075,000  

 

35,000  

 

 

Payments on notes payable - related parties

-  

 

(35,000) 

 

 

Proceeds from convertible notes

267,150  

 

-  

 

 

Proceeds from sale of common stock and warrants

175,000  

 

304,325  

 

 

 

Net cash provided by financing activities

1,525,250  

 

349,325  

 

Effect of foreign currency exchange

(1,091) 

 

-  

 

Net change in cash

(64) 

 

(382) 

 

Cash at beginning of period

485  

 

867  

 

Cash at end of period

$421  

 

$485  

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest

$382  

 

$2,500  

 

 

Cash paid for income taxes

$-  

 

$-  

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Conversion of notes payable and accrued interest to common stock

$26,055  

 

$23,400  

 

 

Reclassifications of derivative liability to APIC

$777,276  

 

$20,044  

 

 

Common stock issued for prepaid services contracts

$120,000  

 

$73,125  

 

 

Common stock issued for purchase of SDA Mill

$426,025  

 

$-  

 

 

Conversion of accounts payable - related party to note payable

$100,000  

 

$-  

 

 

Note payable - Rose Petroleum, purchase of SDA Mill

$50,000  

 

$-  

 

 

Common stock issued for buyout of non-controlling interest

$-  

 

$27,398  

 

 

Dr. Carson capital contribution for waiver of accrued wages

$150,000  

 

$-  

 

 

Unrealized loss on available-for-sale securities

$8,518  

 

$-  

 

 

 

See accompanying notes to financial statements


F-6



MAGELLAN GOLD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Organization, Basis of Presentation, and Continuance 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 December 31, 2014, we formed and organized a new wholly-owned subsidiary, Gulf+Western Industries, Inc., a Nevada corporation (“Gulf+Western” or “G+W”), to own and operate our Silver District mining interests.  On October 1, 2014 we completed the transfer of those assets from Magellan to 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.

 

On June 1, 2015, we transferred 15% of our ownership interest in G+W to Dr. W. Pierce Carson (Dr. Carson), in exchange for one year of service as President, Chief Executive Officer and Director of G+W.  As a result of the transaction, Magellan’s ownership interest in G+W was reduced to 85%.  The transaction was valued at $50,000 representing compensation for the one-year period from 2015 through May 2016. 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, effective June 30, 2016.  As a result, Mr. John Power resigned his positions as President and Chief Executive Officer and retained the position of Chief Financial Officer until December 31, 2017 upon his replacement by Michael P. Martinez as CFO. Mr. Power and Dr. Carson currently serve as Directors of Magellan.

 

In July 2016, the Company completed a share exchange with Dr. Carson in which Dr. Carson surrendered his 15% interest in G+W in exchange for 8,623,957 shares of Magellan Gold Corporation. As a result of this transaction, G+W became a wholly owned subsidiary of Magellan Gold Corporation.

 

On October 24, 2016, the Company entered into a Mining Option Agreement (“Option Agreement”) between and among Rio Silver Inc., a Canadian company (“Rio Silver”), Minera Rio Plata S.A.C. (“Minera”), a Peruvian company and subsidiary of Rio Silver, and Magellan Gold Peru S.A.C. (“Magellan Peru”), a Peruvian company and wholly owned subsidiary of the Company pursuant to which Rio Silver through Minera granted to the Company a sole and exclusive option to acquire an undivided 50% interest in and to property located in central Peru. 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. Further information regarding the Option Agreement is included in Note 3– Mining Option Agreement.

 

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.

 


F-7



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 14,200,834 shares of common stock (the “Shares”) with a fair value of $426,025 at the closing date. The note is non-interest bearing and due on March 10, 2018.  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.

 

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.  At December 31, 2017, the Company had not obtained control of MVO.  Magellan had not paid the purchase price of $2,500, had not received the outstanding shares of MVO and had not legally acquired the assets and liabilities.  The purpose of acquiring MVO is that it is the sister entity that employs all employees of the SDA mill.  The acquisition of MVO will not result in the acquisition of any additional assets or liabilities.

 

Our primary focus with the acquisition of the SDA Mill in Mexico is to transform Magellan into a production company, to continue to advance our Arizona and Peru silver projects 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.

 

Liquidity and Going Concern

 

Our unaudited consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to meet our obligations and continue our operations during the next fiscal year. Asset realization values may be significantly different from carrying values as shown in our consolidated financial statements and do not give effect to adjustments that would be necessary to the carrying values of assets and liabilities should we be unable to continue as a going concern. At December 31, 2017, we had not yet generated any significant revenues or achieved profitable operations and we have accumulated losses of $4,059,888.  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.

 

During the year ended December 31, 2017 we realized $175,000 from sales of our common stock and exercise of warrants. The Company also issued convertible promissory notes to two investors and realized net proceeds of $267,150. Proceeds from these transactions were generally used to fund certain investing activities and for general working capital.

 


F-8



Additionally through various transactions with related parties during the year ended December 31, 2017, the Company realized approximately $1,075,000 which is primarily reflected in a series of promissory notes ("Series 2017 Notes"). The proceeds were generally used to fund the purchase of the SDA Mill in Mexico. The Series 2017 Notes are secured by a pledge of all the outstanding shares of Magellan Acquisition Corporation, a wholly-owned subsidiary that owns the SDA Mill through Minerales Vane 2.

 

We anticipate that additional funding will be in the form of additional loans from officers, directors or significant shareholders, or equity financing from the sale of our common stock but cannot assure than any future financings will occur.

 

Note 2 – Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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 Magellan Gold Peru S.A.C. 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”).

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the period presented.

 

We make our estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. We believe that our significant estimates, assumptions and judgments are reasonable, based upon information available at the time they were made. Actual results could differ from these estimates, making it possible that a change in these estimates could occur in the near term.

 

Reclassifications

 

Certain items in these consolidated financial statements have been reclassified to conform to the current year's presentation.

 

Foreign Currency Translations

 

The Company maintains its accounting records in US Dollars. Our operating subsidiary, Minerales Vane 2, S.A. de C.V is located in Mexico and maintains its accounting records in the Mexican Peso, which is its functional currency. Magellan Gold Peru S.A.C., another of our operating subsidiaries, is located in Peru and maintains its accounting records in the Peruvian Sol, which is its functional currency. Assets and liabilities of the subsidiaries are translated into the U.S. dollars at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rate and revenues and expenses are translated by using the average exchange rates. Translation adjustments are reported as a separate component of other comprehensive loss in the consolidated statements of operations and comprehensive loss. Foreign currency denominated transactions are translated at exchange rates approximating those ruling at the transaction dates. Exchange gains and losses are recognized in income.

 


F-9



Fair Value of Financial Instruments

 

We value our financial assets and liabilities using fair value measurements. Our financial instruments primarily consist of cash and cash equivalents, investments in available for sale securities, accounts payable, accrued liabilities, derivative liabilities, amounts due to related parties and notes payable to related parties.  Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount of cash and cash equivalents, accounts payable, accrued liabilities, notes payable to related parties and other amounts due to related parties approximates fair value because of the short-term nature of these financial instruments.

 

Concentrations of Credit Risk

 

Our financial instruments which potentially subject us to credit risk are our cash and cash equivalents. We maintain our cash and cash equivalents at reputable financial institutions and currently, we are not exposed to significant credit risk.

 

Cash and Cash Equivalents

 

We consider all amounts on deposit with financial institutions and highly liquid investments with an original maturity of three months or less to be cash equivalents at the date of purchase.

 

Investment Securities

 

We report investments in marketable equity securities at fair value. Unrealized gains and losses on available-for-sale investment securities are included in shareholders' equity, net of applicable taxes and other adjustments. We regularly review investment securities for impairment using both quantitative and qualitative criteria.

 

Mineral Rights

 

We have determined that our mineral rights meet the definition of mineral rights, as defined by accounting standards, and are tangible assets. As a result, our direct costs to acquire or lease mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with: leasing or acquiring patented and unpatented mining claims; leasing mining rights including lease signature bonuses, lease rental payments and advance minimum royalty payments; and options to purchase or lease mineral properties.

 

If we establish proven and probable reserves for a mineral property and establish that the mineral property can be economically developed, mineral rights will be amortized over the estimated useful life of the property following the commencement of commercial production or expensed if it is determined that the mineral property has no future economic value or if the property is sold or abandoned. For mineral rights in which proven and probable reserves have not yet been established, we assess the carrying values for impairment at the end of each reporting period and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

The net carrying value of our mineral rights represents the fair value at the time the mineral rights were acquired less accumulated depletion and any abandonment or impairment losses. Proven and probable reserves have not been established for mineral rights as of December 31, 2017.  At December 31, 2017 mineral rights totaling $323,200 were net of $117,857 of impairment and abandonment charges.  No impairment charges were recognized for either the of the years ended December 31, 2017 or 2016.

 

Impairment of Long-lived Assets and Mining Rights

 


F-10



We continually monitor events and changes in circumstances that could indicate that our carrying amounts of long-lived assets, including mineral rights, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through their undiscounted expected future cash flow. If the future undiscounted cash flow is less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

Property and Equipment

 

Property and equipment is recorded at cost, less accumulated depreciation. Property and equipment is amortized on a straight-line basis over its estimated life:

 

SDA Mill – 10 years 

Mill equipment – 10 years 

Tailings Dam – 10 years 

Office and Warehouse – 10 years 

 

Goodwill

 

Goodwill was generated through the acquisition of the SDA Mill in fiscal 2017 as the total consideration paid exceeded the fair value of the net assets acquired.  

 

The Company tests its goodwill for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.  There was an impairment charge of $345,697 and $0 during the years ended December 31, 2017 and 2016 respectively.

 

Asset Retirement Obligations

 

The Company accounts for asset retirement obligations in accordance with ASC 410-20, Asset Retirement Obligations. ASC 410-20 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. Asset retirement obligations consists of estimated final mill closure and associated ground reclamation costs to be incurred by the Company in the future once the economical life of its SDA Mill is reached. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate.  This liability is capitalized as part of the cost of the related asset and amortized over its useful life.  The liability accretes until the Company settles the obligation.

 

Comprehensive Income/Loss

 

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive income/loss and its components in the financial statements. As of December 31, 2017 and 2016, the Company’s component of comprehensive income was foreign currency translation adjustments and unrealized gain or loss on available-for-sale securities.

 

Notes Payable – Related Parties

 


F-11



Notes payable to related parties are classified as current liabilities as either the note holders have the ability to control the repayment dates of the notes or maturity dates are within one year of the reported balance sheet date.

 

Exploration Costs    

 

Mineral exploration costs are expensed as incurred. When it has been determined that it is economically feasible to extract minerals and the permitting process has been initiated, exploration costs incurred to further delineate and develop the property are considered pre-commercial production costs and will be capitalized and included as mine development costs in our balance sheets.

 

Income Taxes

 

We recognize deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements and the effect of net operating losses based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. At December 31, 2017 and 2016, the Company had no uncertain tax positions.

 

Net Loss per Common Share

 

We compute basic net loss per common share by dividing our net loss attributable to common shareholders by our weighted-average number of common shares outstanding during the period. Computation of diluted net loss per common share adds the weighted-average number of potential common shares outstanding to the weighted-average common shares outstanding, as calculated for basic net loss per share, except for instances in which there is a net loss. For the years ended December 31, 2017 and 2016, potential common shares associated with convertible notes payable and outstanding warrants to purchase common stock have been omitted from the net loss per common share computation as they are anti-dilutive due to the net loss for these periods.  

 

Stock-based Compensation 

 

The Company determines the fair value of stock option awards granted to employees in accordance with FASB ASC Topic 718 – 10 and to non-employees in accordance with FASB ASC Topic 505 – 50. Compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

 

New Accounting Standards

 

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our financial statements upon adoption.

 

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, "Leases: Topic 842 (ASU 2016-02)", to supersede nearly all existing lease guidance under GAAP. The guidance would require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. ASU 2016-02 is effective for the Company in the first quarter of our fiscal year ending December 31, 2019 using a modified retrospective approach with the option to elect certain practical expedients. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.


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Recently Adopted Accounting Standards

 

Recently issued Financial Accounting Standards Board Accounting Standards Codification guidance has either been implemented or is not significant to us.

 

Note 3 – Mineral Rights and Properties

 

At both December 31, 2017 and December 31, 2016, our mineral rights and properties were $323,200 associated with our Silver District claims. We updated our impairment analysis as of December 31, 2017, and concluded that the carrying value is not impaired.

 

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 2017, we renewed the BLM lode and mill site claims in La Paz County, Arizona with the Bureau of Land Management and these claims will remain in good standing through August 31, 2018.   Additionally, in both August 2016 and 2015, we made advance minimum royalty payments of $10,000 to a third party landowner on the Red Cloud lease, which includes the Red Cloud Patented claim and two BLM lode claims.  In 2017, we continued to make such payment. We also expanded the Arizona State Exploration Permit to approximately 334.85 acres on the Arizona State section that comprises part of our Silver District land package and are current on our obligations under this permit.  

 

On July 9, 2015, G+W entered into two Lease and Purchase Agreements (“Agreements”) with an individual that grant the Company certain exploration and mining rights for two patented lode claims located in the Silver District, La Paz County, Arizona. The Agreements provide for scheduled variable annual advance minimum royalty payments to the lessor. In addition, the Agreements have an initial term of 20 years, and provide for the purchase of the properties for $125,000 each during the term of the lease, net of any advance royalty payments made up to the date of the purchase. The Company paid the initial advance royalty payments totaling $3,000 and advance royalty payments of $1,000 in July 2016 to maintain these Agreements. Due to an uncertainty associated with the clarification of the legal title for these two patented lode claims, these payments have not been capitalized as mining rights, and therefore are included in exploration costs during the period in which the obligation was due.

 

Note 4 – Mining Option Agreement

 

On June 30, 2016 the Company signed a non-binding Letter of Intent (“LOI”) with Rio Silver Inc., and on October 24, 2016 the Company executed a definitive Mining Option Agreement (“Option Agreement),


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pursuant to which Magellan is granted the option to earn an undivided 50% interest in the Niñobamba Silver-Gold Property (“Property”), located 330 kilometers southeast of Lima in the Department of Ayacucho, Peru.

 

As a condition of the LOI, the Company paid a refundable $12,000 deposit. This payment was recorded as a deposit and subsequently used to maintain certain mining concessions on the property.

 

In addition to the deposit, the Company was obliged to subscribe to two private placement unit financings in Rio Silver, each for aggregate proceeds of Cdn$75,000. The Company completed the first unit private placement on August 23, 2016. The first placement included 1,500,000 units priced at Cdn$0.05, which included one share of Rio Silver common stock and one warrant to purchase one share of Rio Silver common stock for Cdn$0.05 which expire on February 23, 2018. The cost of the units in the first private placement totaled USD $59,753. The second placement included 1,250,000 units priced at Cdn$0.06, which was completed on January 19, 2017, and included one share of Rio Silver common stock and one warrant to purchase one share of Rio Silver common stock for Cdn$0.06 which expire on July 19, 2018. The cost of the units in the second private placement totaled USD $58,297. Each of these transactions were recorded as an investment in Rio Silver equity securities and included on the accompanying consolidated balance sheets at December 31, 2017 and December 31, 2016.

 

Under the terms of the Agreement, the Company acquired 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 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, which has been pledged to secure Mr. Power's note in the principal amount of $125,000.

 

In connection with the termination of the agreement, Rio Silver agreed, subject to regulatory approval and under certain conditions, to apply to the TSX Venture Exchange for an 18-month extension of 2,750,000 warrants that Magellan holds in Rio Silver stock, which otherwise would expire in February and July 2018. The TSX Venture Exchange subsequently approved the extensions. Those Rio Silver warrants have been pledged to secure Mr. Power's note in the principal amount of $125,000.

 

Also in connection with the termination of the agreement, Magellan agreed to grant Rio Silver a right of first refusal on any sale of the 2,750,000 shares of Rio Silver stock that Magellan currently holds.

 

Note 5 – 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, for a total consideration at closing of US$1.5 million, payable in $1,000,000 in cash and $500,000 in restricted common stock of Magellan. Under the terms of the MOU, in consideration of a non-refundable $50,000 option payment, the Company was granted an option until June 3, 2017 to purchase the SDA Mill.  The option period was extended for an additional 60 days with another $100,000 option payment to be applied towards the cash component of the purchase price.  

 

On July 31, 2017, the Company executed Amendment No. 1 to the Memorandum of Understanding (“MOU”) dated March 3, 2017. The amendment provides that on or before August 15, 2017, the Company shall provide the seller executed irrevocable bridge loan commitments representing an aggregate of not less than $900,000 in commitments available to fund the purchase transaction. In addition, the agreement requires the Company to reimburse the seller for certain employee holding and mill maintenance costs for the months of August and September 2017 at a total of $25,300 for each month. The Company paid both the August and September


F-14



reimbursements as agreed upon and the payments are included in General and Adminstrative expenses for the year ended December 31, 2017.

 

On August 14, 2017, as required by Amendment No. 1 to the “MOU”, the Company provided the seller executed bridge loan commitments aggregating $900,000 available to fund the purchase transaction. The Company’s provision of the commitment letters effectively resulted in the extension of the purchase option until the transaction closed.

 

On October 17, 2017, the Company amended the agreement to include the acquisition of Minerales VANE Operaciones (“MVO”) for $2,500 as soon as practicable following the Closing Date, rather than prior to the Closing Date.  At December 31, 2017, the Company had not obtained control of MVO.  Magellan subsequently acquired control of MVO in January 2018 and paid for it in April 2018.  

 

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 November 30, 2017, as disclosed above, the transaction closed for the agreed upon price of approximately US$1.5 million, consisting of $1,000,000 in cash, $50,000 non-refundable option payment, including the $100,000 option extenstion payment, and $500,000 in restricted common stock of Magellan. Based upon the volume weighted average price per share of Magellan Gold stock for the 30 calendar days preceeding the closing date, 14,200,834 shares of stock were issued.in connection with the transaction.

 

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 previously 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 is non-interest bearing and due on March 10, 2018.  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 acquisition of Minerales Vane 2 has been accounted for as a business combination whereby the purchase price was allocated to assets acquired and liabilities assumed.  The Company performed a valuation analysis of the fair market value the SDA Mill’s assets and liabilities. The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:

 


F-15



 

 

Purchase Price

 

Cash

$850,000  

Note payable

50,000  

Option payments

150,000  

Common stock

426,025  

Total Purchase Price

$1,476,025  

 

 

Allocation of Purchase Price

 

Crushing equipment

$254,000  

Grinding equipment

272,000  

Flotation equipment

156,000  

Tailings machinery

6,000  

Concentrate machinery

17,000  

Water machinery

12,000  

Feed

14,000  

Grinding machinery

218,000  

Leaching machinery

54,000  

Precipitation plant

130,000  

Lab equipment

15,000  

Tailings dam

50,000  

Office and warehouse assets

35,000  

Asset retirement obligation

(122,024) 

Goodwill

365,049  

Net assets acquired

$1,476,025  

 

Unaudited pro forma results of operations for the years ended December 31, 2017 and 2016 as though the Company had acquired the SDA Mill on the first day of each fiscal year are set forth below:

 

 

 

December 31, 2017

 

December 31, 2016

 

 

Pro Forma

 

Pro Forma

 

 

 

 

 

Net Sales

 

$305,272  

 

$840,961  

 

 

 

 

 

Operating Expenses

 

2,995,145  

 

2,208,286  

 

 

 

 

 

Net Loss

 

$(2,689,873) 

 

$(1,367,325) 

 

Note 6 – Interim Toll Milling Agreement

 

On November 7, 2017 the Company and Rose executed an Interim Milling Agreement (the “Agreement”), with an effective date of November 1, 2017, whereby, pending closing of the SDA Mill acquisition, Rose shall cause its subsidiary, Minerales Vane S.A. de C.V., a Mexico corporation (“Vane”), to reopen the SDA Mill and recommence operations on a toll milling basis for a third-party. Under the Agreement, the Company is required to provide the working capital to fund the operations and is entitled to all the positive cash flow after covering the related expenses.

 

The Agreement was completed during November 2017. As of December 31, 2017 the Company has an outstanding receivable from Rose of $27,147.

 

Note 7 - Fair Value of Financial Instruments

 

Financial assets and liabilities recorded at fair value in our condensed 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.

 


F-16



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 December 31, 2017

 

 

 

December 31, 2017

 

Level 1

 

Level 2

 

Level 3

 

Derivative conversion option liability

 

$

-

 

$

-

 

$

-

 

$

-

 

Investment in Rio Silver equities

 

 

109,532

 

 

109,532

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value Measurement at December 31, 2016

 

 

 

December 31, 2016

 

Level 1

 

Level 2

 

Level 3

 

Derivative conversion option liability

 

$

119,500

 

$

-

 

$

-

 

$

119,500

 

Investment in Rio Silver equities

 

 

59,753

 

 

59,753

 

 

 

 

 

 

 

 

A summary of the activity of the derivative liability is shown below:

 

Balance December 31, 2016

$     119,500

 

Total losses (unrealized, realized) included in net loss

657,776

 

Reclassifications of derivative liability to APIC

(777,276)

 

 

 

Balance December 31, 2017

$     -

 

A summary of the activity of the Investment in Rio Silver equities is shown below:

 

 

 

Balance December 31, 2016

$59,753  

 

 

Total unrealized losses included in Other comprehensive loss

(8,518) 

 

Purchases of Rio Silver equities

58,297  

 

 

 

Balance December 31, 2017

$109,532  

 

The carrying values for cash and cash equivalents, prepaid assets, accounts payable and accrued liabilities, related party line of credit and notes payable approximate their fair value due to their short-term maturities.

 

Note 8 – 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


F-17



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.  All other terms of the agreement were unchanged. At December 31, 2017 the Company has an additional $67,500 available under the credit line.

 

No draws were made during the year ended December 31, 2017.  During the year ended December 31, 2016, draws totaling $45,000 were made and were primarily used to fund working capital and certain obligations due to maintain our mining rights and properties.  At both December 31, 2017 and December 31, 2016, a total of $932,500 was outstanding under this line of credit.  In addition, a total of $213,657 and $157,707 of interest has been accrued on this obligation and is included in Accrued interest - related parties on the accompanying consolidated balance sheets at December 31, 2017 and December 31, 2016, respectively.

 

Note 9 – Notes Payable – Related Parties

 

In August 2011, we entered into an unsecured loan from John Power, the Company’s Chief Financial Officer, 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.  At both December 31, 2017 and December 31, 2016, the note balance was $15,000. At December 31, 2017 and December 31, 2016, interest totaling $1,576 and $676, respectively, was accrued on this note payable and is included in Accrued interest – related parties on the accompanying consolidated balance sheets.

 

In January 2014, we entered into an additional unsecured loan from Mr. Power, evidenced by a $50,000 promissory note. The promissory note bears interest at 6.75% per annum and is payable on demand with thirty days’ notice from the lender. At December 31, 2017 and December 31, 2016, interest totaling $6,249 and $2,874, respectively, was accrued on this note payable and is included in Accrued interest – related parties on the accompanying consolidated balance sheets.  At both December 31, 2017 and December 31, 2016, the note balance was $50,000.

 

During the third quarter of 2016, we entered into an additional unsecured loan from Mr. Power, evidenced by a $35,000 promissory note that was subsequently paid in full during the fourth quarter of 2016. At December 31, 2016, unpaid accrued interest of $382 remained on this note and was included in Accrued interest – related parties on the accompanying consolidated balance sheet at December 31, 2016. The remaining accrued interest of $382 was paid to Mr. Power during 2017.

 

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 notes were subsequently rolled into the Series 2017 Notes described below. As of December 31, 2017 a total of $3,008 of interest is accrued on these notes.

 

On June 30, 2017 we entered into an additional secured loan for advances from Mr. Power and evidenced by a $125,000 promissory note. The promissory note bears interest at 6% per annum and matured on December 31, 2017.  The maturity date of the promissory note was not extended and therefore the promissory note is currently in default.  The outstanding balance on the note at December 31, 2017 is $125,000. As of December


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31, 2017, accrued interest on the note is $3,781. The note is secured by a pledge of the Company's portfolio of Rio Silver Common Stock and Warrants.

 

On November 30, 2017 we entered into a series of secured promissory notes (“Series 2017 Notes”) with related parties in the aggregate amount of $1,155,000, including financing fees of $105,000 recorded as a 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. Additionally, Mr. Power transferred $53,000 from related party advances. Net proceeds on the issuance after reducing for the transfers listed total $847,000. The notes are secured by a stock pledge agreement covering 100% of the outstaning common stock of Magellan Acquisition Corporation, bear interest at 10% and mature on December 31, 2018. As of December 31, 2017 the balance on the notes and accrued interest is $1,058,220 and $9,810, respectively.

 

Note 10 – Convertible Note Payable and Derivative Liability

 

On October 1, 2014, we issued a convertible promissory note to a provider of legal services in the original principal amount of $51,532.  The note was issued to evidence the Company’s indebtedness for legal services previously rendered. Interest accrues quarterly on the outstanding principal and interest balance of the Note at 6% per annum. The principal plus accrued and unpaid interest was due upon five days’ written demand of the note holder.  The note is unsecured.

 

The note principal and accrued interest was convertible at any time into shares of common stock at a conversion price of $0.039, which represented the closing bid price of the common stock on the OTC Bulletin Board on the date of issuance.

 

In April 2016 the note holder elected to convert a total of $23,400, consisting of $18,512 of principal and $4,888 of accrued interest. The conversion resulted in the issuance of 600,000 shares of the Company’s common stock. As a result of the conversion, a total of $20,044 of the derivative liability associated with the note was reclassified to additional paid in capital on the conversion date. At December 31, 2016 the remaining note balance was $33,020.

 

On April 14, 2017 the Company and the note holder agreed to modify the terms of the note to reduce the conversion rate from $0.039 to $0.01, and the maturity terms from five days written demand to 180 days. Immediately subsequent to the modifications, the note holder converted $20,000 of the principal into 2,000,000 shares of common stock. This transaction resulted in a total of $173,146 of the derivative liability reclassified to additional paid-in capital. Immediately following the conversion, the note principal balance was $13,020 together with accrued interest of $1,830. The Company agreed to pay the note holder $8,850 in cash consisting of a partial principal payment of $7,020 and the $1,830 accrued interest. This resulted in a $76,621 reduction of the derivative liability, which was recorded as a gain on change of the derivative liability. Following these transactions the note had a remaining principal balance of $6,000 and no accrued interest.

 

Immediately following the modifications and conversion, the note holder agreed to sell the note to a third party, Bright Star International, Inc. (“Bright Star”), with which the Company subsequently entered into an investor and public relations consulting agreement effective May 22, 2017. Upon the sale of the note to Bright Star, the Company again agreed to further reduce the conversion rate from $0.01 to $0.001. All other provisions of the note remained unchanged. Bright Star elected to convert $3,000 of the remaining principal into 3,000,000 shares of the Company’s common stock. This transaction resulted in a total of $268,930 of the derivative liability transferred to Additional paid-in capital.  

 

On August 3, 2017, Brightstar converted the remaining $3,000 of the note into an additional 3,000,000 shares of the Company’s stock. Accrued interest on the note of $55 was also converted. This transaction resulted in a total of $335,200 of the derivative liability and $55 of accrued interest transferred to Additional paid-in-capital. As of December 31, 2017, there are no additional principal or accrued interest amounts owed on the note.


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The note contained certain anti-dilution provisions that would reduce the conversion price should the Company issue common stock equivalents at a price less than the note conversion price.  Accordingly, the conversion features of the note are considered a discount to the note.  However, since the note is payable upon demand by the note holder, the value of the discount was considered interest expense at the time of its inception.

 

The note was evaluated quarterly or upon a triggering event, and upon any valuations in which the value of the discount changes we recognized a gain or loss due to a decrease or increase, respectively, in the fair value of the derivative liability.  We estimated the fair value of the derivative using the Black-Scholes option pricing model, which includes assumptions for expected dividends, expected share price volatility, risk-free interest rate, and expected life of the note.  Our expected volatility assumption is based on our historical weekly closing price of our stock over a period equivalent to the expected remaining life of the note.

 

Based upon the above, the note was evaluated upon the initial change in the conversion rate on April 14, 2017 from $0.039 to $0.01. This evaluation resulted in an increase of the liability and a loss on change of the derivative liability of $239,640.  The note was again evaluated upon the subsequent reduction of the conversion rate from $0.01 to $0.001. This evaluation resulted in an increase of the liability and a loss on change of the derivative liability of $485,917.

 

The following table summarizes the assumptions used to value the derivative liability on April 14 for each change in the conversion rate:

 

Fair value assumptions – derivative:

 

April 14, 2017

 

Risk free interest rate

 

1.03%

 

Expected term (years)

 

1.0

 

Expected volatility

 

154%

 

Expected dividends

 

0%

 

 

On August 3, 2017, in accordance with the final conversion of the remaining $3,000 principal of the note, the fair value of the derivative liability was determined to be $335,200 resulting in an additional loss on change of the derivative liability of $1,900

 

The following table summarizes the assumptions used to value the derivative liability at August 3, 2017:

 

Fair value assumptions – derivative:

 

August 3, 2017

 

Risk free interest rate

 

1.22%

 

Expected term (years)

 

1.0

 

Expected volatility

 

137%

 

Expected dividends

 

0%

 

 

The quarterly and special evaluations combined with the gain resulting from the agreement to pay a portion of the principal and interest to the original note holder have resulted in a total loss on changes of the derivative liability of $1,900 and $657,776 for the three and nine-months ended December 31, 2017, respectively. For the three and year ended December 31, 2016, we recorded a gain on the change in the derivative liability of $70,680 and a loss of $75,854, respectively.

 

The following table summarizes the assumptions used to value the derivative liability at December 31, 2016:

 

Fair value assumptions – derivative:

 

December 31, 2016

 

Risk free interest rate

 

0.85%

 

Expected term (years)

 

1.0

 

Expected volatility

 

158%

 

Expected dividends

 

0%

 

 


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A total of $-0- and $1,316 of interest is accrued on the note at December 31, 2017 and December 31, 2016, respectively, and is included in Accrued interest on the accompanying consolidated balance sheets.

 

On November 1, 2017, the Company sold a 10% Convertible Promissory Note (“Note”) in a principal amount of $170,000 for a purchase price equal to the principal amount of the Note pursuant to the terms a of Securities Purchase Agreement dated November 1, 2017. After deducting the investor’s discount and legal fees, net proceeds to the Company were $153,650. The Note matures on November 1, 2018 and can be converted into the Company’s common stock after 180 days from the date the Note is issued.

 

On November 2, 2017, the Company sold a 10% Convertible Promissory Note (“Note”) in principal amount of $125,000 for a purchase price equal to the principal amount of the Note pursuant to the terms of a of Securities Purchase Agreement dated November 2, 2017. After deducting the investor’s discount and legal fees, net proceeds to the Company were $