NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization, Basis of Presentation, and Nature of
Operations
Organization and Nature of Operations
Magellan Gold Corporation (“we” “our”,
“us”, the “Company” or “Magellan”) was incorporated on September 28, 2010, under the laws
of the State of Nevada. Our principal business is the acquisition and exploration of mineral resources. We have not presently determined
whether the properties to which we have mining rights contain mineral reserves that are economically recoverable.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
We prepare our financial statements in accordance
with accounting principles generally accepted in the United States (“GAAP”). The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with GAAP for interim financial information in accordance with Article 8 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our
opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2022 are not necessarily indicative of the results for the full year. While we believe that
the disclosures presented herein are adequate and not misleading, these interim financial statements should be read in conjunction with
the audited financial statements and the footnotes thereto contained in our annual report on Form 10-K for the year ended December 31,
2021.
Our consolidated financial statements include
our accounts and the accounts of our 100% owned subsidiaries, Clearwater and M Gold. All intercompany transactions and balances have been
eliminated. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
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 six
months ended June 30, 2022, 72,000 of stock options, 117,500 of warrants, and 1,916,904 shares issuable from convertible notes were considered
for their dilutive effects. For the six months ended June 30, 2021, 72,000 of stock options, 423,635 of warrants, and 1,283,375 shares
issuable from convertible notes were considered for their dilutive effects
Derivative Financial Instruments
Fair value accounting requires bifurcation of
embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement of their fair value
for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible debt host instrument
is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not
considered conventional convertible debt under ASC 470, the Company will continue its evaluation process of these instruments as derivative
financial instruments under ASC 815. The Company applies the guidance in ASC 815-40-35-12 to determine the order in which each convertible
instrument would be evaluated for derivative classification. The Company’s sequencing policy is to evaluate for reclassification
contracts with the earliest maturity date first.
Once determined, derivative liabilities are adjusted
to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations
as an adjustment to fair value of derivatives.
Recent Accounting Pronouncements
The Company does not believe that any recently
issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying
financial statements.
Liquidity and Going Concern
Our consolidated financial statements have been
prepared on a going concern basis, which assumes that we will be able to meet our obligations and continue our operations during the next
fiscal year. Asset realization values may be significantly different from carrying values as shown in our consolidated financial statements
and do not give effect to adjustments that would be necessary to the carrying values of assets and liabilities should we be unable to
continue as a going concern. At June 30, 2022, we had a working capital deficit of $1,854,729, we had not yet generated any significant
revenues or achieved profitable operations and we have accumulated losses of $18,506,640. 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, of which there can be no assurance.
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 3 – Mineral Rights and Properties
Center Star Gold Mine
On July 1, 2020, the Company entered into a Stock
Purchase Agreement to acquire Clearwater Gold Mining Corporation (“Clearwater”) which owns certain unpatented mining claims
in Idaho County, Idaho that include the historic Center Star Gold Mine (“Center Star”) near Elk City, Idaho. As a result of
the Clearwater acquisition, Gregory Schifrin, the sole shareholder of Clearwater, was appointed to serve as a member of the Company’s
Board on July 1, 2020. In consideration for 100% of the issued and outstanding shares of Clearwater, the Company has agreed to pay Clearwater’s
sole shareholder 1,000,000 shares of Magellan common stock, $125,000 convertible note and $25,000 in cash. The 1,000,000 shares are to
be issued to the shareholder on and under the terms as follows: 250,000 shares at the time of closing, 250,000 shares at the time the
Center Mine receives its permit to reopen the main portal of the mine, 250,000 shares at the point the main portal has been reopened and
250,000 shares two-years from closing concurrent the pay-off of the $125,000 convertible note. As of June 30, 2022 and December 31, 2021,
the mineral rights and properties balance totaled $1,000,000.
As of June 30, 2022 and December 31, 2021, the
Company had $194,274 and $193,505 in capitalized development cost to develop gold resources at Center Star, respectively.
Note 4 – Fair Value of Financial Instruments
Financial assets and liabilities recorded at fair
value in our consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the
inputs used to measure fair value into the following levels:
Level 1 – Quoted market prices in
active markets for identical assets or liabilities at the measurement date.
Level 2 – Quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active;
or other inputs that are observable and can be corroborated by observable market data.
Level 3 – Inputs
reflecting management’s best estimates and assumptions of what market participants would use in pricing assets or liabilities
at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
A financial instrument's categorization within
the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The carrying values for cash and cash equivalents,
prepaid assets, accounts payable and accrued liabilities, related party line of credit and notes payable approximate their fair value
due to their short-term maturities.
Fair Value Measurements
The Company’s assets and liabilities recorded
at fair value have been categorized based upon a fair value hierarchy.
The following table presents information about
the Company’s liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value
hierarchy of those assets and liabilities as of June 30, 2022 and December 31, 2021:
| Schedule of fair value measurements on a recurring basis | |
| | | |
| | | |
| | | |
| | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair value at
June 30, 2022 | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Derivative liability | |
$ | – | | |
$ | – | | |
$ | 427,965 | | |
$ | 427,965 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair value at
December 31, 2021 | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Derivative liability | |
$ | – | | |
$ | – | | |
$ | 150,953 | | |
$ | 150,953 | |
There were no transfers between Level 1, 2 or
3 during the period.
The table below presents the change in the fair
value of the derivative liability during the six months ended June 30, 2022:
| Schedule of fair value of the derivative liability | |
| | |
| Fair value as of December 31, 2021 | |
$ | 150,953 | |
| Loss on change in fair value of derivatives | |
| 277,012 | |
| Fair value as of June 30, 2022 | |
$ | 427,965 | |
Note 5 – Notes payable, Convertible Note
Payable and Derivative Liability
Notes payable
On March 4, 2022, the
Company entered into two unsecured promissory notes totaling $40,000. The promissory notes bear interest at 12% per annum and are payable
on demand. As of June 30, 2022, the notes payable balance was $40,000, with accrued interest of $2,304.
Series 2019A 10% Unsecured Convertible Notes
In 2019, the Company sold $135,000 of Series 2019A
10% Unsecured Convertible Notes. The purchase price of the Note is equal to the principal amount of the Note. The Series 2019A Notes are
convertible into shares of Common Stock at a conversion price of $1.00 during the life of the Note. The lenders were issued 100,000 common
stock warrants with an exercise price of $2.00 per share. The Company evaluated the conversion option and concluded a beneficial conversion
feature was present at issuance. The Company recognized the beneficial conversion feature and relative fair value of the warrants as a
debt discount and additional paid in capital in August and December 2019. The $135,000 debt discount is amortized over the term of the
loan. The Notes will accrue interest at the rate of 10% per annum, payable quarterly in arrears. The Notes mature twelve (12) months from
the date of issue. The maturity date can be extended at the option of the Company for an additional one (1) year. There are two Series
2019A 10% Unsecured Convertible Notes that were due and payable in August 2020 and are currently past due and in default. The default
interest rate on the notes is 12%. As of June 30, 2022 and December 31, 2021, the balance due under these notes $75,000, with accrued
interest of $21,944 and $17,481, respectively.
On October 1, 2019, the Company sold a 10%
Unsecured Convertible Note for $145,978 due on demand to settle accounts payable. The purchase price of the 10% Unsecured Convertible
Note is equal to the principal amount of the Note. The 10% Unsecured Convertible Note is convertible into shares of Common Stock at a
conversion price of $1.00 during the life of the Note. The Company evaluated the conversion option and concluded a beneficial conversion
feature was present at issuance. The Company recognized the beneficial conversion feature as a debt discount and additional paid in capital
in October 2019. The debt discount will be amortized over the term of the loan. The 10% Unsecured Convertible Note will accrue interest
at the rate of 10% per annum payable quarterly, accruing from the date of issuance. As of June 30, 2022 and December 31, 2021, the balance
due under this note is $145,978, with accrued interest of $40,074 and $32,835, respectively.
Series 2020A 8% Unsecured Convertible Notes
In 2020, the Company sold $285,000 of Series 2020A
8% Unsecured Convertible Notes with a maturity date of November 30, 2020. The purchase price of the Note is equal to the principal amount
of the Note. The Series 2020A Notes are convertible into shares of Common Stock at a conversion price of $0.50 during the life of the
Note. The lenders were issued 142,500 common stock warrants with an exercise price of $0.50 per share for a term of 5 years. Two related
parties purchased $60,000 of the 2020A notes. The Company evaluated the conversion option and concluded a beneficial conversion feature
was present at issuance. The Company recognized the beneficial conversion feature as a debt discount and additional paid in capital as
of December 31, 2020. The $237,263 debt discount will be amortized over the term of the loan. The Notes will accrue interest at the rate
of 8% per annum, payable quarterly in arrears. In July 2020, $25,000 of Series 2020A 8% Unsecured Convertible Notes were converted into
50,000 shares of common stock at a conversion price of $0.50 per share. As of June 30, 2022 and December 31,2021, the balance due to a
third party under these notes is $200,000, with accrued interest of $32,231 and $24,297, respectively.
3% Secured Convertible Note
On July 1, 2020, the Company issued a $125,000
Secured Convertible Note to a related party for the as part of the purchase of Clearwater Mining Corporation. The convertible note is
secured by common stock of the Company, matures on July 1, 2022 and will accrue interest at the rate of 3% per annum, payable yearly in
arrears beginning July 1, 2021. The Note is convertible into shares of Common Stock at a conversion price of $0.50 during the life of
the Note. The Company evaluated the conversion option and concluded a beneficial conversion feature was present at issuance. The Company
recognized the beneficial conversion feature and relative fair value of the warrants as a debt discount and additional paid in capital
in July 2019. The $87,500 debt discount will be amortized over the term of the loan. Amortization expense of $21,695 was recognized during
the six months ended June 30, 2022. As of June 30, 2022, the balance due to a related party under this note net of unamortized discount
of $120, is $124,880, with accrued interest of $7,490. As of December 31, 2021, the balance due to a related party under this note net
of unamortized discount of $21,815, is $103,185, with accrued interest of $5,630.
AJB Convertible Note
On February 10, 2021, the Company entered into
a debt agreement to borrow $200,000. The secured note has an original issuance discount of $16,000 along with $9,000 in legal and finder
fees recorded as a discount, which will be amortized over the life of the note. The loan is secured by common stock of the Company, bears
interest at a rate of 10% and has a six-month maturity. In August 2021, the note was extended six months and the interest rate was increase
to 15%. The unpaid principal is convertible into shares of the Company’s common stock at the conversion price. The conversion price
shall be the less of 90% of the lowest trading price during the previous twenty (20) trading day period ending on the issuance date, or
during the previous twenty (20) trading day period ending on date of conversion of this note. The Company issued the debtholder 266,667
common shares as a commitment fee. Due to the variable conversion feature the note conversion feature was bifurcated from the note and
recorded as a derivative liability. The day one derivative liability was $95,715 was recorded as a discount on the convertible notes payable.
On February 9,2022, the Company extended the maturity to May 10, 2022. In consideration of the extension, the Company issued the debtholder
180,000 shares of common stock valued at $54,000. The incremental value of the debt modification of $54,000 will be recorded over the
remaining life of the note ending May 10, 2022. On May 11, 2022, the Company agreed to a second amendment to extend the maturity of the
AJB note to August 10, 2022. In consideration for the extension, the Company issued 233,334 shares of common stock at a price of $0.30
per share for a total value of $70,000. The incremental value of the debt modification of $70,000 will be recorded over the remaining
life of the note ending August 10, 2022. During the six months ended June 30, 2022, the Company recognized $100,667 of expense related
to the debt modification. As of June 30, 2022, the balance on the loan, net of unamortized discount of $23,333 is $176,667. As of December
31, 2021, the balance on the loan, net of unamortized discount of $0 is $200,000, with accrued interest of $0.
As of June 30, 2022, the total derivative liability
on the above note was adjusted to a fair value of $427,965. The fair value of the conversion option was estimated using the Black-Scholes
option pricing model and the following assumptions during the period: fair value of stock $0.13, volatility of 249.06% based on a comparable
company peer group, expected term of 0.50 years, risk-free rate of 2.51% and a dividend yield of 0%.
Note 6 – Stockholders’ Deficit
Common Stock
On February 9,2022, the Company extended the maturity
of a convertible note to May 10, 2022. In consideration of the extension, the Company issued the debtholder 180,000 shares of common stock
valued at $54,000.
On May 11, 2022, the Company agreed to a second
amendment to extend the maturity of the AJB note to August 10, 2022. In consideration for the extension, the Company issued 233,334 shares
of common stock at a price of $0.30 per share for a total value of $70,000.
Stock Warrants, Stock Options and the 2017
Equity Incentive Plan:
Under the 2017 Equity Incentive Plan, the Company
is authorized to grant rights to acquire up to a maximum of 200,000 shares of common stock. The 2017 Plan provides for the grant of (1)
both incentive and nonstatutory stock options, (2) stock bonuses, (3) rights to purchase restricted stock and (4) stock appreciation rights.
As of June 30, 2022, the Company had 128,000 shares available for future grant.
Stock option activity within the 2017 Equity
Incentive Plan and warrant activity outside the plan, for the six months ended June 30, 2022 is as follows:
| Schedule of stock option and warrant activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Options |
|
|
Stock Warrants |
|
| |
|
Shares |
|
|
Weighted Average
Exercise Price |
|
|
Shares |
|
|
Weighted Average
Exercise Price |
|
| Outstanding at December 31, 2021 |
|
|
72,000 |
|
|
$ |
2.00 |
|
|
|
423,635 |
|
|
$ |
0.28 |
|
| Granted |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Cancelled |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Expired |
|
|
– |
|
|
|
– |
|
|
|
(306,135 |
) |
|
|
0.20 |
|
| Exercised |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
| Outstanding at June 30, 2022 |
|
|
72,000 |
|
|
$ |
2.00 |
|
|
|
117,500 |
|
|
$ |
0.28 |
|
| Exercisable at June 30, 2022 |
|
|
72,000 |
|
|
$ |
2.00 |
|
|
|
117,500 |
|
|
$ |
0.50 |
|
As of June 30, 2022, the outstanding stock options have a weighted
average remaining term of 5.38 years and have no intrinsic value, and the outstanding stock warrants have a weighted average remaining
term of 2.93 years and have no intrinsic value.
Note 7 – Commitments and Contingencies
Mining Claims
As part of our acquisition of the Center Star
gold mine project, we acquire 15 Bureau of Land Management (“BLM”) unpatented mining claims and subsequently staked another
16 unpatented mining claims. In order to maintain the BLM lode claims, annual payments are required before the end of August of each
year. As of June 30, 2022, all of these claims are in good standing.
Note 8 – Executive Employment Agreement
Effective August 1, 2020, the Company and Michael
Lavigne, executed a Restricted Stock Unit Agreement pursuant to which the Company agreed to grant to Mr. Lavigne, in consideration of
services to be rendered as President, CEO and Director, restricted stock units consisting of 15,000 units for each month of service. The
vested stock units will be settled in shares of common stock upon or as soon as practicable (a) upon written request any time after December
31, 2020 or (b) following the termination date, whichever occurs first. As of June 30, 2022, 345,000 restricted stock units may be settled
in shares of common stock. During the six months ended June 30, 2022, the Company recognized $18,608 of stock-based compensation related
to the agreement.
Note 9 – Related Party Transactions
Advances- Related Parties
During the six months ended June 30, 2022, the
CEO paid $938 of expenses on behalf of the Company. As of June 30, 2022 and December 31, 2021, the advances related party balance totaled
$21,190 and $20,252, respectively.
Accrued Interest - Related Parties
Accrued interest due to related parties is included
in our consolidated balance sheets as follows:
| Schedule of related party transactions (accrued interest) | |
| | | |
| | |
| | |
June 30,
2022 | | |
December 31,
2021 | |
| Accrued interest payable – Mr. Gibbs | |
$ | 8,653 | | |
$ | 6,597 | |
| Accrued interest payable – Mr. Schifrin | |
| 7,490 | | |
| 5,630 | |
| Accrued interest payable – Mr. Malhotra | |
| 1,438 | | |
| 1,041 | |
| Accrued interest payable – Mr. Lavigne | |
| 144 | | |
| – | |
| | |
$ | 17,725 | | |
$ | 13,268 | |
Notes Payable - Related Parties
In June 2022, the Company
entered into three unsecured promissory notes with related parties totaling $30,000. The promissory notes bear interest at 12% per annum
and are payable on demand.