MAGELLAN COPPER & GOLD Corp 10-K

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, 2021 and 2020. Forward-Looking Statements Some of the information presented in this Form 10-K constitutes “forward-looking statements”. These forward-looking statements include, but are not limited to, statements that include terms such as “may,” “will,” “intend,” “anticipate,” “estimate,” “expect,” “continue,” “believe,” “plan,” or the like, as well as all statements that are not historical facts. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from current expectations. Although we believe our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from expectations. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made. Overview We were incorporated on September 28, 2010, in Nevada. Our principal business is the acquisition and exploration of mineral resources. We have not presently determined whether the properties to which we have mineral rights contain mineral reserves that are economically recoverable. 22 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, 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. Since our acquisition, we have increased our land position in the Silver District by staking two unpatented lode mining claims, leased two additional patented claims and have increased our Arizona State Exploration Permit to 334.85 acres. On September 30, 2014, we formed and organized a new wholly-owned subsidiary, Gulf + Western Industries, Inc., a Nevada corporation (“Gulf+Western” or “G+W”), to own our Silver District mining interests. On October 1, 2014 we completed the transfer of those assets from Magellan to G+W. At the time of the transfer, Magellan owned all the outstanding common stock of G+W. Effective December 31, 2014, Magellan pledged all its ownership interest in G+W to Mr. John D. Gibbs, a significant shareholder in the Company, as security for outstanding amounts under a line of credit agreement between Magellan and Mr. Gibbs. During the year ended December 31, 2019, the total amount owed under the credit agreement was $1,174,188, which includes $869,550 of principal and $304,638 of accrued interest was settled with the issuance of Series A Preferred Stock. On October 24, 2016, the Company entered into a Mining Option Agreement (“Agreement”) between and among Rio Silver Inc., a Canadian company (“Rio Silver”), Minera Rio Plata S.A.C., a Peruvian company and subsidiary of Rio Silver (“Minera”), and Magellan Gold Peru S.A.C., a Peruvian company and wholly owned subsidiary of the Company (“Magellan Peru”) pursuant to which Rio Silver through Minera, granted to the Company the sole and exclusive option to acquire an undivided 50% interest in and to property located in central Peru. Under the terms of the Agreement, the Company has the right to earn an undivided 50% interest in the Niñobamba Silver/Gold Project in central Peru. To earn its 50% interest, the Company must spend $2.0 million in exploration activities in the project over three years. The Niñobamba project is comprised of five concessions that total 36.5 square kilometers (9.026 acres). Effective December 31, 2017, the Company agreed with Rio Silver to terminate the option agreement, thereby terminating the Company’s option to earn an interest in the Niñobamba Silver/Gold Project. The Company retained its ownership of Rio Silver stock. On November 30, 2017, the Company purchased from Rose Petroleum plc (“Rose”) a mineral processing mill operation located in the state of Navarit, Mexico (the “SDA Mill”) as well as its associated assets, licenses and agreements. Magellan previously paid a $50,000 option payment, and an additional $100,000 option-to-purchase extension. The $100,000 option extension payment was applied against the cash portion of the purchase price. The purchase price for the SDA Mill consisted of $850,000 cash, a $50,000 promissory note, the $50,000 non-refundable option payment, the $100,000 for the option-to-purchase payment, and 284,017 shares of common stock (the “Shares”). The note is non-interest bearing and has been paid in full. The Shares will be held in escrow for a period of 12 months and the Company has the option to repurchase the Shares from Rose for the sum of $500,000 in the first six months and $550,000 in months seven to twelve. Prior to closing, all of the assets and operations related to the SDA Mill were transferred to a newly incorporated entity, Minerales Vane 2 S.A. de C.V. (“Minerales Vane 2”). Effective November 30, 2017, the Company’s newly incorporated wholly-owned subsidiary, Magellan Acquisition Corporation (“MAC”), acquired 100% of the issued and outstanding shares of Minerales Vane 2. On October 17, 2017, the Company amended the agreement to include the acquisition of Minerales Vane Operaciones ("MVO") (the entity that provides labor to the Mill) for $2,500. In January 2018 the Company paid the purchase price and obtained legal control of MVO. MVO is the sister entity which was organized for the purpose of employing all personnel of the SDA mill. The acquisition of MVO will not result in the acquisition of any additional assets or liabilities. The Company entered into an agreement giving it the right to acquire the El Dorado Gold-Silver Property, a 50 hectare mining concession located near the village of Las Minitas, which lies 50 kilometers south of Magellan’s SDA Flotation Plant at Acaponeta, Nayarit State. Magellan intends to advance El Dorado towards production as a matter of priority. The project has excellent road and rail infrastructure, and the Company plans to truck the ore from El Dorado to the SDA Plant for processing. El Dorado is situated within a district of epithermal vein systems from which historic mining produced high grades. 23 Effective March 31, 2020 Magellan Gold Corporation, a Nevada corporation (the “Company”) entered into an Agreement to Accept Collateral in Full Satisfaction of Obligations (the “Agreement”) with certain holders of Promissory Notes (the “Lenders”) due December 31, 2019 (the “Notes”) in the aggregate principal amount of $1.05 million. The Company is indebted under the Notes to the Lenders and the Company’s obligations to the Lenders are secured by a Stock Pledge and Security Agreement covering 100 shares of common stock of Magellan Acquisition Corporation and one (1) share of Minerales Vane 2 S.A. de CV (“MV2”) (the “Collateral”) held under a Collateral Agent Agreement. Magellan Acquisition Corp. and MV2 own the SDA Mill and El Dorado prospect in Nayarit, Mexico. The Notes matured on December 31, 2019 an remain unpaid and in default. The Lenders have accelerated the Company’s indebtedness. Pursuant to terms set forth in the Agreement, the Lenders have agreed to accept the Collateral in full satisfaction of the Notes and unconditionally and irrevocably waive any entitlement or right to receive payment of (i) the initial 10% Financing Fee included in the principal amount of the Notes, (ii) the 5% Rollover Fee agreed to in an Allonge and Modification Agreement. The effective date of the Agreement was March 31, 2020. Effective July 1, 2020, Magellan entered into a stock purchase agreement to acquire Clearwater Gold Mining Corporation (“Clearwater”) which owns certain unpatented mining claims in Idaho County, Idaho that include the historic Center Star Gold Mine near Elk City, Idaho. The Center Star Mine hosts high grade gold mineralization that was discovered in the early 1900’s. There was periodic historic production and development work done under different ownership through the 1980s. With the high-grade gold mineralization present, Magellan will be evaluating the historic mine data to assess the potential to develop a gold resource at Center Star. The project area is located 45 miles from Grangeville, Idaho and near the town of Elk City, Idaho. In consideration for 100% of the issued and outstanding shares of Clearwater, Magellan has agreed to pay its sole shareholder 1,000,000 shares of Magellan common stock and $150,000 in cash. Of the 1,000,000 shares, 750,000 have been issued and 250,000 shares will be issued two years from the closing concurrent with the pay-off of the secured promissory note. The cash consideration of $25,000 was paid and the balance of $125,000 is evidenced by a secured promissory note due in two years. The Note is secured by the Clearwater shares and assets. Our primary focus is to advance our Idaho gold project towards resource definition and eventual development, and possibly to acquire additional mineral rights and conduct additional exploration, development and permitting activities. Our permitting applications and exploration and development efforts will require additional capital. We rely upon the sale of our securities as well as advances and loans from executive management and significant shareholders to fund our operations as we have not generated any significant revenue. Results of Operations for the Years Ended December 31, 2021 and 2020 Years Ended December 31, 2021 2020 Operating expenses: General and administrative expenses $ 1,770,847 $ 1,175,110 Total operating expenses 1,770,847 1,175,110 Operating loss (1,770,847 ) (1,175,110 ) Other income (expense): Interest expense (230,647 ) (424,858 ) Other income – 26,980 Loss on settlement of liabilities – (2,110,047 ) Loss on change in derivative liability (55,238 ) – Total other income (expense) (285,885 ) (2,507,925 ) Net loss from continuing operations (2,056,732 ) (3,683,035 ) Net loss from discontinued operation – (31,599 ) Net loss $ (2,056,732 ) $ (3,714,634 ) 24 Operating expenses During the year ended December 31, 2021, our total operating expenses included general and administrative expenses of $1,770,847 as compared to $1,175,110 during the year ended December 31, 2020. The $595,737 increase is primarily associated with increases in rent, audit fees and stock-based compensation which were offset by decreases in consulting fees and investor relation fees. Other income (expenses) Interest expense for the year ended December 31, 2021 and 2020 totaled $230,647 and $424,858, respectively. The decrease in interest expense is related to the conversion of debt to equity during the year ended December 31, 2020. Loss on settlement of liabilities for the year ended December 31, 2020 totaled $2,110,047. The loss on settlement was a result of settlement of convertible debt and advances for common shares and warrants during the year ended December 31, 2020. Other income for the year ended December 31, 2020 of $26,980 was related to the NVX option and Small Business Administration Economic Injury Disaster Loan Grant. Discontinued operations The net loss from discontinued operations during the year ended December 31, 2020 totaled $31,599. Net loss from discontinued operations represents the Mexico operations and Gulf+Western that were disposed of in March 2020 and July 2020, respectively. 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, 2021, we had not yet generated any significant revenues or achieved profitable operations and we have accumulated losses of $17,969,813. We expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern depends on our ability to generate future profits and/or to obtain the necessary financing to meet our obligations arising from normal business operations when they come due. During the year ended December 31, 2021, the Company entered into a debt agreement to borrow up to $200,000 and received $175,000 in cash proceeds. Additionally, the Company received $287,000 of proceeds from the exercise of warrants. During the year ended December 31, 2020, the Company sold $285,000 of Series 2020A 8% Unsecured Convertible Notes with a maturity date of November 30, 2020. The purchase price of the Note is equal to the principal amount of the Note. The Series 2020A Notes are convertible into shares of Common Stock at a conversion price of $0.50 during the life of the Note. The lenders were issued 142,500 common stock warrants with an exercise price of $0.50 per share for a term of 5 years. Effective March 31, 2020 the Company entered into an Agreement to Accept Collateral in Full Satisfaction of Obligations (the “Agreement”) with certain holders of Promissory Notes (the “Lenders”) due December 31, 2019 (the “Notes”) in the aggregate principal amount of $1.05 million. The Company is indebted under the Notes to the Lenders and the Company’s obligations to the Lenders are secured by a Stock Pledge and Security Agreement covering 100 shares of common stock of Magellan Acquisition Corporation and one (1) share of MV2 (the “Collateral”) held under a Collateral Agent Agreement. Magellan Acquisition Corp. and MV2 own the SDA Mill and El Dorado prospect in Nayarit, Mexico. The Notes matured on December 31, 2019 and remain unpaid and in default. The Lenders have accelerated the Company’s indebtedness. Pursuant to terms set forth in the Agreement, the Lenders have agreed to accept the Collateral in full satisfaction of the Notes and unconditionally and irrevocably waive any entitlement or right to receive payment of (i) the initial 10% Financing Fee included in the principal amount of the Notes, (ii) the 5% Rollover Fee agreed to in an Allonge and Modification Agreement. The effective date of the Agreement was March 31, 2020. 25 On July 21, 2020, the Company entered into a Stock Purchase agreement with Tri Power Resources, LLC to sell 1,000 shares representing 100% ownership of Gulf+Western Industries, Inc (“Gulf+Western”) to Tri Power in consideration for the return and cancellation of 50,000 shares of the Company’s Series A Preferred Stock with a stated value of $10 per share. John Gibbs, a majority shareholder in the Company, is the Managing Member and Chief Executive Officer of Tri Power Resources, LLC We anticipate that additional funding will be in the form of additional loans from officers, directors or significant shareholders, or equity financing from the sale of our common stock but cannot assure that any future financings will occur. Cash Flows A summary of our cash provided by and used in operating, investing and financing activities is as follows: Years ended December 31, 2021 2020 Net cash used in operating activities from continuing operations $ (312,882 ) $ (136,803 ) Net cash used in operating activities from discontinued operations – (51,491 ) Net cash used in operating activities (312,882 ) (188,294 ) Net cash used in investing activities from continuing operations (80,537 ) (113,828 ) Net cash used in investing activities from discontinued operations – – Net cash used in investing activities (80,537 ) (113,828 ) Net cash provided by financing activities from continuing operations 412,185 233,319 Net cash provided by financing activities from discontinued operations – – Net cash used in financing activities 412,185 233,319 Effect of foreign currency exchange – 68,636 Net change in cash and cash equivalents 18,766 (167 ) Cash and cash equivalents beginning of period – 167 Cash and cash equivalents end of period $ 18,766 $ – At December 31, 2021, we had $18,766 in cash and a $1,459,741 working capital deficit. This compares to no cash and a working capital deficit of $1,476,062 at December 31, 2020. Net cash used in operating activities from continuing operations during the year ended December 31, 2021 was $312,882 and was mainly comprised of our $2,056,732 net loss during the year, adjusted by $1,454,580 of stock compensation and accretion of discounts on notes payable of $164,465. In addition, it reflects changes in operating assets and liabilities of $69,567. Net cash used in operating activities from continuing operations during the year ended December 31, 2020 was $136,803 and was mainly comprised of our $3,683,035 net loss during the year, adjusted by a non-cash charges of $2,153,183 for loss on settlement of liabilities, $634,921 of stock compensation and accretion of discounts on notes payable of $346,781. In addition, it reflects changes in operating assets and liabilities of $411,347. Net cash used in operating activities from discontinued operations during the years ended December 31, 2021 and 2020 of $0 and $51,491, respectively, are related to the disposal of the Mexico and Gulf+Western operations. 26 Net cash used in investing activities from continuing operations during the year ended December 31, 2021 was $80,537 which was comprised of cash payments for development costs. Net cash used in investing activities from continuing operations during the year ended December 31, 2020 was $113,828 and was comprised of cash payments of $101,328 in development costs and $12,500 for mineral rights for Clearwater Mining Corporation. Net cash provided by financing activities from continuing operations during the year ended December 31, 2021 was $412,185 comprised $287,500 proceeds from the sale of common stock and warrants, $175,000 proceeds from convertible debt from third parties, $605 proceeds from advances from related parties, offset by $30,420 payments on convertible notes from third parties and $20,000 payments on advances from related parties. Net cash provided by financing activities from continuing operations during the year ended December 31, 2020 was $233,319 comprised $38,500 proceeds from the sale of common stock and warrants, $235,000 proceeds from convertible debt from third parties, $60,000 proceeds from convertible debt from related parties, $45,830 proceeds from advances from related parties, $20,000 proceeds on advances from third parties, offset by $10,000 payments on convertible notes from third parties and $156,011 payments on advances from related parties. 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.