UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2015March 31, 2016
¨TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to __________________
000-21777
(Commission File Number)
GOLDEN QUEEN MINING CO. LTD.
(Exact name of registrant as specified in its charter)
British Columbia, Canada | Not Applicable | ||
(State or other jurisdiction of incorporation) | (IRS Employer Identification) No.) |
2300 – 1066 West Hastings Street
Vancouver, British Columbia
V6E 3X2 Canada
(Address of principal executive offices)
Issuer’s telephone number, including area code:(778) 373-1557
Former name, former address and former fiscal year, if changed since last report:N/A
Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Securities and 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. Yesx No¨
Check 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). Yesx No¨
Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer¨ Accelerated filerx¨ Non-accelerated filer¨x Smaller reporting company¨
Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes¨ Nox
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:As of November 9, 2015May 10, 2016 the registrant’s outstanding common stock consisted of 99,928,683 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2 |
Golden Queen Mining Co. Ltd.
Condensed Consolidated Interim Financial Statements
September 30, 2015March 31, 2016
(US Dollars)Dollars - Unaudited)
2
3 |
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Balance Sheets
(UnauditedUS dollars - US dollars)Unaudited)
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash (Note 8 (vii)) | $ | 52,005,369 | $ | 91,407,644 | ||||
Receivables | 28,031 | 52,136 | ||||||
Prepaid expenses and other current assets | 222,805 | 114,625 | ||||||
Inventory (Note 3) | 182,865 | - | ||||||
Total current assets | 52,439,070 | 91,574,405 | ||||||
Property (Note 2) | 229,470 | 251,467 | ||||||
Mineral property interests (Note 4) | 112,848,211 | 37,138,134 | ||||||
Reclamation financial assurance (Note 6) | 902,382 | 553,329 | ||||||
Total Assets | $ | 166,419,133 | $ | 129,517,335 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities (Note 8(i)) | $ | 4,615,341 | $ | 3,309,476 | ||||
Interest payable (Note 8(ii) and (iii)) | 1,166,667 | 320,721 | ||||||
Closing fee payable (Note 8(iii)) | - | 250,000 | ||||||
Notes payable (Note 8(iii)) | - | 13,881,305 | ||||||
Current portion of loans payable (Note 11) | 3,323,700 | 222,839 | ||||||
Derivative liability–convertible debenture (Note 8(ii)) | - | 1,829,770 | ||||||
Convertible debenture (Note 8(ii)) | - | 6,649,967 | ||||||
Total current liabilities | 9,105,708 | 26,464,078 | ||||||
Notes payable (Note 8(iii)) | 34,241,143 | - | ||||||
Derivative liability – warrants (Note 8(iv)) | 3,964,164 | - | ||||||
Asset retirement obligations (Note 6) | 902,382 | 624,142 | ||||||
Loans payable (Note 11) | 9,677,902 | 690,293 | ||||||
Total Liabilities | 57,891,299 | 27,778,513 | ||||||
Temporary Equity | ||||||||
Redeemable portion of non-controlling interest (Note 8(vii)) | 27,322,445 | 22,833,645 | ||||||
Shareholders’ Equity | ||||||||
Common shares, no par value, unlimited shares authorized 99,928,683 (2014 – 99,778,683) shares issued and outstanding (Notes 5 and 8(i)) | 62,860,443 | 62,709,015 | ||||||
Additional paid-in capital (Note 8(vii)) | 56,545,713 | 56,390,510 | ||||||
Deficit accumulated | (79,184,434 | ) | (74,444,816 | ) | ||||
Total shareholders’ equity attributable to GQM Ltd. | 40,221,722 | 44,654,709 | ||||||
Non-controlling interest (Note 8(vii)) | 40,983,667 | 34,250,468 | ||||||
Total Shareholders’ Equity | 81,205,389 | 78,905,177 | ||||||
Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 166,419,133 | $ | 129,517,335 |
March 31, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 26,658,270 | $ | 37,587,311 | ||||
Receivables | 26,164 | 23,962 | ||||||
Inventory (Note 2) | 4,424,044 | 1,935,599 | ||||||
Prepaid expenses and other current assets | 439,784 | 432,353 | ||||||
Total current assets | 31,548,262 | 39,979,225 | ||||||
Property, plant, equipment and mineral interests (Note 3) | 136,785,656 | 128,562,572 | ||||||
Reclamation financial assurance deposit (Note 5) | - | 902,382 | ||||||
Total Assets | $ | 168,333,918 | $ | 169,444,179 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities (Note 7(i)) | $ | 3,631,830 | $ | 3,258,692 | ||||
Interest payable (Note 7(ii)) | 988,696 | 969,645 | ||||||
Notes payable (Note 7(ii)) | 37,634,420 | 36,053,012 | ||||||
Current portion of loan payable (Note 12) | 5,057,912 | 4,942,716 | ||||||
Derivative liability – Warrants (Note 7(iii)) | 9,423,226 | 2,498,269 | ||||||
Derivative liability– Hedging instruments (Note 8) | 106,268 | - | ||||||
Total current liabilities | 56,842,352 | 47,722,334 | ||||||
Asset retirement obligations (Note 5) | 1,075,149 | 978,453 | ||||||
Loan payable (Note 12) | 12,379,776 | 13,430,107 | ||||||
Deferred tax liability | 12,922,000 | 12,922,000 | ||||||
Total liabilities | 83,219,277 | 75,052,894 | ||||||
Temporary Equity | ||||||||
Redeemable portion of non-controlling interest (Note 7(v)) | 26,981,875 | 27,123,741 | ||||||
Shareholders’ Equity | ||||||||
Common shares, no par value, unlimited shares authorized (2015 -unlimited); 99,928,683 (2015 – 99,778,683) shares issued and outstanding (Note 4) | 62,860,443 | 62,860,443 | ||||||
Additional paid-in capital | 43,631,310 | 43,627,511 | ||||||
Deficit accumulated | (88,831,798 | ) | (79,906,021 | ) | ||||
Total shareholders’ equity attributable to GQM Ltd. | 17,659,955 | 26,581,933 | ||||||
Non-controlling interest (Note 7(v)) | 40,472,811 | 40,685,611 | ||||||
Total Shareholders’ Equity | 58,132,766 | 67,267,544 | ||||||
Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 168,333,918 | $ | 169,444,179 |
Basis of Presentation and Ability to Continue as a Going Concern (Note 1)
Commitments and Contingencies (Note 7)6)
Subsequent Events (Note 15)14)
Approved by the Directors:
“Thomas M. Clay” | “Bryan A. Coates” | |
Thomas M. Clay, | Bryan A. Coates, Director |
See Accompanying Summary of Accounting Policies and Notes to the Condensed Consolidated Interim Financial Statements
3
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GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Income/(Loss)Loss and Comprehensive Income/(Loss)Loss
(UnauditedUS dollars - US dollars)Unaudited)
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
General and administrative expenses (Notes 9 and 13) | $ | (672,738 | ) | $ | (1,119,216 | ) | $ | (3,403,485 | ) | $ | (4,266,435 | ) | ||||
Change in fair value of derivative liability including change in foreign exchange (Notes 8(ii) and 8(iv)) | (598,770 | ) | 2,861,314 | 1,868,329 | (1,251,381 | ) | ||||||||||
(1,271,508 | ) | 1,742,098 | (1,535,156 | ) | (5,517,816 | ) | ||||||||||
Interest expense (Note 8(vi) and Note 11) | (981,390 | ) | (208,126 | ) | (2,999,254 | ) | (1,163,543 | ) | ||||||||
Loss on extinguishment of debt (Note 8(iii)) | - | - | (151,539 | ) | - | |||||||||||
Closing fee (Note 8(iii)) | - | - | (1,500,000 | ) | - | |||||||||||
Commitment fee (Note 8(vii)) | - | (2,250,000 | ) | - | (2,250,000 | ) | ||||||||||
Joint venture transaction fee (Note 8(vii)) | - | (2,275,000 | ) | - | (2,275,000 | ) | ||||||||||
Interest income | 49,805 | 18,940 | 168,330 | 33,778 | ||||||||||||
Net and comprehensive income (loss) for the period | (2,203,093 | ) | (2,972,088 | ) | (6,017,619 | ) | (11,172,581 | ) | ||||||||
Add: Net and comprehensive loss attributable to the non-controlling interest for the period (Note 8(vii)) | 278,926 | 1,160,245 | 1,278,001 | 1,160,245 | ||||||||||||
Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. for the period | $ | (1,924,167 | ) | $ | (1,811,843 | ) | $ | (4,739,618 | ) | $ | (10,012,336 | ) | ||||
Earnings (Loss) per share – basic (Note 10) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.10 | ) | ||||
Earnings (Loss) per share – diluted (Note 10) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.10 | ) | ||||
Weighted average number of common shares outstanding -basic | 99,928,683 | 99,778,683 | 99,881,430 | 99,554,864 | ||||||||||||
Weighted average number of common shares outstanding -diluted | 99,928,683 | 99,778,683 | 99,881,430 | 99,554,864 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
General and administrative expenses | (1,527,176 | ) | (739,533 | ) | ||||
Change in fair value of derivative liability including change in foreign exchange (Notes 7(iii) and 8) | (7,031,225 | ) | (101,749 | ) | ||||
(8,558,401 | ) | (841,282 | ) | |||||
Interest expense (Note 7(iv)) | (761,571 | ) | (947,753 | ) | ||||
Interest income | 39,529 | 66,142 | ||||||
Net loss and comprehensive loss for the period | (9,280,443 | ) | (1,722,893 | ) | ||||
Deduct: Net loss and comprehensive loss attributable to the non-controlling interest for the period (Note 7(v)) | 354,666 | 286,706 | ||||||
Net loss and comprehensive loss attributable to Golden Queen Mining Co Ltd. for the period | $ | (8,925,777 | ) | $ | (1,436,187 | ) | ||
Loss per share - basic (Note 11) | $ | (0.09 | ) | $ | (0.01 | ) | ||
Loss per share - diluted (Note 11) | $ | (0.09 | ) | $ | (0.01 | ) | ||
Weighted average number of common shares outstanding – basic and diluted | 99,928,683 | 98,785,350 |
See Accompanying Summary of Accounting Policies and Notes to the Condensed Consolidated Interim Financial Statements
4
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GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Shareholders’ Equity, Non-controlling Interest and Redeemable Portion of Non-controlling Interest
(UnauditedUS dollars - US dollars)Unaudited)
Common Shares | Amount | Additional Paid-in Capital | Deficit Accumulated | Total Shareholders’ Equity attributable to GQM Ltd | Non-controlling Interest | Total Shareholders’ Equity | Redeemable Portion of Non- controlling Interest | |||||||||||||||||||||||||
Balance, December 31, 2013 | 99,233,383 | $ | 62,289,402 | $ | 9,927,142 | $ | (65,975,612 | ) | $ | 6,240,932 | $ | - | $ | 6,240,932 | $ | - | ||||||||||||||||
Issuance of common shares for mineral property interests | 15,300 | 24,480 | - | - | 24,480 | - | 24,480 | - | ||||||||||||||||||||||||
Stock options exercised | 530,000 | 395,133 | (283,712 | ) | - | 111,421 | - | 111,421 | - | |||||||||||||||||||||||
Stock-based compensation | - | - | 233,672 | - | 233,672 | - | 233,672 | - | ||||||||||||||||||||||||
Dilution of ownership interest in subsidiary to non-controlling interest (Note 8(vi)) | - | - | 46,513,408 | - | 46,513,408 | 38,091,955 | 84,605,363 | 25,394,637 | ||||||||||||||||||||||||
Distributions to non-controlling interest | - | - | - | - | - | (3,000,000 | ) | (3,000,000 | ) | (2,000,000 | ) | |||||||||||||||||||||
Net loss for the year | - | - | - | (8,469,204 | ) | (8,469,204 | ) | (841,487 | ) | (9,310,691 | ) | (560,992 | ) | |||||||||||||||||||
Balance, December 31, 2014 | 99,778,683 | $ | 62,709,015 | $ | 56,390,510 | $ | (74,444,816 | ) | $ | 44,654,709 | $ | 34,250,468 | $ | 78,905,177 | $ | 22,833,645 | ||||||||||||||||
Issuance of common shares as part of management agreement | 150,000 | 151,428 | - | - | 151,428 | - | 151,428 | - | ||||||||||||||||||||||||
Top-up contribution from non-controlling interest | - | - | - | - | - | 7,500,000 | 7,500,000 | 5,000,000 | ||||||||||||||||||||||||
Stock-based compensation | - | - | 155,203 | - | 155,203 | - | 155,203 | - | ||||||||||||||||||||||||
Net loss for the period | - | - | - | (4,739,618 | ) | (4,739,618 | ) | (766,801 | ) | (5,506,419 | ) | (511,200 | ) | |||||||||||||||||||
Balance, September 30, 2015 | 99,928,683 | $ | 62,860,443 | $ | 56,545,173 | $ | (79,184,434 | ) | $ | 40,221,722 | $ | 40,983,667 | $ | 81,205,389 | $ | 27,322,445 |
Common Shares | Amount | Additional Paid-in Capital (Restated – Note 15) | Deficit Accumulated | Total Shareholders’ Equity attributable to GQM Ltd (Restated – Note 15) | Non-controlling Interest | Total Shareholders’ Equity (Restated – Note 15) | Redeemable Portion of Non- controlling Interest | |||||||||||||||||||||||||
Balance, December 31, 2014 (Restated – Note 15) | 99,778,683 | $ | 62,709,015 | $ | 43,468,510 | $ | (74,444,816 | ) | $ | 31,732,709 | $ | 34,250,468 | $ | 65,983,177 | $ | 22,833,645 | ||||||||||||||||
Issuance of common shares as part of management agreement (Note 6) | 150,000 | 151,428 | - | - | 151,428 | - | 151,428 | - | ||||||||||||||||||||||||
Stock-based compensation | - | - | 159,001 | - | 159,001 | - | 159,001 | - | ||||||||||||||||||||||||
Capital contribution from non-controlling interest (Note 7(v)) | - | - | - | - | - | 7,500,000 | 7,500,000 | 5,000,000 | ||||||||||||||||||||||||
Net loss for the year | - | - | - | (5,461,205 | ) | (5,461,205 | ) | (1,064,857 | ) | (6,526,062 | ) | (709,904 | ) | |||||||||||||||||||
Balance, December 31, 2015 | 99,928,683 | $ | 62,860,443 | $ | 43,627,511 | $ | (79,906,021 | ) | $ | 26,581,933 | $ | 40,685,611 | $ | 67,267,544 | $ | 27,123,741 | ||||||||||||||||
Stock-based compensation | - | - | 3,799 | - | 3,799 | - | 3,799 | - | ||||||||||||||||||||||||
Net loss for the period | - | - | - | (8,925,777 | ) | (8,925,777 | ) | (212,800 | ) | (9,138,577 | ) | (141,866 | ) | |||||||||||||||||||
Balance, March 31, 2016 | 99,928,683 | $ | 62,860,443 | $ | 43,631,310 | $ | (88,831,798 | ) | $ | 17,659,955 | $ | 40,472,811 | $ | 58,132,766 | $ | 26,981,875 |
See Accompanying Summary of Accounting Policies and Notes to the Condensed Consolidated Interim Financial Statements
5
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GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Cash Flows
(UnauditedUS dollars - US dollars)Unaudited)
Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||
Operating activities: | ||||||||
Loss for the period | $ | (6,017,619 | ) | $ | (11,172,581 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
Amortization and depreciation | 21,997 | 26,705 | ||||||
Amortization of debt discount and interest accrual | 2,863,396 | 953,936 | ||||||
Change in fair value of derivative liabilities including change in foreign exchange | (1,868,329 | ) | 1,251,381 | |||||
Shares for services (Note 8(i) and Note 13) | 151,428 | - | ||||||
Stock-based compensation | 155,203 | 279,917 | ||||||
Loss on extinguishment of debt (Note 8(iii)) | 151,539 | - | ||||||
Closing fee related to long-term debt | 1,500,000 | - | ||||||
Realized foreign exchange | (839,849 | ) | (282,415 | ) | ||||
Changes in assets and liabilities: | ||||||||
Receivables | 24,105 | (50,846 | ) | |||||
Prepaid expenses and other current assets | (108,180 | ) | (91,276 | ) | ||||
Inventory | (182,865 | ) | - | |||||
Accounts payable and accrued liabilities | 285,272 | (76,376 | ) | |||||
Interest payable | (951,445 | ) | (186,180 | ) | ||||
Cash used in operating activities | (4,815,347 | ) | (9,347,735 | ) | ||||
Investment activities: | ||||||||
Additions to mineral property interests | (59,812,875 | ) | (13,232,736 | ) | ||||
Purchase of financial assurance | (349,053 | ) | (84,366 | ) | ||||
Cash used in investing activities | (60,161,928 | ) | (13,317,102 | ) | ||||
Financing activities: | ||||||||
Top-up contribution from non-controlling interest | 12,500,000 | - | ||||||
Investment in Golden Queen Mining LLC by non-controlling interest | - | 110,000,000 | ||||||
Distribution to non-controlling interest | - | (5,000,000 | ) | |||||
Borrowing under long-term debt | 25,000,000 | - | ||||||
Repayment of short-term debt | (2,500,000 | ) | (10,000,000 | ) | ||||
Borrowing under short-term debt | 20,000,000 | |||||||
Repayment of convertible debentures | (7,675,000 | ) | - | |||||
Closing fees related to short-term debt capitalized to the loan | (250,000 | ) | - | |||||
Closing fees related to long-term debt | (1,500,000 | ) | - | |||||
Issuance of common shares upon exercise of stock options | - | 111,421 | ||||||
Cash provided by financing activities | 25,575,000 | 115,111,421 | ||||||
Net change in cash | (39,402,275 | ) | 92,446,584 | |||||
Cash, Beginning balance | 91,407,644 | 5,030,522 | ||||||
Cash, Ending balance | $ | 52,005,369 | $ | 97,477,106 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Operating activities: | ||||||||
Net loss for the period | $ | (9,280,443 | ) | $ | (1,722,893 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
Amortization and depreciation | 6,739 | 7,700 | ||||||
Amortization of debt discount and interest accrual | 761,571 | 934,342 | ||||||
Change in fair value of derivative liabilities including change in foreign exchange | 7,031,225 | 101,749 | ||||||
Stock-based compensation | 3,799 | - | ||||||
Non-cash consulting expense | - | 151,428 | ||||||
Foreign exchange gain | - | (581,102 | ) | |||||
Changes in assets and liabilities: | ||||||||
Receivables | (2,202 | ) | 17,635 | |||||
Prepaid expenses and other current assets | (7,431 | ) | (143,117 | ) | ||||
Inventory | (1,620,940 | ) | - | |||||
Accounts payable and accrued liabilities | 51,807 | 132,611 | ||||||
Interest payable | (144,284 | ) | (250,000 | ) | ||||
Cash used in operating activities | (3,200,159 | ) | (1,351,647 | ) | ||||
Investment activities: | ||||||||
Additions to property, plant, equipment and mineral interests | (7,401,004 | ) | (18,131,600 | ) | ||||
Release (purchase) of reclamation financial assurance deposit | 902,382 | (14 | ) | |||||
Cash used in investing activities | (6,498,622 | ) | (18,131,614 | ) | ||||
Financing activities: | ||||||||
Repayment of loans payable | (1,230,260 | ) | (90,779 | ) | ||||
Repayment of short-term debt | - | (2,500,000 | ) | |||||
Financing fees related to short-term debt capitalized to the loan | - | (250,000 | ) | |||||
Cash provided by financing activities | (1,230,260 | ) | (2,840,779 | ) | ||||
Net change in cash | (10,929,041 | ) | (22,324,040 | ) | ||||
Cash, Beginning balance | 37,587,311 | 91,407,644 | ||||||
Cash, Ending balance | $ | 26,658,270 | $ | 69,083,604 |
Supplementary Disclosures of Cash Flow Information (Note 9)
See Accompanying Summary of Accounting Policies and Notes to the Condensed Consolidated Interim Financial Statements
6
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Nature of Business Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or the “Company”) is engaged in the development of the Soledad Mountain Project (“the Project”), located in the Mojave Mining District, Kern County, California. The construction phase of the Project was completed in February 2016 and the Company commenced production in March 2016.
The Company originally used its wholly owned subsidiary, Golden Queen Mining Company, Inc. (“GQM Inc.”), to explore and develop the Project. On September 10, 2014, GQM Inc. was converted to a limited liability company, Golden Queen Mining Company, LLC (“GQM LLC”). The Company entered into a Joint Venture Transaction(the “JV”) agreement with Gauss LLC (“Gauss”) through its newly formed, wholly owned subsidiary, Golden Queen Mining Holdings, Inc. (“GQM Holdings”). The Joint Venture TransactionJV was completed on September 15, 2014. Upon completion of the Joint Venture Transaction,JV, both the Company, through GQM Holdings, and Gauss each owned, and continue to own, 50% of GQM LLC. In February 2015, the Company incorporated Golden Queen Mining Canada Ltd. (“GQM Canada”), a wholly-owned British Columbia subsidiary, to hold the Company’s interest in GQM Holdings.
Basis of PreparationThese unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accounting policies followed in preparing these condensed consolidated interim financial statements are those used by the Company as set out in the audited consolidated financial statements for the year ended December 31, 2015.
Certain information and note disclosures normally included for annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. These condensed consolidated interim financial statements should be read together with the audited consolidated financial statements of the Company for the year ended December 31, 2015.
In the opinion of management, all adjustments considered necessary (including reclassifications and normal recurring adjustments) to present fairly the financial position, results of operations and cash flows at March 31, 2016 and for all periods presented, have been included in these financial statements. The interim results are not necessarily indicative of results for the full year ending December 31, 2016, or future operating periods. For further information, see the Company’s annual consolidated financial statements, including the accounting policies and notes thereto.
Judgements and EstimatesThe preparation of financial statements in conformity with GAAP requires management to make judgements, estimates, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and judgements have been made by Management in several areas including the accounting for the joint venture transaction and determination of temporary and permanent non-controlling interest, the recoverability of mineral properties expenditures, royalty obligations, inventory valuations, ore on heap leach pads, asset retirement obligations, convertible debentures, and derivative liability – warrants. A key judgement for 2016 relates to when the Soledad Mountain mine enters the production phase. Generally, under US GAAP a mine would be considered to be in the production phase once it has demonstrated that it is producing saleable quantities of product. As at March 31, 2016, the Soledad Mountain mine is not considered to have entered the production phase.
Principles of ConsolidationThe Company consolidates all entities in which it can vote a majority of the outstanding voting stock. In addition, it consolidates entities which meet the definition of a variable interest entity for which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. We consider special allocations of cash flows and preferences, if any, to determine amounts allocable to non-controlling interests. All intercompany transactions and balances are eliminated in consolidation.
These condensed consolidated interim financial statements include the accounts of Golden Queen, a British Columbia corporation, its wholly-owned subsidiaries, GQM Canada, GQM Holdings, a US (State of California) corporation, and GQM LLC, a limited liability company in which Golden Queen has a 50% interest, through GQM Holdings. GQM LLC meets the definition of a Variable Interest Entity (“VIE”). Golden Queen has determined it is the member of the related party group that is most closely associated with GQM LLC and, as a result, is the primary beneficiary who consolidates GQM LLC.
Generally Accepted Accounting Principles (“GAAP”) The condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
CashFor purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash and cash equivalents with high quality financial institutions. At times, such cash deposits may be in excess of Federal Deposit Insurance Corporation insurance limits. To date, the Company has not experienced a loss or lack of access to its cash and cash equivalents. However, no assurance can be provided that access to the Company’s cash and cash equivalents will not be impacted by adverse economic conditions in the financial markets.
PropertyProperty is stated at the lower of cost or net realizable value less accumulated depreciation. Depreciation is provided by the straight-line method over the estimated service lives of the respective assets, which range from 0 to 30 years, as follows:
The Company has instituted a policy that all property and equipment, not related to the development of the mine, acquired for an amount over $3,000 will be capitalized and all property and equipment purchased for under this threshold will be expensed as incurred.
Metal and Other InventoryInventories include stock piles, in-process inventory, doré, and operating materials and supplies. The classification of inventory is determined by the stage at which the ore is in the production process. All inventories are stated at the lower of cost or market, with cost being determined using a weighted average cost method. Dore inventory includes product at the mine site. Dore inventory costs include direct labor, materials, depreciation, depletion and amortization as well as overhead costs relating to mining activities.
7
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Mineral Properties Costs related to the development of our mineral reserves are capitalized whenit has been determined an ore body can be economically developed. An ore body is determined to be economically minable based on proven and probable reserves and when appropriate permits are in place. Major mine development expenditures are capitalized, including primary development costs such as costs of building access roads, heap leach pads, processing facilities, and infrastructure development. The Company also capitalizes additional development expenditures that are directly related to the development of the mine.
Drilling and related costs are classified as additional development expenditures, are charged to operations as incurred, or capitalized, based on the following criteria:
If all of these criteria are met, drilling and related costs are capitalized. Drilling costs not meeting all of these criteria are expensed as incurred. The following factors are considered in determining whether or not the criteria listed above have been met, and capitalization of drilling costs is appropriate:
Once production has commenced, capitalized costs will be depleted using the units-of-production method over the estimated life of the proven and probable reserves. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for that period.
We assess the carrying cost of our mineral properties for impairment whenever information or circumstances indicate the potential for impairment. Such evaluations compare estimated future net cash flows with our carrying costs and future obligations on an undiscounted basis. If it is determined that the future undiscounted cash flows are less than the carrying value of the property, a write down to the estimated fair value is charged to the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the period. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses if the carrying value can be recovered.
Capitalized Interest For significant exploration and development projects, interest is capitalized as part of the historical cost of developing and constructing assets in accordance with ASC 835-20 ("capitalization of interest"). Interest is capitalized until the asset is ready for service. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on general debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depletion or impairment. See Note 8(vi) - Amortization of Discount and Interest Expense.
Valuation of Long-lived Assets Accounting standards require recognition of impairment of long-lived assets in the event the carrying value of such assets may not be recoverable. It requires that those long-lived assets to be disposed of by sale are to be measured at the lower of carrying amount or fair value less cost of sale whether or not reported in continuing operations or in discontinued operations. In accordance with the provisions of the accounting standard 360-10-35, the Company reviews the carrying value of its mineral properties on a regular basis. Estimated undiscounted future cash flows from the mineral properties are compared with the current carrying value in order to determine if impairment exists. Reductions to the carrying value, if necessary, are recorded to the extent the net book value of the property exceeds the estimate of future discounted cash flows or liquidation value.
8
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Foreign Currency Translation The Company’s functional and reporting currency, the US dollar, is the primary economic currency. Assets and liabilities in foreign currencies are generally translated into US dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at exchange rates on the date of the transaction. Where amounts denominated in a foreign currency are converted into US dollars by remittance or repayment, the realized exchange differences are included in other income. The exchange rates prevailing at September 30, 2015 and December 31, 2014 were $1.33 and $1.16, and stated in Canadian dollars per one US dollar, respectively. The average rates of exchange during the nine months ended September 30, 2015 and the year ended December 31, 2014 were $1.26 and $1.10, stated in Canadian dollars per one US dollar, respectively.
Earnings (Loss) Per Share The Company computes and discloses earnings (loss) per share in accordance with ASC 260, “Earnings per Share”, which requires dual presentation of basic earnings (loss) per share and diluted earnings (loss) per share on the face of all income statements presented for all entities with complex capital structures. Basic earnings (loss) per share is computed as net income (loss) attributed to the Company divided by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and convertible instruments. Net income attributable to any non-controlling interest is not included in the calculation of the basic and diluted earnings (loss) per share.
Asset Retirement Obligations Asset retirement obligations (‘‘AROs’’) arise from the acquisition, development and construction of mining properties and plant and equipment due to government controls and regulations that protect the environment on the closure and reclamation of mining properties. The major parts of the carrying amount of AROs relate to tailings and heap leach pad closure and rehabilitation, demolition of buildings and mine facilities, ongoing water treatment and ongoing care and maintenance of closed mines. The Company recognizes an ARO at the time the environmental disturbance occurs. When the ARO provision is recognized, the corresponding cost is capitalized to mineral property interests and depreciated over the life of the related assets.
The timing of the actual environmental remediation expenditures is dependent on a number of factors such as the life and nature of the asset, the operating license conditions and the environment in which the mine operates. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a risk-free interest rate. AROs are adjusted each period to reflect the passage of time (accretion). Accretion expense is recorded in cost of sales each period. Upon settlement of an ARO, the Company records a gain or loss if the actual cost differs from the carrying amount of the ARO. Settlement gains/losses are recorded in the consolidated statements of income (loss).
Expected ARO is updated to reflect changes in facts and circumstances. The principal factors that can cause expected the ARO to change are the construction of new processing facilities, changes in the quantities of material in proven and probable mineral reserves and a corresponding change in the life-of-mine plan, changing ore characteristics that impact required environmental protection measures and related costs, changes in water quality that impact the extent of water treatment required and changes in laws and regulations governing the protection of the environment.
Each reporting period, provisions for AROs are re-measured to reflect any changes to significant assumptions, including the amount and timing of expected cash flows and risk-free interest rates. Changes to the reclamation provision resulting from changes in estimate are added to or deducted from the cost of the related asset, except where the reduction of the reclamation provision exceeds the carrying value of the related assets in which case the asset is reduced to nil and the remaining adjustment is recognized in the consolidated statements of income (loss).
EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and judgements have been made by Management in several areas including the accounting for the joint venture transaction and determination of the temporary and permanent non-controlling interest (Note 8(vii)), the recoverability of mineral properties expenditures (Note 4), estimates of recoverability of metals within the stock pile inventory, estimates of total tonnage mined and placed on the stock pile inventory, asset retirement obligation (Note 6), warrant liability (Note 8(iv)) and convertible debenture (Note 8(ii)). Actual results could differ from those estimates.
9
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash, receivables, accounts payable and accrued liabilities, interest payable, closing fee payable and reclamation financial assurance approximate fair values because of the immediate or short-term maturity of these non-level 3 financial instruments. The fair value of the short-term and long-term loans payable approximate their carrying values as the interest rates are based on the market rates as they were initiated during the quarter and the previous three quarters. The market rates have remained steady for the loans payable during the past four quarters. The carrying value of the short and long term portions of the notes payable approximates their carrying value and have been estimated based on discounted cash flows using interest rates being offered for similar debt instruments. The carrying amount of the notes payable are being recorded at amortized cost using the effective interest rate method.
As at September 30, 2015, the fair value of the convertible debt and the notes payable were estimated using a discounted cash flow analysis based on an interest rate for a similar type of instrument without a conversion feature was $Nil (December 31, 2014: $7,972,993) and $30,564,497 (December 31, 2014: $Nil), respectively. The embedded derivatives in connection with the share purchase warrants are being recorded at their fair values using an acceptable valuation model at each reporting period.
Income TaxesThe Company follows the asset and liability method of accounting for income taxes whereby the deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. If it is determined that the realization of the future tax benefit is not more likely than not, the Company establishes a valuation allowance.
Stock Option Plan The Company’s current stock option plan (the “Plan”) was adopted by the Company in 2013 and approved by shareholders of the Company in 2013. The Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of stock options. The exercise price of stock options granted under the Plan shall be determined by the Company’s Board of Directors (the “Board”), but shall not be less than the volume-weighted, average trading price of the Company’s shares on the TSX for the five trading days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject to a maximum term of five years. The Plan provides that the expiry date of the vested portion of a stock option will be the earlier of the date so fixed by the Board at the time the stock option is awarded and the early termination date (the “Early Termination Date”). The Early Termination Date will be the date the vested portion of a stock option expires following the option holder ceasing to be a director, employee or consultant, as determined by the Board at the time of grant, or in the absence thereof at any time prior to the time the option holder ceases to be a director, employee or consultant, in accordance with and subject to the provisions of the Plan. All options granted under the 2013 Plan will be subject to such vesting requirements as may be prescribed by the TSX, if applicable, or as may be imposed by the Board. A total of 1,270,000 (December 31, 2014 – 750,000) common shares were issuable pursuant to such stock options as at September 30, 2015.
Stock-based CompensationCompensation costs are charged to the consolidated statements of income (loss) and comprehensive income (loss). Compensation costs for employees are amortized over the period from the grant date to the date the options vest. Compensation expense for non-employees is recognized immediately for past services and pro-rata for future services over the service provision period.
We account for stock-based compensation awards granted to non-employees in accordance with FASB ASC Topic 505-50,Equity-Based Payments to Non-Employees, or ASC 505-50. Under ASC 505-50, we determine the fair value of the stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
The Company uses the Black-Scholes option valuation model to calculate the fair value of stock options at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate.
Derivative Financial Instruments The Company reviews the terms of its equity instruments and other financing arrangements to determine whether or not there are embedded derivative instruments that are required to be accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services.
10
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Derivative financial instruments are measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to profit or loss. For simple warrant-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to estimate fair value of the derivative instruments. For more complex derivative financial instruments, including warrants that do not have a fixed exercise price, the Company uses acceptable pricing models to estimate fair value of the derivative instrument.
The classification of derivative instruments, including whether or not such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
11
8 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
NewRecent Accounting PoliciesStandards
(i) | Effective August 2014, FASB issued Accounting Standards update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40 –Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update essentially requires management of all entities, for annual and interim periods, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following:
1. | Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans). |
2. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations. |
3. | Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there issubstantial doubt about the entity’s ability to continue as a going concernwithin one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
This update will come into effect for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is assessing the impact of this standard.
(ii) | In February 2015, the FASB issued ASU 2015-02,Consolidation (Topic 810) – Amendments to the Consolidation Analysiswhich focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the standards and improves current GAAP by: |
· | Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met. |
· | Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE). |
· | Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. |
The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. The Company is assessingadopted the ASU effective January 1, 2016. The Company assessed and concluded there was no impact on the Company with the adoption of thisthe new standard.
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9 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
(iii) | In January 2016, FASB issued ASU 2016-01, Financial Instruments – Recognition and measurement of financial assets and financial liabilities (Subtopic 825-10) which updates several aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments that are relevant to the Company are as follows: |
1. | Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. |
2. | Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. |
3. | Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. |
The ASU will be effective for periods beginning after December 15, 2015,2017, for public companies. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of this standard.
(iv) | In |
The ASU will be effective for periods beginning after December 15, 2016, for public companies. Early adoption is permitted, including adoption in an interim period. The Company has assessedis assessing the impact of this new standard and will adopt the new standard effective October 1, 2015.standard.
13
10 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
1. |
The accompanying unaudited condensed consolidated interim financial statements and notes to the unaudited condensed consolidated interim financial statements contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of Golden Queen Mining Co. Ltd. (“Golden Queen”) and its consolidated subsidiaries. These unaudited condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2014, as it may be amended from time to time.
The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.
The Company has hadgenerated no revenues from operations since inception and as at September 30, 2015March 31, 2016 had aan accumulated deficit of $79,184,434 (December 31, 2014 - $74,444,816)$88,831,798 and a working capital deficit of $43,333,362 (December$25,294,090. Cash used in operations for the three months ended March 31, 2014 –$65,110,327).2016 was $3,055,875.
The Company and its 50%-owned subsidiary, GQM LLC, are a going concern as both have sufficient funds to meet their contractual obligations for the next twelve months.
The Company has a $37.5 million loan maturing on December 8, 2016. Golden Queen, on a non-consolidated basis, currently does not have sufficient funds to repay the $37,500,000 loan plus the accrued interest at the issuance date of the condensed consolidated interim financial statements. However, in order to secure the necessary funds to meet this loan.upcoming obligation and mitigate the going concern issue, management is actively exploring several options including debt financing and equity offering.
While Golden Queen has been successful at certain of these efforts in the past, there can be no assurance that future efforts will be successful. This raises substantial doubt about this entity’s ability to continue as a going concern.
At the Project level, GQM LLC has sufficient funds to meet its contractual obligations for the next twelve months.
The Company’s access to the net assets of GQM LLC is determined by the Board of Managers of GQM LLC. The Board of Managers is not controlled by the Company and therefore there is evaluatingno guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its options, including debtmembership units at their sole discretion.
These condensed consolidated interim financial statements do not include any adjustments to the recoverability and equity,classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to re-finance the June 2015 Loan before or at maturity.continue as a going concern. Such adjustments could be material.
2. |
Property consists of:
March 31, 2016 | December 31, 2015 | |||||||
Stockpile inventory | $ | 1,018,603 | $ | 1,259,669 | ||||
Dore inventory | 255,527 | - | ||||||
Supplies and spare parts | 1,122,325 | 592,690 | ||||||
$ | 2,396,455 | $ | 1,852,359 | |||||
Ore on heap leach pad: | ||||||||
Current | $ | 2,027,588 | 83,240 |
September 30, 2015 | December 31, 2014 | |||||||
Land | $ | 109,600 | $ | 109,600 | ||||
Rental properties | 324,566 | 324,566 | ||||||
Property, cost | 434,166 | 434,166 | ||||||
Less accumulated depreciation | (204,696 | ) | (182,699 | ) | ||||
Property, net | $ | 229,470 | $ | 251,467 |
September 30, 2015 | December 31, 2014 | |||||||
Stock pile inventory | $ | 182,865 | $ | - |
In July 2012, the Company received notice that it had met all the remaining major conditions of the conditional use permits for development of the Project and began capitalizing all development expenditures directly related to the Project. Prior to July 2012, all acquisition costs were expensed due to uncertainties around obtaining the necessary permits.
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11 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Property, Plant, Equipment and Mineral |
Components of capitalized costs related to the mineral properties as of September 30, 2015 and December 31, 2014 are as follows:
September 30, 2015 | December 31, 2014 | |||||||
Mineral property interest, land and claims | $ | 3,893,287 | $ | 3,299,319 | ||||
Deferred mine development costs | 102,572,677 | 31,020,717 | ||||||
Asset retirement costs | 550,807 | 272,567 | ||||||
Capitalized interest | 4,921,914 | 2,412,015 | ||||||
Capitalized depreciation | 909,526 | 133,516 | ||||||
Balance, end of the period | $ | 112,848,211 | $ | 37,138,134 |
March 31, 2016 | December 31, 2015 | |||||||
Land | $ | 3,895,681 | $ | 109,600 | ||||
Mineral property interest and claims | 1,896,239 | 4,458,744 | ||||||
Mine development | 38,274,609 | 86,038,407 | ||||||
Mine equipment | 55,855,709 | 25,425,661 | ||||||
Buildings | 17,010,959 | 5,691,335 | ||||||
Computer equipment and software | 304,582 | 51,030 | ||||||
Vehicles | 1,956,586 | 218,822 | ||||||
Infrastructure (Water/power) | 10,905,711 | 978,573 | ||||||
Asset retirement costs | 723,574 | 626,878 | ||||||
Capitalized interest | 6,180,069 | 5,174,846 | ||||||
Less: | ||||||||
Accumulated depreciation, depletion and amortization expensed | (218,063 | ) | (211,324 | ) | ||||
$ | 136,785,656 | $ | 128,562,572 |
As at September 30, 2015, included in deferred mine development costs are buildings and equipment with a total accumulated cost of $21,692,687 (December 31, 2014 - $2,424,635). Total additions during the three and nine months ended September 30, 2015 were $12,607,036 and $19,268,052 (Three and nine months ended September 30, 2014 - $701,921 and $885,507). During the three and nine monthsmonth period ended September 30, 2015,March 31, 2016, the Company capitalized depreciation of $448,278 and $776,010 (Three and nine months ended September 30, 2014$3,777,949 (December 31, 2015 - $59,962 and $81,062)$1,850,403) relating to these assets was capitalized within deferred mine development.used in the development of the mine.
The Company is capitalizing a portion of the interest expense related to the convertible debenture and loannotes payable in accordance with its accounting policy.See Note 8 (vi)7 (iv) –Amortization of DiscountDiscounts and Interest Expense.
Share Capital |
The Company’s common shares outstanding haveare no par value, and are voting shares with no preferences or rights attached to them.
Common shares -– 2016
During the three months ended March 31, 2016, no common shares were issued by the Company.
Common shares – 2015
In March 2015, the Company issued 150,000 common shares to the former President of the Company for achieving two of the three milestones outlined in his management agreement (See Note 76 – Commitments and Contingencies). The common shares had a total fair value of $151,428 (Note 8(i)7(i)). The fair value was based on the market price on the date of issuance.
Common shares - 2014
In May 2014, 300,000 stock options were exercised and the Company issued 300,000 common shares at $0.21 per share for proceeds of $63,000. The total transferred to share capital from additional paid-in capital upon exercise of stock options was $160,592.
In April 2014, 170,000 stock options were exercised and the Company issued 170,000 common shares at $0.21 per share for proceeds of $35,700. The total transferred to share capital from additional paid-in capital upon exercise of stock options was $91,002.
In February 2014, the Company issued 15,300 common shares for mineral property interests with a total fair value of $24,480. The fair value was based on the market price on the date of issuance.
In February 2014, 60,000 stock options were exercised and the Company issued 60,000 common shares at $0.21 per share for proceeds of $12,721. The total transferred to share capital from additional paid-in capital upon exercise of stock options was $32,118.
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12 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Share Capital |
Stock options
The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. In accordance with the accounting standard for employees, the compensation expense is amortized on a straight-line basis over the requisite service period, which approximates the vesting period. Compensation expense for stock options granted to non-employees is amortized over the contract services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options granted to non-employees is re-measured on each balance sheet date using the Black-Scholes option pricing model.
The following is a summary of stock option activity during the ninethree months ended September 30, 2015March 31, 2016 and September 30, 2014:2015:
Shares | Weighted Average Exercise Price per Share | |||||||
Options outstanding, December 31, 2013 | 1,380,000 | $ | 0.87 | |||||
Options exercised | (530,000 | ) | $ | 0.21 | ||||
Option outstanding, September 30, 2014 | 850,000 | $ | 1.27 | |||||
Options exercisable, September 30, 2014 | 750,000 | $ | 1.29 | |||||
Options forfeited | (100,000 | ) | $ | 1.16 | ||||
Option outstanding and exercisable, December 31, 2014 | 750,000 | $ | 1.29 | |||||
Options expired | (50,000 | ) | $ | 1.22 | ||||
Options issued | 570,000 | $ | 0.58 | |||||
Options outstanding, September 30, 2015 | 1,270,000 | $ | 0.97 | |||||
Options exercisable, September 30, 2015 | 1,176,667 | $ | 1.01 |
Shares | Weighted Average Exercise Price per Share | |||||||
Options outstanding and exercisable, December 31, 2014 | 750,000 | $ | 1.29 | |||||
Options issued | 570,000 | $ | 0.58 | |||||
Options forfeited | (250,000 | ) | $ | 1.18 | ||||
Options outstanding, December 31, 2015 | 1,070,000 | $ | 0.94 | |||||
Options exercisable, December 31, 2015 | 976,667 | $ | 0.97 | |||||
Options outstanding, March 31, 2016 | 1,070,000 | $ | 0.94 | |||||
Options exercisable, March 31, 2016 | 976,667 | $ | 0.97 |
There were no stock options issued, expired, forfeited or cancelled during the three months ended March 31, 2016 and 2015.
During the three and nine months ended September 30, 2015, the Company issued 570,000 stock options with an exercise price of $0.58, expiring in five years for a total stock-based compensation of $155,203 of which $140,008 related to 430,000 stock options issued to directors and $15,195 related to vested portion of the 140,000 stock option issued to an employee of the Company. The stock options issued to the employee have the following vesting conditions:
During the three and nine months ended September 30, 2015,March 31, 2016, the Company recognized $155,203$3,799 (Three and nine months ended September 30, 2014March 31, 2015 - $87,769 and $279,917) in stock-based compensation.
During the year ended December 31, 2014, the Company recognized $233,672$Nil) in stock-based compensation relating to employee stock options that havewere issued and/or had vesting terms. This included a reversal of $46,245 in stock based compensation related to forfeited stock options.
As at September 30, 2015,March 31, 2016, the aggregate intrinsic value of the outstanding exercisable options was $76,267$521,217 (December 31, 20142015 - $Nil).
The total intrinsic value of 530,000 options exercised during 2014 was approximately $754,513. There were no options exercised in the three and nine months ended September 30, 2015.
16
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Stock options – Continued
The fair value of stock options granted as above is calculated using the following weighted average assumptions:
2015 | 2014 | |||||||
Expected life years | 5.00 | - | ||||||
Interest rate | 0.75 | % | - | |||||
Volatility | 76.83 | % | - | |||||
Dividend yield | 0.00 | % | - | |||||
Grant date fair value | $ | 0.326 | - |
The following table summarizes information about stock options outstanding and exercisable at September 30, 2015:March 31, 2016:
Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (Years) | Exercise Price | ||||||||||||
November 11, 2015 | 200,000 | 200,000 | 0.12 | $ | 1.16 | |||||||||||
June 3, 2018 | 50,000 | 50,000 | 2.68 | $ | 1.16 | |||||||||||
September 3, 2018 | 150,000 | 150,000 | 2.93 | $ | 1.59 | |||||||||||
September 18, 2018 | 300,000 | 300,000 | 2.97 | $ | 1.26 | |||||||||||
September 8, 2020 | 570,000 | 476,667 | 4.95 | $ | 0.58 | |||||||||||
Balance, September 30, 2015 | 1,270,000 | 1,176,667 |
The total stock options outstanding had a weighted average remaining contractual life of 3.39 years and the total exercisable stock options had a weighted average remaining contractual life of 3.27 years.
Share Purchase Warrants
During the nine months ended September 30, 2015, the Company granted 10,000,000 share purchase warrants in connection with a financing. See Note 8(iv), for accounting treatment. The following is a summary of the share purchase warrant activity:
September 30, 2015 | December 31, 2014 | |||||||||
Balance, beginning of the period | $ | - | $ | - | ||||||
Issued | 10,000,000 | - | ||||||||
Balance, end of the period | $ | 10,000,000 | $ | - |
Expiry Date | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Exercise Price | Number Outstanding | Number Exercisable | Remaining Contractual Life (Years) | Exercise Price | |||||||||||||||||||||
June 8, 2020 | 10,000,000 | 4.69 | $ | 0.95 | ||||||||||||||||||||||||
June 3, 2018 | 50,000 | 50,000 | 2.18 | $ | 1.16 | |||||||||||||||||||||||
September 3, 2018 | 150,000 | 150,000 | 2.43 | $ | 1.59 | |||||||||||||||||||||||
September 18, 2018 | 300,000 | 300,000 | 2.47 | $ | 1.26 | |||||||||||||||||||||||
September 8, 2020 | 570,000 | 476,667 | 4.44 | $ | 0.58 | |||||||||||||||||||||||
Balance, March 31, 2016 | 1,070,000 | 976,667 | 3.50 |
17
13 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Asset Retirement Obligations and Financial Reclamation Assurance |
Financial Reclamation Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities, forms the basis for a cash deposit ofthe reclamation financial assurance. The reclamation estimate for 2015 isassurance provided as at March 31, 2016 was $624,142 (December 31, 20142015 - $624,142).
The Company is also required to provide financial assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) for closure and reclamation costs related to the lined impoundments, which are defined as the Stage 1 heap leach pad, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate for as of March 31, 2016 is $1,210,889 (December 31, 2015 - $Nil).
In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Project’s waste management units as required by the Lahontan Regional Water Quality Control Board (the “Regional Board”).Board. The reclamation financial assurance estimate for 2015as of March 31, 2016 is $278,240 (December 31, 20142015 - $Nil)$278,240).
In January 2016 the company entered into $2.1 million in surety bond agreements in order to release its reclamation deposits and post a portion of the financial assurance due in 2016. The Company pays a yearly premium. Golden Queen Ltd. has provided reclamation financial assurance toa corporate guarantee on the Bureau of Land Management, the State and Kern County and a reasonably foreseeable release financial assurance to the Regional Board totaling $902,382 (December 31, 2014 - $553,329; September 30, 2014 - $563,105).surety bonds.
Asset Retirement Obligation
The total asset retirement obligation as of September 30, 2015March 31, 2016 is $902,382$1,075,149 (December 31, 20142015 - $624,142; September 30, 2014 - $552,250)$978,453).
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and clean-up its property based on its activities to date. During the ninethree months ended September 30, 2015,March 31, 2016, there was an increase of $278,240$96,696 (Three months ended March 31, 2015 - $Nil) to the asset retirement obligations as compared with the year ended December 31, 2014, where $71,892that was capitalized to property, plant, equipment and mineral property interests as the asset portion of the asset retirement obligation. The Company estimates that the cash outflows related to these reclamation activities will be incurred primarily in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a credit adjusted risk-free interest rate and adjusted for inflation. The Company used a credit adjusted risk-free rate of 9.20% (December 31, 2015 – 9.20%) and an inflation rate of 2.27% (December 31, 2015 – 2.27%).
The following is a summary of asset retirement obligations:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Balance, beginning of the period | $ | 624,142 | $ | 552,250 | $ | 978,453 | $ | 624,142 | ||||||||
Changes in cash flow estimates | 278,240 | 71,892 | 96,696 | 278,240 | ||||||||||||
Balance, end of the period | $ | 902,382 | $ | 624,142 | $ | 1,075,149 | $ | 978,453 |
14 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2016 and 2015
(US dollars - Unaudited)
Commitments and Contingencies |
Property rent payments (Advance minimum royalties)
The Company has acquired a number of mineral properties outright. It has acquired exclusive rights to explore, develop and mine other portions of the Project under various mining lease agreements with landowners.
The Company is required to make property rent payments related to its mining lease agreements with landholders, in the form of advance minimum royalties. The total property rent payments for the three and nine month periods ended September 30, 2015 were $8,539 and $68,706 (Three and nine months ended September 30, 2014March 31, 2016 were $2,500 (2015 - $16,456 and $116,436 of which $24,480 related to common shares issued)$10,000), and the Company isexpects to pay approximately $75,000 in property rent payments in 2016. Production royalties are expected to make approximate payments of $140,000commence in the fourth quarter of 2015 to various landowners under the existing lease agreements. The payments will cease if and when the Company goes into production and then begins paying royalty payments on production yields.2016.
There are multiple third party landholders and the royalty amount due to each landholder over the life of the Project varies with each property.
Finder’s fee
The Company has agreed to issue 100,000 common shares as a finder’s fee in connection with certain property acquisitions upon commencement of commercial production, ofas defined in the agreement , at the Project. As of September 30, 2015,March 31, 2016, commercial production hasphase had not commenced and accordingly no shares have been issued.
18
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Management agreements
In 2004, the Company entered into an agreement with the former President of the Company to issue 300,000 bonus shares upon completion of certain milestones. Upon receipt by the Company of a bankable feasibility study and the decision to place the Property into commercial production (Achieved), a bonus of 150,000 (Issued) common shares would be issued. Upon commencement of commercial production on the Property, a further bonus of 150,000 common shares would be issued. In May 2010, the Company entered into an amendment to the agreement whereby the 300,000 bonus shares would alternatively be issuable upon a change of control transaction, or upon a sale of all or substantially all of the Company’s assets, having a value at or above C$1.00 per share of the Company, with a further 300,000 bonus shares being issuable in the event the change of control transaction or asset sale occurred at a value at or above C$1.50 per share. This amended agreement is for a term of three years and shall automatically renew for two years. The first of two milestones was reached during the first quarter of 2015 and as a result 150,000 bonus shares, valued at $151,428, were issued to H. Lutz Klingmann on March 27, 2015.
In May 2015, the Company replaced the former President’s management agreement with an employment agreement. In addition to the previously mentioned bonus shares issuable upon commencement of commercial production, included in the agreement with the former President is a provision that if the President’s position is lost upon a change of control or within nine Months of a change of control the former President would be entitled to a one-time payment equal to twice the annual salary C$438,000 total plus twice the annual bonus. The annual bonus is determined by the Board subsequent to a review of the President’s performance.
On August 10, 2015, the President and Chief Executive Officer of the Company stepped down. Mr. Thomas M. Clay, the current Chairman of the Company, assumed the role of Interim Chief Executive Officer. The Company also appointed the President and Chief Executive Officer of Golden Queen LLC to the position of Chief Operating Officer. The Company and the former President and Chief Executive Officer entered into a separation agreement as of August 10, 2015, which provides for the termination of the his employment agreement and an agreement for the Company to pay six month’s salary commencing from the date of termination. The separation agreement also confirms that the 150,000 bonus shares that were to be issued upon reaching the commencement of production, will no longer be issuable as that milestone was not met as at the date of termination of the employment agreement.
In 2013, the Company entered into an employment agreement with the Chief Financial Officer (“CFO”). Included in the agreement with the CFO is a provision that if the CFO’s position is lost upon a change of control or within nine months of a change of control the CFO would be entitled to a one-time payment equal to twice the annual salary, C$300,000 total, plus twice the annual bonus. The annual bonus is determined by the Board subsequent to a review of the CFO’s performance.
Compliance with Environmental Regulations
The Company’s exploration and development activities are subject to laws and regulations controlling not only the exploration and mining of mineral properties, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays or affect the economics of a project, and cause changes or delays in the Company’s activities.
The Company may, from time to time, be involved in legal proceedings and claims that arise in the ordinary course of business. The Company believes that any adverse outcome of existing claims, individually or in the aggregate, would not have a material effect on its financial position, results of operations or cash flows.
Mine Development Commitments
As of September 30, 2015,March 31, 2016, GQM LLC has entered into contracts for construction totaling approximately $60.3$2.0 million of which $10.9 million remains to be paid. The major commitments relate to the construction of the crushing-screening plant for $18.1 million, the construction of the Phase 1, Stage 1 heap leach pad for $8.4 million, the construction of the conveying and stacking system for $8.2 million and work related to the Merrill-Crowe plant equipment for $7.2 million. The commitments are expected to be paid for mine development commitments entered into prior to fiscal 2016. The commitments were paid out in 2015.subsequent to March 31, 2016. GQM LLC made approximately $4.0 million indid not make material additional construction commitments during the three months ended March 31, 2016 or subsequent to September 30, 2015.
19
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)this date.
In addition, GQM LLC committed, as of September 30, 2015, to $20.6 million of Komatsu mobile mining equipment with Road Machinery LLC, of which $16.7 million worth of equipment has been received and paid. See Note 1112 for further details on the mobile mining equipment loans. Please refer to Note 15 for additional commitments entered into by the Company subsequent to September 30, 2015.
Related Party Transactions |
Except as noted elsewhere in these consolidated financial statements, related party transactions are disclosed as follows:
(i) | Consulting Fees |
For the three and nine months ended September 30,March 31, 2015, the Company paid $Nil and $201,312 (Three and nine months ended September 30, 2014 - $42,417 and $126,476)$188,934 to Mr. H. Lutz Klingmann for services as President of the Company of which $Nil (December 31, 2014 - $Nil; September 30, 2014 - $13,811) is payable as at September 30, 2015.Company. Included in thethese consulting fees for the three and nine months ended September 30, 2015 was $Nil and $151,428 (Three and nine months ended September 30, 2014 - $Nil and $Nil) related to 150,000 bonus shares issued in accordance with Mr. Klingmann’s management agreement (Refer to Note 74 – Commitments and Contingencies)Share Capital). On May 1, 2015, Mr. Klingmann became an employee of the Company and his salary, to August 10, 2015, the date he ceased to be an employee, is included under corporate salary expenses. Please refer to management agreement above for additional changes in management.
During the three and nine months ended September 30, 2015,March 31, 2016, the Company paid a total of $44,732 and $81,584 (2014$28,535 (Three months ended March 31, 2015 - $11,640 and $35,079, respectively) for regular director fees$18,438) to the three independent directors and Thomas M. Clay.
On July 26, 2013, the Company entered into agreements to issue convertible debentures for aggregate proceeds of C$10,000,000 ($9,710,603), from a significant shareholder group. The convertible debentures are unsecured and bear interest at 2% per annum, calculated on the outstanding principal balance, payable annually. The principal amounts of the notes are convertible into shares ofCompany. During the Company at a price of C$1.03 per share for a period of two years. If the notes have not been converted by the holder prior to the maturity date, then the Company may convert them at the lower of C$1.03 or the market price as at the maturity date.
The market price on the maturity date will be determined based on the volume- weighted average price of the shares traded on the Toronto Stock Exchange for the five trading days preceding the maturity date.
A total of C$7,500,000 of the offering was subscribed for by an investment vehicle managed bythree months ended March 31, 2015, Thomas M. Clay a Director and insider of the Company. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $10,049.also received director fees.
The conversion feature of the convertible debentures meets the definition of a derivative liability instrument because the conversion feature is denominated in a currency other than the Company’s functional currency as well as the fact the exercise price is not a fixed price as described above. Therefore, the conversion feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
As a result, the conversion feature of the notes is required to be recorded as a derivative liability recorded at fair value and marked-to-market each period with the changes in fair value each period being charged or credited to income or loss.
The Company elected to repay the convertible debenture rather than convert into common shares in the Company. The convertible debenture were repaid in full on July 24, 2015.
The fair value of the derivative liability related to the conversion feature as at September 30, 2015 is $Nil (December 31, 2014 - $1,829,770). The derivative liability was calculated using an acceptable option pricing valuation model with the following assumptions:
2015 | 2014 | |||
Risk-free interest rate | 0.49% - 0.50% | 1.00% - 1.09% | ||
Expected life of derivative liability | 0.07 - 0.32 years | 0.57 - 1.32 years | ||
Expected volatility | 49.36% - 77.00% | 73.03% - 98.21% | ||
Dividend rate | 0.00% | 0.00% |
20
15 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Related Party Transactions – Continued |
The changes in the derivative liability related to the conversion feature are as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 1,829,770 | $ | 2,833,987 | ||||
Change in fair value of derivative liability including foreign exchange | (1,829,770 | ) | (1,004,217 | ) | ||||
Balance, end of the period | $ | - | $ | 1,829,770 |
The change in the convertible debentures is as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 6,649,967 | $ | 4,642,620 | ||||
Discounted convertible debentures | - | - | ||||||
Amortization of discount | 1,852,754 | 2,510,611 | ||||||
Foreign exchange | (827,721 | ) | (503,264 | ) | ||||
Repayment of the convertible debenture | (7,675,000 | ) | - | |||||
Balance, end of the period | $ | - | $ | 6,649,967 |
During the three and nine months ended September 30, 2015, in addition to the amortization of the discount on the convertible debenture, the Company incurred interest expense of $14,321 and $94,907, respectively (Three and nine months ended September 30, 2014 - $45,543 and $137,059, respectively) based on the 2% per annum stated interest rate for a total amortization of discount and interest expense of $276,524 and $1,947,661 for the three and nine months ended September 30, 2015 (Three and nine months ended September 30, 2014 - $711,220 and $1,196,353, respectively). Interest payable relating to the convertible debenture as at September 30, 2015 was $Nil (December 31, 2014 - $70,721).
On July 24, 2015, the Company repaid its C$10,000,000 ($7,675,000) convertible debenture and accrued interest of C$200,000 ($153,500).
Notes Payable |
On January 1, 2014, the Company entered into an agreement to secure a $10,000,000 loan (the “January 2014 Loan”). The January 2014 Loan was provided by members of the Clay family, who are shareholders of the Company, including $7,500,000 provided by an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. The January 2014 Loan had a twelve-month term and an annual interest rate of 5%, payable on the maturity date.
The January 2014 Loan was repaid on a date that is less than 183 days before the maturity date. As a result, the Company paid the Lenders an additional charge in the amount that is equivalent to 5% of the principal amount, plus interest on the principal amount at the rate of 5% per annum accrued to the date the January 2014 Loan was repaid. The Company repaid $7,500,000 loan plus the $375,000 accrued interest and $375,000 additional charge on December 31, 2014.
The remaining balance of the loan, $2,500,000, the accrued interest of $125,000 and the additional charge of $125,000, were paid on January 5, 2015. In total, the Company incurred $500,000 in interest expense and $500,000 in additional charge related to the January Loan.
On December 31, 2014 the Company also entered into a new loan (the “December 2014 Loan”) with the same parties for an amount of $12,500,000. The December 2014 Loan iswas due on demand on July 1, 2015 and bearsbore an annual interest rate of 10% payable at the end of each quarter. The loan iswas guaranteed by GQM Holdings, and secured by a pledge of the Company's interests in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC. The Company also incurred a closingfinancing fee to secure the loan in the amount of $1,000,000, of which, $750,000 was paid on December 31, 2014 and the remaining $250,000 was paid on January 5, 2015. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $90,916. The total legal fees paid for the transaction were $118,695.
21
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
The Company also agreed to provide the lenders with the option for certain registration rights whereby the Company would bear the costs and responsibility of registering the lenders common shares for the purposes of disposition subsequent to July 1, 2015. The Company has determined it is unlikely the registration option would be exercised and therefore has not accrued any potential costs related to the registration of the common shares. The Company has presented these transaction costs as a contra liability as substantially all of these costs were paid to the lenders.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increasingincreased the principal amount from $12,500,000 to $37,500,000 (the “June 2015 Loan”). The Company also issued 10,000,000 common share purchase warrants exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95. All other terms remained the same as the December 2014 Loan. The Company also incurred a closingfinancing fee to secure the loan in the amount of $1,500,000, all of which was paid on June 8, 2015. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $46,408. The legal fees were expensed as the transaction met the definition of a debt extinguishment. The terms of the registration rights remains unchanged as does the Company’s assessment of the likelihood of the registration rights being exercised.
16 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2016 and 2015
(US dollars - Unaudited)
7. | Related Party Transactions – Continued |
(ii) | Notes Payable - Continued |
As such, as of September 30, 2015,March 31, 2016, no accrual has been made for the potential costs related to the registration rights.
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 13,881,305 | $ | - | ||||
Fair value at inception of June Loan | 33,497,277 | 22,500,000 | ||||||
Repayment of loans | (2,500,000 | ) | (7,500,000 | ) | ||||
Amortization of closing and legal fees | 967,156 | - | ||||||
Amortization of discount on the June Loan | 743,866 | - | ||||||
Extinguishment of the December Loan | (12,500,000 | ) | - | |||||
Loss on extinguishment of debt | 151,539 | - | ||||||
Capitalized closing fee and legal fees | - | (1,118,695 | ) | |||||
Balance, end of the period | $ | 34,241,143 | $ | 13,881,305 |
March 31, 2016 | December 31, 2015 | |||||||
Balance, beginning of the period | $ | 36,053,012 | $ | 13,881,305 | ||||
Accretion of discount on the June 2015 Loan | 606,422 | 1,374,228 | ||||||
Interest payable transferred to principal balance of the June 2015 Loan | 974,986 | 1,181,507 | ||||||
Fair value at inception, notes payable | - | 33,497,277 | ||||||
Repayment of loans | - | (2,500,000 | ) | |||||
Accretion of financing and legal fees | - | 967,156 | ||||||
Extinguishment of the December 2014 Loan | - | (12,500,000 | ) | |||||
Loss on extinguishment of debt | - | 151,539 | ||||||
Balance, end of the period | $ | 37,634,420 | $ | 36,053,012 |
During the three and nine months ended September 30, 2015, in additionInterest payable relating to the amortization of the discount on the June 2015 Loan the Company incurred interest expense of $937,500 and $1,166,667, respectively. For the same periods in 2014 the Company incurred interest expense of $126,027 and $867,123, respectively. Of the $867,123, $500,000 related to a finance charge.as at March 31, 2016 was $988,696 (December 31, 2015 - $969,645).
Share Purchase Warrants |
On June 8, 2015 the Company issued 10,000,000 share purchase warrants to the Clay family in connection with the June 2015 Loan. The share purchase warrants are exercisable until June 8, 2020 at an exercise price of $0.95. Included in the June 2015 Loan agreement was an anti-dilution provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
The share purchase warrants meet the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
22
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
The fair value of the derivative liability related to the share purchase warrants as at September 30, 2015March 31, 2016 is $3,964,164$9,423,226 (December 31, 20142015 - $Nil)$2,498,269). The derivative liability was calculated using an acceptable option pricing valuation model with the following assumptions:
2015 | 2014 | 2016 | 2015 | |||||||
Risk-free interest rate | 0.81% - 1.02% | - | 0.68% | 0.73% - 1.02% | ||||||
Expected life of derivative liability | 4.69 - 5 years | - | 4.19 years | 4.44 - 5 years | ||||||
Expected volatility | 72.29% - 74.29% | - | 79.45% | 72.29% - 76.11% | ||||||
Dividend rate | 0.00% | - | 0.00% | 0.00% |
The change in the derivative share purchase warrants is as follows:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Balance, beginning of the period | $ | - | $ | - | $ | 2,498,269 | $ | - | ||||||||
Fair value at inception | 4,002,723 | - | - | 4,002,723 | ||||||||||||
Change in fair value | (38,559 | ) | - | 6,924,957 | (1,504,454 | ) | ||||||||||
Balance, end of the period | $ | 3,964,164 | $ | - | $ | 9,423,226 | $ | 2,498,269 |
In July 2014, GQM Inc. entered into a $10,000,000 short-term advance agreement (the “Advance”) with Leucadia and Auvergne (collectively, the “Lenders”), with the Company as guarantor. Leucadia provided $6,500,000 of the loan and Auvergne provided $3,500,000. The Advance had an interest rate of 10.0% per annum, compounded monthly. Auvergne is an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. On closing of the Joint Venture Transaction on September 15, 2014, GQM LLC applied part of the investment of $110,000,000 to repayment of principal and accrued interest on the $10,000,000 bridge loan advanced by the Lenders in July 2014. GQM LLC paid $209,607 in interest payment, including $73,632 paid to Auvergne on the July 2014 Advance, of which $45,264 was capitalized to mineral property interests.
23
17 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Related Party Transactions – Continued |
Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loans and convertible debentures:
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Interest expense related to the convertible debentures | $ | 14,321 | $ | 45,543 | $ | 94,907 | $ | 137,059 | ||||||||
Interest expense related to the January 2014 loans | - | 126,027 | - | 867,123 | ||||||||||||
Interest expense related to the December 2014 loans | - | - | 547,945 | - | ||||||||||||
Interest expense related to the June 2015 loans | 937,500 | - | 1,166,667 | - | ||||||||||||
Interest expense related to Komatsu Financial loans | 91,301 | - | 135,859 | - | ||||||||||||
Amortization of debt discount on the convertible debentures | 262,203 | 665,676 | 1,852,754 | 1,779,294 | ||||||||||||
Interest on Gauss advance | - | 209,607 | - | 209,607 | ||||||||||||
Amortization of the December 2014 loan closing fees | - | - | 967,155 | - | ||||||||||||
Amortization of the June 2015 loan discount | 600,797 | - | 743,866 | - | ||||||||||||
Amortization of discount and interest on loan and convertible debentures | $ | 1,906,122 | $ | 1,046,853 | $ | 5,509,153 | $ | 2,993,083 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Accretion of the June 2015 Loan discount | $ | 606,422 | $ | - | ||||
Interest expense related to the June 2015 Loan | 994,037 | - | ||||||
*Interest expense related to Komatsu Financial loans | 166,335 | 13,411 | ||||||
Interest expense related to the convertible debentures | - | 40,285 | ||||||
Amortization of the convertible debentures | - | 747,870 | ||||||
Interest expense related to the December 2014 Loan | - | 311,644 | ||||||
Accretion of debt discount on the convertible debentures | - | - | ||||||
Interest on Gauss advance | - | - | ||||||
Accretion of the December 2014 Loan financing fees | - | 536,729 | ||||||
Accretion of discount and interest on loan and convertible debentures | $ | 1,766,794 | $ | 1,649,939 |
The Company’s loans were contracted to fund significant development costs. The Company capitalizes a portion of the interest expense as it relatesrelated to funds borrowed to complete development activities at the Project site.
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Amortization of discounts and interest on loan, advance and convertible debenture | $ | 1,906,122 | $ | 1,046,853 | $ | 5,509,153 | $ | 2,993,083 | ||||||||
Less: Interest costs capitalized | (924,732 | ) | (838,727 | ) | (2,509,899 | ) | (1,829,540 | ) | ||||||||
Amortization of discounts and interest expensed | $ | 981,390 | $ | 208,126 | $ | 2,999,254 | $ | 1,163,543 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Accretion of discounts and interest on loan, advance and convertible debenture | $ | 1,766,794 | $ | 1,649,939 | ||||
Less: Interest costs capitalized | (1,005,223 | ) | (702,186 | ) | ||||
Interest expense | $ | 761,571 | $ | 947,753 |
*Komatsu is not a related party and has only been included in the above table to reconcile the total interest expense incurred for the period to the amounts capitalized and expensed.
Joint Venture Transaction |
On September 15, 2014, the Company closed the Joint Venture Transaction with Gauss resulting in both parties owning a 50% interest in the Project. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Project, into a California limited liability company named GQM LLC. On closing of the transaction, Gauss acquired 50% of GQM LLC by investing $110 million cash in exchange for newly issued membership units of GQM LLC. GQ Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
24
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Gauss is a funding vehicle owned by entities controlled by Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay family, a shareholder group which collectively owned approximately 27% of the issued and outstanding shares of Golden Queen (the “Clay Group”) at the time of the transaction. Gauss is owned 70.51% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment entity) and 29.49% by Auvergne LLC (“Auvergne”, the Clay Group’s investment entity). Pursuant to the transaction, Leucadia was paid a transaction fee of $2,000,000 and $275,000 was paid to Auvergne through GQM LLC. The Company has adopted an accounting policy of expensing these transaction costs.
Variable Interest Entity
In accordance with ASC 810-10-30, the Company has determined that GQM LLC meets the definition of a VIE and that the Company is part of a related party group that, in its entirety, would meet the definition of a primary beneficiary. Although no individual variable interest holder individually meets the definition of a primary beneficiary in the absence of the related party group, Golden Queen has determined it is considered the member of the related party group most closely associated with GQM LLC. As a result, the Company has consolidated 100% of the accounts of GQM LLC in these consolidated financial statements, while presenting a non-controlling interest portion representing the 50% interest of Gauss in GQM LLC on its balance sheet. A portion of the non-controlling interest has been presented as temporary equity on the Company’s balance sheet representing the initial value of the non-controlling interest that could potentially be redeemable by Gauss in the future.
18 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2016 and 2015
(US dollars - Unaudited)
7. | Related Party Transactions – Continued |
(v) | Joint Venture Transaction - Continued |
The net assets of GQM LLC as of September 30, 2015March 31, 2016 and December 31, 20142015 are as follows:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Assets, GQM LLC | $ | 155,104,439 | $ | 118,937,371 | $ | 156,991,083 | $ | 158,209,916 | ||||||||
Liabilities, GQM LLC | (18,492,213 | ) | (4,769,144 | ) | (22,081,711 | ) | (22,591,211 | ) | ||||||||
Net assets, GQM LLC | $ | 136,612,226 | $ | 114,168,227 | $ | 134,909,372 | $ | 135,618,705 |
Included in the assets above, is $45,643,060$21,319,945 (December 31, 20142015 - $83,282,403)$31,531,853) in cash held as at September 30, 2015.March 31, 2016. The cash in GQM LLC is directed specifically to fund capital expenditures required to take the Project to production and settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of the primary beneficiary.beneficiary except in two situation. Please refer to Note 15notes 6 and 12 for details on a GQM LLC liability that is guaranteed by the Company.exception.
Non-Controlling Interest
In accordance with ASC 810, the Company has presented Gauss’ ownership in GQM LLC as a non-controlling interest amount on the balance sheet within the equity section. However, the Amended and Restated Limited Liability Company Agreement (“LLC Agreement”) contains terms within Section 12.5 that provides for the exit from the investment in GQM LLC for an initial member whose interest in GQM LLC becomes less than 20%. The following is a summary of the terms of the clause:
Pursuant to Section 12.5, if a member becomes less than a 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three events at the non-diluted member’s option within 60 days of the diluted member’s interest dropping below 20% (the “triggering event”):
25
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Non-Controlling Interest - Continued
If the non-diluted member does not make an election pursuant to the above within 60 days, the diluted member may choose (a) or (b) above. If no election is made by the diluted member, option (a) is deemed to have been elected.
This clause in the Joint Venture Transaction constitutes contingent redeemable equity as outlined in Accounting Series Release No. 268 (“ASR 268”) and has been classified as temporary equity.
On initial recognition the amount of the temporary equity is calculated using the guidance that specifies that the initial measurement of redeemable instruments should be the carrying value. The amount allocated to temporary equity and the permanent equity on initial recognition is shown below. Temporary equity represents the amount of redeemable equity within Gauss’ ownership interest in the net assets of GQM LLC. The remaining 60% of their interest is considered permanent equity as it is not redeemable.
September 15, 2014 | ||||
Net assets, GQM LLC before Joint Venture Transaction | $ | 16,973,184 | ||
Investment by Gauss | 110,000,000 | |||
Net assets, GQM LLC after Joint Venture Transaction | 126,973,184 | |||
Gauss’ ownership percentage | 50 | % | ||
Net assets of GQM LLC attributable to Gauss | $ | 63,486,592 | ||
Allocation of non-controlling interest between permanent equity and temporary equity: | ||||
Permanent non-controlling interest (60% of total non-controlling interest) | $ | 38,091,955 | ||
Temporary non-controlling interest (40% of total non-controlling interest) | $ | 25,394,637 |
Subsequent to the initial transaction, the carrying value of the non-controlling interest will beis adjusted for net income and loss, distributions and contributions pursuant to ASC 810-10 based on the same percentage allocation used to calculate the initial book value of temporary equity.
September 30, 2015 | December 31, 2014 | |||||||
Net and comprehensive loss in GQM LLC | $ | (2,556,001 | ) | $ | (2,804,957 | ) | ||
Non-controlling interest percentage | 50 | % | 50 | % | ||||
Net and comprehensive loss attributable to non-controlling interest | $ | (1,278,001 | ) | $ | (1,402,479 | ) | ||
Net and comprehensive loss attributable to permanent non-controlling interest | $ | (766,801 | ) | $ | (841,487 | ) | ||
Net and comprehensive loss attributable to temporary non-controlling interest | $ | (511,200 | ) | $ | (560,992 | ) |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Net loss and comprehensive loss in GQM LLC | $ | (709,333 | ) | $ | (573,413 | ) | ||
Non-controlling interest percentage | 50 | % | 50 | % | ||||
Net loss and comprehensive loss attributable to non-controlling interest | (354,666 | ) | (286,706 | ) | ||||
Net loss and comprehensive loss attributable to permanent non-controlling interest | $ | (212,800 | ) | $ | (172,024 | ) | ||
Net loss and comprehensive loss attributable to temporary non-controlling interest | $ | (141,866 | ) | $ | (114,682 | ) |
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, December 31, 2014 | $ | 34,250,468 | $ | 22,833,645 | ||||
Capital contribution | 7,500,000 | 5,000,000 | ||||||
Net loss and comprehensive loss for the period | (1,064,857 | ) | (709,904 | ) | ||||
Carrying value of non-controlling interest, December 31, 2015 | $ | 40,685,611 | $ | 27,123,741 |
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, December 31, 2015 | $ | 40,685,611 | $ | 27,123,741 | ||||
Net loss and comprehensive loss for the period | (212,800 | ) | (141,866 | ) | ||||
Carrying value of non-controlling interest, March 31, 2016 | $ | 40,472,811 | $ | 26,981,875 |
26
19 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
8. |
Non-Controlling Interest – Continued
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, December 31, 2014 | $ | 34,250,468 | $ | 22,833,645 | ||||
Capital contribution | 7,500,000 | 5,000,000 | ||||||
Net and comprehensive loss for the period | (766,801 | ) | (511,200 | ) | ||||
Carrying value of non-controlling interest, September 30, 2015 | $ | 40,983,667 | $ | 27,322,445 |
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, September 15, 2014 | $ | 38,091,955 | $ | 25,394,637 | ||||
Distributions to non-controlling interest | (3,000,000 | ) | (2,000,000 | ) | ||||
Net and comprehensive loss for the period | (841,487 | ) | (560,992 | ) | ||||
Carrying value of non-controlling interest, December 31, 2014 | $ | 34,250,468 | $ | 22,833,645 |
Dilution of Interest in Subsidiary
As a result ofDuring the Joint Venture Transaction, the Company’s interest in GQM LLC was diluted from 100% to 50% and ordinarily,three months ended March 31, 2016, the Company would recognizeentered into a charge on dilution. However, since the transaction wasseries of “zero-cost put/call” collar contracts for gold with a related partysettlements scheduled between June 30, 2016 and December 30, 2016 with an average floor price of $1,100 per ounce and an average ceiling price of $1,320 per ounce. These derivative instruments were not designated as hedges by the Company retained control,and are recorded at their fair value at the excess has not been recognizedend of each reporting period with changes in net income but rather has beenfair value recorded in equity as an increase to additional paid in capital based on guidance provided in ASC 810-10-55-4Dthe statement of loss and -4E.comprehensive loss.
September 15, 2014 | ||||
Investment by Gauss | $ | 110,000,000 | ||
Less: | ||||
Initial carrying value of permanent equity | (38,091,955 | ) | ||
Initial carrying value of temporary equity | (25,394,637 | ) | ||
Effect of dilution of subsidiary recorded to APIC | $ | 46,513,408 |
Management Agreement
GQM LLC is managed by a board of managers comprising an equal number of representatives of each of Gauss and GQ Holdings. The initial officers of GQM LLC were H. Lutz Klingmann as Chief Executive Officer, and Andrée St-Germain as Chief Financial Officer. On August 10, 2015, Robert C. Walish Jr. was appointed to replace Mr. Klingmann as Chief Executive Officer of GQM LLC. Bryan A. Coates was appointed to the GQM LLC Board of Managers as a nominee of the Company, replacing Mr. Klingmann. As long as a member of the Clay family holds greater that 25% of the Company, the Clay Group is entitled to appoint one of the Company’s representatives to the GQM LLC board of managers.
27
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
Capital Contribution Agreement
Pursuant to the Joint Venture Transaction, GQ Holdings’ made a single capital contribution to GQM LLC of $12.5 million on June 15, 2015. Gauss funded an amount equal to GQM Holdings’ capital contribution to GQM LLC, and the aggregate amount of $25 million is anticipated to provide GQM LLC with the necessary funds to fully develop the Project. Both partners will maintain their 50% ownership of the Project.
Standby Commitment
Golden Queen also entered into a backstop guarantee agreement with Gauss (the “Backstop Agreement”) whereby, ifthree months ended March 31, 2016, the Company conducted a rights offering, Gauss agreed to purchase, upon the terms set forthrecorded an unrealized derivative loss of $106,268 (Three months ended March 31, 2015 - $Nil) in the Backstop Agreement, any common shares which had not been acquired pursuant to the exercisestatement of rights under the Rights Offering at a purchase price to be determined but not to exceed $1.10 per common share, up to a maximum amount of $45 million in the aggregate. In consideration for entering into the Backstop Agreement,loss and comprehensive loss on closing of the Joint Venture, the Company paid Leucadia and Auvergne a standby guarantee fee of $2,250,000, of which $731,250 was paid to Auvergne.these contracts.
The Transaction Agreement and Backstop Agreement contemplated thatfollowing is a summary, by maturity dates, of the Company would file a registration statement in connection with the rights offering by October 15, 2014. Company’s gold collar contracts outstanding as at March 31, 2016:
2016 | ||||
Gold zero cost collars: | ||||
Floor amount (ounces) | 7,000 | |||
Average floor price | $ | 1,100 | ||
Ceiling amount (ounces) | 7,000 | |||
Average ceiling price | $ | 1,320 |
The Company decided not to proceed with a rights offering, and as a result the standby commitment has expired.unrealized fair value of these contracts at March 31, 2016 was $106,298 (December 31, 2015 - $Nil).
9. | Supplementary Disclosures of Cash Flow Information |
March 31, 2016 | March 31, 2015 | |||||||||||||||
September 30, 2015 | September 30, 2014 | |||||||||||||||
Cash paid during period for: | ||||||||||||||||
Interest | $ | 1,070,664 | $ | 395,787 | $ | 144,284 | $ | 260,498 | ||||||||
Income taxes | $ | - | $ | - | ||||||||||||
Non-cash financing and investing activities: | ||||||||||||||||
Stock-based compensation | $ | 155,428 | $ | 279,917 | ||||||||||||
Common shares issued for mineral property | $ | - | $ | 24,480 | ||||||||||||
Mineral property acquired through issuance of debt | $ | 12,088,470 | $ | - | ||||||||||||
Mineral property expenditures included in accounts payable | $ | 4,117,646 | $ | 1,000,991 | ||||||||||||
Common shares issued as part of a management agreement | $ | - | $ | 151,428 | ||||||||||||
Change is cash flow estimates related to asset retirement obligations charged to mineral property interests | $ | 96,696 | $ | - | ||||||||||||
Mobile equipment acquired through issuance of debt | $ | 295,125 | $ | 2,865,983 | ||||||||||||
Property, plant, equipment and mineral interest expenditures included in accounts payable | $ | 2,311,472 | $ | 5,521,461 | ||||||||||||
Inventory expenditures included in accounts payable | $ | 867,505 | - | |||||||||||||
Non-cash interest cost capitalized to mineral property interests | $ | 2,509,899 | $ | 1,829,540 | $ | 838,888 | $ | 702,186 | ||||||||
Non-cash amortization of discount and interest expense | $ | 2,863,396 | $ | 1,163,543 | $ | 606,422 | $ | 934,342 | ||||||||
Interest payable converted to principal balance on notes Payable | $ | 974,986 | $ | - |
28
20 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
10. |
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) – numerator for basic EPS | $ | (1,924,167 | ) | $ | (1,811,843 | ) | $ | (4,739,618 | ) | $ | (10,012,336 | ) | ||||
Numerator for diluted EPS | $ | (1,924,167 | ) | $ | (1,811,843 | ) | $ | (4,739,618 | ) | $ | (10,012,336 | ) |
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Denominator: | ||||||||||||||||
Denominator for basic EPS | 99,928,683 | 99,778,683 | 99,881,430 | 99,554,864 | ||||||||||||
Denominator for diluted EPS | 99,928,683 | 99,778,683 | 99,881,430 | 99,554,864 | ||||||||||||
Basic earnings(loss) per share | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.10 | ) | ||||
Diluted loss per share | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.10 | ) |
For the three and nine month periods ended September 30, 2015 and 2014, 1,176,667 and 750,000, respectively, exercisable options were not included above as their impact would be anti-dilutive.
For the three and nine months ended September 30, 2015, 10,000,000 and 10,000,000 (Three and nine months ended September 30, 2014 – Nil and Nil) warrants were not included above as their impact would be anti-dilutive.
For the three and nine months ended September 30, 2014, the convertible debentures were not included above as their impact would be anti-dilutive. The Company repaid the convertible debentures in July of 2015.
During the three and nine months ended September 30, 2015, the Company acquired seven and fourteen (Three and nine months ended September 30, 2014 – Nil and Nil) pieces of mining equipment from Komatsu through financing agreements. As at September 30, 2015 and December 31, 2014, the financing agreement balances are as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of period | $ | 913,132 | $ | - | ||||
Additions | 15,523,198 | 1,106,521 | ||||||
Payments | (3,434,728 | ) | (193,389 | ) | ||||
Balance, end of period | 13,001,602 | $ | 913,132 |
29
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
The terms of the financing agreements are as follows:
September 30, 2015 | December 31, 2014 | |||||||
Total acquisition costs | $ | 16,629,719 | $ | 1,106,521 | ||||
Interest rates | 0.00% - 4.24% | 1.80% - 2.99% | ||||||
Monthly payments | $4,669 - $33,906 | $5,268 - $15,109 | ||||||
Average remaining life (Years) | 3.61 | 3.89 | ||||||
Short-term portion | 3,323,700 | 222,839 | ||||||
Long-term portion | $ | 9,677,902 | $ | 690,293 |
For the three and nine months ended September 30, 2015, the Company made total down payments of $1,606,452 and $2,525,921 (Three and nine months ended September 30, 2014 - $Nil and $Nil). The down payment consist of the sales tax on the assets and a 10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years and are secured by the underlying asset. For interest expense relating to the loan payable see Note 8(iv).
The following table outlines the principal payments to be made for the remaining 2015 fiscal year to the end of the 2019 fiscal year:
Year | Principal Payments | |||
2015 | $ | 819,671 | ||
2016 | $ | 3,353,953 | ||
2017 | $ | 3,477,885 | ||
2018 | $ | 3,591,522 | ||
2019 | $ | 1,758,571 |
Financial Instruments |
Fair Value Measurements
All financial assets and financial liabilities are recorded at fair value on initial recognition. Transaction costs are expensed when they are incurred, unless they are directly attributable to the acquisition of qualifying assets, in which case they are added to the costs of those assets until such time as the assets are substantially ready for their intended use or sale.
The three levels of the fair value hierarchy are as follows:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |
Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; | |
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
30
March 31, 2016 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants (Note 7(iv)) | $ | 9,423,226 | $ | - | $ | 9,423,226 | $ | - | ||||||||
Derivatives – Hedging instruments (Note 8) | 106,268 | - | 106,268 | - | ||||||||||||
$ | 9,529,494 | $ | - | $ | 9,529,494 | $ | - |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Nine Months Ended September 30, 2015
(Unaudited - US dollars)
September 30, 2015 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Warrants (Note 8(iv)) | $ | 3,964,164 | $ | - | $ | 3,964,164 | $ | - | ||||||||
$ | 3,964,164 | $ | - | $ | 3,964,164 | $ | - |
December 31, 2014 | December 31, 2015 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Derivative Liability (Note 8(ii)) | $ | 1,829,770 | $ | - | $ | 1,829,770 | $ | - | ||||||||||||||||||||||||
$ | 1,829,770 | $ | - | $ | 1,829,770 | $ | - | |||||||||||||||||||||||||
Share purchase warrants (Note 7(iv)) | $ | 2,498,269 | $ | - | $ | 2,498,269 | $ | - |
Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value measurement of the financial instruments above use observable inputs in option price models such as the binomial and the black-scholesBlack-Scholes valuation models.
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United States are insured by the FDIC for up to $250,000 and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$100,000.
21 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2016 and 2015
(US dollars - Unaudited)
GeneralCertain United States and administrative expensesCanadian bank accounts held by the Company exceed these federally insured limits or are broken downuninsured as follows:they relate to US Dollar deposits held in Canadian financial institutions. As of March 31, 2016 and December 31, 2015, the Company’s cash balances held in United States and Canadian financial institutions include $26,658,270 and $37,587,311 respectively, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit risk in cash.
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Audit & Accounting | $ | 97,607 | $ | 187,576 | $ | 372,975 | $ | 452,097 | ||||||||
Legal | 85,590 | 285,836 | 700,912 | 1,214,603 | ||||||||||||
Consulting fees | - | 42,417 | 201,312 | 156,166 | ||||||||||||
Corporate salary | 409,213 | 399,698 | 1,164,061 | 787,453 | ||||||||||||
Corporate expense | 85,364 | 39,418 | 172,283 | 677,081 | ||||||||||||
Office | 306,499 | 207,143 | 896,752 | 581,501 | ||||||||||||
Insurance | 81,613 | 36,706 | 217,515 | 78,614 | ||||||||||||
Regulatory and licensing | 34,103 | 48,126 | 145,057 | 119,583 | ||||||||||||
Environmental matters | 27,794 | 6,751 | 84,514 | 23,844 | ||||||||||||
Foreign exchange | (319,600 | ) | (300,989 | ) | (786,688 | ) | (279,457 | ) | ||||||||
Stock-based compensation | 155,203 | 87,769 | 155,203 | 279,917 | ||||||||||||
Pre-production costs | (322,359 | ) | - | (3,839 | ) | - | ||||||||||
Public relations & promotion | 31,711 | 78,765 | 83,428 | 175,033 | ||||||||||||
Total | $ | 672,738 | $ | 1,119,216 | $ | 3,403,486 | $ | 4,266,435 |
Interest Rate Risk
The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the three months ended March 31, 2016, a 1% decrease in interest rates would have reduced the interest income to a trivial amount.
Foreign Currency Exchange Risk
Certain purchases of corporate overhead expenditures are denominated in Canadian Dollar. As a result, currency exchange fluctuations may impact the costs of our operations. Specifically, the appreciation of the Canadian Dollar against the US Dollar may result in an increase in the Canadian operating expenses in US dollar terms. As of March 31, 2016, the Company maintained the majority of its cash balance in US Dollar. The Company currently does not engage in any currency hedging activities.
Commodity Price Risk
The Company’s primary business activity is the development of the open pit, gold and silver, heap leach project on the Project. Decreases in the price of either of these metals from current levels has the potential to negatively impact the future viability of the Project. The Company holds a small portfolio of derivative contracts in the form of gold zero-cost collars in order to hedge against the gold spot price volatility risk. A 10% change in the gold spot price would have a trivial impact on the change in the fair value of the derivative contracts held by the Company. The Company may enter into hedging contracts from time to time to protect the cash flows from commodity price volatility.
Loss Per Share |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Numerator: | ||||||||
Net loss – numerator for basic and diluted EPS | $ | (8,925,777 | ) | $ | (1,436,187 | ) | ||
Denominator: | ||||||||
Denominator for basic and diluted EPS | 99,893,341 | 99,785,350 | ||||||
Basic loss per share | (0.09 | ) | $ | (0.01 | ) |
For the three months ended March 31, 2016, 1,070,000 (Three months ended March 31, 2015 – 750,000) options and 10,000,000 (Three months ended March 31, 2015 - Nil) warrants were not included above as their impact would be anti-dilutive.
For the three months ended March 31, 2015 the convertible debentures were not included above as their impact would be anti-dilutive.
22 |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2016 and 2015
(US dollars - Unaudited)
12. | Loan Payable |
During the three months ended March 31, 2016, the Company acquired (1) one (Three months ended March 31, 2015 – (4) four) pieces of mining equipment from Komatsu through financing agreements. As at March 31, 2016 and December 31, 2015, the finance agreement balances are as follows:
March 31, 2016 | December 31, 2015 | |||||||
Balance, beginning of period | $ | 18,372,823 | $ | 913,132 | ||||
Additions | 352,438 | 23,155,510 | ||||||
Down payments, taxes and principal repayments | (1,287,573 | ) | (5,695,819 | ) | ||||
Balance, end of period | $ | 17,437,688 | $ | 18,372,823 |
The terms of the financing agreements are as follows:
March 31, 2016 | December 31, 2015 | |||||||
Total acquisition costs | $ | 24,614,468 | $ | 24,262,031 | ||||
Interest rates | 0.00% - 4.40% | 0.00% - 4.40% | ||||||
Monthly payments | $4,669 - $33,906 | $4,669 - $33,906 | ||||||
Average remaining life (Years) | 3.23 | 3.46 | ||||||
Short-term portion | 5,057,912 | 4,942,716 | ||||||
Long-term portion | $ | 12,379,776 | $ | 13,430,107 |
For the three months ended March 31, 2016, the Company made total down payments of $57,313 (Three months ended March 31, 2015 - $574,600). The down payments consist of the sales tax on the assets and a 10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years, except one which is for three years, and are secured by the underlying asset except for the mining drill loan for which GQM Ltd. has provided a corporate guarantee.
The following table outlines the principal payments to be made for each of the remaining years:
Year | Principal Payments | |||
2016 | $ | 3,776,086 | ||
2017 | $ | 5,198,262 | ||
2018 | $ | 5,323,624 | ||
2019 | $ | 3,133,086 | ||
2020 | $ | 6,630 | ||
Total | $ | 17,437,688 |
13. | Comparative Figures |
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for the current year. The reclassifications had notno impact on the net loss, comprehensive loss, deficit accumulated or the cash flows as previously reported. Also see Note 15 for restatement of certain 2015 balances.
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GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the NineThree Months Ended September 30,March 31, 2016 and 2015
(UnauditedUS dollars - US dollars)Unaudited)
Subsequent Events |
Subsequent to September 30, 2015, GQM LLC took possession of two haul trucks and a water truck, valued at $4.0 million. The Company made total payments, tax and a 10% down payment, of $0.7 million. The remaining $3.3 million will be financed over 48 months at an interest rate of 3.90% for the two haul trucks and 0.99% for the water truck.
Subsequent to September 30, 2015, GQM LLC also acquired a blasthole drill valued at $1.1 million. A down payment of $0.2 million was made with the remaining amount being financed over 36 months at a rate of 4.40%. The loan agreement has been guaranteed by Golden Queen.
On October 1st, 2015,April 1st, 2016, the Company was to make the quarterly interest payment on the June 2015 loan. In accordance with the terms withof the June 2015 loan agreement, the Company chose to exercise its right to pay in kind by addingadd the interest owed on October 1st, 2015April 1st, 2016 to the principal balance of the June 2015 loan.balance. The principal balance of the loan was increased by $1,181,507. The principal balance$988,696.
15. | Prior Periods Financial Restatements |
During the preparation of the loan moving forward will be $38,681,507deferred tax calculations for 2015 the Company found an accounting error in the calculation of the deferred income taxes for the year ended December 31, 2014. The accounting error related to the recognition of a deferred tax liability resulting from the dilution gain recorded in additional paid-in capital from the JV transaction (Note 7(vi)). The impact of the error on the financial statements for the three months ended March 31, 2015 are presented below. There was no impact on the Company’s Consolidated Statements of Loss and interest will be calculated on this balance.Comprehensive Loss or the Consolidated Statement of Cash Flows.
Impact for the three months ended March 31, 2015:
March 31, 2015 | ||||||||
As Previously Reported | As Restated | |||||||
Liabilities: | ||||||||
Deferred tax liability | $ | - | $ | 12,922,000 | ||||
Total liabilities | $ | 31,358,690 | $ | 44,280,690 | ||||
Shareholders’ Equity: | ||||||||
Additional paid-in capital | $ | 56,390,510 | $ | 43,468,510 | ||||
Total shareholders’ equity attributable to GQM Ltd. | $ | 43,369,950 | $ | 30,447,950 | ||||
Total shareholders’ equity | $ | 77,448,394 | $ | 64,526,394 |
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of the operating results and financial condition of Golden Queen Mining Co. Ltd. (“Golden Queen”, “Company”, “we”, “our” or “us”) is as at November 9, 2015May 10, 2016 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the quarter ended September 30, 2015March 31, 2016 and the notes thereto.
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is prepared in accordance with U.S. generally accepted accounting principles and all amounts herein are in U.S. dollars unless otherwise noted.
The Soledad Mountain Project
Overview
The Company is developing a gold-silver,an emerging gold and silver producer utilizing an open pit, heap leach operation on its fully-permitted Soledad Mountain property, located just outside the town of Mojave in Kern County in southern California. The Soledad Mountain Project (the “Project”) will useutilizes conventional open pit mining methods and the cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore.
The Company closed a joint venture transaction (the “Joint Venture Transaction”) with Gauss LLC (“Gauss”) pursuant to which it sold 50% of its ownership in the Project for an investment of $110 million in September 2014. Gauss is a funding vehicle owned by entities controlled by Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay family, a shareholder group which, at the time of the Joint Venture Transaction, collectively owned approximately 27% of the issued and outstanding shares of Golden Queen (the “Clay Group”). Gauss is owned 70.51% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment entity) and 29.49% by Auvergne LLC (“Auvergne”, the Clay Group’s investment entity).
Golden Queen Mining Co., Inc. (“GQM Inc.”), a California corporation and the wholly-owned subsidiary of the Company, was converted into a limited liability company, Golden Queen Mining Company, LLC (“GQM LLC”) on September 10, 2014 in preparation for the formation of the Joint Venture. Golden Queen Mining Holdings (“GQ Holdings”), the Company’s wholly-owned subsidiary, now owns a 50% interest in GQM LLC and Gauss holds the remaining 50%.
On June 15, 2015, GQ Holdings and Gauss LLC each made a single capital contribution of $12.5 million to GQM LLC, for an aggregate contribution of $25 million.
The Company started construction of infrastructure-related items during the third quarter of 2013 and expects commissioning of the processing facilities in late 2015.
Please refer to the Company’s Form 10-K dated March 16, 201530, 2016 for information on the Project and the Joint Venture Transaction.
The Company commenced commissioning of the facilities in the last quarter of 2015. The first gold and silver doré was poured, as part of the testing and commissioning process, on March 1, 2016. Testing and commissioning continued in March 2016 and production commenced on April 1, 2016.
ConstructionCommissioning of Infrastructure and Projectthe Facilities
Construction progressed on site and proceeded with no incidents to report duringCommissioning of the third quarter and to datecrushing-screening plant commenced in the fourth quarter of 2015.2015 as scheduled. Leaching of the agglomerated ore was initiated in early February and the commissioning of the Merrill-Crowe facility was completed mid-February. A significant milestone was achieved when the inaugural gold and silver doré bar was poured on March 1, 2016.
The Company anticipates achieving commercial production in the second half of 2016. In accordance with US GAAP, the Company expects to begin recognizing revenues and expenses related to the sale of metals in the second quarter of 2016.
Please refer toCash used in Investing Activities below for further details on the construction work done on site.
Mining
A total of 291K tons of ore were mined in the first quarter with a strip ratio of 3.3 waste to ore.
The mining of the North West Pit commenced in 2015 and the waste rock has been used to construct the Main Pit, Phase 1 access road and the East Pit access road. Mining of the North West Pit will continue for the remainder of the year.
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Mining of the Main Pit, phase 1, commenced in early January of this year. Mining of the Main pit will continue into 2017.
The grade reconciliation with the Block-Model for both the North West Pit and Main Pit is on-going.
An in-fill drilling program of the East Pit is being contemplated for later this quarter. The Company anticipates mining of the East Pit to commence in January 2017.
Processing and Production during Commissioning/Testing Phase
The crushing-screening plant daily average in Q1 2016 was 4,038 tons per day. In April, the daily average was 6,790 tons per day. The Company has made steady progress with the commissioning of the crushing-screening plant and the pad-loading systems. The performance of the HPGR system has exceeded expectations but there have been some issues with the pad-loading system and wear on liners for the crushers, various chutes and other parts.
As of the end of April, a total of 584K tons are currently leaching on the heap-leach pad. Agglomerate quality was very good in Q1 2016 and the porosity and permeability of the heap-leach pad is extremely high. The Company forecasts the 150-day recovery of the first lift to be approximately 70%.
A total of 1,109 oz of gold and 11,108 oz of silver have been produced as of April 30, 2016.
February 2015 Technical Report and Updated Feasibility Study
The Company engaged Mine Development Associates (“MDA”) in 2014 to update the Project's geological model from first principles and to provide updated mineral resource estimates. The Company also engaged Norwest Corporation (“Norwest”) and Kappes, Cassiday & Associates (“KCA”) to update the mineral reserve estimates and prepare a feasibility study and economic analysis based upon current information. The updated mineral resource and reserve estimates and results of the feasibility study were disclosed in a news release on February 10, 2015. The Company filed a technical report pursuant to National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) titled “Soledad Mountain Technical Report and Updated Feasibility Study” with an effective date of February 25, 2015 (the “Technical Report”) on the System for Electronic Document Analysis and Retrieval (“SEDAR”) on February 27, 2015 and with the U.S. Securities And Exchange CommissionElectronic Data Gathering, Analysis, and Retrieval system (“SEC”EDGAR”) on March 2, 2015. The Technical Report was prepared by Carl E. Defilippi of KCA, Sean Ennis of Norwest, Michael M. Gustin of MDA and Peter Ronning of New Caledonian Geological Consulting, each of whom is a Qualified Person and independent of the Company pursuant to NI 43-101.
The updated feasibility study highlights include:includes the following estimates and assumptions:
(expressed on a 100% Basis)
· | Life of mine average annual production of 74k oz of gold and 781k oz of silver during full production |
Years 2-11;
· | Total production of 807k oz of gold and 8.3mm oz of silver; |
· | Stripping ratio of 3.41:1 (waste tons : ore tons); |
· |
Pre-production capital costs of approximately |
· | Base case after-tax net present value (5% discount rate) of |
· | Base case after-tax IRR of 28.3% with a gold price of $1,250/oz and a silver price of $17/oz. |
Please refer to the Company’s news release dated February 10, 2015 and Form 10-K dated March 16, 201530, 2016 for further details on the Technical Report and updated feasibility study. The Technical Report and updated feasibility study are also available on the Company’s website or on SEDAR.
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The Center for Biodiversity Petition to List the MojaveMohave Shoulderband Snail as an Endangered Species
On January 31, 2014, the Center for Biological Diversity (“CBD”) filed an emergency petition (the "Petition"“Petition”) with the United States Fish and Wildlife Service ("USFWS"(“USFWS”) asking the USFWS to list the Mohave Shoulderband snail as a threatened or endangered species. Citing a report published more than 80 years ago, the Petition claims that the snail exists in only three places, and that most of the snail habitat occurs on Soledad Mountain, where the Company is developing the Project.
The Company worked with its environmental and legal advisors to prepare a detailed response to the petition, which was filed with the USFWS on March 31, 2014. The Company’s response is available on the Company’s website at www.goldenqueen.com.
On April 22, 2014, the Company learned that the USFWS had determined that there is no emergency to justify listing the Mohave Shoulderband snail as threatened or endangered under the Endangered Species Act of 1973, as amended. The USFWS reviewed the petition filed by the CBD and concluded that there was no imminent threat to the snail that would cause them to believe an emergency listing was required.
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Even though an emergency listing was not warranted, the USFWS is required by the Endangered Species Act to continue processing the Petition. Aslisting petition. A public comment period on the petition commenced on April 10, 2015 for a period of 60 days. On September 9, 2015, the USFWS stated inand the CBD entered into a Stipulated Settlement Agreement that established a 12 Month Finding date of April 11, 2016.
In November 2015, the Company, the USFWS, and the CBD entered into a Memorandum of Understanding under which the USFWS and the CBD agreed to defer the 12 Month Finding date to June 30, 2017, and the Company agreed not to disturb until June 30, 2017 certain points on Soledad Mountain where snails or snail shells had been identified. The Company, the USFWS, and the CBD have jointly selected a third party environmental consultant that will conduct a survey to better understand the snail’s range and distribution on Soledad Mountain before the USFWS prepares its notice, taking this step does not mean that a listing will be justified at12 Month Finding. Surveying is anticipated to take place between the endfall of 2016 and the 12-month study period.spring of 2017.
The Project has received all necessary regulatory approvals. The decisionongoing review by the USFWS to proceed with a study does not affect the Project’s regulatory approvals or preventinterfere with the Project from moving forward.Project’s operation. The November 2015 Memorandum of Understanding caused no material adjustments to the Project’s mine plan. The Company believes that conservation of the snail can be accomplished without material adjustments to the Project’s mine plan, but if the USFWS ultimately finds that the snail is ‘endangered’ or ‘threatened’ and no agreed conservation plan is established, material adjustments to the Project’s mine plan may be required.
Other Legal Matters
National Labor Relations Board
During the second quarter of 2014, theThe Company filed a complaintcharge with the National Labor Relations Board (the “NLRB”) against the Building and Construction Trades Council of Kern, Inyo, and Mono Counties (the “Union”). on May 23, 2014. The complaintcharge was in response to the action taken by the Union related to a 1997 project labor agreement (the “PLA”)(PLA) that the Company believes is not applicable to the current Project and in any event, unenforceable under federal labor law.
The NLRB informed the Company that the NLRB’s General Counsel had found in favor of the Company in the above matter in early October 2014. The NLRB issued a complaintComplaint against the Union withand the matter was heard by Administrative Law Judge (ALJ) John McCarrick in June 2015. In December 2015 ALJ McCarrick issued his Decision finding that the PLA violates Section 8(e) of the National Labor Relations Act and is therefore unenforceable. The Union is in the process of appealing that Decision to the NLRB in the role of prosecutor. In the case the NLRB Region 31 will be acting as a representative of the NLRB General Counsel and will be prosecuting this unfair labor practice charge against the Union.
A Field Attorney for the NLRB reported that he had his first substantive conversation with legal counsel for the Union on December 4, 2014. The Field Attorney explored the possibility of a settlement whereby the Union would agree not to enforce the 1997 PLA. Legal counsel for the Union indicated that they were not interested in a settlement because the Unions believed that the PLA was lawful and enforceable. The Field Attorney then asked the Company’s legal counsel about the possibility of a “non-Board” settlement, meaning a settlement between the Company and the Union. Our legal counsel’s response was that we had made several attempts to settle this issue and a likelihood of a settlement at this point was low.
A hearing before a United States Administrative Law Judge was held in Los Angeles from June 24 to June 26, 2015. The various parties that attended the hearing prepared briefs that were submitted to the Judge on September 18th, 2015.Washington, D.C.
Complaint on Alleged Short-swing Trading Profits
We received notice that a complaint was filed on April 22, 2015 in United States District Court, District of Massachusetts seeking recovery pursuant Section 16(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), of alleged short-swing trading profits. The complaint was filed by Ryan T. Darby, as plaintiff, and named Landon T. Clay, a shareholder of the Company (“Clay”), and the Company as defendants. The plaintiff alleges that Mr. Clay realized short-swing profits in connection with transactions in Company securities within a period of six months. There can be no assurance thatThe Company and the Plaintiff have entered into an agreement to settle the claims. Under the agreement, the Company will receive any funds as a resultagree to adopt certain changes to its existing Section 16 policies and procedures and pay legal fees of this suit. Although$185,000 to Plaintiff’s counsel. A Motion to Dismiss with prejudice the Company is only a nominal defendant in this action time and money may be required to resolve it. The Company is unable to predict the timing or outcome of this litigation. Each of Mr.was filed on March 31, 2016. Clay and the Company believeshave, and continue to, expressly deny that the allegations are without merit and intendeither or both have committed any act or omission giving rise to vigorously defend against the claims.any liability and/or violation of law.
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In conjunction with the June 2015 Loan, as defined elsewhere herein, the Company agreed to indemnify the Clay Group and their affiliates for up to $350,000 in legal expenses (not damages) incurred in defense of complaints brought against the lenders and their affiliates by shareholders of the Company under Section 16 of the Exchange Act. The legal fees reimbursed by the Company currently amount to $53,723.$345,572, including the $185,000 in legal fees paid to the Plaintiff’s counsel. Please refer to theTransaction with Related Parties section for further details on the June 2015 Loan.
Management Changes
On August 10, 2015, the President and Chief Executive Officer of the Company stepped down. Mr. Thomas M. Clay, the current Chairman of the Company, assumed the role of Interim Chief Executive Officer. The Company also appointed the President and Chief Executive Officer of Golden Queen LLC to the position of Chief Operating Officer. The Company and the former President and Chief Executive Officer entered into a separation agreement as of August 10, 2015, which provides for the termination of his employment agreement and an agreement for the Company to pay six month’s salary commencing from the date of termination. The separation agreement also confirms that the 150,000 bonus shares that were to be issued upon reaching the commencement of production will no longer be issuable as that milestone was not met as at the date of termination of the employment agreement.
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Results of Operations
The following are the results of operations for the three and nine months ended September 30, 2015,March 31, 2016, and the corresponding periodsperiod ended September 30, 2014.March 31, 2015.
The Company had no revenue from operations during the three and nine months ended September 30, 2015 and the corresponding periods ended September 30, 2014.March 31, 2016.
The Company incurred general and administrative expenses of $672,738 and $3,403,486$1,527,176 during the three and nine months ended September 30, 2015March 31, 2016 as compared to $1,119,216 and $4,266,435$739,533 for the same periodsperiod in 2014.2015. Costs were lowerhigher by $446,478 and $862,949$787,643 for the three and nine months ended September 30, 2015March 31, 2016 when compared with the same periods in 2014.2015. The reasons for the variance in costs are highlighted below.
The following significant general and administrative expenses were incurred during the ninethree months ended September 30, 2015March 31, 2016 with a comparison to costs incurred during the same period in 2014:2015:
· | $ |
· | $342,467 (2015 - $151,430) for corporate salary. This increase is related to the addition of administrative personnel in Mojave as the Project |
· | $ |
· | $ |
The following significant general and administrative expenses were incurred during the three months ended September 30, 2015 with a comparison to costs incurred during the same period in 2014:
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The Company experienced a net foreign exchange gain of $319,600 and a gain of $786,688$1,557 during the three and nine months ended September 30, 2015, respectively,March 31, 2016, as compared with a gain of $300,989 and $279,457$561,512 for the same periodsperiod in 2014.2015. The net foreign exchange gain is made up by realized and unrealized gains and losses related to the Company’s convertible debentures, Canadian expenditures, and the Canadian balances of cash, accounts payable and, accounts payable. Thein 2015, the convertible debentures. During the first quarter of 2015 the net foreign exchange gain was mainly the result of the gain realizedunrealized on the convertible debentures, which were denominated in Canadian dollars while the Company’s functional currency is the US dollar. The exchange rate, stated in Canadian dollars per one US dollar, moved from $1.16$0.72 as of December 31, 20142015 to $1.33$0.77 on September 30, 2015.March 31, 2016.
For the three and nine months ended September 30, 2015,March 31, 2016, the Company incurred a total interest expense of $981,390 and $2,999,254, respectively$761,571 (three months ended September 30, 2014March 31, 2015 - $208,126, nine months ended September 30, 2014 - $1,163,543)$1,649,939) related to its various loans and its convertible debentures.loans. The increasedecrease was mainly due to the fact the convertible debentures are no longer outstanding and the amortization of the discounts and the interest payable relateddiscount only relates to the convertible debentures, the December 2014 loan and the June 2015 Loan.loan. Please refer to theTransaction with Related Parties section for a complete breakdown of the interest expenses as there was a portion of the interest capitalized to mineral property interests.interests as development costs directly attributable to the mine.
TheDuring the first quarter of 2016 the amount of the Company’s derivative liability includes the convertible debentures and the warrants issued in conjunction with the June 2015 Loan.Loan and the fair value of hedging instruments. During the first quarter of 2015 the Company’s derivative liability only included the convertible debentures. The Company recorded an increase in the derivative liability including foreign exchange of $598,770$7,031,225 as a result of an increase in the Company’s share price during the three months ended September 30, 2015 as compared to a decrease of $2,861,314 for the same quarter in 2014. For the nine months ended September 30, 2015, the Company recorded a decrease in the derivative liability including foreign exchange of $1,868,329, of which $1,829,770 relates to the convertible debentures and $38,559 relates to the share purchase warrants, as a result of a decrease in the Company’s share price during the nine months ended September 30, 2015March 31, 2016 as compared to an increase of $1,251,381$101,749 for the same periodquarter in 2014, all of which is related to the convertible debentures. The convertible debenture was repaid in July 2015 and therefore there is no related derivative liability as of September 30, 2015. These derivative liability changes are a non-cash item and were recorded in accordance with accounting pronouncement ASC 850-40-15. Refer to NoteNotes 7(iv) and 8 of the unaudited condensed consolidated interim financial statements for a detailed analysis of the changes in fair value of the derivative liability.
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Interest income of $49,805 (2014$39,529 (2015 - $18,940)$66,142) was higherlower during the three months ended September 30, 2015March 31, 2016 as compared with the same period in 20142015 due to higher cash balancesa decrease in 2015. For the nine months ended September 30, 2015, interest income was $168,330 (2014 - $33,778), significantly higher than the same period in 2014 due to higher cash balances. Interest rates remained low during the quarter and are projected to remain low for the remainder of 2015.2016.
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The Company recorded a net loss and comprehensive loss of $1,924,167* and $4,739,168*$8,925,777* (or $0.02 and $0.05)$0.09 loss per basic share) during the three and nine months ended September 30, 2015 respectively,March 31, 2016 as compared to net and comprehensive loss of $1,811,843 and $10,012,336$1,436,187 (or $0.02 and $0.10$0.01 loss per basic share) during the same periodsperiod of 2014.2015. The difference between the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is mainly due to the costs associated with the Joint Venture Transactionsignificant increase in the third quarter of 2014. Duringderivative liability related to the nine months ended September 30, 2014, the Company had significantly higher accounting and legal costs that were associated with the Joint Venture Transaction. In addition, there were closing and transaction fees that totaled $4,525,000 during the nine months ended September 30, 2014 as compared with $1,500,000 in closing fees during the same period in 2015.Company’s warrants.
* Net income (loss) for the period attributable to the Company.
Summary of Quarterly Results
Results for the eight most recent quarters are set out in the table below:
Results for the quarter ended on: | Sept. 30, 2015 | June 30, 2015 | March 31, 2015 | Dec. 31, 2014 | March 31, 2016 | Dec. 31, 2015 | Sept. 30, 2015 | June 30, 2015 | ||||||||||||||||||||||||
Item | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Revenue | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | ||||||||||||||||||||||||
Net income (loss) for the quarter | (1,924,167 | )* | (1,379,265 | )* | (1,436,186 | )* | 1,543,120 | * | (8,925,777 | )* | (721,587 | )* | (1,924,167 | )* | (1,379,265 | )* | ||||||||||||||||
Basic net income (loss) per share | (0.02 | ) | (0.01 | ) | (0.01 | ) | 0.02 | (0.09 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | |||||||||||||||||
Diluted net income (loss) per share | (0.02 | ) | (0.01 | ) | (0.01 | ) | 0.00 | (0.09 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) |
Results for the quarter ended on: | Sept. 30, 2014 | June 30, 2014 | March 31, 2014 | Dec. 31, 2013 | March 31, 2015 | Dec. 31, 2014 | Sept. 30, 2014 | June 30, 2014 | ||||||||||||||||||||||||
Item | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Revenue | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | ||||||||||||||||||||||||
Net income (loss) for the quarter | (1,811,843 | )* | (705,843 | ) | (7,494,638 | ) | 1,221,564 | (1,436,187 | )* | 1,543,120 | * | (1,811,843 | )* | (705,843 | ) | |||||||||||||||||
Basic net income (loss) per share | (0.02 | ) | (0.01 | ) | (0.08 | ) | 0.02 | (0.01 | ) | 0.02 | (0.02 | ) | (0.01 | ) | ||||||||||||||||||
Diluted net income (loss) per share | (0.02 | ) | (0.02 | ) | (0.08 | ) | (0.01 | ) | (0.01 | ) | 0.00 | (0.02 | ) | (0.01 | ) |
* Net income (loss) for the period attributable to the Company.Company
For the quarters illustrated in the above table, the main reasons for the significant fluctuations in net income (loss) between periods are the fluctuations in the Company’s derivative liabilities, interest expense and the costs related to the Joint Venture Transaction, as explained above.Transaction. The Company’s derivative liabilities are a function of the Company’s stock price againstas compared to the instrumentsinstruments’ strike price and the exchange rate between the Canadian dollar and the US dollar. As the stock price rises, the derivative liabilities increase resulting in the Company recognizing losses. When the stock price decreases, the Company recognizes gains.
For fiscal 2015, the Company experienced a loss related to its derivative liabilities in the amount of $101,749 (2014 – Loss of $5,747,376) in the first quarter whereas it recorded a gain of $2,568,849 (2014 – Gain of $1,634,681) during the second quarter. The second quarter gain was however off-set by higher interest expensesexpense and a one-time closingfinancing fee of $1,500,000 paid in connection with the June 2015 Loan. In the third quarter of 2015, the Company experienced a loss of $598,770 (2014 – Gain of $2,861,314) related to the derivative liabilities. Adding to the losses for the three months ended September 30, 2015 was the interest expense and amortization of the discount on the June 2015 loan and the convertible debenture and the interest expense related to the Komatsu loans. The total charge forIn the three months ended September 30, 2015 was$1,538,297. The thirdfourth quarter of 2015, the Company experienced a gain of $1,465,895 (2014 – Gain of $2,255,598) related to the derivative liabilities. This gain was partially off-set by interest expense and amortization of the first full quarter in whichdiscount on the June 2015 loan was outstanding.and the interest expense related to the Komatsu loans.
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For fiscal 2014, the Company experienced a significant loss related to its derivative liabilities in the amount of $5,747,376 (2013 – Gain of $611,949) in the first quarter whereas the second, third and fourth quarters of 2014 resulted in gains of $1,634,681 (2013 – Gain of $1,672,861)–$1,672,861), $2,861,314 (2013 – Gain of $475,862)–$475,862) and $2,255,598 (2013 – Gain of $2,624,988)–$2,624,988), respectively. In addition to the derivative liabilities, the Company also incurred in 2014 a commitment fee of $2,250,000 (2013 - $Nil) and a Joint Venture Transaction fee of $2,275,000 (2013 - $Nil) in the third quarter of fiscal 2014 that were meaningful contributing factors to the significant loss recognized in that quarter. Both fees were one-time fees not previously incurred in earlier quarters or to be incurred in future quarters.
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In general, the results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken during the quarter, whether or not the Company incurs gains or losses on foreign exchange or grants stock options, and the movements in its derivative liability.
Please refer to theResults of Operationssection above for the results of operations for the three and nine months ended on September 30, 2015.March 31, 2016.
Reclamation Financial Assurance and Asset Retirement Obligation
Reclamation Financial Assurance
The Company has provided reclamation financial assuranceis required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County andwith a reasonably foreseeable releaserevised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities, forms the basis for the reclamation financial assurance. The reclamation assurance provided as at March 31, 2016 was $624,142 (December 31, 2015 - $624,142).
The Company is also required to provide financial assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) totaling $902,382 (December 31, 2014 - $553,329; September 30, 2014 - $563,105).
The total asset retirement obligation as of September 30, 2015 is $902,382(December 31, 2014 - $624,142; September 30, 2014 - $552,250).
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaimfor closure and clean-up its property based on its activities to date. During the nine months ended September 30, 2015, there was an increase of $278,240reclamation costs related to the retirement obligations as compared with the year ended December 31, 2014, where $71,892 was capitalized to mineral property interestslined impoundments, which are defined as the asset portion ofStage 1 heap leach pad, the retirement obligation.
Reclamation Financial Assurance
overflow pond, and the solution collection channel. The Company has provided reclamation financial assurance to the Bureauestimate for as of Land Management, the State and Kern County totaling $624,142March 31, 2016 is $1,210,889 (December 31, 20142015 - $553,329; September 30, 2014 - $563,105)$Nil). This deposit earns interest at 0.2% per annum and is not available for working capital purposes. The increase in the deposit in 2015 was to ensure the reclamation financial assurance covers the asset retirement obligation for 2015.
The financial assurance increased to $624,142 in 2015 based upon the anticipated work done on site in 2015 and recorded this anticipated obligation as at December 31, 2014. The estimate was submitted to the State Office of Mine Reclamation for review and was subsequently approved by the Kern County Engineering, Surveying & Permit Services Department.
Reasonably Foreseeable Release Financial Assurance
In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Project’s waste management units as required by the Lahontan Regional Water Quality Control Board (the “Regional Board”).Board. The reclamation financial assurance estimate for 2015as of March 31, 2016 is $278,240 (December 31, 20142015 - $Nil)$278,240).
In January 2016 the company entered into $2.1 million in surety bond agreements in order to release its reclamation deposits and post a portion of the financial assurance due in 2016. The Company pays a yearly premium. Golden Queen Ltd. has provided a corporate guarantee on the surety bonds.
Asset Retirement Obligation
The total asset retirement obligation as of March 31, 2016 is $1,075,149 (December 31, 2015 - $978,453).
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and clean-up its property based on its activities to date. The Company estimates that the cash outflows related to these reclamation activities will be incurred primarily in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a credit adjusted risk-free interest rate and adjusted for inflation. The Company used a credit adjusted risk-free rate of 9.20% (December 31, 2015 – 9.20%) and an inflation rate of 2.27% (December 31, 2015 – 2.27%).
Property Rent Payments
The Company continueshas acquired a number of mineral properties outright. It has acquired exclusive rights to explore, develop and mine other portions of the Project under various mining lease agreements with landowners.
The Company is required to make property rent payments related to its mining lease agreements with landholders, and paid $68,706 in cashthe form of advance minimum royalties. The total property rent payments for the ninethree months ended September 30, 2015, as compared to $116,436 in cashMarch 31, 2016 were $2,500 (2015 - $10,000), and $24,480 in common shares of the Company during the same periodexpects to pay approximately $75,000 in 2014. The overallproperty rent payments during the yearin 2016. Production royalties are expected to decrease from approximately $184,000commence in fiscal 2014 to approximately $140,000 in fiscal 2015 as the Company has been buying back royalty interests. The Company is in ongoing discussions with2016.
30 |
There are multiple third party landholders and has made offersthe royalty amount due to buy back royalty interests. Aseach landholder over the life of September 30, 2015, $552,971 of cumulative property rental payments were capitalized to mineral properties.the Project varies with each property.
Mine Development CommitmentsContractual Obligations
As of September 30, 2015,March 31, 2016, GQM LLC has entered into contracts for construction totaling approximately $60.3$2.0 million of which $10.9 million remains to be paid. The major commitments relate to the construction of the crushing-screening plant for $18.1 million, the construction of the Phase 1, Stage 1 heap leach pad for $8.4 million, the construction of the conveying and stacking system for $8.2 million and work related to the Merrill-Crowe plant equipment for $7.2 million. The commitments are expected to be paid for mine development commitments entered into prior to fiscal 2016. The commitments were paid out in 2015.subsequent to March 31, 2016. GQM LLC made approximately $4.0million indid not make material additional construction commitments during the three months ended March 31, 2016 or subsequent to September 30, 2015.
39
In addition, GQM LLC committed, as of September 30, 2015, to $20.6 million of Komatsu mobile mining equipment with Road Machinery LLC, of which $16.7 million has been received (see Note 11 of the unaudited condensed consolidated interim financial statements for more details). Please refer toSubsequent Events section below for additional commitments entered into by the Company subsequent to September 30, 2015.this date.
GQM LLC’s contractual obligations as of September 30, 2015March 31, 2016 are shown in the table below:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations (Komatsu Financial loans) | $ | 13,001,602 | $ | 3,323,701 | $ | 6,114,722 | $ | 3,563,179 | - | |||||||||||
Capital lease obligations | - | - | - | - | - | |||||||||||||||
Operating lease obligations | - | - | - | - | - | |||||||||||||||
Purchase obligations (see above) (construction contracts) | $ | 10,939,072 | $ | 10,939,072 | - | - | - | |||||||||||||
Asset retirement obligations | $ | 902,382 | - | - | - | $ | 902,382 | |||||||||||||
Other long-term liabilities | - | - | - | - | - | |||||||||||||||
Total | $ | 24,843,056 | $ | 14,262,773 | $ | 6,114,722 | $ | 3,563,179 | $ | 902,382 |
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Debt obligations (mostly mobile mining equipment financing) | $ | 17,437,687 | $ | 5,057,912 | $ | 10,437,265 | $ | 1,942,510 | - | |||||||||||
Property rent payments | $ | 75,000 | $ | 75,000 | - | - | - | |||||||||||||
Remaining construction purchase obligations | $ | 2,360,491 | $ | 2,360,491 | - | - | - | |||||||||||||
Asset retirement obligations (Undiscounted) | $ | 2,113,271 | - | - | - | $ | 2,113,271 | |||||||||||||
Total | $ | 21,986,449 | $ | 7,493,403 | $ | 10,437,265 | $ | 1,942,510 | $ | 2,113,271 |
GQM LTD’s contractual obligations as of September 30, 2015March 31, 2016 are shown in the table below:
Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||
Interest payable - June 2015 Clay loan | $ | 1,166,667 | $ | 1,166,667 | - | - | - | $ | 988,696 | $ | 988,696 | - | - | - | ||||||||||||||||||||||||||
2015 June Clay Loan (Face value) | $ | 37,500,000 | - | $ | 37,500,000 | - | - | $ | 39,656,493 | $ | 39,656,493 | - | - | - | ||||||||||||||||||||||||||
Other long-term liabilities | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Total | $ | 38,666,667 | $ | 1,166,667 | $ | 37,500,000 | - | - | $ | 40,645,189 | $ | 40,645,189 | - | - | - |
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Stock Option Plan
The Company’s current stock option plan (the “Plan”) was adopted by the Company in 2013 and approved by shareholders of the Company in 2013. The Company also adopted a house keeping amendment to the plan on April 27, 2015 to clarify the procedure for fixing the early termination date of stock options. The Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of stock options. The exercise price of stock options granted under the Plan shall be determined by the Company’s board of directors (the “Board”), but shall not be less than the volume-weighted, average trading price of the Company’s shares on the Toronto Stock Exchange (the “TSX”) for the five trading days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject to a maximum term of five years. The Plan provides that the expiry date of the vested portion of a stock option will be the earlier of the date so fixed by the Board at the time the stock option is awarded and the early termination date (the “Early Termination Date”). The Early Termination Date will be the date the vested portion of a stock option expires following the option holder ceasing to be a director, employee or consultant, as determined by the Board at the time of grant, or in the absence thereof at any time prior to the time the option holder ceases to be a director, employee or consultant, in accordance with and subject to the provisions of the Plan. All options granted under the 2013 Plan will be subject to such vesting requirements as may be prescribed by the TSX, if applicable, or as may be imposed by the Board.
The Company granted 50,000 stock options to a consultant of the Company on April 19, 2010. The options were exercisable at a price of $1.22 per share for a period of 5 years from the date of grant. The options expired unexercised on April 19, 2015.
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During the quarter ended June 30, 2013, the Company granted 300,000 options to an officer of the Company, on June 3, 2013. The options are exercisable at a price of $1.16 for a period of five years from the date of grant and vest over a period of 18 months with 100,000 vesting in 6, 12 and 18 months respectively. During the fourth quarter of 2014, the officer resigned and as a result, 100,000 unvested stock options were forfeited. The remaining 200,000 remain outstanding with an accelerated expiration date of November 11, 2015. The Company also granted 50,000 stock options to a consultant of the Company on June 3, 2013. The options are exercisable at a price of $1.16 for a period of five years from the date of grant and vest immediately.
During the quarter ended September 30, 2013, the Company granted 300,000 options to Ms. Andrée St-Germain, the Company’s Chief Financial Officer, on September 18, 2013. The options are exercisable at a price of $1.26 for a period of five years from the date of grant and vest over a period of 12 months with 100,000 vesting on the date of grant, 100,000 vesting in 6 and 12 months respectively. The Company also granted 150,000 stock options to the Company’s independent directors on September 4, 2013. The options are exercisable at a price of $1.59 for a period of five years from the date of grant and vest immediately.
The Company did not grant options during the quarters ended December 31, 2013, March 31, 2014, June 30, 2014, September 30, 2014, December 31, 2014, March 31, 2015, and June 30, 2015.2015, December 31, 2015 and March 31, 2016.
The Company granted the aggregate amount of 430,000 options on September 8, 2015 to the Company’s directors. The options are exercisable at a price of $0.58 for a period of five years from the date of grant and vest immediately. At the same time, the Company granted 140,000 options to Ms. Andrée St-Germain at an exercise price of $0.58. The amount of 46,666 options vest immediately, 46,667 options vest 12 months from the grant date, and a further 46,6667 options vest 24 months from the grant date. The Company recorded stock-based compensation of $155,203 in the third quarter of 2015 related to the issuance of the stock options.
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A total of 1,270,000 (1,176,6661,070,000 (976,667 exercisable) (December 31, 20142015 – 750,000 (750,0001,070,000 (976,667 exercisable); September 30, 2014March 31, 2015 – 850,000750,000 (750,000 exercisable)) common shares were issuable pursuant to such stock options as at September 30, 2015.March 31, 2016.
Transactions with Related Parties
Except as noted elsewhere in this Form 10-Q, related party transactions are disclosed as follows:
(i) | Consulting Fees |
For the three and nine months ended September 30,March 31, 2015, the Company paid $Nil and $201,312 respectively (2014 - $42,417 and $126,476)$188,934 to Mr. H. Lutz Klingmann for services as President of the Company, of which $Nil (December 31, 2014 - $Nil; September 30, 2014 - $13,811) is payable as at September 30, 2015.Company. Included in thethese consulting fees for the three and nine months ended September 30, 2015 was $Nil and $151,428 (nine months ended September 30, 2014 - $Nil) related to 150,000 bonus shares issued in accordance with Mr. Klingmann’s management agreement (Refer to Note 74 – Commitments and Contingencies ofShare Capital). There were no consulting fees paid for the unaudited condensed consolidated interim financial statements). On May 1, 2015 Mr. Klingmann became an employee of the Company and his salary, to August 10, 2015, the date he ceased to be an employee, is included under corporate salary expenses. Please refer toManagement Changes above for additional changes in management.three months ended March 31, 2016
During the three and nine months ended September 30, 2015,March 31, 2016, the Company paid a total of $44,732 and $81,584, respectively (2014$28,535 (Three months ended March 31, 2015 - $11,640 and $35,079, respectively) for regular director fees$18,438) to the three independent directors andof the Company. During the three months ended March 31, 2015, Thomas M. Clay.Clay also received director fees.
(ii) |
On July 26, 2013, the Company entered into agreements to issue convertible debentures for aggregate proceeds of C$10,000,000 ($9,710,603), to a significant shareholder group. The convertible debentures are unsecured and bear interest at 2% per annum, calculated on the outstanding principal balance, payable annually. The principal amounts of the notes are convertible into shares of the Company at a price of C$1.03 per share for a period of two years. If the notes had not been converted by the holder prior to the maturity date, then the Company could have converted them at the lower of C$1.03 or the market price as at the maturity date.
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The market price on the maturity date will be determined based on the volume- weighted average price of the shares traded on the Toronto Stock Exchange for the five trading days preceding the maturity date.
A total of C$7,500,000 of the offering was subscribed for by an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $10,049.
The conversion feature of the convertible debentures meets the definition of a derivative liability instrument because the conversion feature is denominated in a currency other than the Company’s functional currency as well as the fact the exercise price is not a fixed price as described above. Therefore, the conversion feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
As a result, the conversion feature of the notes is required to be recorded as a derivative liability recorded at fair value and marked-to-market each period with the changes in fair value each period being charged or credited to income or loss.
The Company elected to repay the convertible debenture rather than convert into common shares in the Company. The convertible debenture were repaid in full on July 24, 2015.
The fair value of the derivative liability related to the conversion feature as at September 30, 2015 is $Nil (September 30, 2014 - $4,085,368; December 31, 2014 - $1,829,770). The derivative liability was calculated using an acceptable option pricing valuation model with the following assumptions:
2015 | 2014 | |||
Risk-free interest rate | 0.49% - 0.50% | 1.00% - 1.09% | ||
Expected life of derivative liability | 0.07 – 0.32 years | 0.57 – 1.32 years | ||
Expected volatility | 49.36% - 77.00% | 73.03 – 98.21% | ||
Dividend rate | 0.00% | 0.00% |
The changes in the derivative liability related to the conversion feature are as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 1,829,770 | $ | 2,833,987 | ||||
Change in fair value of derivative liability including foreign exchange | (1,829,770 | ) | (1,004,217 | ) | ||||
Balance, end of the period | $ | - | $ | 1,829,770 |
The change in the convertible debentures is as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 6,649,967 | $ | 4,642,620 | ||||
Discounted convertible debentures | - | - | ||||||
Amortization of discount | 1,852,754 | 2,510,611 | ||||||
Foreign exchange | (827,721 | ) | (503,264 | ) | ||||
Repayment of the convertible debenture | (7,675,000 | ) | - | |||||
Balance, end of the period | $ | - | $ | 6,649,967 |
During the three and nine months ended September 30, 2015, in addition to the amortization of the discount on the convertible debenture, the Company incurred interest expense of $14,321 and $94,907, respectively (Three and nine months ended September 30, 2014 - $45,543 and $137,059, respectively) based on the 2% per annum stated interest rate for a total amortization of discount and interest expense of $276,524 and $1,947,661 for the three and nine months ended September 30, 2015 (Three and nine months ended September 30, 2014 - $711,220 and $1,196,353, respectively). Interest payable relating to the convertible debenture as at September 30, 2015 was $Nil (December 31, 2014 - $70,721). As the convertible derivative matures, the amortization of the discount increases and as such, the total interest expense increases month-to-month and quarter-to-quarter.
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On July 24, 2015, the Company repaid its C$10,000,000 ($7,675,000) convertible debenture and accrued interest of C$200,000 ($153,500).
Notes Payable |
On January 1, 2014, the Company entered into an agreement to secure a $10,000,000 loan (the “January 2014 Loan”). The January 2014 Loan was provided by members of the Clay family, who are shareholders of the Company, including $7,500,000 provided by an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. The January 2014 Loan had a twelve-month term and an annual interest rate of 5%, payable on the maturity date.
The January 2014 Loan was repaid on a date that wasis less than 183 days before the maturity date. As a result, the Company paid the Lenders an additional charge in the amount that is equivalent to 5% of the principal amount, plus interest on the principal amount at the rate of 5% per annum accrued to the date the January 2014 Loan was repaid. The Company repaid the $7,500,000 loan plus the $375,000 accrued interest and $375,000 additional charge on December 31, 2014.
The remaining balance of the loan, $2,500,000, the accrued interest of $125,000 and the additional charge of $125,000, were paid on January 5, 2015. In total, the Company incurred $500,000 in interest expense and $500,000 in additional charge related to the January Loan.
On December 31, 2014 the Company also entered into a new loan (the “December 2014 Loan”) with the same parties for an amount of $12,500,000. The December 2014 Loan was due on demand on July 1, 2015 withand bore an annual interest rate of 10% payable at the end of each quarter. The loan was guaranteed by GQM Holdings, and secured by a pledge of the Company's interests in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC. The Company also incurred a closingfinancing fee to secure the loan in the amount of $1,000,000, of which, $750,000 was paid on December 31, 2014 and the remaining $250,000 was paid on January 5, 2015. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $90,916. The total legal fees paid for the transaction were $118,695.
The Company also agreed to provide the lenders with the option for certain registration rights whereby the Company would bear the costs and responsibility of registering the lenders common shares for the purposes of disposition subsequent to July 1, 2015. The Company has determined it is unlikely the registration option would be exercised and therefore has not accrued any potential costs related to the registration of the common shares. The Company has presented these transaction costs as a contra liability as substantially all of these costs were paid to the lenders.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increasingincreased the principal amount from $12,500,000 to $37,500,000 (the “June 2015 Loan”). The Company also issued 10,000,000 common share purchase warrants exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95. All other terms remained the same as the December 2014 Loan. The Company also incurred a closingfinancing fee to secure the loan in the amount of $1,500,000, all of which was paid on June 8, 2015. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $46,408. The legal fees were expensed as the transaction met the definition of a debt extinguishment. The terms of the registration rights remains unchanged as does the Company’s assessment of the likelihood of the registration rights being exercised.
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As such, as of September 30, 2015,March 31, 2016, no accrual has been made for the potential costs related to the registration rights.
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | 13,881,305 | $ | - | ||||
Fair value at inception | 33,497,277 | 22,500,000 | ||||||
Repayment of loans | (2,500,000 | ) | (7,500,000 | ) | ||||
Amortization of closing and legal fees | 967,156 | - | ||||||
Amortization of discount on the June Loan | 743,866 | - | ||||||
Extinguishment of the December Loan | (12,500,000 | ) | - | |||||
Loss on extinguishment of debt | 151,539 | - | ||||||
Capitalized closing fee and legal fees | - | (1,118,695 | ) | |||||
Balance, end of the period | $ | 34,421,143 | $ | 13,881,305 |
March 31, 2016 | December 31, 2015 | |||||||
Balance, beginning of the period | $ | 36,053,012 | $ | 13,881,305 | ||||
Accretion of discount on the June 2015 Loan | 606,422 | 1,374,228 | ||||||
Interest payable transferred to principal balance of the June 2015 Loan | 974,986 | 1,181,507 | ||||||
Fair value at inception, notes payable | - | 33,497,277 | ||||||
Repayment of loans | - | (2,500,000 | ) | |||||
Accretion of financing and legal fees | - | 967,156 | ||||||
Extinguishment of the December 2014 Loan | - | (12,500,000 | ) | |||||
Loss on extinguishment of debt | - | 151,539 | ||||||
Balance, end of the period | 37,634,420 | $ | 36,053,012 |
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During the three and nine months ended September 30, 2015, in additionInterest payable relating to the amortization of the discount on the June 2015 Loan the Company incurred interest expense of $937,500 and $1,166,667, respectively. For the same periods in 2014 the Company incurred interest expense of $126,027 and $867,123, respectively. Of the $867,123, $500,000 related to a finance charge.as at March 31, 2016 was $988,696 (December 31, 2015 - $969,645).
Share Purchase Warrants |
On June 8, 2015 the Company issued 10,000,000 share purchase warrants to the Clay family in connection with the June 2015 Loan. The share purchase warrants are exercisable until June 8, 2020 at an exercise price of $0.95. Included in the June 2015 Loan agreement was an anti-dilution provision with respect to the share purchase warrants.provision. If the Company were to complete a financing at a share price lower than the exercise price of the share purchase warrants, the exercise price of the share purchase warrants would be adjusted to match the price at which the financing was completed.
The share purchase warrants meet the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.
The fair value of the derivative liability related to the share purchase warrants as at September 30, 2015March 31, 2016 is $3,964,164$9,423,226 (December 31, 20142015 - $Nil)$2,498,269). The derivative liability at inception and at period end, was calculated using an acceptable option pricing valuation model with the following assumptions:
2015 | 2014 | 2016 | 2015 | |||||||||||
Risk-free interest rate | 0.81% - 1.02% | - | 0.68 | % | 0.73% - 1.02 | % | ||||||||
Expected life of derivative liability | 4.69 - 5 years | - | 4.19 years | 4.44 - 5 years | ||||||||||
Expected volatility | 72.29% - 74.29% | - | 79.45 | % | 72.29% - 76.11 | % | ||||||||
Dividend rate | 0.00% | - | 0.00 | % | 0.00 | % |
The change in the derivative share purchase warrants is as follows:
September 30, 2015 | December 31, 2014 | |||||||
Balance, beginning of the period | $ | - | $ | - | ||||
Fair value at inception | 4,002,723 | - | ||||||
Change in fair value | (38,559 | ) | - | |||||
Balance, end of the period | $ | 3,964,164 | $ | - |
March 31, 2016 | December 31, 2015 | |||||||
Balance, beginning of the period | $ | 2,498,269 | $ | - | ||||
Fair value at inception | - | 4,002,723 | ||||||
Change in fair value | 6,924,957 | (1,504,454 | ) | |||||
Balance, end of the period | $ | 9,423,226 | $ | 2,498,269 |
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In July 2014, GQM Inc. entered into a $10,000,000 short-term advance agreement (the ���Advance”) with Leucadia and Auvergne (collectively, the “Lenders”), with the Company as guarantor. Leucadia provided $6,500,000 of the loan and Auvergne provided $3,500,000. The Advance had an interest rate of 10.0% per annum, compounded monthly. Auvergne is an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. On closing of the Joint Venture Transaction on September 15, 2014, GQM LLC applied part of the investment of $110,000,000 to repayment of principal and accrued interest on the $10,000,000 bridge loan advanced by the Lenders in July 2014. GQM LLC paid $209,607 in interest payment, including $73,632 paid to Auvergne on the July 2014 Advance, of which $45,264 was capitalized to mineral property interests.
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Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discountdiscounts and interest on loanloans and convertible debentures as at September 30, 2015 and as at September 30, 2014.debentures:
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||
Interest expense related to the convertible debentures | $ | 14,321 | $ | 45,543 | $ | 94,907 | $ | 137,059 | ||||||||
Interest expense related to the January 2014 loans | - | 126,027 | - | 867,123 | ||||||||||||
Interest expense related to the December 2014 loans | - | - | 547,945 | - | ||||||||||||
Interest expense related to the June 2015 loans | 937,500 | - | 1,166,667 | - | ||||||||||||
Interest expense related to Komatsu Financial loans | 91,301 | - | 135,859 | - | ||||||||||||
Amortization of debt discount on the convertible debentures | 262,203 | 665,676 | 1,852,754 | 1,779,294 | ||||||||||||
Interest on Gauss advance | - | 209,607 | - | 209,607 | ||||||||||||
Amortization of the December 2014 loan closing fees | - | - | 967,155 | - | ||||||||||||
Amortization of the June 2015 loan discount | 600,797 | - | 743,866 | - | ||||||||||||
Amortization of discount and interest on loan and convertible debentures | $ | 1,906,122 | $ | 1,046,853 | $ | 5,509,153 | $ | 2,993,083 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Accretion of the June 2015 Loan discount | $ | 606,422 | $ | - | ||||
Interest expense related to the June 2015 Loan | 994,037 | - | ||||||
*Interest expense related to Komatsu Financial loans | 166,335 | 13,411 | ||||||
Interest expense related to the convertible debentures | - | 40,285 | ||||||
Amortization of the convertible debentures | - | 747,870 | ||||||
Interest expense related to the December 2014 Loan | - | 311,644 | ||||||
Accretion of debt discount on the convertible debentures | - | 2,510,611 | ||||||
Interest on Gauss advance | - | 209,607 | ||||||
Accretion of the December 2014 Loan financing fees | - | 536,729 | ||||||
Accretion of discount and interest on loan and convertible debentures | $ | 1,766,794 | $ | 1,649,939 |
The Company’s loans were contracted to fund significant development costs. The Company capitalizes a portion of the interest expense as it related to funds borrowed to complete development activities at the Project site.
Three Months Ended Sep. 30, 2015 | Three Months Ended Sep. 30, 2014 | Nine Months Ended Sep. 30, 2015 | Nine Months Ended Sep. 30, 2014 | |||||||||||||
Amortization of discounts and interest on loan, advance and convertible debenture | $ | 1,906,122 | $ | 1,046,853 | $ | 5,509,153 | $ | 2,993,083 | ||||||||
Less: Interest costs capitalized | (924,732 | ) | (838,727 | ) | (2,509,899 | ) | (1,829,540 | ) | ||||||||
Amortization of discounts and interest expensed | $ | 981,390 | $ | 208,126 | $ | 2,999,254 | $ | 1,163,543 |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||
Accretion of discounts and interest on loan, advance and convertible debenture | $ | 1,766,794 | $ | 1,649,939 | ||||
Less: Interest costs capitalized | (1,005,223 | ) | (702,186 | ) | ||||
Interest expense | $ | 761,571 | $ | 947,753 |
*Komatsu is not a related party and has only been included in the above table to reconcile the total interest expense incurred for the period to the amounts capitalized and expensed.
Joint Venture Transaction |
On September 15, 2014, the Company closed the Joint Venture Transaction with Gauss resulting in both parties owning a 50% interest in the Project. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Project, into a California limited liability company named GQM LLC. On closing of the transaction, Gauss acquired 50% of GQM LLC by investing $110 million cash in exchange for newly issued membership units of GQM LLC. GQ Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
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Gauss is a funding vehicle owned by entities controlled by Leucadia and certain members of the Clay family, a shareholder group which collectively owned approximately 27% of the issued and outstanding shares of Golden Queen (the “Clay Group”) at the time of the transaction. Gauss is owned 70.51% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment entity) and 29.49% by Auvergne. Pursuant to the transaction, Leucadia was paid a transaction fee of $2,000,000 and $275,000 was paid to Auvergne through GQM LLC. The Company has adopted an accounting policy of expensing these transaction costs.
Variable Interest Entity (“VIE”)
In accordance with ASC 810-10-30, the Company has determined that GQM LLC meets the definition of a VIE and that the Company is part of a related party group that, in its entirety, would meet the definition of a primary beneficiary. Although no individual variable interest holder individually meets the definition of a primary beneficiary in the absence of the related party group, Golden Queen has determined it is considered the member of the related party group most closely associated with GQM LLC. As a result, the Company has consolidated 100% of the accounts of GQM LLC in these consolidated financial statements, while presenting a non-controlling interest portion representing the 50% interest of Gauss in GQM LLC on its balance sheet. A portion of the non-controlling interest has been presented as temporary equity on the Company’s balance sheet representing the initial value of the non-controlling interest that could potentially be redeemable by Gauss in the future. The net assets of GQM LLC as September 30, 2015of March 31, 2016 and December 31, 20142015 are as follows:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Assets, GQM LLC | $ | 155,104,439 | $ | 118,937,371 | $ | 156,991,083 | $ | 158,209,916 | ||||||||
Liabilities, GQM LLC | (18,492,213 | ) | (4,769,144 | ) | (22,081,711 | ) | (22,591,211 | ) | ||||||||
Net assets, GQM LLC | $ | 136,612,226 | $ | 114,168,227 | $ | 134,909,372 | $ | 135,618,705 |
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Included in the assets above, is $45,643,060$21,319,945 (December 31, 20142015 - $83,282,403)$31,531,853) in cash held as at September 30, 2015. The decrease in cash since DecemberMarch 31, 2014 is the result of construction expenditures, partly off-set by the proceeds from the June 2015 capital contributions from GQ Holdings and Gauss, totaling $25,000,000.2016. The cash in GQM LLC is directed specifically to fund capital expenditures required to take the Project to production and settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of the primary beneficiary.beneficiary except in two situation. Please refer to the Subsequent Events details belownotes 6 and 12 for details on a GQM LLC liability that is guaranteed by Golden Queen.the exception.
Non-Controlling Interest
In accordance with ASC 810, the Company has presented Gauss’ ownership in GQM LLC as a non-controlling interest amount on the balance sheet within the equity section. However, the Amended and Restated Limited Liability Company Agreement (“LLC Agreement”) contains terms within Section 12.5 that provides for the exit from the investment in GQM LLC for an initial member whose interest in GQM LLC becomes less than 20%. The following is a summary of the terms of the clause:
Pursuant to Section 12.5, if a member becomes less than a 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three events at the non-diluted member’s option within 60 days of the diluted member’s interest dropping below 20% (the “triggering event”):
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If the non-diluted member does not make an election pursuant to the above within 60 days, the diluted member may choose (a) or (b) above. If no election is made by the diluted member, option (a) is deemed to have been elected.
This clause in the Joint Venture Transaction constitutes contingent redeemable equity as outlined in Accounting Series Release No. 268 (“ASR 268”) and has been classified as temporary equity.
On initial recognition the amount of the temporary equity is calculated using the guidance that specifies that the initial measurement of redeemable instruments should be the carrying value. The amount allocated to temporary equity and the permanent equity on initial recognition is shown below. Temporary equity represents the amount of redeemable equity within Gauss’ ownership interest in the net assets of GQM LLC. The remaining 60% of their interest is considered permanent equity as it is not redeemable.
September 15, 2014 | ||||
Net assets, GQM LLC before Joint Venture Transaction | $ | 16,973,184 | ||
Investment by Gauss | 110,000,000 | |||
Net assets, GQM LLC after Joint Venture Transaction | 126,973,184 | |||
Gauss’ ownership percentage | 50 | % | ||
Net assets of GQM LLC attributable to Gauss | $ | 63,486,592 | ||
Allocation of non-controlling interest between permanent equity and temporary equity: | ||||
Permanent non-controlling interest (60% of total non-controlling interest) | $ | 38,091,955 | ||
Temporary non-controlling interest (40% of total non-controlling interest) | $ | 25,394,637 |
Subsequent to the initial transaction, the carrying value of the non-controlling interest will beis adjusted for net income and loss, distributions and distributionscontributions pursuant to ASC 810-10 based on the same percentage allocation used to calculate the initial book value of temporary equity.
September 30, 2015 | December 31, 2014 | |||||||
Net and comprehensive loss in GQM LLC | $ | (2,556,001 | ) | $ | (2,804,957 | ) | ||
Non-controlling interest percentage | 50 | % | 50 | % | ||||
Net and comprehensive loss attributable to non-controlling interest | $ | (1,278,001 | ) | $ | (1,402,479 | ) | ||
Net and comprehensive loss attributable to permanent non-controlling interest | $ | (766,801 | ) | $ | (841,487 | ) | ||
Net and comprehensive loss attributable to temporary non-controlling interest | $ | (511,200 | ) | $ | (560,992 | ) |
Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | |||||||||||||||
Net loss and comprehensive loss in GQM LLC | $ | (709,333 | ) | $ | (573,413 | ) | ||||||||||
Non-controlling interest percentage | 50 | % | 50 | % | ||||||||||||
Net loss and comprehensive loss attributable to non-controlling interest | (354,666 | ) | (286,706 | ) | ||||||||||||
Net loss and comprehensive loss attributable to permanent non-controlling interest | $ | (212,800 | ) | $ | (172,024 | ) | ||||||||||
Net loss and comprehensive loss attributable to temporary non-controlling interest | $ | (141,866 | ) | $ | (114,682 | ) | ||||||||||
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||||||||
Carrying value of non-controlling interest, December 31, 2014 | $ | 34,250,468 | $ | 22,833,645 | $ | 34,250,468 | $ | 22,833,645 | ||||||||
Capital contribution | 7,500,000 | 5,000,000 | 7,500,000 | 5,000,000 | ||||||||||||
Net and comprehensive loss for the period | (766,801 | ) | (511,200 | ) | ||||||||||||
Carrying value of non-controlling interest, September 30, 2015 | $ | 40,983,667 | $ | 27,322,445 | ||||||||||||
Net loss and comprehensive loss for the period | (1,064,857 | ) | (709,904 | ) | ||||||||||||
Carrying value of non-controlling interest , December 31, 2015 | $ | 40,685,611 | $ | 27,123,741 | ||||||||||||
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||||||||||
Carrying value of non-controlling interest, December 31, 2015 | $ | 40,685,611 | $ | 27,123,741 | ||||||||||||
Net loss and comprehensive loss for the period | (212,800 | ) | (141,866 | ) | ||||||||||||
Carrying value of non-controlling interest , March 31, 2016 | $ | 40,472,811 | $ | 26,981,875 |
Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
Carrying value of non-controlling interest, September 15, 2014 | $ | 38,091,955 | $ | 25,394,637 | ||||
Distributions to non-controlling interests | (3,000,000 | ) | (2,000,000 | ) | ||||
Net and comprehensive loss for the period | (841,487 | ) | (560,992 | ) | ||||
Carrying value of non-controlling interest, December 31, 2014 | $ | 34,250,468 | $ | 22,833,645 |
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Dilution of Interest in Subsidiary
As a result of the Joint Venture Transaction, the Company’s interest in GQM LLC was diluted from 100% to 50% and ordinarily, the Company would recognize a charge on dilution. However, since the transaction was with a related party and the Company retained control, the excess has not been recognized in net income but rather has been recorded in equity as an increase to additional paid in capital based on guidance provided in ASC 810-10-55-4D and -4E.
September 15, 2014 | ||||
Investment by Gauss | $ | 110,000,000 | ||
Less: | ||||
Initial carrying value of permanent equity | (38,091,955 | ) | ||
Initial carrying value of temporary equity | (25,394,637 | ) | ||
Effect of dilution of subsidiary recorded to APIC | $ | 46,513,408 |
Management Agreement
GQM LLC is managed by a board of managers comprising an equal number of representatives of each of Gauss and GQM Holdings. The initial officers of GQM LLC were H. Lutz Klingmann as Chief Executive Officer, and Andrée St-Germain as Chief Financial Officer. During the third quarter offiscal 2015, Robert C. Walish Jr. was appointed to replace Mr. Klingmann as Chief OperatingExecutive Officer of the Company.GQM LLC. Bryan A. Coates was appointed to the GQM LLC Board of Managers as a nominee of the Company, replacing Mr. Klingmann. As long as a member of the Clay family holds greater that 25% of the Company, the Clay Group is entitled to appoint one of the Company’s representatives to the GQM LLC board of managers.
Capital Contribution Agreement
Pursuant to the Joint Venture Transaction, GQ Holdings made a single capital contribution to GQM LLC of $12.5 million on June 15, 2015. Gauss also funded an amount equal to the GQ Holding capital contribution to GQM LLC, and the aggregate amount of $25 million is anticipated to provide GQM LLC with the necessary funds to fully develop the Project. Both partners will maintain their 50% ownership of the Project.
Standby Commitment
Golden Queen also entered into a backstop guarantee agreement with Gauss (the “Backstop Agreement”) whereby, if the Company conducts a rights offering, Gauss has agreed to purchase, upon the terms set forth in the Backstop Agreement, any common shares which have not been acquired pursuant to the exercise of rights under the Rights Offering at a purchase price to be determined but not to exceed $1.10 per common share, up to a maximum amount of $45 million in the aggregate. In consideration for entering into the Backstop Agreement, on closing of the Joint Venture, the Company paid Leucadia and Auvergne a standby guarantee fee of $2,250,000, of which $731,250 was paid to Auvergne.
The Transaction Agreement and Backstop Agreement contemplated that the Company would file a registration statement in connection with the rights offering by October 15, 2014. The Company has decided not to proceed with a rights offering, and as a result the standby commitment has expired.
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Fair Value of Financial Instruments
All financial assets and financial liabilities are recorded at fair value on initial recognition. Transaction costs are expensed when they are incurred, unless they are directly attributable to the acquisition of qualifying assets, in which case they are added to the costs of those assets until such time as the assets are substantially ready for their intended use or sale.
The carrying amounts reported in the balance sheets for cash, receivables, accounts payable and accrued liabilities, interest payable, closing fee payable and reclamation financial assurance approximate fair values becausethree levels of the immediate or short-term maturityfair value hierarchy are as follows:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
March 31, 2016 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants (Note 7(iv)) | $ | 9,423,226 | $ | - | $ | 9,423,226 | $ | - | ||||||||
Derivatives – Hedging instruments (Note 8) | 106,268 | - | 106,268 | - | ||||||||||||
$ | 9,529,494 | $ | - | $ | 9,529,494 | $ | - | |||||||||
December 31, 2015 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Share purchase warrants (Note 7(iv)) | $ | 2,498,269 | $ | - | $ | 2,498,269 | $ | - |
Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of these non-level 3 financial instruments.input that is significant to the fair value measurement. The fair value measurement of the short-term and long-term loans payable approximate their carrying valuesfinancial instruments above use observable inputs in option price models such as the interest rates are based on the market rates as they were initiated during the quarterbinomial and the previous three quarters. The market rates have remained steady for the loans payable during the past four quarters. The carrying value of the short and long term portions of the notes payable approximates their carrying value and have been estimated based on discounted cash flows using interest rates being offered for similar debt instruments. The carrying amount of the notes payable are being recorded at amortized cost using the effective interest rate method.Black-Scholes valuation models.
As at September 30, 2015, the fair value of the convertible debt and the notes payable were estimated using a discounted cash flow analysis based on an interest rate for a similar type of instrument without a conversion feature was $Nil (December 31, 2014: $7,972,993) and $30,564,497 (December 31, 2014: $Nil), respectively. The embedded derivatives in connection with share purchase warrants are being recorded at their fair values using an acceptable valuation model at each reporting period.
Please refer also to the note on fair value of derivative liability underResults of Operations above for more information.
Liquidity and Capital Resources
The Company has generated no revenues from operations since inception and as at March 31, 2016 had an accumulated deficit of $88,831,798 and a working capital deficit of $25,294,090. Cash used in operations for the three months ended March 31, 2016 was $3,200,159.
Golden Queen, on a non-consolidated basis, currently does not have sufficient funds to repay the $37,500,000 loan plus the accrued interest at the issuance date of the condensed consolidated interim financial statements. However, in order to secure the necessary funds to meet this upcoming obligation and mitigate the going concern issue, management is actively exploring several options including debt financing and equity offering.
While Golden Queen has been successful at certain of these efforts in the past, there can be no assurance that future efforts will be successful. This raises substantial doubt about this entity’s ability to continue as a going concern.
At the Project level, GQM Holdings (100%-ownedLLC has sufficient funds to meet its contractual obligations for the next 12 months.
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The Company’s access to the net assets of GQM LLC is determined by the Company) held $6,362,309 in cash on September 30, 2015 as compared to $5,442,546 on September 30, 2014. The increase in cash is due to the proceeds from the June 2015 Loan, partly off-set by the $12.5 million capital contribution paid toBoard of Managers of GQM LLC. ItThe Board of Managers is expected that the cash heldnot controlled by the Company will fundand therefore there is no guarantee that any access to the Company’s corporate expenses until late 2016.net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The convertible debenture was repaid on July 24, 2015 forBoard of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its membership units at their sole discretion.
These condensed consolidated interim financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a total of $7.7 million (C$10 million), including, $153,500 (C$200,000) of accrued interest. The June 2015 Loan will mature in December 2016.going concern. Such adjustments could be material.
The Company’s 50%-owned subsidiary, GQM LLC, which holds the Company’s interest in the Soledad Mountain project, held $45,643,060$21,319,945 in cash as of September 30, 2015March 31, 2016 as compared to $92,034,560$64,508,799 on September 2014. The cash will be used to fund capital expenditures required to take the Project to production. GQM LLC has entered into contracts for construction totaling approximately $60.3 million as at September 30, 2015, of which $10.9 million remains to be paid. The major commitments relate to the construction of the crushing-screening plant for $18.1 million, the construction of the Phase 1, Stage 1 heap leach pad for $8.4 million, the construction of the conveying and stacking system for $8.2 million, and work related to the Merrill-Crowe plant equipment for $7.2 million. The commitments are expected to be paid out in 2015 with the cash on hand. The capital expenditures significantly increased in 2015 as the Company started full construction. The trend will continue until the Company reaches the commissioning phase in lateMarch 31, 2015. It is expected that the current cash on hand will fund capital expenditures andremaining working capital needs until later in 2016 when the Project reachesis expected to reach positive cash flow. The portion related to mobile mining equipment will be financed through loans with Komatsu Financial.
GQM LLC has committed to all the major turn-key projects. Remaining expenditures mostly relate to engineering work, site support, pre-production related expenses, labour, maintenance, spare parts and commissioning related expenses.
Cash used in Operating Activities:
Cash used to fund operating activities, including general and administrative expenses such as legal fees, accounting, taxation and auditing fees, corporate expenses, office expenses and corporate salary was $4,815,347 (2014$3,200,159 (three month period ended March 31, 2015 - $9,347,735)$1,351,647) for the ninethree months period ended September 30, 2015.March 31, 2016. The decreaseincrease in cash used in operating activities is mostly due to the significant costs incurred in 2014 related to the Joint Venture Transaction. The decrease is partially off-set by an increase in interest payableactivity on site as the company started the commissioning of its facilities during the nine months period ended September 30, 2015, as compared to the same period in 2014.first quarter of 2016.
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Cash used in Investing Activities:
The Company began capitalizing all development expenditures directly related to the Project in July 2012. Prior to July 2012, all Project-related expenditures were written off due to uncertainties around obtaining the necessary approvals for proceeding with the Project.
Cash used in investing activities totaled $60,161,928$6,498,622 during the ninethree months ended September 30,March 31, 2016 (three months ended March 31, 2015 (2014 - $13,317,102)$18,131,614). The increasedecrease is due to the increaseddecreased level of construction activity on site.site as the Project construction was finalized.
The development costs incurred/capitalized, by the Company totalled $59,812,875 (2014 - $13,232,736) for the nine months ended September 30, 2015, which was an increase of $46,580,139 as compared to the same period in 2014. See Note 9 – Supplementary Disclosures of Cash Flow Information in the unaudited condensed consolidated interim financial statements for non-cash adjustments to mineral property interest investing activities. There was a significant increase in activity on site during 2015 to date due to the initiation of full construction in the fourth quarter of 2014. The following is a breakdown of significant development costs incurred during the ninethree months ended September 30, 2015 as compared withMarch 31, 2016 included the same period in 2014:
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The Company, through GQM LLC, continued its work on the Project as described inConstruction of Infrastructure and Project Facilitiesabove. Construction is advancing smoothly and is approximately 90% complete. All turn-key projects have been awarded to independent contractors.
Workshop-Warehouse: This project was completed on time and on budget in 2014. The workshop-warehouse was fully equipped with the necessary lubrication equipment, compressor, work-benches and a waste oil storage tank in February 2015. Construction of four offices on the floor above the warehouse was completed in March. We received approval for early occupancy of the workshop-warehouse in April. The workshop-warehouse is fully functional and is now being used.
Assay Laboratory: The construction started in the fourth quarter of 2014 and was completed on time and on budget during the first quarter of 2015. We received approval for early occupancy of the assay laboratory in April. The laboratory was equipped during the second quarter of 2015 and ventilation balancing, mechanical equipment installation and electrical hookups were completed in June. The laboratory was commissioned in July and is now fully operational.
Water Supply & Water Storage: The construction of the basic water supply infrastructure for the Project has been completed. The electrical installations at water well PW-1 were completed in March and water supply from the well is now fully automated. Five water storage tanks were delivered during the second quarter and the construction of the foundations is underway. The backup production water well (PW-4) was drilled, equipped and tested in June and the connection to the mine water supply infrastructure is nearly complete.
Power Supply: Construction of the site-wide power distribution system has essentially been completed and all power poles have been set. The primary sub-station was completed in November. We expect to connect to the Southern California Edison grid in two phases in November 2015.
Crushing-Screening Plant: The Hilfiker wall was completed in February. Construction of the footings and construction of a retaining wall in the primary crusher area was completed in April. Structural steel and equipment for the crushing-screening plant was delivered during the second and third quarters and assembly started shortly thereafter. The order for the high pressure grinding roll or HPGR was placed with ThyssenKrupp Industrial Solutions (USA), Inc. in the third quarter of 2014 and the HPGR has been delivered to site in early August. Construction of a second Hilfiker wall in the HPGR was completed mid-July. The Primary sectioncompletion of the crushing-screening plant was commissioned in late October. The Secondaryfacilities, the conveyor and Tertiary (HPGR) sections of the crushing-screening plant are nearly complete and are expected to be commissioned in November.
Heap Leach Pad Phase 1/Stage 1: The earthmoving phase of the Phase 1, Stage 1 heap-leach pad, the events pond and the solution conveying channel were completed during the first quarter. Mixing of the historical tailings and natural clay from a deposit along Mojave Tropico Road was completed in May and the mix has been used to construct the lower, impervious liner for the events pond, the solution conveying channel and for the heap leach pad. The synthetic upper liner was placed in the events pond and solution collection ditch in May and the upper synthetic liner was placed on the heap leach pad in May and June. A sub-contractor mobilized a portable crushing-screening plant to site and over-liner material was crushed and placed on the heap leach pad. The Phase 1, Stage 1 heap-leach pad turn-key project was completed in September.
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Merrill-Crowe plant: The contract for the equipment was awarded during the fourth quarter of 2014 and the contract forstacking system, the Merrill-Crowe plant building was awarded in January 2015. The supporting steel was fabricated in Mexico. Basic construction of the pump box was completed in March. Construction of the footings was completed in August and the erection of the building started shortly thereafter. The equipment was received during the third quarterwater and the installation is well underway. This turn-key project is expected to be completed in late November or early December.
Stacking and Conveying System: Equipment and structural steel components of the conveying and stacking system were delivered during the second quarter and the assembly started shortly thereafter. This turn-key project is expected to be completed in November.power supply.
Cash from Financing Activities:
Cash fromused in financing activities totaled $25,575,000$1,230,260 during the ninethree months ended September 30,March 31, 2016 (three months ended March 31, 2015 (2014 - proceeds– cash used of $115,111,421))$2,840,779). The cash fromused in financing activities was significantly higherlower during the ninethree months ended September 30, 2014 asMarch 31, 2016 when compared to the same period in 2015 as 2016 principal repayments only related to GQM LLC loans, while repayments in 2015 also included loans related to GQM Ltd. The January 1, 2016 interest payment due to the Joint Venture Transaction. Financing activities during the nine months ended on September 30, 2015 include the June 2015 Loan incremental proceeds of $25,000,000 and Gauss LLC’s $12,500,000 capital contribution$974,986 has been added to GQM LLC. The remaining balance of the January 2014 Loan, $2,500,000 and closing fees of $250,000 on the December 2014 Loan were paid during the first quarter of 2015. The Company also paid closing fees of $1,500,000 in conjunction with the June 2015 Loan. The Company retired its convertible debentures on July 26, 2015 for $7,675,000.
On January 1, 2014, the Company entered into the $10,000,000 January Loan. The January Loan had a twelve-month term and an annual interest rate of 5%, payable on the maturity date. The Company repaid $7,500,000 of the loan on December 31, 2014. The remaining balance of the loan, $2,500,000 was repaid on January 5, 2015 (please seeTransactions with Related Parties above for more information).
On June 8, 2015, the Company amended the December Loan to extend the maturity to December 8, 2016 and increasing the principal amount from $12,500,000 to $37,500,000 (the “June Loan”). The Company also issued 10,000,000 common share purchase warrants exercisable for a period of five years expiring June 8, 2020. The common share purchase warrants have an exercise price of $0.95. All other terms remained the same as the December Loan. The Company also incurred a closing fee to secure the loan in the amount of $1,500,000, all of which was paid on June 8, 2015. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $46,408. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.balance.
Working Capital:
As at September 30, 2015,March 31, 2016, the Company, on a consolidated basis, had current assets of $52,439,070$31,548,261 (December 31, 20142015 - $91,574,405; September 30, 2014 - $97,695,965)$39,979,225) and current liabilities of $9,105,708$56,842,352 (December 31, 20142015 - $26,464,078; September 30, 2014 - $22,586,126)$47,722,334) or working capital deficit of $43,333,362$25,294,090 (December 31, 2014 - $65,110,327; September 30, 2014 -2015 – working capital deficit of $75,109,839)$7,743,109). The decrease in current assets from December 31, 20142015 is mostly the result of project-relatedconstruction and working capital expenditures partially off-set by June 2015 loan and capital contribution from Gauss LLC.on site. The decrease isincrease in current liabilities is the result of the extension of the December 2014 Loan with the June 2015 Loan and the repayment of the convertible debenture, partly off-set by an increasenow being included in mobile equipment loans at the Joint Venture level.our current liabilities. The June 2015 Loan was previously included in our long-term liabilities. It has been re-classified as a current liability as it is now due in less than twelve months.
GQM LLC will use its cash on hand for ongoing construction work on site (refer toConstruction of Infrastructure and Project Facilities above) and for working capital related expenditures until later in 2016 when the Project reachesis expected to be generating positive cash flows.
Golden Queen Mining Co. Ltd will use its cash for general corporate expenditures such as accounting fees, legal fees, interest expense and corporate salary expenses.
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Please refer also toOutlookbelow.
Outstanding Share Data
The number of shares issued and outstanding and the fully diluted share position are set out in the table below:
Item | No. of Shares | |||||||
Shares issued and outstanding on June 30, 2015 | 99,928,683 | |||||||
Shares issued for mineral properties | Nil | |||||||
Shares issued pursuant to the exercise of stock options | Nil | |||||||
Shares issued and outstanding on September 30, 2015 | 99,928,683 | Exercise Price | Expiry Date | |||||
Director and consultants stock options | 1,270,000 | $0.58 to $1.59 | From 11/11/15 to 09/08/20 | |||||
Shares to be issued on exercise of warrants | 10,000,000 | $0.95 | 06/08/20 | |||||
Shares to be issued as a finder’s fee | Nil | Not Applicable | Not Applicable | |||||
Fully diluted on September 30, 2015 | 111,198,683 | |||||||
Fully diluted on November 9, 2015 | 111,198,683 |
Item | No. of Shares | |||||||||
Shares issued and outstanding on December 31, 2015 | 99,928,683 | |||||||||
Shares issued pursuant to the exercise of stock options | Nil | |||||||||
Shares issued and outstanding on March 31, 2016 | 99,928,683 | Exercise Price | Expiry Date | |||||||
Shares to be issued on exercise of directors and employees stock options | 1,070,000 | $ | 0.58 to $1.59 | From 06/03/18 to 09/08/20 | ||||||
Shares to be issued on exercise of warrants | 10,000,000 | $ | 0.95 | 06/08/20 | ||||||
Shares to be issued as a finder’s fee (due upon commercial production) | 100,000 | Not Applicable | Not Applicable | |||||||
Fully diluted March 31, 2016 | 111,098,683 |
The company has an unlimited authorized share capital
Outlook
The estimated capital costs, including contingency, working capital and mining equipment, are $144 million.
The net proceeds from the Joint Venture Transaction will be applied to the continued development of the Project. It is expected that the current cash on hand will fund capital expenditures and working capital needs until the Project reaches positive cash flows from production. The portion related to mobile mining equipment will be financed through loans with Komatsu.
Construction is advancing smoothly and has progressed to a 90% completion rate; all turn-key projects have been awarded to independent contractors. The Company expects commissioning of the processing facilities in late 2015.
The Company is evaluating its options, including debt and equity, to re-finance the June 2015 Loan which matures on December 8, 2016.
The ability of the Company to developoperate a mine on the property is subject to numerous risks, certain of which are disclosed in the Company’s latest Form 10-K filing with the SEC, dated March 16, 2015.30, 2016. Readers should evaluate the Company’s prospects in light of these and other risk factors.
The Company was completing testing and commissioning in the three months ended March 31, 2016. The Company moved into the production phase subsequent to March 31, 2016.
Mineral PropertiesInterests
In July 2012, the Company received notice that it had met all remaining major conditions of the conditional use permits for the Project. As a result, managementManagement made the decision to begin capitalizing all development expenditures related to the Project while all other expenses not related to the development of the project continue to be expensed as incurred. Refer also to Note 43 Property, Plant, Equipment and Mineral Property Interests of the unaudited condensed consolidated interim financial statements for a more detailed discussion.
Subsequent Events
Subsequent to September 30, 2015, GQM LLC took possession of two haul trucks and a water truck, valued at $4.0 million. The Company made total payments, tax and a 10% down payment, of $0.7 million. The remaining $3.3 million will be financed over 48 months at an interest rate of 3.90% for the two haul trucks and 0.99% for the water truck.
Subsequent to September 30, 2015, GQM LLC also acquired a blasthole drill valued at $1.1 million. A down payment of $0.2 million was made with the remaining amount being financed over 36 months at a rate of 4.40%. The loan agreement has been guaranteed by Golden Queen.
On October 1st, 2015,April 1st, 2016, the Company was to make the quarterly interest payment on the June 2015 loan. In accordance with the terms withof the June 2015 loan agreement, the Company chose to exercise its right to pay in kind by addingadd the interest owed on October 1st, 2015April 1st, 2016 to the principal balance of the June 2015 loan. The principal balance of the loan was increased by $1,181,507. The principal balance of the loan moving forward will be $38,681,507 and interest will be calculated on this balance.
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Application of Critical Accounting Estimates$988,696.
The financial statementsSummary of Significant Accounting Policies and Estimates
Full disclosure of the Company have been preparedCompany’s significant accounting policies and estimates in accordance with generally accepted accounting principles in the United States. Because a precise determinationStated can be found in notes of many assets and liabilities is dependent upon future events, the preparation ofits audited consolidated financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.as at December 31, 2015.
The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:
Recent Accounting Standards
Metal and Other Inventory
Inventories include stock piles, in-process inventory, doré, and operating materials and supplies. The classification of inventory is determined by the stage at which the ore is in the production process. All inventories are stated at the lower of cost or market, with cost being determined using a weighted average cost method. Dore inventory includes product at the mine site. Dore inventory costs include direct labor, materials, depreciation, depletion and amortization as well as overhead costs relating to mining activities.
Mineral Property and Exploration Costs
Costs related to the development of our mineral reserves are capitalized whenit has been determined an ore body can be economically developed. An ore body is determined to be economically minable based on proven and probable reserves and when appropriate permits are in place. Major mine development expenditures are capitalized, including primary development costs such as costs of building access roads, heap leach pads, processing facilities, and infrastructure development. The Company also capitalizes additional development expenditures that are directly related to the development of the mine.
Drilling and related costs are classified as additional development expenditures, are charged to operations as incurred, or capitalized, based on the following criteria:
If all of these criteria are met, drilling and related costs are capitalized. Drilling costs not meeting all of these criteria are expensed as incurred. The following factors are considered in determining whether or not the criteria listed above have been met, and capitalization of drilling costs is appropriate:
Once production has commenced, capitalized costs will be depleted using the units-of-production method over the estimated life of the proven and probable reserves. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to the Consolidated Statements of Comprehensive Income (Loss) for that period.
We assess the carrying cost of our mineral properties for impairment whenever information or circumstances indicate the potential for impairment. Such evaluations compare estimated future net cash flows with our carrying costs and future obligations on an undiscounted basis. If it is determined that the future undiscounted cash flows are less than the carrying value of the property, a write down to the estimated fair value is charged to the Consolidated Statement of Comprehensive Income (Loss) for the period. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses if the carrying value can be recovered.
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Proceeds received under option agreements and/or earn-in agreements are recorded as a cost recovery against the carrying value of the underlying project until the carrying value is reduced to zero. Any proceeds received in excess of the carrying value of the project are recorded as a realized gain in the Consolidated Statement of Comprehensive Income (Loss).
Capitalized Interest
For significant exploration and development projects, interest is capitalized as part of the historical cost of developing and constructing assets in accordance with ASC 835-20 ("capitalization of interest"). Interest is capitalized until the asset is ready for service. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on general debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depletion or impairment. See Note 8(vi) of the unaudited condensed consolidated interim financial statements.
Non-controlling Interest
Non-controlling interest consists of equity in GQM LLC not attributable, directly or indirectly, to Golden Queen. GQM LLC meets the definition of a Variable Interest Entity (“VIE”). Golden Queen has determined it is the member of the related party group that is most closely associated with GQM LLC and, as a result, is the primary beneficiary who consolidates GQM LLC. The non-controlling interest has been classified into two categories; permanent equity and temporary equity.
Non-controlling interests in temporary equity represent the estimated portion of non-controlling interest that could potentially be convertible through either a conversion of the non-controlling interest into a net smelter royalty obligation of GQM LLC or a buy-out of the non-controlling interest at fair value by the Company. The convertible portion of non-controlling interest recorded in temporary equity is initially recorded at the carrying value and then adjusted for net income or loss and distributions attributable to the temporary equity.
The non-controlling interest in permanent equity represents the portion of the non-controlling interest that is not convertible. Please refer to Note 8(vii) of the unaudited condensed consolidated interim financial statements for complete details of how the transaction has been accounted for.
Derivative Liabilities
Derivative liabilities consist of the Company’s convertible debentures and derivative liabilities related to their share purchase warrants.
If the Company’s convertible debentures had not been converted by the holder prior to the maturity date, then either the Company or the holder may convert them at the lower of C$1.03 or the market price as at the maturity date. The convertible debentures were required to be accounted for as separate derivative liabilities due to this possible variability in conversion price.
The share purchase warrants issued by the Company are exercisable at $0.95 per share purchase warrant for a period of five years. They are required to be accounted for as a separate derivative liability due to an anti-dilution clause that could potentially result in the exercise price being reduced.
These liabilities were required to be measured at fair value. These instruments were adjusted to reflect fair value at each period end. Any increase or decrease in the fair value was recorded in results of operations as change in fair value of derivative liabilities. In determining the appropriate fair value, we used the Binomial pricing model.
New Accounting Policies
(i) | Effective August 2014, FASB issued Accounting Standards update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40 –Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update essentially requires management of all entities, for annual and interim periods, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued. |
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If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following:
1. | Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans). |
2. | Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations. |
3. | Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern. |
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there issubstantial doubt about the entity’s ability to continue as a going concernwithin one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
This update will come into effect for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is assessing the impact of this standard.
(ii) | In February, 2015, the FASB issued ASU 2015-02,Consolidation (Topic 810) – Amendments to the Consolidation Analysiswhich focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the standards and improves current GAAP by: |
· | Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met. |
· | Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE). |
· | Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. |
The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. The Company is assessingwill adopt the impact of this standard.ASU effective January 1, 2016.
(iii) | In |
1. | Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on |
2. | Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. |
3. | Require separate presentation of |
The ASU will be effective for periods beginning after December 15, 2015,2017, for public companies. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of this standard.
(iv) | In |
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The ASU will be effective for periods beginning after December 15, 2016, for public companies. Early adoption is permitted, including adoption in an interim period. The Company has assessedis assessing the impact of this new standard and will adopt the new standard effective October 1, 2015.standard.
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Qualified Person and Caution With Respect to Forward-looking Statements
Mr. Sean Ennis, P. Eng., P.E. is a qualified person for the purposes of NI 43-101 and has reviewed and approved the technical information in this Form 10-Q.
This Form 10-Q contains certain forward-looking statements, which relate to the intent, belief and current expectations of the Company’s management, as well as assumptions and parameters used in the feasibility study referenced in this report. These forward-looking statements are based upon numerous assumptions that involve risks and uncertainties and other factors that may cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include among other things the receipt and compliance with the terms of required approvals and permits, the costs of and availability of sufficient capital to fund the projects to be undertaken by the Company and commodity prices. In addition, projected mining results, including quantity of ore, grade, production rates, and recovery rates, are subject to numerous risks normally associated with mining activity of the nature described in this report and in the feasibility study, and as a result actual results may differ substantially from projected results. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date the statements were made.
Caution to U.S. Investors
Management advises U.S. investors that while the terms “measured resources”, “indicated resources” and “inferred resources” are recognized and required by Canadian regulations, the SEC does not recognize these terms. U.S. investors are cautioned not to assume that any part or all of the material in the mineral resource categories will be converted into mineral reserves. References to such terms are contained in the Company’s Form 10-K and other publicly available filings. We further advise U.S. investors that the mineral reserve estimates disclosed in this report have been prepared in accordance with Canadian regulations and may not qualify as “reserves” under the SEC Industry Guide 7. Accordingly, information concerning mineral resources and reserves set forth herein may not be comparable with information presented by companies using only U.S. standards in their public disclosure.
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Additional Information
Further information on Golden Queen Mining Co. Ltd. is available on the SEDAR web site atwww.sedar.com and on the Company’s web site atwww.goldenqueen.com.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. To mitigate exposure to credit risk on financial assets the Company has established policies to ensure liquidity of funds and ensure counterparties demonstrate minimum acceptable credit worthiness.
The Company maintains its US Dollar and Canadian Dollar cash in bank accounts with major financial institutions with high credit standings. Cash deposits held in the United States are insured by the FDIC for up to $250,000 and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$100,000.
Certain United States and Canadian bank accounts held by the Company exceed these federally insured limits or are uninsured as they relate to US Dollar deposits held in Canadian financial institutions. As of March 31, 2016 and 2015, the Company’s cash balances held in United States and Canadian financial institutions include $26,658,270 and $69,083,604 respectively, which are not fully insured by the FDIC or CDIC. The Company has not experienced any losses on such accounts and management believes that using major financial institutions with high credit ratings mitigates the credit risk in cash.
Interest Rate Risk
The Company holds 85% of its cash in bank deposit accounts with a single major financial institution. The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the quarter ended September 30, 2015,three months ending March 31, 2016, a 1% decrease in interest rates would have reduced the interest income for the period byto a trivial amount.
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Foreign Currency Exchange Risk
Certain purchases of labour are denominated in Canadian dollars. As a result, currency exchange fluctuations may impact the costs of our operations. Specifically, the appreciation of the Canadian dollar against the U.S. dollar may result in an increase in the Canadian operating expenses in U.S. dollar terms. As of September 30, 2015,March 31, 2016, the Company maintained the majority of its cash balance in U.S. dollars. The Company currently does not engage in any currency hedging activities.
Commodity Price Risk
The Company’s primary business activity is the development of the open pit, gold and silver, heap leach project on the Property. Decreases in the price of either of these metals from current levels has the potential to negatively impact the Company’s abilityfuture viability of the Project. The Company holds a small portfolio of derivative contracts in the form of gold zero-cost collars in order to secure significant additional financing requiredhedge against the gold spot price volatility risk. A 10% change in the gold spot price would have a trivial impact on the change in the fair value of the derivative contracts held by the Company. The Company may enter into hedging contracts from time to developtime to protect the Project into an operating mine. We do not currently engage in hedging transactions and we have no hedged mineral resources.cash flows from commodity price volatility.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. These rules refer to the controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. It is management’s responsibility to establish and maintain adequate disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, and our external Sarbanes-Oxley consultants carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2015March 31, 2016 and concluded that since the last quarterly review, our disclosure controls and procedures were operating effectively.
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Changes in Internal Control
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the quarter ended September 30, 2015March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Fraud Analysis
The Company is committed to preventing fraud and corruption and is developing an anti-fraud culture. To achieve this goal, the Company has committed to the following:
1. | Developing and maintaining effective controls to prevent fraud; |
2. | Ensuring that if fraud occurs a vigorous and prompt investigation takes place; |
3. | Taking appropriate disciplinary and legal actions; |
4. | Reviewing systems and procedures to prevent similar frauds; |
5. | Investigating whether there has been a failure in supervision and take appropriate disciplinary action if supervisory failures occurred; and |
6. | Recording and reporting all discovered cases fraud. |
The following policies have been developed to support the Company’s goals:
· | Insider Trading Policy |
· | Managing Confidential Information Policy |
· | Whistleblower Policy |
· | Anti-corruption Policy |
All policies can be viewed in full on the Company’s website atwww.goldenqueen.com
For the three and nine months ended September 30, 2015March 31, 2016 and year ended December 31, 2014,2015, there were no reported instances of fraud.
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Part II – Other Information
Item 1. Legal Proceedings
See “The Center for Biodiversity Petition to List the Mojave Shoulderband Snail as an Endangered Species” and “Other Legal Matters” contained in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q.
Item 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in our Form 10-K for the fiscal period ended December 31, 2014,2015, as filed with the SEC on March 16, 2015.30, 2016.
Item 4. Mine Safety Disclosures
GQM LLC is the operator of the Project, which is located in Mojave in Kern County, California. The Company and GQM LLC have no mine safety violations to report.disclosures required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K are included in Exhibit 95.1 of this Quarterly Report. There were no lost-time accidents at GQM LLC during the thirdfirst quarter of 2015.2016.
Item 6. Exhibits
Exhibit No. | Description of Exhibit | Manner of Filing | ||
3.1 | Notice of Articles | Incorporated by reference to Exhibit | ||
3.2 | Articles | Incorporated by reference to Exhibit 3.2 to the Form 8-K of the Company, filed with the SEC on September 2, 2010 | ||
31.1 | Certification of the Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934 | Filed herewith | ||
31.2 | Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange | Filed herewith | ||
32.1 | Section 1350 Certification of the Principal Executive Officer | Filed herewith | ||
32.2 | Section 1350 Certification of the Principal Financial Officer | Filed herewith | ||
95.1 | Mine Safety Disclosure | Filed herewith | ||
101 | Financial Statements from the Quarterly Report on Form 10-Q of the Company for the three months ended | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 10, 2016
GOLDEN QUEEN MINING CO. LTD. | ||
(Registrant) | ||
By: | /s/ Thomas M. Clay | |
Thomas M. Clay | ||
Principal Executive Officer | ||
By: | ||
Andrée St-Germain | ||
Principal Financial Officer |
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