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 endedJuneSeptember 30, 2017
¨TRANSITION REPORT UNDER SECTION 13 OR 15(d)15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to ___________________________
000-21777
(Commission File Number)
GOLDEN QUEEN MINING CO. LTD.LTD.
(Exact name of registrant as specified in its charter)
| British Columbia, Canada | Not Applicable | |
| (State or other jurisdiction of incorporation) | (IRS Employer |
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¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ |
| Smaller reporting companyx | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 August 9,November 14, 2017, the registrant’s outstanding common stock consisted of 111,148,683 shares.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Balance Sheets
(amounts expressed in thousands of US dollars - Unaudited)
| June 30, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 6,284 | $ | 13,301 | ||||
| Receivables | 22 | 34 | ||||||
| Inventories (Note 5) | 12,399 | 10,941 | ||||||
| Prepaid expenses and other current assets | 559 | 577 | ||||||
| Total current assets | 19,264 | 24,853 | ||||||
| Property, plant, equipment and mineral interests (Note 6) | 140,174 | 134,550 | ||||||
| Advance minimum royalties | 304 | 303 | ||||||
| Total Assets | $ | 159,742 | $ | 159,706 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 5,864 | $ | 4,264 | ||||
| Interest payable | 646 | 296 | ||||||
| Current portion of note payable (Note 9 (ii)) | 5,922 | - | ||||||
| Current portion of loan payable (Note 16) | 6,194 | 5,656 | ||||||
| Derivative liability – Related party warrants (Note 10) | 4,006 | 5,458 | ||||||
| Derivative liability – Warrants (Note 10) | 530 | 972 | ||||||
| Total current liabilities | 23,162 | 16,646 | ||||||
| Note payable (Note 9 (ii)) | 22,087 | 26,347 | ||||||
| Loan payable (Note 16) | 8,519 | 9,494 | ||||||
| Asset retirement obligation (Note 8) | 1,601 | 1,366 | ||||||
| Deferred tax liability | 12,922 | 12,922 | ||||||
| Total liabilities | 68,291 | 66,775 | ||||||
| Temporary Equity | ||||||||
| Redeemable portion of non-controlling interest (Note 9 (iv)) | 26,156 | 26,220 | ||||||
| Shareholders’ Equity | ||||||||
| Common shares, no par value, unlimited shares authorized (2016 - unlimited); 111,148,683 (2016 – 111,048,683) shares issued and outstanding (Note 7) | 71,126 | 71,067 | ||||||
| Additional paid-in capital | 43,737 | 43,652 | ||||||
| Deficit accumulated | (88,800 | ) | (87,335 | ) | ||||
| Total shareholders’ equity attributable to GQM Ltd. | 26,063 | 27,384 | ||||||
| Non-controlling interest (Note 9 (iv)) | 39,232 | 39,327 | ||||||
| Total Shareholders’ Equity | 65,295 | 66,711 | ||||||
| Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 159,742 | $ | 159,706 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,683 | $ | 13,301 | ||||
| Inventories (Note 5) | 11,952 | 10,941 | ||||||
| Prepaid expenses and other current assets | 344 | 611 | ||||||
| Total current assets | 16,979 | 24,853 | ||||||
| Property, plant, equipment and mineral interests (Note 6) | 141,194 | 134,550 | ||||||
| Advance minimum royalties | 304 | 303 | ||||||
| Total Assets | $ | 158,477 | $ | 159,706 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 5,960 | $ | 4,265 | ||||
| Interest payable | 651 | 296 | ||||||
| Current portion of note payable (Note 9 (ii)) | 9,061 | - | ||||||
| Current portion of loan payable (Note 16) | 6,998 | 5,656 | ||||||
| Derivative liability – Related party warrants (Note 10) | 3,129 | 5,458 | ||||||
| Derivative liability – Warrants (Note 10) | 268 | 972 | ||||||
| Total current liabilities | 26,067 | 16,647 | ||||||
| Note payable (Note 9 (ii)) | 20,096 | 26,347 | ||||||
| Loan payable (Note 16) | 9,398 | 9,494 | ||||||
| Asset retirement obligation (Note 8) | 1,719 | 1,366 | ||||||
| Deferred tax liability | 12,922 | 12,922 | ||||||
| Total liabilities | 70,202 | 66,776 | ||||||
| Temporary Equity | ||||||||
| Redeemable portion of non-controlling interest (Note 9 (iv)) | 25,621 | 26,219 | ||||||
| Shareholders’ Equity | ||||||||
| Common shares, no par value, unlimited shares authorized (2016 - unlimited); 111,148,683 (2016 – 111,048,683) shares issued and outstanding (Note 7) | 71,126 | 71,067 | ||||||
| Additional paid-in capital | 43,785 | 43,652 | ||||||
| Deficit accumulated | (90,687 | ) | (87,335 | ) | ||||
| Total shareholders’ equity attributable to GQM Ltd. | 24,224 | 27,384 | ||||||
| Non-controlling interest (Note 9 (iv)) | 38,430 | 39,327 | ||||||
| Total Shareholders’ Equity | 62,654 | 66,711 | ||||||
| Total Liabilities, Temporary Equity and Shareholders’ Equity | $ | 158,477 | $ | 159,706 | ||||
Ability to Continue as a Going Concern (Note 2)
Commitments and Contingencies (Note 12)
Subsequent Events (Note 17)
Approved by the Directors:
| “Thomas M. Clay” | “Bryan A. Coates” | ||
| Thomas M. Clay, Director | Bryan A. Coates, Director |
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| Sales | $ | 16,882 | $ | 3,464 | $ | 31,686 | $ | 3,464 | ||||||||
| Cost of Sales | ||||||||||||||||
| Direct mining costs | (13,367 | ) | (3,563 | ) | (24,929 | ) | (3,563 | ) | ||||||||
| Depreciation and depletion (Note 6) | (2,742 | ) | (1,843 | ) | (5,498 | ) | (1,843 | ) | ||||||||
| Income (loss) from mine operations | 773 | (1,942 | ) | 1,259 | (1,942 | ) | ||||||||||
| General and administrative expenses (Note 14) | (712 | ) | (989 | ) | (2,128 | ) | (2,517 | ) | ||||||||
| Operating income (loss) | 61 | (2,931 | ) | (869 | ) | (4,459 | ) | |||||||||
| Other income (expenses) | ||||||||||||||||
| Gain (loss) on derivative instruments (Note 10) | 2,375 | 1,135 | 1,894 | (5,896 | ) | |||||||||||
| Interest expense (Note 9 (iii)) | (1,250 | ) | (1,793 | ) | (2,297 | ) | (2,554 | ) | ||||||||
| Interest income | 37 | 43 | 63 | 83 | ||||||||||||
| Other expenses | (31 | ) | (22 | ) | (415 | ) | (22 | ) | ||||||||
| Total other income (expenses) | 1,131 | (637 | ) | (755 | ) | (8,389 | ) | |||||||||
| Net and comprehensive income (loss) for the period | $ | 1,192 | $ | (3,568 | ) | $ | (1,624 | ) | $ | (12,848 | ) | |||||
| Less: Net and comprehensive loss (income) attributable to the non-controlling interest for the period (Note 9 (iv)) | (230 | ) | 1,459 | 159 | 1,814 | |||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. for the period | $ | 962 | $ | (2,109 | ) | $ | (1,465 | ) | $ | (11,034 | ) | |||||
| Income (loss) per share – basic (Note 15) | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.11 | ) | |||||
| Income (loss) per share – diluted (Note 15) | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.11 | ) | |||||
| Weighted average number of common shares outstanding - basic | 111,113,341 | 99,893,341 | 111,096,766 | 99,893,341 | ||||||||||||
| Weighted average number of common shares outstanding - diluted | 111,113,341 | 99,893,341 | 111,096,766 | 99,893,341 | ||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | ||||||||||||||||
| Metal Sales | $ | 16,496 | $ | 13,451 | $ | 48,182 | $ | 16,915 | ||||||||
| Cost of Sales | ||||||||||||||||
| Direct mining costs | (15,404 | ) | (9,111 | ) | (40,333 | ) | (12,674 | ) | ||||||||
| Depreciation and depletion (Note 6) | (2,931 | ) | (2,232 | ) | (8,429 | ) | (4,081 | ) | ||||||||
| Income (loss) from mine operations | (1,839 | ) | 2,108 | (580 | ) | 160 | ||||||||||
| General and administrative expenses (Note 14) | (1,171 | ) | (657 | ) | (3,297 | ) | (3,167 | ) | ||||||||
| Operating income (loss) | (3,010 | ) | 1,451 | (3,877 | ) | (3,007 | ) | |||||||||
| Other income (expenses) | ||||||||||||||||
| Gain (loss) on derivative instruments (Note 10) | 1,139 | 3,944 | 3,033 | (1,952 | ) | |||||||||||
| Interest expense (Note 9 (iii)) | (1,295 | ) | (1,814 | ) | (3,592 | ) | (4,369 | ) | ||||||||
| Interest income | 14 | 33 | 77 | 116 | ||||||||||||
| Other expenses | (72 | ) | (23 | ) | (488 | ) | (45 | ) | ||||||||
| Total other income (expenses) | (214 | ) | 2,140 | (970 | ) | (6,250 | ) | |||||||||
| Net and comprehensive income (loss) for the period | $ | (3,224 | ) | $ | 3,591 | $ | (4,847 | ) | $ | (9,257 | ) | |||||
| Less: Net and comprehensive loss (income) attributable to the non-controlling interest for the period (Note 9 (iv)) | 1,335 | (853 | ) | 1,495 | 961 | |||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. for the period | $ | (1,889 | ) | $ | 2,738 | $ | (3,352 | ) | $ | (8,296 | ) | |||||
| Income (loss) per share – basic (Note 15) | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) | |||||
| Income (loss) per share – diluted (Note 15) | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) | |||||
| Weighted average number of common shares outstanding - basic | 111,148,683 | 108,026,944 | 111,137,694 | 102,657,767 | ||||||||||||
| Weighted average number of common shares outstanding - diluted | 111,148,683 | 108,402,626 | 111,137,694 | 102,657,767 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Shareholders’ Equity, Non-controlling Interest and Redeemable Portion of Non-controllingNon-Controlling Interest
(amounts expressed in thousands of US dollars, except shares amounts- 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, 2015 | 99,928,683 | $ | 62,860 | $ | 43,628 | $ | (79,906 | ) | $ | 26,582 | $ | 40,686 | $ | 67,268 | $ | 27,124 | ||||||||||||||||
| Stock-based compensation | - | - | 7 | - | 7 | - | 7 | - | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | (11,034 | ) | (11,034 | ) | (1,089 | ) | (12,123 | ) | (726 | ) | |||||||||||||||||||
| Balance, June 30, 2016 | 99,928,683 | $ | 62,860 | $ | 43,635 | $ | (90,940 | ) | $ | 15,555 | $ | 39,597 | $ | 55,152 | $ | 26,398 | ||||||||||||||||
| Balance, December 31, 2016 | 111,048,683 | $ | 71,067 | $ | 43,652 | $ | (87,335 | ) | $ | 27,384 | $ | 39,327 | $ | 66,711 | $ | 26,220 | ||||||||||||||||
| Issuance of common shares | 100,000 | 59 | - | - | 59 | - | 59 | - | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 85 | - | 85 | - | 85 | - | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | (1,465 | ) | (1,465 | ) | (95 | ) | (1,560 | ) | (64 | ) | |||||||||||||||||||
| Balance, June 30, 2017 | 111,148,683 | $ | 71,126 | $ | 43,737 | $ | (88,800 | ) | $ | 26,063 | $ | 39,232 | $ | 65,295 | $ | 26,156 | ||||||||||||||||
| 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, 2015 | 99,928,683 | $ | 62,860 | $ | 43,628 | $ | (79,906 | ) | $ | 26,582 | $ | 40,686 | $ | 67,268 | $ | 27,124 | ||||||||||||||||
| Issuance of common shares, private placement net of share issuance cost (Note 4) | 11,120,000 | 8,207 | - | - | 8,207 | - | 8,207 | - | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 11 | - | 11 | - | 11 | - | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | (8,296 | ) | (8,296 | ) | (577 | ) | (8,873 | ) | (384 | ) | |||||||||||||||||||
| Balance, September 30, 2016 | 111,048,683 | $ | 71,067 | $ | 43,639 | $ | (88,202 | ) | $ | 26,504 | $ | 40,109 | $ | 66,613 | $ | 26,740 | ||||||||||||||||
| Balance, December 31, 2016 | 111,048,683 | $ | 71,067 | $ | 43,652 | $ | (87,335 | ) | $ | 27,384 | $ | 39,327 | $ | 66,711 | $ | 26,220 | ||||||||||||||||
| Issuance of common shares (Note 7) | 100,000 | 59 | - | - | 59 | - | 59 | - | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 133 | - | 133 | - | 133 | - | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | (3,352 | ) | (3,352 | ) | (897 | ) | (4,249 | ) | (599 | ) | |||||||||||||||||||
| Balance, September 30, 2017 | 111,148,683 | $ | 71,126 | $ | 43,785 | $ | (90,687 | ) | $ | 24,224 | $ | 38,430 | $ | 62,654 | $ | 25,621 | ||||||||||||||||
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Condensed Consolidated Interim Statements of Cash Flows
(amounts expressed in thousands of US dollars - Unaudited)
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2017 | 2016 | |||||||
| Operating Activities | ||||||||
| Net loss for the period | $ | (1,624 | ) | $ | (12,848 | ) | ||
| Adjustment to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and depletion | 5,498 | 1,850 | ||||||
| Amortization of debt discount and interest accrual | 740 | 2,401 | ||||||
| Accretion expense | 62 | 22 | ||||||
| Change in fair value of derivative liabilities (Note 10) | (1,894 | ) | 5,896 | |||||
| Stock based compensation | 85 | 7 | ||||||
| Unrealized foreign exchange | (7 | ) | - | |||||
| Non-cash finder fees | 59 | - | ||||||
| Changes in non-cash working capital items: | ||||||||
| Receivables | 12 | (3 | ) | |||||
| Prepaid expenses & other current assets | 18 | 154 | ||||||
| Inventory | (1,458 | ) | (6,285 | ) | ||||
| Accounts payable & accrued liabilities | 2,687 | 1,749 | ||||||
| Interest payable | 1,272 | - | ||||||
| Cash generated from (used in) operating activities | 5,450 | (7,057 | ) | |||||
| Investment activities: | ||||||||
| Additions to property, plant, equipment and mineral interests | (9,479 | ) | (10,289 | ) | ||||
| Release (purchase) of reclamation financial assurance deposit | - | 902 | ||||||
| Cash used in investing activities | (9,479 | ) | (9,387 | ) | ||||
| Financing activity: | ||||||||
| Repayments of loan payable (Komatsu) | (2,988 | ) | (2,477 | ) | ||||
| Cash used in financing activities | (2,988 | ) | (2,477 | ) | ||||
| Net change in cash and cash equivalents | (7,017 | ) | (18,921 | ) | ||||
| Cash and cash equivalents, beginning balance | 13,301 | 37,587 | ||||||
| Cash and cash equivalents, ending balance | $ | 6,284 | $ | 18,666 | ||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2017 | 2016 | |||||||
| Operating Activities | ||||||||
| Net loss for the period | $ | (4,847 | ) | $ | (9,257 | ) | ||
| Adjustment to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and depletion | 8,429 | 4,081 | ||||||
| Amortization of debt discount and interest accrual | 1,250 | 4,071 | ||||||
| Accretion expense | 93 | 45 | ||||||
| Change in fair value of derivative liabilities (Note 10) | (3,033 | ) | 1,952 | |||||
| Stock based compensation | 133 | 11 | ||||||
| Unrealized foreign exchange | (48 | ) | (273 | ) | ||||
| Non-cash finder fees | 59 | - | ||||||
| Changes in non-cash working capital items: | ||||||||
| Prepaid expenses & other current assets | 267 | 154 | ||||||
| Inventory | (1,011 | ) | (7,326 | ) | ||||
| Accounts payable & accrued liabilities | 2,390 | 3,454 | ||||||
| Interest payable | 1,915 | (18 | ) | |||||
| Cash generated from (used in) operating activities | 5,597 | (3,106 | ) | |||||
| Investment activities: | ||||||||
| Additions to property, plant, equipment and mineral interests | (9,566 | ) | (11,401 | ) | ||||
| Release (purchase) of reclamation financial assurance deposit | - | 902 | ||||||
| Cash used in investing activities | (9,566 | ) | (10,499 | ) | ||||
| Financing activity: | ||||||||
| Issuance of common shares and warrants, net of share issue costs (Note 7) | - | 10,909 | ||||||
| Repayments of loan payable (Note 16) | (4,649 | ) | (3,736 | ) | ||||
| Cash used in financing activities | (4,649 | ) | 7,173 | |||||
| Net change in cash and cash equivalents | (8,618 | ) | (6.432 | ) | ||||
| Cash and cash equivalents, beginning balance | 13,301 | 37,587 | ||||||
| Cash and cash equivalents, ending balance | $ | 4,683 | $ | 31,155 | ||||
Supplementary Disclosures of Cash Flow Information (Note 11)
See Accompanying Notes to Condensed Consolidated Interim Financial Statements
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 1. | Nature of Business |
Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or the “Company”) is engaged in the operation of the Soledad Mountain Mine (“the Mine”), located in the Mojave Mining District, Kern County, California. The Company originally used its wholly owned subsidiary, Golden Queen Mining Company, Inc. (“GQM Inc.”), to explore and develop the Mine. On September 10, 2014, GQM Inc. was converted to a limited liability company,owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”)., the operator of the Mine. The Company entered into a Joint Venture (the “JV”) agreement withremaining 50% is owned by Gauss LLC (“Gauss”) through its newly formed, wholly owned subsidiary, Golden Queen Mining Holdings, Inc. (“GQM Holdings”). The JV was completed on September 15, 2014. Upon completion of the 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.
| 2. | Ability to Continue as a Going Concern |
The unaudited condensed consolidated interim financial statements of Golden Queen Mining Co Ltd. have been prepared using accounting principles generally accepted in the United States (“US GAAP”) applicable to a going concern.
The Company generated $2.8 million and $5.5$6.0 million in cash from operating activities during the three and sixnine months ended JuneSeptember 30, 2017, respectively.2017. The Company had a working capital deficit of $3.9$9.1 million at JuneSeptember 30, 2017.
The Company is required to pay $3.2 and $8.4the following to the Clay Group on the following dates: $5.4 million of accrued interest and debt principal to the Clay Group, in total, on the three following dates: January 1, 2018,2018; $3.1 million of interest and principal on April 1, 20182018; $3.0 million of interest and principal on July 1, 2018; $3.0 million of interest and principal on and October 1, 2018. The Company will need to receive cash distributions from GQM LLC to service its debt and such distributions are contingent on GQM LLC’s ability to generate positive cash flows. The Company revisedreviewed the mine plan in light of the sixnine months ended JuneSeptember 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussiondiscussions with the Clay Group to restructure the reimbursement schedule have been initiated. While the Company has been successful in re-negotiating the debt reimbursement schedule with the Clay Group on previous occasions, there can be no assurance that will be achieved going forward.
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 no 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 membership units at their sole discretion.
The unaudited condensed consolidated interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used, that would be necessary if the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
| 3. | Basis of Presentation |
The unaudited condensed consolidated interim financial statements have been prepared in accordance with US 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, 2016.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 3. | Basis of Presentation (continued) |
Certain information and note disclosures normally included for annual consolidated financial statements prepared in accordance with US GAAP have been omitted. These unaudited condensed consolidated interim financial statements should be read together with the audited consolidated financial statements of the Company for the year ended December 31, 2016.
In the opinion of Management,management, all adjustments considered necessary (including reclassifications and normal recurring adjustments) to present fairly the financial position, results of operations and cash flows at JuneSeptember 30, 2017 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, 2017, or future operating periods. For further information, see the Company’s annual consolidated financial statements, including the accounting policies and notes thereto.
The 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 on consolidation.
These unaudited condensed consolidated interim financial statements include the accounts of Golden Queen, a limited liability Canadian corporation (Province of British Columbia), its wholly-owned subsidiary, 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 Canada’s ownership of 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.
| 4. | Summary of Accounting Policies and Estimates and Judgements |
Estimates
The preparation of financial statements in conformity with US 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, the recoverability of mineral properties interests, royalty obligations, inventory valuation, asset retirement obligations, and derivative liability – warrants. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
| (i) | In July 2015, ASU No. 2015-11 was issued related to the inventory, simplifying the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The update |
| (ii) | In March 2016, ASU No. 2016-09 was issued related to stock-based compensation. The new guidance simplifies the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This update |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 4. | Summary of Accounting Policies and Estimates and Judgements (continued) |
New Accounting Policies
| In May 2014, ASU 2014-09 was issued related to revenue from contracts with customers. The ASU was further amended in August 2015, March 2016, April 2016, and May 2016 by ASU 2015-14, 2016-08, 2016-10 and |
In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning after December 31, 2017, and will be applied retrospectively. Early adoption is not permitted.
We are currently assessing the impact of implementation of ASU No. 2014-09, however, Managementmanagement does not believe it will change the point of revenue recognition or amount of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. We will finalize our assessment of the impact of ASU No. 201-09 on our revenue recognition during 2017 and assess the additional disclosure requirements under the guidance.
| In February 2016, FASB issued ASC 842 that requires lessees to recognize lease assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months. The update, which supersedes existing lease guidance, will continue to classify leases as either finance or operating, with the classification determining the pattern of expense recognition in the income statement. |
The ASU will be effective for annual and interim periods beginning January 1, 2019, with early adoption permitted, and is applicable on a modified retrospective basis with various optional practical expedients. The Company is assessing the impact of this standard.
| In August 2016, ASC guidance was issued to amend the classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective for the Company’s fiscal year and interim periods beginning December 1, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating this guidance and the impact on its consolidated financial statements. |
| 5. | Inventories |
Inventories consist primarily of production from the Company’s operation, in varying stages of the production process and supplies and spare parts, all of which are presented at the lower of cost or net realizable value. Inventories of the Company are comprised of:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Stockpile inventory | $ | 346 | $ | 318 | $ | 50 | $ | 318 | ||||||||
| In-process inventory | 9,861 | 9,491 | 9,425 | 9,491 | ||||||||||||
| Dore inventory | 366 | 76 | 414 | 76 | ||||||||||||
| Supplies and spare parts | 1,826 | 1,056 | 2,063 | 1,056 | ||||||||||||
| $ | 12,399 | $ | 10,941 | $ | 11,952 | $ | 10,941 | |||||||||
The amounts above are net of allowances of $804 (2016 - $nil), the provision of which has been recognized within cost of sales.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 6. | Property, Plant, Equipment and Mineral Interests |
Property, plant and equipment and mineral interests, are depreciated and depleted using either the units-of-production or straight-line method over the shorter of the estimated useful life of the asset or the expected life of mine. Assets under construction in progress are recorded at cost and re-allocated to its corresponding category when they become available for use.
| Land | Mineral property interest and claims | Mine development | Machinery and equipment | Buildings and infrastructure | Construction in progress | Interest capitalized | Total | |||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||
| At December 31, 2015 | $ | 110 | $ | 4,459 | $ | 84,798 | $ | 28,085 | $ | 8,565 | $ | - | $ | - | $ | 126,017 | ||||||||||||||||
| Additions | 3,777 | 9,391 | 542 | 5,674 | 19,384 | |||||||||||||||||||||||||||
| Transfers | 6 | (6 | ) | (42,765 | ) | 32,117 | 10,648 | - | - | - | ||||||||||||||||||||||
| Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| At December 31, 2016 | $ | 3,893 | $ | 4,453 | $ | 42,033 | $ | 60,202 | $ | 28,604 | $ | 542 | $ | 5,674 | $ | 145,401 | ||||||||||||||||
| Additions | 69 | 547 | 8,511 | 8,051 | - | 8,488 | - | 25,666 | ||||||||||||||||||||||||
| Transfers | - | (58 | ) | - | - | (36 | ) | (8,867 | ) | - | (8,961 | ) | ||||||||||||||||||||
| Disposals | (23 | ) | - | - | (1,344 | ) | (171 | ) | - | - | (1,538 | ) | ||||||||||||||||||||
| At September 30, 2017 | $ | 3,939 | $ | 4,942 | $ | 50,544 | $ | 66,909 | $ | 28,397 | $ | 163 | $ | 5,674 | $ | 160,568 | ||||||||||||||||
| Accumulated depreciation and depletion | ||||||||||||||||||||||||||||||||
| At December 31, 2015 | $ | - | $ | - | $ | 654 | $ | 1,462 | $ | 350 | $ | - | $ | - | $ | 2,466 | ||||||||||||||||
| Additions | - | 72 | 317 | 5,666 | 2,330 | - | - | 8,385 | ||||||||||||||||||||||||
| Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| At December 31, 2016 | $ | - | $ | 72 | $ | 971 | $ | 7,128 | $ | 2,680 | $ | - | $ | - | $ | 10,851 | ||||||||||||||||
| Additions | - | 211 | 1,805 | 4,676 | 1,765 | - | 348 | 8,779 | ||||||||||||||||||||||||
| Disposals | - | - | - | (256 | ) | (26 | ) | - | - | (282 | ) | |||||||||||||||||||||
| At September 30, 2017 | $ | - | $ | 283 | $ | 2,776 | $ | 11,548 | $ | 4,419 | $ | - | $ | 348 | $ | 19,374 | ||||||||||||||||
| Carrying values | ||||||||||||||||||||||||||||||||
| At December 31, 2016 | $ | 3,893 | $ | 4,381 | $ | 41,062 | $ | 53,074 | $ | 25,924 | $ | 542 | $ | 5,674 | $ | 134,550 | ||||||||||||||||
| At September 30, 2017 | $ | 3,939 | $ | 4,659 | $ | 47,768 | $ | 55,361 | $ | 23,978 | $ | 163 | $ | 5,326 | $ | 141,194 | ||||||||||||||||
| Land | Mineral property interest and claims | Mine development | Machinery and equipment | Buildings and infrastructure | Construction in progress | Interest capitalized | Total | |||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||
| At December 31, 2015 | $ | 110 | $ | 4,459 | $ | 84,798 | $ | 28,085 | $ | 8,565 | $ | - | $ | - | $ | 126,017 | ||||||||||||||||
| Additions | 3,777 | - | - | - | 9,391 | 542 | 5,674 | 19,384 | ||||||||||||||||||||||||
| Transfers | 6 | (6 | ) | (42,765 | ) | 32,117 | 10,648 | - | - | - | ||||||||||||||||||||||
| Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| At December 31, 2016 | $ | 3,893 | $ | 4,453 | $ | 42,033 | $ | 60,202 | $ | 28,604 | $ | 542 | $ | 5,674 | $ | 145,401 | ||||||||||||||||
| Additions | 17 | 96 | - | 4,074 | - | 8,286 | - | 12,473 | ||||||||||||||||||||||||
| Transfers | - | - | (58 | ) | - | (36 | ) | - | - | (94 | ) | |||||||||||||||||||||
| Disposals | - | - | - | (1,344 | ) | - | - | - | (1,344 | ) | ||||||||||||||||||||||
| At June 30, 2017 | $ | 3,910 | $ | 4,549 | $ | 41,975 | $ | 62,932 | $ | 28,568 | $ | 8,828 | $ | 5,674 | $ | 156,436 | ||||||||||||||||
| Accumulated depreciation and depletion | ||||||||||||||||||||||||||||||||
| At December 31, 2015 | $ | - | $ | - | $ | 654 | $ | 1,462 | $ | 350 | $ | - | $ | - | $ | 2,466 | ||||||||||||||||
| Additions | - | 72 | 317 | 5,666 | 2,330 | - | - | 8,385 | ||||||||||||||||||||||||
| Disposals | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| At December 31, 2016 | $ | - | $ | 72 | $ | 971 | $ | 7,128 | $ | 2,680 | $ | - | $ | - | $ | 10,851 | ||||||||||||||||
| Additions | - | 134 | 1,171 | 2,962 | 1,179 | - | 221 | 5,667 | ||||||||||||||||||||||||
| Disposals | - | - | - | (256 | ) | - | - | - | (256 | ) | ||||||||||||||||||||||
| At June 30, 2017 | $ | - | $ | 206 | $ | 2,142 | $ | 9,834 | $ | 3,859 | $ | - | $ | 221 | $ | 16,262 | ||||||||||||||||
| Carrying values | ||||||||||||||||||||||||||||||||
| At December 31, 2016 | $ | 3,893 | $ | 4,381 | $ | 41,062 | $ | 53,074 | $ | 25,924 | $ | 542 | $ | 5,674 | $ | 134,550 | ||||||||||||||||
| At June 30, 2017 | $ | 3,910 | $ | 4,343 | $ | 39,833 | $ | 53,098 | $ | 24,709 | $ | 8,828 | $ | 5,453 | $ | 140,174 | ||||||||||||||||
During the three and sixnine months ended JuneSeptember 30, 2017, the Company acquired 34 pieces of mining equipment (2016 – 1 piece of mining equipment)1) from Komatsu through financing agreements. Also, during the same periods the Companyagreements and disposed of 2 pieces of mining equipment (2016 – $Nil)nil). See Note 16 for further details.
| 7. | Share Capital |
The Company’s common shares outstanding are no par value, voting shares with no preferences or rights attached to them.
Common shares – 2016
In July 2016, the Company completed a financing for gross proceeds of $12.1$12.2 million (C$16.1 million) consisting of 11,120,000 units at a price of $1.10 (C$1.45) per unit. Each unit consisted of one common share of the Company and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share of the Company at a price of C$2.00 per common share until July 25, 2019.The aggregate fair value of the common share purchase warrants at the time of issuance was $2.3$2.4 million, which was recorded as a derivative liability and the Company allocated the remaining proceeds of $9.8 million to the common shares (See Note 10).
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 7. | Share Capital (continued) |
The Company also issued 757,700 common share purchase warrants to brokers with the same terms as the common share purchase warrants issued with the financing units. The aggregate fair value of the common share purchase warrants issued to the brokers at the time of issuance was $0.3 million which was recorded as a derivative liability (See Note 10).
In addition, the Company incurred cash share issue costs totalling $1.2$1.3 million, which consisted of legal fees, commission and other direct financing costs.
Stock options
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 Toronto Stock Exchange (“TSX”) for the five (5) 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 (5) 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 1,395,002 (December 31, 2016 – 1,555,000) common shares were issuable pursuant to such stock options as at JuneSeptember 30, 2017.
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, theThe compensation expense is amortized on a straight-line basis over the requisite service period, which approximates the vesting period.
The following is a summary of stock option activity during the sixnine months ended JuneSeptember 30, 2017 and 2016:
| Shares | Weighted Average Exercise Price per Share | Shares | Weighted Average Exercise Price per Share | |||||||||||||
| Options outstanding, December 31, 2015 | 1,070,000 | $ | 0.94 | 1,070,000 | $ | 0.94 | ||||||||||
| Options granted | 485,000 | $ | 0.66 | 485,000 | $ | 0.66 | ||||||||||
| Options outstanding, December 31, 2016 | 1,555,000 | $ | 0.85 | 1,555,000 | $ | 0.85 | ||||||||||
| Options granted | 400,002 | $ | 0.65 | 400,002 | $ | 0.65 | ||||||||||
| Options forfeited | (166,667 | ) | $ | 0.24 | (166,667 | ) | $ | 0.64 | ||||||||
| Options expired | (393,333 | ) | $ | 1.10 | (393,333 | ) | $ | 1.10 | ||||||||
| Options outstanding, June 30, 2017 | 1,395,002 | $ | 0.75 | |||||||||||||
| Options outstanding, September 30, 2017 | 1,395,002 | $ | 0.75 | |||||||||||||
On March 20, 2017, the Company granted 400,002 options to the Company’s Chief Financial Officer (“CFO”). The options which are exercisable at a price of $0.65 for a period of five years from the date of grant andgrant. 133,334 options vest on March 20, 2018, 133,334 options vest on March 20, 2019 and 133,334 options on March 20, 2020.
On March 14, 2017, the former CFO of the Company resigned. 146,667 stock options were forfeited on this date as they did not meet the vesting conditions. The expiry date of 393,333 stock options which vested was modified to June 14, 2017 pursuant to the terms of the employment agreement.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 7. | Share Capital (continued) |
Stock options (continued)
On March 14, 2017, the former CFO of the Company resigned. 146,667 stock options were forfeited on this date as they did not meet the vesting conditions. Accordingly, the share-based compensation associated with the unvested stock options was reversed. The expiry date of 393,333 stock options that had vested was modified to June 14, 2017 pursuant to the terms of the employment agreement.
These stock options were not exercised, thus expired during the sixnine months ended JuneSeptember 30, 2017. The share-based compensation associated with the unvested stock options was reversed accordingly.
Upon resignation of an employee on June 19, 2017, 20,000 stock options were forfeited as they did not meet the vesting conditions. The share-based compensation associated with the unvested stock options was reversed accordingly.
The fair value of stock options granted as above iswas calculated using the following weighted average assumptions:
| 2017 | 2016 | |||||||
| Expected life (years) | 5.00 | 5.00 | ||||||
| Interest rate | 1.18 | % | 1.00 | % | ||||
| Volatility | 77.29 | % | 81.27 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| 2017 | 2016 | |||||||
| Expected life (years) | 5.00 | 4.92 | ||||||
| Interest rate | 1.18 | % | 1.00 | % | ||||
| Volatility | 77.29 | % | 81.27 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
During the three and sixnine months ended JuneSeptember 30, 2017, the Company recognized $0.05 million and $0.09$0.1 million (the three(three and sixnine months ended JuneSeptember 30, 2016 - $0.04 million and $0.07$0.01 million) in stock-based compensation relating to employee stock options that were issued and/or had vesting terms.
The following table summarizes information about stock options outstanding and exercisable at JuneSeptember 30, 2017:
| Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Exercise Price | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||||||
| June 3, 2018 | 50,000 | 50,000 | 0.93 | $ | 1.16 | 50,000 | 50,000 | 0.67 | $ | 1.16 | ||||||||||||||||||||||
| September 3, 2018 | 150,000 | 150,000 | 1.18 | $ | 1.59 | 150,000 | 150,000 | 0.93 | $ | 1.59 | ||||||||||||||||||||||
| September 8, 2020 | 430,000 | 430,000 | 3.19 | $ | 0.58 | 430,000 | 430,000 | 2.94 | $ | 0.58 | ||||||||||||||||||||||
| November 30, 2021 | 365,000 | 0 | 4.42 | $ | 0.66 | 365,000 | - | 4.17 | $ | 0.66 | ||||||||||||||||||||||
| March 20, 2022 | 400,002 | 0 | 4.72 | $ | 0.65 | 400,002 | - | 4.47 | $ | 0.65 | ||||||||||||||||||||||
| Balance, June 30, 2017 | 1,395,002 | 630,000 | 3.66 | |||||||||||||||||||||||||||||
| Balance, September 30, 2017 | 1,395,002 | 630,000 | 3.40 | $ | 0.75 | |||||||||||||||||||||||||||
As at JuneSeptember 30, 2017, the aggregate intrinsic value of the outstanding exercisable options was $Nil$nil (December, 31, 2016 - $0.4 million).
Warrants
The following is a summary of common share purchase warrants activity:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Balance, beginning of the period | 24,317,700 | 10,000,000 | 24,317,700 | 10,000,000 | ||||||||||||
| Issued - financing units | - | 5,560,000 | - | 5,560,000 | ||||||||||||
| Issued - financing brokers(1) | - | 757,700 | - | 757,700 | ||||||||||||
| Issued - debt restructuring(1) | - | 8,000,000 | - | 8,000,000 | ||||||||||||
| Balance, end of the period | 24,317,700 | 24,317,700 | 24,317,700 | 24,317,700 | ||||||||||||
| (1) | Non-tradable share purchase warrants. |
(1) Non-tradable share purchase warrants.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 7. | Share Capital (continued) |
Warrants (continued)
The following table summarizes information about share purchase warrants outstanding and exercisable at JuneSeptember 30, 2017:
| Expiry Date | Number Outstanding | Remaining Contractual Life (periods) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 2.94 | $ | 0.95 | ||||||||
| July 25, 2019 | 5,560,000 | 2.07 | C$ | 2.00 | ||||||||
| July 25, 2019 | 757,700 | 2.07 | C$ | 2.00 | ||||||||
| November 18, 2021 | 8,000,000 | 4.40 | $ | 0.85 | ||||||||
| Expiry Date | Number Outstanding | Remaining Contractual Life (periods) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 2.69 | $ | 0.95 | ||||||||
| July 25, 2019 | 6,317,700 | 1.82 | C$ | 2.00 | ||||||||
| November 18, 2021 | 8,000,000 | 4.15 | $ | 0.85 | ||||||||
| 8. | Asset Retirement Obligation and Financial Reclamation Assurance |
Asset Retirement Obligation
The total asset retirement obligation as of JuneSeptember 30, 2017, was $1.6$1.7 million (December 31, 2016 - $1.4 million).
The Company estimated its asset retirement obligation based on its requirements to reclaim and remediate its property based on its activities to date. As at JuneSeptember 30, 2017, the Company estimates the primary cash outflow related to these reclamation activities will commence in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based on a credit adjusted risk-free interest rate of 8.7% and an inflation rate of 2.45%.
The following is a summary of asset retirement obligations:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 1,366 | $ | 978 | ||||
| Accretion | 62 | 90 | ||||||
| Changes in cash flow estimates | 173 | 298 | ||||||
| Balance, end of the period | $ | 1,601 | $ | 1,366 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 1,366 | $ | 978 | ||||
| Accretion | 92 | 90 | ||||||
| Changes in cash flow estimates | 261 | 298 | ||||||
| Balance, end of the period | $ | 1,719 | $ | 1,366 | ||||
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County, California 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 of reclamation financial assurance. The reclamation assurance provided as at JuneSeptember 30, 2017 is $1.5 million (December 31, 2016 - $1.5 million).
The Company is also required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County, California with a revised reclamation cost estimate annually. The financial assurance is adjusted oncewith the cost estimate is approved.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 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 of reclamation financial assurance. The reclamation assurance providedestimate as at Juneof September 30, 2017 is $1.5$1.2 million (December 31, 2016 - $1.5$1.2 million).
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 Mine’s waste management units as required by the Regional Board. The reclamation financial assurance estimate for as of JuneSeptember 30, 2017, is $0.3 million (December 31, 2016 - $0.3 million).
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 8. | Asset Retirement Obligation and Financial Reclamation Assurance (continued) |
Asset Retirement Obligation (continued)
During 2016, the Company entered into $3.0 million in surety bond agreements to maintain the necessary financial assurance as required by the relevant regulatory bodies, as described in the paragraphs above, and in order to release its reclamation deposits. The Company pays a yearly premium of $0.1 million. Golden Queen Mining Co. Ltd. has provided a corporate guaranty on the surety bonds (See Note 12).
| 9. | Related Party Transactions |
Except as noted elsewhere in these unaudited condensed consolidated interim financial statements, related party transactions are disclosed as follows:
| (i) | Management Agreement |
During the three and sixnine months ended JuneSeptember 30, 2017, the Company paid a total of $0.03 million and $0.06$0.09 million (the three(three and sixnine months ended JuneSeptember 30, 2016 - $0.03$0.02 million and $0.06$0.08 million respectively), respectively, to the three independent directors of the Company. Additionally, the Company paid $0.02 million (2016 - $Nil) for consulting services to Behre Dolbear, a company of which a director of Golden Queen serves in the capacity of an executive officer.
| (ii) | Note Payable |
On December 31, 2014, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 2015. On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and bore an annual interest rate of 10%. The loan was guaranteed by GQM Holdings, and secured by a pledge ofincreased the Company's interests in GQM Canada, GQM Canada’s interest in GQM Holdings and GQM Holdings' 50% interest in GQM LLC.
principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”).
The Company also incurred a financing fee to secure the loan in the amount of $1.0 million, of which, $0.8 million was paid onOn December 31, 2014, and the remaining $0.2Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, was paiddue on January 5,July 1, 2015.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”). The Company also issued to the lenders 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 financing fees to secure the loan in the amount of $1.5 million. The Company agreed to pay the legal fees incurred by the lenders relating to this debt instrument which amounted to $0.04 million. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.
On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million (the “November 2016 Loan”). The new loanNovember 2016 Loan has a thirty-month term and an annual interest rate of 8%, payable on a quarterly basis commencing during the first quarter of 2017. Quarterly principal payments of $2.5 million commence during the first quarter of 2018, with a payment of the remaining balance at the maturity date. TheUnder terms of the November 2016 loan, at the Company’s option, the payment of the first fourthree quarterly interest payments underdue have been deferred to January 1, 2018. On November 10, 2017, the Company amended the terms of the November 2016 Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and on July 1, 2017 (See(see Note 17).
In connection with the November 2016 Loan the Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. The common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to secure the loan in the amount of $0.9 million, all of which was paid on November 18, 2016.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 9. | Related Party Transactions (continued) |
| (ii) | Note Payable (continued) |
The table below summarizes the activity on the November 2016 Loan:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Balance, beginning of the period | $ | 26,347 | $ | 36,053 | $ | 26,347 | $ | 36,053 | ||||||||
| Interest payable transferred to principal balance | 922 | 2,977 | 1,560 | 2,977 | ||||||||||||
| Accretion of discount on loans | 740 | 1,996 | 1,250 | 1,996 | ||||||||||||
| Capitalized financing fee and legal fees | - | (930 | ) | - | (930 | ) | ||||||||||
| Reduction of debt upon issuance of warrants | - | (3,090 | ) | - | (3,090 | ) | ||||||||||
| Repayment of loans and interest | - | (10,659 | ) | - | (10,659 | ) | ||||||||||
| Balance, end of the period | $ | 28,009 | $ | 26,347 | $ | 29,157 | $ | 26,347 | ||||||||
| Current portion | $ | 5,922 | $ | - | $ | 9,061 | $ | - | ||||||||
| Non-current portion | $ | 22,087 | $ | 26,347 | $ | 20,096 | $ | 26,347 | ||||||||
| (iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of the Nov 2016 Loan discount | $ | 454 | $ | - | �� | $ | 740 | $ | - | |||||||
| Interest expense related to the Nov 2016 Loan | 646 | - | 1,272 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 150 | 154 | 285 | 320 | ||||||||||||
| Accretion of the June 2015 Loan discount | - | 626 | - | 1,232 | ||||||||||||
| Interest expense related to the June 2015 Loan | - | 1,013 | - | 2,008 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of the November 2016 Loan discount | $ | 510 | $ | - | $ | 1,250 | $ | - | ||||||||
| Interest expense related to the November 2016 Loan | 642 | - | 1,914 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 143 | 144 | 428 | 464 | ||||||||||||
| Accretion of the June 2015 Loan discount | - | 621 | - | 1,853 | ||||||||||||
| Interest expense related to the June 2015 Loan | - | 1,050 | - | 3,057 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 | ||||||||
The Company’s loans were contracted to fund significant development costs.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of discounts and interest on loan(1) | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
| Less: Interest costs capitalized(2) | - | - | - | (1,006 | ) | |||||||||||
| Interest expense | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 2,554 | ||||||||
| (1) | 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. |
| (2) | Interest capitalization ended on March 31, 2016 because the mine went into production on April 1, 2016. |
On September 15, 2014, the Company closed the Joint Venture Transaction with Gauss resulting in both parties owning a 50% interest in the Mine. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Mine, 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. GQM Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 9. | Related Party Transactions (continued) |
| (iv) | Joint Venture Transaction |
Gauss is a funding vehicle owned by entities controlled by Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay Group, 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 $2.0 million and $0.3 million was paid to Auvergne through GQM LLC in 2014. The Company expensed 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 condensed consolidated interim 100% of the accounts of GQM LLC in these condensed consolidated interim 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 Company has presented Gauss’ ownership in GQM LLC as a non-controlling interest amount on the balance sheet within the equity section. However, there are terms in the agreement that provide for the exit from the investment in GQM LLC for an initial member whose interest in GQM LLC becomes less than 20%.
If a member becomes less than a 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three3 events at the non-diluted member’s option:
| a. | Through conversion to a net smelter royalty (“NSR”); |
| b. | Through a buy-out (at fair value) by the non-diluted member; or |
| c. | Through a sale process by which the diluted member’s interest is |
The net assets of GQM LLC as of JuneSeptember 30, 2017, and December 31, 2016 are as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Assets, GQM LLC | $ | 152,934 | $ | 151,802 | ||||
| Liabilities, GQM LLC | (22,157 | ) | (20,710 | ) | ||||
| Net assets, GQM LLC | $ | 130,777 | $ | 131,092 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| Assets, GQM LLC | $ | 152,193 | $ | 151,802 | ||||
| Liabilities, GQM LLC | (24,092 | ) | (20,710 | ) | ||||
| Net assets, GQM LLC | $ | 128,101 | $ | 131,092 | ||||
Included in the assets above, is $5.0$3.8 million (December 31, 2016 - $11.1 million) in cash held as at JuneSeptember 30, 2017. The cash in GQM LLC is directed specifically to fund capital expenditures required to continue with production and to settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of Golden Queen except for $2.2 million for 2 mining drill loans and $3.0 million in surety bond agreements.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 9. | Related Party Transactions (continued) |
| (iv) | Joint Venture Transaction (continued) |
Non-Controlling Interest
The carrying value of the non-controlling interest is 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.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | 462 | $ | (2,919 | ) | $ | (317 | ) | $ | (3,628 | ) | |||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive loss attributable to non-controlling interest | $ | 230 | $ | (1,459 | ) | $ | (159 | ) | $ | (1,814 | ) | |||||
| Net and comprehensive loss attributable to permanent non-controlling interest | $ | 138 | $ | (876 | ) | $ | (95 | ) | $ | (1,088 | ) | |||||
| Net and comprehensive loss attributable to temporary non-controlling interest | $ | 92 | $ | (584 | ) | $ | (64 | ) | $ | (726 | ) | |||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,220 | ||||
| Net and comprehensive loss for the period | (95 | ) | (64 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2017 | $ | 39,232 | $ | 26,156 | ||||
Dilution of Interest in Subsidiary
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | (2,674 | ) | $ | 1,706 | $ | (2,991 | ) | $ | (1,922 | ) | |||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive loss attributable to non-controlling interest | $ | (1,335 | ) | $ | 853 | $ | (1,495 | ) | $ | (961 | ) | |||||
| Net and comprehensive loss attributable to permanent non-controlling interest | $ | (801 | ) | $ | 512 | $ | (897 | ) | $ | (577 | ) | |||||
| Net and comprehensive loss attributable to temporary non-controlling interest | $ | (534 | ) | $ | 341 | $ | (598 | ) | $ | (384 | ) | |||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,219 | ||||
| Net and comprehensive loss for the period | (897 | ) | (598 | ) | ||||
| Carrying value of non-controlling interest, September 30, 2017 | $ | 38,430 | $ | 25,621 | ||||
As a result
| 15 | Page |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of the Joint Venture Transaction, the Company’s interest in GQM LLC was diluted from 100% to 50% and ordinarily, the Company would recognize gain on dilution with the book value of the investment in GQM LLC increasing as well. 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 (“APIC”) based on guidance provided in ASC 810-10-55-4D and -4E.
US dollars - Unaudited)
The deferred tax liability resulted from the increase in the book value over tax value of the investment in GQM LLC.
| 9. | Related Party Transactions (continued) |
Capital Contribution Agreement
Pursuant to the Joint Venture Transaction, GQM 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. Both partners maintain their 50% ownership of the Mine.
| (v) | Revolving credit |
On May 23, 2017, GQM LLC entered into a revolving credit facility of $5 million with Gauss Holdings and Auvergne LLC. The revolving credit is available until May 23, 2018 and bears a 12% simple annual interest. GQM LLC paid a closing fee of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million and $0.04 million of the closing fee was amortized during the three and sixnine months ended JuneSeptember 30, 2017.2017, respectively. As at JuneSeptember 30, 2017, no amounts had been drawn under this facility.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 10. | Derivative Liabilities |
Share Purchase Warrants – Clay loans (Related Party)
On June 8, 2015, the Company issued 10,000,000 share purchase warrants to the Clay Group 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.
On November 18, 2016, the Company issued 8,000,000 share purchase warrants to the Clay Group in connection with the November 2016 Loan. The share purchase warrants are exercisable until November 18, 2021 at an exercise price of $0.85. Included in the November 2016 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.
The fair value of the derivative liabilities related to the share purchase warrants as at JuneSeptember 30, 2017 is $4.0$3.1 million (December 31, 2016 - $5.5 million). The derivative liabilities were calculated using the binomial and the Black-Scholes pricing valuation models with the following assumptions:
| Warrants related to June 2015 Loan | June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||
| Risk-free interest rate | 1.17 | % | 0.84%. | 1.58 | % | 0.84 | % | |||||||||
| Expected life of derivative liability | 2.94 years | 3.44 years | 2.69 years | 3.44 years | ||||||||||||
| Expected volatility | 76.60 | % | 78.79 | % | 76.50 | % | 78.79 | % | ||||||||
| Dividend rate | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
| Warrants related to November 2016 Loan | June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||
| Risk-free interest rate | 1.38 | % | 1.11 | % | 1.58 | % | 1.11 | % | ||||||||
| Expected life of derivative liability | 4.40 years | 4.89 years | 4.15 years | 4.89 years | ||||||||||||
| Expected volatility | 79.58 | % | 77.21 | % | 75.21 | % | 77.21 | % | ||||||||
| Dividend rate | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Balance, beginning of the period | $ | 5,458 | $ | 2,498 | $ | 5,458 | $ | 2,498 | ||||||||
| Fair value at inception | - | 3,090 | - | 3,090 | ||||||||||||
| Change in fair value | (1,452 | ) | (130 | ) | (2,329 | ) | (130 | ) | ||||||||
| Balance, end of the period | $ | 4,006 | $ | 5,458 | $ | 3,129 | $ | 5,458 | ||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 10. | Derivative Liabilities (continued) |
Share Purchase Warrants – July 2016 financing
On July 25, 2016, the Company issued a total of 6,317,700 share purchase warrants in connection with the July 2016 financing with an exercise price of C$2.00.2.00 and expiry date of July 25, 2019. In accordance with the guidance in ASC 815-40-15, the share purchase warrants met the criteria of a derivative instrument liability because they were exercisable in a currency other than the functional currency of the Company and thus did not meet the “fixed-for-fixed” criteria of that guidance. As a result, the Company was required to separately account for the share purchase warrants as derivative liabilities recorded at fair value and marked-to-market each period with the changes in the fair value each period charged or credited to income.
As at JuneSeptember 30, 2017, the Company had re-measured the share purchase warrants and determined the fair value of the derivative liability to be $0.5$0.3 million (December 31, 2016 - $1.0 million) using the Black-Scholes option pricing model with the following assumptions:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Risk-free interest rate | 1.09 | % | 0.84 | % | 1.52 | % | 0.84 | % | ||||||||
| Expected life of derivative liability in years | 2.07 years | 2.56 years | 1.82 years | 2.56 years | ||||||||||||
| Expected volatility | 76.01 | % | 79.40 | % | 74.89 | % | 79.40 | % | ||||||||
| Dividend rate | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Fair value of warrants issued | $ | 972 | $ | 2,701 | $ | 972 | $ | 2,701 | ||||||||
| Change in fair value of warrants | (442 | ) | (1,729 | ) | (704 | ) | (1,729 | ) | ||||||||
| Balance, end of the period | $ | 530 | $ | 972 | $ | 268 | $ | 972 | ||||||||
| 11. | Supplementary Disclosures of Cash Flow Information |
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2017 | 2016 | |||||||
| Cash paid during the period for: | ||||||||
| Interest on loan payable | $ | 285 | $ | 323 | ||||
| Non-cash financing and investing activities: | ||||||||
| Common shares issued as part of a management agreement | $ | - | $ | - | ||||
| Asset retirement costs charged to mineral property interests | $ | 173 | $ | 171 | ||||
| Mining equipment acquired through issuance of debt | $ | 2,551 | $ | 295 | ||||
| Mineral property expenditures included in accounts payable | $ | 1,081 | $ | 708 | ||||
| Interest cost capitalized to mineral property interests | $ | - | $ | 839 | ||||
| Inventory expenditures included in accounts payable | $ | - | $ | - | ||||
| Non-cash finder fees | $ | 59 | $ | - | ||||
| Non-cash amortization of discount and interest expense | $ | 740 | $ | 1,232 | ||||
| Interest payable converted to principal balance | $ | 922 | $ | 1,964 | ||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2017 | 2016 | |||||||
| Cash paid during the period for: | ||||||||
| Interest on loan payable | $ | 428 | $ | 468 | ||||
| Non-cash financing and investing activities: | ||||||||
| Asset retirement costs charged to mineral property interests | $ | 260 | $ | 245 | ||||
| Mining equipment acquired through issuance of debt | $ | 5,895 | $ | 295 | ||||
| Mineral property expenditures included in accounts payable | $ | 1,081 | $ | 318 | ||||
| Interest cost capitalized to mineral property interests | $ | - | $ | 839 | ||||
| Non-cash finder fess | $ | 59 | $ | - | ||||
| Non-cash amortization of discount and interest expense | $ | 1,250 | $ | 1,853 | ||||
| Interest payable converted to principal balance | $ | 1,560 | $ | 2,977 | ||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 12. | Commitments and Contingencies |
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 Mine under various mining lease agreements with landowners. Royalty amount due to each landholder over the life of the Mine varies with each property.
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 mine, and cause changes or delays in the Company’s activities.
Corporate Guaranties
The Company has provided corporate guaranties for two2 of GQM LLC’s mining drill loans. The Company has also provided a corporate a guaranty for GQM LLC’s surety bonds.
| 13. | 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). |
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 13. | Financial Instruments (continued) |
Fair Value Measurements (continued)
| June 30, 2017 | September 30, 2017 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 4,006 | $ | - | $ | 4,006 | $ | - | $ | 3,129 | $ | - | $ | 3,129 | $ | - | ||||||||||||||||
| Share purchase warrants – (Note 10) | 530 | - | 530 | - | 268 | - | 268 | - | ||||||||||||||||||||||||
| $ | 4,536 | $ | - | $ | 4,536 | $ | - | $ | 3,397 | $ | - | $ | 3,397 | $ | - | |||||||||||||||||
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
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-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 Federal Deposit Insurance Corporation (“FDIC”) for up to $0.3 million and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$0.1 million.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
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 JuneSeptember 30, 2017, the Company’s cash balances held in United States and Canadian financial institutions include $6.3$4.7 million, 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 98% 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 threenine months ended JuneSeptember 30, 2017 a 1% decrease in interest rates would have reduced the interest income for 2017 toby an immaterial amount.
Foreign Currency Exchange Risk
Certain purchases of corporate overhead items 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 JuneSeptember 30, 2017, 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 isGOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the operationThree and Nine Months Ended September 30, 2017 and 2016
(amounts expressed in thousands of the open pit, gold and silver, heap leach project on the Mine. Decreases in the price of either of these metals from current levels has the potential to negatively impact the future viability of the Mine.US dollars - Unaudited)
| 14. | General and Administrative Expenses |
General and administrative expenses are incurred to support the administration of the business that are not directly related to production. Significant components of general and administrative expenses are comprised of the following:
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Audit, legal and professional fees | $ | 108 | $ | 197 | $ | 396 | $ | 972 | ||||||||
| Salaries and benefits and director fees | 140 | 395 | 700 | 737 | ||||||||||||
| Regulatory fees and licenses | 17 | 60 | 70 | 83 | ||||||||||||
| Insurance | 114 | 116 | 247 | 240 | ||||||||||||
| Corporate administration | 333 | 221 | 715 | 485 | ||||||||||||
| $ | 712 | $ | 989 | $ | 2,128 | $ | 2,517 | |||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Six Months Ended June 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Audit, legal and professional fees | $ | 165 | $ | 125 | $ | 561 | $ | 1,097 | ||||||||
| Salaries and benefits and director fees | 431 | 437 | 1,131 | 1,176 | ||||||||||||
| Regulatory fees and licenses | 15 | (15 | ) | 85 | 68 | |||||||||||
| Insurance | 122 | 116 | 369 | 356 | ||||||||||||
| Corporate administration | 438 | (6 | ) | 1,151 | 470 | |||||||||||
| $ | 1,171 | $ | 657 | $ | 3,297 | $ | 3,167 | |||||||||
| 15. | Income (Loss) Per Share |
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net gain (loss) attributable to the shareholders of the Company - numerator for basic and diluted LPS | $ | (1,889 | ) | $ | 2,738 | $ | (3,352 | ) | $ | (8,296 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average number of common shares outstanding -basic and diluted | 111,148,683 | 108,026,944 | 111,137,694 | 102,657,767 | ||||||||||||
| Loss per share – basic and diluted | $ | (0.02 | ) | $ | 0.03 | $ | (0.03 | ) | $ | (0.08 | ) | |||||
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net gain (loss) attributable to the shareholders of the Company - numerator for basic and diluted LPS | $ | 962 | $ | (2,109 | ) | $ | (1,465 | ) | $ | (11,034 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average number of common shares outstanding -basic and diluted | 111,113,341 | 99,893,341 | 111,096,766 | 99,893,341 | ||||||||||||
| Income (loss) per share – basic and diluted | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.11 | ) | |||||
Weighted average number of shares for the sixnine months ended JuneSeptember 30, 2017 excludes 1,395,002 options (June(September 30, 2016 - 1,070,000) and 24,317,700 warrants (June(September 30, 2016 – 10,000,000) that were antidilutive.
| 16. | Loan Payable |
During the sixnine months ended JuneSeptember 30, 2017,2016, the Company sold two2 (December 31, 2016 –Nil)– nil) pieces of equipment with a net book value of $1.0 million in consideration for settlement of two2 loans by $0.6 million plus $0.1 million in cash. The Company also bookedrecorded $0.3 million as a loss in disposition of fixed assets.
During the sixnine months ended JuneSeptember 30, 2017, the Company entered into three4 new loan agreements for a total of $3.8$7.6 million for the acquisition of three4 (December 31, 2016 – two)2) pieces of mining equipment from Komatsu.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016
(amounts expressed in thousands of US dollars - Unaudited)
| 16. | Loan Payable (continued) |
As at JuneSeptember 30, 2017 and December 31, 2016, the finance agreement balances are as follows:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Balance, beginning of the period | $ | 15,150 | $ | 18,373 | $ | 15,150 | $ | 18,373 | ||||||||
| Additions | 3,737 | 2,047 | 7,646 | 2,047 | ||||||||||||
| Down payments and taxes | (700 | ) | (264 | ) | (1,338 | ) | (264 | ) | ||||||||
| Settlements | (485 | ) | - | (414 | ) | - | ||||||||||
| Principal repayments | (2,989 | ) | (5,006 | ) | (4,648 | ) | (5,006 | ) | ||||||||
| Balance, end of the period | $ | 14,713 | $ | 15,150 | $ | 16,396 | $ | 15,150 | ||||||||
| Current portion | $ | 6,194 | $ | 5,656 | $ | 6,998 | $ | 5,656 | ||||||||
| Non-current portion | $ | 8,519 | $ | 9,494 | $ | 9,398 | $ | 9,494 | ||||||||
For the sixnine months ended JuneSeptember 30, 2017, the Company made total down payments of $0.7$1.3 million (2016 - $0.3 million). 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 four4 years, except two2 which are for three3 years, and are secured by the underlying asset except for two2 mining drill loans for which GQM Ltd. has provided a corporate guarantee. Interest rates range from 0.00% to 4.50% with monthly payments in the range of $0.005 to $0.03 million.
The following table outlines the principal payments to be made for each of the remaining years:
| Years | Principal Payments | Principal Payments | ||||||
| 2017 | $ | 6,194 | $ | 6,998 | ||||
| 2018 | 5,899 | 6,146 | ||||||
| 2019 | 2,024 | 2,060 | ||||||
| 2020 | 596 | 1,191 | ||||||
| Total | $ | 14,713 | $ | 16,395 | ||||
| 17. | Subsequent Events |
On July 1,October 20, 2017, the Company wasgranted 1,204,999 options to makecertain directors and employees of Golden Queen. The options are exercisable at a quarterly interest paymentprice of $0.29 for a period of five years from the date of grant. 401,666 options vest on October 20, 2018; 401,666 options vest on October 20, 2019; and 401,667 options vest on October 20, 2020.
On November 10, 2017, the Company and the Clay Group agreed to amend the November 2016 loan. In accordanceLoan by reducing the quarterly principal payments that commence the first quarter of 2018 from $2.5 million to $1.0 million and increasing the annual interest rate from 8% to 10% effective January 1, 2018. As well, all interest payments in 2017 that were deferred at the Company’s option along with a $2.5 million principal payment and a $0.40 amendment fee are payable on January 1, 2018. At the Company’s option, interest and principal payments due on January 1, 2018 can be delayed until February 15, 2018 to accommodate delays in the Offering process.
On November 13, 2017, the Company filed a preliminary prospectus with the termssecurities regulatory authorities in each of the November 2016 loan agreement,provinces and territories of Canada in connection with qualifying an offering of the Company chose to exercise its right to add(the “Offering"), in connection with a marketed offering of common shares in the interest owed on July 1, 2017 to the principal balance. The principal balancecapital of the loan was increased by $0.6Company for aggregate gross proceeds of $25 million.
Closing of the Offering is subject to receipt of applicable regulatory approvals including approval of the Toronto Stock Exchange. The net proceeds of the Offering will be used to reduce the corporate debt, purchase additional equipment for the mine and general corporate and working capital purposes.
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 August 9,November 14, 2017 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and sixnine months ended JuneSeptember 30, 2017 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 US generally accepted accounting principles (“US GAAP”) and all. All amounts herein are in thousands of US dollars unless otherwise noted.
Cautionary Note Regarding Forward-looking Statements
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, results of operations and commodity prices. In addition, projected mining results, including quantity of ore, grade, production rates, operating costs 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.
Cautionary Note to US Investors
We advise US 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 Information concerning mineral resources and reserves set forth herein may not be comparable with information presented by companies using only US standards in their public disclosure.
Mr. Peter A. Herrera, CPG is a qualified person for the purposes of NI 43-101 and has reviewed and approved the technical information in this Form 10-Q.
The Soledad Mountain Mine
Overview
Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or the “Company”) is engaged in the operation of the Soledad Mountain Mine (“the Mine”), located in the Mojave Mining District, Kern County, California. The Company originally used its wholly owned subsidiary, Golden Queen Mining Company, Inc. (“GQM Inc.”), to explore and develop the Mine. 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 (the “JV”) agreement with Gauss LLC (“Gauss”) through its newly formed, wholly owned subsidiary, Golden Queen Mining Holdings, Inc. (“GQM Holdings”). The JV was completed on September 15, 2014. Upon completion of the 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. The Mine is located just outside the town of Mojave in southern California. The MineCalifornia and utilizes conventional open pit mining methods and the cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore. The Mine also produces aggregate.
Highlights
The Mine produced a total of 12,632 ounces of gold and 51,920
| · | Total of 4.9 million tons of ore and waste were mined in the third quarter including 928 kt of ore |
| · | Plant processed a total of 898 kt of ore at an average grade of 0.013 oz/t |
| · | Third quarter production was 12,275 ounces of gold and 48,631 ounces of silver |
| · | Purchase of new shovel at a capital cost of $3.9 million |
| · | Completion of leach pad phase 2 at a capital cost of $8.4 million |
Project Update
The mine acquired a new shovel in late August as planned at a capital cost of $3.9 million. The performance of this unit is expected to enhance mining productivity over the life of mine. In addition, leach pad phase 2 was completed during the second quarter at a capital cost of 2017. GQM LLC recorded revenue$8.4 million, and ore leaching has commenced on the first lift. Leaching performance is matching the feasibility study - total apparent gold recovery to September 30, 2017 is 73%, which Management believes is on track to achieve the life of $16.9 million during this period. Operating costs were at $13.48 per ton processed, which is lower than the previous quarter, which was $16.08 per ton processed. The reductionmine 80% gold recovery sometime in costs is a result of an improved utilization rate and increased tonnage from the mine in addition to the reduced downtime and increased efficiency.2018.
A totalAs a result of 4.7 million tons of orethe lower tonnage and waste were mined within the second quarter, including 1.0 million tons of ore; tracking in-line with the budgeted projection. Mining continuesgrade in the Northwest pitNorth-West and Main pit, phase 1. Mining of waste from(Phase 1) Pits, the East pit is ongoingore grade was lowered to a value near cut-off in an effort to prepareoperate the areapad-loading operations at capacity. However, periodic shortfalls in ore supplied to the crusher have been experienced, despite the lower target grade.
Management is accelerating the East Pit development to access higher-grade ore tons as soon as possible to make up for the shortfall in ore supplied and the lower than expected gold ore grades from the North-West and Main (Phase 1) Pits. During the period of development of the East Pit, it is expected that gold production will be lower than plan. The transition to the East Pit will provide the majority of anticipated ore production for at least the next three years. In anticipation of the development of the East Pit, an additional two trucks were recently purchased and are expected to be in service before year-end. There are an additional three trucks planned for purchase early next year.
The mine has generated positive operating cash flow year-to-date, and this is expected to resume once ore mining laterhas been established within the defined ore-zone developed by the East Pit. In the meantime, preliminary estimates indicate that mining operations at Soledad Mountain will require between $15m and $20m of capital in 2017.the near term to execute this plan. This amount would likely need to be funded equally between the Company and its 50% joint venture partner.
A totalFor the nine months ended September 30, 2017, the Company recorded aggregate sales of 1.03 million tons were processed$0.01 million. The Company was recently added to the California AB 3098 list, which allows the Company to sell its aggregates to state and stacked onmunicipal agencies. The Company will not include the leach pad.sale of aggregate in cash flow projections until such time as a long-term contract for the sale of products has been secured.
During the third quarter, the Company initiated the process to support permitting of additional infrastructure for ongoing operations and planned activities that are expected to extend the mine life of Soledad Mountain beyond the initial 11 years contemplated in the 2015 Feasibility Study. The quarter’s daily average was 11,273 tons, improving from the previous quarter average of 10,200 tons. The phaseprocess is anticipated to take approximately 2 leach pad was completed and placed in service in late July.to 3 years.
The cash balance as at JuneSeptember 30, 2017 was $6.3$4.7 million. Currently there areThere is a total of 202199 employees currently on site.
Results of Operations
The following are the results of operations for the three and sixnine months ended JuneSeptember 30, 2017, and the corresponding periods ended JuneSeptember 30, 2016.
| Three months ended | Six months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||||||
| 30-Jun-17 | 30-Jun-16 | 30-Jun-17 | 30-Jun-16 | 30-Sep-17 | 30-Sep-16 | 30-Sep-17 | 30-Sep-16 | |||||||||||||||||||||||||||||
| Mining - Key Metrics(1) | ||||||||||||||||||||||||||||||||||||
| Ore mined | k ton | 1,010 | 660 | 1,862 | 951 | k ton | 928 | 808 | 2,790 | 1,759 | ||||||||||||||||||||||||||
| Waste mined: ore mined ratio | ore mined ratio | 3.7:1 | 1.8:1 | 3.7:1 | 2.3:1 | ore mined ratio | 4.3:1 | 2.2:1 | 3.9:1 | 2.2:1 | ||||||||||||||||||||||||||
| Gold grade placed | oz/ton | 0.016 | 0.013 | 0.017 | 0.010 | oz/ton | 0.013 | 0.015 | 0.016 | 0.013 | ||||||||||||||||||||||||||
| Silver grade placed | oz/ton | 0.201 | 0.040 | 0.215 | 0.311 | oz/ton | 0.180 | 0.362 | 0.203 | 0.349 | ||||||||||||||||||||||||||
| Gold sold | oz | 12,653 | 2,362 | 23,813 | 2,482 | oz | 12,255 | 8,715 | 36,068 | 11,197 | ||||||||||||||||||||||||||
| Silver sold | oz | 53,514 | 26,500 | 115,609 | 27,500 | oz | 47,977 | 97,430 | 163,856 | 124,930 | ||||||||||||||||||||||||||
| EBITDA margin(2) | % | 19.81 | % | nm | 18.06 | % | nm | |||||||||||||||||||||||||||||
| Off-site costs(2) | $/t placed | 0.71 | 0.19 | 0.77 | 0.17 | |||||||||||||||||||||||||||||||
| Total cash costs | $/t placed | 13.48 | 12.13 | 14.61 | 13.61 | |||||||||||||||||||||||||||||||
| Apparent cumulative recovery - gold(2) | % | 68.0 | % | 37.5 | % | 68.0 | % | 37.5 | % | % | 73.0 | % | 53.1 | % | 73.0 | % | 53.1 | % | ||||||||||||||||||
| Apparent cumulative recovery - silver(2) | % | 25.3 | % | 13.4 | % | 25.3 | % | 13.4 | % | % | 25.8 | % | 21.9 | % | 25.8 | % | 21.9 | % | ||||||||||||||||||
| Financial(1) | ||||||||||||||||||||||||||||||||||||
| Revenue | $ | 16,882 | 3,464 | 31,686 | 3,464 | $ | 16,496 | 13,451 | 48,182 | 16,915 | ||||||||||||||||||||||||||
| Income from mine operations | $ | 773 | (1,942 | ) | 1,259 | (1,942 | ) | |||||||||||||||||||||||||||||
| Income (loss) from mine operations | $ | (1,839 | ) | 2,108 | (580 | ) | 160 | |||||||||||||||||||||||||||||
| General and administrative expenses | $ | (712 | ) | (989 | ) | (2,128 | ) | (2,517 | ) | $ | (1,171 | ) | (657 | ) | (3,297 | ) | (3,167 | ) | ||||||||||||||||||
| Total other income (expenses) | $ | 1,131 | (637 | ) | (755 | ) | (8,389 | ) | $ | (214 | ) | 2,140 | (970 | ) | (6,250 | ) | ||||||||||||||||||||
| Net and comprehensive income (loss) | $ | 1,192 | (3,568 | ) | (1,624 | ) | (12,848 | ) | $ | (3,224 | ) | 3,591 | (4,847 | ) | (9,257 | ) | ||||||||||||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | 962 | (2,109 | ) | (1,465 | ) | (11,034 | ) | $ | (1,889 | ) | 2,738 | (3,352 | ) | (8,296 | ) | ||||||||||||||||||||
| Average realized gold price(2) | $/oz sold | 1,262 | 1,276 | 1,246 | 1,214 | $/oz sold | 1,280 | 1,329 | 1,257 | 1,303 | ||||||||||||||||||||||||||
| Average realized silver price(2) | $/oz sold | 17.10 | 17.02 | 17.37 | 16.40 | $/oz sold | 16.89 | 19.22 | 17.23 | 18.60 | ||||||||||||||||||||||||||
| Total cash costs - net of by product credits(2) | $/Au oz produced | 1,038 | 1,580 | 1,016 | 1,580 | |||||||||||||||||||||||||||||||
| All-in sustaining costs - net of by product credits(2) | $/Au oz produced | 1,427 | 1,921 | 1,552 | 1,921 | |||||||||||||||||||||||||||||||
| Total cash costs - net of by-product credits (2) | $/Au oz produced | 1,177 | 1,086 | 1,074 | 1,948 | |||||||||||||||||||||||||||||||
| All-in sustaining costs - net of by-product credits (2) | $/Au oz produced | 1,502 | 1,200 | 1,517 | 2,102 | |||||||||||||||||||||||||||||||
| Total cash costs | $/t placed | 16.99 | 13.80 | 15.40 | 13.69 | |||||||||||||||||||||||||||||||
| Off-site costs (2) | $/t placed | 0.78 | 0.67 | 0.77 | 0.38 | |||||||||||||||||||||||||||||||
| (1) | For accounting purposes, the transition to the production phase commenced on April 1, 2016. As such, comparative figures for certain measures or data are not available or are not meaningful. |
| (2) | Total cash costs, all-in sustaining costs, |
The Company placed 1.02 million of ore on the pad in three months ended June 30, 2017 compared to 0.79 million of ore in three months ended March 31, 2017. The cash costs did not increase at the same rate as ore mined, therefore the cash costs per ton decreased. See the Non-GAAP financial performance measures section below.
Stripstrip ratio and gold grade for the three and sixnine months ended JuneSeptember 30, 2016 were not representative of the life-of-mine estimated averages due to the commencement of production on April 1, 2016 and the limited equipment and crew available during these periods compared withperiods. Notwithstanding the periods of 2017. Notwithstandingstrip ratio and gold grade for the three and nine months ended September 30, 2016, the higher strip ratio inas a result of mining more waste than ore for the three and sixnine months ended JuneSeptember 30, 2017 contributingcompared to the slightlysame periods in 2016, contributed to the higher total cost per ton placed, the higher gold ounces produced and sold have contributed to lower costs per ounce of gold produced.placed.
Financial Results
The Company hadgenerated revenues from operations during the three and six months ended June 30, 2017 in the amount of $16.9$16.5 million from the salessale of 12,65312,255 ounces of gold and 53,51447,977 ounces of silver for the three months ended September 30, 2017 and $31.7$48.2 million from the salessale of 23,81336,068 ounces of gold and 115,609163,586 ounces of silver respectively.during the nine months ended September 30, 2017. The Company generated revenues of $3.5$13.5 million from the salessale of 2,3628,715 ounces of gold and 26,50097,430 ounces of silver for the three months ended September 30, 2016 and $16.9 million from the sale of 11,197 ounces of gold and 124,930 ounces of silver during the three and sixnine months ended JuneSeptember 30, 2016. Production commenced on April 1, 2016 and therefore the Company did not generate any revenues during the first fiscal quarter of 2016.
The Company generated more revenues from operations$0.39 million less revenue during the three months ended September 30, 2017 compared to the three months ended June 30, 2017, by selling moremostly as a result of fewer ounces of gold and silver. In comparison,silver sold. Although the Company generated $14.8 million fromaverage realized gold price per ounce was $18 higher for the sales of 11,406three months ended September 30, 2017 compared to the three months ended June 30, 2017 ($1,280 vs. $1,262 respectively), 398 fewer ounces of gold were sold in the current quarter compared to the previous quarter (12,255 ounces of gold sold vs. 12,653 ounces of gold sold respectively). The average realized silver price per ounce was slightly lower for the three months ended September 30, 2017 compared to the three months ended June 30, 2017 and 64,5815,537 fewer ounces of silver during three months ended March 31, 2017.were sold in the current quarter compared to the previous quarter (47,977 ounces of silver sold vs. 53,514 ounces of silver sold respectively).
The costs, excluding depreciation and depletion, applicable to sales incurred during the three and sixnine months ended JuneSeptember 30, 2017 were $13.4$15.4 million and $24.9$40.3 million (three and sixnine months ended JuneSeptember 30, 2016 - $3.6$9.1 million and $12.7 million), respectively. The cost of sales, excluding depreciation and depletion, increased mainly as a result of higher mining costs due to higher sales of goldmining more waste and silverless ore compared to the prior quarter (three months ended March 31,June 30, 2017 - $11.6$13.4 million). and recording an inventory allowance of $0.80 million in the current quarter. Costs of sales include mining, processing, maintenance and site support costs. Also, included in the costs of sales are refining, transportation costs, royalties and personal property taxes.
Depreciation and depletion expenses during the three and sixnine months ended JuneSeptember 30, 2017 were $2.7$2.9 million and $5.5$8.4 million (three and sixnine months ended JuneSeptember 30, 2016 - $1.8$2.2 million and $4.1 million), respectively. Production commenced on April 1, 2016 and therefore the Company did not record significant depreciation and depletion until after this date. The depreciation and depletion expenses for three months ended JuneSeptember 30, 2017 were little changed fromincreased slightly compared to the priorprevious quarter (three months ended March 31,June 30, 2017 - $2.8$2.7 million). as a result of recording more expense due to a change in Management’s estimate of the useful lives of certain pieces of equipment being reduced from ten to seven years.
General and administrative expenses decreasedincreased by $0.29$0.5 million to $0.7$1.2 million during the three months ended JuneSeptember 30, 2017 when compared to $0.99$0.7 million for the same period in 2016 primarily as a result of a decrease in corporate salaries.foreign exchange gains as the Canadian dollar has strengthened against the US dollar. General and administrative expenses decreasedincreased slightly by $0.4$0.1 million to $2.1$3.3 million during the sixnine months ended JuneSeptember 30, 2017 when compared to $2.5$3.2 million for the same period in 2016 primarily due to a decrease in legal costs of $0.5 million. The decrease in legal costs was offset by increase in corporate expenditures by $0.1 million between two periods. General and administrative expenses for three months ended June 30, 2017 were lower than the prior quarter (three months ended March 31, 2017 – $1.4 million) mainly because of decrease in corporate administration costs and audit, legal and professional fees.2016.
| 24 | Page |
For the three and sixnine months ended JuneSeptember 30, 2017, the Company incurred a total interest expense of $1.3 million and $2.3$3.6 million (three and sixnine months ended JuneSeptember 30, 2016 - $1.8 million and $2.6$4.4 million, respectively), respectively, related to its various loans. The decrease was mainly due toresulted from the fact the June 2015 Loan was replaced by a new loan in November 2016 with a lower principal and a reduction of 2% on the interest rate. Please refer to Note 9(ii) and 9(iii) of the unaudited condensed consolidated interim financial statements. Also, during the three and sixnine months ended JuneSeptember 30, 2017 there werewas no interest capitalized to mineral properties, compared to $1.0 million in the same periods of 2016. The interest expense of $1.0 million for three months ended March 31, 2017 was lower than the interest for the current quarter because of the greater balance of loan due to interest accretion in the prior quarter and interest payable balance transfer to principal balance.
The Company’s derivative liability as at JuneSeptember 30, 2017 and for the sixnine months then ended includes the warrants issued in conjunction with the November 2016 Clay Loan, the June 2015 Loan and the July 2016 Financing. During the three and sixnine months ended JuneSeptember 30, 2017, the Company recorded a decrease in the derivative liability of $2.4$1.1 million and $1.8$3.0 million (three and sixnine months ended JuneSeptember 30, 2016 – a decrease of $1.1$3.9 million and an increase of $5.9$2.0 million, respectively), respectively.. The significant increasedecrease during the sixnine months ended JuneSeptember 30, 2017 was due to a decrease in the Company’s share price whereas the significant increase for the comparable period in 2016 was due to an increase in the Company’s share price. Refer to Note 10 of the unaudited condensed consolidated interim financial statements for a detailed analysis of the changes in fair value of the derivative liability. During the first quarter of 2017, the Company recorded an increase in the derivative liability of $0.5 million due to a slight increase in the Company’s share price.
Summary of Quarterly Results (in thousands of US dollars, except per share)
Results for the eight most recent quarters are set out in the table below:below (in $000 other than per share amounts):
| Results for the quarter ended on: | Results for the quarter ended on: | |||||||||||||||||||||||||||||||
| 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | 30-Sep-16 | 30-Sep-17 | 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | |||||||||||||||||||||||||
| Revenue | $ | 16,882 | $ | 14,804 | $ | 10,278 | $ | 13,451 | $ | 16,496 | $ | 16,882 | $ | 14,804 | $ | 10,278 | ||||||||||||||||
| Net and comprehensive income (loss) | $ | 1,192 | $ | (2,816 | ) | $ | (434 | ) | $ | 3,590 | $ | (3,224 | ) | $ | 1,192 | $ | (2,816 | ) | $ | (434 | ) | |||||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | 962 | $ | (2,426 | ) | $ | 868 | 2,738 | $ | (1,889 | ) | $ | 962 | $ | (2,426 | ) | 868 | |||||||||||||||
| Basic net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | |||||||||||||
| Diluted net income (loss) per share | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | $ | 0.03 | $ | (0.02 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.01 | |||||||||||||
| Results for the quarter ended on: | Results for the quarter ended on: | |||||||||||||||||||||||||||||||
| 30-Jun-16 | 31-Mar-16 | 31-Dec-15 | 30-Sep-15 | 30-Sep-16 | 30-Jun-16 | 31-Mar-16 | 31-Dec-15 | |||||||||||||||||||||||||
| Revenue | $ | 3,464 | $ | Nil | $ | Nil | $ | Nil | $ | 13,451 | $ | 3,464 | $ | Nil | $ | Nil | ||||||||||||||||
| Net and comprehensive loss | (3,568 | ) | $ | (9,280 | ) | $ | (1,217 | ) | $ | (2,203 | ) | |||||||||||||||||||||
| Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. | $ | (2,109 | ) | (8,926 | ) | (722 | ) | (1,924 | ) | |||||||||||||||||||||||
| Net and comprehensive income (loss) | $ | 3,591 | $ | (3,568 | ) | $ | (9,280 | ) | $ | (1,217 | ) | |||||||||||||||||||||
| Net and comprehensive income loss attributable to Golden Queen Mining Co Ltd. | $ | 2,738 | $ | (2,109 | ) | (8,926 | ) | (722 | ) | |||||||||||||||||||||||
| Basic net loss per share | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||||||||
| Diluted net loss per share | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | 0.03 | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||||||||
During the second quarter ofthree months ended September 30, 2017, net and comprehensive incomeloss was $1.2$3.2 million compared to net and comprehensive lossincome of $2.8$1.2 million induring the quarterthree months ended March 31,June 30, 2017. This change is primarily due to the movement in the value of the Company’s derivative liability (discussed above).
For fiscal 2016, although and the Company generated revenues starting inloss from mine operations of $1.8 million during the second quarterthree months ended September 30, 2017 compared to income from mine operations of 2016,$0.8 million during the main reasons for the significant fluctuations in net (loss) income between quarterly periods are the fluctuations in the Company’s derivative liability and interest expense.three months ended June 30, 2017.
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 Operations section above for the results of operations for the three and sixnine months ended JuneSeptember 30, 2017.
Reclamation Financial Assurance and Asset Retirement Obligation
Reclamation Financial Assurance
The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County, California with a reclamation cost estimate on an annual basis. An independent consulting engineer provides this estimate. This cost estimate, once approved by state and county authorities, forms the basis for a surety bond for reclamation financial assurance. The reclamation assurance provided as at JuneSeptember 30, 2017 is $1.5 million (December 31, 2016 - $1.5 million).
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 and Stage 2 heap leach pad, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate for as of JuneSeptember 30, 2017 is $1.9$1.2 million (December 31, 2016 - $1.2 million).
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 Mine’s waste management units as required by the Regional Board. The reclamation financial assurance estimate for as of JuneSeptember 30, 2017, is $0.3 million (December 31, 2016 - $0.3 million).
TheDuring 2016, the Company entered into $3.0 million in surety bond agreements to maintain the necessary financial assurance as required by the relevant regulatory bodies, as described in the paragraphs above, and in order to release its reclamation deposits. The Company pays a yearly premium of $0.1 million. Golden Queen Mining Co. Ltd. has provided a corporate guaranty on the surety bonds (see Note 12 to the of the unaudited condensed consolidated interim financial statements).
Asset Retirement Obligation
The total asset retirement obligation as of JuneSeptember 30, 2017, was $1.6$1.7 million (December 31, 2016 - $1.4 million). The Company estimated its asset retirement obligation based on its requirements to reclaim and remediate its property based on its activities to date. As at JuneSeptember 30, 2017, the Company estimates the primary cash outflow related to these reclamation activities will commence in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a discount rate based on a credit adjusted risk-free interest rate of 8.7% and an inflation rate of 2.45%.
Property Rent Payments and Production Royalty Expenses
The Company has acquired a number of mineral properties outright and has acquired exclusive rights to explore, develop and mine other portions of the Mine under various mining lease agreements with landowners. As a result, the Company is required to make property rent payments related to its mining lease agreements with landholders, in the form of advance minimum royalties or production royalties. The total property rent and production royalty expenses for the three and six months ended June 30, 2017 were $0.4 million and $0.7 million, respectively (the three and six months ended June 30, 2016 - $Nil million and $0.01 million, respectively). There are multiple third party landholders and the royalty amount due to each landholder over the life of the Mine varies with each property.
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.
There is a total of 1,395,002 options outstanding of which 630,000 options are currently exercisable (December 31, 2016 – 1,555,000 outstanding of which 1,023,334 are exercisable) common shares were issuable pursuant to such stock options as at June 30, 2017.
Transactions with Related Parties
Except as noted elsewhere in this Form 10-Q, related party transactions are disclosed as follows:
| (i) | Management Agreement |
During the three and sixnine months ended JuneSeptember 30, 2017, the Company paid a total of $0.03 million and $0.06$0.09 million (the three and sixnine months ended JuneSeptember 30, 2016 - $0.03 million and $0.06$0.09 million, respectively), respectively, to the three independent directors of the Company. Additionally, the Company paid $0.02 million (2016 - $Nil) for consulting services to Behre Dolbear, a company of which a director of Golden Queen serves in the capacity of an executive officer.
| (ii) |
On December 31, 2014, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 2015 and bore an annual interest rate of 10%. The December 2014 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 financing fee to secure the loan in the amount of $1.0 million, of which, $0.8 million was paid on December 31, 2014 and the remaining $0.2 million was paid on January 5, 2015.
On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”). The Company also issued to the lenders 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 financing fees to secure the loan in the amount of $1.5 million. The Company agreed to pay the legal fees incurred by the lenders relating to this debt instrument in the amount of $0.04 million. The total legal fees were expensed as the transaction met the definition of a debt extinguishment.
On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an equity financing. The Company restructured the remaining debt with a new loan with a principal amount of $31.0 million (the “November 2016 Clay Loan”). The new loan has a thirty-month term and an annual interest rate of 8%, payable on a quarterly basis commencing during the first quarter of 2017. Quarterly principal payments of $2.5 million commence during the first quarter of 2018, with a payment of the remaining balance at the maturity date. The first four quarterly interest payments under the November 2016 Clay Loan can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and April 1, 2017 and transferred $0.3 million and $0.6 million of interest to the principal, respectively.
In connection with the November 2016 Clay Loan the Company issued 8,000,000 common share purchase warrants exercisable for a period of five years expiring November 21, 2021. The common share purchase warrants have an exercise price of $0.85. The Company also incurred a financing fee to secure the loan in the amount of $0.9 million, all of which was paid on November 18, 2016.
The table below summarizes the activity on the note payable:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 26,347 | $ | 36,053 | ||||
| Interest payable transferred to principal balance | 922 | 2,977 | ||||||
| Accretion of discount on loans | 740 | 1,996 | ||||||
| Capitalized financing fee and legal fees | - | (930 | ) | |||||
| Reduction of debt upon issuance of warrants | - | (3,090 | ) | |||||
| Repayment of loans and interest | - | (10,659 | ) | |||||
| Balance, end of the period | $ | 28,009 | $ | 26,347 | ||||
| Current portion | $ | 5,922 | $ | - | ||||
| Non-current portion | $ | 22,087 | $ | 26,347 | ||||
Share Purchase Warrants – Clay loans
On June 8, 2015, the Company issued 10,000,000 share purchase warrants to the Clay Group 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.
On November 18, 2016, the Company issued 8,000,000 share purchase warrants to the Clay Group in connection with the November 2016 Clay Loan. The share purchase warrants are exercisable until November 18, 2021 at an exercise price of $0.85. Included in the November 2016 Clay 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.
The fair value of the derivative liabilities related to the share purchase warrants at June 30, 2017 is $4.0 million (December 31, 2016 - $5.5 million). The derivative liabilities are calculated using the binomial and the Black-Scholes pricing valuation models with the following assumptions:
| Warrants related to June 2015 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.17 | % | 0.84%. | |||||
| Expected life of derivative liability | 2.94 years | 3.44 years | ||||||
| Expected volatility | 76.60 | % | 78.79 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
| Warrants related to November 2016 Loan | June 30, 2017 | December 31, 2016 | ||||||
| Risk-free interest rate | 1.38 | % | 1.11 | % | ||||
| Expected life of derivative liability | 4.40 years | 4.89 years | ||||||
| Expected volatility | 79.58 | % | 77.21 | % | ||||
| Dividend rate | 0.00 | % | 0.00 | % | ||||
The change in the derivative share purchase warrants is as follows:
| June 30, 2017 | December 31, 2016 | |||||||
| Balance, beginning of the period | $ | 5,458 | $ | 2,498 | ||||
| Fair value at inception | - | 3,090 | ||||||
| Change in fair value | (1,452 | ) | (130 | ) | ||||
| Balance, end of the period | $ | 4,006 | $ | 5,458 | ||||
| Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:loan ($000):
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | Three Months Ended Sep 30, | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | Nine Months Ended Sep 30, | |||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| Accretion of the Nov 2016 Loan discount | $ | 454 | $ | - | $ | 740 | $ | - | $ | 510 | $ | - | $ | 1,250 | $ | - | ||||||||||||||||
| Interest expense related to the Nov 2016 Loan | 646 | - | 1,272 | - | 642 | - | 1,914 | - | ||||||||||||||||||||||||
| Interest expense related to Komatsu financial loans(1) | 150 | 154 | 285 | 320 | 143 | 144 | 428 | 464 | ||||||||||||||||||||||||
| Accretion of the June 2015 Loan discount | - | 626 | - | 1,232 | - | 621 | - | 1,853 | ||||||||||||||||||||||||
| Interest expense related to the June 2015 Loan | - | 1,013 | - | 2,008 | - | 1,050 | - | 3,057 | ||||||||||||||||||||||||
| Accretion of discount and interest on loan | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 | ||||||||||||||||
The Company’s loans were contracted to fund significant development costs at the Mine. The Company capitalizes a portion of the interest expense as it related to funds borrowed to complete development activities at the site.
| Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of discounts and interest on loan(1) | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 3,560 | ||||||||
| Less: Interest costs capitalized(2) | - | - | - | (1,006 | ) | |||||||||||
| Interest expense | $ | 1,250 | $ | 1,793 | $ | 2,297 | $ | 2,554 | ||||||||
| Three Months Ended Sep 30, | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | Nine Months Ended Sep 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accretion of discounts and interest on loan(1) | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 5,374 | ||||||||
| Less: Interest costs capitalized(2) | - | - | - | (1,005 | ) | |||||||||||
| Interest expense | $ | 1,295 | $ | 1,815 | $ | 3,592 | $ | 4,369 | ||||||||
| (1) | 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. |
| (2) | Interest capitalization ended on March 31, 2016 because the mine went into production on April 1, 2016. |
| 26 | Page |
| (iv) | Joint Venture |
The Company completed the Joint Venture Transaction with Gauss in September 2014 resulting in both parties owning a 50% interest in the Mine. Pursuant to the Joint Venture Transaction, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Mine, into a California limited liability company named GQM LLC. Upon closing, Gauss acquired 50% of GQM LLC by investing $110 million cash in exchange for newly issued membership units of GQM LLC. GQM Holdings, a newly incorporated subsidiary of the Company, holds the other 50% of GQM LLC.
Gauss is a funding vehicle owned by entities controlled by Leucadia and the Clay Group. Gauss is owned 70.51% by Gauss Holdings and 29.49% by Auvergne, the Clay Group’s investment entity. Pursuant to the transaction, Leucadia was paid a transaction fee of $2.0 million and $0.3 million was paid to Auvergne through GQM LLC in 2014. 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 Variable Interest Entity (“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 condensed consolidated interim 100% of the accounts of GQM LLC in these condensed consolidated interim 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 is 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 of JuneSeptember 30, 2017, and December 31, 2016 are as follows:
| June 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
| Assets, GQM LLC | $ | 152,934 | $ | 151,802 | $ | 152,193 | $ | 151,802 | ||||||||
| Liabilities, GQM LLC | (22,157 | ) | (20,710 | ) | (24,092 | ) | (20,710 | ) | ||||||||
| Net assets, GQM LLC | $ | 130,777 | $ | 131,092 | $ | 128,101 | $ | 131,092 | ||||||||
Included in the assets above is $5.0$3.8 million (December 31, 2016 - $11.1 million) in cash held as at JuneSeptember 30, 2017. The cash in GQM LLC is directed specifically to fund capital expenditures required to continue with production and settle GQM LLC’s obligations. The liabilities of GQM LLC do not have recourse to the general credit of the primary beneficiary except for two2 mining drill loans and $3.0 million in surety bond agreements.
Non-Controlling Interest
The carrying value of the non-controlling interest is 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.
| Six Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2017 | 2016 | |||||||
| Net and comprehensive income (loss) in GQM LLC | $ | (317 | ) | $ | (3,628 | ) | ||
| Non-controlling interest percentage | 50 | % | 50 | % | ||||
| Net and comprehensive loss attributable to non-controlling interest | $ | (159 | ) | $ | (1,814 | ) | ||
| Net and comprehensive loss attributable to permanent non-controlling interest | $ | (95 | ) | $ | (1,088 | ) | ||
| Net and comprehensive loss attributable to temporary non-controlling interest | $ | (64 | ) | $ | (726 | ) | ||
| Permanent Non-Controlling Interest | Temporary Non-Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2016 | $ | 39,327 | $ | 26,220 | ||||
| Net and comprehensive loss for the period | (95 | ) | (64 | ) | ||||
| Carrying value of non-controlling interest, June 30, 2017 | $ | 39,232 | $ | 26,156 | ||||
| Revolving credit |
Revolving credit
On May 23, 2017, GQM LLC entered into a revolving credit facility of $5 million with Gauss Holdings and Auvergne LLC. The revolving credit is available until May 23, 2018 and bears a 12% simple annual interest. GQM LLC paid a closing fee of $0.1 million which was classified as prepaid expenses and other current assets. $0.02 million of the closing fee was amortized during three and sixthe nine months ended JuneSeptember 30, 2017. As at JuneSeptember 30, 2017 and AugustNovember 9, 2017, (“the reporting date”), no amounts had been drawn under this facility.
Fair Value of Financial Instruments
Fair Value Measurements
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). |
| September 30, 2017 ($000) | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 3,129 | $ | - | $ | 3,129 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 268 | - | 268 | - | ||||||||||||
| $ | 3,397 | $ | - | $ | 3,397 | $ | - | |||||||||
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
| June 30, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 4,006 | $ | - | $ | 4,006 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 530 | - | 530 | - | ||||||||||||
| $ | 4,536 | $ | - | $ | 4,536 | $ | - | |||||||||
| 27 | Page |
| December 31, 2016 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (Note 10) | $ | 5,458 | $ | - | $ | 5,458 | $ | - | ||||||||
| Share purchase warrants – (Note 10) | 972 | - | 972 | - | ||||||||||||
| $ | 6,430 | $ | - | $ | 6,430 | $ | - | |||||||||
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 uses observable inputs in option price models such as the binomial and the Black-Scholes valuation models.
Please refer also to the note on fair value of derivative liability underResults of operations above for more information.
Select Non-Consolidated Figures
The Company has a 50% interest in GQM LLC, which meets the definition of a VIE.Variable Interest Entity (“VIE”). The Company consolidates entities which meet the definition of a VIE for which it is the primary beneficiary. The Company 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 following table shows figures attributable to the Company only as of JuneSeptember 30, 2017 and for sixnine months then ended:ended ($000):
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||||||||||||||
| (1) | (2) | (1) + (2) | (1) | (2) | (1) + (2) | |||||||||||||||||||||||||||
| Cash | $ | 4,992 | $ | 2,496 | $ | 1,292 | $ | 3,789 | $ | 3,755 | $ | 1,878 | $ | 928 | $ | 2,806 | ||||||||||||||||
| Short Term Debt | $ | 6,194 | $ | 3,097 | $ | 5,922 | $ | 9,019 | $ | 7,024 | $ | 3,512 | $ | 9,061 | $ | 12,573 | ||||||||||||||||
| Long Term Debt | $ | 8,519 | $ | 4,260 | $ | 22,087 | $ | 26,347 | $ | 9,372 | $ | 4,686 | $ | 20,096 | $ | 24,782 | ||||||||||||||||
| Working Capital / (Deficit) | $ | 5,873 | $ | 2,937 | $ | (9,771 | ) | $ | (6,835 | ) | $ | (9,114 | ) | $ | (4,557 | ) | $ | (12,133 | ) | $ | (16,690 | ) | ||||||||||
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Revenue | $ | 48,182 | $ | 24,091 | $ | - | $ | 24,091 | ||||||||
| Cost of sales including depreciation and depletion | $ | (48,431 | ) | $ | (24,216 | ) | $ | (331 | ) | $ | (24,547 | ) | ||||
| Accretion expense | $ | (94 | ) | $ | (47 | ) | $ | - | $ | (47 | ) | |||||
| G&A Expenses | $ | (1,896 | ) | $ | (948 | ) | $ | (1,316 | ) | $ | (2,264 | ) | ||||
| Share based payments | $ | - | $ | - | $ | (133 | ) | $ | (133 | ) | ||||||
| Foreign exchange gain (loss) | $ | - | $ | - | $ | 48 | $ | 48 | ||||||||
| (Increase) / Decrease in fair value of derivative liability | $ | - | $ | - | $ | 3,033 | $ | 3,033 | ||||||||
| Interest Expense | $ | (428 | ) | $ | (214 | ) | $ | (3,164 | ) | $ | (3,378 | ) | ||||
| Interest Income | $ | 70 | $ | 35 | $ | 7 | $ | 42 | ||||||||
| Others | $ | (394 | ) | $ | (197 | ) | $ | - | $ | (197 | ) | |||||
| Net Loss | $ | (2,991 | ) | $ | (1,496 | ) | $ | (1,856 | ) | $ | (3,352 | ) | ||||
| GQM LLC 100% | GQM LLC 50% Attributable to LTD | LTD on a Non-Consolidated Basis * | LTD Attributable | |||||||||||||
| (1) | (2) | (1) + (2) | ||||||||||||||
| Revenue | $ | 31,686 | $ | 15,843 | $ | 0 | $ | 15,843 | ||||||||
| Cost of sales including depreciation and depletion | $ | (30,207 | ) | $ | (15,103 | ) | $ | (221 | ) | $ | (15,324 | ) | ||||
| Accretion expense | $ | (63 | ) | $ | (31 | ) | $ | 0 | $ | (31 | ) | |||||
| G&A Expenses | $ | (1,151 | ) | $ | (575 | ) | $ | (899 | ) | $ | (1,474 | ) | ||||
| Share based payments | $ | 0 | $ | 0 | $ | (84 | ) | $ | (84 | ) | ||||||
| Foreign exchange gain (loss) | $ | 0 | $ | 0 | $ | 7 | $ | 8 | ||||||||
| (Increase) / Decrease in fair value of derivative liability | $ | 0 | $ | 0 | $ | 1,894 | $ | 1,894 | ||||||||
| Interest Expense | $ | (286 | ) | $ | (143 | ) | $ | (2,011 | ) | $ | (2,154 | ) | ||||
| Interest Income | $ | 56 | $ | 28 | $ | 7 | $ | 35 | ||||||||
| Others | $ | (353 | ) | $ | (176 | ) | $ | 0 | $ | (176 | ) | |||||
| Net Loss | $ | (317 | ) | $ | (158 | ) | $ | (1,306 | ) | $ | (1,464 | ) | ||||
* Includes GQM Holdings
Liquidity and Capital Resources
The Company has generated $58.9$75.4 million in revenues from operations since inception and as at JuneSeptember 30, 2017 had an accumulated deficit of $88.8$90.7 million and a working capital deficit of $3.9$9.1 million. Cash generated fromThe Company used $1.2 million in operations for the three and six month periodsmonths ended JuneSeptember 30, 2017 was $2.8and generated $4.3 million and $5.5 million respectively.in operations for the nine months ended September 30, 2017.
On December 31, 2014, the Company entered into a loan (the “December 2014 Loan”) with the Clay Group for $12.5 million, due on July 1, 2015. On June 8, 2015, the Company amended the December 2014 Loan to extend the maturity to December 8, 2016 and increased the principal amount from $12.5 million to $37.5 million (the “June 2015 Loan”). On November 18, 2016, the Company repaid $12.2 million of the June 2015 Loan and accrued interest with cash on hand and the net proceeds of $10.1 million from an equity financing. The Company restructured the remaining debt with the November 2016 Clay Loana new loan with a principal amount of $31.0 million.million (the “November 2016 Loan”). The November 2016 Clay Loan has a 30-monththirty-month term and an annual interest rate of 8%, payable on a quarterly basis commencing during the first quarter of 2017, a repayment2017.
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As per terms of $2.5 million on a quarterly basis commencing first quarter of 2018 and repayment of balance at maturity date. The first four quarterly interest payments on the November 2016 Clay Loan, can be added to the loan principal balance rather than paid in cash, at the Company’s option. The Company exercised this option on January 1, 2017 and April 1, 2017, and transferred $0.3 million and $0.6 million interest to the principal, respectively.
The Company is required to pay $3.2 and $8.4the following to the Clay Group on the following dates: $5.4 million of accrued interest and debt principal in total, on the three following dates: January 1, 2018,2018; $3.1 million of interest and principal on April 1, 20182018; $3.0 million of interest and principal on July 1, 2018; $3.0 million of interest and principal on and October 1, 2018. The Company will need to receive cash distributions from GQM LLC to service its debt and such distributions are contingent on GQM LLC’s ability to generate positive cash flows. The Company revisedreviewed the mine plan in light of the sixnine months ended JuneSeptember 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussiondiscussions with the Clay Group to restructure the reimbursement schedule hashave been initiated. While the Company has been successful in re-negotiating the debt reimbursement schedule with the Clay Group on previous occasions, there can be no assurance that will be achieved going forward.
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 no 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 membership units at their sole discretion.
The unaudited condensed consolidated interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used, that would be necessary if the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
Cash generated from (used in) operating activities:activities:
Cash generated by operating activities was $5.5$6.0 million for the nine months ended September 30, 2017 (used in the sixnine months ended JuneSeptember 30, 2016 - $7.1$3.1 million) for the six months ended June 30, 2017.. The increase in cash utilized ingenerated by operating activities is primarily due to the increase in revenues since the Company started production in the second quarter of 2016, improvements in working capital and operating cost.
Cash used in investing activities:
Cash used in investing activities totaled $9.5$10.0 million during the sixnine months ended JuneSeptember 30, 2017 (the six(nine months ended JuneSeptember 30, 2016 - $9.4– $10.5 million). Construction of the second stage of the leach pad commenced in the first quarter of 2017. The significant development costs related to the heap leach pad incurred during the six months ended June 30, 2017 were $8.6 million and included the solution collection piping and drain cover placement, drain cover crushing, subgrade and liner. The significant development costs incurred during the six months ended June 30, 2016 included the completion of the crushing-screening plant facilities, the conveying and stacking system, the Merrill-Crowe plant and the water and power supply.was completed in September.
Cash from financing activities:
Cash used in financing activities totaled $3.0$4.6 million during the sixnine months ended JuneSeptember 30, 2017 (the six(nine months ended JuneSeptember 30, 2016 – cash usedgenerated of $2.5$7.2 million). The main financing activities of the Company during the sixnine months ended JuneSeptember 30, 2017 included:were related to loans payable on mining equipment and machinery.
Working capital ($000):
| LTD on a Non-Consolidated Basis * | LTD on a Consolidated Basis ** | |||||||
| Current Assets | $ | 959 | $ | 16,979 | ||||
| Current Liabilities | $ | (13,092 | ) | $ | (26,093 | ) | ||
| Working Capital / (Deficit) | $ | (12,133 | ) | $ | (9,114 | ) | ||
* Includes GQM Holdings ** Includes GQM Holdings and GQM LLC | ||||||||
Working capital:
| LTD on a Non-Consolidated Basis * | LTD on a Consolidated Basis ** | |||||||
| Current Assets | $ | 1,371 | $ | 19,264 | ||||
| Current Liabilities | $ | (11,143 | ) | $ | (23,163 | ) | ||
| Working Capital / (Deficit) | $ | (9,771 | ) | $ | (3,899 | ) | ||
* Includes GQM Holdings ** Includes GQM Holdings and GQM LLC | ||||||||
Golden Queen and GQM Holdings
As at JuneSeptember 30, 2017, Golden Queen and GQM Holdings had current assets of $1.4$1.0 million (December 31, 2016 - $2.3 million) and current liabilities of $11.1$13.1 million (December 31, 2016 - $6.9 million) orfor a working capital deficit of $9.8$12.1 million (December 31, 2016 – $4.6 million). The decrease in current assets from December 31, 2016 is the result of general corporate expenditures such as corporate salary expenses, legal fees, audit fees, financing fees and interest expenses. The increase in current liabilities is the result of the principal payments of the November 2016 Clay Loan due within 12 months now being included in our current liabilities.
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Golden Queen will use its cash for general corporate expenditures such as accounting fees, legal fees and corporate salary expenses. Interest expenses on the November 2016 Clay Loan due during 2017 may behave been added to the loan principal balance rather than paid in cash, at the Company’s option.
GQM LLC
As at JuneSeptember 30, 2017, GQM LLC had current assets of $17.9$16.0 million (December 31, 2016 - $22.7 million) and current liabilities of $12.0$13.0 million (December 31, 2016 - $9.9 million) orfor a working capital surplus of $5.9$3.0 million (December 31, 2016 – $12.8 million). The decrease in current assets from December 31, 2016 is resulting from thea result of cash spent on project-related expenditures and working capital. The increase in current liabilities is due to an increase in accounts payable and an increase of the short-term portion of the mobile equipment loans.
GQM LLC will use its cash on hand for sustaining capital expenditures and for working capital needs.
Outstanding SharesShare 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 December 31, 2016 | 111,048,683 | |||||
| Shares issued as the result of a purchase agreement | 100,000 | |||||
| Shares issued pursuant to the exercise of stock options | Nil | |||||
| Shares issued and outstanding on June 30, 2017 | 111,148,683 | Exercise Price | Expiry Date | |||
| Shares to be issued on exercise of directors and employees stock options | 1,395,002 | $0.58 to $1.59 | From 06/03/18 to 03/16/22 | |||
| Shares to be issued on exercise of warrants | 24,317,700 | $0.95 | 06/08/20 | |||
| Fully diluted June 30, 2017 | 136,861,385 | |||||
| The company has an unlimited authorized share capital |
| Item | No. of Shares | |||||
| Shares issued and outstanding on December 31, 2016 | 111,048,683 | |||||
| Shares issued as the result of a purchase agreement | 100,000 | |||||
| Shares issued pursuant to the exercise of stock options | Nil | |||||
| Shares issued and outstanding on September 30, 2017 | 111,148,683 | Exercise Price | Expiry Date | |||
| Shares to be issued on exercise of directors and employees stock options | 2,600,001 | $0.29 to $1.59 | From 06/03/18 to 10/20/22 | |||
| Shares to be issued on exercise of warrants | 24,317,700 | $0.85 to $0.95 and CAD $2.00 | From 06/08/20 to 11/18/21 | |||
| Fully diluted November 9, 2017 | 138,066,384 | |||||
| The company has an unlimited authorized share capital | ||||||
Subsequent Events
On July 1,October 20, 2017, the Company was scheduledgranted 1,204,999 options to makecertain directors and employees of Golden Queen. The options are exercisable at a quarterly interest paymentprice of $0.29 for a period of five years from the date of grant. 401,666 options vest on October 20, 2018; 401,666 options vest on October 20, 2019; and 401,667 options vest on October 20, 2020.
On November 10, 2017, the Company and the Clay Group agreed to amend the November 2016 Clay Loan. In accordanceLoan by reducing the quarterly principal payments that commence the first quarter of 2018 from $2.5 million to $1.0 million and increasing the annual interest rate from 8% to 10% effective January 1, 2018. As well, all interest payments in 2017 that were deferred at the Company’s option along with a $2.5 million principal payment and a $0.40 amendment fee are payable on January 1, 2018. At the Company’s option, interest and principal payments due on January 1, 2018 can be delayed until February 15, 2018 to accommodate delays in the Offering process.
On November 13, 2017, the Company filed a preliminary prospectus with the termssecurities regulatory authorities in each of the November 2016 Clay Loan agreement,provinces of British Columbia, Alberta and Ontario, Canada and the United Sates except for the states of Arizona, Arkansas, California, Minnesota and Wisconsin in connection with qualifying an offering of the Company chose to exercise its right to add(the “Offering"), in connection with a marketed offering of common shares in the interest owed on July 1, 2017 to the principal balance; thereby increasing the principal balancecapital of the loan by $0.6Company for aggregate gross proceeds of $25.0 million. Closing of the Offering is subject to receipt of applicable regulatory approvals including approval of the Toronto Stock Exchange. The net proceeds of the Offering will be used to reduce the corporate debt, purchase additional equipment for the mine and general corporate and working capital purposes.
Non-GAAP Financial Performance Measures
Non-GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles. These measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.
Total Cash Costs
Total cash costs are derived from amounts included in the statement of operations and include direct mining costs and site general and administrative costs. The direct mining costs shown on the table below include mine site operating costs such as mining, processing, smelting, refining, third party transportation costs, advanced minimum royalties and production costs less silver metals revenues. Management has determined that silver metals revenues when compared with gold metals revenues, are immaterial and therefore are considered a by-product of the production of gold.
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The table below shows a reconciliation of total cash costs per gold ounce and cash costs per gold ounce on a by-product basis (expressed in thousands of US dollars except ounce and per ounce amounts):
| Three Months Ended | ||||||||||||
| June 30, 2017 | March 31, 2017 | December 31, 2016 | ||||||||||
| Total cash costs | ||||||||||||
| Mining | $ | 6,583 | $ | 5,624 | $ | 4,933 | ||||||
| Processing | 4,797 | 4,379 | 4,243 | |||||||||
| Indirect mining cost | 1,795 | 1,880 | 1,901 | |||||||||
| Inventory changes and others | 192 | (322 | ) | (2,181 | ) | |||||||
| Cost of sales | 13,367 | 11,561 | 8,896 | |||||||||
| Site general and administrative | 658 | 838 | 776 | |||||||||
| Cash costs before by-product credits | 14,025 | 12,399 | 9,672 | |||||||||
| Divided by gold produced (oz) | 12,632 | 11,406 | 7,779 | |||||||||
| Cash costs per ounce of gold produced ($/oz) | 1,110 | 1,087 | 1,243 | |||||||||
| Less: By-product silver credits per ounce ($/oz) | (72 | ) | (98 | ) | (148 | ) | ||||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 1,038 | $ | 989 | $ | 1,096 | ||||||
| Ore placed (tons) | 1,026,332 | 791,232 | 894,754 | |||||||||
| Total Cash Costs ($/t placed) | 13.48 | 16.08 | 13.25 | |||||||||
| Crusher mechanical availability (%) | 81 | % | 63 | % | 70 | % | ||||||
| Apparent cumulative recovery(1) - gold (%) | 68.0 | % | 64.2 | % | 59.7 | % | ||||||
| Apparent cumulative recovery(1) - silver (%) | 25.3 | % | 25.3 | % | 24.0 | % | ||||||
| Three Months Ended | ||||||||||||||||
| September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | |||||||||||||
| Total Cash Costs | ||||||||||||||||
| Mining | $ | 7,178 | $ | 6,583 | $ | 5,624 | $ | 4,933 | ||||||||
| Processing | 5,055 | 4,797 | 4,379 | 4,243 | ||||||||||||
| Indirect mining cost | 2,189 | 1,795 | 1,880 | 1,901 | ||||||||||||
| Inventory changes and others | 982 | 192 | (322 | ) | (2,181 | ) | ||||||||||
| Direct mining costs | 15,404 | 13,367 | 11,561 | 8,896 | ||||||||||||
| Site general and administrative | 830 | 658 | 838 | 776 | ||||||||||||
| Cash costs before by-product credits | 16,234 | 14,025 | 12,399 | 9,672 | ||||||||||||
| Divided by gold produced (oz) | 12,275 | 12,632 | 11,406 | 7,779 | ||||||||||||
| Cash costs per ounce of gold produced ($/oz) | 1,323 | 1,110 | 1,087 | 1,243 | ||||||||||||
| Less: By-product silver credits per ounce ($/oz) | (66 | ) | (72 | ) | (98 | ) | (148 | ) | ||||||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 1,257 | $ | 1,038 | $ | 989 | $ | 1,096 | ||||||||
| Ore placed (tons) | 897,549 | 1,026,332 | 791,232 | 894,754 | ||||||||||||
| Total Cash Costs ($/t placed) | 16.99 | 13.48 | 16.08 | 13.25 | ||||||||||||
| Crusher mechanical availability (%) | 74 | % | 81 | % | 63 | % | 70 | % | ||||||||
| Apparent cumulative recovery(1) – gold | 73.0 | % | 68.0 | % | 64.2 | % | 59.7 | % | ||||||||
| Apparent cumulative recovery (1) – silver | 25.8 | % | 25.3 | % | 25.3 | % | 24.0 | % | ||||||||
| (1) | Note: Apparent cumulative recovery is the ratio of metal produced since beginning of leaching over total estimated metal contained in ore loaded to pad since beginning of operation. |
All-in Sustaining Costs
Golden Queen defines all-in sustaining costs as the sum of direct mining costs (as defined under total cash costs), site and corporate general and administrative costs, share based payments, reclamation liability accretion and capital expenditures that are sustaining in nature. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measures of other companies. Other companies may calculate these measures differently.
The table below shows a reconciliation of cash costs per gold ounce on a by-product basis and all-in sustaining costs per ounce (expressed in thousands of US dollars except ounce and per ounce amounts):
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||
| June 30, 2017 | March 31, 2017 | December 31, 2016 | September 30, 2017 | June 30, 2017 | March 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
| All-in sustaining costs | ||||||||||||||||||||||||||||
| Cash costs before by-product credits | $ | 14,025 | $ | 12,399 | $ | 9,672 | $ | 16,234 | $ | 14,025 | $ | 12,399 | $ | 9,672 | ||||||||||||||
| Silver by-product | (915 | ) | (1,092 | ) | (1,150 | ) | (810 | ) | (915 | ) | (1,092 | ) | (1,150 | ) | ||||||||||||||
| Total cash cost after by-product | 13,110 | 11,307 | 8,522 | 15,424 | 13,110 | 11,307 | 8,522 | |||||||||||||||||||||
| Corporate general and administrative expenses | 54 | 578 | 311 | 341 | 54 | 578 | 311 | |||||||||||||||||||||
| Share based payments | 51 | 34 | 17 | 48 | 51 | 34 | 17 | |||||||||||||||||||||
| Accretion expense | 32 | 31 | 23 | 93 | 32 | 31 | 23 | |||||||||||||||||||||
| Sustaining capital | 4,781 | 7,288 | 2,648 | 3,990 | 4,781 | 7,288 | 2,648 | |||||||||||||||||||||
| All-in sustaining costs | 18,028 | 19,237 | 11,521 | 19,896 | 18,028 | 19,238 | 11,521 | |||||||||||||||||||||
| Divided by gold produced (oz) | 12,632 | 11,406 | 7,779 | 12,275 | 12,632 | 11,406 | 7,779 | |||||||||||||||||||||
| All-in sustaining costs per gold ounce on a by-product basis | $ | 1,427 | $ | 1,724 | $ | 1,481 | $ | 1,621 | $ | 1,427 | $ | 1,687 | $ | 1,481 | ||||||||||||||
Summary of Significant Accounting Policies and Estimates
Full disclosure of the Company’s significant accounting policies and estimates in accordance with US GAAP can be found in notes of its audited consolidated financial statements as at December 31, 2016.
Recently Adopted Accounting Pronouncements
New Accounting Policies
In August 2015, the effective date was deferred to reporting periods, including interim periods, beginning after December 31, 2017, and will be applied retrospectively. Early adoption is not permitted.
We are currently assessing the impact of implementation of ASU No. 201-09, however, management does not believe it will change the point of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. We will finalize our assessment of the impact of ASU No. 201-09 on our revenue recognition during 2017 and assess the additional disclosure requirements under the guidance.
The ASU will be effective for annual and interim periods beginning January 1, 2019, with early adoption permitted, and are applicable on a modified retrospective basis with various optional practical expedients. The Company is assessing the impact of this standard.
Other Legal Matters
The Center for Biodiversity Petition to List the Mohave Shoulderband Snail as an Endangered Species
As a result of a petition filed by the Center for Biological Diversity (“CBD”) to list the Mohave Shoulderband snail as an endangered species under the Endangered Species Act, the United States Fish and Wildlife Service (“USFWS”) is required to issue a 12-Month Finding on the species by November 30, 2017. The Company, the USFWS, and the CBD have jointly surveyed for the presence of the snail on and around Soledad Mountain. The Company believes that conservation of the snail can be accomplished without material adjustments to the 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 Mine plan may be required.
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 Federal Deposit Insurance Corporation (“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 JuneSeptember 30, 2017, the Company’s cash balances held in United States and Canadian financial institutions include $9.5$4.7 million, 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.
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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 and six months ended JuneSeptember 30, 2017, a 1% decrease in interest rates would have reduced the interest income by a trivial amount.
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 US dollar may result in an increase in the Canadian operating expenses in US dollar terms. As of JuneSeptember 30, 2017, the Company maintained the majority of its cash balance in US currency.
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 have the potential to negatively impact the future viability of the Mine. 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.
Item 4. Controls and Procedures.
Disclosure controls and procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.
The Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s report on internal control over financial reporting
Changes in internalInternal 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 three and six monthsquarter ended JuneSeptember 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the Company is in the process of implementinghas implemented a remediation plan to addressand has addressed the deficiency previously noted in the areas of personnel and controls including the engagement ofand has engaged an external consultant to assist in the documentation and review of its internal controls.
Fraud analysisAnalysis
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 of fraud. |
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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 sixnine months ended JuneSeptember 30, 2017 and year ended December 31, 2016, there were no reported instances of fraud.
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
Golden Queen and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of development of the Mine. Certain of these risks and uncertainties are under the heading “Risk Factors” under Golden Queen’s Form 10-K dated March 15, 2017 which is available on SEDAR atwww.sedar.com, EDGAR atwww.sec.gov and on our website atwww.goldenqueen.com.
Item 4. Mine Safety Disclosures
GQM LLC is the operator of the Mine,Project, which is located in Mojave in Kern County, California. The mine safety 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 was onewere no lost-time accidentaccidents at GQM LLC during the sixthree months ended JuneSeptember 30, 2017.
Item 6. Exhibits
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: August 9,November 14, 2017
| GOLDEN QUEEN MINING CO. LTD. | ||||
| (Registrant) | ||||
| By: | /s/ Thomas M. Clay | |||
| Thomas M. Clay | ||||
| Principal Executive Officer | ||||
| By: | /s/ Guy Le Bel | |||
| Guy Le Bel | ||||
| Principal Financial Officer | ||||