Related Party Transactions | 9 Months Ended |
Sep. 30, 2014 |
Related Party Transactions [Text Block] | ' |
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6. Related Party Transactions |
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Except as noted elsewhere in these consolidated financial statements, related party transactions are disclosed as follows: |
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| (i) | Consulting Fees | | | | | |
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| | For the three and nine months ended September 30, 2014, the Company paid $42,417 and $126,476 (2013 - $40,047 and $114,570) to Mr. H. L. Klingmann for services as President of the Company of which $13,811 (December 31, 2013 - $47,967 ; September 30, 2013 - $14,763) is payable as at September 30, 2014. | | | | | |
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| | During the three and nine months ended September 30, 2014, the Company paid a total of $11,640 and $35,079 (2013 - $12,172 and $19,505) to its three independent directors. The two non-independent directors, Lutz Klingmann and Thomas M. Clay, do not receive directors’ fees for the three and nine months ended September 30, 2014 or 2013. | | | | | |
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| (ii) | Convertible Debentures | | | | | |
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| | On July 26, 2013, the Company entered into agreements to issue convertible debentures for aggregate proceeds of C$10,000,000 ($9,710,603), from a significant shareholder group. The convertible debentures are unsecured and bear interest at 2% per annum, calculated on the outstanding principal balance, payable annually. The principal amounts of the notes are convertible into shares of the Company at a price of C$1.03 per share for a period of two years. If the notes have not been converted by the holder prior to the maturity date, then the Company may convert them at the lower of C$1.03 or the market price as at the maturity date. | | | | | |
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| | The market price on the maturity date will be determined based on the volume- weighted average price of the shares traded on the Toronto Stock Exchange for the five trading days preceding the maturity date. A total of C$7,500,000 of the offering was subscribed for by an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. The Company agreed to pay the legal fees incurred by the lenders relating to this instrument which amounted to $10,049. | | | | | |
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The conversion feature of the convertible debentures meets the definition of a derivative liability instrument because the conversion feature is denominated in a currency other than the Company’s functional currency as well as the fact the exercise price is not a fixed price as described above. Therefore, the conversion feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15. |
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As a result, the conversion feature of the notes is required to be recorded as a derivative liability recorded at fair value and marked-to-market each period with the changes in fair value each period being charged or credited to income or loss. |
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On inception of the debentures, the fair value of the derivative liability related to the conversion feature was $5,741,520 and as at September 30, 2014, was $4,085,368 (December 31, 2013 - $2,833,987). The derivative liability was calculated using an acceptable option pricing valuation model with the following assumptions: |
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| 2014 | 2013 | | | | | |
Risk-free interest rate | 1.07% - 1.09% | 1.13% - 1.15% | | | | | |
Expected life of derivative liability | 1.07 - 1.32 years | 1.57 - 2 years | | | | | |
Expected volatility | 95.87 - 98.71% | 73.43% - 89.52% | | | | | |
Dividend rate | 0.00% | 0.00% | | | | | |
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The changes in the derivative liability related to the conversion feature are as follows: |
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| | 30-Sep-14 | | | 31-Dec-13 | | |
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Balance, beginning of the period | $ | 2,833,987 | | $ | - | | |
Fair value at inception | | - | | | 5,741,520 | | |
Change in fair value of derivative liability including | | | | | | | |
foreign exchange | | 1,251,381 | | | (2,907,533 | ) | |
Balance, end of the period | $ | 4,085,368 | | $ | 2,833,987 | | |
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With the conversion feature initially being valued at $5,741,520, the resulting residual value allocated to the host debentures was $3,975,480, being the difference between the face value of the convertible debentures and the fair value of the conversion feature derivative liability. |
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The change in the convertible debentures is as follows: |
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| | 30-Sep-14 | | | 31-Dec-13 | | |
Balance, beginning of the period | $ | 4,642,620 | | $ | - | | |
Discounted convertible debentures | | - | | | 3,975,480 | | |
Amortization of discount | | 1,779,294 | | | 811,327 | | |
Foreign exchange | | (275,435 | ) | | (144,187 | ) | |
Balance, end of the period | $ | 6,146,479 | | $ | 4,642,620 | | |
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During the three and nine months ended September 30, 2014, in addition to the amortization of the discount on the convertible debenture, the Company incurred interest expense of $45,543 and $137,059, (September 30, 2013 - $29,899 and $29,899) based on the 2% per annum stated interest rate for a total interest expense of $711,220 and $1,916,353 for the three and nine months ended September 30, 2014 (September 30, 2013 - $348,821 and $348,821). |
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| (iii) | Loan Payable | | | | | |
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| | On January 1, 2014, the Company entered into an agreement to secure a $10,000,000 loan (the “Loan”). The Loan was provided by members of the Clay family, who are shareholders of the Company, including $7,500,000 provided by an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. The Loan has a twelve-month term and bears an annual interest rate of 5%, payable on the maturity date. | | | | | |
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| | The Loan will be repaid on a date that is less than 183 days before the maturity date As a result, the Company will pay the Lenders a prepayment penalty in the amount that is equivalent to 105% of the principal amount, plus interest on the principal amount at the rate of 5% per annum accrued to the date the Loan is repaid. The estimated $500,000 finance charge, included in the $867,123 interest payable balance, represents the prepayment penalty to the Lenders. | | | | | |
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| | | 30-Sep-14 | | | | |
| Balance, beginning of the period | $ | - | | | | |
| Proceeds from the loan | | 10,000,000 | | | | |
| Balance, end of the period | $ | 10,000,000 | | | | |
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| | The interest expense and prepayment finance charge of $126,027 (2013 - $Nil) and $867,123 (2013 - $Nil) has been accrued on this loan three and nine months ended September 30, 2014 and is included in interest payable as at September 30, 2014. | | | | | |
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| (iv) | Advance | | | | | |
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| | In July 2014, GQM Inc. entered into a $10,000,000 short-term advance agreement (the “Advance”) with Leucadia and Auvergne (together with Leucadia, the “Lenders”), with the Company as guarantor. Leucadia provided $6,500,000 of the loan and Auvergne provided $3,500,000. The Advance had an interest rate of 10.0% per annum, compounded monthly. Auvergne is an investment vehicle managed by Thomas M. Clay, a Director and insider of the Company. On closing of the joint venture transaction on September 15, 2014, GQ California applied part of the investment of $110,000,000 to repayment of principal and accrued interest on the $10,000,000 bridge loan advanced by the Lenders in July 2014. GQ California paid $209,607 in interest payment, including $73,632 paid to Auvergne on the July 2014 Advance, of which $45,264 was capitalized to mineral property interests. | | | | | |
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| (v) | Amortization of Discount and Interest Expense | | | | | |
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| | The following summarizes the capitalized amortization of discount and interest expense as at September 30, 2014 and December 31, 2013. | | | | | |
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| | | 30-Sep-14 | | | 31-Dec-13 | |
| Amortization of discount and interest on loan and | | | | | | |
| convertible debenture | $ | 2,993,083 | | $ | 888,026 | |
| Less: Interest costs capitalized | | (1,829,540 | ) | | - | |
| Amortization of discount and interest expensed | $ | 1,163,543 | | $ | - | |
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| (vi) | Joint Venture Transaction | | | | | |
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| | On September 15, 2014, the Company closed the JV with Gauss resulting in both parties owning 50% interest in the Project. Pursuant to the JV, Golden Queen converted its wholly-owned subsidiary GQM Inc., the entity developing the Project, into a California limited liability company named Golden Queen Mining Company, LLC, “GQ California”. On closing of the transaction, Gauss acquired 50% of GQ California by investing $110 million cash in exchange for newly issued membership units of GQ California. GQ Holdco, a newly incorporated subsidiary of the Company, holds the other 50% of GQ California. | | | | | |
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| | Gauss is a funding vehicle owned by entities controlled by Leucadia National Corporation (NYSE: LUK) (“Leucadia”) and certain members of the Clay family, a shareholder group which collectively owned approximately 27%, at the time of the transaction, of the issued and outstanding shares of Golden Queen (the “Clay Group”). Gauss is owned 67.5% by Gauss Holdings LLC (“Gauss Holdings”, Leucadia’s investment entity) and 32.5% by Auvergne LLC (“Auvergne”, the Clay Group’s investment entity). Pursuant to the transaction, Leucadia was paid a transaction fee of $2,000,000 and $275,000 was paid to Auvergne through GQ California. The Company has adopted an accounting policy of expensing transaction costs. | | | | | |
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| | Variable Interest Entity | | | | | |
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| | In accordance with ASC 810-10-30, the Company has determined that GQ California 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 GQ California. As a result, the Company has consolidated 100% of the accounts of GQ California in these condensed consolidated interim financial statements, while presenting a non-controlling interest portion representing the 50% interest in GQ California of Gauss 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 fair value of the non-controlling interest that could potentially be redeemable by Gauss in the future. | | | | | |
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| | Non-Controlling Interest | | | | | |
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| | In accordance with ASC 810, the Company has presented Gauss’ ownership in GQ California as a non- controlling interest amount on the balance sheet within the equity section. However, the Amended and Restated Limited Liability Company Agreement (“LLC Agreement”) contains terms within Section 12.5 that provides terms for the exit from the investment in GQ California for a member whose interest in GQ California becomes less than 20%. The following is a summary of the terms of the clause: | | | | | |
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| | Pursuant to Section 12.5, if a member becomes less than 20% interest holder, its remaining unit interest will (ultimately) be terminated through one of three events. At the non-diluted member’s option within 60 days of the of the diluted member’s interest dropping below 20% (the “triggering event”): | | | | | |
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| a. | Through conversion to a net smelter royalty (“NSR”) (in which case the conversion ratio is based on a pro rata percentage, determined on a linear basis, based on the following: 0 - 20% membership interest translates to 0 - 5% NSR) obligation of GQ California; | | | | | |
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| b. | Through a buy-out (at fair value) by the non-diluted member; or | | | | | |
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| c. | Through a sale process by which the diluted member’s interest is sold | | | | | |
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| • | If such sale process does not result in a binding offer acceptable to the non- diluted member within six months after the election by the non-diluted member, the sale process terminates and the non-diluted member has 15 days to choose between (a) and (b). | | | | | |
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If the non-diluted member does not make an election pursuant to the above within 60 days, the diluted member may choose (a) or (b) above. If no election is made by the diluted member, option (a) is deemed to have been elected. |
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| | This clause in the JV constitutes contingent redeemable equity as outlined in Accounting Series Release No. 268 (“ASR 268”) and has been classified as temporary equity. | | | | | |
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| | The carrying value of the temporary equity is calculated using the guidance provided in ASC 480-10- S99 that specifies that the initial measurement of redeemable instruments should be carrying value. The breakdown of the allocation initial value of the temporary equity and the permanent equity is shown below. The 40% of temporary equity represents the amount of redeemable equity within Gauss’ ownership interest in the net assets of GQ California. The remaining 60% is considered permanent equity as it is not redeemable. | | | | | |
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| | 15-Sep-14 | | | | | |
Net assets, GQ California before JV | $ | 16,973,184 | | | | | |
Investment by Gauss | | 110,000,000 | | | | | |
Net assets, GQ California after JV | | 126,973,184 | | | | | |
Gauss’ ownership percentage | | 50% | | | | | |
Net assets of GQ California attributable to Gauss | | 63,486,592 | | | | | |
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Allocation of non-controlling interest between permanent | | | | | | | |
equity and temporary equity: | | | | |
Initial value of permanent non-controlling interest ( 60% of | | 38,091,955 | | | | | |
total non-controlling interest) | | | | |
Initial fair value of temporary non-controlling interest ( 40% | | 25,394,637 | | | | | |
of total non-controlling interest) | | | | |
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Subsequent to the initial transaction, the carrying value will be adjusted for net income and loss and distributions pursuant to ASC 810-10 based on the same percentage allocation used to value the initial book value of temporary equity. |
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| | | Three and Nine Months Ended | |
| | | 30-Sep-14 | | | 30-Sep-13 | |
| Net and comprehensive loss in GQ California | $ | (2,320,490 | ) | $ | - | |
| Non-controlling interest percentage | | 50% | | | | |
| Net and comprehensive loss attributable to | | (1,160,245 | ) | | - | |
non- controlling interest |
| Net and comprehensive loss attributable to | $ | (696,147 | ) | $ | - | |
permanent non-controlling interest |
| Net and comprehensive loss attributable to | $ | (464,098 | ) | $ | - | |
temporary non-controlling interest |
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| | Dilution of Interest in Subsidiary | | | | | |
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| | As a result of the JV transaction, the Company’s interest in GQ California was diluted from 100% to 50% and ordinarily, the Company would recognize a gain on dilution. Since the gain is with a related party, the gain was recorded in additional paid in capital (“APIC”) and calculated as being $46,513,408 : | | | | | |
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| | 15-Sep-14 | | | | | |
Investment by Gauss | $ | 110,000,000 | | | | | |
Less: | | | | | | | |
Initial value of permanent equity | | (38,091,955 | ) | | | | |
Initial value of temporary equity | | (25,394,637 | ) | | | | |
Gain on dilution | $ | 46,513,408 | | | | | |
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Based on the guidance provided in ASC 810-10-55-4D and -4E, due to the fact the Company retained control, the gain has not been recognized in net income but rather has been recorded in equity as an increase to APIC. |
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Management Agreement |
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GQ California will be managed by a board of managers comprising an equal number of representatives of each of Gauss and GQ Holdco. The initial officers of GQ California are Lutz Klingmann as Chief Executive Officer, and Andrée St-Germain as Chief Financial Officer. As long as a member of the Clay family holds greater that 25% of the Company, the Clay Group is entitled to appoint one of the Company’s representatives to the GQ California board of managers. Capital Contribution Agreement |
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Pursuant to the JV, GQ Holdco will have the right to make a single capital contribution to GQ California of between $15 million and $25 million (the “Top-Up Contribution”), with each such threshold to be reduced by 50% of the amount of any proceeds received by GQ California from any debt financing transaction . Pursuant to the JV Agreement, if the Company (through GQ Holdco) makes the Top-Up Contribution, Gauss is committed to fund an amount equal to the Top-Up Contribution to GQ California, and the aggregate amount of such contributions are anticipated to provide GQ California with the necessary funds to fully develop the Project. If the Company does not make the Top-Up Contribution, Gauss will be obligated to make up to a $40 million capital contribution to GQ California, in which case GQ Holdco’s ownership interest in GQ California will be diluted and GQ Holdco will surrender one of its board seats in GQ California. |
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Standby Commitment |
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Golden Queen also entered into a backstop guarantee agreement with Gauss (the “Backstop Agreement”) whereby, if the Company conducts a rights offering, Gauss has agreed to purchase, upon the terms set forth in the Backstop Agreement, any common shares which have not been acquired pursuant to the exercise of rights under the Rights Offering at a purchase price to be determined but not to exceed $1.10 per common share, up to a maximum amount of $45 million in the aggregate. In consideration for entering into the Backstop Agreement, on closing of the Joint Venture, the Company paid Leucadia and Auvergne a standby guarantee fee of $2,250,000, of which $731,250 was paid to Auvergne. |
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| | The Transaction Agreement and Backstop Agreement contemplated that the Company would file a registration statement in connection with the rights offering by October 15, 2014, however, the Company is conducting a full review of available financing alternatives, and as a result, whether the Company will proceed with a possible rights offering (if any), and the size of any such rights offering, is not known at this time. The Company will not be subject to additional fees or expenses as a result of not filing a registration statement in connection with a rights offering. | | | | | |