The following is a summary of stock option activity during the three months ended March 31, 2019 and the year ended December 31, 2018:
| Shares | Weighted Average Exercise Price per Share | |||||||
| Options outstanding, December 31, 2017 | 2,600,001 | $ | 0.54 | |||||
| Options forfeited | (75,000 | ) | $ | 0.29 | ||||
| Options expired | (200,000 | ) | $ | 1.48 | ||||
| Options outstanding, March 31, 2019 and December 31, 2018 | 2,325,001 | $ | 0.46 | |||||
During the three months ended March 31, 2019, the Company recognized $27 (2018 - $45) in stock-based compensation relating to the vesting of employee stock options.
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2019 and 2018 and 2017
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| Share Capital (continued) |
Stock options (continued)
The following is a summary of stock option activity during the nine months ended September 30, 2018:
| Shares | Weighted Average Exercise Price per Share | |||||||
| Options outstanding, December 31, 2016 | 1,555,000 | $ | 0.85 | |||||
| Options granted | 1,605,001 | $ | 0.38 | |||||
| Options forfeited | (166,667 | ) | $ | 0.64 | ||||
| Options expired | (393,333 | ) | $ | 1.13 | ||||
| Options outstanding, December 31, 2017 | 2,600,001 | $ | 0.54 | |||||
| Options forfeited | (75,000 | ) | $ | 0.29 | ||||
| Options expired | (200,000 | ) | $ | 1.48 | ||||
| Options outstanding, September 30, 2018 | 2,325,001 | $ | 0.46 | |||||
During the three and nine months ended September 30, 2018, the Company recognized $34 and $113 (the three and nine months ended September 30, 2017 - $48 and $133) 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 as at September 30, 2018:March 31, 2019:
| Expiry Date | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Exercise Price | Number Outstanding | Number Exercisable | Remaining Contractual Life (years) | Exercise Price | ||||||||||||||||||||||||
| September 8, 2020 | 430,000 | 430,000 | 1.94 | $ | 0.58 | 430,000 | 430,000 | 1.44 | $ | 0.58 | ||||||||||||||||||||||
| November 30, 2021 | 365,000 | 121,666 | 3.17 | $ | 0.66 | 365,000 | 243,332 | 2.67 | $ | 0.66 | ||||||||||||||||||||||
| March 20, 2022 | 400,002 | 133,334 | 3.47 | $ | 0.65 | 400,002 | 266,668 | 2.97 | $ | 0.65 | ||||||||||||||||||||||
| October 20, 2022 | 1,129,999 | - | 4.06 | $ | 0.29 | 1,129,999 | 376,666 | 3.56 | $ | 0.29 | ||||||||||||||||||||||
| 2,325,001 | 685,000 | 3.43 | 2,325,001 | 1,316,666 | 2.91 | |||||||||||||||||||||||||||
As at September 30, 2018,March 31, 2019, the aggregate intrinsic value of the outstanding exercisable options was $nil (December 31, 20172018– $nil).
Warrants
As at September 30, 2018,March 31, 2019, 24,317,700 warrants were outstanding (December 31, 20172018 – 24,317,700).
The following table summarizes information about share purchase warrants outstanding as at September 30, 2018:March 31, 2019:
| Expiry Date | Number Outstanding | Remaining Contractual Life (years) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 1.69 | $ | 0.7831 | ||||||||
| July 25, 2019(1) | 6,317,700 | 0.82 | C$ | 2.0000 | ||||||||
| November 18, 2021 | 8,000,000 | 3.14 | $ | 0.6650 | ||||||||
| 24,317,700 | 1.94 | |||||||||||
| Expiry Date | Number Outstanding | Remaining Contractual Life (years) | Exercise Price | |||||||||
| June 8, 2020 | 10,000,000 | 1.19 | $ | 0.7831 | ||||||||
| July 25, 2019(1) | 6,317,700 | 0.32 | C$ | 2.0000 | ||||||||
| November 18, 2021 | 8,000,000 | 2.64 | $ | 0.6650 | ||||||||
| 24,317,700 | 1.44 | |||||||||||
| (1) | Non-tradable share purchase warrants. |
In addition, as at March 31, 2019, the Company had 21,486 GQM LLC Warrants (Note 13(v)) outstanding, with each warrant entitling the holder to purchase a unit of GQM LLC for a period of five (5) years at an exercise price of $475.384 per unit.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2018 and 2017
(amounts expressed in thousands of US dollars - Unaudited)
| 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 September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Three Months Ended | |||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Audit, legal and professional fees | $ | 115 | $ | 165 | $ | 524 | $ | 561 | $ | 103 | $ | 240 | ||||||||||||
| Salaries and benefits and director fees | 297 | 431 | 980 | 1,131 | 799 | 503 | ||||||||||||||||||
| Regulatory fees and licenses | 28 | 15 | 153 | 85 | 25 | 79 | ||||||||||||||||||
| Insurance | 163 | 122 | 446 | 369 | 171 | 139 | ||||||||||||||||||
| Corporate administration | 236 | 438 | 869 | 1,151 | 268 | 293 | ||||||||||||||||||
| Transaction costs (Note 16) | 466 | - | ||||||||||||||||||||||
| $ | 839 | $ | 1,171 | $ | 2,972 | $ | 3,297 | $ | 1,832 | $ | 1,254 | |||||||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| Loss Per Share |
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Three Months Ended | |||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Net loss attributable to the shareholders of the Company - numerator for basic and diluted | $ | (2,403 | ) | $ | (1,889 | ) | $ | (8,452 | ) | $ | (3,252 | ) | ||||||||||||
| Net loss attributable to the shareholders of the Company - numerator for basic and diluted loss per share | $ | (2,300 | ) | $ | (5,417 | ) | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||
| Weighted average number of common shares outstanding -basic and diluted | 300,101,444 | 111,148,683 | 263,418,307 | 111,137,694 | 300,101,444 | 188,829,263 | ||||||||||||||||||
| Loss per share – basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||||
Weighted average number of shares for the three and nine months ended September 30, 2018March 31, 2019 excludes 2,325,001 options (December 31, 20172018– 2,600,001)2,325,001) and 24,317,700 warrants (December 31, 20172018 – 24,317,700) that were antidilutive.
| Related Party Transactions |
Except as noted elsewhere in these consolidated financial statements, related party transactions are disclosed as follows:
| (i) | Compensation of Key Management Personnel, Transactions with Related Parties and Related Party Balances |
For the three and nine months ended September 30, 2018,March 31, 2019, the Company recognized $125 and $424 (for the three and nine months ended September 30, 2017$361 (2018–$163 and $490)195) salaries and fees for Officers and Directors.
As at September 30, 2018, $nil (December 31, 2017– $38) was included in prepaid expenses and other current assets for closing fees paid to related parties.
As at September 30, 2018, $nil (December 31, 2017–$463 for amended fees and accrued interest payable to related parties) was included in accounts payable and accrued liabilities for accrued interest payable to related parties and salaries and fees payable to Officers and Directors.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2018 and 2017
(amounts expressed in thousands of US dollars - Unaudited)
| (ii) | Note Payable |
On November 18, 2016, the
As at December 31, 2018, The Company entered intohad a loan with the Clay Group for $31,000with a principal balance of $25,625 (the “November 2016“Clay Group Loan”),. The Clay Group Loan had principal and accrued interest due as follows: $1.7 million of principal and accrued interest on January 1, 2019; $3.9 million of principal and accrued interest on April 1, 2019; and the balance due on May 21, 2019 with an annual interest rate of 8%, payable quarterly. 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. See Note 7.
2019. On November 10, 2017,December 27, 2018, the Company and the Clay Group agreed to amend the November 2016Clay Group Loan, by reducingextending the 2018 quarterly anddue date of $1.7 million of principal as well as interest from the original due date of January 1, 2019 Q1 principal payments from $2,500 to $1,000, adding the reductionFebruary 1, 2019. An extension fee of such payments pro-rata$125 was added to the remainingprincipal amount owing. On February 1, 2019, payments,the due date was extended to February 8, 2019 for an extension fee of $75 that was added to the principal amount owing. On February 8, 2019, the due dates of principal and increasinginterest on the annual interest rate from 8% to 10% effective January 1, 2018 (the “November 2017 Loan”)Clay Group Loan were extended until completion of the proposed transaction (Note 16). This amendment wasThe amendments were accounted for as a debt modification.modifications.
The following table summarizes activity on the notes payable:
September 30, 2018 | December 31, 2017 | |||||||
| Balance, beginning of the period | $ | 30,099 | $ | 26,347 | ||||
| Interest payable transferred to principal balance | - | 2,212 | ||||||
| Accretion of discount on loans | 1,512 | 1,940 | ||||||
| Capitalized financing and legal fees | - | (400 | ) | |||||
| Accretion of capitalized financing and legal fees | 196 | - | ||||||
| Repayment of loans and interest | (6,711 | ) | - | |||||
| Balance, end of the period | $ | 25,096 | $ | 30,099 | ||||
| Current portion | $ | 25,096 | $ | 7,712 | ||||
| Non-current portion | $ | - | $ | 22,387 | ||||
| March 31, 2019 | December 31, 2018 | |||||||
| Balance, beginning of the year | $ | 24,690 | $ | 30,099 | ||||
| Accretion of discount on loans | 526 | 2,040 | ||||||
| Capitalized financing, extension and legal fees | (75 | ) | (125 | ) | ||||
| Extension fee added to principal | 75 | 125 | ||||||
| Accretion of capitalized financing, extension and legal fees | 265 | 262 | ||||||
| Repayment of loans and interest | - | (7,711 | ||||||
| Balance, end of the year | $ | 25,481 | $ | 24,690 | ||||
| Current portion | $ | 25,481 | $ | 24,690 | ||||
| Non-current portion | $ | - | $ | - | ||||
14
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| 13. | Related Party Transactions (continued) |
| (iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discountsdiscount and interest on loans:
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Three Months Ended | |||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Accretion of the Nov 2017 Loan discount | $ | 518 | $ | 510 | $ | 1,512 | $ | 1,250 | ||||||||||||||||
| Accretion of the Clay Group Loan discount | $ | 526 | $ | 490 | ||||||||||||||||||||
| Accretion of capitalized financing and legal fees | 66 | - | 196 | - | 265 | 65 | ||||||||||||||||||
| Interest expense related to the Nov 2017 Loan | 678 | 642 | 2,087 | 1,914 | ||||||||||||||||||||
| Closing and commitment fees related to the Credit Facility | - | - | 40 | - | ||||||||||||||||||||
| Amortization of deferred financing fees | 655 | - | ||||||||||||||||||||||
| Interest expense related to the Clay Group Loan | 658 | 713 | ||||||||||||||||||||||
| Interest expense related to the 2018 Credit Facility | 180 | - | ||||||||||||||||||||||
| Closing and commitment fees related to credit facilities | 27 | 30 | ||||||||||||||||||||||
| Interest expense related to Komatsu financial loans(1) | 147 | 143 | 548 | 428 | 109 | 235 | ||||||||||||||||||
| Accretion of discount and interest on loan | $ | 1,409 | $ | 1,295 | $ | 4,383 | $ | 3,592 | $ | 2,420 | $ | 1,533 | ||||||||||||
| (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. |
| (iv) | Joint Venture Transaction |
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%.
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2018 and 2017
(amounts expressed in thousands of US dollars - Unaudited)
If a member becomes less than a 20% interest holder, its remaining interest will (ultimately) be terminated through one of 3 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 sold.
| 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 sold. |
The net assets of GQM LLC as at September 30,December 31, 2018 and December 31, 2017 are as follows:
September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Assets, GQM LLC | $ | 158,087 | $ | 149,095 | $ | 176,635 | $ | 171,334 | ||||||||
| Liabilities, GQM LLC | (23,746 | ) | (28,024 | ) | (24,782 | ) | (29,904 | ) | ||||||||
| Net assets, GQM LLC | $ | 134,341 | $ | 121,071 | $ | 151,853 | $ | 141,430 | ||||||||
Included in the assets above, is $3,980$4,713 (December 31, 20172018– $2,606)$4,149) in cash held by GQM LLC which 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 $460$349 for twoa mining drill loansloan and $4,921$5,507 in surety bond agreements.
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| 13. | 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 September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Three Months Ended | |||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | (1,909 | ) | $ | (2,674 | ) | $ | (6,728 | ) | $ | (2,991 | ) | $ | 95 | $ | (7,294 | ) | |||||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||||||
| Net and comprehensive income (loss) attributable to non-controlling interest | $ | (954 | ) | $ | (1,335 | ) | $ | (3,364 | ) | $ | (1,495 | ) | $ | 48 | $ | (3,646 | ) | |||||||
| Net and comprehensive income (loss) attributable to permanent non-controlling interest | $ | (572 | ) | $ | (801 | ) | $ | (2,018 | ) | $ | (897 | ) | $ | 29 | $ | (2,188 | ) | |||||||
| Net and comprehensive income (loss) attributable to temporary non-controlling interest | $ | (382 | ) | $ | (534 | ) | $ | (1,346 | ) | $ | (598 | ) | $ | 19 | $ | (1,458 | ) | |||||||
| Permanent Non-Controlling Interest | Temporary Non-Controlling Interest | |||||||||||||||||||||||
| Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||||||||||||||||||
| Capital contribution | 10,000 | - | ||||||||||||||||||||||
| Net and comprehensive income for the year | 108 | 72 | ||||||||||||||||||||||
| Carrying value of non-controlling interest, December 31, 2018 | $ | 46,429 | $ | 24,286 | ||||||||||||||||||||
| Net and comprehensive income for the period | 29 | 19 | ||||||||||||||||||||||
| Carrying value of non-controlling interest, March 31, 2019 | $ | 46,458 | $ | 24,305 | ||||||||||||||||||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||
| Capital contribution | 10,000 | - | ||||||
| Net and comprehensive loss for the period | (2,018 | ) | (1,346 | ) | ||||
| Carrying value of non-controlling interest, September 30, 2018 | $ | 44,303 | $ | 22,868 | ||||
| (v) | Credit Facility |
On October 12, 2018, GQM LLC entered into an agreement with Gauss Holdings LLC and Auvergne LLC (the “Lenders”) whereby the Lenders are providing GQM LLC a revolving credit loan facility (the “2018 Credit Facility”) in the amount of $20 million. The 2018 Credit Facility bears interest at a rate of 8% per annum and in addition, is subject to a commitment fee of 1% per annum on available loan balance. As per terms of the agreement, GQM LLC accrued commitment fees of $45 for the year ended December 31, 2018. The loan matures March 31, 2020. As at March 31, 2019, GQM LLC had drawn $10,000 (December 31, 2018 - $5,000) from the 2018 Credit Facility and accrued interest of $327 (December 31, 2018 - $121). Subsequent to the period end GQM LLC drew an additional $5,000 from the 2018 Credit Facility (Note 17).
In connection with the 2018 Credit Facility, the Lenders were issued 21,486 warrants (the “GQM LLC Warrants”), with each warrant entitling the holder to purchase a unit of GQM LLC for a period of five (5) years at an exercise price of $475.384 per unit.The warrants are classified as a derivative liability due to a clause in the warrant agreement that offers the warrant holders price protection (Note 8). The fair value of GQM LLC Warrants at the issuance date of $3,314 is accounted for as a finance cost and amortized to the statement of loss over the term of the 2018 Credit Facility. During the three months ended March 31, 2019, the Company recorded amortization expense of $655.
The GQM LLC Warrants represent a fully-diluted 7.5% interest in the equity of GQM LLC. If the GQM LLC warrants are exercised, the Company’s interest in GQM LLC will be diluted to 46.25%. The Company’s current interest in GQM LLC is 50%.
The 2018 Credit Facility is secured by a pledge of the Company’s equity interest in GQM LLC.
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2019 and 2018 and 2017
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
On May 23, 2017, GQM LLC entered into a $5,000 one-year revolving credit agreement (the “Credit Facility”) in which Gauss Holdings LLC and Auvergne, LLC agreed to extend credit in the form of loans to GQM LLC. The Credit Facility commenced on July 1, 2017, bears interest at a rate of 12% per annum and is subject to a commitment fee of 1% per annum. For the three and nine months ended September 30, 2018, GQM LLC paid commitment fees of $40 (2017 – $20 and $40, respectively). The balance of the Credit Facility was $3,000 as at December 31, 2017. The Credit Facility expired on May 22, 2018 and the balance of $5 million was repaid in cash.
| Commitments and Contingencies |
Royalties
The Company has acquired a number of mineral property interests outright. It has acquired exclusive rights to explore, develop and mine other portions of the Mine under various mining lease agreements with landowners. Royalty amounts due to each landholder over the life of the Mine vary 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 two of GQM LLC’s mining drill loans. The Company has also provided a corporate guaranty for GQM LLC’s surety bonds.
| 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). |
| September 30, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 235 | $ | - | $ | 235 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 1 | - | 1 | - | ||||||||||||
| $ | 236 | $ | - | $ | 236 | $ | - | |||||||||
GOLDEN QUEEN MINING CO. LTD.
Notes to Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30, 2018 and 2017
(amounts expressed in thousands of US dollars - Unaudited)
Fair Value Measurements (continued)
| December 31, 2017 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 7) | $ | 439 | $ | - | $ | 439 | $ | - | ||||||||
| Share purchase warrants – (see Note 7) | 2 | - | 2 | - | ||||||||||||
| $ | 441 | $ | - | $ | 441 | $ | - | |||||||||
| March 31, 2019 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 8) | $ | 63 | $ | - | $ | 63 | $ | - | ||||||||
| GQM LLC Warrants – Related Party (see Note 8) | 3,477 | - | 3,477 | - | ||||||||||||
| $ | 3,540 | $ | - | $ | 3,540 | $ | - | |||||||||
| December 31, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party (see Note 8) | $ | 76 | $ | - | $ | 76 | $ | - | ||||||||
| GQM LLC Warrants – Related Party (see Note 8) | 3,314 | - | 3,314 | - | ||||||||||||
| $ | 3,390 | $ | - | $ | 3,390 | $ | - | |||||||||
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.
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| 15. | Financial Instruments (continued) |
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 and Canadian Dollar cash deposits held in Canada are insured by the Canada Deposit Insurance Corporation (“CDIC”) for up to C$100.
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 at September 30, 2018,March 31, 2019, the Company’s cash balances held in United States and Canadian financial institutions include $8,417,$4,713, 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 approximately 55% of its cash in bank deposit accounts with a single major financial institution.institutions. The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the three and nine months ended September 30, 2018,March 31, 2019, a 1% decrease in interest rates would have reduced the interest income for the three and nine months ended September 30, 2018,March 31, 2019, by 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 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 at September 30, 2018,March 31, 2019, the Company maintained the majority of its cash balance in US Dollars. The Company currently does not engage in any currency hedging activities.
16. Proposed Transaction
On February 9, 2019, the Company announced that it had entered into a binding share purchase agreement with a group of purchasers including Thomas M. Clay and certain members of the Clay family and associated entities (the “Purchaser”), whereby the Purchaser will acquire 100% of the Company’s 50% ownership interest in the Soledad Mountain Project (the “Transaction”).
The consideration from the Purchasers is comprised of (1) $4.25 million in cash; (2) the extinguishment of all amounts owing to the Purchasers by the Company under Clay Group Loan (Note 13(ii)); and (3) the cancellation of all of the Purchasers’ ownership interest in the Company (consisting of 177,701,229 Shares, 457,500 options and 18,000,000 share purchase warrants). In addition, the Purchasers may pay a contingent payment to the Company if the Soledad Mountain Project is subsequently sold or transferred to a third party in certain circumstances. The Company incurred $466 of costs relating to the Transaction during the three months ended March 31, 2019.
The transaction is subject to the approval of the shareholders of the Company. The shareholders will vote on the transaction at the Annual General and Special meeting to be held on May 13, 2019.
All payments of interest and principal on the Clay Group Loan (Note 13(ii)) are not due until completion of the proposed Transaction. If the shareholders vote against the Transaction, then the Clay Group Loan principal and accrued interest will be due immediately. Under this scenario, should the Company be unable to negotiate an extension to the Clay Group Loan, the independent directors and management will have no alternative but to pursue a reorganization or, at worst, bankruptcy, where the likely outcome for shareholders is the total loss of equity value.
GOLDEN QUEEN MINING CO. LTD.
Notes to the Condensed Consolidated Interim Financial Statements
For the Three and Nine Months Ended September 30,March 31, 2019 and 2018 and 2017
(amounts expressed in thousands of US dollars, except share amounts - Unaudited)
| Subsequent Events |
On October 12, 2018,Subsequent to March 31, 2019, GQM LLC entered intodrew an agreement with Gauss Holdings LLC and Auvergne LLC (the “Lenders”) where byadditional $5,000 from the Lenders are providing GQM LLC a revolving credit loan facility (the “Facility”) in the amount of $20 million. Through Gauss LLC, the Lenders are the other 50% owners of GQM LLC. Gauss Holdings LLC is wholly owned by Jefferies Financial Group, and Auvergne LLC is wholly owned by members of the Clay family.
Under the terms of the agreement, the maturity date of the2018 Credit Facility is March 31, 2020 and the annual interest rate on drawn amounts is 8%. The Company may prepay all or part of the Facility at any time prior to the maturity date, and amounts prepaid will not be subject to penalty.
GQM LLC has made an initial $5 million draw on the Facility.
In connection with the Facility, the Lenders were issued 21,486 warrants (the “GQM LLC Warrants”(Note 13(v)), with each warrant entitling the holder to purchase a unit of GQM LLC for a period of five (5) years at an exercise price of $475.384 per unit.
The GQM LLC Warrants represent a fully-diluted 7.5% interest in the equity of GQM LLC. If the GQM LLC warrants are exercised, the Company’s interest in GQM LLC will be diluted to 46.25%. The Company’s current interest in GQM LLC is 50%.
The Facility is secured by a pledge of the Company’s equity interest in GQM LLC.
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”, “GQM Ltd.”, “Company”, “we”, “our” or “us”) is as at November 8, 2018May 6, 2019 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and nine months ended September 30, 2018March 31, 2019 and the notes thereto.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is derived from the audited consolidated financial statements and the unaudited condensed consolidated interim financial statements of the Company which have been prepared in accordance with US generally accepted accounting principles (“US GAAP”), where appropriate as applicable to interim financial reporting. All amounts herein are presented in thousands of US dollars, except per share amounts, or 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 Company’s future prospects if the Transaction is not approved, 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.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. Tim Mazanek, SME is a qualified person for the purposes of NI 43-101 and has reviewed and approved the technical information in this Form 10-Q.
Recent Developments
The Transaction
Pursuant to a share purchase agreement dated February 7, 2019, the Company agreed to sell 100% of the shares of its subsidiary Golden Queen Mining Holdings Inc. (the “Transaction”), which currently owns 50% of the outstanding units of Golden Queen Mining, LLC, to a group of purchasers including Thomas M. Clay and certain members of the Clay family and associated entities (collectively, the “Purchasers”). Golden Queen Mining, LLC owns and operates the Soledad Mountain Project located in Kern County, California.
The consideration from the Purchasers is comprised of (i) US$4.25 million in cash; (ii) the extinguishment of all amounts owing to the Purchasers by the Company under a loan agreement (US$27.0 million as of March 31, 2019); and (iii) the cancellation of all of the Purchasers’ ownership interest in the Company (consisting of 177,701,229 Shares, 457,500 options and 18,000,000 share purchase warrants). In addition, the Purchasers may pay a contingent payment to the Company if the Soledad Mountain Project is subsequently sold or transferred to a third party in certain circumstances.
The consideration offered by the Purchasers totals approximately US$37.2 million (excluding the contingent payment), based on the volume-weighted average price of the Company’s Shares on the OTCQX Best Market for the 20 trading days ended February 7, 2019, and including the principal and accrued interest payable to the Purchasers pursuant to the loans to be extinguished.
The Company is currently unable to repay the interest and principal payments due on the Clay Group Loan, which will be extinguished upon completion of the proposed Transaction. If the shareholders do not approve the Transaction, then the Clay Group Loan principal and accrued interest will be due immediately. Under this scenario, should the Company be unable to negotiate an extension to the Clay Group Loan, the Company will have no alternative but to pursue a reorganization or, at worst, bankruptcy, where the likely outcome for shareholders is the total loss of equity value.
Golden Queen Mining Co. Ltd. has been looking for alternatives to refinance and/or reschedule its debt without success and now faces a significant insolvency risk. The proposed transaction has many benefits, including the elimination of this risk. Proxy Advisors, Glass Lewis and Institutional Shareholder Services have both recommended shareholders vote for the transaction.
On May 13, 2019, the Company will hold an Annual General and Special Meeting of Shareholders to vote on the Transaction. Refer to the proxy statement and management information circular dated April 10, 2019 for additional information.
The Soledad Mountain Mine
Overview
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 currently owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”), the operator of the Mine. The remaining 50% is owned by Gauss LLC (“Gauss”). The Mine is located just outside the town of Mojave in southern California and utilizes conventional open pit mining methods and cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore. The Mine also produces small quantities of aggregate.
Highlights: ThirdFirst Quarter Highlights
| Total of |
Plant processed a total of |
Project Update
In the thirdfirst quarter of 2019, the Company continued stripping the East Pit phase 2. Total material mined was up slightly from the previous quarter, while processed ore and gold production were at similar levels. Since the first quarter of 2018, almost all of the Company continued to developMine’s production was sourced from the East Pit. It is anticipated that the transition toMining results from the East Pit will provide the majority of ore productionhave shown positive reconciliation for at least the next two years where higher ore tonnageboth tons and grade and lower waste tons are expected. The plan is to increasewith the delivery of ounces to the heap leach pad by selectively mining higher grade tons as much as practical.mine plan. Operations during the thirdfirst quarter of 2018 show continued improvement2019 showed stabilization in gold ounces loaded on the pad. As a result ofpad after the drill program completed during first quarter of the year, a new life of mine plan is currently being prepared.
During the third quarter of 2018, Soledad Mountain recorded a mined gold grade of 0.026 ounces per ton, the highest quarterly result since the beginning of mine operations. It is anticipated that higher grade ore mined and processed during the third quarter of 2018 will benefit gold productiondecline in the fourth quarter of 2018 (Figure #1). The peak production shown for the third quarter 2018 was the result of higher productivity in the crushing/stacking process and monthly average grade as high as 0.028 oz/ton.
Mechanical availability remained below plan in the first quarter of 2019. Production2019, although downtime included time required for the installation of a larger secondary crusher and two major conveyer belts. The monthly tonnage on pad progressed during the quarter, but lower grade mitigated the total recoverable ounces on leach pad.
Figure #1:
Leaching performance resulted in total apparent gold recovery to March 31, 2019 of 67.4%. The quarterly reduction in apparent gold recovery during the thirdfirst quarter of 2019 was 12,943 ouncescaused in part by limits on the amount of gold and 121,843 ounces of silver. The improved result compared to preceding quarters was driven by the higher-grade oreleach solution that can be placed on the leach pad, since the beginningas a result of the year.
Through the first 13 benches mined in thepad geometry. Management has designed a potential solution that will be implemented when all permits are obtained. In addition, East Pit ore production has encountered almost 35% more gold ouncesexhibited slower leach dynamics than indicated inpreviously processed ore. The final recovery is expected to remain unchanged, although a longer leach time will be required.
During the quarter, Management prepared a new draft of the life of mine plan based onplan. While it has the geological model. The strip ratio inpotential to extend mine life, the East Pitcost structure has been near expectationreset at a higher level. The Company is considering applying for an addendum to the major permit to allow more flexibility for gold and there has been an increase in waste stripping at the top of the mountain during the quarter to facilitate oresilver mining in 2019 and 2020. This advanced stripping negatively impacts current operating costs.
For the third quarter, ore mining rate has been roughly matched to pad-loading production (little stockpile movement). The amount of tons mined increased due to increased stripping in the East Pit phase 2. During the period, there was significant unplanned downtime associated with the jaw and secondary crushers. In addition, the maintenance crew replaced the rolls on the HPGR during the third quarter, a year later than forecast. Merrill-Crowe plant performance improved greatly in the third Quarter. The recovery of gold from solution averaged over 90% in the quarter from the low 80s in previous quarters. Better clarifier performance as well as a change in the procedure for restarting filter presses after cleaning were responsible for the improvement.
Column testing of monthly sample composites show that leaching is generally in line with the feasibility study predictions. Actual leach results from the heap show good recovery that ties well with the projected recovery curves in the feasibility study for ultimate gold recovery. However, East Pit ore leaching exhibits slightly slower leach kinetics than the Northwest/Main Pit phase 1 ore. In addition, recently stacked ore has not been leached for a full cycle yet. It is expected that full-cycle leaching will produce results close to feasibility study ultimate recovery. Currently, less than half the pad is under leach due to the stacking configuration and this significantly delays the recovery of gold and silver from the latter parts of the leach cycle.
The Company has initiated the process of permitting additional infrastructure for ongoingaggregate 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 process is ongoing and it is anticipated to take approximately one to two years.on Soledad.
For the three months ended September 30, 2018,March 31, 2019, the Company recorded aggregate sales of $3.6. The Company was added to the California AB 3098 list last year which allows the Company to sell its aggregate to state and municipal agencies.$9K. The Company will not include the sale of aggregate in cash flow projections until such time as a long-term contract for the sale of products has been secured.
There are currently a totalwere 242 employees on site at the end of 218 persons employed on site.the first quarter 2019.
Results of Operations
The following are the results of operations for the three and nine months ended September 30, 2018March 31, 2019 and 2017:2018:
| Three months ended | Nine months ended | |||||||||||||||||
| 30-Sep-18 | 30-Sep-17 | 30-Sep-18 | 30-Sep-17 | |||||||||||||||
| Mining - Key Metrics | ||||||||||||||||||
| Ore mined | k ton | 916 | 928 | 3,524 | 2,790 | |||||||||||||
ore mined | ||||||||||||||||||
| Waste mined: ore mined ratio | ratio | 4.3:1 | 4.3:1 | 2.6:1 | 3.9:1 | |||||||||||||
| Gold grade placed | oz/ton | 0.025 | 0.013 | 0.021 | 0.016 | |||||||||||||
| Silver grade placed | oz/ton | 0.399 | 0.180 | 0.355 | 0.203 | |||||||||||||
| Gold sold | oz | 12,798 | 12,255 | 29,219 | 36,068 | |||||||||||||
| Silver sold | oz | 100,408 | 47,977 | 250,147 | 163,856 | |||||||||||||
| Apparent cumulative recovery - gold(1) | % | 67.1 | % | 73.0 | % | 67.1 | % | 73.0 | % | |||||||||
| Apparent cumulative recovery - silver(1) | % | 28.5 | % | 25.8 | % | 28.5 | % | 25.8 | % | |||||||||
| Financial(1) | ||||||||||||||||||
| Revenue | $ | 16,855 | 16,496 | 40,925 | 48,182 | |||||||||||||
| Cost of sales, excluding depreciation and depletion (or Direct mining costs) | $ | 14,469 | 15,404 | 35,615 | 40,333 | |||||||||||||
| Depreciation and depletion | $ | 3,615 | 2,931 | 9,955 | 8,429 | |||||||||||||
| Loss from mine operations | $ | (1,229 | ) | (1,839 | ) | (4,645 | ) | (580 | ) | |||||||||
| General and administrative expenses | $ | (839 | ) | (1,171 | ) | (2,972 | ) | (3,297 | ) | |||||||||
| Total other income (expenses) | $ | (1,289 | ) | (214 | ) | (4,199 | ) | (970 | ) | |||||||||
| Net and comprehensive loss | $ | (3,357 | ) | (3,224 | ) | (11,816 | ) | (4,847 | ) | |||||||||
| Net and comprehensive income (loss) attributable to Golden Queen Mining Co Ltd. | $ | (2,403 | ) | (1,889 | ) | (8,452 | ) | (3,352 | ) | |||||||||
| Average realized gold price(1) | $/oz sold | 1,201 | 1,280 | 1,264 | 1,257 | |||||||||||||
| Average realized silver price(1) | $/oz sold | 14.77 | 16.89 | 15.90 | 17.23 | |||||||||||||
| Total cash costs - net of by-product credits(1)(2) | $/Au oz produced | 1,047 | 1,177 | 1,503 | 1,074 | |||||||||||||
| All-in sustaining costs - net of by-product credits(1) | $/Au oz produced | 1,086 | 1,502 | 1,692 | 1,517 | |||||||||||||
| Total cash costs(3) | $/t placed | 19.47 | 16.99 | 18.02 | 15.40 | |||||||||||||
| Off-site costs(1) | $/t placed | 0.53 | 0.78 | 0.59 | 0.77 | |||||||||||||
| Three months ended: | ||||||||||
| March 31, | March 31, | |||||||||
| 2019 | 2018 | |||||||||
| Mining - Key Metrics | ||||||||||
| Ore mined | k ton | 989 | 1,135 | |||||||
| Waste mined: ore mined ratio | ore mined ratio | 4.4:1 | 2.3:1 | |||||||
| Gold grade placed | oz/ton | 0.022 | 0.019 | |||||||
| Silver grade placed | oz/ton | 0.365 | 0.313 | |||||||
| Gold sold | oz | 11,919 | 6,529 | |||||||
| Silver sold | oz | 92,668 | 53,612 | |||||||
| Apparent cumulative recovery - gold(1) | % | 67.4 | % | 71.5 | % | |||||
| Apparent cumulative recovery - silver(1) | % | 29.3 | % | 27.1 | % | |||||
| Financial(1) | ||||||||||
| Revenue | $ | 16,979 | 9,585 | |||||||
| Income (loss) from mine operations | $ | 2,077 | (6,449 | ) | ||||||
| General and administrative expenses | $ | (1,832 | ) | (1,254 | ) | |||||
| Total other expenses | $ | (2,497 | ) | (1,360 | ) | |||||
| Net and comprehensive loss | $ | (2,252 | ) | (9,063 | ) | |||||
| Net and comprehensive loss attributable to GQM Ltd. | $ | (2,300 | ) | (5,417 | ) | |||||
| Average realized gold price(1) | $/oz sold | 1,302 | 1,330 | |||||||
| Average realized silver price(1) | $/oz sold | 15.61 | 16.70 | |||||||
| Total cash costs - net of by-product credits(1) | $/Au oz produced | 985 | 1,954 | |||||||
| All-in sustaining costs - net of by-product credits(1) | $/Au oz produced | 1,226 | 2,406 | |||||||
| Total cash costs(1) | $/t placed | 21.55 | 18.06 | |||||||
| Off-site costs(1) | $/t placed | 0.63 | 0.61 | |||||||
| (1) |
Financial Results
For the three and nine months ended September 30, 2018,March 31, 2019, the Company generated revenues from operations of $16,855$16,979 from the sale of 12,79811,919 ounces of gold and 100,40892,668 ounces of silver and $40,925compared to revenues of $9,585 from the sale of 29,2196,529 ounces of gold and 250,14753,612 ounces of silver respectively. In comparison, forduring the comparable period in 2018, an increase in revenue of $7,394.
The increase in revenue in the first quarter of 2019 compared to the same periods of 2017 the Company generated revenues from operations of $16,496 from the sale of 12,255 ounces of gold and 47,977 ounces of silver and $48,182 from the sale of 36,068 ounces of gold and 163,586 ounces of silver. The decreasequarter in revenue was caused2018 is explained by the lower gold price and, forpoor performance in the nine months, lower ounces sold.
first quarter of 2018; as the mine was slowly pulling out of a period of very low ore grade placed on the leach pad.
The costs, excluding depreciation and depletion, applicable to sales incurred during the three and nine months ended September 30, 2018March 31, 2019 were $14,469 and $35,615$12.2 million (three and nine months ended September 30, 2017March 31, 2018 - $15,404 and $40,333), respectively.$13.0 million). The cost of sales, excluding depreciation and depletion, in the current period decreased in comparisonquarter were relatively consistent with the comparable prior periodquarter. The unit costs per ton placed has increased by 19.3% over the comparable quarter due mainly to decreased revenues offset by increasedthe higher stripping in preparation for East Pit phase 2. Costs of sales include mining, processing, maintenance and site support costs. Also, included in the costs of sales are refining, transportation costs, royalties and property taxes.ratio.
Depreciation and depletion expenses during the three and nine months ended September 30, 2018March 31, 2019 were $3,615 and $9,955 (three and nine months ended September 30, 2017 – $2,931 and $8,429), respectively. The increase$2,566 compared to $2,976 for the same period in 2018, a decrease of $410. The decrease in 2019 compared to 20172018 was mainly due to the addition of depreciable fixed assets of $19,409 in the thirddepreciation and fourth quarters of 2017 and the addition of depreciable fixed assets of $6,088 in the first three quarters of 2018. These new depreciable fixed assets consist primarily of mobile mining equipment.depletion being allocated to stockpile inventory.
General and administrative expenses for the three and nine months ended September 30, 2018March 31, 2019 were $839 and $2,972 (three and nine$1,832 compared to $1,254 for the three months ended September 30, 2017 - $1,171 and $3,297), respectively.March 31, 2018, an increase of $578. The decreaseincrease in 20182019 compared to 20172018 was mainly a result of lower legal and professional fees,transaction costs of $466 relating to a proposed transaction as well as an increase in salaries and benefits offset by higher insurance and regulatory fees. General and administrative expenses are being reduceddirectors’ fees from $503 in an effort2018 to lower costs and improve liquidity.$799 in 2019 as a result of increased compensation to key management.
For the three and nine months ended September 30, 2018,March 31, 2019, the Company incurred finance expenses of $1,409 and $4,383$2,420 compared to $1,295 and $3,592$1,533 for the three and nine months ended September 30, 2017.March 31, 2018, an increase of $887. The increase in finance expenses was mainly due to an increasethe amortization of 2% in thedeferred financing fees relating to LLC warrants and interest rateexpense on the Clay Loan resulting in additional interest payable and increased accretion on the Clay Loan.LLC line of credit.
For the three and nine months ended September 30, 2018,March 31, 2019, the Company recorded gains of $136 and $204a gain on derivative instruments of $150 compared to gains of $1,139 and $3,033a loss on derivative instruments of $138 for the three and nine months ended September 30, 2017, respectively.March 31, 2018. The gain for the nine months ended September 30, 2018in 2019 was smaller due to insignificant downward movement ofa decrease in the Company’s share price comparedand remaining life of derivatives whereas the loss in 2018 was due to an increase in the same period of 2017.Company’s share price.
Summary of Quarterly Results
Results for the eight most recent quarters are set out in the table below:
| Results for the quarter ended: | ||||||||||||||||
| 30-Sep-18 | 30-Jun-18 | 31-Mar-18 | 31-Dec-17 | |||||||||||||
| Revenue | $ | 16,855 | $ | 14,485 | $ | 9,585 | $ | 13,939 | ||||||||
| Net and comprehensive income (loss) | $ | (3,357 | ) | $ | 604 | $ | (9,063 | ) | $ | (1,327 | ) | |||||
| Net and comprehensive loss attributable to GQM Ltd. | $ | (2,403 | ) | $ | (632 | ) | $ | (5,417 | ) | (2,188 | ) | |||||
| Basic net loss per share | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||
| Diluted net loss per share | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.02 | ) | ||||
| Results for the quarter ended: | ||||||||||||||||
| 31-Mar-19 | 31-Dec-18 | 30-Sep-18 | 30-Jun-18 | |||||||||||||
| Revenue | $ | 16,979 | $ | 17,478 | $ | 16,855 | $ | 14,485 | ||||||||
| Net and comprehensive income (loss) | $ | (2,252 | ) | $ | 4,937 | $ | (3,357 | ) | $ | 604 | ||||||
| Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (2,300 | ) | $ | 1,393 | $ | (2,403 | ) | (632 | ) | ||||||
| Basic net income (loss) per share | $ | (0.01 | ) | $ | 0.01 | $ | (0.01 | ) | $ | (0.00 | ) | |||||
| Diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.01 | $ | (0.01 | ) | $ | (0.00 | ) | |||||
| Results for the quarter ended: | ||||||||||||||||
| 31-Mar-18 | 31-Dec-17 | 30-Sep-17 | 30-Jun-17 | |||||||||||||
| Revenue | $ | 9,585 | $ | 13,939 | $ | 16,496 | $ | 16,882 | ||||||||
| Net and comprehensive income (loss) | $ | (9,063 | ) | $ | (1,327 | ) | $ | (3,224 | ) | $ | 1,192 | |||||
| Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (5,417 | ) | $ | (2,188 | ) | (1,889 | ) | 962 | |||||||
| Basic net income (loss) per share | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.01 | |||||
| Diluted net income (loss) per share | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.01 | |||||
| Results for the quarter ended: | ||||||||||||||||
| 30-Sep-17 | 30-Jun-17 | 31-Mar-17 | 31-Dec-16 | |||||||||||||
| Revenue | $ | 16,496 | $ | 16,882 | $ | 14,804 | $ | 10,278 | ||||||||
| Net and comprehensive income (loss) | $ | (3,224 | ) | $ | 1,192 | $ | (2,815 | ) | $ | (434 | ) | |||||
| Net and comprehensive income (loss) attributable to GQM Ltd. | $ | (1,889 | ) | $ | 962 | (2,425 | ) | 868 | ||||||||
| Basic net income (loss) per share | $ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | |||||
| Diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | $ | (0.01 | ) | |||||
During the three months ended March 31, 2019, net and comprehensive loss was $2,252 mainly as a result of G&A and finance expense of $4,252 which was offset by income from mine operations of $2,077.
During the three months ended December 31, 2018, net and comprehensive income of $4,937 was mainly due to a reclassifying depreciation and depletion from the cost of sales to inventory as the inventory stock piles were increasing throughout the year.
During the three months ended September 30, 2018, net and comprehensive loss of $3,357 was mainly due to the loss generated from mine operations of $1,229. Mine operations improvements and higher grade were offset by additional cost for East Pit phase 2 stripping, equipment overhauls and the lower gold price.
During the three months ended June 30, 2018, net and comprehensive income was $602$604 mainly as a result of income generated from mine operations of $2,112.$2,991 and inventory reallocation into stockpile inventory.
During the three months ended March 31, 2018, net and comprehensive loss was $9,063 mainly as a result of loss from mine operations of $6,449 due to higher direct mining costs as a result of developing the East Pit and lower revenues due to lower gold production as a result of fewer available gold ounces on the leach pad.
Although the primary driver of quarterly results above is the performance of the mine, significant fluctuations in net (loss) income between periods are the fluctuations in the Company’s derivative liabilities from warrants and interest expense also impacted results. The Company’s derivative liabilities are a function of the Company’s stock price as compared to the instruments’ strike price and the exchange rate between the Canadian dollar and the US dollar. As the stock price rises, the derivative liabilities increase resulting in the Company recognizing losses. When the stock price decreases, the Company recognizes gains.
In addition to the fluctuations in derivative liabilities described above, results for the second half of 2017 were impacted by the lower gold produced due to significant reduction in ore grade in Nord-West Pit and Main Pit Ph-1. Although the operations moved to East Pit in the middle of November 2017, higher cost of production was experienced during this period. Finally, The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017, which significantly changed U.S. income tax law, including a reduction of the Federal corporate income tax rate from 35% to 21%. The $4,725 income tax recovery was recognized in fourth quarter of 2017.
In general, the results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken, whether or not the Company incurs gains or losses on foreign exchange or grants stock options, and the movements in its derivative liability.
Reclamation Financial Assurance and Asset Retirement Obligation
Reclamation Financial Assurance
GQM LLCThe Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved.
This estimate, once approved by state and county authorities, forms the basis of reclamation financial assurance. The reclamation assurance provided as at September 30, 2018March 31, 2019 was $1,749 (December 31, 20172018– $1,465)$1,749).
GQM LLCThe 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 pads, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate as at September 30, 2018 wasMarch 31, 2019 is $2,450 (December 31, 20172018– $1,869)$2,450).
In addition to the above, GQM LLCthe Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Project’s waste management units as required by the Regional Board. The reclamation financial assurance estimate as at September 30, 2018March 31, 2019 is $278$320 (December 31, 20172018– $278).
As at March 31, 2019 GQM LLC had entered into $4,921 (2017$5,507 (December 31, 2018 –$3,612) $4,921) in surety bond agreements in order to release its reclamation deposits and a bond for power of $444.$443 (December 31, 2018 - $443). GQM LLC pays a yearly premium of $101 (2017$100 (2018 – $90) $100). Golden Queen Ltd. has provided a corporate guarantee on the surety bonds. In addition, a certificate of deposit for $1,000 was posted as collateral to reclamation bonding in 2018.
Asset Retirement Obligation
The total asset retirement obligation as at September 30, 2018,March 31, 2019, was $2,455$2,966 (December 31, 20172018– $1,838)$2,497).
The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and remediate its property based on its activities to date. As at September 30, 2018,March 31, 2019, the Company estimates the cash outflow related to these reclamation activities will be incurred in 2028.2029. 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 8.34%7.9% and an inflation rate of 2.41%2.4%.
The following is a summary of asset retirement obligations:
| March 31, 2019 | December 31, 2018 | |||||||
| Balance, beginning of the period | $ | 2,497 | $ | 1,838 | ||||
| Accretion | 52 | 167 | ||||||
| Changes in cash flow estimates | 417 | 492 | ||||||
| Balance, end of the period | $ | 2,966 | $ | 2,497 | ||||
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Transactions with Related Parties
Except as noted elsewhere in this Form 10-Q, related party transactions are disclosed as follows:
| (i) | Compensation of Key Management Personnel, Transactions with Related Parties and Related Party Balances |
For the three and nine months ended September 30, 2018,March 31, 2019, the Company recognized $125 and $424 (for the three and nine months ended September 30, 2017$361 (2018– $$163 and $490)195) salaries and fees for Officers and Directors.
As at September 30, 2018, $nil (December 31, 2017– $38) was included in prepaid expenses and other current assets for closing fees paid to related parties.
As at September 30, 2018, $nil (December 31, 2017–$463) for amended fees and accrued interest payable to related parties was included in accounts payable and accrued liabilities for accrued interest payable to related parties and salaries and fees payable to Officers and Directors.
| (ii) | Note Payable |
On November 18, 2016, the
As at December 31, 2018, The Company entered intohad a loan with the Clay Group for $31,000with a principal balance of $25,625 (the “November 2016“Clay Group Loan”),. The Clay Group Loan had principal and accrued interest due as follows: $1.7 million of principal and accrued interest on January 1, 2019; $3.9 million of principal and accrued interest on April 1, 2019; and the balance due on May 21, 2019 and an annual interest rate of 8%, payable quarterly. 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. As per an anti-dilution provision included in the November 2016 Loan agreement, the exercise price of the November 2016 Warrants was revised to $0.6650 on the rights offering completion date. The expiry date of November 18, 2021 of the November 2016 Warrants remains unchanged.
2019. On November 10, 2017, the Company and the Clay Group entered into a letter agreement (the “Letter Agreement”) pursuant to which they agreed to amend the November 2016 Loan by reducing the 2018 quarterly and 2019 Q1 principal payments from $2,500 to $1,000, adding the reduction of such payments pro-rata to the remaining 2019 payments, and increasing the annual interest rate from 8% to 10% effective January 1, 2018 (the “November 2017 Loan”). On February 22,December 27, 2018, the Company and the Clay Group entered into definitive agreementsagreed to amend the termsClay Group Loan, extending the due date of $1.7 million of principal as well as interest from the original due date of January 1, 2019 to February 1, 2019. An extension fee of $125 was added to the principal amount owing. On February 1, 2019, the due date was extended to February 8, 2019 for an extension fee of $75 that was added to the principal amount owing. On February 8, 2019, the due dates of principal and interest on the Clay Group Loan were extended until completion of the November 2016 Loanproposed transaction between the Clay Group and the registration rights agreement in accordance with the Letter Agreement. This amendment wasCompany. The amendments were accounted for as a debt modification.modifications.
The following table summarizes activity on the notes payable:
| September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Balance, beginning of the period | $ | 30,099 | $ | 26,347 | $ | 24,690 | $ | 30,099 | ||||||||
| Interest payable transferred to principal balance | - | 2,212 | ||||||||||||||
| Accretion of discount on loans | 1,512 | 1,940 | 526 | 2,040 | ||||||||||||
| Capitalized financing and legal fees | - | (400 | ) | |||||||||||||
| Accretion of capitalized financing and legal fees | 196 | - | ||||||||||||||
| Capitalized financing, extension and legal fees | (75 | ) | (125 | ) | ||||||||||||
| Extension fee added to principal | 75 | 125 | ||||||||||||||
| Accretion of capitalized financing, extension and legal fees | 265 | 262 | ||||||||||||||
| Repayment of loans and interest | (6,711 | ) | - | - | (7,711 | ) | ||||||||||
| Balance, end of the period | $ | 25,096 | $ | 30,099 | ||||||||||||
| Balance, end of the year | $ | 25,481 | $ | 24,690 | ||||||||||||
| Current portion | $ | 25,096 | $ | 7,712 | $ | 25,481 | $ | 24,690 | ||||||||
| Non-current portion | $ | - | $ | 22,387 | $ | - | $ | - | ||||||||
25
| (iii) | Amortization of Discounts and Interest Expense |
The following table summarizes the amortization of discounts and interest on loan:
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Accretion of the Nov 2017 Loan discount | $ | 518 | $ | 510 | $ | 1,512 | $ | 1,250 | ||||||||
| Accretion of capitalized financing and legal fees | 66 | - | 196 | - | ||||||||||||
| Interest expense related to the Nov 2017 Loan | 678 | 642 | 2,087 | 1,914 | ||||||||||||
| Closing and commitment fees related to the Credit Facility | - | - | 40 | - | ||||||||||||
| Interest expense related to Komatsu financial loans(1) | 147 | 143 | 548 | 428 | ||||||||||||
| Accretion of discount and interest on loan | $ | 1,409 | $ | 1,295 | $ | 4,383 | $ | 3,592 | ||||||||
(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.
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||
| 2019 | 2018 | |||||||
| Accretion of the Clay Group Loan discount | $ | 526 | $ | 490 | ||||
| Accretion of capitalized financing and legal fees | 265 | 65 | ||||||
| Amortization of deferred financing fees | 655 | - | ||||||
| Interest expense related to the Clay Group Loan | 658 | 713 | ||||||
| Interest expense related to the 2018 Credit Facility | 180 | - | ||||||
| Closing and commitment fees related to credit facilities | 27 | 30 | ||||||
| Interest expense related to Komatsu financial loans(1) | 109 | 235 | ||||||
| Accretion of discount and interest on loan | $ | 2,420 | $ | 1,533 | ||||
| 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. |
| (iv) | Joint Venture |
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 interest will (ultimately) be terminated through one of three 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 sold.
The net assets of GQM LLC as at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
| September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Assets, GQM LLC | $ | 158,087 | $ | 149,095 | $ | 176,635 | $ | 171,334 | ||||||||
| Liabilities, GQM LLC | (23,746 | ) | (28,024 | ) | (24,782 | ) | (29,904 | ) | ||||||||
| Net assets, GQM LLC | $ | 134,341 | $ | 121,071 | $ | 151,853 | $ | 141,430 | ||||||||
Included in the assets above, is $3,980$4,713 (December 31, 20172018– $2,606)$4,149) in cash held by GQM LLC which 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 $460$349 for twoa mining drill loansloan and $4,921$5,507 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.
| Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net and comprehensive income (loss) in GQM LLC | $ | (1,909 | ) | $ | (2,674 | ) | $ | (6,728 | ) | $ | (2,991 | ) | ||||
| Non-controlling interest percentage | 50 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Net and comprehensive income (loss) attributable to non-controlling interest | $ | (954 | ) | $ | (1,335 | ) | $ | (3,364 | ) | $ | (1,495 | ) | ||||
| Net and comprehensive income (loss) attributable to permanent non-controlling interest | $ | (572 | ) | $ | (801 | ) | $ | (2,018 | ) | $ | (897 | ) | ||||
| Net and comprehensive income (loss) attributable to temporary non-controlling interest | $ | (382 | ) | $ | (534 | ) | $ | (1,346 | ) | $ | (598 | ) | ||||
| Permanent Non- Controlling Interest | Temporary Non- Controlling Interest | |||||||
| Carrying value of non-controlling interest, December 31, 2017 | $ | 36,321 | $ | 24,214 | ||||
| Capital contribution | 10,000 | - | ||||||
| Net and comprehensive loss for the period | (2,018 | ) | (1,346 | ) | ||||
| Carrying value of non-controlling interest, September 30, 2018 | $ | 44,303 | $ | 22,868 | ||||
| (v) | Credit |
On May 23, 2017,October 12, 2018, GQM LLC entered into a $5,000 one-year revolving creditan agreement (the “Credit Facility”) in whichwith Gauss Holdings LLC and Auvergne LLC agreed to extend(the “Lenders”) whereby the Lenders are providing GQM LLC a revolving credit loan facility (the “2018 Credit Facility”) in the formamount of loans to GQM LLC.$20 million. The 20172018 Credit Facility commenced on July 1, 2017, borebears interest at a rate of 12%8% per annum and wasin addition, is subject to a commitment fee of 1% per annum. Forannum on available loan balance. As per terms of the three and nine months ended September 30, 2018,agreement, GQM LLC paidaccrued commitment fees of $0 and $40, respectively (2017 – $20 and $40, respectively). The 2017 Credit Facility expired on May 22,$45 for the year ended December 31, 2018. The balance of the Credit Facility was $3,000 as at December 31, 2017, and the balance of $5,000 was repaid during the first quarter of 2018.
On October 12, 2018, the Company’s wholly-owned subsidiary, Golden Queen Mining Holdings, Inc., as a pledgor (“GQM Holdings” or “Borrower”), entered into a revolving credit agreement by and among GQM Holdings, Golden Queen Mining Company, LLC, as borrower, Gauss LLC, as a pledgor (“Gauss” and together with GQM Holdings, the “Pledgors”), Gauss Holdings LLC (“Gauss Holdings”) and Auvergne, LLC (“Auvergne” and together with Gauss Holdings, the “Lenders”), dated October 12, 2018 (the “Credit Agreement”).
Under the terms of the Credit Agreement, the Lenders have agreed to loan GQM LLC up to $20,000,000 (the “Commitment”) under a revolving credit facility (the “Facility”), which matures on March 31, 2020. As at March 31, 2019, GQM LLC may pre-pay all or parthad drawn $10,000 (December 31, 2018 - $5,000) from the 2018 Credit Facility and accrued interest of the Facility at any time prior$327 (December 31, 2018 - $121). Subsequent to the maturity date, and amounts prepaid will not be subject to penalty. Annual interest rate on drawn amounts under the Facility is 8% (plusperiod end GQM LLC drew an additional 2% upon an Event of Default (as defined in$5,000 from the 2018 Credit Agreement)), and GQM LLC agreed to pay the Lenders a commitment fee (the “Commitment Fee”) computed on a daily basis, equal to one percent (1%) per annum of the excess of (i) the Commitment, over (ii) the average daily amount of outstanding Facility balance for each fiscal quarter of the Borrower (increasing to 3% upon an Event of Default).Facility.
UnderIn connection with the terms of2018 Credit Facility, the Credit Agreement, GQM LLCLenders were issued 21,486 warrants (the “GQM LLC Warrants”), with each warrant entitling the holder to purchase a unit of GQM LLC for a period of five (5) years at an exercise price of $475.384 per unit. The warrants are classified as a derivative liability due to a clause in the warrant agreement that offers the warrant holders price protection. The fair value of GQM LLC Warrants at the issuance date of $3,314 is amortized to the statement of loss over the expected life of the warrants. During the three months ended March 31, 2019, the Company recorded amortization expense of $655.
The GQM LLC Warrants represent a fully-diluted 7.5% interest in the equity of GQM LLC. If the GQM LLC warrants are exercised, the Registrant’sCompany’s interest in GQM LLC will be diluted to 46.25%. The Company’s current interest in GQM LLC is 50%.
The 2018 Credit Facility is secured by a pledge of the Company’s equity interest in GQM LLC.
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, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities: | ||||||||||||||||
| Share purchase warrants – Related Party | $ | 235 | $ | - | $ | 235 | $ | - | ||||||||
| Share purchase warrants | 1 | - | 1 | - | ||||||||||||
| $ | 236 | $ | - | $ | 236 | $ | - | |||||||||
| December 31, 2017 | March 31, 2019 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Share purchase warrants – Related Party | $ | 439 | $ | - | $ | 439 | $ | - | $ | 63 | $ | - | $ | 63 | $ | - | ||||||||||||||||
| Share purchase warrants | 2 | - | 2 | - | ||||||||||||||||||||||||||||
| GQM LLC Warrants – Related Party | 3,477 | - | 3,477 | - | ||||||||||||||||||||||||||||
| $ | 441 | $ | - | $ | 441 | $ | - | $ | 3,540 | $ | - | $ | 3,540 | $ | - | |||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Share purchase warrants – Related Party | $ | 76 | $ | - | $ | 76 | $ | - | ||||||||||||||||||||||||
| GQM LLC Warrants – Related Party | 3,314 | - | 3,314 | - | ||||||||||||||||||||||||||||
| $ | 3,390 | $ | - | $ | 3,390 | $ | - | |||||||||||||||||||||||||
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 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 at September 30, 2018:March 31, 2019:
| GQM LLC | GQM LLC 50% Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| 100% | (1) | (2) | (1) + (2) | |||||||||||||
| Cash | $ | 3,980 | $ | 1,990 | $ | 4,437 | $ | 6,427 | ||||||||
| Short Term Debt | $ | 7,534 | $ | 3,767 | $ | 25,096 | $ | 28,863 | ||||||||
| Long Term Debt | $ | 6,743 | $ | 3,372 | $ | 0 | $ | 3,372 | ||||||||
| Working Capital/(Deficit) | $ | 17,536 | $ | 8,768 | $ | (21,383 | ) | $ | (12,615 | ) | ||||||
GQM LLC | GQM LLC Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| 100% | (1) | (2) | (1) + (2) | |||||||||||||
| Cash and restricted cash | $ | 4,713 | $ | 2,357 | $ | 1,971 | $ | 4,328 | ||||||||
| Short Term Debt | $ | 5,708 | $ | 2,854 | $ | 26,791 | $ | 29,645 | ||||||||
| Long Term Debt | $ | 4,810 | $ | 2,405 | $ | - | $ | 2,405 | ||||||||
| Working Capital | $ | 19,785 | $ | 9,893 | $ | (25,126 | ) | $ | (15,233 | ) | ||||||
* includes GQM Holdings
The following table shows figures attributable to the Company only for the ninethree months ended September 30, 2018:March 31, 2019:
| GQM LLC | GQM LLC 50% Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| 100% | (1) | (2) | (1) + (2) | |||||||||||||
| Revenue | $ | 40,925 | $ | 20,463 | $ | - | $ | 20,463 | ||||||||
| Cost of sales including depreciation and depletion | $ | (45,258 | ) | $ | (22,629 | ) | $ | (312 | ) | $ | (22,941 | ) | ||||
| Accretion expense | $ | (126 | ) | $ | (63 | ) | $ | - | $ | (63 | ) | |||||
| G&A Expenses | $ | (1,738 | ) | $ | (869 | ) | $ | (1,122 | ) | $ | (1,991 | ) | ||||
| Share based payments | $ | - | $ | - | $ | (114 | ) | $ | (114 | ) | ||||||
| Decrease in fair value of derivative liability | $ | - | $ | - | $ | 204 | $ | 204 | ||||||||
| Finance Expense | $ | (588 | ) | $ | (294 | ) | $ | (3,795 | ) | $ | (4,089 | ) | ||||
| Interest Income | $ | 52 | $ | 26 | $ | 49 | $ | 75 | ||||||||
| Other | $ | 8 | $ | 4 | $ | - | $ | 4 | ||||||||
| Net Loss | $ | (6,725 | ) | $ | (3,362 | ) | $ | (5,090 | ) | $ | (8,452 | ) | ||||
| GQM LLC | GQM LLC 50% Attributable to GQM Ltd. | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. Attributable | |||||||||||||
| 100% | (1) | (2) | (1) + (2) | |||||||||||||
| Revenue | $ | 16,979 | $ | 8,490 | $ | - | $ | 8,490 | ||||||||
| Cost of sales including depreciation and depletion | $ | (14,742 | ) | $ | (7,371 | ) | $ | (108 | ) | $ | (7,479 | ) | ||||
| Accretion expense | $ | (52 | ) | $ | (26 | ) | $ | - | $ | (26 | ) | |||||
| G&A Expenses | $ | (1,022 | ) | $ | (511 | ) | $ | (784 | ) | $ | (1,295 | ) | ||||
| Share based payments | $ | - | $ | - | $ | (27 | ) | $ | (27 | ) | ||||||
| Decrease in fair value of derivative liability | $ | (163 | ) | $ | (82 | ) | $ | 13 | $ | (69 | ) | |||||
| Interest Expense | $ | (970 | ) | $ | (485 | ) | $ | (1,450 | ) | $ | (1,935 | ) | ||||
| Interest Income | $ | 66 | $ | 33 | $ | 8 | $ | 41 | ||||||||
| Net Loss | $ | 96 | $ | 48 | $ | (2,348 | ) | $ | (2,300 | ) | ||||||
* includes GQM Holdings
Liquidity and Capital Resources
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 has generated $130,239and therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in revenuesorder to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from operations since inceptionGQM LLC are made to the holders of its membership units at their sole discretion.
The Company was required to pay the following amounts to the Clay Group on the following dates: $1.7 million of interest and asprincipal on January 1, 2019, $3.9 million of interest and principal on April 1, 2019 and $21.7 million of interest and principal on May 21, 2019. On December 27, 2018, the Company and the Clay Group agreed to postpone the January 1, 2019 $1.7 million of interest and principal payment until February 1, 2019 for a restructuring fee of $125. On January 31, 2019, the Company and the Clay Group agreed to an additional extension to February 8, 2019 for an extension fee of $75. On February 9, 2019, the parties agreed to defer payments of principal and interest until completion of the proposed Transaction involving the sale of our 50% ownership in Soledad Mountain.
As at September 30, 2018,March 31, 2019, the Company had an accumulated deficit of $96,952 anda working capital deficit of $11,378.$15.3 million and during the three months ended March 31, 2019, the cash used in operating activities was $1.0 million. The Company is currently unable to repay the interest and principal payments due on the November 2017 Loan. The Company relies on 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 reviewed the 2019 budget and the draft Life of Mine Plan and the results for the three months ended March 31, 2019 and has determined it is unlikely it will receive sufficient distributions from GQM LLC to service its debt in early 2019. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, since the third quarter of 2018, the Company had pursued discussions with the Clay Group to restructure the reimbursement of the debt payments. The discussions terminated with the February 9, 2019 proposed Transaction.
See the “Recent Developments” section of this Form 10-Q for details of the proposed Transaction.
Cash from operating activities:
For the ninethree months ended September 30, 2018, $10,513March 31, 2019, $1,007 of cash was used in operating activities compared to $5,597$7,394 of cash generated fromused in operating activities for the ninethree months ended September 30, 2017.March 31, 2018. The increaseddecreased use of cash in 20182019 was primarily due to increased direct mining costs and reduced revenue arising from lower production in 20182019 compared to 2017.2018.
Cash used in investing activities:
For the ninethree months ended September 30, 2018, $2,585March 31, 2019, $2,031 of cash was used in investing activities compared to $9,566$2,071 of cash used in investing activities for the ninethree months ended September 30, 2017.March 31, 2018. The significant construction costs frommajor use of cash in 2019 was the 2017 period related constructionpurchase and installation of the second phase of the heap leach pad. Since the second phase of the heap leach pad was completed in September 2017, no significant costs were incurred in that regard in the nine months ended September 30, 2018.a replacement secondary cone crusher.
Cash from financing activities:
For the ninethree months ended September 30, 2018, $18,578March 31, 2019, $2,991 of cash was generated from financing activities compared to $4,649$24,758 of cash used ingenerated from financing activities for the ninethree months ended September 30, 2017.March 31, 2018. In the 2019 period, the company received $5,000 from a credit facility. In the 2018 period, the Company completed a rights offering raising gross proceeds of $25,036.
Working capital:
The following table shows working capital as at September 30, 2018:March 31, 2019:
GQM LLC | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. on a Consolidated Basis ** | ||||||||||
| Current assets | $ | 24,550 | $ | 4,615 | $ | 29,053 | ||||||
| Current liabilities | (7,014 | ) | (25,999 | ) | (40,431 | ) | ||||||
| Working capital/(deficit) | $ | 17,536 | $ | (21,383 | ) | $ | (11,378 | ) | ||||
GQM LLC 100% | GQM Ltd. on a Non- Consolidated Basis * | GQM Ltd. on a Consolidated Basis ** | ||||||||||
| Current assets | $ | 37,119 | $ | 2,071 | $ | 39,190 | ||||||
| Current liabilities | (27,333 | ) | (27,197 | ) | (54,530 | ) | ||||||
| Working capital | $ | 9,786 | $ | (25,126 | ) | $ | (15,340 | ) | ||||
| * | includes GQM Holdings |
| ** | includes GQM Holdings and GQM LLC |
Golden Queen and GQM Holdings
As at September 30, 2018,March 31, 2019, Golden Queen and GQM Holdings had current assets of $4,615$2,071 (December 31, 20172018 – $502)$2,693) and current liabilities of $25,999$27,197 (December 31, 20172018 – $9,194)$32,181) for a working capital deficit of $21,383$25,126 (December 31, 20172018 – working capital deficit of $8,692)$29,488). The increase in current liabilities is primarily the result of interest expense on the Clay Group Loan during the three months ended March 31, 2019.
GQM LLC
As at September 30, 2018,March 31, 2019, GQM LLC had current assets of $24,550$37,119 (December 31, 20172018 – $12,162)$28,591) and current liabilities of $7,014$27,333 (December 31, 20172018 – $16,572)$16,786) for working capital of $17,536$9,786 (December 31, 20172018 – working capital deficit of $4,410)$11,805). The increase in current liabilities is due to the $10,000 credit line due March 31, 2020 becoming a current liability.
Outstanding Share Data
The number of shares issued and outstanding and the fully diluted share position are set out in the table below:
| Item | No. of Shares | |||||||
| Shares issued and outstanding as at December 31, | 300,101,444 | |||||||
| Shares issued | - | |||||||
| Shares issued and outstanding as at | May 6, 2019 | 300,101,444 | Exercise Price | Expiry Date | ||||
| Shares to be issued on exercise of directors and employees stock options | 2,325,001 | $0.29 to $0.66 | From | |||||
| Shares to be issued on exercise of warrants | 24,317,700 | $ | From 06/08/20 to 11/18/21 | |||||
| Fully diluted | May 6, 2019 | 326,744,145 |
The Company has unlimited authorized share capital.capital
29
Non-US GAAP Financial Performance Measures
Non-US 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 US 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 revenues when compared with gold revenues, are immaterial and therefore are considered a by-product of the production of gold.
The table below shows a reconciliation of total cash costs per gold ounce and cash costs per gold ounce on a by-product basis:
| Three Months Ended | ||||||||||||||||
| September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||||
| Total cash costs | ||||||||||||||||
| Mining | $ | 9,311 | $ | 8,087 | $ | 7,376 | $ | 7,174 | ||||||||
| Processing | 5,940 | 4,707 | 4,488 | 4,346 | ||||||||||||
| Indirect mining cost | 1,553 | 2,029 | 1,972 | 2,308 | ||||||||||||
| Inventory changes and others | (2,335 | ) | (6,693 | ) | (820 | ) | 1,970 | |||||||||
| Cost of sales | 14,469 | 8,130 | 13,016 | 15,798 | ||||||||||||
| Site general and administrative | 576 | 416 | 732 | 897 | ||||||||||||
| Cash costs before by-product credits | 15,045 | 8,546 | 13,748 | 16,695 | ||||||||||||
| Divided by gold produced (oz) | 12,943 | 9,976 | 6,579 | 9,886 | ||||||||||||
| Cash costs per ounce of gold produced ($/oz) | 1,162 | 857 | 2,090 | 1,689 | ||||||||||||
| Less: By-product silver credits per ounce ($/oz) | (115 | ) | (160 | ) | (136 | ) | (123 | ) | ||||||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 1,047 | $ | 697 | $ | 1,954 | $ | 1,566 | ||||||||
| Ore placed (tons) | 930,776 | 943,148 | 806,450 | 837,779 | ||||||||||||
| Total Cash Costs ($/t placed) | 19.47 | 16.56 | 18.06 | 17.52 | ||||||||||||
| Crusher mechanical availability (%) | 67 | % | 73 | % | 65 | % | 69 | % | ||||||||
| Apparent cumulative recovery(1) - gold (%) | 67.1 | % | 69.1 | % | 71.5 | % | 75.5 | % | ||||||||
| Apparent cumulative recovery(1) - silver (%) | 28.5 | % | 27.7 | % | 27.1 | % | 27.4 | % | ||||||||
(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.
| Three months ended | ||||||||
| March 31, | March 31, | |||||||
| 2019 | 2018 | |||||||
| Total Cash Costs | ||||||||
| Mining | $ | 11,051 | $ | 7,376 | ||||
| Processing | 4,821 | 4,488 | ||||||
| Indirect mining cost | 1,525 | 1,972 | ||||||
| Inventory changes and others | (5,113 | ) | (820 | ) | ||||
| Direct mining costs | 12,284 | 13,016 | ||||||
| Site general and administrative expenses | 1,009 | 732 | ||||||
| Cash costs before by-product credits | 13,293 | 13,748 | ||||||
| Divided by gold produced (oz) | 12,032 | 6,579 | ||||||
| Cash costs per ounce of gold produced ($/oz) | 1,105 | 2,090 | ||||||
| Less: By-product silver credits per ounce ($/oz) | (120 | ) | (136 | ) | ||||
| Total cash cost per ounce of gold produced on a by-product basis ($/oz) | $ | 985 | $ | 1,954 | ||||
| Ore placed (tons) | 852,893 | 806,450 | ||||||
| Total cash costs ($/t placed) | 21.55 | 18.06 | ||||||
| Crusher mechanical availability (%) | 62 | % | 65 | % | ||||
| Apparent cumulative recovery(1) – gold | 67.4 | % | 71.5 | % | ||||
| Apparent cumulative recovery(1) - silver | 29.3 | % | 27.1 | % | ||||
| (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:
| Three Months Ended | ||||||||||||||||
| September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||||
| All-in sustaining costs | ||||||||||||||||
| Cash costs before by-product credits | $ | 15,045 | $ | 8,546 | $ | 13,748 | $ | 16,695 | ||||||||
| Silver by-product | (1,483 | ) | (1,598 | ) | (895 | ) | (1,221 | ) | ||||||||
| Total cash cost after by-product | 13,562 | 6,948 | 12,853 | 15,474 | ||||||||||||
| Corporate general and administrative expenses | 230 | 428 | 477 | 549 | ||||||||||||
| Share based payments | 33 | 35 | 45 | 68 | ||||||||||||
| Accretion expense | 42 | 42 | 42 | 32 | ||||||||||||
| Sustaining capital | 190 | 2,974 | 2,412 | 3,303 | ||||||||||||
| All-in sustaining costs | 14,057 | 10,427 | 15,829 | 19,426 | ||||||||||||
| Divided by gold produced (oz) | 12,943 | 9,976 | 6,579 | 9,886 | ||||||||||||
| All-in sustaining costs per gold ounce on a by-product basis | $ | 1,086 | $ | 1,045 | $ | 2,406 | $ | 1,965 | ||||||||
| Three months ended | ||||||||
| March 31, | March 31, | |||||||
| 2019 | 2018 | |||||||
| All-in sustaining costs | ||||||||
| Cash costs before by-product credits* | $ | 13,293 | $ | 13,748 | ||||
| Silver by-product | (1,447 | ) | (895 | ) | ||||
| Total cash cost after by-product | 11,846 | 12,853 | ||||||
| Corporate general and administrative expenses | 796 | 477 | ||||||
| Stock based compensation | 27 | 45 | ||||||
| Accretion expense | 52 | 42 | ||||||
| Sustaining capital | 2,032 | 2,412 | ||||||
| All-in sustaining costs | 14,753 | 15,829 | ||||||
| Divided by gold produced (oz) | 12,032 | 6,579 | ||||||
| All-in sustaining costs per gold ounce on a by-product basis | $ | 1,226 | $ | 2,406 | ||||
*The following table reconciles the above non-US GAAP measures to the most directly comparable US GAAP measures:
| Three months ended | ||||||||||||||||||||||||
| Three Months Ended | March 31, | March 31, | ||||||||||||||||||||||
| September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | 2019 | 2018 | |||||||||||||||||||
| Cost of goods sold | $ | 18,084 | $ | 11,494 | $ | 16,034 | $ | 19,450 | 14,902 | 16,034 | ||||||||||||||
| Less: depreciation and depletion | (3,615 | ) | (3,364 | ) | (2,976 | ) | (3,526 | ) | $ | (2,566 | ) | $ | (2,976 | ) | ||||||||||
| Less: accretion expense | (42 | ) | (42 | ) | (42 | ) | (126 | ) | (52 | ) | (42 | ) | ||||||||||||
| Direct mining costs | 14,427 | 8,088 | 13,016 | 15,798 | 12,284 | 13,016 | ||||||||||||||||||
| Add: site general and administrative expenses | 576 | 416 | 732 | 897 | 1,009 | 732 | ||||||||||||||||||
| Cash costs before by-product credits | $ | 15,003 | $ | 8,504 | $ | 13,748 | $ | 16,695 | $ | 13,293 | $ | 13,748 | ||||||||||||
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 the notes ofto its audited consolidated financial statements for the year ended December 31, 20172018 and unaudited condensed consolidated interim financial statements for the ninethree months ended September 30, 2018.March 31, 2019.
Adopted
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 was effective for annual and interim periods beginning January 1, 2019 and is applicable on a modified retrospective basis. The Company adopted the guidance effective January 1, 2019 and has applied the guidance on a modified retrospectively basis. There was an immaterial impact on the financial statements from adoption of this guidance.
Additional Information
Further information on Golden Queen Mining Co. Ltd. is available on the SEDAR websiteweb site atwww.sedar.com and on the Company’s web site atwww.goldenqueen.com.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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 Internal Control
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the quarter ended September 30, 2018March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than the Company has implemented a remediation plan and has addressed the deficienciesdeficiency previously noted in the areas of personnel andwith regards to inventory controls, and has engaged an external consultant to assist in the documentation and review of its internal controls.
Fraud Analysis
The Company is committed to preventing fraud and corruption and is developing an anti-fraud culture. To achieve this goal, the Company has committed to the following:
| 1. | Developing and maintaining effective controls to prevent fraud; |
| 2. | Ensuring that if fraud occurs a vigorous and prompt investigation takes place; |
| 3. | Taking appropriate disciplinary and legal actions; |
| 4. | Reviewing systems and procedures to prevent similar frauds; |
| 5. | Investigating whether there has been a failure in supervision and take appropriate disciplinary action if supervisory failures occurred; and |
| 6. | Recording and reporting all discovered cases of fraud. |
The following policies have been developed to support the Company’s goals:
| Insider Trading Policy |
| Managing Confidential Information Policy |
| Whistleblower Policy |
| Anti-corruption Policy |
All policies can be viewed in full on the Company’s website atwww.goldenqueen.com
For the ninethree months ended September 30, 2018March 31, 2019 and the year ended December 31, 2017,2018, there were no reported instances of fraud.
PartPART II – Other InformationOTHER INFORMATION
Item 1. Legal Proceedings
Fromtime to time, we are a party to routine litigation and proceedings that are considered part of the ordinary course of our business. We are not aware of any material current, pending, or threatened litigation with respectlitigation.
Item 1A. Risk Factors
Golden Queen and its future business, operations and financial condition are subject to various risks and uncertainties due to the Company.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 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
Not applicable.
Item 3. Defaults Upon Senior SecuritiesSecurities.
Not applicable.
Item 4. Mine Safety Disclosures
GQM LLC is the operator of the Soledad Mountain mine (the “Project”),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 were no reportable incidentswas one lost-time accident at GQM LLC during the three months ended September 30, 2018.March 31, 2019.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
33
| 31.2 | Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the US Securities Exchange Act of 1934 | Filed herewith | ||
| 32.1 | Section 1350 Certification of the Principal Executive Officer | Filed herewith | ||
| 32.2 | Section 1350 Certification of the Principal Financial Officer | Filed herewith | ||
| 95.1 | Mine Safety Disclosure | Filed herewith | ||
| 101 | Financial Statements from the Quarterly Report on Form 10-Q of the Company for the three | Filed herewith |
* Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted materials for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.
34
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: November 8, 2018May 7, 2019
| GOLDEN QUEEN MINING CO. LTD. | ||||
| (Registrant) | ||||
| By: | ||||
| Guy Le Bel | ||||
| Principal Executive and Financial Officer | ||||