Company Quick10K Filing
Quick10K
Golden Queen Mining
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-22 Enter Agreement, M&A, Regulation FD, Exhibits
8-K 2019-05-13 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-05-07 Earnings, Regulation FD, Exhibits
8-K 2019-05-02 Earnings, Regulation FD, Other Events, Exhibits
8-K 2019-04-11 Regulation FD, Other Events, Exhibits
8-K 2019-03-25 Earnings, Regulation FD, Exhibits
8-K 2019-02-08 Regulation FD, Exhibits
8-K 2019-02-07 Enter Agreement, Officers, Exhibits
8-K 2019-02-05 Regulation FD, Exhibits
8-K 2019-01-31 Regulation FD, Exhibits
8-K 2019-01-08 Regulation FD, Exhibits
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-10-12 Regulation FD, Exhibits
8-K 2018-10-12 Enter Agreement, Exhibits
8-K 2018-08-09 Earnings, Regulation FD, Exhibits
8-K 2018-06-11 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-05-17 Regulation FD, Exhibits
8-K 2018-05-10 Earnings, Regulation FD, Exhibits
8-K 2018-04-19 Regulation FD, Exhibits
8-K 2018-04-03 Regulation FD, Exhibits
8-K 2018-03-27 Earnings, Regulation FD, Exhibits
8-K 2018-02-22 Regulation FD, Exhibits
8-K 2018-02-21 Regulation FD, Exhibits
8-K 2018-02-13 Regulation FD, Exhibits
8-K 2018-01-18 Other Events, Exhibits
8-K 2018-01-12 Regulation FD, Exhibits
CA CA 15,562
PSTL Postal Realty Trust 80
MMND Mastermind 45
NAUH National American University Holdings 25
QNTO Quaint Oak Bancorp 25
BRTI Blackridge Technology 19
ENZN Enzon Pharmaceuticals 11
RMES Red Metal Resources 4
CDTI CDTI Advanced Materials 2
FNEC First National Energy 0
GQM 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv520253_ex31-1.htm
EX-31.2 tv520253_ex31-2.htm
EX-32.1 tv520253_ex32-1.htm
EX-32.2 tv520253_ex32-2.htm
EX-95.1 tv520253_ex95-1.htm

Golden Queen Mining Earnings 2019-03-31

GQM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520253_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

For the transition period from _________ to __________________

 

000-21777
(Commission File Number)

 

GOLDEN QUEEN MINING CO. LTD.

(Exact name of registrant as specified in its charter)

 

British Columbia, Canada Not Applicable
(State or other jurisdiction of incorporation) (IRS Employer Identification) No.)

 

2300 – 1066 West Hastings Street

Vancouver, British Columbia

V6E 3X2 Canada

 

(Address of principal executive offices)

 

Issuer’s telephone number, including area code: (778) 373-1557

 

Former name, former address and former fiscal year, if changed since last report: N/A

 

Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Check whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x Emerging growth company ¨

 

Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As at May 6, 2019, the registrant’s outstanding common stock consisted of 300,101,444 shares. 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
NONE  

OTCQX:GQMNF

 

NONE

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Golden Queen Mining Co. Ltd.

Condensed Consolidated Interim Financial Statements

March 31, 2019

 

(US dollars – Unaudited)

 

2 

 

 

GOLDEN QUEEN MINING CO. LTD.

Condensed Consolidated Interim Balance Sheets

(amounts expressed in thousands of US dollars - Unaudited)

 

  

March 31,

2019

  

December 31,

2018

 
Assets          
Current assets:          
Cash  $5,675   $5,725 
Inventories (Note 4)   32,984    25,031 
Prepaid expenses and other current assets   531    467 
Total current assets   39,190    31,223 
Restricted cash (Note 5)   1,008    1,005 
Deferred financing cost (Note 13(v))   2,659    3,314 
Property, plant, equipment and mineral interests (Note 6)   134,769    135,818 
Advance minimum royalties   497    497 
Inventories (Note 4)   5,279    6,913 
Total Assets  $183,402   $178,770 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Accounts payable and accrued liabilities  $8,491   $6,899 
Interest payable   1,637    773 
Credit facility (Note 13(v))   10,000    - 
Current portion of note payable (Note 13(ii))   25,481    24,690 
Current portion of loan payable (Note 7)   5,381    6,578 
Derivative liabilities (Note 8)   3,540    3,390 
Total current liabilities   54,530    42,330 
Credit facility (Note 13(v))   -    5,000 
Loan payable (Note 7)   4,810    5,622 
Asset retirement obligation (Note 9)   2,966    2,497 
Deferred tax liability   8,588    8,588 
Total liabilities   70,894    64,037 
Temporary Equity          
Redeemable portion of non-controlling interest (Note 13(iv))   24,305    24,286 
Shareholders’ Equity          
Common shares, no par value, unlimited shares authorized (2018 - unlimited); 300,101,444 (2018 –  300,101,444) shares issued and outstanding (Note 10)   95,575    95,575 
Additional paid-in capital   44,029    44,002 
Deficit accumulated   (97,859)   (95,559)
Total shareholders’ equity attributable to GQM Ltd.   41,745    44,018 
Non-controlling interest (Note 13(iv))   46,458    46,429 
Total Shareholders’ Equity   88,203    90,447 
Total Liabilities, Temporary Equity and Shareholders’ Equity  $183,402   $178,770 

 

Going Concern (Note 2)

Commitments and Contingencies (Notes 14 and 16)

Subsequent Events (Note 17)

 

Approved by the Directors:

 

“Paul M. Blythe”   “Bryan A. Coates”  
Paul M. Blythe, Director   Bryan A. Coates, Director  

 

See Accompanying Notes to the Condensed Consolidated Interim Financial Statements

 

3 

 

 

GOLDEN QUEEN MINING CO. LTD.

Condensed Consolidated Interim Statements of Loss and Comprehensive Loss

(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)

 

   Three Months
Ended
March 31,
   Three Months
Ended
March 31,
 
   2019   2018 
Revenues          
Metal Sales  $16,979   $9,585 
           
Cost of Sales          
Direct mining costs   (12,284)   (13,016)
Depreciation and depletion (Note 6)   (2,566)   (2,976)
Accretion expense   (52)   (42)
Income (Loss) from mine operations   2,077    (6,449)
           
General and administrative expenses (Note 11)   (1,832)   (1,254)

Operating income (loss)

   245   (7,703)
           
Other income (expenses)          
(Loss) gain on derivative instruments (Note 8)   (150)   138 
Finance expense (Note 13(iii))   (2,420)   (1,533)
Interest income   73    35 
Total other income (expenses)   (2,497)   (1,360)
Net and comprehensive loss for the period   (2,252)   (9,063)
Less: Net and comprehensive (income) loss attributable to the non-controlling interest for the period (Note 13(iv))   (48)   3,646 
Net and comprehensive loss attributable to Golden Queen Mining Co Ltd. for the period  $(2,300)  $(5,417)
Loss per share – basic (Note 12)  $(0.01)  $(0.03)
Loss per share – diluted (Note 12)  $(0.01)  $(0.03)
           
Weighted average number of common shares outstanding -basic   300,101,444    188,829,263 
Weighted average number of common shares outstanding - diluted   300,101,444    188,829,263 

 

See Accompanying Notes to the Condensed Consolidated Interim Financial Statements

 

4 

 

 

GOLDEN QUEEN MINING CO. LTD.

Condensed Consolidated Interim Statements of Shareholders’ Equity,

Non-controlling Interest and Redeemable Portion of Non-controlling Interest

(amounts expressed in thousands of US dollars, except shares amounts - Unaudited)

 

   Common
shares
   Amount   Additional
Paid-in
Capital
   Deficit
Accumulated
   Total 
Shareholders’
Equity 
attributable
to GQM Ltd
   Non-
controlling
Interest
   Total
Shareholders’
Equity
   Redeemable
Portion of
Non-
controlling
Interest
 
Balance, December 31, 2017   111,148,683   $71,126   $43,853   $(88,500)  $26,479   $36,321   $62,800   $24,214 
Issuance of common shares (Note 10)   188,952,761    24,368    -    -    24,368    -    24,368    - 
Capital contribution from non-controlling interest   -    -    -    -    -    10,000    10,000    - 
Stock-based compensation   -    -    45    -    45    -    45    - 
Net loss for the period   -    -    -    (5,417)   (5,417)   (2,188)   (7,605)   (1,458)
Balance, March 31, 2018   300,101,444   $95,494   $43,898   $(93,917)  $45,475   $44,133   $89,608   $22,756 
                                         
Balance, December 31, 2018   300,101,444   $95,575   $44,002   $(95,559)  $44,018   $46,429   $90,447   $24,286 
Stock-based compensation   -    -    27    -    27    -    27    - 
Net loss for the period   -    -    -    (2,300)   (2,300)   29    (2,271)   19 
Balance, March 31, 2019   300,101,444   $95,575   $44,029   $(97,859)  $41,745   $46,458   $88,203   $24,305 

  

See Accompanying Notes to the Condensed Consolidated Interim Financial Statements

 

5 

 

 

GOLDEN QUEEN MINING CO. LTD.

Condensed Consolidated Interim Statements of Cash Flows

(amounts expressed in thousands of US dollars - Unaudited)

 

   Three Months
Ended
March 31,
   Three Months
Ended
March 31,
 
   2019   2018 
Operating Activities          
Net loss for the period  $(2,252)  $(9,063)
Adjustment to reconcile net loss to cash used in operating activities:          
Depreciation and depletion   2,566    2,976 
Amortization of debt discount and interest accrual   1,473    555 
Accretion expense   52    42 
Change in fair value of derivative liabilities (Note 8)   150    (138)
Stock based compensation   27    45 
Unrealized foreign exchange gain   (3)   (43)
Changes in non-cash working capital items:          
Prepaid expenses & other current assets   (64)   14 
Inventory   (5,388)   (900)
Accounts payable & accrued liabilities   1,595    (1,595)
Interest payable   837    713 
Cash used in operating activities   (1,007)   (7,394)
Investment activities:          
Additions to property, plant, equipment and mineral interests   (2,031)   (2,071)
Cash used in investing activities   (2,031)   (2,071)
Financing activity:          
Issuance of common shares (Note 10)   -    24,368 
Proceeds from credit facility   5,000    - 
Repayment of credit facility   -    (3,000)
Repayments of loan payable (Note 7)   (2,009)   (1,898)
Repayments of note payable and accrued interest (Note 13(ii))   -    (4,712)
Capital contribution from non-controlling interest   -    10,000 
Cash generated from financing activities   2,991    24,758 
Net change in cash, cash equivalents and restricted cash   (47)   15,293 
Cash, cash equivalents and restricted cash, beginning balance   6,730    2,937 
Cash, cash equivalents and restricted cash, ending balance  $6,683   $18,230 

 

Supplementary Disclosure of Cash Flow Information

 

   Three Months
Ended
March 31,
   Three Months
Ended
March 31,
 
   2019   2018 
Cash paid during the period for:          
Interest on loan and note payable  $109   $235 
Non-cash financing and investing activities:          
Asset retirement costs charged to mineral property interests  $417   $349 
Mining equipment acquired through issuance of debt  $-   $514 
Mineral property expenditures included in accounts payable  $-   $165 
Extension fee added to principal balance  $75   $- 
Non-cash amortization of discount and interest expense  $1,473   $555 

  

See Accompanying Notes to the Condensed Consolidated Interim Financial Statements

 

6 

 

 

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)

 

1.Nature of Business

 

Golden Queen Mining Co. Ltd. (“Golden Queen”, “GQM Ltd.” or the “Company”) is engaged in the operation of the Soledad Mountain Mine (“the Mine”), located in the Mojave Mining District, Kern County, California. The Company owns 50% of Golden Queen Mining Company, LLC (“GQM LLC”), the operator of the Mine. The remaining 50% is owned by Gauss LLC (“Gauss”).

 

2.Basis of Presentation and Going Concern

 

These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) applicable to going concern. The accounting policies followed in preparing these condensed consolidated interim financial statements are those used by the Company as set out in the audited consolidated financial statements for the year ended December 31, 2018 other than noted below.

 

Certain information and note disclosures normally included for annual consolidated financial statements prepared in accordance with US GAAP have been omitted. These unaudited condensed consolidated interim financial statements should be read together with the audited consolidated financial statements of the Company for the year ended December 31, 2018.

 

In the opinion of Management, all adjustments considered necessary (including reclassifications and normal recurring adjustments) to present fairly the financial position, results of operations and cash flows as at March 31, 2019 and for all periods presented, have been included in these unaudited condensed consolidated interim financial statements. The interim results are not necessarily indicative of results for the full year ending December 31, 2019, or future operating periods.

 

The Company’s access to the net assets of GQM LLC is determined by the Board of Managers of GQM LLC.  The Board of Managers is not controlled by the Company and therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its membership units at their sole discretion.

 

Under the terms of the Note Payable, the Company was originally required to pay the following amounts to the Clay Group on the following dates: $1.7 million of interest and principal 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 payment of $1.7 million of interest and principal 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 a restructuring fee of $75. On February 9, 2019, the parties agreed to defer the payments of all principal and interest mentioned above until completion of a proposed transaction involving the sale of our 50% ownership in Soledad Mountain (see Note 16).

 

As at March 31, 2019, the Company had a working capital deficit of $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 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 Note 16).

 

The unaudited condensed consolidated interim financial statements do not reflect adjustments to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used, that would be necessary if the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

 

7 

 

  

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)

 

3.Summary of Accounting Policies and Estimates and Judgements

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and judgements have been made by Management in several areas including the accounting for the joint venture transaction and determination of the temporary and permanent non-controlling interest, the recoverability of mineral properties interests, royalty obligations, inventory valuation, asset retirement obligations, and derivative liability – warrants. Actual results could differ from those estimates.

 

New Accounting Pronouncements

 

Adopted

 

(i)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 retrospective basis. There was an immaterial impact on the financial statements from adoption of this guidance.

 

Not Yet Adopted

 

None

 

4.Inventories

 

Inventories consist primarily of production from the Company’s operation, in varying stages of the production process and supplies and spare parts, all of which are presented at the lower of cost or net realizable value. Inventories of the Company are comprised of:

 

   March 31,
2019
   December 31,
2018
 
Stockpile inventory  $10,353   $6,913 
In-process inventory   24,149    21,607 
Dore inventory   892    761 
Supplies and spare parts   2,869    2,663 
   $38,263   $31,944 
           
Current portion  $32,984   $25,031 
Non-current portion  $5,279   $6,913 

 

The rate of recovery of gold and silver from the leach pad is a significant area of estimation. Whilst inventory is shown as a current asset it is probable that some portion of the gold and silver on the leach pad will be recovered more than a year from the balance sheet date, depending on the length of the leaching cycle and on management's strategy for optimizing the recovery from the leach pad.

 

8 

 

  

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)

 

5.Restricted Cash

 

The Company’s restricted cash consists of the following:

 

   March 31,
2019
   December 31,
2018
 
 Certificate of Deposit  $1,008   $1,005 

 

The surety required a certificate of deposit to bond reclamation requirements of regulatory agencies. (see Note 9)

 

6.Property, Plant, Equipment and Mineral Interests

 

Property, plant and equipment and mineral interests, are depreciated and depleted using either the units-of-production or straight-line method over the shorter of the estimated useful life of the asset or the expected life of mine. Assets under construction in progress are recorded at cost and re-allocated to its corresponding category when they become available for use.

 

   Land   Mineral
property
interest and
claims
   Mine
development
   Machinery
and
equipment
   Buildings and
infrastructure
   Construction
in progress
   Interest
capitalized
   Total 
Cost                                        
At December 31, 2017  $3,969   $5,280   $50,773   $70,066   $28,397   $54   $5,886   $164,425 
Additions   173    5    492    -    -    6,902    -    7,572 
Transfers   (5)   550    711    5,375    48    (6,679)   -    - 
Disposals   -    -    -    (213)   -    -    -    (213)
At December 31, 2018  $4,137   $5,835   $51,976   $75,228   $28,445   $277   $5,886   $171,784 
Additions   132    -    416    89    -    1,862    -    2,499 
Disposals   -    -    -    -    (50)   -    -    (50)
At March 31, 2019  $4,269   $5,835   $52,392   $75,317   $28,395   $2,139   $5,886   $174,233 
                                         
Accumulated depreciation and depletion                                        
At December 31, 2017  $-   $328   $3,415   $13,353   $5,010   $-   $471   $22,577 
Additions   -    278    2,682    7,789    2,357    -    430    13,536 
Disposals   -    -    -    (147)   -    -    -    (147)
At December 31, 2018  $-   $606   $6,097   $20,995   $7,367   $-   $901   $35,966 
Additions   -    55    772    1,981    582    -    108    3,498 
At March 31, 2019  $-   $661   $6,869   $22,976   $7,949   $-   $1,009   $39,464 
                                         
Carrying values                                        
At December 31, 2018  $4,137   $5,229   $45,879   $54,233   $21,078   $277   $4,985   $135,818 
At March 31, 2019  $4,269   $5,174   $45,523   $52,341   $20,446   $2,139   $4,877   $134,769 

 

9 

 

  

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)

 

7.Loan Payable

 

As at March 31, 2019 and December 31, 2018, equipment financing balances are as follows:

 

   March 31,
2019
   December 31,
2018
 
Balance, beginning of the period  $12,200   $17,243 
Additions   -    3,751 
Principal repayments   (2,009)   (8,156 
Down payments and taxes   -    (638)
Balance, end of the period  $10,191   $12,200 
           
Current portion  $5,381   $6,578 
Non-current portion  $4,810   $5,622 

 

The terms of the equipment financing agreements are as follows:

 

   

March 31,

2019

   

December 31,

2018

 
Total acquisition costs   $ 39,443     $ 39,443  
Interest rates     0.00% ~ 4.50%       0.00% ~ 4.50%  
Monthly payments   5 ~ 74     5 ~ 74  
Average remaining life (years)     1.27       1.27  

 

For the three months ended March 31, 2019, the Company made total down payments of $nil (December 31, 2018 $638). The down payments consisted of the sales tax on the assets and a 10% payment of the pre-tax purchase price. All of the loan agreements are for a term of four years, except two which are for three years, and are secured by the underlying asset.

 

The following table outlines the principal payments to be made for each of the remaining years:

 

Years  Principal Payments 
2019  $4,220 
2020   3,204 
2021   2,184 
2022   583 
Total  $10,191 

 

8.Derivative Liabilities

 

Share Purchase Warrants

 

The Company has 10,000,000 share purchase warrants outstanding exercisable at $0.7831 per share and 8,000,000 share purchase warrants outstanding exercisable at $0.665 per share (the “Clay Group share purchase warrants”). The Company has an additional 6,317,700 share purchase warrants outstanding with an exercise price of C$2.00 per share. The share purchase warrants meet the definition of a derivative liability instrument as the exercise price is not a fixed price as described above. Therefore, the settlement feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15.

 

The fair value of the derivative liabilities related to the share purchase warrants as at March 31, 2019 was $63 (December 31, 2018 $76). The derivative liabilities were calculated using the Black-Scholes pricing valuation model with the following weighted average assumptions:

 

10 

 

  

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)

 

8.Derivative Liabilities (continued)

 

Warrants derivative liabilities  March 31,
2019
   December 31,
2018
 
Risk-free interest rate   1.37%   1.37%
Expected life of derivative liability   1.44 years    1.69 years 
Expected volatility   173.18%   93.96%
Dividend rate   0.00%   0.00%

 

GQM LLC Warrants (Note 13(v))

 

In connection with the 2018 Credit Facility (Note 14(v)), GQM LLC 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 the derivative liabilities related to the warrants as at March 31, 2019 was $3,477 (December 31, 2018 - $3,314). The derivative liability was calculated using the Black-Scholes pricing valuation model.

 

GQM LLC Warrants derivative liability  March 31,
2019
   December 31,
2018
 
Risk-free interest rate   2.23%   2.65%
Expected life of derivative liability   4.75 years    4.89 years 
Expected volatility   20.00%   20.00%
Dividend rate   0.00%   0.00%

 

The change in the derivative liabilities is as follows:

 

   March 31,
2019
   December 31,
2018
 
Balance, beginning of the period  $3,390   $441 
GQM LLC Warrants (Note 13(v))   -    3,314 
Change in fair value   150    (365)
Balance, end of the period  $3,540   $3,390 

 

9.Asset Retirement Obligations

 

Reclamation Financial Assurance

 

GQM LLC 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 March 31, 2019 was $1,749 (December 31, 2018 $1,749).

 

GQM LLC 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 March 31, 2019 was $2,450 (December 31, 2018 $2,450).

 

In addition to the above, GQM LLC 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 March 31, 2019 is $320 (December 31, 2018 $278).

 

As at March 31, 2019 GQM LLC had entered into $5,507 (December 31, 2018 $4,921) in surety bond agreements in order to release its reclamation deposits and a bond for power of $443 (December 31, 2018 - $443). GQM LLC pays a yearly premium of $100 (2018 $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.

 

11 

 

  

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)

 

9.Asset Retirement Obligations (continued)

 

Asset Retirement Obligation

 

The total asset retirement obligation as at March 31, 2019 was $2,966 (December 31, 2018 $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 March 31, 2019, the Company estimates the cash outflow related to these reclamation activities will be incurred in 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 7.9% and an inflation rate of 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 

 

10.Share Capital

 

The Company’s common shares outstanding are no par value, voting shares with no preferences or rights attached to them.

 

Common shares

 

On February 22, 2018, the Company closed a rights offering and issued 188,952,761 shares for total gross proceeds of $25,036. The Company paid associated fees of $587 which were classified as share issue costs.

 

Stock options

 

The Company’s current stock option plan (the “Plan”) was adopted by the Company in 2013 and approved by shareholders of the Company in 2013. The Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of stock options. The exercise price of stock options granted under the Plan shall be determined by the Company’s Board of Directors (the “Board”) but shall not be less than the volume-weighted, average trading price of the Company’s shares on the Toronto Stock Exchange (“TSX”) for the five (5) trading days immediately prior to the date of the grant. The expiry date of a stock option shall be the date so fixed by the Board subject to a maximum term of five (5) years.

 

The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. The compensation expense is amortized on a straight-line basis over the requisite service period, which approximates the vesting period.

 

The following is a summary of stock option activity during the 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.

 

12 

 

  

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)

 

10.Share Capital (continued)

 

Stock options (continued)

 

The following table summarizes information about stock options outstanding and exercisable as at March 31, 2019:

 

Expiry
Date
  Number
Outstanding
   Number
Exercisable
   Remaining
Contractual Life
(years)
   Exercise
Price
 
September 8, 2020   430,000    430,000    1.44   $0.58 
November 30, 2021   365,000    243,332    2.67   $0.66 
March 20, 2022   400,002    266,668    2.97   $0.65 
October 20, 2022   1,129,999    376,666    3.56   $0.29 
    2,325,001    1,316,666    2.91      

 

As at March 31, 2019, the aggregate intrinsic value of the outstanding exercisable options was $nil (December 31, 2018 $nil).

 

Warrants

 

As at March 31, 2019, 24,317,700 warrants were outstanding (December 31, 2018 – 24,317,700).

 

The following table summarizes information about share purchase warrants outstanding as at March 31, 2019:

 

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.

 

11.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
March 31,

  

Three Months

Ended
March 31,

 
   2019   2018 
Audit, legal and professional fees  $103   $240 
Salaries and benefits and director fees   799    503 
Regulatory fees and licenses   25    79 
Insurance   171    139 
Corporate administration   268    293 
Transaction costs (Note 16)   466    - 
   $1,832   $1,254 

 

13 

 

  

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)

 

12.Loss Per Share

 

  

Three Months

Ended
March 31,

  

Three Months

Ended
March 31,

 
   2019   2018 
Numerator:          
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    188,829,263 
           
Loss per share – basic and diluted  $(0.01)  $(0.03)

 

Weighted average number of shares for the three months ended March 31, 2019 excludes 2,325,001 options (December 31, 2018 2,325,001) and 24,317,700 warrants (December 31, 2018 – 24,317,700) that were antidilutive.

 

13.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 months ended March 31, 2019, the Company recognized $361 (2018 $195) salaries and fees for Officers and Directors.

 

(ii)Note Payable

 

As at December 31, 2018, The Company had a loan with the Clay Group with a principal balance of $25,625 (the “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. On December 27, 2018, the Company and the Clay Group agreed to amend the Clay 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 proposed transaction (Note 16). The amendments were accounted for as debt modifications.

 

The following table summarizes activity on the notes payable:

 

   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 discount and interest on loans:

 

  

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 

 

(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%.

 

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.

 

The net assets of GQM LLC as at December 31, 2018 and 2017 are as follows:

 

   March 31,
2019
   December 31,
2018
 
Assets, GQM LLC  $176,635   $171,334 
Liabilities, GQM LLC   (24,782)   (29,904)
Net assets, GQM LLC  $151,853   $141,430 

 

Included in the assets above, is $4,713 (December 31, 2018 $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 $349 for a mining drill loan and $5,507 in surety bond agreements.

 

15 

 

  

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
March 31,

  

Three Months

Ended
March 31,

 
   2019   2018 
Net and comprehensive income (loss) in GQM LLC  $95   $(7,294)
Non-controlling interest percentage   50%   50%
Net and comprehensive income (loss) attributable to non-controlling interest  $48   $(3,646)
Net and comprehensive income (loss) attributable to permanent non-controlling interest  $29   $(2,188)
Net and comprehensive income (loss) attributable to temporary non-controlling interest  $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 

 

(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.

 

16 

 

  

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)

 

14.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.

 

15.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 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2Quoted 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 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

  

   March 31, 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.

 

17 

 

  

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 March 31, 2019, the Company’s cash balances held in United States and Canadian financial institutions include $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 its cash in bank deposit accounts with major financial institutions. The interest rates received on these balances may fluctuate with changes in economic conditions. Based on the average cash balances during the three months ended March 31, 2019, a 1% decrease in interest rates would have reduced the interest income for the three months ended 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 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.

 

18 

 

  

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)

 

17.Subsequent Events

 

Subsequent to March 31, 2019, GQM LLC drew an additional $5,000 from the 2018 Credit Facility (Note 13(v)).

 

19 

 

 

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 May 6, 2019 and should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three months ended March 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.

 

20 

 

  

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 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 aggregate.

 

First Quarter Highlights

 

Total of 5.4 million tons of ore and waste were mined including 989 kilotons of ore;
Plant processed a total of 853 kilotons of ore at an average grade of 0.022 ounces per ton; and
12,032 ounces of gold and 95,615 ounces of silver were produced.

 

Project Update

 

In the first 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 Mine’s production was sourced from the East Pit. Mining results from the East Pit have shown positive reconciliation for both tons and grade with the mine plan. Operations during the first quarter of 2019 showed stabilization in gold ounces loaded on the pad after the decline 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, 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:

 

 

21 

 

  

Leaching performance resulted in total apparent gold recovery to March 31, 2019 of 67.4%. The quarterly reduction in apparent gold recovery during the first quarter of 2019 was caused in part by limits on the amount of leach solution that can be placed on the leach pad, as a result of pad geometry. Management has designed a potential solution that will be implemented when all permits are obtained. In addition, East Pit ore has exhibited slower leach dynamics than previously 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. While it has the potential to extend mine life, the cost structure has been reset at a higher level. The Company is considering applying for an addendum to the major permit to allow more flexibility for gold and silver mining as well as aggregate operations on Soledad.

 

For the three months ended March 31, 2019, the Company recorded aggregate sales of $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 were 242 employees on site at the end of the first quarter 2019.

 

Results of Operations

 

The following are the results of operations for the three months ended March 31, 2019 and 2018:

 

      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)total cash costs, all-in sustaining costs, apparent cumulative recovery, off-site costs, average realized gold price and average realized silver price are financial performance measures with no standard meaning under US GAAP. Refer to “Non-US GAAP Financial Performance Measures” for further information.

 

Financial Results

 

For the three months ended March 31, 2019, the Company generated revenues from operations of $16,979 from the sale of 11,919 ounces of gold and 92,668 ounces of silver compared to revenues of $9,585 from the sale of 6,529 ounces of gold and 53,612 ounces of silver during 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 quarter in 2018 is explained by the poor performance in the first quarter of 2018; as the mine was slowly pulling out of a period of very low ore grade placed on the leach pad.

 

22 

 

  

The costs, excluding depreciation and depletion, applicable to sales incurred during the three months ended March 31, 2019 were $12.2 million (three months ended March 31, 2018 - $13.0 million). The cost of sales, excluding depreciation and depletion, in the current quarter were relatively consistent with the comparable prior quarter. The unit costs per ton placed has increased by 19.3% over the comparable quarter due mainly to the higher stripping ratio.

 

Depreciation and depletion expenses during the three months ended March 31, 2019 were $2,566 compared to $2,976 for the same period in 2018, a decrease of $410. The decrease in 2019 compared to 2018 was due to depreciation and depletion being allocated to stockpile inventory.

 

General and administrative expenses for the three months ended March 31, 2019 were $1,832 compared to $1,254 for the three months ended March 31, 2018, an increase of $578. The increase in 2019 compared to 2018 was mainly a result of transaction costs of $466 relating to a proposed transaction as well as an increase in salaries and benefits and directors’ fees from $503 in 2018 to $799 in 2019 as a result of increased compensation to key management.

 

For the three months ended March 31, 2019, the Company incurred finance expenses of $2,420 compared to $1,533 for the three months ended March 31, 2018, an increase of $887. The increase in finance expenses was mainly due to the amortization of deferred financing fees relating to LLC warrants and interest expense on the LLC line of credit.

 

For the three months ended March 31, 2019, the Company recorded a gain on derivative instruments of $150 compared to a loss on derivative instruments of $138 for the three months ended March 31, 2018. The gain in 2019 was due to a decrease in the Company’s share price and remaining life of derivatives whereas the loss in 2018 was due to an increase in the 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: 
   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 

 

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.

 

23 

 

  

During the three months ended June 30, 2018, net and comprehensive income was $604 mainly as a result of income generated from mine operations of $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

 

The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County with a revised reclamation cost estimate annually.  The financial assurance is adjusted once the cost estimate is approved.

 

This estimate, once approved by state and county authorities, forms the basis of reclamation financial assurance. The reclamation assurance provided as at March 31, 2019 was $1,749 (December 31, 2018 $1,749).

 

The Company is also required to provide financial assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) for closure and reclamation costs related to the lined impoundments, which are defined as the Stage 1 and Stage 2 heap leach pads, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate as at March 31, 2019 is $2,450 (December 31, 2018 $2,450).

 

In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Project’s waste management units as required by the Regional Board. The reclamation financial assurance estimate as at March 31, 2019 is $320 (December 31, 2018 $278).

 

As at March 31, 2019 GQM LLC had entered into $5,507 (December 31, 2018 – $4,921) in surety bond agreements in order to release its reclamation deposits and a bond for power of $443 (December 31, 2018 - $443). GQM LLC pays a yearly premium of $100 (2018 – $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 March 31, 2019, was $2,966 (December 31, 2018 $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 March 31, 2019, the Company estimates the cash outflow related to these reclamation activities will be incurred in 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 7.9% and an inflation rate of 2.4%.

 

24 

 

  

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 months ended March 31, 2019, the Company recognized $361 (2018 – $195) salaries and fees for Officers and Directors.

 

(ii)Note Payable

 

As at December 31, 2018, The Company had a loan with the Clay Group with a principal balance of $25,625 (the “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. On December 27, 2018, the Company and the Clay Group agreed to amend the Clay 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 proposed transaction between the Clay Group and the Company. The amendments were accounted for as debt modifications.

 

The following table summarizes activity on the notes payable:

 

   March 31,
2019
   December 31,
2018
 
Balance, beginning of the period  $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  $-   $- 

 

25 

 

 

(iii)Amortization of Discounts and Interest Expense

 

The following table summarizes the amortization of discounts and interest on loan:

 

   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 
(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

 

The net assets of GQM LLC as at March 31, 2019 and December 31, 2018 are as follows:

 

   March 31,
2019
   December 31,
2018
 
Assets, GQM LLC  $176,635   $171,334 
Liabilities, GQM LLC   (24,782)   (29,904)
Net assets, GQM LLC  $151,853   $141,430 

 

Included in the assets above, is $4,713 (December 31, 2018 $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 $349 for a mining drill loan and $5,507 in surety bond agreements.

 

(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.

 

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. 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 Company’s interest in GQM LLC will be diluted to 46.25%. The Company’s current interest in GQM LLC is 50%.

 

26 

 

  

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 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2Quoted 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 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

   March 31, 2019 
   Total   Level 1   Level 2   Level 3 
Liabilities:                    
Share purchase warrants – Related Party  $63   $-   $63   $- 
GQM LLC Warrants – Related Party   3,477    -    3,477    - 
   $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 under Results 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 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 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

 

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The following table shows figures attributable to the Company only for the three months ended 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  $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 and therefore there is no guarantee that any access to the net assets of GQM LLC would be provided to the Company in order to continue as a going concern. The Board of Managers of GQM LLC determine when and if distributions from GQM LLC are made to the holders of its membership units at their sole discretion.

 

The Company was required to pay the following amounts to the Clay Group on the following dates: $1.7 million of interest and principal 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 March 31, 2019, the Company had a working capital deficit of $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 three months ended March 31, 2019, $1,007 of cash was used in operating activities compared to $7,394 of cash used in operating activities for the three months ended March 31, 2018. The decreased use of cash in 2019 was primarily due to increased revenue in 2019 compared to 2018.

 

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Cash used in investing activities:

 

For the three months ended March 31, 2019, $2,031 of cash was used in investing activities compared to $2,071 of cash used in investing activities for the three months ended March 31, 2018. The major use of cash in 2019 was the purchase and installation of a replacement secondary cone crusher.

 

Cash from financing activities:

 

For the three months ended March 31, 2019, $2,991 of cash was generated from financing activities compared to $24,758 of cash generated from financing activities for the three months ended 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 March 31, 2019:

 

  

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 March 31, 2019, Golden Queen and GQM Holdings had current assets of $2,071 (December 31, 2018 – $2,693) and current liabilities of $27,197 (December 31, 2018 – $32,181) for a working capital deficit of $25,126 (December 31, 2018 – working capital deficit of $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 March 31, 2019, GQM LLC had current assets of $37,119 (December 31, 2018 – $28,591) and current liabilities of $27,333 (December 31, 2018 – $16,786) for working capital of $9,786 (December 31, 2018 – working capital deficit of $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, 2018  300,101,444      
Shares issued during the period up to May 6, 2019  -      
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 09/08/20 to 10/20/22
Shares to be issued on exercise of warrants  24,317,700  $0.67 to $0.78 and CAD $2.00  From 06/08/20 to 11/18/21
Fully diluted May 6, 2019  326,744,145      

 

The Company has unlimited authorized share capital

 

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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 
   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.

 

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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 
   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 
   March 31,   March 31, 
   2019   2018 
Cost of goods sold   14,902    16,034 
Less: depreciation and depletion  $(2,566)  $(2,976)
Less: accretion expense   (52)   (42)
Direct mining costs   12,284    13,016 
Add: site general and administrative expenses   1,009    732 
Cash costs before by-product credits  $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 to its audited consolidated financial statements for the year ended December 31, 2018 and unaudited condensed consolidated interim financial statements for the three months ended 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 web site at www.sedar.com and on the Company’s web site at www.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.

 

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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 March 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 deficiency previously noted with 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 at www.goldenqueen.com

 

For the three months ended March 31, 2019 and the year ended December 31, 2018, there were no reported instances of fraud.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time 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.

 

Item 1A. Risk Factors

 

Golden Queen and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of development of the Mine. Certain of these risks and uncertainties are under the heading “Risk Factors” under Golden Queen’s Form 10-K dated March 15, 2017 which is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and on our website at www.goldenqueen.com.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

GQM LLC is the operator of the Project, which is located in Mojave in Kern County, California. The mine safety disclosures required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K are included in Exhibit 95.1 of this Quarterly Report. There was one lost-time accident at GQM LLC during the three months ended March 31, 2019.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

Exhibit 
No.
  Description of Exhibit   Manner of Filing
10.1   First Amendment to Second Amended and Restated Term Loan Agreement dated February 22, 2018 among the Company, the Landon T. Clay 2009 Irrevocable Trust Dated March 6, 2009, EHT, LLC, and the Clay Family 2009 Irrevocable Trust dated April 14, 2009   Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company, filed with the SEC on May 10, 2018
         
10.2   First Amendment to Amended and Restated Registration Rights Agreement dated February 22, 2018 among the Company, the Landon T. Clay 2009 Irrevocable Trust Dated March 6, 2009, EHT, LLC, and the Clay Family 2009 Irrevocable Trust dated April 14, 2009   Incorporated by reference to Exhibit 10.2 to the Form 10-Q of the Company, filed with the SEC on May 10, 2018
         
10.3   Revolving Credit Agreement dated October 12, 2018 among Golden Queen Mining Company, LLC, Golden Queen Mining Holdings, Inc., Gauss LLC, Gauss Holdings LLC and Auvergne LLC   Incorporated by reference to Exhibit 10.3 to the Form 10-Q of the Company, filed with the SEC on November 8, 2018
         
10.4   Share Purchase Agreement dated February 7, 2019 among the Company, and Estate of Landon Thomas Clay, Thomas M. Clay, Lavinia D. Clay, Cassius M.C. Clay, Landon H. Clay, Richard T. Clay, Jonathan Clay, James Clay, Clay Family 2009 Irrevocable Trust, LTC 2009 Irrevocable Trust, EHT, LLC, Monadnock Charitable Lead Annuity Trust dated May 31, 1996, Arctic Coast Petroleums, Ltd., and 933 Milledge, LLC   Incorporated by reference to Exhibit 10.1 to the Form 8-K of the Company, filed with the SEC on February 11, 2019
         
31.1   Certification of the Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the US Securities Exchange Act of 1934   Filed herewith

 

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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 months ended March 31, 2019, formatted in XBRL   Filed herewith

  

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 7, 2019

 

  GOLDEN QUEEN MINING CO. LTD.
  (Registrant)
     
  By: /s/ Guy Le Bel
  Guy Le Bel
  Principal Executive and  Financial Officer

 

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