Golden Queen Mining

Golden Queen co ltd files sec form 10-k/a annual report

Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion of the operating results and financial position of Golden Queen Mining Co. Ltd. (the "Company") is dated March 31, 2010 and should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2009 and the notes thereto.

All amounts herein are in US$ unless otherwise noted.

Results of Operations

Following are the results of operations for the year ended December 31, 2009.

The Company had no revenue from operations.

The Company incurred general and administrative expenses of $2,246,953 for the year ended December 31, 2009 (2008 - $2,817,429).

The following significant costs were incurred in the general and administrative expenses during the year:

� $174,196 for advance minimum royalties owing to landholders (2008 - $735,333 ). The advance minimum royalties owing to landholders from the end of the three year moratorium period from 2000 to 2003 were brought current in 2008 as more fully described in the section titled Property Interests Are In Good Standing above;

� $362,050 for the Air Quality and Health Risk Assessment and for ongoing maintenance of and data recovery from the meteorological station (2008 - $109,007 ). The increase was primarily due to the fact that the Planning Department requested that the Air Quality Assessment and Health Risk Assessment for the Project be redone in February 2009 to provide current information for the SEIR. This study was completed and delivered to the Planning Department and EKAPCD on July 21, 2009. The study was prepared by consulting engineers;

� $15,355 for a study to confirm that there are no desert tortoise found on the property (2008 - $0);

� $35,354 for quarterly water sampling and analysis (2008 - $37,837);

� $172,114 for detailed engineering for the Phase 1 heap leach pad, for the associated site drainage plan and general support for the approvals and permitting process (2008 - $428,012 ). The Company is proceeding with detailed engineering designs of the key facilities for construction as described in more detail in the section titled Outlook. The foregoing costs were incurred for this particular design. Design costs may recur if changes are made to the heap leach pad, however the extent of any recurring costs is not known at this time;

� $60,194 for traffic studies and detailed design for the new access road for the Project (2008 - $0 ). The Company's consulting engineers completed two traffic studies, which were required for the SEIR in 2009;

� $41,869 for the detailed design of the workshop and warehouse for the Project (2008 - $0 ). The Company is proceeding with detailed engineering designs of the key facilities for construction as described in more detail in the section titled Outlook. Significant costs were therefore incurred for this particular design. Design costs are non-recurring;

� $202,883 for ongoing work on the occurrence of arsenic in groundwater, a review of the use of cyanide in heap leaching, a study of the occurrence of mercury and capture of mercury and general support required for the approvals and permitting process (2008 - $278,914 ). The Company's consulting engineers completed work on the studies outlined above at a reduced level of activity in 2009 and then continued to communicate and liaise with the Regional Board leading up to the regular meeting held on July 14, 2010 at which the Waste Discharge Requirements and a Monitoring and Reporting Program for the Project were approved. Accordingly, the Company additional costs were incurred in 2010 to complete the consulting services;

� $45,024 for ongoing work done by a registered surveyor on the status of mining claims (2008 - $70,958);

� $17,953 to an independent engineer for ongoing site support (2008 - $21,710);

� $15,425 to a local contractor for ongoing cleanup and weekly safety checks (2008 - $266,034 ). The major cleanup on site was completed in 2008 and work continued on a reduced scale in 2009.

� $167,898 for property purchases (2008 - $133,641 ), consisting of land adjacent to the Project;

� $20,440 to the Bureau of Land Management for annual assessment work for 2009 (2008 - 19,800);

� $26,195 for property taxes for 2009 - 2010 (2008 -2009 - $24,885) ;

� $31,412 for insurance for 2009-2010 (2008-2009 - $31,431);

� $190,201 for legal fees incurred for ongoing work on the S EIR (2008 - $10,000 ). During the fiscal year ended 2009, the Company engaged legal counsel to work with the Planning Department on the preparation of the SEIR. We expect that additional legal costs for the SEIR will be incurred in 2010;

� $85,448 for general corporate legal fees and work on agreements with landholders (2008 - $77,089);

� $20,051 to the Planning Department for work on the SEIR (2008 - $200,392 ). The Company provided advances of $55,000 in February 2008 and $123,800 in September 2008 to the Planning Department for work on the SEIR;

� $90,000 for preparing promotional material and seeking public support for the Project (2008 - $56,250);

� C$180,184 for ongoing mine design and drafting support (2008 - C$124,102);

� C$19,798 to confirm the availability of power for the Project with Southern California Edison and for the design of a sub-station for the Project (2008
- C$0);

� C$26,787 for stock exchange and filing fees (2008 - C$18,135);

� C$55,656 for general corporate legal fees (2008 - $43,452)

� C$108,019 for accounting and audit fees and the preparation of tax returns (2008 - C$77,808 ), in part due to costs associated with consultants engaged to provide book-keeping services and to prepare financial statements;

For the year ended December 31, 2009, the Company has also recorded a change in fair value of derivative liability of $2,095,300. This item is a non-cash item and was recorded in accordance with the new accounting pronouncement of ASC 850-40-15. This guidance requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument's contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), now included in the FASB Codification at ASC 815-10-15-74(a), and should be classified as a liability and marked-to-market. ASC 815-40-15 was effective for fiscal years beginning after December 15, 2008 and thus, upon its adoption on January 1, 2009, was applied to the Company's outstanding stock options.

Interest income of $10,070 (2008 - $107,956) was significantly lower by $97,886 as there was less cash on deposit during the year and interest rate has been significantly lower compared to prior year. There was no interest expense during the year.

The Company incurred a net loss of $ 4,514,742 (or $0.05 loss per share) for the year as compared to a net loss of $3,996,777 (or $0.05 per share) for 2008 for a difference in the net loss of $517,965.

The following significant and non-recurring costs were incurred in 2008 and this therefore contributed to the difference in net loss between 2009 and 2008:

� Property purchases of $133,641;
� Costs of $266,034 incurred on a major cleanup program on site;
� Difference in the advance minimum royalties paid of $561,137;
� Advances of $178,800 paid to the Planning Department for work by consulting engineers on the SEIR;
� A amount of $163,000 was paid for a study on the right to extract groundwater and other issues relating to the availability of water to support the Project and
� A production water well was drilled at a cost of $141,000.

The results of operations can vary from quarter to quarter depending upon the nature, timing and cost of activities undertaken during the quarter and whether or not the Company incurs gains or losses on foreign exchange, grants of stock options or makes end-of-year adjustments.

Reclamation Financial Assurance and Asset Retirement Obligation

The Company provided reclamation financial assurance in the form of an Irrevocable Payment Bond Certificate with Union Bank of California in the amount of $286,653 on October 21, 2009. The financial assurance is reassessed annually and the estimate for reclamation of historical disturbances on the property is $283,809 for 2010. The financial assurance will be provided in the fourth quarter of 2010.

The asset retirement obligation accrual is estimated at $177,564 and this is shown as a liability on the consolidated balance sheet. The actual obligation could differ materially from these estimates.

Advance Minimum Royalties

The Company is continuing to pay advance minimum royalties to landholders with a total of $174,196 paid in 2009.

A mining lease agreement with one group of landholders expired in 2004 and the Company has prepared a new mining lease agreement for discussion with the group of landholders.

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Stock Option Plan

The Company prepared a new stock option plan ("New Plan") to replace its existing stock option plan. The New Plan provides a fixed number of 7,200,000 common shares of the Company that may be issued pursuant to the grant of options. The exercise price of all stock options shall be determined by the Company's Board of Directors, but it shall not be less than the last price at which the Company's shares were issued prior to the award date or the closing price on the day immediately preceding the award date. The expiry date of the option shall be the date so fixed by the Board, unless the option holder dies or ceases to be employed as a director or as a consultant prior to the date fixed by the Board.

The Company granted 1,950,000 stock options to directors, officers and consultants of the Company pursuant to the new plan on January 28, 2009. The options are exercisable at a price of C$0.26 per share for a period of 5 years from the date of grant. The new plan and the stock options were approved by the shareholders of the Company at the 2009 annual general meeting, which was held on May 21, 2009.

Transactions With Related Parties

Mr. H. Lutz Klingmann was paid $116,776 (2008 - $136,500) for services as President of the Company and Mr. Chester Shynkaryk was paid $18,620 (2008 - $17,996) for consulting services to the Company for the year ended December 31, 2009. No other compensation was paid or given during the year for services rendered by the directors in such capacity and no additional amounts were payable at year-end under any standard arrangements for committee participation or special assignments.

Four directors of the Company were paid $1,752 (2008 - $ 1,861) and two directors were paid $2,000 (2008 -$2,000) in director fees for the year ended December 31, 2009.

There were no other related party transactions during the year ended December 31, 2009.

Fair Value of Financial Instruments

The carrying amount reported in the balance sheets for cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The company does not hold any bank or non-bank asset-backed commercial paper. The fair value of the reclamation financial assurance approximates carrying value because the stated interest rate reflects recent market conditions. It is the opinion of management that the Company is not exposed to significant interest, currency or credit risk arising from the use of these financial instruments.

Liquidity and Capital Resources

The Company concluded a non-brokered private placement of 2,337,500 common shares of the Company at a price of C$0.65 per share for proceeds of $1,396,646 (C$1,519,375) on July 30, 2009.

The Company held $2,433,202 in cash and cash equivalents on December 31, 2009.

The Company has no long-term debt.

Management plans to control costs and does not expect that additional cash will be required (prior to securing production financing) beyond cash currently on hand for ongoing work on approvals and permits for the Project, for bringing current the remaining advance minimum royalties owing to landholders, for additional property purchases, for ongoing work on site and for general corporate purposes to the end of 2010.

In January 2010 , the Company issued 700,000 common shares for proceeds of $233,111 (C$245,000) pursuant to the exercise of stock options.

The company's authorized share capital is 100,000,000 common shares with no par value.

Outlook

The Company plans to put the Project into production as an open pit heap leach operation and to construct facilities to process ore at a rate of 4.5million tonnes (5.0million tons) per year and these have been reduced from the earlier planned mining rates. Projected life of the open pit heap leach operation has increased from 7 years to 12 years. The Company also plans to produce and sell aggregate for an extended period after gold and silver production from the heap leach operation has ended. The Company has completed or is proceeding with detailed engineering designs for each of the key facilities to be constructed. The Company is also securing approvals such as building permits and other approvals for these facilities. Cost estimates for construction of the key facilities are being obtained from contractors. These cost estimates are being incorporated into the feasibility study update, which is being prepared by Norwest Corporation of Vancouver. The feasibility study update, once completed, will be considered by management in connection with making a production decision.

If all approvals and permits are secured for the Project and a production decision is made, the Company will need significant additional financing to develop the Project into an operating mine. The Company believes that financing for the Project can be secured if gold and silver prices remain at or above $600.00/oz and $12.50/oz respectively and these are the prices used for the feasibility study base case cash flow projections that were released on December 14, 2007. Gold and silver prices averaged $972.35/oz and $14.67/oz in 2009 and closing prices on March 19, 2010 were $1,105.50/oz and $16.96/oz respectively. The Company is targeting a project financing in the first quarter of 2011. The ability to finance the Project will be subject to market conditions at the time of financing.

The following are possible financing options that the Company will evaluate, and that may be combined:

a. An equity financing;
b. A combination of equity and debt;
c. A silver-stream financing; and
d. A merger with an established mining company.

It is not expected that the Company will hedge any of its gold or silver production.

Subsequent Event

Four directors exercised a total of 700,000 options on shares for proceeds of $233,111 (C$245,000) in January 2010.

Application of Critical Accounting Estimates

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.

The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below:

Mineral Property and Exploration Costs

Exploration costs are expensed as incurred. Development costs are expensed until it has been established that a mineral deposit is commercially mineable and a production decision has been made by the Company to implement a mining plan and develop a mine, at which point the costs subsequently incurred to develop the mine on the property prior to the start of mining operations are capitalized.

The Company capitalizes the cost of acquiring mineral property interests, including undeveloped mineral property interests, until the viability of the mineral interest is determined. Capitalized acquisition costs are expensed if it is determined that the mineral property has no future economic value. Exploration stage mineral interests represent interests in properties that are believed to potentially contain (i) other mineralized material such as measured, indicated or inferred resources with insufficient drill hole spacing to qualify as proven and probable mineral reserves and (ii) other mine-related or green field exploration potential that are not an immediate part of measured or indicated resources. The Company's mineral rights are generally enforceable regardless of whether or not proven and probable reserves have been established. The Company has the ability and intent to renew mineral rights where the existing term is not sufficient to recover undeveloped mineral interests.

Capitalized amounts (including capitalized development costs) are also written down if future cash flows, including potential sales proceeds, related to the mineral property are estimated to be less than the property's total carrying value. Management reviews the carrying value of each mineral property periodically, and, whenever events or changes in circumstances indicate that the carrying value may not be recoverable, makes the necessary adjustments. Reductions in the carrying value of a property would be recorded to the extent that the total carrying value of the mineral property exceeds its estimated fair value. A write down of $167,898 (2008 - $1,270,366) in mineral property interests was recorded for the year ended December 31, 2009.

Asset Retirement Obligations

In accordance with the Accounting for Asset Retirement Obligations, the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company has recorded an asset retirement obligation to reflect its legal obligations related to future abandonment of its mineral property using estimated expected cash flow associated with the obligation and discounting the amount using a credit-adjusted, risk-free interest rate. At least annually, the Company reassesses the obligation to determine whether or not a change in any estimated obligation is necessary. The Company has evaluated whether or not there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. The asset retirement obligation recorded as a liability on the Consolidated Balance Sheet is $177,564 (2008 - $162,903) as at December 31, 2009.

Stock-based Compensation

Management has made significant assumptions and estimates in determining the fair market value of stock-based compensation granted to directors, officers, employees and consultants. These estimates have an effect on the stock-based compensation expense recognized and the additional paid-in capital and share capital balances on the Company's Balance Sheet. The value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. For consultants, such amount is revalued on a quarterly basis. To date, substantially all of our stock option grants have been to directors and officers of the Company. Increases in the Company's share price will likely result in increased stock option compensation expense. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected term of the option award and stock price volatility. The expected life used for the purposes of the Black-Scholes calculation is the term of the award. These estimates involve inherent uncertainties and the application of management judgment.

Recently Issued Accounting Standards

In January 2010, an accounting standard update on codification, Fair value Measurements and Disclosures, improving disclosures about fair value measurements was issued. This update provides amendments that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The standard adds new disclosure and clarifies existing disclosure requirements. The new standard requires disclosures of the fair value of financial instruments for interim reporting periods of publicly traded companies in addition to the annual disclosure required at year-end. The provisions of the new standard are effective for the interim periods ending after June 15, 2009. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In June 2008, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force ("EITF") Issue 07-5 (EITF 07-5), "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock" which is now included in the FASB Accounting Standards Codification at ASC 815-40-15. This guidance requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument's contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), now included in the FASB Codification at ASC 815-10-15-74(a), and should be classified as a liability and marked-to-market. ASC 815-40-15 was effective for fiscal years beginning after December 15, 2008 and thus, upon its adoption on January 1, 2009, was applied to the Company's outstanding stock options and warrants.

In January 2010, an accounting standard update on stock compensation was issued. This accounting standards update codifies Escrowed Share Arrangements and the Presumption of Compensation. When evaluating whether presumption of compensation has been overcome, registrants should consider the substance of the arrangement, including whether the arrangement was entered into for purposes unrelated to, and not contingent upon, continued employment. An escrowed share arrangement in which the shares are automatically forfeited if employment terminates is compensation. The adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements.

In September 2009, an accounting standard update, "Fair Value Measurement and Disclosures" was issued. This amendments to Fair Value Measurements and Disclosures-Overall for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this Update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this Update. The amendments in this Update are effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. If an entity elects to early adopt the measurement amendments in this Update, the entity is permitted to defer the adoption of the disclosure provisions until periods ending after December 15, 2009. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In August 2009, "Fair Value of Measurements and Disclosure - Measuring Liabilities at Fair Value" was issued. The new guidance provides clarification . . .