GOLD RESERVE LTD 10-K

Item 1A. Risk Factors If we do not prevail in our arbitration proceedings and obtain compensation from the Venezuelan government for the value of our investment in the Brisas Project, the Company would be materially adversely affected. On October 21, 2009, we filed a Request for Arbitration under the Additional Facility Rules of ICSID. In November 2009, the Request for Arbitration was registered by ICSID. We commenced the arbitration proceedings to establish Venezuela’s liability for its breaches of the Canada-Venezuela Treaty, including the expropriation of the Brisas Project, and to obtain compensation claimed us as a result of such breaches. The cost of prosecuting our claims over an estimated three to five years could be substantial, and there is no assurance that we will be successful in our claims or, if successful, will collect any compensation from the Venezuelan government. If we are unable to prevail on claims against the Venezuelan government or collect compensation in respect of our claims, the Company would be materially adversely affected. Failure to acquire or invest in another mining project would adversely affect future results. The Company is currently an exploration stage company with no mining properties at this time. We currently do not generate revenue from operations and have historically financed operating activities primarily from the sale of common shares, other equity securities or debt securities. With the expropriation of the Brisas Project, we are actively pursuing alternative mining prospects. However, the identification of a viable mining project takes time, and a substantial amount of management’s attention is currently focused on the Brisas arbitration proceeding. Even if a new mining project is identified, there is no guarantee that we could adequately finance or successfully construct and operate the project. If we are unable to identify, finance and/or construct and operate another project, our future financial condition and results of operations could be materially adversely affected. As of March 30, 2010, the Company had approximately $77 million in cash and investments. In the near-term, management believes that cash and investment balances are sufficient to enable us to fund our activities through 2011 (excluding any substantial acquisition or development activities). The conversion or repurchase of our convertible notes could result in the issuance of a significant number of our common shares causing significant dilution to existing shareholders and, in certain circumstances, could result in a change of control. In May 2007, we issued $103,500,000 aggregate principal amount of 5.50% convertible notes due on June 15, 2022. The notes are convertible into Class A common shares of the Company at the initial conversion rate, subject to adjustment, of 132.626 shares per $1,000 principal amount (equivalent to a conversion price of $7.54) or approximately 13.3 million common shares. Upon a request for payment, we generally have the option to deliver common shares, cash or a combination thereof for the notes surrendered. On June 15, 2012 note holders have a one time option to require the Company to repurchase the notes, at a price equal to 100% of the principal amount of the notes plus accrued but unpaid interest. The repurchase of the notes for cash may not occur if we lack sufficient liquidity at that time. As a result, we may elect to satisfy our obligation to pay the repurchase price, in whole or in part, by delivering common shares. If in the future we elect to repurchase the notes with common shares, we would be required to issue shares based on the share price on June 15, 2012, which will likely result in significant dilution to existing shareholders and a potential change of control of the Company which could result in the payment of significant severance compensation pursuant to change of control agreements with certain employees. Uncertainty resulting from the outcome of the litigation regarding the enjoined hostile takeover bid may adversely affect our business. On December 15, 2008, Rusoro Mining Ltd (“Rusoro”) made an unsolicited proposal to acquire all of the Company’s outstanding shares. On December 16, 2008, the Company filed an action in the Ontario Superior Court of Justice against Rusoro and Rusoro’s financial advisor Endeavour Financial International Corporation (“Endeavour”) seeking an injunction restraining Rusoro and Endeavour from proceeding with Rusoro’s unsolicited offer, significant monetary damages, and various other items. Endeavour was the Company’s financial advisor from 2004 until shortly after the commencement of Rusoro’s offer. Subsequently, the Ontario Superior Court of Justice granted us an interlocutory injunction restraining Rusoro and Endeavour from proceeding with any hostile bid to acquire the shares of the Company until the conclusion and disposition at trial of our original legal action. In April 2009, a request for permission to appeal by Rusoro was denied and Rusoro and Endeavour filed counterclaims for, among other things, damages of Cdn $102.5 million and $0.5 million, respectively. Our legal action is ongoing and there can be no assurances as to its ultimate outcome, whether Rusoro and or Endeavour will pursue any other legal course of action or, if successful, whether Rusoro will initiate another unsolicited offer for the Company. Failure to retain and attract key personnel could adversely affect the Company. We are and will be dependent upon the abilities and continued participation of key management personnel to manage the Brisas arbitration and identify, acquire and develop new opportunities. Substantially all of the key management personnel have been employed by the Company for over 15 years. If the services of our key employees were lost (in particular those long time key management personnel possessing important historical knowledge related to the Brisas Project which is relevant to our arbitration claims) or we are unable to obtain the new personnel necessary to execute our plan to acquire a new project, it could have a material adverse effect on our future operations. Operating losses are expected to continue. We have experienced losses from operations for each of the last five years as the result of expenditures associated with corporate activities related to the development of the Brisas Project and the Choco 5 property, including the write-off of previously capitalized expenditures associated with our Venezuelan operations that are recorded in our consolidated statement of operations. We expect this trend to continue until sometime after the Company invests in an alternative project and achieves commercial production, if any. In addition, such losses may increase if we invest in an alternative project and we can give no assurances that this trend will ultimately be reversed. We may raise funds for future operations through the issuance of common shares, debt instruments convertible into common shares or other equity-based instruments. In order to finance an alternative project, we may raise additional funds through the issuance of common shares, debt instruments convertible into common shares or other equity-based instruments, such as warrants. We cannot predict the size of any such future issuances of securities, or the effect, if any, that future issuances and sales of our securities will have on the market price of our common shares or the fair market value of the notes. Any transaction involving the issuance of previously authorized but unissued shares, or securities convertible into shares, will result in dilution, possibly of a substantial nature, to present and prospective holders of shares. Our ability to generate the cash needed to pay interest and principal amounts on the notes and service any other debt depends on many factors, some of which are beyond our control. Unless and until we acquire or develop other operating properties, cash to meet our obligations will be sourced from cash on hand or the issuance of additional equity or debt securities. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or to delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. The price of our common shares may be volatile. Our common shares are publicly traded and are subject to various factors that have historically made their price volatile. The market price of our common shares may fluctuate based on a number of factors, including: · the result of our arbitration and litigation proceedings; · economic and political developments in Venezuela; · our operating performance and financial condition; · the performance of competitors and other similar companies; · the public’s reaction to our press releases, public announcements by our competitors regarding mining development or other matters and our filings with the various securities regulatory authorities; · the price of gold and copper and other metal prices, as well as metal production volatility; · changes in recommendations by research analysts who track our common shares or the shares of other companies in the resource sector; · changes in general economic conditions; · the arrival or departure of key personnel; · acquisitions, strategic alliances or joint ventures involving us or our competitors; · the dilutive effect of the sale by us of significantly more common shares in order to finance our activities; and · other factors listed under “Cautionary statement regarding forward-looking statements.” In addition, the market price of the common shares is affected by many variables not directly related to our performance and that are therefore not within our control. These include other developments that affect the market for all resource sector shares, the breadth of the public market for the common shares, and the attractiveness of alternative investments. The effect of these and other factors on the market price of the common shares on the Toronto Stock Exchange (“TSX”) and NYSE Amex (formerly known as AMEX) has historically made our share price volatile and suggests that our share price will continue to be volatile in the future. Risks inherent in the mining industry could adversely impact future operations. Exploration for gold and other metals is speculative in nature, involves many risks and frequently is unsuccessful. Exploration programs entail risks relating to the location of economic ore bodies, the development of appropriate metallurgical processes, the receipt of necessary governmental permits and regulatory approvals and the construction of mining and processing facilities at the mining site. If ore bodies are developed, it can take a number of years and substantial expenditures from the initial phases of drilling until production commences, during which time the economic feasibility of production may change. Significant capital investment is required to achieve commercial production from exploration efforts and there is no assurance that we will have, or be able to raise, the required funds to engage in these activities or to meet our obligations with respect to the exploration properties in which we may acquire an interest. To the extent we are successful in any exploration program or identify any acquisition opportunities, we may experience problems associated with the exploration or development of such projects or may not be able to find adequate acquisition opportunities. Any one or more of these factors or occurrence of other risks could cause us not to realize the anticipated benefits of an acquisition of properties or companies, and could have a material adverse effect on our financial condition and results of operations. U.S. Internal Revenue Service designation as a “passive foreign investment company” may result in adverse U.S. tax consequences to U.S. shareholders. U.S. taxpayers should be aware that we have determined that the Company is a “passive foreign investment company” under Section 1297(a) of the U.S. Internal Revenue Code (a “PFIC”) for the taxable year ended December 31, 2009, and it may be a PFIC for all taxable years prior to the time the Company has income from production activities. We do not, however, believe that any of the Company’s subsidiaries were PFICs as to any shareholder of the Company for the taxable year ended December 31, 2009. For taxable years in which the Company is a PFIC, any gain recognized on the sale of the Company's common shares and any “excess distributions” (as specifically defined) paid on the Company's common shares must be ratably allocated to each day in a U.S. taxpayer’s holding period for the common shares. The amount of any such gain or excess distribution allocated to prior years of such U.S. taxpayer’s holding period for the common shares generally will be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such prior year, and the U.S. taxpayer will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year. Alternatively, a U.S. taxpayer that makes a timely and effective “QEF election” generally will be subject to U.S. federal income tax on such U.S. taxpayer’s pro rata share of the Company's “net capital gain” and “ordinary earnings” (calculated under U.S. federal income tax rules), regardless of whether such amounts are actually distributed by the Company. For a U.S. taxpayer to make a QEF election, the Company must agree to supply annually to the U.S. taxpayer the “PFIC Annual Information Statement” and permit the U.S. taxpayer access to certain information in the event of an audit by the U.S. tax authorities. We will prepare and make the statement available to U.S. taxpayers, and will permit access to the information. As a possible second alternative, a U.S. taxpayer may make a “mark-to-market election” with respect to a taxable year in which the Company is a PFIC and the common shares are “marketable stock” (as specifically defined). A U.S. taxpayer that makes a mark-to-market election generally will include in gross income, for each taxable year in which the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares as of the close of such taxable year over (b) such U.S. taxpayer’s adjusted tax basis in such common shares. The determination of whether the Company and any of its subsidiaries will be a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether the Company and any of its subsidiaries will be a PFIC for any taxable year generally depends on the Company's and its subsidiaries’ assets and income over the course of each such taxable year and, as a result, cannot be predicted with certainty as of the date of this Annual Report on Form 10-K. Accordingly, there can be no assurance that the Company and any of its subsidiaries will not be a PFIC for any taxable year. It may be difficult to bring certain actions or enforce judgments against the Company and/or its directors and executive officers. Investors in the U.S. or in other jurisdictions outside of Canada may have difficulty bringing actions and enforcing judgments against the Company, our directors or executive officers based on civil liability provisions of federal securities laws or other laws of the U.S. or any state thereof or the equivalent laws of other jurisdictions of residence. We are organized under the laws of the Yukon Territory, Canada. Some of our directors and officers, and some of the experts named in our filings, are residents of Canada or otherwise reside outside of the U.S. and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside of the U.S. As a result, it may be difficult for investors in the U.S. or outside of Canada to bring an action in the U.S. against directors, officers or experts who are not resident in the U.S. It may also be difficult for an investor to enforce a judgment obtained in a U.S. court or a court of another jurisdiction of residence predicated upon the civil liability provisions of Canadian security laws or U.S. federal securities laws or other laws of the U.S. or any state thereof against us or those persons. Item 1B. Unresolved Staff Comments Not Applicable.