Item 1. Financial Statements
Item
1. Financial Statements (Unaudited)
CONSOLIDATED BALANCE SHEETS
September 30, 2010 (unaudited)
September 30, December 31,
U.S. Dollars 2010 2009
ASSETS
Current Assets:
Cash and cash equivalents (Note 4) $ 55,440,670 $ 60,962,813
Marketable debt securities (Note 5) 10,032,392 10,175,020
Marketable equity securities (Note 6) 2,020,383 598,825
Deposits, advances and other 699,789 566,483
Total current assets 68,193,234 72,303,141
Property, plant and equipment, net (Note 9) 30,022,617 38,122,102
Restricted cash (Note 13) 8,995,701 9,489,777
Total assets $ 107,211,552 $ 119,915,020
LIABILITIES
Current Liabilities :
Accounts payable and accrued expenses $ 2,681,385 $ 3,790,003
Accrued interest 1,641,849 234,550
Total current liabilities 4,323,234 4,024,553
Convertible notes (Note 16) 96,128,728 93,693,168
Total liabilities 100,451,962 97,717,721
Noncontrolling interest 2,275,026 2,279,699
Measurement uncertainty (Note 1)
Commitments and contingencies (Notes 11, 13)
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value, none issued
Common shares and equity units, without par value (Note 15) 248,239,008 247,905,231
Equity component of convertible notes (Note 16) 28,652,785 28,652,785
Less common shares held by affiliates (636,267) (636,267)
Stock options (Note 11) 10,077,910 10,014,136
Accumulated deficit (282,272,209) (265,630,369)
Accumulated other comprehensive income (loss) 534,028 (277,225)
KSOP debt (Note 10) (110,691) (110,691)
Total shareholders' equity 4,484,564 19,917,600
Total liabilities and shareholders' equity $ 107,211,552 $ 119,915,020
The accompanying notes are an integral part of the consolidated financial statements.
Approved by the Board of Directors:
s/ Chris D. Mikkelsen s/ Patrick D. McChesney
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)
Three Months Ended Nine Months Ended
U.S. Dollars 2010 2009 2010 2009
OTHER INCOME
Interest $ 62,748 $ 74,672 $ 191,285 $ 221,924
Gain on extinguishment of debt 601,936
Gain on disposition of marketable securities 42,042 285,362 148,593 2,139,345
Gain on sale of equipment 36,633 406,677
Foreign currency (loss) gain (56,181) 46,779 88,105 (4,142)
85,242 406,813 834,660 2,959,063
EXPENSES
Corporate general and administrative 729,920 1,147,667 2,511,437 3,668,635
Venezuelan operations 327,830 686,147 1,204,481 2,152,968
Equipment holding costs 305,979 12,500 784,968 75,458
Corporate communications 101,124 195,166 363,415 599,617
Legal and accounting 81,148 222,286 372,810 1,292,225
Loss on sale of equipment 3,423,544 3,423,544
Arbitration (Note 3) 3,437,287 260,771 5,861,225 260,771
Takeover defense (Note 17) 23,804 1,383,002
4,983,288 5,971,885 11,098,336 12,856,220
Loss before interest expense
and income tax (4,898,046) (5,565,072) (10,263,676) (9,897,157)
Interest expense (2,246,755) (6,654,770)
Loss before income tax (7,144,801) (5,565,072) (16,918,446) (9,897,157)
Income tax benefit (expense) 213,964 1,198 276,606 (165,479)
Net loss for the period $(6,930,837) $(5,563,874) $ (16,641,840) $(10,062,636)
Net loss per share, basic and diluted $ (0.12) $ (0.10) $ (0.29) $ (0.18)
Weighted average common
shares outstanding 57,806,689 57,421,516 57,700,834 57,191,673
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF DEFICIT
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
U.S. Dollars
Deficit, December 31, 2009 $ (265,630,369)
Net loss for the period (16,641,840)
Deficit, September 30, 2010 $ (282,272,209)
Deficit, December 31, 2008 $ (100,180,541)
Net loss for the period (10,062,636)
Deficit, September 30, 2009 $ (110,243,177)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)
Three Months Ended Nine Months Ended
U.S. Dollars 2010 2009 2010 2009
Net loss for the period $ (6,930,837) $ (5,563,874) $(16,641,840) $ (10,062,636)
Other comprehensive income, net of tax:
Unrealized gain on marketable securities 462,576 647,823 959,846 1,599,245
Adjustment for realized gains
included in net loss (42,042) (285,362) (148,593) (2,139,345)
Other comprehensive income (loss) 420,534 362,461 811,253 (540,100)
Comprehensive loss for the period $ (6,510,303) $ (5,201,413) $ (15,830,587) $ (10,602,736)
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)
Three Months Ended Nine Months Ended
U.S. Dollars 2010 2009 2010 2009
Cash Flows from Operating Activities:
Net loss for the period $ (6,930,837) $ (5,563,874) $ (16,641,840) $ (10,062,636)
Adjustments to reconcile net loss to net cash
used by operating activities:
Stock option compensation 10,690 90,657 91,862 475,399
Depreciation 29,845 53,548 105,564 161,595
Gain on extinguishment of debt (601,936)
(Gain) loss on sale of equipment (36,633) 3,423,544 (406,677) 3,423,544
Amortization of premium on
marketable debt securities 48,065 48,066 142,628 61,650
Accretion of convertible notes 842,142 2,435,560
Foreign currency gain (142,699) (34,621)
Other 8,283 (3,715) (4,673) (8,679)
Net gain on disposition of marketable securities (42,042) (285,362) (148,593) (2,139,345)
Future income tax (benefit) expense (216,640) (275,106) 169,815
Shares issued for compensation 26,465 264,605 392,025
Changes in non-cash working capital:
Net decrease (increase) in deposits and advances 76,190 386,049 (133,306) 178,761
Net increase (decrease) in accounts payable
and accrued expenses 2,242,781 (1,143,286) 298,681 (4,849,511)
Net cash used in operating activities (3,941,691) (3,137,072) (14,271,295) (12,833,939)
Cash Flows from Investing Activities:
Proceeds from disposition of marketable securities 134,937 2,118,614 744,529 5,192,893
Purchase of marketable securities (99,159) (250,000) (931,135) (13,670,028)
Purchase of property, plant and equipment (2,552) (6,062,697) (500,992) (11,818,595)
Proceeds from sales of equipment 50,506 7,297,598 8,901,590 7,297,598
Decrease in restricted cash 1,742,162 494,076 2,490,970
Capitalized interest paid on convertible notes (2,828,841)
Other (7,460) (35,929)
Net cash provided by (used in) investing activities 83,732 4,838,217 8,708,068 (13,371,932)
Cash Flows from Financing Activities:
Net proceeds from the issuance of common shares 41,084
Extinguishment of convertible notes (415,254)
Net cash provided by (used in) financing activities 41,084 (415,254)
Change in Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (3,857,959) 1,701,145 (5,522,143) (26,621,125)
Cash and cash equivalents - beginning of period 59,298,629 63,227,897 60,962,813 91,550,167
Cash and cash equivalents - end of period $ 55,440,670 $ 64,929,042 $ 55,440,670 $ 64,929,042
The accompanying notes are an integral part of the consolidated financial statements.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010
and 2009 (unaudited)
Expressed in U.S. Dollars
1. The Company and Significant Accounting
Policies
The Company. Gold Reserve Inc. (the “Company”) is an exploration
stage company incorporated in 1998 under the laws of the Yukon Territory, Canada, and is the successor issuer to Gold Reserve Corporation which was incorporated in
1956. The Company is engaged in the business of acquiring, exploring and
developing mining projects. From 1992 to 2009 the Company focused substantially
all of its management and financial resources on the development of the Brisas
gold and copper project located in the Kilometre 88 mining district of the
State of Bolivar in south-eastern Venezuela (which we refer to as the “Brisas
Project” or “Brisas”). As further detailed in Note 3, we discontinued
development of the Brisas Project after it was expropriated by the Venezuelan
government and while we are pursuing our arbitration claim. While we are
resolving our investment dispute, either through arbitration or settlement,
with Venezuela we are also seeking to invest in or acquire alternative mining
projects. The Company has no revenue producing mining operations at this time.
All amounts shown herein are expressed in U.S. dollars unless otherwise noted.
The expense categories shown in the consolidated statements of operations have
been revised on a comparative basis to better present the current operations of
the Company. The revisions had no effect
on previously reported results of operations.
In
February 1999, the shareholders of Gold Reserve Corporation approved a plan of
reorganization whereby Gold Reserve Corporation became a subsidiary of Gold Reserve Inc., the successor issuer (the “Reorganization”). Generally, each shareholder of Gold Reserve Corporation received one Gold Reserve Inc. Class A common share for each common
share owned of Gold Reserve Corporation.
Certain
U.S. holders of Gold Reserve Corporation elected, for tax reasons, to receive
equity units in lieu of Gold Reserve Inc. Class A common shares. An equity unit
is comprised of one Gold Reserve Inc. Class B common share and one Gold Reserve Corporation Class B common share. Each equity unit is substantially equivalent to a
Class A common share and is immediately convertible into a Gold Reserve Inc. Class
A common share, upon compliance with certain procedures. Equity units are not
listed for trading on any stock exchange, but, subject to compliance with
applicable federal, provincial and state securities laws, may be transferred.
Unless otherwise noted, general references to common shares of the Company
include Class A common shares and Class B common shares as a combined group.
Principles of Consolidation .
The consolidated financial statements contained herein have been prepared in
accordance with accounting principles generally accepted in Canada, which as described in Note 18, differ in certain material respects from accounting
principles generally accepted in the U.S.
These
consolidated financial statements include the accounts of the Company, Gold Reserve Corporation, two domestic subsidiaries, Great Basin Energies, Inc. (“Great Basin”)
and MGC Ventures Inc. (“MGC Ventures”), four Venezuelan subsidiaries, two
Barbadian subsidiaries and one Aruban subsidiary which were formed to hold the
Company’s interest in its foreign subsidiaries or for future transactions. All
subsidiaries are wholly owned with the exception of Great Basin and MGC
Ventures which are 45% and 44% owned, respectively. All intercompany accounts
and transactions have been eliminated on consolidation. The Company’s policy is
to consolidate those subsidiaries where control exists. See Note 12.
Cash and Cash Equivalents .
The Company considers short-term, highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for purposes
of reporting cash equivalents and cash flows. Cash and cash equivalents are
designated as held-for-trading and recorded at fair value. The Company manages
the exposure of its cash and cash equivalents to credit risk by diversifying
its holdings into major Canadian and U.S. financial institutions and
corporations
Exploration and Development Costs . Exploration costs incurred in locating areas of potential
mineralization are expensed as incurred. Exploration costs of properties or
working interests with specific areas of potential mineralization are
capitalized at cost pending the determination of a property’s economic
viability. Development costs of proven mining properties not yet producing are
capitalized at cost and classified as capitalized exploration costs under
property, plant and equipment. Costs related to staffing and maintenance of
offices and facilities in Venezuela are charged to operations. Property holding
costs are charged to operations during the period if no significant exploration
or development activities are being conducted on the related properties. Upon
commencement of production, capitalized exploration and development costs would
be amortized based on the estimated proven and probable reserves benefited.
Properties determined to be impaired or that are abandoned are written-down to
the estimated fair value. Carrying values do not necessarily reflect present or
future values.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010
and 2009 (unaudited)
Expressed in U.S. Dollars
Property, Plant and Equipment . Property, plant and equipment are recorded at cost less
accumulated depreciation. Replacements and major improvements are capitalized.
Maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation of assets retired or sold are removed from the
accounts and any resulting gain or loss is reflected in operations.
Depreciation is provided using straight-line and accelerated methods over the
lesser of the useful life or lease term of the related asset. Interest and
financing costs incurred during the construction and development of qualifying
assets are capitalized on an interest avoidance basis. The amount capitalized
during an accounting period is determined by applying an interest rate to the
average amount of accumulated qualifying assets during the period. Adjustments
increasing the carrying value of convertible notes upon remeasurement due to a
change in estimated life are considered interest costs and are therefore
eligible for capitalization. The Company’s qualifying assets include its costs
of developing mining properties and constructing new facilities.
Impairment of Long Lived Assets . The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. If the sum of the expected future net cash flows to be
generated from the use or disposition of a long-lived asset (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized and the asset is written down to fair value. Fair
value is generally determined by discounting estimated cash flows, using quoted
market prices where available or making estimates based on the best information
available.
Foreign Currency. The U.S. dollar is the Company’s functional currency.
The Company’s foreign subsidiaries are integrated foreign operations and
accordingly foreign currency amounts are translated into U.S. dollars using the
temporal method. Non-monetary assets and liabilities are translated at
historical rates, monetary assets and liabilities are translated at current
rates and revenue and expense items are translated at average exchange rates
during the reporting period, except for depreciation which is translated at
historical rates. Translation gains and losses are included in operating
expenses. Since the Company has discontinued development of the Brisas project,
the financial statement impact of transactions in the Venezuelan currency is
expected to be reduced in the future.
Stock Based Compensation .
The Company uses the fair value method of accounting for stock options. The
fair value of options granted to employees is computed using the Black-Scholes
method as described in Note 11 and is expensed over the vesting period of the
option. For non-employees, the fair value of stock based compensation is
recorded as an expense over the vesting period or, if earlier, upon completion
of performance. Consideration paid for shares on exercise of share options, in
addition to the fair value attributable to stock options granted, is credited
to capital stock. Fair value of restricted stock issued as compensation is
based on the grant date market value and expensed over the vesting period. The Company also maintains the Gold Reserve Director and
Employee Retention Plan. Units granted under the plan become fully vested and
payable upon a change of control. Each Unit granted to a participant entitles
such person to receive a cash payment equal to the fair market value of one
Gold Reserve Class A Common Share (1) on the date the Unit was granted or (2)
on the date any such participant becomes entitled to payment, whichever is
greater.
Income Taxes . The Company
uses the liability method of accounting for income taxes. Future tax assets and
liabilities are determined based on the differences between the tax basis of
assets and liabilities and those amounts reported in the financial statements.
The future tax assets or liabilities are calculated using the substantively
enacted tax rates expected to apply in the periods in which the differences are
expected to be settled. Future tax assets are recognized to the extent that
they are considered more likely than not to be realized.
Use of Estimates . The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, 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. Actual results could differ from those estimates.
Measurement
Uncertainty. Any operations we may
have are subject to the effects of changes in legal, tax and regulatory
regimes, political, labor and economic developments, social and political
unrest, currency and exchange controls, import/export restrictions and
government bureaucracy in the countries in which we may operate. In 2009, subsequent
to the expropriation and the resulting loss of control and physical access to
the Brisas project, we recorded a $150.7 million non-cash write-off of the
carrying value of the expropriated assets including an adjustment for the
estimated net realizable value of certain processing and related equipment
purchased for the Brisas Project of approximately $14.5 million. The realizable
value of the remaining processing and related equipment may be different than
management’s current estimate. See Notes 3, 9 and 13. The Company operates and
files tax returns in a number of jurisdictions. The preparation of such tax
filings requires considerable judgment and the use of assumptions. Accordingly,
the amounts reported could vary in the future.
Net Loss Per Share . Net loss per share is computed by dividing net loss
by the combined weighted average number of Class A and B common shares
outstanding during each year, which is reduced by the common shares owned by Great Basin and MGC Ventures. In periods in which a loss is incurred, the effect of
potential issuances of shares under options and convertible notes would be
anti-dilutive, and therefore basic and diluted losses per share are the same.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010
and 2009 (unaudited)
Expressed in U.S. Dollars
Asset
Retirement Obligations . The fair value of a liability for an asset retirement
obligation is recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and
amortized over the same period as the underlying asset.
Convertible Notes . Convertible
notes are initially recorded at fair value and subsequently measured at
amortized cost. The fair value is allocated between the equity and debt
component parts based on their respective fair values at the time of issuance
and recorded net of transaction costs. The equity portion of the notes is
estimated using the residual value method. The fair value of the debt component
is accreted to the face value of the notes using the effective interest rate
method over the expected life of the notes, with the resulting charge recorded
as interest expense. Interest expense allocable to the qualifying cost of
developing mining properties and to constructing new facilities is capitalized
until assets are ready for their intended use.
Comprehensive Income .
Comprehensive income includes net income or loss and other comprehensive
income. Other comprehensive income may include unrealized gains and losses on
available-for-sale securities, gains and losses on certain derivative
instruments and foreign currency gains and losses from self sustaining foreign
operations. The Company presents comprehensive income and its components in the
consolidated statements of comprehensive loss.
Financial
Instruments. The Company’s
financial instruments consist of cash and cash equivalents, marketable
securities, accounts payable, accrued expenses and convertible notes. Cash and
cash equivalents are classified as held for trading and any changes in fair
value are charged to the statement of operations. Marketable equity securities
are classified as available for sale with any unrealized gain or loss recorded
in other comprehensive income. Marketable debt securities are classified as
held-to-maturity and are measured at amortized cost using the effective
interest rate method. Other financial liabilities are accounted for at cost or
amortized cost.
Disposal of Long-Lived Assets. Long-Lived assets are classified as held for sale in
the period in which certain criteria are met. Assets held for sale are measured
at the lower of carrying amount or fair value less cost to sell and are not
depreciated as long as they remain classified as held for sale.
2. New
Accounting Policies
US GAAP. The Company currently prepares its financial
statements in accordance with Canadian GAAP and includes a footnote reconciliation
to US GAAP. Effective January 1, 2011, the Company will adopt US GAAP and will
prepare its financial statements in accordance with US GAAP for all subsequent
US and Canadian filings.
3. Expropriation of Brisas Project by
Venezuelan Government and Related Arbitration
From
1992 to 2009 we focused substantially all of our management and financial
resources on the development of the Brisas gold and copper project located in
the Kilometre 88 mining district of the State of Bolivar in south-eastern Venezuela. After approval of the Brisas operating plan and the Environmental and Social
Impact Study in 2003 and 2007, respectively, the Ministry of Environment issued
in March 2007, the Authorization to Affect for the Brisas Project. In April
2008, the Ministry of Environment revoked the Authorization to Affect without
prior notification.
After
months of continuous efforts to meet with representatives of the Venezuelan
government to resolve the issues related to the revocation of the Authorization
to Affect, on April 21, 2009 the Company notified the Venezuelan government of
the existence of a dispute under the Agreement between the Government of Canada
and the Government of the Republic of Venezuela for the Promotion and
Protection of Investments (“Canada – Venezuela Treaty”).
After
additional months of efforts to meet with representatives of the Venezuelan
government to resolve the issues related to the revocation of the Authorization
to Affect, on October 21, 2009 we filed a Request for Arbitration under the
Additional Facility Rules of the International Centre for Settlement of
Investment Disputes (ICSID), against the Bolivarian Republic of Venezuela (“Respondent”). On October 26, 2009, Venezuelan
government personnel arrived at the Brisas Project camp site, claimed ownership
of the Brisas Alluvial Concession, seized assets, expelled our personnel and
took physical possession of the property. Subsequently, on November 4, 2009,
the Venezuelan government notified the Company through the issuance of an Administrative
Act, dated October 20, 2009, of its intent to cancel the Company’s underlying
hard rock concession which was formally cancelled in June 2010. In November 2009 our Request for Arbitration was
registered by ICSID (Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1)).
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
As a result of the expropriation of the Brisas Project by the Venezuelan government we no longer have control or physical access to the project which has caused the Company to discontinue the development of its Venezuelan properties, including Brisas and Choco 5 (which was a grass-roots exploration property also located in the State of Bolivar) and discontinue reporting mineral reserves for Brisas. In 2009 we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets including an adjustment for the estimated net realizable value of certain processing and related equipment purchased for the Brisas Project of approximately $14.5 million. The realizable value of the remaining processing and related equipment may be different than managements current estimate.
The Company is seeking compensation in the arbitration for all of the loss and damage resulting from Venezuelas wrongful conduct which includes the full market value of the legal rights to develop the Brisas Project. The Tribunal held the first session with the parties on April 23, 2010 during which time several procedural matters were agreed to, including the time schedule for the Arbitration. In compliance with that schedule, we filed our initial written submission, known as the Memorial, on September 24, 2010. The Respondent is required to file its reply to the Companys Memorial by March 7, 2011. Thereafter, further written submissions are scheduled to be made prior to the oral hearings, which are scheduled to commence on December 5, 2011.
As a precondition to bringing an arbitration claim under the Canada-Venezuela Treaty the Company waived its right to commence or continue before Venezuelan courts or tribunals with other legal or administrative challenges to the conduct that forms the basis of this ICSID claim, including the revocation of the Authorization to Affect and the denial of the extension of the Brisas Alluvial and El Pauji Concessions. Both concessions were part of the Brisas Project.
4. Cash and Cash Equivalents
September 30, December 31,
2010 2009
Bank deposits $ 48,124,779 $ 53,900,646
Money market funds 7,315,891 7,062,167
Total $ 55,440,670 $ 60,962,813
The above amounts exclude restricted cash of approximately $9 million and $9.5 million as at September 30, 2010 and December 31, 2009, respectively. See Note 13, Commitments. At September 30, 2010 and December 31, 2009, the Company had approximately $151,000 and $59,000 respectively, in Venezuela and banks outside Canada and the U.S.
5. Marketable Debt Securities
September 30, December 31,
2010 2009
Amortized cost $ 10,032,392 $ 10,175,020
The Companys marketable debt securities are classified as held-to-maturity and are measured at amortized cost using the effective interest rate method.
6. Marketable Equity Securities
September 30, December 31,
2010 2009
Fair value at beginning of year $ 598,825 $ 1,342,760
Acquisitions 681,135 2,135,293
Dispositions, at cost (345,936) (2,102,548)
Realized gain on sale (148,593) (2,274,848)
Unrealized gain 1,234,952 1,498,168
Fair value at balance sheet date $ 2,020,383 $ 598,825
The Companys marketable equity securities are classified as available-for-sale and are recorded at quoted market value with gains and losses recorded within other comprehensive income until realized. As of September 30, 2010 and December 31, 2009 marketable securities had a cost basis of $1,211,249 and $876,049, respectively.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
7. Financial Instruments
The fair values as at September 30, 2010 and December 31, 2009 along with the carrying amounts shown on the consolidated balance sheets for each classification of financial instrument are as follows:
September 30, 2010 December 31, 2009
Carrying Fair Carrying Fair
Classification Amount Value Amount Value
Cash and cash equivalents held for trading $ 55,440,670 $ 55,440,670 $ 60,962,813 $ 60,962,813
Restricted cash held for trading 8,995,701 8,995,701 9,489,777 9,489,777
Marketable debt securities held to maturity 10,032,392 10,041,850 10,175,020 10,208,950
Marketable equity securities available for sale 2,020,383 2,020,383 598,825 598,825
Deposits advances and other held to maturity 699,789 699,789 566,483 566,483
A/P and accruals other financial liabilities 2,681,385 2,681,385 3,790,003 3,790,003
Accrued interest other financial liabilities 1,641,849 1,641,849 234,550 234,550
Convertible notes other financial liabilities 96,128,728 66,033,681 93,693,168 52,540,530
Fair value estimates for marketable securities are made at the balance sheet date by reference to recent market transactions. The convertible notes are not listed on an exchange and the market for them is not active. Fair value estimates for convertible notes are made at the balance sheet date by reference to weighted average transaction prices over the preceding twelve months.
CICA 3862 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities, Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability and Level 3 inputs are unobservable inputs for the asset or liability that reflect the entitys own assumptions.
Fair value
September 30, 2010 Level 1 Level 2 Level 3
Cash and cash equivalents $ 55,440,670 $ 55,440,670
Marketable equity securities 2,020,383 2,020,383
Restricted cash 8,995,701 8,995,701
Fair value
December 31, 2009 Level 1 Level 2 Level 3
Cash and cash equivalents $ 60,962,813 $ 60,962,813
Marketable equity securities 598,825 598,825
Restricted cash 9,489,777 9,489,777
The Company is exposed to various risks including credit risk, liquidity risk, currency risk and interest rate risk as described below:
a) Credit risk is the risk that a counter party will fail to meet its obligations to the Company. The Companys primary exposure to credit risk is through its cash and cash equivalents, restricted cash and marketable debt securities balances. The Company diversifies its cash holdings into major Canadian and U.S. financial institutions and corporations.
b) Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with its financial liabilities. The Company manages this risk by maintaining adequate cash balances through equity and debt offerings to meet its current and foreseeable obligations. The following table presents the Companys payments due on accounts payable and accrued expenses and its undiscounted interest and principal payments due on its convertible notes, based on the estimate that the term of the notes will end on June 15, 2012. If the notes were to reach their contractual maturity date of June 15, 2022, additional interest payments would amount to $56.3 million over the additional ten year term of the notes.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
Payments due by Period
Less than More Than
Total 1 Year 1-3 Years 4-5 Years 5 Years
A/P and accruals $ 2,681,385 $ 2,681,385
Interest 11,258,390 5,629,195 $ 5,629,195
Principal 102,349,000 102,349,000
Total $ 116,288,775 $ 8,310,580 $ 107,978,195
c) The Company is subject to currency risk mainly due to its operations in Venezuela. Transactions denominated in foreign currency are exposed to exchange rate fluctuations which have an impact on the statement of operations. The Companys cash, value added tax and other monetary assets and liabilities that are held in Venezuelan and Canadian currency are subject to fluctuations against the US dollar. A 10% weakening of those currencies against the US dollar would have increased (decreased) the Companys net gain or loss from the translation of foreign currency denominated financial instruments, for the nine months ended September 30, 2010 and 2009, by the amounts shown below.
2010 2009
Venezuelan Bolívar $ (13,383) $ 64,552
Canadian dollar (2,481) 3,485
Total $ (15,864) $ 68,037
The Company limits the amount of currency held in non-U.S dollar accounts, but does not actively use derivative instruments to limit its exposure to fluctuations in foreign currency rates.
d) The Company is subject to the risk that changes in market interest rates will cause fluctuations in the fair values of its financial instruments. Cash and cash equivalents earn floating market rates of interest. Other current financial assets and liabilities are generally not exposed to this risk because of their immediate or short-term maturity. The interest rate on the Companys convertible notes is fixed and therefore the interest payments are not subject to changes in market rates of interest.
8. Capital Management
The capital structure of the Company consists of common shares and equity units, convertible notes, stock options, accumulated deficit, accumulated other comprehensive income and KSOP debt. The Companys objectives when managing its capital are to:
a) maintain sufficient liquidity in order to meet financial obligations including the costs of acquiring and developing mining projects and servicing debt;
b) safeguard the Companys assets and its ability to continue as a going concern and
c) maintain a capital structure that provides the flexibility to access additional sources of capital with minimal dilution to existing shareholders.
The Company manages its capital consistent with the objectives stated above and makes adjustments to its capital structure based on economic conditions and the risk characteristics of the underlying assets. The Company is in compliance with the covenants of its convertible notes. There were no changes to the Companys capital management during 2010.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
9. Property, Plant and Equipment
Accumulated
Cost Depreciation Net
September 30, 2010
United States
Machinery and equipment deposits $ 29,563,378 $ $ 29,563,378
Furniture and office equipment 506,339 (426,277) 80,062
Leasehold improvements 41,190 (38,411) 2,779
$ 30,110,907 $ (464,688) $ 29,646,219
Venezuela
Buildings $ 403,286 $ (277,757) $ 125,529
Furniture and office equipment 482,562 (457,728) 24,834
Transportation equipment 240,534 (223,882) 16,652
Machinery and equipment 497,808 (288,425) 209,383
1,624,190 (1,247,792) 376,398
Total $ 31,735,097 $ (1,712,480) $ 30,022,617
Accumulated
Cost Depreciation Net
December 31, 2009
United States
Machinery and equipment deposits $ 37,491,372 $ $ 37,491,372
Furniture and office equipment 506,007 (399,737) 106,270
Leasehold improvements 41,190 (37,022) 4,168
$ 38,038,569 $ (436,759) $ 37,601,810
Venezuela
Buildings $ 403,286 $ (254,200) $ 149,086
Furniture and office equipment 482,562 (439,028) 43,534
Transportation equipment 480,198 (361,907) 118,291
Machinery and equipment 497,808 (288,427) 209,381
1,863,854 (1,343,562) 520,292
Total $ 39,902,423 $ (1,780,321) $ 38,122,102
Machinery and equipment deposits include amounts paid for infrastructure and milling equipment either in the manufacturing stage or completed and being stored. In 2009 we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets including an adjustment for the estimated net realizable value of certain processing and related equipment purchased for the Brisas Project of approximately $14.5 million. The realizable value of the remaining processing and related equipment may be different than managements current estimate.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
10. KSOP Plan
The KSOP Plan, adopted in 1990 for the benefit of employees, is comprised of two parts, (1) a salary reduction component, or 401(k), and (2) an employee share ownership component, or ESOP. Unallocated shares are recorded as a reduction to shareholders equity. Allocation of common shares or cash contributions to participants accounts is at the discretion of the Companys board of directors, subject to certain limitations. The value of the shares allocated is recorded in the statement of operations with a reduction of the KSOP debt account. The Company allocated shares or made cash contributions to eligible participants for the Plan years 2010, 2009 and 2008 valued at $0, $57,292 and $269,679, respectively. As of September 30, 2010, 22,246 common shares remain unallocated to plan participants.
11. Stock Based Compensation
The Company has two equity incentive plans; the 1997 Equity Incentive Plan (last amended in March 2006 and last re-approved by the shareholders in June 2009, the 1997 Plan) and the 2008 Venezuelan Equity Incentive Plan (approved by the shareholders in June 2008, the Venezuelan Plan). Both plans permit the grants of stock options, stock appreciation rights and restricted stock, or any combination thereof, and each shall be 10% of the Companys outstanding shares, from time to time. The grants will be for terms up to ten years with vesting periods ranging from immediate to up to 3 years
Subsequent to shareholder approval in June 2008, 1,056,947 options previously granted to Venezuelan employees and consultants under the 1997 Plan were transferred to the Venezuelan Plan. The 1997 Plan remains available for insiders, employees and consultants of the Company.
Combined share option transactions for the nine months ended September 30, 2010 and 2009 are as follows:
2010 2009
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding at beginning of period 4,573,318 $ 2.67 5,007,931 $ 3.18
Options exercised (141,666) 0.29
Options expired (439,582) 4.59 (584,589) 4.01
Options forfeited (101,917) 2.83 (79,667) 4.42
Options granted 547,500 0.73
Options outstanding at end of period 3,890,153 2.54 4,891,175 2.79
Options exercisable at end of period 3,462,364 $ 2.81 3,442,265 $ 3.73
Options available for
grant at end of period
under 1997 plan 2,655,139 1,794,322
Options available for
grant at end of period
under Venezuelan plan 5,168,288 4,948,661
Price Price
Range Range
Exercise price at end of period $0.29 - $ 5.36 $ 0.29 - $ 5.36
Exercise price for exercisable shares $0.29 - $ 5.36 $ 0.29 - $ 5.36
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
The following table relates to stock options at September 30, 2010:
Weighted Average
Weighted Weighted Exercise Price
Price Number Average Remaining Average Number of Exercisable
Range Outstanding Contractual Life Exercise Price Exercisable Options
$0.29 - $0.29 1,130,577 3.18 $0.29 702,788 $0.29
$0.73 - $1.89 921,250 2.06 $1.22 921,250 $1.22
$3.95 - $4.19 686,000 1.01 $4.12 686,000 $4.12
$4.22 - $4.62 298,500 1.17 $4.57 298,500 $4.57
$4.83 - $4.83 574,826 0.38 $4.83 574,826 $4.83
$5.07 - $5.36 279,000 1.16 $5.19 279,000 $5.19
$0.29 - $5.36 3,890,153 1.82 $2.54 3,462,364 $2.81
The Company recorded compensation expense during the nine months ended September 30, 2010 and 2009 of $91,862 and $475,398, respectively, for stock options granted. During the nine months ended September 30, 2010 and 2009, 0 and 547,500 new options were granted, respectively. The fair value of options granted in 2009 was calculated at $323,449 using the Black-Scholes model based on the following assumptions:
Weighted average risk free interest rate 1.46%
Expected life 4.6 years
Expected volatility 120%
Dividend yield nil
In addition to the equity incentive plans, the Company also maintains the Gold Reserve Director and Employee Retention Plan. Units granted under the plan become fully vested and payable upon achievement of certain milestones related to the Brisas project or in the event of a change of control. The Companys Board of Directors is currently evaluating modifying the vesting provisions of the units to more adequately reflect the current business objectives of the Company including successful arbitration, settlement of our dispute with Venezuela, reacquiring the rights to the Brisas Project and successful acquisition of a new business opportunity meeting specific parameters. Each Unit granted to a participant entitles such person to receive a cash payment equal to the fair market value of one Gold Reserve Class A Common Share (1) on the date the Unit was granted or (2) on the date any such participant becomes entitled to payment, whichever is greater. As of September 30, 2010 an aggregate of 1,732,500 unvested Units have been granted to directors and executive officers of the Company and 315,000 Units have been granted to other employees. The value of these units, based on the grant date value of the Class A shares, was approximately $8.9 million
12. Related Party Transactions:
MGC Ventures . The Chief Executive Officer, President, Vice President-Finance and Vice President-Administration of the Company are also officers and/or directors and shareholders of MGC Ventures. The Company owned 12,062,953 common shares of MGC Ventures at September 30, 2010 and December 31, 2009, which represented 44% of its outstanding shares. The Company believes it has control over MGC Ventures due to the combined shareholdings of the Company and its officers and directors. MGC Ventures owned 258,083 common shares of the Company at September 30, 2010 and December 31, 2009. In addition, MGC Ventures owned 0 and 280,000 common shares of Great Basin at September 30, 2010 and December 31, 2009, respectively. During the last three years, the Company sublet a portion of its office space to MGC Ventures for $6,000 per year.
Great Basin . The Chief Executive Officer, President, Vice President-Finance and Vice President-Administration of the Company are also officers and/or directors and shareholders of Great Basin. The Company owned 15,661,595 common shares of Great Basin at September 30, 2010 and December 31, 2009, which represented 45% of its outstanding shares. The Company believes it has control over Great Basin due to the combined shareholdings of the Company and its officers and directors. Great Basin owned 491,192 common shares of the Company at September 30, 2010 and December 31, 2009. Great Basin also owned 0 and 170,800 common shares of MGC Ventures at September 30, 2010 and December 31, 2009, respectively. During the last three years, the Company sublet a portion of its office space to Great Basin for $6,000 per year.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010
and 2009 (unaudited)
Expressed in U.S. Dollars
13.
Commitments
In
mid 2007, we commenced procurement efforts for the Brisas Project and placed
orders totaling approximately $125 million for a gyratory crusher, pebble
crushers, SAG and ball mills, mill motors, and other equipment for the Brisas
Project. Since the revocation of the Authorization to Affect, the Company has
sold certain equipment originally costing approximately $61.4 million. The
Company recovered approximately $35.1 million of progress payments and the
purchaser assumed the Company's remaining payment obligations of approximately
$21.9 million resulting in a combined loss on sale of equipment of approximately
$4.4 million. As of September 30, 2010, the Company had remaining equipment
commitments of approximately $9 million due within one year. The Company
opened an irrevocable standby letter of credit with a Canadian chartered bank
providing security on the performance of a portion of these obligations. As of
September 30, 2010 and December 31, 2009, the Company had restricted cash of $9
million and $9.5 million, respectively, as required by this letter of credit.
14. Shareholder
Rights Plan
The Company instituted a shareholder rights plan (the
“Rights Plan”) in 1999. Since the original approval by the shareholders, the
Rights Plan and the Rights Plan agreement have been amended and continued from
time to time. In June 2009, the shareholders approved certain amendments to the
Rights Plan including continuing the Shareholder Rights Plan until June 30,
2012. In December 2008, the Company’s Board of Directors amended the Rights
Plan by extending the definition of “Permitted Bid” to include a bid by an entity
which has confidential information about the Company that has executed a
confidentiality and standstill agreement within three months prior to the
commencement of the bid. The Rights Plan is intended to give adequate time for
shareholders of the Company to properly assess the merits of a take-over bid
without pressure and to allow competing bids to emerge. The Rights Plan is
designed to give the Board of Director’s time to consider alternatives to allow
shareholders to receive full and fair value for their common shares. One right
is issued in respect of each outstanding share. The rights become exercisable
only when a person, including any party related to it or acting jointly with
it, acquires or announces its intention to acquire 20% or more of the Company’s
outstanding shares without complying with the “permitted bid” provisions of the
Rights Plan. Each right would, on exercise, entitle the holder, other than the
acquiring person and related persons, to purchase Class A common shares of the
Company at a 50% discount to the market price at the time.
15. Common
Shares and Equity Units
During
the nine months ended September 30, 2010, the Company issued 141,666 shares at
an average price of $0.29 per share upon exercise of stock options and 231,000
shares at an average price of $1.15 per share as compensation. As of September
30, 2010, there were a total of 58,067,663 Class A and 500,236 Class B shares
issued. During the nine months ended September 30, 2009, the Company issued 551,500
shares at an average price of $0.71 per share as compensation.
16. Convertible
Notes
In
May 2007, the Company issued $103,500,000 aggregate principal amount of its
5.50% Senior subordinated convertible notes. The notes are unsecured, bear
interest at a rate of 5.50% annually, pay interest semi-annually in arrears and
are 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). Upon conversion, the Company will have the option, unless there has
occurred and is then continuing an event of default under the Company’s
indenture, to deliver common shares, cash or a combination of common shares and
cash for the notes surrendered.
The note holders have the
option to require the Company to repurchase the notes on June 15, 2012, at a
price equal to 100% of the principal amount of the notes plus accrued but
unpaid interest. The Company may elect to satisfy its obligation to pay the
repurchase price, in whole or in part, by delivering Common Shares. In the
event of a change of control of the Company, the Company may be required to
offer to repurchase the notes at a purchase price equal to 100% of the principal
amount of the notes plus accrued but unpaid interest unless there has occurred
and is continuing certain events of default under the Company’s indenture.
At any time on or after June
16, 2010, and until June 15, 2012, the Company may redeem the notes, in whole
or in part, for cash at a redemption price equal to 100% of the principal
amount being redeemed plus accrued and unpaid interest if the closing sale
price of the Common Shares is equal to or greater than 150% of the conversion
price then in effect and the closing price for the Company’s Common Shares has
remained above that price for at least twenty trading days in the period of
thirty trading days preceding the Company’s notice of redemption. Beginning on
June 16, 2012, the Company may, at its option, redeem all or part of the notes
for cash at a redemption price equal to 100% of the principal amount being
redeemed plus accrued and unpaid interest.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010
and 2009 (unaudited)
Expressed in U.S. Dollars
The
covenants contained in the 5.50% subordinated note indenture are limited to
administrative issues such as payments of interest, maintenance of office or
agency location, delivery of reports and other related issues. Likewise, events
of default are defined as failure to pay interest and principal amounts when
due, default in the performance of covenants, failure to convert notes upon
holder’s exercise of conversion rights and similar provisions or the Company’s
failure to give notice of a fundamental change which is generally defined as
events related to a change of control in the Company.
Canadian
accounting standards require the Company to allocate the notes between their
equity and debt component parts based on their respective fair values at the
time of issuance. The liability component was computed by discounting the
stream of future payments of interest and principal at the prevailing market
rate for a similar liability that does not have an associated equity component.
The equity portion of the notes was estimated using the residual value method
at approximately $29 million, net of issuance costs. The fair value of the debt
component is accreted to the face value of the notes using the effective
interest rate method over the expected life of the notes, with the resulting
charge recorded as interest expense. The expected life of the notes is an estimate
and is subject to change, if warranted by facts and circumstances related to
the potential early redemption of the notes by either the Company or the
holders. Interest and accretion expense allocable to the qualifying cost of
developing mining properties and to constructing new facilities is capitalized
until assets are ready for their intended use. The Company capitalized interest
and accretion on the notes until October, 2009, when the Company filed for
arbitration and when the Venezuelan government expropriated Brisas. Thereafter
all interest and accretion on the notes has been expensed. As of September 30,
2010, convertible notes with a face value of $1,151,000 had been settled in cash
or repurchased by the Company at a total cost of approximately $451,000.
17. Takeover
Defense and Related Litigation
On
December 15, 2008, Rusoro Mining Ltd. (“Rusoro”) commenced an unsolicited offer
to acquire all of the outstanding shares and equity units of the Company in
consideration for three shares of Rusoro for each Company share or equity unit.
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.
On
February 10, 2009, the Ontario Superior Court of Justice granted an
interlocutory injunction restraining Rusoro from proceeding with any hostile
takeover bid to acquire the shares of the Company until the conclusion and
disposition at trial of the action commenced by the Company. The injunction was
granted by the Court following a motion by the Company on the basis that Rusoro
had access to or benefited from the use of the Company’s confidential
information as a result of Rusoro’s relationship with Endeavour. The Court also
issued an interlocutory injunction restraining Endeavour from having any
involvement with a hostile takeover bid for the Company. The Court further
required that Rusoro, Endeavour and their agents return to the Company both all
the confidential information of the Company and also anything produced from
that confidential information and pay the court costs. Following the issuance
of the interlocutory injunctions, Rusoro withdrew its unsolicited offer to
acquire the outstanding shares and equity units of the Company.
On
February 15, 2009, Rusoro and Endeavour both served a motion with the Ontario
Superior Court of Justice seeking permission to appeal to the Divisional Court the February 10, 2009 order that was granted against them. The Company
opposed these motions which were heard in Toronto on April 2, 2009. On April 6,
2009 the permission to appeal was denied. Rusoro has filed a counterclaim
against the Company for, among other things, damages of Cdn $102.5 million
allegedly arising from the Company’s successful motion for an interlocutory
injunction. Endeavour has filed a $0.5 million counter claim against the
Company relating to the lost opportunity to earn a success fee from the
successful completion of the Rusoro offer. The Company recently added two
additional defendants and amended the claim for monetary damages.
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
18. Differences Between Canadian and U.S. GAAP
The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles (GAAP) in Canada, which differ in certain respects from GAAP in the United States. The effect of the principal measurement differences between U.S. and Canadian GAAP are summarized below.
Consolidated Summarized Balance Sheets
Canadian GAAP Change U.S. GAAP
September 30, 2010
Assets
Current assets $ 68,193,234 $ $ 68,193,234
Property, plant and equipment, net 30,022,617 30,022,617
Other assets 8,995,701 8,995,701
$ 107,211,552 $ $ 107,211,552
Liabilities
Convertible notes C $ 96,128,728 $ 4,354,006 $ 100,482,734
Other liabilities 4,323,234 4,323,234
100,451,962 4,354,006 104,805,968
Noncontrolling interest F 2,275,026 (2,275,026)
Shareholders equity
Common shares & equity units B 248,239,008 (5,698,031) 242,540,977
Equity component of convertible notes C 28,652,785 (28,652,785)
Less, common shares & equity units
held by affiliates (636,267) (636,267)
Contributed surplus E 5,171,603 5,171,603
Stock options B 10,077,910 4,434,753 14,512,663
Accumulated deficit A,B,D (282,272,209) 20,115,348 (262,156,861)
Accumulated other comprehensive income A 534,028 275,106 809,134
KSOP debt (110,691) (110,691)
Total Gold Reserve Inc. equity 4,484,564 (4,354,006) 130,558
Noncontrolling interest F 2,275,026 2,275,026
Total Equity 4,484,564 (2,078,980) 2,405,584
$ 107,211,552 $ $ 107,211,552
Canadian GAAP Change U.S. GAAP
December 31, 2009
Assets
Current assets $ 72,303,141 $ $ 72,303,141
Property, plant and equipment, net 38,122,102 38,122,102
Other assets 9,489,777 9,489,777
$ 119,915,020 $ $ 119,915,020
Liabilities
Convertible notes C $ 93,693,168 $ 6,048,554 $ 99,741,722
Other liabilities 4,024,553 4,024,553
97,717,721 6,048,554 103,766,275
Noncontrolling interest F 2,279,699 (2,279,699)
Shareholders equity
Common shares & equity units B 247,905,231 (5,698,031) 242,207,200
Equity component of convertible notes C 28,652,785 (28,652,785)
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
Less, common shares & equity units
held by affiliates (636,267) (636,267)
Contributed surplus E 5,171,603 5,171,603
Stock options B 10,014,136 4,434,753 14,448,889
Accumulated deficit B,D (265,630,369) 18,695,906 (246,934,463)
Accumulated other comprehensive income (277,225) (277,225)
KSOP debt (110,691) (110,691)
Total Gold Reserve Inc. equity 19,917,600 (6,048,554) 13,869,046
Noncontrolling interest F 2,279,699 2,279,699
Total Equity 19,917,600 (3,768,855) 16,148,745
$ 119,915,020 $ $ 119,915,020
Consolidated Summarized Statements of Operations
2010 2009
Net Loss under Canadian GAAP $ (16,641,840) $ (10,062,636)
Interest expense D 1,694,548
Gain on settlement of debt C (47,429)
Income tax A (275,106) 169,815
Net loss under U.S. GAAP (15,222,398) (9,940,250)
Basic and diluted net loss per share
under U.S. GAAP $ (0.26) $ (0.17)
Consolidated Summarized Statements of Comprehensive Loss
2010 2009
Net loss under U.S. GAAP (15,222,398) (9,940,250)
Other comprehensive income (loss)
Unrealized gain on available-
for-sale securities: A
Holding gain arising during period 1,234,952 1,429,430
Reclassification adjustment for gain
included in net loss (148,593) (2,139,345)
Total comprehensive loss under
U.S. GAAP $ (14,136,039) $ (10,650,165)
Consolidated Summarized Statements of Cash Flows
2010 2009
Cash flow used in operating activities
under Canadian GAAP $ (14,271,295) $ (12,833,939)
Cash flow used in operating activities
under U.S. GAAP $ (14,271,295) $ (12,833,939)
Cash flow provided by (used in) investing
activities under Canadian GAAP $ 8,708,068 $ (13,371,932)
Cash flow provided by (used in) investing
activities under U.S. GAAP $ 8,708,068 $ (13,371,932)
Selected Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2010 and 2009 (unaudited)
Expressed in U.S. Dollars
A Effective September 30, 2008, the Company adopted EIC 172, which requires that the tax benefit of tax loss carryforwards recognized to offset unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale securities, be recognized in net income (loss). EIC 172 was applied retrospectively with restatement of prior periods from January 1, 2007. Under US GAAP, the tax benefit is recorded in other comprehensive income.
B For U.S. GAAP purposes, the Company adopted SFAS 123R (codified within ASC 718), Accounting for Stock Based Compensation effective January 1, 2006. SFAS 123R requires the use of the fair value method of accounting for stock based compensation. This standard is substantially consistent with the revised provisions of CICA 3870, which was adopted by the Company for Canadian GAAP effective January 1, 2004. For U.S.GAAP, the Company applied the modified prospective method of adoption included in SFAS 123R which requires that the company expense the fair value of all unvested and new grants on a prospective basis beginning January 1, 2006. In 2005, for U.S. GAAP purposes, the Company accounted for stock-based employee compensation arrangements using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No.25, Accounting for Stock Issued to Employees. Under Opinion No. 25, when the exercise price of certain stock options is amended, these options are accounted for as variable compensation from the date of the effective repricing. Under this method, following the repricing date, compensation expense is recognized when the quoted market value of the Companys common shares exceeds the amended exercise price. Should the quoted market value subsequently decrease, a recovery of a portion, or all of the previously recognized compensation expense will be recognized. The Company has not amended the exercise price of any stock options since 2001.
C In 2007, the company issued $103,500,000 aggregate principal amount of convertible notes. As described in Note 16, under Canadian GAAP these notes are allocated between their equity and debt component parts. The debt component is accreted to the face value of the notes with the resulting interest expense charged to operations. Under U.S. GAAP, the notes are classified as a liability net of issuance costs and accreted to face value over the term ending on the first put date of the notes. As of September 30, 2010 and December 31, 2009, an additional $24.3 million and $22.6 million, respectively of accretion expense had been incurred for Canadian GAAP purposes over the amount incurred under U.S. GAAP.
D Prior to the Brisas expropriation and related arbitration filing, the Company capitalized interest on its convertible notes on an interest avoidance basis. The amount capitalized during an accounting period is determined by applying an interest rate to the average amount of accumulated qualifying assets during the period. The Companys qualifying assets include its costs of developing mining properties and constructing new facilities. The amount capitalized under U.S. GAAP differed from the amount capitalized under Canadian GAAP due to the difference in the amount of qualifying mineral property costs which had been accumulated under the two sets of accounting principles. Subsequent to the expropriation of the Brisas Project, all capitalized interest was written off.
E In 2003 and 2004, the Company completed equity offerings consisting of common shares and common share purchase warrants. For Canadian GAAP purposes the proceeds from the offerings were recorded as common shares. For U.S. GAAP purposes a value was assigned to the warrants and recorded as a separate element of stockholders equity. Warrants that expired unexercised were subsequently recorded as contributed surplus.
F Under Canadian GAAP, the noncontrolling interest is shown on the balance sheet between liabilities and equity. Under US GAAP, the nononcontrolling interest is reclassified to equity and shown as a separate component from the equity of the parent.
Additional Balance Sheet disclosure - U.S. GAAP
2010 2009
Accounts payable $ 1,786,793 $ 2,064,306
Accrued expenses 894,592 1,242,847
Accounts payable and accrued expenses $ 2,681,385 $ 3,307,153
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.