GOLD RESERVE LTD 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview This Management’s Discussion and Analysis of Financial Condition and Results of Operations, dated November 9, 2010 is intended to assist in understanding and assessing our results of operations and financial condition. The expense categories shown in the consolidated statements of operations were revised as of the end of 2009 to better present the current operations of the Company. As a result the expense categories for the three and nine month periods ended September 30, 2009 have been revised to be comparative with the presentation of the three and nine month periods ended September 30, 2010. The revisions had no effect on previously reported results of operations. Gold Reserve, an exploration stage company, is engaged in the business of acquiring, exploring and developing mining projects. 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 (which we refer to as the “Brisas Project” or “Brisas”). The Brisas Project is one of the largest undeveloped gold/copper deposits in the world, containing estimated ore reserves of 10.2 million ounces of gold and 1.4 billion pounds of copper. In March 2007, the Venezuelan Ministry of Environment (“MinAmb”) issued the Authorization for the Affectation of Natural Resources for the Construction of Infrastructure and Services Phase of the Brisas Project (the “Authorization to Affect”). The Authorization to Affect was issued to the Company based on the extensive work the Company had completed on the development of the Brisas Project including the 2003 and updated 2005 Brisas operating plan approved by the Venezuelan Ministry of Mines (“MIBAM”), and the July 2005 Brisas Environmental and Social Impact Study for the Exploitation and Processing of Gold and Copper Ore (“Estudio de Impacto Ambiental y Sociocultural” or “ESIA”), as supplemented in January 2007, approved by the MinAmb. With the Authorization to Affect, the Company in May 2007 raised (net of expenses) $177.5 million for the Brisas Project comprised of $103.5 million of 5.50% senior subordinated convertible notes (“convertible notes”) and $74 million of common shares. Thereafter we commenced significant pre-construction efforts including awarding contracts for site preparation and construction camp facilities and placing equipment orders totaling approximately $125.3 million. In April 2008, the MinAmb revoked the March 2007 Authorization to Affect without prior notification. After the Company’s Board of Directors unanimously rejected an August 2008 unsolicited offer by Rusoro Mining Ltd. (“Rusoro”) to complete a business combination by issuing two shares of Rusoro for each share of Gold Reserve, Rusoro with the assistance of Endeavour Financial International Corporation (“Endeavour”) in mid December 2008 launched a hostile takeover of the Company. Rusoro was primarily focused on its mining activities in Venezuela and Endeavour had been the Company’s financial advisor from 2004 until shortly after the commencement of the hostile offer. The Company filed an action in the Ontario Superior Court of Justice (“Ontario Court”) seeking an injunction restraining Rusoro and Endeavour from proceeding with the unsolicited offer, significant monetary damages, and various other items. The Ontario Court granted an interlocutory injunction in February 2009 restraining Rusoro from proceeding with any hostile takeover until the conclusion and disposition at trial of the action commenced by the Company. As a result Rusoro withdrew its takeover offer and both Rusoro and Endeavour requested permission to appeal the injunction which was subsequently denied in April 2009. Rusoro 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 and Endeavour 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. (See Part II- Other Information- Item 1. Legal Proceedings- Litigation). In April 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”). In May 2009 the Venezuelan government denied the extension of the Brisas Alluvial Concession and the El Pauji Concession which had been properly requested by the Company pursuant to Article 25 of the Venezuelan mining law, in October 2007 and January 2008, respectively. MIBAM did not respond to our request for the extensions during the requisite 6 month time period as outlined in Article 25. Accordingly, the extensions were automatically granted pursuant to the mining law. After being unsuccessful in our efforts to meet with government officials to resolve the investment dispute, on October 21, 2009 the Company 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. Venezuelan government personnel subsequently arrived at the Brisas Project camp site on October 26, 2009, 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 Brisas hard rock concession and the government formally notified the Company of its cancelation 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)). The Company is seeking compensation in the arbitration for all of the loss and damage resulting from Venezuela’s wrongful conduct which includes the full market value of the legal rights to develop the Brisas Project. The Tribunal held its 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 claiming US$1.928 billion compensation for all of the loss and damage resulting from Venezuela’s wrongful conduct, which includes the full market value of the legal rights to develop the Brisas Project. The Respondent is required to file its reply to the Company’s 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. 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 management’s current estimate. The information contained in this Quarterly Report on Form 10-Q relating to Brisas and Choco 5 is presented for informational and historical purposes and should not be construed as an indication of our expectations regarding the future development and operation of these properties or the outcome of the arbitration proceedings. As a result of the expropriation of the Brisas Project by the Venezuelan government, in 2009 we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets. Also, we no longer report mineral reserves for Brisas, and we have discontinued our activities relating to the Brisas and Choco 5 properties. Since acquiring the Brisas Alluvial Concession in 1992, we have spent close to $300 million on the project including equipment, financial, legal and engineering costs incurred in support of our Venezuelan operations and the write-down of previously capitalized costs associated with our Venezuelan operations. We have no commercial production at this time and, as a result, we have not recorded revenue or cash flows from mining operations and continue to experience losses from operations, a trend we expect to continue unless and until the investment dispute regarding Brisas is resolved favorably to the Company and/or we acquire directly or indirectly other mining projects. Historically we have financed the Company’s operations through the issuance of common stock, other equity securities and convertible debt. The Company has only one operating segment, the exploration and development of mineral properties. We prepare our consolidated financial statements in U.S. dollars in accordance with accounting principles generally accepted in Canada (see Note 18 to the Consolidated Financial Statements- Differences between Canadian and U.S. GAAP). The Company’s historical results of operations and current financial position are a result of the Company’s efforts, since 1992, to develop the Brisas Project into an operating mine and more specifically, our decision, subsequent to the issuance of the Authorization to Affect (the authorization to begin construction of the Brisas Project), to issue convertible notes and common shares, place orders to acquire equipment, and to continue the development of Brisas. Likewise our October 2009 Request for Arbitration under the Additional Facility Rules of ICSID will shape the future financial position and results of operations of the Company. We expect the arbitration process to last approximately three years, consume substantial management time and cost an estimated $8 million to $10 million, excluding the time and funds necessary to collect on any award. Our primary objective is to manage the arbitration effort in cooperation with arbitration counsel and various experts, to minimize costs and accelerate its completion, to the extent possible. Substantially all of the key management personnel have been employed by the Company for over 15 years with a single focus of developing the Brisas Project. These individuals possess valuable historical knowledge related to the Brisas Project which is important to the successful execution of our arbitration efforts. In addition to the management of our arbitration claim, we continue to explore efforts to facilitate a resolution of our dispute with the Venezuelan government, liquidate Brisas Project assets and evaluate other mining opportunities for a direct or indirect participation. Throughout the second and third quarters of 2010, management of the Company met several times with working committees of MIBAM to discuss our investment dispute and the government’s objective regarding the Brisas Project. In October 2010, the Venezuelan Attorney General’s office and MIBAM requested a meeting with the Company to explore possible resolutions. Management believes that this meeting was positive primarily from the standpoint of attendance by the Attorney General’s office and key members of MIBAM. While a general framework for proceeding with settlement talks was considered and the overall tone was constructive, there can be no assurance that a resolution to this investment dispute can be concluded as an alternative to completing the arbitration process. The timing of our involvement in any new mining opportunity if any, and the amounts that may be required cannot be determined at this time and are subject to available cash, sale of equipment originally slated for the Brisas Project and/or future financings, if any. Upon the sale of Brisas Project assets or successful settlement of our dispute with the Venezuelan Government, it is the intent of Management to explore efforts to redeem all or a portion of the outstanding convertible notes. These efforts could include a public offer to reacquire all or a portion of the notes or a more limited “Dutch auction” or individual private transactions. The time and extent of any plan will be influenced by, among other things, terms of the indenture, regulatory issues, market conditions and available cash. Investors are urged to read our filings with U.S. and Canadian securities regulatory agencies, which can be viewed on-line at www.sec.gov, www.sedar.com or at the Company’s website, www.goldreserveinc.com which also includes the Company’s corporate governance policies. Additionally, you can request a copy of any of these documents directly from us. Financial Overview Cautionary Statement Regarding Forward-Looking Statements The information presented or incorporated by reference in this Quarterly Report on Form 10-Q contains both historical information and forward-looking statements (within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Securities Act (Ontario)) that may state our intentions, hopes, beliefs, expectations or predictions for the future. In this report, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements of the Company to be materially different from our estimated future results, performance, or achievements expressed or implied by those forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions that may never materialize, prove incorrect or materialize other than as currently contemplated which could cause our results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “may,” “could” and other similar expressions that are predictions of or indicate future events and future trends which do not relate to historical matters, identify forward-looking statements. Any such forward-looking statements are not intended to give any assurances as to future results. Numerous factors could cause actual results to differ materially from those in the forward-looking statements. Due to risks and uncertainties, including the risks and uncertainties identified in our Annual Report on Form 10-K- “Part I- Item 1A. Risk Factors”, actual results may differ materially from current expectations. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation: · the outcome of our arbitration under the Additional Facility Rules of the International Centre for Settlement of Investment Disputes of the World Bank, in Washington D.C. to determine compensation claimed by us resulting from our claims against the Venezuelan government and its agents and agencies; · the realizable value of the remaining processing and related equipment may be different than management’s current estimate · corruption and uncertain legal enforcement; · political and social instability; · requests for improper payments; · competition with companies that are not subject to or do not follow Canadian and U.S. laws and regulations; · regulatory, political and economic risks associated with Venezuela including changes in laws and legal regimes; · the result or outcome of the litigation regarding the enjoined hostile takeover bid for us; · impact of currency, metal prices and metal production volatility; · our dependence upon the abilities and continued participation of certain key employees; · the value of our 5.50% senior subordinated convertible notes due on June 15, 2022 and potential volatility of our Class A common shares (also referred to herein as “Common Shares”), including potential dilution as a result of the conversion of the convertible notes into our common shares by either us or the holder; · the prospects for exploration and development of other mining projects by us; · and risks normally incident to the exploration, development and operation of mining properties. Investors are cautioned not to put undue reliance on forward-looking statements, and investors should not infer that there has been no change in our affairs since the date of this report that would warrant any modification of any forward-looking statement made in this document, other documents filed periodically with securities regulators or documents presented on our website. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this notice. We disclaim any intent or obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of assumptions or factors, whether as a result of new information, future events or otherwise, subject to our disclosure obligations under applicable rules promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Liquidity and Capital Resources At September 30, 2010 our total financial resources, which included cash and cash equivalents, restricted cash and marketable securities, were approximately $76.5 million compared to $81.2 million at December 31, 2009. The Company’s cash and investments are held primarily in US dollar denominated accounts. September 30, 2010 December 31, 2009 Change Cash and cash equivalents $ 55,440,670 $ 60,962,813 $ (5,522,143) Restricted cash 8,995,701 9,489,777 (494,076) 64,436,371 70,452,590 (6,016,219) Marketable securities 12,052,775 10,773,845 1,278,930 Total $ 76,489,146 $ 81,226,435 $ (4,737,289) Our financial resources decreased approximately $4.7 million from December 31, 2009. This decrease was primarily due to cash used in operating activities of approximately $14.3 million more fully described below and net purchases of marketable securities of $0.2 million, partially offset by proceeds from the sale of equipment of approximately $8.9 million. Restricted cash decreased by approximately $0.5 million as a result of payments for purchases of equipment relating to our previous purchase commitments for the Brisas Project. As of November 9, 2010 we held approximately $75 million in cash, restricted cash and marketable securities. The primary future obligation of the Company is the 5.50% senior subordinated notes which may be settled in cash or common shares in the event the holder chooses a one-time option to put the notes back to the Company for repurchase on June 15, 2012 (see Note 16 to the consolidated financial statements). As a result, in the near-term we believe that cash and investment balances and funds available from potential future equipment sales will be sufficient to enable us to fund our activities through 2011. The timing and extent of additional funding, if any, depends on a number of important factors, including, but not limited to the timing and outcome of our investment dispute with the Venezuelan government, the timing and the amount of proceeds, if any, from the sale of Brisas Project assets, the extent of future acquisitions or investments, if any, status of the financial markets and our share price. Operating Activities Cash flow used by operating activities for the three and nine month periods ended September 30, 2010 was approximately $3.9 and $14.3 million, which was an increase over the same periods in 2009 of approximately $0.8 and $1.5 million, respectively. Investing Activities Cash provided by investing activities during the three months ended September 30, 2010 decreased by $4.8 million from the comparable period in 2009. This decrease was primarily due to a decrease in net proceeds from marketable securities and equipment transactions of $1.8 million and $2.9 million, respectively. Cash provided by investing activities during the nine months ended September 30, 2010 increased by $22.1 million from the comparative periods in 2009. This change is primarily due to a decrease in net cash used in marketable securities transactions of $8.3 million, an increase in net proceeds from equipment transactions of $10.9 million and a decrease in interest paid on convertible notes of $2.8 million (See Notes 5, 6 and 13 to the consolidated financial statements). 3 months 9 months 2010 2009 Change 2010 2009 Change Net proceeds (purchases) of marketable securities $ 35,778 $ 1,868,614 $ (1,832,836) $ (186,606) $ (8,477,135) $ 8,290,529 Purchase of property, plant and equipment (2,552) (6,062,697) 6,060,145 (500,992) (11,818,595) 11,317,603 Proceeds from sale of equipment 50,506 7,297,598 (7,247,092) 8,901,590 7,297,598 1,603,992 Decrease in restricted cash - 1,742,162 (1,742,162) 494,076 2,490,970 (1,996,894) Interest paid on convertible debt - - - - (2,828,841) 2,828,841 Other - (7,460) 7,460 - (35,929) 35,929 $ 83,732 $ 4,838,217 $ (4,754,485) $ 8,708,068 $ (13,371,932) $ 22,080,000 Financing Activities The convertible notes (see Note 16 to the consolidated financial statements) are trading in the gray market often at a significant discount to face value. As the terms of the indenture provide that the Company may repurchase the convertible notes in open market purchases or negotiated transactions, in 2009 we re-purchased approximately $1.1 million (face value) of convertible notes for approximately $0.4 million. 3 months 9 months 2010 2009 Change 2010 2009 Change Net proceeds from issuance of common shares - - - $ 41,084 - $ 41,084 Extinguishment of convertible notes - - - - $ (415,254) 415,254 - - - $ 41,084 $ (415,254) $ 456,338 Contractual Obligations The following table sets forth information on the Company’s material contractual obligation payments for the periods indicated as of September 30, 2010: Payments due by Period Total Less than 1 Year 1-3 Years More Than 5 Years Convertible Notes (1) $113,258,390 $5,629,195 $107,629,195 – Equipment Contracts (2) 9,024,135 9,024,135 – – Total $122,282,525 $14,653,330 $107,629,195 – 1 In May 2007, the Company issued $103,500,000 aggregate principal amount of its 5.50% convertible notes. The notes pay interest semi-annually and are due on June 15, 2022. Subject to certain conditions, the notes may be converted into Class A common shares of the Company, redeemed or repurchased. 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 will 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 20 trading days in the period of 30 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. As of September 30, 2010, $1,151,000 face value of convertible notes have been settled in cash or repurchased by the Company at a total cost of $451,000. The amounts shown above include the interest and principal payments due 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. 2 The Company originally placed orders totaling $125.3 million for the fabrication of processing equipment, mobile equipment and other mining equipment and related engineering. As of September 30, 2010, the Company had equipment orders totaling $61.7 million and has made payments on these orders of $52.7 million. Results of Operations Summary Results of Operations Consolidated net loss for the three and nine months ended September 30, 2010 was approximately $6.9 million and $16.6 million, an increase of approximately $1.4 million and $6.6 million, respectively over the comparable periods in 2009. As more fully discussed below, the change in net loss for the three and nine months ended September 30, 2010 was due to a decrease in other income of approximately $0.3 and $2.1 million, respectively and an increase in expenses of approximately $1.0 million and $4.5 million, respectively. 3 months 9 months 2010 2009 Change 2010 2009 Change Other Income $ 85,242 $ 406,813 $ (321,571) $ 834,660 $ 2,959,063 $ (2,124,403) Total expenses (7,016,079) (5,970,687) (1,045,392) (17,476,500) (13,021,699) (4,454,801) Net Loss $ (6,930,837) $ (5,563,874) $ (1,366,963) $(16,641,840) $ (10,062,636) $ (6,579,204) Other Income As noted above we have no commercial production at this time and as a result, other income is often variable from period to period due to one-time or otherwise atypical sources of income such as gains on disposition of marketable securities, extinguishment of debt and sale of equipment. During the three months ended September 30, 2010, the decrease in other income was primarily attributed to a reduction in gain on disposition of marketable securities of approximately $0.2 million, and an increase in foreign currency loss of $0.1 million. During the nine months ended September 30, 2010, the decrease in other income is primarily attributed to a reduction in gain on extinguishment of debt of approximately $0.6 million, due to the absence of any re-purchases of the Company’s convertible notes, reduction in gain on disposition of marketable securities of approximately $2.0 million, partially offset by a gain on sale of equipment of $0.4 million and an increase in foreign currency gain of $0.1 million. 3 months 9 months 2010 2009 Change 2010 2009 Change Interest $ 62,748 $ 74,672 $ (11,924) $ 191,285 $ 221,924 $ (30,639) Gain on extinguishment of debt - - - - 601,936 (601,936) Gain on disposition of marketable securities 42,042 285,362 (243,320) 148,593 2,139,345 (1,990,752) Gain on sale of equipment 36,633 - 36,633 406,677 - 406,677 Foreign currency gain (loss) (56,181) 46,779 (102,960) 88,105 (4,142) 92,247 $ 85,242 $ 406,813 $ (321,571) $ 834,660 $ 2,959,063 $ (2,124,403) Expenses Overall the Company’s expenditures during the three and nine months ended September 30, 2010 are a function of the Company’s efforts to reduce core operating expenses which are obscured by ongoing costs associated with our arbitration claim against the government of Venezuela, equipment storage costs, takeover defense costs associated with the 2008 Rusoro hostile takeover bid and interest expense on the convertible debt which as a result of the expropriation of the Brisas Project is no longer capitalized as a cost of the project. During the three and nine month periods ended September 30, 2010, core operating costs decreased by approximately $1.1 million $3.3 million, respectively, primarily as a result of reductions related to both the number of personnel and compensation related items, fees associated with consultants, other discretionary costs and litigation costs. On a net basis, non-core operating costs, primarily costs associated with equipment storage, equipment sales, arbitration, takeover defense and interest on the convertible notes that is no longer capitalized, increased during the three and nine months ended September 30, 2010 by approximately $2.1 million and $7.7 million, respectively. Overall, as a result of reductions in more readily controllable core operating costs, expenses increased by approximately $1.1 million and $4.5 million during the three and nine months ended September 30, 2010. 3 months 9 months 2010 2009 Change 2010 2009 Change Corporate general and administrative $ 729,920 $ 1,147,667 $ (417,747) $ 2,511,437 $ 3,668,635 $ (1,157,198) Venezuelan expenses 327,830 686,147 (358,317) 1,204,481 2,152,968 (948,487) Corporate communications 101,124 195,166 (94,042) 363,415 599,617 (236,202) Legal and accounting 81,148 222,286 (141,138) 372,810 1,292,225 (919,415) 1,240,022 2,251,266 (1,011,244) 4,452,143 7,713,445 (3,261,302) Equipment holding costs 305,979 12,500 293,479 784,968 75,458 709,510 Loss on sale of equipment - 3,423,544 (3,423,544) - 3,423,544 (3,423,544) Arbitration 3,437,287 260,771 3,176,516 5,861,225 260,771 5,600,454 Takeover defense - 23,804 (23,804) - 1,383,002 (1,383,002) Interest expense 2,246,755 - 2,246,755 6,654,770 - 6,654,770 Income tax (benefit) expense (213,964) (1,198) (212,766) (276,606) 165,479 (442,085) 5,776,057 3,719,421 2,056,636 13,024,357 5,308,254 7,716,103 Total Expenses for the Period $ 7,016,079 $ 5,970,687 $ 1,045,392 $ 17,476,500 $ 13,021,699 $ 4,454,801 Off-Balance Sheet Arrangements The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. Adoption of US GAAP in 2011 The Company currently prepares its financial statements in accordance with Canadian GAAP and includes a foot note 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. Transactions with Related Parties 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. 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. 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.