GOLD RESERVE LTD 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities OFFER AND LISTING DETAILS The Class A common shares of Gold Reserve Inc. are traded on The Toronto Stock Exchange (“TSX”) and on the NYSE Amex under the symbol “GRZ.” Neither the Company’s equity units nor the 5.50% convertible notes and the related underlying securities are listed for trading on any exchange. TSX NYSE Amex Canadian dollars U.S. dollars 2011 High Low High Low March (through 03/22/11) $1.77 $1.66 $1.82 $1.67 February 1.82 1.66 1.85 1.68 January 1.88 1.67 1.87 1.67 2010 Fourth Quarter $1.84 $1.39 $1.84 $1.37 Third Quarter 1.32 0.82 1.28 0.80 Second Quarter 1.25 0.76 1.24 0.71 First Quarter 1.63 1.01 1.58 0.98 2009 Fourth Quarter $1.79 $0.89 $1.73 $0.86 Third Quarter 1.13 0.51 1.04 0.48 Second Quarter 0.85 0.56 0.70 0.50 First Quarter 1.45 0.70 1.23 0.54 On March 22, 2011, the closing price for a Class A common share of the Company was Cdn $1.71 per share on the TSX and U.S. $1.70 per share on the NYSE Amex. As of March 22, 2011, there were a total of 58,962,351 Class A common shares and 500,236 Class B common shares issued and outstanding. The number of holders of Class A and Class B common shares of record on March 22, 2011 was approximately 819. As of March 22, 2011, based on information received from our transfer agent and other service providers, we believe our common shares are owned beneficially by approximately 8,000 shareholders. - 13 - We have not declared or paid any dividends on our common shares since 1984. We intend to retain earnings, if any, to finance the growth and development of our business and do not intend to pay cash dividends on the common shares in the foreseeable future. The payment of future cash dividends, if any, will be reviewed periodically by the Board of Directors and will depend upon, among other things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and conditions and other factors. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Gold Reserve Corporation, the NASDAQ Composite Index and the S&P Gold Index Copyright© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. Fiscal year ending December 31. Exchange Controls There are no governmental laws, decrees or regulations in Canada that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to nonresident holders of the securities of the Company, other than a Canadian withholding tax. See “—Certain Canadian Income Tax Considerations for U.S. Residents,” below. Certain Canadian Federal Income Tax Considerations for U.S. Residents The following summarizes certain Canadian federal income tax consequences generally applicable under the Income Tax Act (Canada) and the regulations enacted thereunder (collectively, the “Canadian Tax Act”) and the Canada-United States Income Tax Convention (1980) (the “Convention”) to the holding and disposition of common shares. Comment is restricted to holders of common shares each of whom, at all material times for the purposes of the Canadian Tax Act and the Convention, (i) is a resident of the United States and is not a resident of Canada, (ii) is entitled to the benefit of the Convention, (iii) holds all common shares solely as capital property, (iv) deals at arm’s length with and is not affiliated with Gold Reserve, and (v) does not use or hold and is not deemed to use or hold, any common shares in a business carried on in Canada, and none of whose common shares constitute “taxable Canadian property” as defined in the Canadian Tax Act (each such individual, a “U.S. Resident”). Generally, a person will be considered to hold a common share as capital property provided that the person acquired the share as a long-term investment, is not a trader or dealer in securities, did not acquire, hold or dispose of the share in a transaction considered to be an adventure or concern in the nature of trade (i.e. speculation), and does not hold the common share as inventory in the course of carrying on a business. Special rules, which are not discussed below, may apply to a U.S. Resident who is an insurer that carries on business in Canada and elsewhere. - 14 - Generally, (a) a person’s Class A common shares will not constitute “taxable Canadian property” at a particular time provided that the common shares are listed on a “designated stock exchange” (which currently includes the Toronto Stock Exchange) at that time and at all times in the 60 months preceding the particular time, (i) neither the person nor one or more other persons with whom the first person does not deal at arm’s length, alone or in any combination, held, directly or indirectly, 25% or more of the issued shares of any class in the capital stock of Gold Reserve, or (ii) more than 50% of the fair market value of the share was not derived directly or indirectly from one or any combination of (A) real or immovable property situated in Canada, (B) Canadian resource properties, (C) timber resource properties and (D) options in respect of, or interests in, or for civil law rights in, property described in any of (A), (B) and (C), whether or not the property existed, and (b) a person’s Class B common shares will not constitute “taxable Canadian property” at a particular time provided that at all times in the 60 months preceding the particular time, more than 50% of the fair market value of the share was not derived directly or indirectly from one or any combination of property described in any of (A), (B), (C) and (D) above, whether or not the property existed. Certain entities that are fiscally transparent for United States federal income tax purposes (including limited liability companies) do not qualify as residents of the United States for the purposes of the Convention. A member or holder of an interest in such an entity that holds common shares should consult the member or holder’s own tax advisors. This summary is based on the current provisions of the Canadian Tax Act and the Convention in effect on the date hereof, all specific proposals to amend the Canadian Tax Act and Convention publicly announced by or on behalf of the Minister of Finance (Canada) on or before the date hereof (the “Tax Proposals”), and the current published administrative and assessing policies of the Canada Revenue Agency. It is assumed that all such amendments will be enacted as currently proposed, and that there will be no other material change to any applicable law or administrative policy, although no assurance can be given in these respects. Except as otherwise expressly provided, this summary does not take into account any provincial, territorial or foreign tax considerations. This summary is of a general nature only, is not exhaustive of all possible Canadian federal income tax considerations, and is not and is not to be construed as legal or tax advice to any particular holder or prospective holder of common shares. Each holder or prospective holder of common shares is urged to consult his, her or its own tax advisors for advice with respect to the holder or prospective holder’s particular circumstances. The discussion below is qualified accordingly. Disposition of Common Shares A U.S. Resident who disposes of a common share will not thereby incur any liability for Canadian federal income tax. Taxation of Dividends on Common Shares A U.S. Resident who is or is deemed to be paid or credited a dividend on the U.S. Resident’s common shares will be subject to Canadian withholding tax equal to 15% or, if the U.S. Resident is a company that holds 10% or more of the voting stock of Gold Reserve, 5%, of the gross amount of the dividend. A U.S. Resident that is (i) a qualifying religious, scientific, literary, educational or charitable organization and is exempt from tax in the U.S., or (ii) a qualifying trust, company, organization or arrangement operated exclusively to administer or provide pension, retirement or employee benefits and is exempt from tax in the U.S. may be exempt under the Convention from Canadian withholding tax provided specific administrative procedures are complied with. - 15 - Item 6. Selected Financial Data 2010 2009 2008 2007 2006 STATEMENT OF OPERATIONS Other Income $ 958,368 $ 3,165,736 $ 2,521,302 $ 6,499,084 $ 8,252,058 Expenses Corporate general and administrative $ 3,288,691 $ 4,559,721 $ 7,707,545 $ 12,983,822 $ 6,836,418 Venezuelan expenses 1,714,543 3,600,648 5,030,541 4,635,784 5,231,333 Corporate communications 525,658 753,737 1,043,227 977,454 724,622 Legal and accounting 446,611 1,320,855 1,035,065 781,243 772,695 5,975,503 10,234,961 14,816,378 19,378,303 13,565,068 Equipment holding costs 1,567,181 401,336 15,000 Write-down of machinery & equipment 2,518,796 Loss (gain) on sale of equipment (419.413) 3,423,544 1,346,423 Arbitration 6,289,647 673,592 Takeover defense 1,330,366 5,271,360 Foreign currency (gain) loss 21,907 (5,429) 61,212 (926,299) 1,141,932 Loss before interest expense, income tax and extraordinary item (14,995,253) (12,892,634) (18,989,071) (11,952,920) (6,454,942) Interest expense (8,911,448) (1,688,403) Income tax benefit (expense) 359,767 (142,319) (737,050) (26,848) (521,803) Loss before extraordinary item (23,546,934) (14,723,356) (19,726,121) (11,979,768) (6,976,745) Extraordinary loss on expropriation (150,726,472) Net loss (23,546,934) (165,449,828) (19,726,121) (11,979,768) (6,976,745) Net loss per share - basic and diluted (0.41) (2.89) (0.35) (0.24) (0.18) Note: Expenses for the periods prior to the year ended December 31, 2010 have been reclassified to be comparative with the 2010 presentation. The revisions had no effect on previously reported results of operations BALANCE SHEET Cash and cash equivalents, marketable securities, restricted cash $ 60,450,401 $ 81,226,435 $110,402,599 $151,748,690 $ 28,684,310 Property, plant and equipment, net (1) 28,503,330 38,122,102 175,132,478 128,624,670 73,643,895 Total assets (2) 98,430,366 119,915,020 287,614,514 281,898,903 104,615,721 Convertible notes (3) 96,975,421 93,693,168 91,829,699 70,306,054 - Total liabilities 98,843,121 97,717,721 102,508,078 80,578,094 3,643,709 Total shareholders’ equity (deficit) (412,755) 19,917,600 185,106,436 201,320,809 100,972,012 (1) Includes approximately $28 million related to Brisas Project equipment management intends to dispose of in the future. (2) Includes approximately $7.9 million of assets held for sale liquidated in the first quarter of 2011. (3) Face value of outstanding convertible notes is approximately $102.3 million. Note 17. to the consolidated financial statements. STATEMENT OF CASH FLOWS Net cash used in operating activities $(20,428,684) $(15,130,345) $(13,858,222) $(5,675,305) $(11,179,770) Net cash provided by (used in) investing activities 17,608,688 (15,048,843) 10,454,475 (97,797,970) (8,518,467) Net cash provided by (used in) financing activities 43,661 (408,166) 273,338 172,779,163 25,702,673 - 16 - Item 7. 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 March 22, 2011 is intended to assist in understanding and assessing our results of operations and financial condition. Gold Reserve, an exploration stage company, is engaged in the business of acquiring, exploring and developing mining projects. From 1992 to 2008 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”). Since 1992, expenditures associated with the Brisas Project and Choco 5 property both capitalized and expensed as a period cost total nearly $300 million. See Item 2. Properties. The Company’s current financial position and historical results of operations are a product of the Company’s efforts, since 1992, to develop the Brisas Project into an operating mine and more specifically, a function of our decision, subsequent to the issuance of the Authorization to Affect, to place orders to acquire approximately $125 million of equipment, raise $183 million through the issuance of convertible notes and common shares and to continue to incur substantial operating deficits. Likewise, our October 2009 Request for Arbitration under the Additional Facility Rules of ICSID and the write-off of the costs associated with our Venezuelan operations will continue to influence the future financial position and results of operations of the Company. We expect the arbitration process, which commenced in April 2009 when we advised Venezuela of our claims pursuant to the Canada –Venezuela Treaty, to last three to five years from commencement and consume substantial management time and financial resources. In continuance of our 2010 efforts, our primary 2011 objectives are to manage the arbitration claim against Venezuela including, to the extent possible, accelerating its completion and to minimize costs. Our other major objectives for 2011 are to continue to: (1) pursue an amicable settlement with Venezuela that may include a monetary agreement and/or project participation; (2) dispose of previously purchased Brisas Project assets, which originally cost approximately $39 million and are recorded on the balance sheet at their estimated net realizable value of $28 million; (3) pursue alternative industry opportunities for participation; and (4) continue to evaluate the Company’s options to redeem, restructure or otherwise modify the terms of the 5.50% convertible notes which, among other things, are subject to the sale of the Brisas Project assets. We believe the successful execution of these objectives will be facilitated by the Company’s senior management team, which has extensive technical, financial and administrative experience in the mining industry- substantially all of whom have been employed by the Company for over 15 years with a single focus of developing the Brisas Project. These individuals not only possess valuable historical knowledge related to the Brisas Project which is important to the successful execution of our arbitration efforts but they also play a critical role in the Company’s ongoing evaluation and monitoring of mining opportunities for potential participation by the Company. The timing of any such new investment or transaction 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. On October 26, 2009, in apparent response to our filing on October 21, 2009, a Request for Arbitration under the Additional Facility Rules of ICSID against Venezuela, government personnel arrived at the project 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, Venezuela notified us through the issuance of an Administrative Act, dated October 20, 2009, of its intent to cancel our underlying hard rock concession which it formally completed in June 2010. We recorded a non-cash expense adjustment of approximately of $151 million related to the capital costs associated with the Brisas Project for the year ended December 31, 2009. See Item 3. Legal Proceedings –Arbitration. In October 2010, the Company attended a meeting with representatives from the Venezuelan Attorney General’s office and MIBAM to discuss our dispute and possible resolutions. As a result of the meeting we have had formal and informal communications and expect to meet with these representatives in the near future to continue our discussions. - 17 - In December 2010, Venezuela filed a request with the Tribunal for the production of documents over and above the 33 volumes of hard copy exhibits and thousands of pages of electronic appendices which accompanied the Company’s September 24, 2010 Memorial and also filed a jurisdictional objection claiming that Gold Reserve did not have the right to present a claim under the Canada –Venezuela Treaty. Venezuela further requested a suspension of the proceedings on the merits so that the jurisdictional objections could be treated as a preliminary matter separate from the merits. On February 3, 2011, the Tribunal issued a procedural order granting in part Venezuela’s request for the production of certain documents. To the extent the documents ordered to be produced were deemed to be proprietary by the Company, the Tribunal’s order granted view-only access to such documents. In addition to the production of documents, the Tribunal in its order established a revised schedule for the remaining written submissions including granting Venezuela a five week extension from March 7, 2011 to April 14, 2011 to file its response or Counter-Memorial to the Company’s Memorial. The oral hearing date of February 6, 2012 remains unchanged. On February 25, 2011, the Tribunal denied Venezuela’s previous petition to bifurcate the arbitration into a jurisdiction phase and a merits phase and decided that Venezuela’s jurisdictional objections will be addressed together with the merits. See Item 3. Legal Proceedings – Arbitration 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 or invest in an alternative project. 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. Segmented financial information by geographic region is shown in Note 14 to the consolidated financial statements. The expense categories shown in the consolidated statements of operations were reclassified in 2010 to better present the current operations of the Company. As a result, expenses for the years ended December 31, 2009 and 2008 have been reclassified to be comparative with the December 31, 2010 presentation. These reclassifications had no effect on previously reported results of operations. We prepare our consolidated financial statements in U.S. dollars in accordance with accounting principles generally accepted in Canada. See Note 19. to the consolidated financial statements. Forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Part I- Item 1A. Risk Factors” of this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Part II- Item 6. Selected Financial Data” and the consolidated financial statements and related notes. The Company no longer characterizes historically reported mineralization as “reserves”. The information contained in this Annual Report on Form 10-K relating to our past development efforts, regulatory process and reported mineral reserves for the Brisas Project and Choco 5 property are presented only 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. 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. Critical Accounting Estimates We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Management considers 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) and compares that to its carrying value and if such expected future net cash flows are less than the carrying value 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. In 2009, subsequent to the loss of control and physical access to the Brisas Project, we - 18 - recorded a non-cash adjustment of approximately $151 million related to the carrying value of Brisas Project assets including an adjustment of approximately $14.5 million for the estimated net realizable value of certain processing and related equipment. In 2010 we recorded an additional $2.5 million write-down of some of this processing and related equipment to estimated net realizable value. Management makes no assurances that the estimated net realizable value of the remaining processing and related equipment can be disposed of for its recorded estimated value. See Note 3. and Note 15. to the consolidated financial statements. The fair value of the debt component of the Company’s convertible notes 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. At December 31, 2008, we revised our estimate of the expected life of the notes to June 15, 2012 and adjusted the carrying value accordingly. See Consolidated Balance Sheets - Convertible Notes and Note 17. to the consolidated financial statements. The adjusted carrying value was calculated by computing the present value of estimated future interest and principal payments at the original effective interest rate. As a result of this change, the carrying value of the notes increased by approximately $20.5 million with a corresponding increase in capitalized interest and accretion. 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. We operate and file 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. See Consolidated Statements of Operations - Income tax expense. The Company uses the fair value method of accounting for stock options. The fair value is computed using the Black-Scholes method which utilizes estimates that affect the amounts ultimately recorded as stock based compensation. See Note 11. to the consolidated financial statements. Significant Accounting Policies Our accounting policies are described in Note 1 of the consolidated financial statements contained in this Annual Report on Form 10-K for the year ended December 31, 2010. The more significant accounting policies are as follows: Financial Instruments. The Company provides disclosures in its financial statements that enable users to evaluate: (a) the significance of financial instruments for the Company's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages those risks. Stock Based Compensation. We use the fair value method of accounting for stock options granted to employees and directors. 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. 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. 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 operate. The realizable value of the remaining processing and related equipment recorded in the consolidated financial statements may be different than management’s current estimate. See Note 3. and Note 9. to the consolidated financial - 19 - statements. 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. Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. We believe that internal controls over financial reporting no matter how well conceived and operated, can only provide reasonable assurance that their objectives are met. There have been no changes in the Company’s internal control over financial reporting during the twelve months ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2010 the Company had cash and cash equivalents of approximately $58.2 million which represents a net reduction over the prior period of approximately $2.8 million. The net reduction in cash and cash equivalents was primarily comprised of cash used by operations of $20.4 million offset by cash provided by investing activities of $17.6 million. The components of changes in cash are more fully described in the “Operating,” “Investing” and “Financing” Activities section below. 2010 2009 Change Cash and cash equivalents $ 58,186,478 $ 60,962,813 $ (2,776,335) Total financial resources, which includes cash and cash equivalents as well as restricted cash, marketable securities and assets held for sale (which were liquidated in the first quarter of 2011), totaled approximately $68.4 million at December 31, 2010. As of March 22, 2011 we held approximately $66 million in cash and investments. The Company’s cash and investments are held primarily is US dollar denominated accounts. In addition to cash and cash equivalents and investments, the Company holds approximately $28.1 million of equipment that it intends to dispose of in 2011. The primary future obligation of the Company is the $103.5 million 5.50% convertible notes which may be settled in cash or common shares in the event the holder chooses the onetime option to put the notes back to the Company for repurchase on June 15, 2012. See Note 17 to the consolidated financial statements and Contractual Obligations below. With the ability to settle any call for redemption of the convertible notes with common shares, 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 2012. 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 Venezuela, 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 2010 was approximately $20.4 million, which consists of a net operating loss of approximately $23.5 million adjusted for certain non-cash income and expense items primarily related to the write-down of Brisas Project assets, accretion of convertible notes and shares issued for compensation and certain non-cash changes in working capital. Cash flow used by operating activities for 2010 represented an increase over the prior comparable period of approximately $5.3 million which is primarily attributable to the increase in costs associated with arbitration and equipment storage, maintenance and insurance (equipment holding costs). Although management was successful in reducing certain operating expenses as more fully discussed below in Results of Operations, non-core expenses increased as a result of our arbitration efforts, equipment holding costs and the recognition of interest expense in the statement of operations which was previously capitalized. - 20 - Investing Activities In 2010 net cash provided by investing activities amounted to $17.6 million an increase of $32.7 million compared to 2009 during which $15 million of net cash was used in investing activities. 2010 Change 2009 Change 2008 Net proceeds (purchases) of marketable securities $ 10,130,643 $ 18,173,275 $ (8,042,632) $ (9,247,214) $ 1,204,582 Purchase of property, plant and equipment (9,496,692) 8,274,749 (17,771,441) 20,928,147 (38,699,588) Proceeds from sale of equipment 8,914,615 1,617,017 7,297,598 (11,887,142) 19,184,740 Decrease in restricted cash 9,489,777 1,469,882 8,019,895 (26,551,036) 34,570,931 Capitalized interest on convertible debt - 4,507,319 (4,507,319) 1,181,111 (5,688,430) Other (1,429,655) (1,384,711) (44,944) 72,816 (117,760) $ 17,608,688 $ 32,657,531 $ (15,048,843) $ (25,503,318) $ 10,454,475 In 2010, net proceeds from marketable securities totaled approximately $10.1 million compared to net purchases of $8.0 million in 2009 and net proceeds of $1.2 million in 2008. The change in marketable securities primarily relates to debt securities which were purchased in 2009 and matured in 2010. Investments in property, plant and equipment mainly relate to contractual purchases of equipment entered in 2007 and paid when the equipment was manufactured and delivered to the Company. Equipment purchases in 2010, 2009 and 2008 totaled approximately $9.5 million, $17.8 million and $38.7 million, respectively. Since the revocation of the Authorization to Affect, the Company has sold certain equipment originally costing approximately $61.4 million. In 2010 the Company collected proceeds from the disposal of this equipment totaling approximately $8.9 million. Over all, the Company has recovered approximately $35.1 million of progress payments and the purchaser assumed the Company's remaining payment obligations of approximately $21.9 million. As of December 31, 2010, the Company’s equipment purchase commitments were substantially complete and it held approximately $28.1 million of equipment intended for sale. In connection with a portion of the 2007 equipment commitments, we opened an irrevocable standby letter of credit, secured by cash, with a Canadian chartered bank providing security on the performance of certain of our purchase obligations. During 2010, the Company made its final payments on the commitments covered under the letter of credit and accordingly, as of December 31, 2010 the Company had no restricted cash. Prior to October 2009, we capitalized interest expense related to our convertible notes. After Venezuela seized physical control of the Brisas Project in October 2009, we expensed interest charges related to the convertible notes. Included in interest expense are amounts related to the accretion of the notes to their face value. See Note 17. to the consolidated financial statements. Financing Activities The Company had no significant financing activities in 2010. Net proceeds from the issuance of commons shares have been limited over the last three years and mainly relates to the exercise of employee stock options. The repurchase of convertible notes relates to the open market purchase of approximately $1.1 million (face value) of convertible notes for $0.4 million. See Note 17. to the consolidated financial statements and Contractual Obligations below. 2010 Change 2009 Change 2008 Net proceeds from issuance of common shares $43,661 $36,573 $7,088 $ (302,117) $ 309,205 Repurchase of convertible notes - 415,254 (415,254) (379,387) (35,867) $43,661 $451,827 $(408,166) $ (681,504) $ 273,338 - 21 - Contractual Obligations The following table sets forth information on the Company’s material contractual obligation payments for the periods indicated as of December 31, 2010: Payments due by Period Total Less than 1 Year 1-3 Years More Than 5 Years Convertible Notes (1) $110,792,793 $5,629,195 $105,163,598 – Equipment Contracts (2) 39,582 39,582 – – Total $110,832,375 $5,668,777 $105,163,598 – 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. Although the convertible notes have a face value of $103.5 million, they are recorded on the balance sheet at approximately $97 million as Canadian accounting standards require the Company to allocate the proceeds from the notes between their equity and debt components based on their respective fair values at the time of issuance. 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. If in the future we elect to repurchase the notes with common shares, we would be required to issue shares based on the share price on June 15, 2012. 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. The convertible notes 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. As of December 31, 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. The covenants contained in the 5.50% convertible 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. 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 with cash or Common Shares unless there has occurred and is continuing certain events of default under the Company’s indenture. 2 Remaining balance due on equipment purchase contracts entered during 2007. 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. - 22 - RESULTS OF OPERATIONS Summary Results of Operations Consolidated net loss for the year ended December 31, 2010 was approximately $23.5 million or $0.41 per share compared to a net loss for the year ended December 31, 2009 of $165.4 million or $2.89 per share, a decrease of approximately $141.9 million. Subsequent to the seizure of the Brisas Project in October 2009 by Venezuela, we recorded a $150.7 million non-cash expense adjustment related to the carrying value of the project assets and the value of certain processing and related equipment. 2010 Change 2009 Change 2008 Other Income $ 958,368 $ (2,207,368) $ 3,165,736 $ 644,434 $ 2,521,302 Total expenses (24,505,302) 144,110,262 (168,615,564) (146,368,141) (22,247,423) Net Loss $ 23,546,934 $ 141,902,894 $ 165,449,828 $(145,723,707) $ 19,726,121 Excluding the 2009 extraordinary loss on expropriation of assets of $150.7 million, the net loss increased from 2009 to 2010 approximately $8.8 million. Core operating expenses (Corporate G&A, Venezuela expenses, Corporate communications and Legal and accounting) declined by nearly 40% or $4.3 million during this period but were offset by increases in costs associated with arbitration, equipment holding costs and interest expense which was previously capitalized. Consolidated net loss for the year ended December 31, 2009 was approximately $165.5 million or $2.89 per share, an increase of approximately $145.7 million from 2008. In addition to the $150.7 million adjustment for the impairment of the assets associated with the Brisas project, the change in net loss was due to decreases in other expenses of $4.4 million and an increase in other income of $0.6 million. Other Income 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 variable sources of income such as gains on disposition of marketable securities, extinguishment of debt and sale of equipment. In 2010, the decrease in other income was primarily attributable to reductions in gains on sales of marketable securities of $2.0 million. In addition, gains on extinguishment of debt decreased $0.6 million due to the absence of any re-purchases of the Company’s convertible notes. These reductions in other income were partially offset by a $0.5 million gain on the disposition of equity interests in two previously consolidated subsidiaries. See Note 12. to the consolidated financial statements. In 2009, the increase in other income was due to a $2.5 million increase of gains on disposition of marketable securities and a $0.5 million increase in gains on the extinguishment of debt as a result of the re-purchase of approximately $1.0 million (face value) of the Company’s convertible notes at a substantial discount. These increases were offset by a decrease in interest income primarily due to substantially reduced rates of return on invested cash and to a lesser extent, lower levels of invested cash. 2010 Change 2009 Change 2008 Interest $ 242,170 $ (46,782) $ 288,952 $(2,398,873) $ 2,687,825 Gain (loss) on disposition of marketable securities 241,621 (2,033,227) 2,274,848 2,517,901 (243,053) Gain on sale of subsidiaries 474,577 474,577 - - - Gain on extinguishment of debt - (601,936) 601,936 525,406 76,530 $ 958,368 $ (2,207,368) $ 3,165,736 $ 644,434 $ 2,521,302 Expenses Overall the changes in expenditures are a function of the Company’s efforts to reduce principal operating expenses which are masked by ongoing costs associated with our arbitration claim against the Republic 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 seizure of the Brisas Project is no longer capitalized as a cost of the project. - 23 - During 2010 and 2009, core operating costs decreased from the prior years by $4.3 million and $4.6 million, respectively, primarily as a result of reductions related to both the number of personnel and compensation related items, fees associated with consultants and other discretionary costs. Excluding the extraordinary loss, costs associated with equipment holding costs, further write-down of Brisas Project related assets, net equipment sales, arbitration, takeover defense and interest on the convertible notes that is no longer capitalized, increased during 2010 and 2009 by $10.9 million and $0.2 million, respectively. 2010 Change 2009 Change 2008 Corporate general and administrative $3,288,691 $ (1,271,030) $ 4,559,721 $ (3,147,824) $ 7,707,545 Venezuela expenses 1,714,543 (1,886,105) 3,600,648 (1,429,893) 5,030,541 Corporate communications 525,658 (228,079) 753,737 (289,490) 1,043,227 Legal and accounting 446,611 (874,244) 1,320,855 285,790 1,035,065 5,975,503 (4,259,458) 10,234,961 (4,581,417) 14,816,378 Equipment holding costs 1,567,181 1,165,845 401,336 386,336 15,000 Write-down of machinery & equipment 2,518,796 2,518,796 - - - Loss (gain) on sale of equipment (419,413) (3,842,957) 3,423,544 2,077,121 1,346,423 Arbitration 6,289,647 5,616,055 673,592 673,592 - Takeover defense - (1,330,366) 1,330,366 (3,940,994) 5,271,360 Foreign currency (gain) loss 21,907 27,336 (5,429) (66,641) 61,212 Interest expense 8,911,448 7,223,045 1,688,403 1,688,403 - Income tax (benefit) expense (359,767) (502,086) 142,319 (594,731) 737,050 18,529,799 10,875,668 7,654,131 223,086 7,431,045 Extraordinary loss on expropriation - (150,726,472) 150,726,472 150,726,472 - Total expenses for the period $24,505,302 $ (144,110,262) $168,615,564 $146,368,141 $ 22,247,423 Future expenditures associated with corporate general and administrative, corporate communications and legal and accounting are expected to decline at a moderate level, while we expect Venezuelan expenses to decline considerably from the amounts recorded in 2010. Costs associated with the arbitration are expected to moderate and decline as we incurred a substantial portion of the expected costs upfront in preparation of our initial Memorial and case. Equipment write-downs are expected to be negligible while equipment holding costs will continue until we are able to dispose of Brisas Project related equipment. Interest expense, which was previously capitalized and comprised of approximately $5.6 million of actual interest paid plus an amount related to accretion of the face value of the convertible note, is expected to stay at substantially the same level as 2010.