Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
MANAGEMENTS REPORT
To the Shareholders of Gold Reserve Inc.
The accompanying consolidated financial statements of the Company were prepared by management in accordance with accounting principles generally accepted in Canada, consistently applied and within the framework of the summary of significant accounting policies in these consolidated financial statements. Management is responsible for all information in the Annual Report on Form 10-K. All financial and operating data in the Annual Report on Form 10-K is consistent, where appropriate, with that contained in the consolidated financial statements.
Management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. Management has established and maintains a system of internal accounting control designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, financial information is reliable and accurate and transactions are properly recorded and executed in accordance with managements authorization. This system includes established policies and procedures, the selection and training of qualified personnel and an organization providing for appropriate delegation of authority and segregation of responsibilities.
The Board of Directors fulfills its responsibilities for the consolidated financial statements primarily through the activities of its Audit Committee, which is composed of three directors, none of whom are members of management. This Committee monitors the independence and performance of our independent auditors and meets with the auditors to discuss the results of their audit and their audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. This Committee reviews and discusses with management the consolidated financial statements, related accounting principles and practices and (when required of management under securities commissions or the applicable listing standards) managements assessment of internal control over financial reporting. This Committee also monitors the integrity of our financial reporting process and systems of internal controls regarding finance, accounting and legal compliance.
The consolidated financial statements have been audited on behalf of the shareholders by the Companys independent auditors, PricewaterhouseCoopers LLP. The auditors report outlines the scope of their examination and their opinion on the consolidated financial statements. The auditors have full and free access to the Audit Committee.
/s/ Rockne J. Timm
Chief Executive Officer
March 22, 2011
/s/ Robert A. McGuinness
Vice PresidentFinance and CFO
March 22, 2011
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Independent Auditors Report
To the Shareholders of
Gold Reserve Inc.
We have audited the accompanying consolidated financial statements of Gold Reserve Inc. (the Company) which comprise the consolidated balance sheets as at December 31, 2010 and 2009, consolidated statements of operations, comprehensive loss, changes in shareholders equity and cash flows for each of the three years ended December 31, 2010, 2009 and 2008 and the related notes including a summary of significant accounting policies.
Managements responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2010 and 2009 and the results of its operations and its cash flows for each of the years in the period ended December 31, 2010, 2009 and 2008 in accordance with Canadian generally accepted accounting principles.
Signed PricewaterhouseCoopers LLP
Chartered Accountants
March 22, 2010
Vancouver, BC
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GOLD RESERVE INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
(Expressed in U.S. dollars)
2010
2009
ASSETS
Cash and cash equivalents (Note 4)
$ 58,186,478
$ 60,962,813
Assets held for sale (Note 9)
7,968,813
Marketable debt securities (Note 5)
10,175,020
Marketable equity securities (Note 6)
2,263,923
598,825
Deposits, advances and other
1,507,822
566,483
Total current assets
69,927,036
72,303,141
Property, plant and equipment, net (Note 9)
28,503,330
38,122,102
Restricted cash (Note 15)
9,489,777
Total assets
$ 98,430,366
$ 119,915,020
LIABILITIES
Accounts payable and accrued expenses
$ 1,633,150
$ 3,790,003
Accrued interest
234,550
234,550
Total current liabilities
1,867,700
4,024,553
Convertible notes (Note 17)
96,975,421
93,693,168
Total liabilities
$ 98,843,121
$ 97,717,721
Noncontrolling interest
2,279,699
Measurement Uncertainty (Note 1)
Commitments and Contingencies (Note 15)
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value
Authorized:
Unlimited
Issued:
None
Common shares and equity units:
$ 249,280,489
$ 247,905,231
Class A common shares, without par value
Authorized:
Unlimited
Issued:
2010
58,769,851
2009
57,694,997
Outstanding:
2010
58,769,851
2009
57,444,997
Equity Units
Issued:
2010
500,236
2009
500,236
Outstanding:
2010
500,236
2009
961
Equity component of convertible notes (Note 17)
28,652,785
28,652,785
Less, common shares and equity units held by affiliates
(636,267)
Stock options (Note 11)
10,083,817
10,014,136
Accumulated deficit
(289,177,303)
(265,630,369)
Accumulated other comprehensive income (loss)
858,148
(277,225)
KSOP debt (Note 10)
(110,691)
(110,691)
Total shareholders' (deficit) equity
(412,755)
19,917,600
Total liabilities and shareholders' equity
$ 98,430,366
$ 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
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GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
(Expressed in U.S. dollars)
2010
2009
2008
Other Income:
Interest income
$ 242,170
$ 288,952
$ 2,687,825
Gain (loss) on disposition of marketable securities
241,621
2,274,848
(243,053)
Gain on sale of subsidiaries (Note 12)
474,577
Gain on extinguishment of debt
601,936
76,530
958,368
3,165,736
2,521,302
Expenses:
Corporate general and administrative
3,288,691
4,559,721
7,707,545
Venezuela expenses
1,714,543
3,600,648
5,030,541
Equipment holding costs
1,567,181
401,336
15,000
Write-down of machinery and equipment (Note 9)
2,518,796
Loss (gain) on sale of equipment
(419,413)
3,423,544
1,346,423
Corporate communications
525,658
753,737
1,043,227
Legal and accounting
446,611
1,320,855
1,035,065
Arbitration (Note 3)
6,289,647
673,592
Takeover defense (Note 18)
1,330,366
5,271,360
Foreign currency (gain) loss
21,907
(5,429)
61,212
15,953,621
16,058,370
21,510,373
Loss before interest expense, income tax
and extraordinary item
(14,995,253)
(12,892,634)
(18,989,071)
Interest expense
(8,911,448)
(1,688,403)
Loss before income tax and
extraordinary item
(23,906,701)
(14,581,037)
(18,989,071)
Income tax benefit (expense) (Note 13)
359,767
(142,319)
(737,050)
Loss before extraordinary item
(23,546,934)
(14,723,356)
(19,726,121)
Extraordinary loss on expropriation of assets (Note 3)
(150,726,472)
Net loss for the year
$ (23,546,934)
$ (165,449,828)
$(19,726,121)
Basic and diluted net loss per share:
Loss before extraordinary item
(0.41)
(0.26)
(0.35)
Extraordinary loss on expropriation of assets
(2.63)
Basic and diluted net loss per share
$ (0.41)
$ (2.89)
$ (0.35)
Weighted average common shares outstanding
57,754,492
57,309,238
55,988,372
The accompanying notes are an integral part of the consolidated financial statements.
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GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2010 and 2009
(Expressed in U.S. dollars)
2010
2009
Net loss for the year
$(23,546,934)
$(165,449,828)
Other comprehensive income (loss), net of tax:
Unrealized gain on marketable securities
1,376,994
1,667,983
Adjustment for realized gains included in net loss
(241,621)
(2,274,848)
Other comprehensive income (loss)
1,135,373
(606,865)
Comprehensive loss for the year
$(22,411,561)
$(166,056,693)
The accompanying notes are an integral part of the consolidated financial statements.
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GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2010, 2009, and 2008
(Expressed in U.S. dollars)
Equity Com-
Common Shares
Accumulated
Common Shares and Equity Units Issued
ponent of Con-
and Equity Units
Stock
Accumulated
Other Compre-
KSOP
Common Shares
Equity Units Amount
vertible Notes
Held by Affiliates
Options
Deficit
hensive income
Debt
Balance, December 31, 2007
55,060,934
1,085,099
244,295,503
28,784,710
(636,267)
7,662,237
(80,454,420)
1,779,737
(110,691)
Equity units exchanged for
common shares
584,863
(584,863)
Net loss
(19,726,121)
Other comprehensive loss
(1,450,097)
Stock option compensation
1,958,470
Conversions and repurchase of
convertible notes
(10,489)
Fair value of options exercised
191,905
(191,905)
Common shares issued for:
Cash
162,133
309,205
Services
1,311,125
2,704,659
Balance, December 31, 2008
57,119,055
500,236
247,501,272
28,774,221
(636,267)
9,428,802
(100,180,541)
329,640
(110,691)
Net loss
(165,449,828)
Other comprehensive loss
(606,865)
Stock option compensation
590,180
Conversions and repurchase of
convertible notes
(121,436)
Fair value of options exercised
4,846
(4,846)
Common shares issued for:
Cash
24,442
7,088
Services
551,500
392,025
Balance, December 31, 2009
57,694,997
500,236
247,905,231
28,652,785
(636,267)
10,014,136
(265,630,369)
(277,225)
(110,691)
Net loss
(23,546,934)
Other comprehensive income
1,135,373
Stock option compensation
99,532
Fair value of options exercised
29,851
(29,851)
Common shares issued for:
Cash
150,554
43,661
Services
924,300
1,503,566
Decrease in shares held
by affiliates
(201,820)
636,267
Balance, December 31, 2010
58,769,851
500,236
$249,280,489
$ 28,652,785
$ -
$ 10,083,817
$ (289,177,303)
$ 858,148
$ (110,691)
The accompanying notes are an integral part of the consolidated financial statements.
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GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
(Expressed in U.S. dollars)
2010
2009
2008
Cash Flow from Operating Activities:
Net loss for the year
$ (23,546,934)
$ (165,449,828)
$(19,726,121)
Adjustments to reconcile net loss to net
cash used by operating activities:
Stock option compensation
99,532
590,180
1,958,470
Depreciation
132,653
213,902
224,071
Gain on extinguishment of debt
(601,936)
(76,530)
Loss (gain) on sale of equipment
(419,413)
3,423,544
1,346,423
Gain on sale of subsidiaries
(474,577)
Loss on expropriation of assets
150,726,472
Write-down of machinery and equipment
2,518,796
Amortization of premium on
marketable debt securities
175,020
109,715
Accretion of convertible notes
3,282,253
554,581
Foreign currency loss
50,522
6,796
Other
(27,124)
(8,712)
Net (gain) loss on disposition of marketable securities
(241,621)
(2,274,848)
243,053
Future income tax expense (benefit) (Note 13)
(359,767)
169,815
747,019
Shares issued for compensation
1,503,566
392,025
2,704,659
Changes in non-cash working capital:
Decrease (increase) in deposits, advances and accrued interest
(941,339)
507,737
(442,931)
Decrease in accounts payable and accrued expenses
(2,156,853)
(3,515,102)
(834,419)
Net cash used in operating activities
(20,428,684)
(15,130,345)
(13,858,222)
Cash Flow from Investing Activities:
Purchase of marketable securities
(1,028,144)
(12,095,811)
(3,262,239)
Purchase of property, plant and equipment
(9,496,692)
(17,771,441)
(38,699,588)
Proceeds from the sale of marketable securities
11,158,787
4,053,179
4,466,821
Proceeds from the sale of equipment
8,914,615
7,297,598
19,184,740
Decrease (increase) in restricted cash
9,489,777
8,019,895
34,570,931
Capitalized interest paid on convertible notes
(4,507,319)
(5,688,430)
Deconsolidation of subsidiaries
(1,429,655)
Other
(44,944)
(117,760)
Net cash provided by (used in) investing activities
17,608,688
(15,048,843)
10,454,475
Cash Flow from Financing Activities:
Net proceeds from issuance of common shares
43,661
7,088
309,205
Extinguishment of convertible notes
(415,254)
(35,867)
Net cash provided by (used in) financing activities
43,661
(408,166)
273,338
Change in Cash and Cash Equivalents:
Net increase decrease in cash and cash equivalents
(2,776,335)
(30,587,354)
(3,130,409)
Cash and cash equivalents - beginning of year
60,962,813
91,550,167
94,680,576
Cash and cash equivalents - end of year
$ 58,186,478
$ 60,962,813
$ 91,550,167
The accompanying notes are an integral part of the consolidated financial statements.
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1. The Company and Significant Accounting Policies:
The Company. Gold Reserve Inc. (the Company) is engaged in the business of acquiring, exploring and developing mining projects. 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.
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.
From 1992 to 2008 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 seized by the Bolivarian Republic of Venezuela (Venezuela). 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.
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 19, 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, four Venezuelan subsidiaries, two Barbadian subsidiaries and one Aruban subsidiary which were formed to hold the Companys interest in its foreign subsidiaries or for future transactions. All subsidiaries are wholly owned. All intercompany accounts and transactions have been eliminated on consolidation. The Companys policy is to consolidate those subsidiaries where control exists. In years ended 2009 and 2008, the consolidated financial statements also included the accounts of two domestic subsidiaries, Great Basin Energies, Inc. (Great Basin) and MGC Ventures Inc. (MGC Ventures). Great Basin and MGC Ventures were 45% and 44% owned, respectively until the Company in December 2010, disposed of its equity interest in the subsidiaries. See Note 12. to the consolidated financial statements.
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.
- 33 -
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 propertys 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.
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 Companys qualifying assets include its costs of developing mining properties and constructing new facilities.
Assets Held for Sale . 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.
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 Companys functional currency. The Companys 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.
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
- 34 -
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, as a result of the loss of control and physical access to the Brisas project, we recorded a $150.7 million non-cash expense adjustment related to the carrying value of the Brisas Project related assets including an adjustment of approximately $14.5 million for the estimated net realizable value of certain processing and related equipment. See Notes 3, 9 and 15. 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. 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.
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 estimated to be June 15, 2012, 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 Companys 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.
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 Venezuela and Related Arbitration:
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 southeastern Venezuela. After approval of the Brisas operating plan by the Ministry of Mines and the Environmental and Social Impact Study by the Ministry of Environment in 2003 and early 2007, respectively, the Ministry of Environment issued in March 2007, the Authorization to Affect which authorized the commencement of construction activities on 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 Venezuela to resolve the issues related to the revocation of the Authorization to Affect, on April 21, 2009 the Company notified Venezuela of the existence of a dispute under the Canada Venezuela Treaty.
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After several additional months of efforts to meet with representatives of Venezuela 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 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, Venezuela notified the Company through the issuance of an Administrative Act, dated October 20, 2009, of its intent to cancel the Companys 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)).
As a result of the seizure of the Brisas Project by Venezuela 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 expense adjustment related to the carrying value of the Brisas Project related assets including an adjustment of approximately $14.5 million for the estimated net realizable value of certain processing and related equipment.
The Company is seeking compensation of $1.98 billion 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 April 14, 2011. Thereafter, further written submissions are scheduled to be made prior to the oral hearings, which are scheduled to commence on February 6, 2012.
4.
Cash and Cash Equivalents:
2010
2009
Bank deposits
$ 52,307,918
$ 53,900,646
Money market funds
5,878,560
7,062,167
Total
$ 58,186,478
$ 60,962,813
The above amounts exclude restricted cash of approximately $9.5 million in 2009. See Note 15. At December 31, 2010 and 2009, the Company had approximately $39,000 and $59,000, respectively, in Venezuela and banks outside Canada and the U.S.
5.
Marketable Debt Securities:
2010
2009
Amortized cost
$
$10,175,020
All of the Companys marketable debt securities matured in December, 2010. These securities were classified as held-to-maturity and measured at amortized cost using the effective interest rate method.
6.
Marketable Equity Securities:
2010
2009
Fair value at beginning of year
$ 598,825
$ 1,342,760
Acquisitions
778,144
2,135,293
Dispositions, at cost
(667,166)
(2,102,548)
Realized gain on sale
(241,621)
(2,274,848)
Unrealized gain
1,795,741
1,498,168
Fair value at end of year
$ 2,263,923
$ 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 December 31, 2010 and 2009 marketable equity securities had a cost basis of $1,046,009 and $876,049, respectively.
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7. Financial Instruments:
The fair values as at December 31, 2010 and 2009 along with the carrying amounts shown on the consolidated balance sheets for each classification of financial instrument are as follows:
December 31, 2010
December 31, 2009
Carrying
Fair
Carrying
Fair
Classification
Amount
Value
Amount
Value
Cash and cash equivalents
held for trading
$ 58,186,478
$ 58,186,478
$ 60,962,813
$ 60,962,813
Restricted cash
held for trading
9,489,777
9,489,777
Marketable debt securities
held to maturity
10,175,020
10,208,950
Marketable equity securities
available for sale
2,263,923
2,263,923
598,825
598,825
A/P and accruals
other financial liabilities
1,633,150
1,633,150
3,790,003
3,790,003
Accrued interest
other financial liabilities
234,550
234,550
234,550
234,550
Convertible notes
other financial liabilities
96,975,421
69,477,790
93,693,168
69,085,575
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 but are traded on a limited basis in a grey market. Fair value estimates for convertible notes are based on an assessment of available market information.
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 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
December 31, 2010
Level 1
Level 2
Level 3
Cash and cash equivalents
$ 58,186,478
$ 58,186,478
Marketable equity securities
2,263,923
2,263,923
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 has historically managed this risk by maintaining adequate cash balances through equity and debt offerings to meet its obligations. With respect to the convertible notes, the holders have the option to require the Company to repurchase the notes on June 15, 2012, for the principal amount of the notes plus unpaid interest and the Company may satisfy this obligation, in whole or in part, by delivering Common Shares. 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.
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Payments due by Period
Less than
More Than
Total
1 Year
1-3 Years
4-5 Years
5 Years
A/P and accruals
$ 1,633,150
$ 1,633,150
Interest
8,443,793
5,629,195
$ 2,814,598
Principal
102,349,000
102,349,000
Total
$ 112,425,943
$ 7,262,345
$ 105,163,598
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 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 loss from the translation of foreign currency denominated financial instruments, as at December 31, 2010 and 2009, by the amounts shown below.
2010
2009
Venezuelan Bolívar
$ (38,365)
$ 60,766
Canadian Dollar
(11,363)
(10,894)
Total
$ (49,728)
$ 49,872
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.
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9.
Property, Plant and Equipment:
Accumulated
Cost
Depreciation
Net
2010
United States
Machinery and equipment
$ 28,071,469
$
$ 28,071,469
Furniture and office equipment
506,339
(435,224)
71,115
Leasehold improvements
41,190
(38,874)
2,316
$ 28,618,998
$ (474,098)
$ 28,144,900
Venezuela
Buildings
403,286
(285,696)
117,590
Furniture and office equipment
480,751
(462,208)
18,543
Transportation equipment
214,112
(201,196)
12,916
Machinery and equipment
497,808
(288,427)
209,381
1,595,957
(1,237,527)
358,430
Total
$ 30,214,955
$ (1,711,625)
$ 28,503,330
Accumulated
Cost
Depreciation
Net
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 includes amounts paid for infrastructure and milling equipment previously intended for use on the Brisas project. In 2010 we recorded a $2.5 million write-down of some of this equipment to estimated net realizable value. In 2009 we recorded a $150.7 million non-cash expense adjustment related to the carrying value of the Brisas Project related assets including an adjustment of approximately $14.5 million for the estimated net realizable value of certain processing and related equipment.
At December 31, 2010 certain equipment with a carrying value of approximately $8.0 was reclassified to assets held for sale. During the first quarter of 2011, this equipment was sold for $8.3 million and the Company recorded a gain on sale of $0.3 million.
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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, subject to certain limitations, is at the discretion of the Companys board of directors. The fair market value of the shares when allocated is recorded in the statement of operations with a reduction of the KSOP debt account. The Company made cash contributions to eligible participants for the Plan years 2010, 2009, and 2008 of $175,174, $57,292, and $269,679, respectively. As of December 31, 2010, 22,246 common shares remain unallocated to plan participants.
11. Stock Based Compensation Plans:
Equity Incentive Plans
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 years ended December 31, 2010, 2009 and 2008 are as follows:
2010
2009
2008
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
Options outstanding at
beginning of year
4,573,318
$ 2.67
5,007,931
$ 3.18
4,445,139
$ 4.14
Options exercised
(150,554)
0.29
(24,442)
0.29
(162,133)
1.91
Options expired
(1,142,745)
3.75
(875,004)
4.28
(494,427)
4.37
Options forfeited
(101,917)
2.83
(82,667)
4.44
(84,000)
4.72
Options granted
547,500
0.73
1,303,352
0.29
Options outstanding at
end of year
3,178,102
2.39
4,573,318
$ 2.67
5,007,931
$ 3.18
Options exercisable
at end of year
3,178,102
2.39
3,591,362
$ 3.25
3,792,324
$3.70
Options available for
grant at end of year
under 1997 plan
3,058,076
2,045,790
1,793,750
Options available for
grant at end of year
under Venezuelan plan
5,617,840
5,019,938
4,722,177
2010
2009
2008
Price
Price
Price
Range
Range
Range
Exercise price at end of year
$ 0.29 - $ 5.36
$ 0.29 - $ 5.36
$ 0.29 - $ 5.36
Exercise price of exercisable options
$ 0.29 - $ 5.36
$ 0.29 - $ 5.36
$ 0.29 - $ 5.36
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The following table relates to stock options at December 31, 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
1,121,689
2.93
$0.29
1,121,689
$0.29
$0.73 - $0.73
535,000
3.21
$0.73
535,000
$0.73
$3.95 - $4.19
686,000
0.76
$4.12
686,000
$4.12
$4.30 - $4.62
298,500
0.92
$4.57
298,500
$4.57
$4.83 - $4.83
257,913
0.40
$4.83
257,913
$4.83
$5.07 - $5.36
279,000
1.91
$5.19
279,000
$5.19
$0.29 - $5.36
3,178,102
1.94
$2.39
3,178,102
$2.39
The Company recorded compensation expense during 2010, 2009, and 2008 of $99,532, $590,180, and $1,958,470, respectively, for stock options granted. The fair value of the options granted was calculated using the Black-Scholes model based on the following assumptions:
2010
2009
2008
Weighted average risk free interest rate
1.46%
1.55%
Expected life
4.6 years
4.5 years
Expected volatility
120%
92%
Dividend yield
nil
nil
Retention Units Plan
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 an interest in 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 December 31, 2010 an aggregate of 1,607,500 unvested Units have been granted to directors and executive officers of the Company and 315,000 Units have been granted to other employees. The Company currently does not accrue a liability for these units as events required for vesting of the units have not yet occurred. The value of these units, based on the grant date value of the Class A shares, was approximately $8.4 million.
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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. On December 15, 2010, the non-affiliated shareholders of MGC Ventures approved the redemption of all of the shares of MGC Ventures common stock held by Gold Reserve. Gold Reserve received $0.9 million and recorded a gain on sale of subsidiary of $0.2 million. Prior to the redemption, Gold Reserve owned 12,062,953 common shares of MGC Ventures which represented 44% of its outstanding shares. MGC Ventures owned 258,083 common shares of the Company at December 31, 2010 and 2009. 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. On December 15, 2010, the non-affiliated shareholders of Great Basin approved the redemption of all of the shares of Great Basin common stock held by Gold Reserve. Gold Reserve received $1.2 million and recorded a gain on sale of subsidiary of $0.3 million. Prior to the redemption, Gold Reserve owned 15,661,595 common shares of Great Basin which represented 45% of its outstanding shares. Great Basin owned 491,192 common shares of the Company at December 31, 2010 and 2009. During the last three years, the Company sublet a portion of its office space to Great Basin for $6,000 per year.
13. Income Tax:
2010
2009
2008
Current income tax expense (benefit)
$
$ (27,496)
$ (9,969)
Future income tax expense (benefit)
(359,767)
169,815
747,019
$ (359,767)
$ 142,319
$ 737,050
Income tax expense differs from the amount that would result from applying Canadian tax rates to net loss before taxes. These differences result from the items noted below:
2010
2009
2008
Income tax benefit based on Canadian tax rates
$ (6,693,876)
$ (48,765,715)
$ (5,601,776)
Increase (decrease) due to:
Different tax rates on foreign subsidiaries
(218,882)
(5,333,076)
(544,744)
Non-deductible expenses
1,108,571
509,749
1,461,477
Change in valuation allowance and other
5,444,420
53,731,361
5,422,093
$ (359,767)
$ 142,319
$ 737,050
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No current income tax has been recorded by the parent company for the three years ended December 31, 2010. Current income tax in 2009 and 2008 relates to two of the Companys former U.S. subsidiaries. Future income tax relates to unrealized gains and losses on available-for-sale securities.
The Company has recorded a valuation allowance to reflect the estimated amount of the future tax assets which may not be realized, principally due to the uncertainty of utilization of net operating losses and other carry forwards prior to expiration. The valuation allowance for future tax assets may be reduced in the near term if the Companys estimate of future taxable income changes. The components of the Canadian and U.S. future income tax assets and liabilities as of December 31, 2010 and 2009 were as follows:
Future Tax Asset
2010
2009
Accounts payable and accrued expenses
$ 129,618
$ 153,649
Property, plant and equipment
(9,170)
(11,914)
Total temporary differences
120,448
141,735
Net operating loss carry forward
30,134,668
26,049,292
Alternative minimum tax credit
19,871
19,871
Total temporary differences, operating losses
and tax credit carry forwards
30,274,987
26,210,898
Valuation allowance
(30,274,987)
(26,210,898)
Net deferred tax asset
$
$
At December 31, 2010, the Company had the following U.S. and Canadian tax loss carry forwards and tax credits:
U.S.
Canadian
Expires
Regular tax net operating loss:
$ 645,622
2011
1,424,144
2012
1,725,246
2014
2,150,316
2015
1,386,674
2018
1,621,230
2019
665,664
2020
896,833
2021
1,435,774
2022
1,806,275
2023
2,386,407
2024
3,680,288
2025
4,622,825
2,610,981
2026
6,033,603
4,845,641
2027
4,360,823
18,469,375
2028
1,769,963
17,503,563
2029
2,159,079
21,639,404
2030
$ 34,895,204
$ 68,944,526
Alternative minimum tax net operating loss:
$ 618,845
2011
1,399,529
2012
$ 2,018,374
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14. Segmented Financial Information:
The Company has one operating segment, which is the exploration and development of mineral properties.
Segmented financial information by geographic region is as follows:
U.S./Canada
Venezuela
Consolidated
2010
Other income
$ 958,368
$
$ 958,368
Depreciation
40,913
91,740
132,653
Net loss after tax
$ 21,921,652
$ 1,625,282
$ 23,546,934
Identifiable assets
Property, plant and equipment, net
$ 28,144,900
$ 358,430
$ 28,503,330
General corporate assets
69,529,033
398,003
69,927,036
Total identifiable assets
$ 97,673,933
$ 756,433
$ 98,430,366
2009
Other income
$ 3,165,736
$
$ 3,165,736
Depreciation
46,774
167,128
213,902
Extraordinary loss
150,726,472
150,726,472
Net loss after tax
$ 8,028,733
$ 157,421,095
$ 165,449,828
Identifiable assets
Property, plant and equipment, net
$ 37,601,810
$ 520,292
$ 38,122,102
General corporate assets
81,428,089
364,829
81,792,918
Total identifiable assets
$ 119,029,899
$ 885,121
$ 119,915,020
2008
Other income
$ 2,444,772
$
$ 2,444,772
Depreciation
50,053
174,018
224,071
Net loss after tax
$ 15,075,179
$ 4,650,942
$ 19,726,121
Identifiable assets
Property, plant and equipment, net
$ 129,112
$ 175,003,366
$ 175,132,478
General corporate assets
110,951,216
1,530,820
112,482,036
Total identifiable assets
$ 111,080,328
$ 176,534,186
$ 287,614,514
Net loss and identifiable assets of each segment are those that are directly identified with those geographic locations.
15. 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 December 31, 2010, the Company had remaining equipment commitments of less than $0.1 million. 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 December 31, 2010 and December 31, 2009, the Company had restricted cash of $0 and $9.5 million, respectively, as required by this letter of credit.
- 44 -
16. 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. 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 Directors 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 Companys 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.
17. 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 Companys 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 Companys 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 Companys Common Shares has remained above that price for at least twenty trading days in the period of thirty trading days preceding the Companys 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 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 holders exercise of conversion rights and similar provisions or the Companys 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 which is estimated to be June 15, 2012, with the resulting charge recorded as interest expense. The Company capitalized interest and accretion on the notes until October, 2009, when the Company filed for arbitration and when Venezuela seized the Brisas Project. Thereafter all interest and accretion on the notes has been expensed. As of December 31, 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.
- 45 -
18. Takeover defense and 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 Rusoros financial advisor Endeavour Financial International Corporation (Endeavour) seeking an injunction restraining Rusoro and Endeavour from proceeding with Rusoros unsolicited offer, significant monetary damages, and various other items. Endeavour was the Companys financial advisor from 2004 until shortly after the commencement of Rusoros 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 Companys confidential information as a result of Rusoros 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 and 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 Companys 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. During 2010, the Company developed its strategy for the execution of this action, added two additional defendants and amended the claim for monetary damages and collected all its relevant documents, including electronically stored information and is in the process of proceeding to depositions.
19. 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.
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Consolidated Summarized Balance Sheets
Canadian GAAP
Change
U.S. GAAP
December 31, 2010
Assets
Current assets
$ 69,927,036
$
$ 69,927,036
Property, plant and equipment, net
28,503,330
28,503,330
$ 98,430,366
$
$ 98,430,366
Liabilities
Convertible notes C
$ 96,975,421
$ 3,778,983
$100,754,404
Other liabilities
1,867,700
1,867,700
98,843,121
3,778,983
102,622,104
Shareholders equity
Common shares & equity units B,E
249,280,489
(5,698,031)
243,582,458
Equity component of convertible notes C
28,652,785
(28,652,785)
Contributed surplus E
5,171,603
5,171,603
Stock options B
10,083,817
4,434,753
14,518,570
Accumulated deficit A,B,D
(289,177,303)
20,605,710
(268,571,593)
Accumulated other comprehensive income A
858,148
359,767
1,217,915
KSOP debt
(110,691)
(110,691)
Total shareholders equity (deficit)
(412,755)
(3,778,983)
(4,191,738)
$ 98,430,366
$
$ 98,430,366
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,E
247,905,231
(5,698,031)
242,207,200
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
10,014,136
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 Shareholders Equity
19,917,600
(3,768,855)
16,148,745
$119,915,020
$
$119,915,020
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Consolidated Summarized Statements of Operations
2010
2009
2008
Net Loss under Canadian GAAP
$ (23,546,934)
$ (165,449,828)
$ (19,726,121)
Interest expense D
2,269,571
405,054
(224,139)
Gain on settlement of debt C
(47,429)
28,838
Income tax A
(359,767)
169,815
747,019
Expropriation of assets
64,892,575
Net loss under U.S. GAAP
(21,637,130)
(100,029,813)
(19,174,403)
Other comprehensive income (loss)
Unrealized gain (loss) on available-
for-sale securities: A
Holding gain (loss) arising during period
1,736,761
1,498,168
(2,440,169)
Reclassification adjustment for (gain)
loss included in net loss
(241,621)
(2,274,848)
243,053
Total comprehensive loss under
U.S. GAAP
$ (20,141,990)
$ (100,806,493)
$ (21,371,519)
Basic and diluted net loss per share
under U.S. GAAP
$ (0.37)
$ (1.75)
$ (0.34)
Consolidated Summarized Statements of Cash Flows
2010
2009
2008
Cash flow used by operating activities
under Canadian GAAP
$ (20,428,684)
$ (15,130,345)
$ (13,858,222)
Cash paid for interest D
35,483
(214,729)
Cash flow used in operating activities
under U.S. GAAP
$ (20,428,684)
$ (15,094,862)
$ (14,072,951)
Cash flow (used) provided by investing
activities under Canadian GAAP
$ 17,608,688
$ (15,048,843)
$ 10,454,475
Cash paid for interest D
(35,483)
214,729
Cash flow provided by (used in) investing
activities under U.S. GAAP
$ 17,608,688
$ (15,084,326)
$ 10,669,204
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 17, 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 December 31, 2010 and 2009, an additional $24.9 million and $22.6 million, respectively of accretion expense had been incurred for Canadian GAAP purposes over the amount incurred under U.S. GAAP.
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D
Prior to the seizure of the Brisas Project 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 loss of control 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
$ 629,103
$ 2,531,523
Accrued expenses
1,004,047
1,258,480
Accounts payable and accrued expenses
$ 1,633,150
$ 3,790,003
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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
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.