FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the month of May 2012
Commission File Number: 001-31819
Gold Reserve Inc.
(Exact name of registrant as specified in its charter)
926 W. Sprague Avenue, Suite 200
Spokane, Washington 99201
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F
x
Form 40-F
¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1):
¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7):
¨
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes
¨
No
x
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
EXPLANATORY NOTE
The Company determined as of June 30, 2011 (the last business day of its most recently completed second fiscal quarter), that less than 50 percent of its outstanding voting securities were directly or indirectly held of record by residents of the United States. Because the share ownership percentage of United States residents of the Company is less than 50% and the Company is organized under the laws of the Yukon Territory, the Company is a “foreign private issuer” pursuant to Rule 3b-4 under the Securities Exchange Act of 1934, as amended. Foreign private issuers are not required to file its Quarterly Report to Shareholders with the SEC pursuant to Form 10-Q. Instead, we have furnished a copy of our Canadian Quarterly Report to Shareholders to the SEC under cover of Form 6-K.
The following exhibits are furnished with this Form 6-K:
99.1
March 31, 2012 Interim Consolidated Financial Statements
99.2
March 31, 2012 Management’s Discussion and Analysis
99.3 Chief Executive Officer’s Certification of Interim Filings
99.4 Chief Financial Officer’s Certification of Interim Filings
Cautionary Statement Regarding Forward-Looking Statements
The information furnished under cover of this Form 6-K contains both historical information and forward-looking statements (within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Securities Act (Ontario)) that may state our intentions, hopes, beliefs, expectations or predictions for the future. In this report, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by us at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements of the Company to be materially different from our estimated future results, performance, or achievements expressed or implied by those forward-looking statements.
These forward-looking statements involve risks and uncertainties, as well as assumptions that may never materialize, prove incorrect or materialize other than as currently contemplated which could cause our results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “anticipate,” “expect,” “intend,” “estimate,” “plan,” “may,” “could” and other similar expressions that are predictions of or indicate future events and future trends which do not relate to historical matters, identify forward-looking statements. Any such forward-looking statements are not intended to give any assurances as to future results. Numerous factors could cause actual results to differ materially from those in the forward-looking statements. Due to risks and uncertainties, including the risks and uncertainties identified in our Annual Information Form, actual results may differ materially from current expectations.
Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation:
·
the outcome of our arbitration under ICSID against the Bolivarian Republic of Venezuela;
·
the actual value realized from the disposition of the remaining Brisas Project related assets;
·
the result or outcome of the litigation regarding the enjoined hostile takeover bid for us;
·
the potential equity dilution in the event the convertible notes are converted in part or in whole to common shares;
·
our ability to maintain continued listing on the NYSE MKT and/or the TSX Venture;
·
corruption and uncertain legal enforcement;
·
political and social instability;
·
requests for improper payments;
·
competition with companies that are not subject to or do not follow Canadian and U.S. laws and regulations;
·
regulatory, political and economic risks associated with Venezuela including changes in laws and legal regimes;
·
impact of currency, metal prices and metal production volatility;
·
our dependence upon the abilities and continued participation of certain key employees;
·
the prospects for exploration and development of other mining projects by us; and
·
risks normally incident to the exploration, development and operation of mining properties.
Investors are cautioned not to put undue reliance on forward-looking statements, and investors should not infer that there has been no change in our affairs since the date of this report that would warrant any modification of any forward-looking statement made in this document, other documents filed periodically with securities regulators or documents presented on our website. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this notice. We disclaim any intent or obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of assumptions or factors, whether as a result of new information, future events or otherwise, subject to our disclosure obligations under applicable rules promulgated by the relevant securities regulators.
(Signature page follows)
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 29, 2012
GOLD RESERVE INC.
(Registrant)
By: /s/
Robert A.
McGuinness
Name: Robert A. McGuinness
Title:
Vice President – Finance & CFO
Exhibit
99.1 Financial Statements (Unaudited)
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE
SHEETS
(Expressed in U.S. dollars)
|
|
March 31,
2012
|
|
|
December 31, 2011
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents (Note 4)
|
$
|
53,760,689
|
|
$
|
57,677,370
|
Assets
held for sale (Note 7)
|
|
–
|
|
|
450,000
|
Marketable
securities (Note 5)
|
|
861,792
|
|
|
892,271
|
Deposits,
advances and other
|
|
1,879,167
|
|
|
194,802
|
Total
current assets
|
|
56,501,648
|
|
|
59,214,443
|
Property,
plant and equipment, net (Note 7)
|
|
19,121,242
|
|
|
19,125,626
|
Total
assets
|
$
|
75,622,890
|
|
$
|
78,340,069
|
LIABILITIES
|
|
|
|
|
|
Current Liabilities
:
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$
|
2,139,550
|
|
$
|
2,076,131
|
Accrued
interest
|
|
1,641,816
|
|
|
234,545
|
Total
current liabilities
|
|
3,781,366
|
|
|
2,310,676
|
|
|
|
|
|
|
Convertible
notes (Notes 12, 14)
|
|
102,112,927
|
|
|
101,833,491
|
Total
liabilities
|
|
105,894,293
|
|
|
104,144,167
|
|
|
|
|
|
|
Measurement
uncertainty (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Serial
preferred stock, without par value
|
|
|
|
|
|
Authorized:
|
Unlimited
|
|
|
|
|
|
|
Issued:
|
None
|
|
|
|
|
|
|
Common shares and equity units
|
|
246,167,909
|
|
|
244,023,265
|
Class A common shares, without par value
|
|
|
|
|
|
Authorized:
|
Unlimited
|
|
|
|
|
|
|
Issued and outstanding:
|
2012…59,751,472
|
2011…59,043,972
|
|
|
|
|
|
Equity Units
|
|
|
|
|
|
|
|
Issued and outstanding:
|
2012…500,236
|
2011…500,236
|
|
|
|
|
|
Contributed Surplus
|
|
5,171,603
|
|
|
5,171,603
|
Stock options (Note 9)
|
|
18,277,515
|
|
|
17,143,278
|
Accumulated deficit
|
|
(299,905,965)
|
|
|
(292,183,986)
|
Accumulated other comprehensive income
|
|
17,535
|
|
|
41,742
|
Total shareholders' deficit
|
|
(30,271,403)
|
|
|
(25,804,098)
|
Total liabilities and shareholders' deficit
|
$
|
75,622,890
|
|
$
|
78,340,069
|
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
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Expressed
in U.S. dollars)
|
|
|
|
|
|
|
|
January 1, 2010
|
|
|
|
|
Three Months Ended March 31,
|
|
through
|
|
|
|
|
2012
|
|
2011
|
|
March 31, 2012
|
OTHER
INCOME
|
|
|
|
|
|
|
|
|
Interest
|
|
|
$
|
1,230
|
$
|
44,048
|
$
|
360,356
|
Gain
on disposition of marketable securities
|
|
|
|
7,373
|
|
198,191
|
|
1,021,692
|
Gain on
sale of equipment
|
|
|
|
–
|
|
361,208
|
|
1,880,140
|
Gain
on sale of subsidiaries (Note 10)
|
|
|
|
–
|
|
–
|
|
474,577
|
Gain
on extinguishment of debt
|
|
|
|
–
|
|
–
|
|
1,304
|
Foreign
currency gain (loss)
|
|
|
|
1,313
|
|
3,586
|
|
(13,765)
|
|
|
|
|
9,916
|
|
607,033
|
|
3,724,304
|
EXPENSES
|
|
|
|
|
|
|
|
|
Corporate
general and administrative
|
|
|
|
2,335,743
|
|
2,704,361
|
|
12,250,227
|
Venezuelan
operations
|
|
|
|
354,377
|
|
347,741
|
|
3,354,288
|
Equipment
holding costs
|
|
|
|
356,532
|
|
464,305
|
|
3,592,967
|
Write-down
of machinery and equipment
|
|
|
|
–
|
|
–
|
|
4,400,755
|
Corporate
communications
|
|
|
|
209,969
|
|
183,220
|
|
1,356,332
|
Legal
and accounting
|
|
|
|
101,388
|
|
87,508
|
|
1,066,215
|
Arbitration
(Note 3)
|
|
|
|
2,687,179
|
|
335,025
|
|
15,636,185
|
|
|
|
|
6,045,188
|
|
4,122,160
|
|
41,656,969
|
Loss
before interest expense
|
|
|
|
(6,035,272)
|
|
(3,515,127)
|
|
(37,932,665)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(1,686,707)
|
|
(1,650,495)
|
|
(15,038,837)
|
Net
loss for the period
|
|
|
$
|
(7,721,979)
|
$
|
(5,165,622)
|
$
|
(52,971,502)
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
|
|
$
|
(0.13)
|
$
|
(0.09)
|
|
|
Weighted average common shares outstanding
|
|
|
|
60,015,224
|
|
59,358,254
|
|
|
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Expressed
in U.S. dollars)
|
|
|
|
|
|
|
|
January 1, 2010
|
|
|
|
|
Three Months Ended March 31,
|
|
through
|
|
|
|
|
2012
|
|
2011
|
|
March 31, 2012
|
Net
loss for the period
|
|
|
$
|
(7,721,979)
|
$
|
(5,165,622)
|
$
|
(52,971,502)
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on marketable securities
|
|
|
|
(16,834)
|
|
(110,619)
|
|
1,316,452
|
Adjustment
for realized gains included in net loss
|
|
|
|
(7,373)
|
|
(198,191)
|
|
(1,021,692)
|
Other
comprehensive income (loss)
|
|
|
|
(24,207)
|
|
(308,810)
|
|
294,760
|
Comprehensive loss for the period
|
|
|
$
|
(7,746,186)
|
$
|
(5,474,432)
|
$
|
(52,676,742)
|
The accompanying notes are an integral part of the
consolidated financial statements.
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2012 and the Year Ended December 31, 2011
(Expressed in U.S. dollars)
|
Common Shares and Equity Units
|
Contributed
Surplus
|
Stock Options
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive income
|
KSOP
Debt
|
|
|
Common Shares
|
Equity Units
|
Amount
|
Balance, December 31, 2010
|
58,769,851
|
500,236
|
$ 243,582,458
|
$ 5,171,603
|
$ 14,518,570
|
$(268,571,593)
|
$ 1,217,915
|
$ (110,691)
|
Net loss
|
|
|
|
|
|
(23,612,393)
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(1,176,173)
|
|
Stock option compensation
|
|
|
|
|
2,723,577
|
|
|
|
Fair value of options exercised
|
|
|
98,869
|
|
(98,869)
|
|
|
|
Common shares issued for:
|
|
|
|
|
|
|
|
|
Option exercises ($0.16/share avg.)
|
95,921
|
|
15,778
|
|
|
|
|
|
Services ($1.83/share avg.)
|
178,200
|
|
326,160
|
|
|
|
|
|
KSOP allocation
|
|
|
|
|
|
|
|
110,691
|
Balance, December 31, 2011
|
59,043,972
|
500,236
|
244,023,265
|
5,171,603
|
17,143,278
|
(292,183,986)
|
41,742
|
-
|
Net loss
|
|
|
|
|
|
(7,721,979)
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(24,207)
|
|
Stock option compensation
|
|
|
|
|
1,141,206
|
|
|
|
Fair value of options exercised
|
|
|
6,969
|
|
(6,969)
|
|
|
|
Common shares issued for:
|
|
|
|
|
|
|
|
|
Option exercises ($1.82/share avg.)
|
5,000
|
|
9,100
|
|
|
|
|
|
Services ($3.03/share avg.)
|
702,500
|
|
2,128,575
|
|
|
|
|
|
Balance, March 31, 2012
|
59,751,472
|
500,236
|
$ 246,167,909
|
$ 5,171,603
|
$ 18,277,515
|
$(299,905,965)
|
$ 17,535
|
$ -
|
The accompanying notes are an integral part of the consolidated financial statements.
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
|
|
|
|
|
|
|
|
January 1, 2010
|
|
|
|
|
Three Months Ended March 31,
|
|
through
|
|
|
|
|
2012
|
|
2011
|
|
March 31, 2012
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
$
|
(7,721,979)
|
$
|
(5,165,622)
|
$
|
(52,971,502)
|
Adjustments
to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
|
|
1,141,206
|
|
1,454,790
|
|
3,964,315
|
Depreciation
|
|
|
|
6,093
|
|
23,981
|
|
206,968
|
Gain on extinguishment of debt
|
|
|
|
–
|
|
–
|
|
(1,304)
|
Gain on sale of equipment
|
|
|
|
–
|
|
(361,208)
|
|
(1,880,140)
|
Gain
on sale of subsidiaries
|
|
|
|
–
|
|
–
|
|
(474,577)
|
Write-down
of machinery and equipment
|
|
|
|
–
|
|
–
|
|
4,400,755
|
Amortization
of premium on marketable
|
|
|
|
|
|
|
|
|
debt
securities
|
|
|
|
–
|
|
–
|
|
175,020
|
Accretion of convertible notes
|
|
|
|
279,436
|
|
243,196
|
|
2,373,192
|
Net gain on disposition of marketable securities
|
|
|
|
(7,373)
|
|
(198,191)
|
|
(1,021,692)
|
Shares issued for compensation
|
|
|
|
780,325
|
|
311,400
|
|
2,810,899
|
Changes
in non-cash working capital:
|
|
|
|
|
|
|
|
|
Net decrease (increase) in deposits and advances
|
|
|
|
(336,115)
|
|
42,677
|
|
(54,591)
|
Net
increase (decrease) in accounts payable
|
|
|
|
|
|
|
|
|
and
accrued expenses
|
|
|
|
1,470,690
|
|
1,260,452
|
|
(243,187)
|
Net
cash used in operating activities
|
|
|
|
(4,387,717)
|
|
(2,388,525)
|
|
(42,715,844)
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from disposition of marketable securities
|
|
|
|
13,645
|
|
558,941
|
|
12,839,183
|
Purchase
of marketable securities
|
|
|
|
–
|
|
(454,948)
|
|
(1,726,718)
|
Purchase
of property, plant and equipment
|
|
|
|
(1,709)
|
|
(2,513)
|
|
(9,548,879)
|
Proceeds
from sales of equipment
|
|
|
|
450,000
|
|
8,337,140
|
|
25,822,156
|
Decrease
in restricted cash
|
|
|
|
|
|
–
|
|
9,489,777
|
Deconsolidation
of subsidiaries
|
|
|
|
|
|
–
|
|
(1,429,655)
|
Net
cash provided by investing activities
|
|
|
|
461,936
|
|
8,438,620
|
|
35,445,864
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from the issuance of common shares
|
|
|
|
9,100
|
|
3,625
|
|
68,539
|
Extinguishment
of convertible notes
|
|
|
|
–
|
|
–
|
|
(683)
|
Net
cash provided by financing activities
|
|
|
|
9,100
|
|
3,625
|
|
67,856
|
Change
in Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
|
|
(3,916,681)
|
|
6,053,720
|
|
(7,202,124)
|
Cash
and cash equivalents - beginning of period
|
|
|
|
57,677,370
|
|
58,186,478
|
|
60,962,813
|
Cash
and cash equivalents - end of period
|
|
|
$
|
53,760,689
|
$
|
64,240,198
|
$
|
53,760,689
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
Note 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, Gold Reserve
Corporation became a subsidiary of Gold Reserve Inc., the successor issuer.
Generally, each shareholder exchanged its Gold Reserve Corporation shares for
an equal number of Gold Reserve Inc. Class A Common shares. For tax reasons,
certain U.S. holders elected 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, is
substantially equivalent to a Class A common share and is generally immediately
convertible into a Gold Reserve Inc. Class A common share. Unless otherwise
noted, general references to common shares of the Company include Class A
common shares and Equity Units as a group. At March 31, 2012, there were
500,236 Equity Units outstanding.
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”) and are resolving our
investment dispute through arbitration against Venezuela under the Additional
Facility Rules of the International Centre for Settlement of Investment
Disputes (“ICSID”).
Concurrent with the arbitration
we are pursuing settlement of our dispute with Venezuela and are 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.
Principles of Consolidation
.
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The 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 Company’s
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 Company’s policy is to consolidate those
subsidiaries where control exists. In Management’s opinion, all adjustments
necessary for a fair statement are reflected in the interim periods presented.
Development
Stage Enterprise.
As a result of the seizure of the Brisas Project by
the Venezuelan government, the Company was forced to abandon its development
efforts on the project and, in 2009, expensed all capitalized costs associated
with its development. The seizure resulted in the end of the development of the
Brisas project and management considers January 1, 2010 the relevant inception
date of the development of the Company’s new business of acquiring and
exploring other mining projects. ASC 915 requires additional disclosures of
development stage enterprises including cumulative amounts from the inception
of the development stage.
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. The cost of these investments
approximates 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.
Exploration and Development
Costs
. Exploration costs incurred in locating areas of potential
mineralization or evaluating properties or working interests with specific
areas of potential mineralization are expensed as incurred. Development costs
of proven mining properties not yet producing are capitalized at cost and
classified as capitalized exploration costs under property, plant and
equipment. 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 the lower of
cost less accumulated depreciation or estimated net realizable value. Included
in property, plant and equipment is $29 million of equipment that has been
adjusted to an estimated net realizable value of $19 million which is not being
depreciated. 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.
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
Company’s (and its foreign subsidiaries’) functional currency. Monetary assets
and liabilities denominated in a foreign currency are translated into U.S.
dollars at the rates of exchange in effect at the balance sheet dates.
Non-monetary assets and liabilities are translated at historical 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 the statement of
operations.
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 9 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 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. 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. Stock options, restricted stock and
Units granted under their respective plans become fully vested and exercisable
and/or payable upon a change of control.
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
enacted tax rates expected to apply in the periods in which the differences are
expected to be settled. Future tax assets are recognized to the extent that
they are considered more likely than not to be realized.
Use of Estimates
.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Measurement Uncertainty.
The
realizable value of the remaining equipment, originally purchased for the
Brisas Project, may be different than management’s current estimate. 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. 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 classified as a liability and are initially recorded at
face value, net of issuance costs. The notes are subsequently accreted to face
value using the effective interest rate method over the expected life of the
notes, currently estimated to be June 15, 2012, with the resulting charge
recorded as interest expense.
Comprehensive Loss
.
Comprehensive loss includes net loss and other comprehensive income or loss.
Other comprehensive loss may include unrealized gains and losses on
available-for-sale securities and gains and losses on certain derivative
instruments. The Company presents comprehensive loss and its components in the
consolidated statements of comprehensive loss.
Financial
Instruments.
Marketable equity securities are classified as available
for sale with any unrealized gain or loss recorded in other comprehensive
income. Cash and cash equivalents, deposits, advances, accounts payable and
accrued expenses are accounted for at cost which approximates fair value.
Note 2. New Accounting Policies:
In
June 2011, the FASB issued Accounting Standards Update 2011-05 that
requires changes in the presentation of comprehensive income. Effective for
periods beginning after December 15, 2011, entities have the option of
presenting the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive
statements. The adoption of the updated guidance did not have an effect on the
Company’s financial statements.
In
May 2011, the FASB issued Accounting Standards Update 2011-04 which
contains amendments resulting in common fair value measurement and disclosure
requirements in financial statements prepared in accordance with U.S. GAAP and
International Financial Reporting Standards. The amendments change the wording
used to describe the requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements. This update is effective
for periods beginning after December 15, 2011 and did not have a significant
impact on the Company’s financial statements.
Note 3.
Expropriation of Brisas Project by Venezuela and Related Arbitration:
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 Kilometer 88
mining district of the State of Bolivar in south-eastern 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 for the Affectation of Natural Resources for the Construction
of Infrastructure and Services Phase of the Brisas Project (the “Authorization
to Affect”) which authorized the commencement of construction activities on the
Brisas Project. In April 2008, the Ministry of Environment revoked, without
notice, the Authorization to Affect.
In October 2009 we filed a
Request for Arbitration under the Additional Facility Rules of the International
Centre for Settlement of Investment Disputes (“ICSID”), against the Bolivarian Republic of Venezuela (“Respondent”) seeking compensation in the arbitration for all
of the loss and damage resulting from Venezuela’s wrongful conduct. Gold
Reserve alleges violations of three provisions of the Canada-Venezuela BIT
culminating in the effective expropriation of Gold Reserve’s sizable
investments in the world-class Brisas gold/copper project and the promising
Choco 5 property. 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)). Our claim includes the full market value of
the legal rights to develop the Brisas Project at the date of the
Tribunal’s decision, the value of the Choco 5 Property and interest on the
claim calculated since the loss. Our claim as last updated in our July 2011
Reply totals approximately $2.1 billion which includes interest from April 14,
2008 (the date of the loss) to July 29, 2011 (the date of our reply) of
approximately $400 million.
The full market value of the
legal rights to develop the Brisas Project was measured by an independent
expert pursuant to a fair market value standard utilizing three standard
valuation approaches: (1) the Discounted Cash Flow (“DCF”) Approach, (2) the
Comparable Publicly Traded Company (“CPTC”) Approach, and (3) the Comparable
Transaction (“CT”) Approach. These three valuations converged in a reasonably
consistent range of values, which were combined to arrive at a weighted average
valuation based upon the independent expert’s qualitative assessment of the
robustness of the data available to implement each valuation methodology.
Venezuela has numerous pending
arbitration actions being pursued against it at this time before ICSID (See
ICSID website-
http://icsid.worldbank.org/ICSID/
) and has
reportedly settled and/or made full or partial payment for damages to a limited
number of claimants in past months, although management has no specific
information regarding the actual amounts paid or what percentage such payments
represented of the original claim against Venezuela. Based on the uncertain
nature of arbitration under investment treaties, the timing and the amount of
an award or settlement, if any, the likelihood of its collection and the timing
thereof cannot be determined at this time.
In
compliance with the schedule originally set by the Tribunal which has been
amended by the Tribunal from time-to-time, we filed our initial written
submission, referred to as the Memorial, in September 2010. Thereafter in April
2011, the Respondent submitted its response to the Company’s Memorial, referred
to as the Counter-Memorial. Subsequent to that, the Company submitted its Reply
to the Respondent’s Counter Memorial in July 2011 and finally Respondent filed
its Rejoinder in December 2011. The Rejoinder was the last filing to be made
prior to the oral hearing which was held February 13 to February 17, 2012.
The oral hearing was the
culmination of an extensive undertaking by the Company’s counsel, technical,
legal and financial experts, as well as its employees which focused on the
evidentiary record in the case and allowed counsel for both the Company and Respondent
to address the issues of jurisdiction, liability and damages. The oral hearing
also allowed the Tribunal to hear testimony from certain fact and expert
witnesses, as well as to address questions to each of the parties.
The Company and Respondent both
submitted post-hearing briefs on March 16, 2012, commenting in conclusion on
the full evidentiary record, as is typically permitted in such arbitrations.
The Tribunal may request additional information from the parties and in any
event may issue its decision thereafter. It is typical for tribunals in this
type of arbitration to require six to eighteen months (the historical average
is approximately 1.2 years) to finalize and issue its decision.
Note 4. Cash
and Cash Equivalents:
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
|
2012
|
|
2011
|
US Treasury bills
|
|
|
|
|
$
|
39,995,022
|
$
|
40,000,000
|
Bank deposits
|
|
|
|
|
|
8,326,529
|
|
12,238,554
|
Money market funds
|
|
|
|
|
|
5,439,138
|
|
5,438,816
|
Total
|
|
|
|
|
$
|
53,760,689
|
$
|
57,677,370
|
At March 31, 2012
and December 31, 2011, the Company had approximately $216,000 and $88,000
respectively, in Venezuela. As of March 31, 2012, 87% of bank deposits were
maintained in FDIC insured accounts.
Note 5. Marketable Securities:
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
|
2012
|
|
2011
|
Fair value at beginning of year
|
|
|
|
|
$
|
892,271
|
$
|
2,263,923
|
Acquisitions
|
|
|
|
|
|
–
|
|
698,574
|
Dispositions, at cost
|
|
|
|
|
|
(6,272)
|
|
(894,053)
|
Realized gain on sale
|
|
|
|
|
|
(7,373)
|
|
(772,698)
|
Unrealized loss
|
|
|
|
|
|
(16,834)
|
|
(403,475)
|
Fair value at balance sheet date
|
|
|
|
|
$
|
861,792
|
$
|
892,271
|
The Company’s marketable
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. Realized gains and losses are based on the average cost method.
As of March 31, 2012 and December 31, 2011, marketable securities had a cost
basis of $844,257 and $850,529, respectively.
Note 6. Fair Value Measurements:
ASC 820
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities, Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability and Level 3 inputs are unobservable inputs for the asset or liability that reflect the entity’s own assumptions.
|
|
Fair value
March 31, 2012
|
Level 1
|
Level 2
|
Level 3
|
Marketable securities
|
|
$ 861,792
|
$ 861,792
|
–
|
–
|
|
|
|
|
|
|
|
|
Fair value
December 31, 2011
|
Level 1
|
Level 2
|
Level 3
|
Marketable securities
|
|
$ 892,271
|
$ 892,271
|
–
|
–
|
|
|
|
|
|
|
|
Note 7. Property, Plant and Equipment:
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
March 31, 2012
|
|
|
|
|
|
|
Machinery and equipment
|
$
|
18,985,828
|
$
|
–
|
$
|
18,985,828
|
Furniture and office equipment
|
|
518,944
|
|
(468,696)
|
|
50,248
|
Leasehold improvements
|
|
41,190
|
|
(41,190)
|
|
–
|
Venezuelan property and equipment
|
|
1,397,625
|
|
(1,312,459)
|
|
85,166
|
|
$
|
20,943,587
|
$
|
(1,822,345)
|
$
|
19,121,242
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
December 31, 2011
|
|
|
|
|
|
|
Machinery and equipment
|
$
|
18,985,828
|
$
|
–
|
$
|
18,985,828
|
Furniture and office equipment
|
|
517,235
|
|
(463,066)
|
|
54,169
|
Leasehold improvements
|
|
41,190
|
|
(40,727)
|
|
463
|
Venezuelan property and equipment
|
|
1,415,972
|
|
(1,330,806)
|
|
85,166
|
|
$
|
20,960,225
|
$
|
(1,834,599)
|
$
|
19,125,626
|
Machinery and equipment includes amounts paid for equipment previously intended for use on the Brisas project. At December 31, 2011 equipment with a carrying value of approximately $0.45 million was reclassified to assets held for sale and sold during the first quarter of 2012 for its carrying value. Equipment classified as assets held for sale at December 31, 2010 was sold during the first quarter of 2011 for $8.3 million and the Company recorded a gain on sale of $0.3 million.
Note 8. 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 Company’s 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. In 2011, the Plan allocated $127,220 cash and common shares valued at $110,690 to eligible participants.
Note 9. 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”). Pursuant to TSX Venture rules the plans must be re-approved by Shareholders every year. Previous to February 1, 2012, the Plans were subject to Toronto Stock Exchange rules which required approval every three years. On June 10, 2011 the Venezuelan Plan was suspended and further grants from the 1997 Plan will be suspended after June 10, 2012 until re-approved by Shareholders. 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 Company’s outstanding shares. The Company provides newly issued shares to satisfy stock option exercises and for the issuance of restricted stock. The grants are made for terms of up to ten years with vesting periods ranging from immediate to up to 3 years.
Combined share option transactions for the three months ended March 31, 2012 and 2011 are as follows:
|
2012
|
|
2011
|
|
|
Shares
|
Weighted Average Exercise Price
|
|
Shares
|
Weighted Average Exercise Price
|
|
Options outstanding - beginning of period
|
5,185,188
|
1.42
|
|
3,178,102
|
2.39
|
|
Options exercised
|
(5,000)
|
1.82
|
|
(12,500)
|
0.29
|
|
Options expired
|
–
|
–
|
|
–
|
–
|
|
Options forfeited
|
–
|
–
|
|
–
|
–
|
|
Options granted
|
1,620,500
|
2.89
|
|
2,843,000
|
1.82
|
|
Options outstanding - end of period
|
6,800,688
|
1.77
|
|
6,008,602
|
2.13
|
|
|
|
|
|
|
|
|
Options exercisable - end of period
|
3,382,288
|
1.33
|
|
3,876,352
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at end of
period under 1997 plan
|
859,170
|
|
|
821,826
|
|
|
Options available for grant at end of
period under Venezuelan plan
|
–
|
|
|
5,062,090
|
|
|
|
|
|
|
|
|
|
The following table relates to stock options at March 31, 2012:
|
Outstanding Options
|
|
Exercisable Options
|
Exercise Price Range
|
Number
|
Weighted Average Exercise Price
|
Aggregate Intrinsic Value
|
Weighted Average Remaining Contractual Term (Years)
|
|
Number
|
Weighted Average Exercise Price
|
Aggregate Intrinsic Value
|
Weighted Average Remaining Contractual Term (Years)
|
$0.29 - $0.29
|
1,079,188
|
$0.29
|
$3,982,204
|
1.68
|
|
1,079,188
|
$0.29
|
$3,982,204
|
1.68
|
$0.73 - $0.73
|
481,000
|
$0.73
|
1,563,250
|
1.96
|
|
481,000
|
$0.73
|
1,563,250
|
1.96
|
$1.82 - $1.82
|
2,670,000
|
$1.82
|
5,767,200
|
3.76
|
|
1,332,500
|
$1.82
|
2,878,200
|
3.76
|
$1.92 - $1.92
|
950,000
|
$1.92
|
1,957,000
|
9.19
|
|
-
|
|
|
|
$2.89 - $2.89
|
1,620,500
|
$2.89
|
1,766,345
|
4.84
|
|
489,600
|
$2.89
|
533,664
|
4.84
|
$0.29 - $2.89
|
6,800,688
|
$1.77
|
$15,035,999
|
4.32
|
|
3,382,288
|
$1.33
|
$8,957,318
|
3.00
|
During
the first quarter of 2012 and 2011, the Company granted approximately 1.6
million and 2.8 million options, respectively. The Company recorded
compensation expense during 2012 and 2011 of $1.1 million and $1.5 million,
respectively, for stock options granted in 2012 and prior periods. As of March
31, 2012, compensation expense of $1.9 million related to unvested options
remains to be recognized over the remaining vesting period.
The weighted average grant
date fair value of options granted in the first quarter of 2012 and 2011 was
calculated at $1.39 and $1.22, respectively. The fair value of options granted was
determined using the Black-Scholes model based on the following weighted
average assumptions:
|
2012
|
2011
|
Risk free interest rate
|
0.29%
|
1.88%
|
Expected
Term
|
2.9 years
|
4.7 years
|
Expected
volatility
|
65%
|
107%
|
Dividend
yield
|
nil
|
nil
|
The risk free interest rate
is based on the US Treasury rate on the date of grant for a period equal to the
expected term of the option. The expected term is based on historical exercise
experience and expected post-vesting behavior. The expected volatility is based
on historical volatility of the Company’s stock over a period equal to the
expected term of the option.
Retention Units Plan
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 Company’s Board of Directors has considered,
but not acted upon alternative vesting provisions for the units to more
adequately reflect the current business objectives of the Company. 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 March 31, 2012 an aggregate
of 1,457,500 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 minimum value of
these units, based on the grant date value of the Class A shares, was
approximately $7.7 million.
Note 10. Related Party Transactions:
MGC Ventures
. The Chief
Executive Officer, President, Vice President-Finance and Vice
President-Administration of the Company are also directors and/or officers 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 March 31, 2012 and December 31, 2011. 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 directors and/or officers 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 March 31, 2012 and December 31, 2011. During the last three years,
the Company sublet a portion of its office space to Great Basin for $6,000 per
year.
Note 11. 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
designed to give the Board of Director’s time to consider alternatives, allow
shareholders time to properly assess the merits of a bid and insure they
receive full and fair value for their common shares. One right is issued in
respect of each outstanding share. The rights become exercisable only when a
person, including any party related to it or acting jointly with it, acquires
or announces its intention to acquire 20% or more of the Company’s outstanding
shares without complying with the “permitted bid” provisions of the Rights
Plan. Each right would, on exercise, entitle the holder, other than the
acquiring person and related persons, to purchase Class A common shares of the
Company at a 50% discount to the market price at the time.
Note 12. Convertible Notes:
In May 2007, the Company issued
$103,500,000 aggregate principal amount of Senior subordinated convertible
notes, of which $102,347,000 remains outstanding as of March 31, 2012. The
unsecured notes, bear interest at a rate of 5.50% annually, pay interest
semi-annually in arrears and mature 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 generally
has the option, unless there has occurred and is then continuing an event of
default under the Company’s indenture, to deliver common shares, cash or a
combination of common shares and cash for the notes surrendered.
Pursuant to the terms of the
Indenture 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, in whole or in part, by delivering Cash
and/or Common Shares (the “Put Option”). 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.
In the event of a Fundamental
Change which includes among other things a change of control as defined in the
Indenture, the Company may be required to offer to repurchase the notes, in
cash or shares at the Company’s discretion, at a purchase price equal to 100%
of the principal amount of the notes plus accrued but unpaid interest unless
there has occurred and is continuing certain events of default under the
Company’s indenture.
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.
The notes are classified as a
liability and were initially recorded at face value, net of issuance costs. The
notes are accreted to face value using the effective interest rate method over
the expected life of the notes, currently 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. The Company has paid
$5.6 million in interest on the notes during each of the last three years. As
of March 31, 2012, convertible notes with a face value of $1,153,000 had been
settled in cash or repurchased by the Company at a total cost of approximately
$452,000.
On May 16, 2012, the Company
notified the convertible note holders that they have the right to require the
Company to purchase all or a portion of their Notes on or before June 15, 2012
(the “Put Option”) and that the Company will pay, in cash, any notes validly
surrendered. Concurrently with the Put Option, the Company announced a
restructuring agreement (the “Restructuring”), subject to shareholder approval,
with its three largest note holders (“
Large
Note holders”)
, covering 87.8% of the Company’s outstanding Notes. (see
note 14. Subsequent Event)
Note 13. Litigation:
The Company is a party to
litigation in the Ontario Superior Court of Justice related to a 2008
unsolicited takeover bid in which the defendants have made counterclaims
totaling approximately $103 million. Our counsel with respect to this
litigation matter has advised management that it is premature to determine the
likely outcome of the litigation with substantial reliability. In the event
that one or both defendants prevail with their counterclaims, the Company could
be subject to the full amount of the combined damages noted above. However,
based on the facts of the case, the activity through the filing date and the
overall scope and context of the proceedings, management has concluded, that an
estimate of the possible loss or range of loss cannot be made at this time.
Note 14. Subsequent Event:
On May 16, 2012, the Company
notified the convertible note holders that they have the right to require the
Company to purchase all or a portion of their Notes on or before June 15, 2012
(the “Put Option”) and that the Company will pay, in cash, any notes validly
surrendered. Concurrently with the Put Option, the Company announced a
restructuring agreement (the “Restructuring”), subject to shareholder approval,
with its three largest note holders (“
Large
Note holders”)
, covering 87.8% of the Company’s outstanding Notes. The
holders of the remaining 12.2% of Company’s outstanding notes are herein
referred to as the “Other Holders”.
Under the terms of the
Restructuring which is subject to shareholder approval, the Notes of the Large
Note holders that are not put to the Company for cash will be modified upon the
following terms for each $1,000 in principal amount, plus any accrued and
unpaid interest on the Notes through the date on which the Restructuring is consummated:
$700 principal amount of Notes that are not put to the Company shall be
exchanged for (i) $200.00 in cash, (ii) 147.06 Common Shares, and (iii) a pro
rata portion of the aggregate 5% Contingent Value Right payable in respect of
all Subject Notes; iv) a fee payable based on each holders pro rata percentage
of Notes restructured in an aggregate amount of up to $1 million; and $300
principal of Notes that are not put to the Company shall remain outstanding and
represent the same continuing indebtedness, subject to certain amended terms including
the following:
(i) maturity date will be June 29, 2014; (ii) convertible into 250
shares of Common Stock per $1,000 (equivalent to a conversion price of $4.00) at
any time after the closing date upon 3 days prior written notice to the
Company; (iii) mandatory redemption obligation for an amount of cash equal to
120% of the face value thereof plus accrued and unpaid interest upon certain
events related to the receipt of proceeds connected with the arbitration
proceedings or sale or other disposition of the Company’s mining data; (iv)
optional redemption for shares of Common Stock at the conversion price noted
above plus cash for any accrued and unpaid interest if the closing sale price
of its common shares is equal to or greater than 200% of the conversion price
for at least 20 trading days in the period of 30 consecutive trading days; and (v)
redemption at maturity by payment of cash in an amount equal to the principal
plus accrued and unpaid interest thereon.
Each Large Note holder will be
entitled to a contingent value right (“CVR”) that will entitle them to receive,
net of certain deductions, a pro rata portion of and aggregate amount of 5% of
the proceeds actually received by the Company with respect to the Arbitration proceedings
or disposition of the Brisas Project mining data, net of certain deductions.
The proceeds may be cash, commodities, bonds, shares or any other consideration
received by the Company and if such proceeds are other than cash, the fair
market value of such non-cash proceeds, net of any required deductions (e.g.,
for taxes) will be subject to the CVR.
The Company has filed a Tender
Offer Statement on Schedule TO with the US Securities and Exchange Commission
notifying all Note holders of the Put Option and expects to amend the Schedule
TO to announce that the Restructuring will also be made available to Other
Holders and to reflect the final terms of the proposed Restructuring of the
Notes that has been agreed to with Large Note holders.
If the Shareholders do not
approve the Restructuring, certain terms of the Notes will be amended subject
to compliance with the Indenture (herein referred to as the “Alternative
Transaction”). For the avoidance of doubt, all Other Holders that elect to
participate in the Restructuring will receive the same treatment automatically.
The more substantive amendments are expected to include the following:
(i) Put Option date will be
Friday, September 14, 2012; (ii) common shares to be delivered upon exercise of
the Put Option will have a floor price of $3.61 and a ceiling price of $4.00; (iii
) convertible into 250 shares of Common Stock per $1,000 (equivalent to a
conversion price of $4.00) at any time after the closing date upon 3 days prior
written notice to the Company; (iv) subject to mandatory redemption obligation
for an amount of cash equal to 120% of the face value thereof plus accrued and
unpaid interest upon certain events related to the receipt of proceeds
connected with the arbitration proceedings or sale or other disposition of the
Company’s mining data; (v) first priority blanket lien on all of the Company’s
mining data to secure the Company’s obligations under the Notes.
The Company maintains Change of
Control Agreements with each of the executive officers and several employees
which were implemented by the Board to induce such individuals to remain with
the Company and continue their involvement in the then ongoing development of
the Brisas project and more recently, resolution of the investment dispute with
Venezuela and the pursuit of new corporate opportunities. In addition, the
directors, executive officers, and certain other employees are participants in
the Director and Employee Retention Plan which contains vesting provisions
linked to a change of control. In connection with the Restructuring described
above, the Company’s executive officers, certain employees and directors will
enter into Waiver Agreements, whereby such individuals will waive their rights
to receive change of control payments that would otherwise be triggered
pursuant to the Restructuring, excluding the Alternative Transaction as
described above.
In the event shareholders do not
approve the Restructuring and Note holders tender to the Alternative
Transaction, a change of control will likely result causing an estimated payout
to individuals holding Change of Control Agreements and Retention Units at
March 31, 2012, determined exclusive of any gross-up payments as defined
by the agreements, of approximately $22 million. In addition, under the terms
of the Alternative Transaction, management would likely issue substantially
more common shares in exchange for the tendered Notes, resulting in
substantially more dilution to the existing shareholders.
99.2
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Overview
This Management’s Discussion and
Analysis of Financial Condition and Results of Operations, dated
May 29, 2012 is intended to assist in understanding and assessing our results
of operations and financial condition and should be read in conjunction with
the consolidated financial statements and related notes.
Any information contained in this
report relating to our past development efforts for the Brisas Project and
status of the 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.
Gold Reserve, an exploration
stage company, is engaged in the business of acquiring, exploring and
developing mining projects. The Company acquired the Brisas Project and the
Choco 5 property in 1992 and 2000, respectively, both located in the Guayana
region of Bolivar State, Venezuela. From 1992 to 2008 we focused substantially
all of our management and financial resources on the development of the Brisas Project.
After approval of the Brisas
operating plan by the Ministry of Mines and the Environmental and Social Impact
Study of the infrastructure and service works by the Ministry of Environment in
2003 and early 2007, respectively, the Ministry of Environment issued in March
2007, the Authorization for the Affectation of Natural Resources for the
Construction of Infrastructure and Services Phase of the Brisas Project (the
“Authorization to Affect”) which authorized the commencement of construction
activities on the Brisas Project. Based on the issuance of the Authorization to
Affect, we commenced significant pre-construction efforts including
accelerating detailed project engineering, hiring senior technical staff and
awarding contracts for Brisas site prep, construction camp facilities, processing
equipment, early-works construction equipment and various other site equipment and
launched a number of environmental and social initiatives. In order to fund
these activities, the Company completed the sale of approximately $180 million
in debt and common shares.
In April 2008, Venezuela revoked the Authorization to Affect. This revocation and subsequent improper actions by Venezuela forced the Company to discontinue development of the Brisas Project and
exploration of the Choco 5 property. In October 2009 we filed a Request for
Arbitration under the Additional Facility Rules of the International Centre for
Settlement of Investment Disputes (“ICSID”), against the Bolivarian Republic of Venezuela (“Respondent”) seeking compensation in the arbitration for all of the
loss and damage resulting from Venezuela’s wrongful conduct. Gold Reserve
alleges violations of three provisions of the Canada-Venezuela BIT culminating
in the effective expropriation of Gold Reserve’s sizable investments in the
world-class Brisas Project and the promising Choco 5 property. (See note 3 to
the consolidated financial statements)
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)). Our claim includes the full market
value of the legal rights to develop the Brisas Project at the date of the
Tribunal’s decision, the value of the Choco 5 Property and interest on the
claim calculated since the loss. Our claim as last updated in our July 2011
Reply totals approximately $2.1 billion which includes interest from April 14,
2008 (the date of the loss) to July 29, 2011 (the date of our reply) of
approximately $400 million. The Company is well advanced in the arbitration
process, with the oral hearing completed, as scheduled, on February 17, 2012.
The oral hearing was the
culmination of an extensive undertaking by the Company’s counsel, technical,
legal and financial experts, as well as its employees which focused on the
evidentiary record in the case and allowed counsel for both the Company and Venezuela to address the issues of jurisdiction, liability and damages. The oral hearing also
allowed the arbitral tribunal to hear testimony from certain fact and expert
witnesses, as well as to address questions to each of the parties.
The Company and Respondent both
submitted post-hearing briefs on March 16, 2012, commenting in conclusion on
the full evidentiary record, as is typically permitted in such arbitrations. The
Tribunal may request additional information from the parties and in any event
may issue its decision thereafter. It is typical for tribunals in this type of
arbitration to require six to eighteen months (the historical average is
approximately 1.2 years) to finalize and issue its decision.
In
December 2008, Rusoro (advised by Endeavour, Gold Reserve’s financial advisor
from 2004 until shortly after the commencement of Rusoro’s offer) commenced an
unsolicited offer to acquire all of the outstanding shares of the Company. The Ontario
Superior Court of Justice subsequently granted an interlocutory injunction in
February 2009, restraining Rusoro and Endeavour from proceeding until the
disposition at trial of the action commenced by the Company. Rusoro and
Endeavour have filed counterclaims against the Company for Cdn $102.5 million
and $0.5 million, respectively. (See note 13 to the consolidated financial
statements)
Our counsel with respect to this
litigation matter has advised management that it is premature to determine the
likely outcome of the litigation with substantial reliability. In the event
that one or both defendants prevail with their counterclaims, the Company could
be subject to the full amount of the combined damages noted above. However,
based on the facts of the case, the activity through the filing date and the
overall scope and context of the proceedings, management has concluded, that an
estimate of the possible loss or range of loss cannot be made at this time.
In June 2011, the Company was
advised by the NYSE MKT (the “NYSE”) that it intended to delist the Company’s
common shares. The seizure of the Brisas Project by the Venezuelan authorities
in October 2009, led the NYSE to conclude that the Company “no longer complied”
with the NYSE’s continued listing rules. The Company appealed the NYSE’s decision
and in October 2011, the Company received notice that the NYSE had accepted the
Company’s plan to regain compliance with the NYSE’s listing standards (the
“Plan”) by a targeted completion date of December 20, 2012. During this time the
Company’s listing is being continued pursuant to the extension of the exception
to the NYSE Listing Standards.
The Plan provides for an 18 month
schedule (starting from the initial date of notice of non-compliance, June 20,
2011) whereby the Company expects to obtain a working interest in one or more
acceptable mineral exploration properties with commensurate exploration
expenditures made thereon. The Company will continue to provide the NYSE staff
with updates relative to the initiatives detailed in the Plan, including the
specific milestones to be met by July 31, 2012, and December 20, 2012. There
can be no assurance that the Company will be able to achieve compliance within
the required time frame, and if the Company is not able to achieve compliance
as outlined in the Plan or otherwise show progress consistent with the Plan,
the Company will remain subject to delisting procedures as set forth in the
Company Guide.
In November 2011, the Company was
similarly advised by the Toronto Stock Exchange (the “TSX”) that it also intended
to delist the Company’s common shares because, in its opinion, the Company “no
longer complied” with its original listing rules as a result of the seizure of
the Brisas Project. Although the Company appealed the TSX’s original
determination, submitting a plan similar to that approved by the NYSE, the Company’s
plans were not sufficiently advanced for the TSX to grant the Company additional
time to regain compliance. As a result, trading of the Company’s common shares
(symbol “GRZ.V”) moved from the TSX to the TSX Venture beginning February 1,
2012.
In May 2012 the Company entered
into a an Option Agreement with Soltoro Ltd. (“Soltoro”) whereby Soltoro
granted Gold Reserve the right to earn an undivided 51% interest in the La
Tortuga property located in Jalisco State, Mexico. The Option Agreement allows
the Company to acquire an undivided 51% interest by making an aggregate
$650,000 in option payments to Soltoro as well as expending $3 million on the
property over 3 years. At completion of the earn-in a joint venture agreement
will be formalized. The Company may subsequently exercise of an option to
acquire an additional 9% interest in the property for $2,000,000. Upon signing,
he Company made an initial $50,000 option payment to Soltoro. La Tortuga is an
11,562 hectare property being investigated for its base and precious metal
potential with occurrences of copper and gold mineralization over 49 square
kilometers. Work on the property has included 151 line-kilometers of Induced
Polarization, diamond drill holes, mapping and sampling and ground magnetics.
On May 16, 2012, the Company
notified the note holders that they have the right to require the Company to
purchase all or a portion of their Notes on or before June 15, 2012 (the “Put
Option”) and that the Company will pay, in cash, any Notes validly surrendered.
Concurrently with the Put Option, the Company announced a restructuring
agreement (the “Restructuring”), subject to shareholder approval, with its
three largest note holders (“
Large Note holders”)
,
covering 87.8% of the Company’s outstanding Notes. The holders of the remaining
12.2% of Company’s outstanding notes are herein referred to as the “Other
Holders”. (See note 14 to the consolidated financial statements).
Under
the terms of the Restructuring which is subject to shareholder approval, the
Notes of the Large Note holders that are not put to the Company for cash will
be modified upon the following terms for each $1,000 in principal amount, plus
any accrued and unpaid interest on the Notes through the date on which the
Restructuring is consummated: $700 principal amount of Notes that are not put
to the Company shall be exchanged for (i) $200.00 in cash, (ii) 147.06 Common
Shares, and (iii) a pro rata portion of the aggregate 5% Contingent Value Right
payable in respect of all Subject Notes; iv) a fee payable based on each
holders pro rata percentage of Notes restructured in an aggregate amount of up
to $1 million; and $300 principal of Notes that are not put to the Company
shall remain outstanding and represent the same continuing indebtedness,
subject to certain amended terms including the following:
(i) maturity date will be June 29, 2014; (ii) convertible into 250
shares of Common Stock per $1,000 (equivalent to a conversion price of $4.00) at
any time after the closing date upon 3 days prior written notice to the
Company; (iii) mandatory redemption obligation for an amount of cash equal to
120% of the face value thereof plus accrued and unpaid interest upon certain
events related to the receipt of proceeds connected with the arbitration
proceedings or sale or other disposition of the Company’s mining data; (iv)
optional redemption for shares of Common Stock at the conversion price noted
above plus cash for any accrued and unpaid interest if the closing sale price
of its common shares is equal to or greater than 200% of the conversion price
for at least 20 trading days in the period of 30 consecutive trading days; and (v)
redemption at maturity by payment of cash in an amount equal to the principal
plus accrued and unpaid interest thereon.
Each Large Note holder will be
entitled to a contingent value right (“CVR”) that will entitle them to receive,
net of certain deductions, a pro rata portion of and aggregate amount of 5% of
the proceeds actually received by the Company with respect to the Arbitration proceedings
or disposition of the Brisas Project mining data, net of certain deductions.
The proceeds may be cash, commodities, bonds, shares or any other consideration
received by the Company and if such proceeds are other than cash, the fair
market value of such non-cash proceeds, net of any required deductions (e.g.,
for taxes) will be subject to the CVR.
The Company has filed a Tender
Offer Statement on Schedule TO with the US Securities and Exchange Commission
notifying all Note holders of the Put Option and expects to amend the Schedule
TO to announce that the Restructuring will also be made available to Other
Holders and to reflect the final terms of the proposed Restructuring of the
Notes that has been agreed to with Large Note holders.
Depending on the total number of
bonds tendered, if any, and for which alternative, management estimates a
maximum cash expenditure of approximately $25.2 million related to the Put
Option and an estimated $15.4 million related to the Restructuring for a
maximum combined total of $40.6 million. Likewise, depending on the election of
the Note holders, the Company may issue from 11.4 million to 13.2 million
common shares to repurchase the Notes.
If the Shareholders do not
approve the Restructuring, certain terms of the Notes will be amended subject
to compliance with the Indenture (herein referred to the “Alternative
Transaction”). For the avoidance of doubt, all Other Holders that elect to
participate in the Restructuring will receive the same treatment automatically.
The more substantive amendments are expected to include the following:
(i) Put Option date will be Friday, September 14, 2012; (ii) common
shares to be delivered upon exercise of the Put Option will have a floor price
of $3.61 and a ceiling price of $4.00; (iii ) convertible into 250 shares of
Common Stock per $1,000 (equivalent to a conversion price of $4.00) at any time
after the closing date upon 3 days prior written notice to the Company; (iv) subject
to mandatory redemption obligation for an amount of cash equal to 120% of the
face value thereof plus accrued and unpaid interest upon certain events related
to the receipt of proceeds connected with the arbitration proceedings or sale or
other disposition of the Company’s mining data; (v) first priority blanket lien
on all of the Company’s mining data to secure the Company’s obligations under
the Notes.
In the event Shareholder approval
of the proposed Restructuring is not obtained, it is expected the Large Note
holders will retain the right to put their Notes to the Company, which could
result in substantial dilution because the Company could not satisfy 20% of the
Large Holder’s Notes for cash in an Alternate Transaction; and the limited
waivers executed by the Company’s executive management and directors would not
apply to the Alternate Transaction, thereby resulting in substantial change in
control payments.
Management
has identified a number of potential mineral prospects and has signed or is in
the process of signing confidentiality agreements allowing access to the target
company’s confidential information regarding such prospects. As with any
similarly-situated mining company, we are evaluating multiple prospects at once
as these efforts are subject to, among other things, the mineralized potential,
the terms of any agreement, the level and quality of previous work completed by
the target companies, schedules, weather and geography. Our selection process
or criteria, among others, focuses on prospects that are promising and have
potential for success and generally located in a politically friendly jurisdiction
which has clear and well established mining, tax and environmental laws, an
experienced mining authority and likely to be an open pit versus an underground
prospect.
A determining factor in the
Company’s current financial position and continuing results of operations is
the substantial operating deficits and Brisas Project development costs
incurred since 1992, the issuance of $183 million of convertible notes and
common shares and the acquisition of approximately $125 million of equipment
subsequent to the issuance of the Authorization to Affect, the subsequent termination
of the development of Brisas and Choco 5, as a result of the seizure of the
Brisas Project, the ongoing ICSID arbitration, the write-down of previously
capitalized costs and equipment associated with the project development and the
ongoing efforts to dispose of such equipment.
Our objectives continue to be:
(1) obtain a working interest in one or more acceptable mineral exploration
properties; (2) diligently pursue the arbitration claim against Venezuela and
minimize costs to the extent possible; (3) pursue an amicable settlement with
Venezuela that may include a monetary agreement and/or project participation;
(4) dispose of remaining assets previously purchased for the Brisas Project;
and (5) redeem, restructure or otherwise modify the terms of the 5.50%
convertible notes.
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
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, cash required
to repurchase all or a portion of the convertible notes and/or future
financings, if any. The Company has only one operating segment, the
exploration and development of mineral properties.
Financial Overview
Liquidity and
Capital Resources
At March
31, 2012, the Company had cash and cash equivalents of approximately $53.8,
million which represents a decrease from December 31, 2011 of approximately $3.9
million. The net decrease was primarily due to cash used by operations of $4.4
million offset by proceeds from sales of equipment of $0.5 million. The
components of changes in cash are more fully described in the “Operating,”
“Investing” and “Financing” Activities section below.
|
2012
|
2011
|
Change
|
Cash and cash
equivalents
|
$ 53,760,689
|
$ 57,677,370
|
$ (3,916,681)
|
As of March 31, 2012, our total
financial resources, which include cash and cash equivalents, marketable securities
and assets held for sale (which were liquidated in the first quarter of 2012),
totaled approximately $54.6 million. In addition to these financial resources,
the Company holds Brisas Project related equipment that it intends to dispose
of in the near term. This equipment is carried on the balance sheet (as
property, plant and equipment and assets held for sale) at its estimated fair
value of approximately $19 million.
The primary future obligation of
the Company is the $102.3 million 5.50% convertible notes. Pursuant to the
terms of the Indenture governing the convertible notes, the Company notified
the note holders on May 16, 2012 that they 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. Concurrently,
the Company announced the Restructuring Agreement, subject to shareholder
approval, with its three largest note holders in connection with the Put
Option. (See notes 12 and 14 to the consolidated financial statements, Overview
and Contractual Obligations).
The Company maintains Change of Control Agreements with each of the executive officers and several employees which were implemented by the Board to induce such individuals to remain with the Company and continue their involvement in the then ongoing development of the Brisas project and more recently, resolution of the investment dispute with Venezuela and the pursuit of new corporate opportunities. In addition, the directors, executive officers, and certain other employees are participants in the Director and Employee Retention Plan which contains vesting provisions linked to a change of control. In connection with the Restructuring described above, the Company’s executive officers, certain employees and directors will enter into Waiver Agreements, whereby such individuals will waive their rights to receive change of control payments that would otherwise be triggered pursuant to the Restructuring, excluding the Alternative Transaction as described above.
Depending on the total number of bonds tendered, if any, and for which alternative, management estimates a maximum cash expenditure of approximately $25.2 million related to the Put Option and an estimated $15.4 million related to the Restructuring for a maximum combined total of $40.6 million. Likewise, depending on the election of the Note holders, the Company may issue from 11.4 million to 13.2 million common shares to repurchase the Notes.
In the event shareholders do not approve the Restructuring and Note holders tender to the Alternative Transaction, a change of control will likely result causing an estimated payout to individuals holding Change of Control Agreements and retention Units at March 31, 2012, determined exclusive of any gross-up payments as defined by the agreements, of approximately $22 million. In addition, under the terms of the Alternative Transaction, management would likely issue substantially more common shares in exchange for the tendered Notes, resulting in substantially more dilution to the existing shareholders.
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 extent and manner in which Note holders participate in the proposed Restructuring of the Notes as more fully described above in Overview, the timing and the amount of proceeds, if any, from the sale of Brisas Project related equipment, the extent of future acquisitions or investments, if any, status of the financial markets and our share price.
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 2013. As of May 29, 2012, we had approximately $53 million in cash and investments, which are held primarily in US dollar denominated accounts.
Operating Activities
Cash flow used by operating activities for the three months ended March 31, 2012 and 2011 was approximately $4.4 million and $2.4 million, respectively. Cash flow used by operating activities consists of net operating losses (the components of which are more fully discussed below) adjusted for certain non-cash income and expense items primarily related stock options and common shares issued in lieu of cash compensation, accretion of convertible notes, gains on sale of equipment and marketable securities, and certain non-cash changes in working capital. Cash flow used by operating activities during the first quarter of 2012 increased from the prior comparable period primarily due to expenses connected with the arbitration.
Investing Activities
During the three months ended March 31, 2012, net cash provided by investing activities decreased approximately $8.0 million from the comparable period in 2011. Investing activities primarily consisted of the sale of Brisas Project related equipment and to a lesser extent transactions in marketable securities. As of March 31, 2012, the Company held approximately $19 million of Brisas project related equipment intended for future sale.
|
2012
|
2011
|
Change
|
Proceeds (net of purchases) of marketable securities
|
$13,645
|
$ 103,993
|
$(90,348)
|
Purchase of property, plant and equipment
|
(1,709)
|
(2,513)
|
804
|
Proceeds from sale of equipment
|
450,000
|
8,337,140
|
(7,887,140)
|
|
$ 461,936
|
$ 8,438,620
|
$ (7,976,684)
|
|
|
|
|
Financing Activities
The Company had no significant financing activities in the first quarter of 2012 and 2011. Net proceeds from the issuance of common shares relate to the exercise of employee stock options and totaled $9,100 and $3,625 during the three months ended 2012 and 2011, respectively.
Contractual Obligations
The following table sets forth information on the Company’s material contractual obligation payments for the periods indicated as of March 31, 2012:
|
Payments due by Period
|
|
Total
|
Less than 1 Year
|
1-3 Years
|
4-5 Years
|
More Than 5 Years
|
Convertible Notes
(1)
|
$102,347,000
|
–
|
–
|
–
|
$102,347,000
|
Interest
|
59,105,393
|
$5,629,085
|
$11,258,170
|
$11,258,170
|
30,959,968
|
|
$161,452,393
|
$5,629,085
|
$11,258,170
|
$11,258,170
|
$133,306,968
|
1
In May 2007, the Company issued $103,500,000 aggregate principal amount of its 5.50% convertible notes. As of March 31, 2012, $102,347,000 remains outstanding. The notes pay interest semi-annually and are due on June 15, 2022. The notes are recorded on the balance sheet at amortized cost of approximately $102.1 million. Subject to certain conditions described elsewhere in this document, the notes may be converted into Class A common shares of the Company, redeemed or repurchased.
Pursuant to the terms of the May 2007 Indenture governing the Company’s Senior subordinated convertible notes, the Company notified the note holders on May 16, 2012 that they 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. Concurrently, the Company announced the Restructuring Agreement, subject to shareholder approval, with its three largest note holders in connection with the Put Option. (See notes 12 and 14 to the consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations above).
The convertible notes are trading in the gray market often at a significant (15% to 25%) discount to face value. The terms of the indenture provide that the Company may repurchase the convertible notes in open market purchases or negotiated transactions. As of March 31, 2012, $1,153,000 face value of convertible notes have been settled in cash or repurchased by the Company at a total cost of $0.45 million. 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.
Results of Operations
Summary Results of Operations
Consolidated net loss for the three months ended March 31, 2012 was approximately $7.7 million representing an increase of approximately $2.6 million over the comparable period in 2011.
|
|
|
|
|
2012
|
2011
|
Change
|
Other Income
|
$ 9,916
|
$ 607,033
|
$ (597,117)
|
Total expenses
|
(7,731,895)
|
(5,772,655)
|
(1,959,240)
|
Net Loss
|
$ (7,721,979)
|
$ (5,165,622)
|
$ (2,556,357)
|
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. The decrease in other income was primarily due to decreases in gain on sale of equipment and gain on disposition of marketable securities.
|
|
|
|
|
2012
|
2011
|
Change
|
Interest
|
$ 1,230
|
$ 44,048
|
$ (42,818)
|
Gain on disposition of marketable securities
|
7,373
|
198,191
|
(190,818)
|
Gain on sale of equipment
|
-
|
361,208
|
(361,208)
|
Foreign currency gain
|
1,313
|
3,586
|
(2,273)
|
|
$ 9,916
|
$ 607,033
|
$ (597,117)
|
Expenses
Total expenses for three months ended March 31, 2012 increased by $2.0 million over the comparable period in 2011. The increase was primarily due to an increase in arbitration costs and expenses partially off-set by decreases in general and administrative expense and equipment holding costs.
The oral hearing in the Company’s arbitration against Venezuela was held during the first quarter of 2012. The hearing was the culmination of an extensive undertaking by the Company’s counsel, technical, legal and financial experts, as well as its employees. With the completion of the hearing and the filing of post hearing briefs, management expects a significant decrease in future costs associated with the arbitration. General and administrative expense decreased due to non-cash decreases in costs associated with the issuance of stock options. Equipment holding costs in decreased due to the sale of certain equipment.
|
|
|
|
|
2012
|
2011
|
Change
|
Corporate general and administrative
|
$ 2,335,743
|
$ 2,704,361
|
$ (368,618)
|
Venezuelan expenses
|
354,377
|
347,741
|
6,636
|
Corporate communications
|
209,969
|
183,220
|
26,749
|
Legal and accounting
|
101,388
|
87,508
|
13,880
|
|
3,001,477
|
3,322,830
|
(321,353)
|
Arbitration
|
2,687,179
|
335,025
|
2,352,154
|
Equipment holding costs
|
356,532
|
464,305
|
(107,773)
|
Interest expense
|
1,686,707
|
1,650,495
|
36,212
|
Total Expenses for the Period
|
$ 7,731,895
|
$ 5,772,655
|
$ 1,959,240
|
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.
Transactions with Related Parties
MGC Ventures
. The Chief Executive Officer, President, Vice President-Finance and Vice President-Administration of the Company are also directors and/or officers 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 March 31, 2012 and December 31, 2011. 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 directors and/or officers 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 March 31, 2012 and December 31, 2011. During the last three years, the Company sublet a portion of its office space to Great Basin for $6,000 per year.
EXHIBIT 99.3 Chief
Executive Officer’s Certification of Interim Filings
Form 52-109F2
Certification
of interim filings – full certificate
I,
Rockne J. Timm, Chief Executive Officer of Gold Reserve Inc., certify the
following:
-
I
have reviewed the interim financial report and interim MD&A (together,
the “interim filings”) of Gold Reserve Inc. (the “issuer”) for the interim
period ended March 31, 2012.
-
Based
on my knowledge, having exercised reasonable diligence, the interim
filings do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was
made, with respect to the period covered by the interim filings.
-
Based
on my knowledge, having exercised reasonable diligence, the interim
financial report together with the other financial information included in
the interim filings fairly present in all material respects the financial
condition, financial performance and cash flows of the issuer, as of the
date of and for the periods presented in the interim filings.
-
The
issuer’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (DC&P) and internal
control over financial reporting (ICFR), as those terms are defined in
National Instrument 52-109
Certification of Disclosure in Issuers’
Annual and Interim Filings,
for the issuer.
-
Subject
to the limitations, if any, described in paragraphs 5.2 and 5.3, the
issuer’s other certifying officer and I have, as at the end of the period
covered by the interim filings
(a) designed
DC&P, or caused it to be designed under our supervision, to provide
reasonable assurance that
(i)
material information relating to the
issuer is made known to us by others, particularly during the period in which
the interim filings are being prepared; and
(ii)
information required to be
disclosed by the issuer in its annual filings, interim filings or other reports
filed or submitted by it under securities legislation is recorded, processed,
summarized and reported within the time periods specified in securities
legislation; and
(b)
designed ICFR, or caused it to be
designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with the issuer’s GAAP.
5.1
The control framework the issuer’s other certifying
officer and I used to design the issuer’s ICFR is the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework.
5.2
N/A
5.3
N/A
-
The issuer has disclosed in
its interim MD&A any change in the issuer’s ICFR that occurred during
the period beginning on January 1, 2012 and ended on March 31, 2012 that
has materially affected, or is reasonably likely to materially affect, the
issuer’s ICFR.
Date:
May 29, 2012
/s/Rockne J. Timm
Rockne J. Timm
Chief Executive Officer
EXHIBIT
99.4 Chief Financial Officer’s Certification of Interim Filings
Form 52-109F2
Certification
of interim filings – full certificate
I, Robert A. McGuinness, Chief Financial Officer of
Gold Reserve Inc., certify the following:
-
I
have reviewed the interim financial report and interim MD&A (together,
the “interim filings”) of Gold Reserve Inc. (the “issuer”) for the interim
period ended March 31, 2012.
-
Based
on my knowledge, having exercised reasonable diligence, the interim
filings do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was
made, with respect to the period covered by the interim filings.
-
Based
on my knowledge, having exercised reasonable diligence, the interim financial
report together with the other financial information included in the
interim filings fairly present in all material respects the financial
condition, financial performance and cash flows of the issuer, as of the
date of and for the periods presented in the interim filings.
-
The
issuer’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (DC&P) and internal
control over financial reporting (ICFR), as those terms are defined in
National Instrument 52-109
Certification of Disclosure in Issuers’
Annual and Interim Filings,
for the issuer.
-
Subject
to the limitations, if any, described in paragraphs 5.2 and 5.3, the
issuer’s other certifying officer and I have, as at the end of the period
covered by the interim filings
(a) designed
DC&P, or caused it to be designed under our supervision, to provide
reasonable assurance that
(iii)
material information relating to
the issuer is made known to us by others, particularly during the period in
which the interim filings are being prepared; and
(iv)
information required to be
disclosed by the issuer in its annual filings, interim filings or other reports
filed or submitted by it under securities legislation is recorded, processed,
summarized and reported within the time periods specified in securities
legislation; and
(c)
designed ICFR, or caused it to be
designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with the issuer’s GAAP.
5.1
The control framework the issuer’s other certifying
officer and I used to design the issuer’s ICFR is the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework.
5.2
N/A
5.3
N/A
-
The issuer has disclosed in
its interim MD&A any change in the issuer’s ICFR that occurred during
the period beginning on January 1, 2012 and ended on March 31, 2012 that
has materially affected, or is reasonably likely to materially affect, the
issuer’s ICFR.
Date:
May 29, 2012
/s/Robert
A. McGuinness
Robert A. McGuinness
Chief Financial Officer
Gold Reserve (AMEX:GRZ)
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