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 August 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):
The following exhibits are furnished with this Form 6-K:
99.1
June 30, 2012 Interim Consolidated Financial Statements
99.2
June 30, 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
99.5 Gold Reserve Inc. Bonus Plan
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:
·
outcome of our ICSID arbitration against the Bolivarian Republic of Venezuela;
·
continued servicing or restructuring of our convertible notes or other obligations as they come due;
·
equity dilution resulting from the conversion of the convertible notes in part or in whole to common shares;
·
value realized from the disposition of the remaining Brisas Project related assets;
·
outcome of the litigation regarding the enjoined hostile takeover bid for us;
·
ability to maintain continued listing on the NYSE MKT and/or the TSX Venture;
·
competition with companies that are not subject to or do not follow Canadian and U.S. laws and regulations;
·
corruption, uncertain legal enforcement and political and social instability;
·
regulatory, political and economic risks associated with Venezuela including changes in laws and legal regimes;
·
currency, metal prices and metal production volatility;
·
adverse U.S and Canadian tax consequences;
·
abilities and continued participation of certain key employees;
·
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: August 28, 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)
|
|
June 30,
2012
|
|
|
December 31, 2011
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents (Note 4)
|
$
|
30,548,624
|
|
$
|
57,677,370
|
Assets
held for sale (Note 7)
|
|
–
|
|
|
450,000
|
Marketable
securities (Notes 5, 6)
|
|
611,477
|
|
|
892,271
|
Deposits,
advances and other (Note 12)
|
|
2,459,002
|
|
|
194,802
|
Total
current assets
|
|
33,619,103
|
|
|
59,214,443
|
Property,
plant and equipment, net (Note 7)
|
|
19,165,683
|
|
|
19,125,626
|
Total
assets
|
$
|
52,784,786
|
|
$
|
78,340,069
|
LIABILITIES
|
|
|
|
|
|
Current Liabilities
:
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$
|
1,782,748
|
|
$
|
2,076,131
|
Accrued
interest
|
|
195,816
|
|
|
234,545
|
Current
portion - convertible notes (Notes 12, 14)
|
|
17,955,500
|
|
|
–
|
Total
current liabilities
|
|
19,934,064
|
|
|
2,310,676
|
|
|
|
|
|
|
Convertible
notes (Notes 12, 14)
|
|
67,491,500
|
|
|
101,833,491
|
Total
liabilities
|
|
87,425,564
|
|
|
104,144,167
|
|
|
|
|
|
|
Measurement
uncertainty (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Serial
preferred stock, without par value
|
|
|
|
|
|
Authorized:
|
Unlimited
|
|
|
|
|
|
|
Issued:
|
None
|
|
|
|
|
|
|
Common shares and equity units
|
|
246,296,902
|
|
|
244,023,265
|
Class A common shares, without par value
|
|
|
|
|
|
Authorized:
|
Unlimited
|
|
|
|
|
|
|
Issued and outstanding:
|
2012…59,798,972
|
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)
|
|
18,937,131
|
|
|
17,143,278
|
Accumulated deficit
|
|
(304,813,634)
|
|
|
(292,183,986)
|
Accumulated other comprehensive income (loss)
|
|
(232,780)
|
|
|
41,742
|
Total shareholders' deficit
|
|
(34,640,778)
|
|
|
(25,804,098)
|
Total liabilities and shareholders' deficit
|
$
|
52,784,786
|
|
$
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
through
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
June 30, 2012
|
OTHER
INCOME
|
|
|
|
|
|
|
|
|
|
|
Interest
|
$
|
12,614
|
$
|
42,753
|
$
|
13,844
|
$
|
86,801
|
$
|
372,970
|
Gain
on disposition of marketable securities
|
|
–
|
|
313,477
|
|
7,373
|
|
511,668
|
|
1,021,692
|
Gain on
sale of equipment
|
|
–
|
|
185,787
|
|
–
|
|
546,995
|
|
1,880,140
|
Gain
on sale of subsidiaries (Note 10)
|
|
–
|
|
–
|
|
–
|
|
–
|
|
474,577
|
Gain
on extinguishment of debt
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,304
|
Foreign
currency loss
|
|
(8,476)
|
|
(25,448)
|
|
(7,163)
|
|
(21,862)
|
|
(22,241)
|
|
|
4,138
|
|
516,569
|
|
14,054
|
|
1,123,602
|
|
3,728,442
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Corporate
general and administrative
|
|
1,984,731
|
|
1,621,381
|
|
4,320,474
|
|
4,325,742
|
|
14,234,958
|
Venezuelan
operations
|
|
160,193
|
|
401,016
|
|
514,570
|
|
748,757
|
|
3,514,481
|
Equipment
holding costs
|
|
203,879
|
|
474,256
|
|
560,411
|
|
938,561
|
|
3,796,846
|
Write-down
of machinery and equipment
|
|
–
|
|
–
|
|
–
|
|
–
|
|
4,400,755
|
Corporate
communications
|
|
284,114
|
|
196,754
|
|
494,083
|
|
379,974
|
|
1,640,446
|
Legal
and accounting
|
|
496,591
|
|
215,431
|
|
597,979
|
|
302,939
|
|
1,562,806
|
Arbitration
(Note 3)
|
|
179,684
|
|
2,810,820
|
|
2,866,863
|
|
3,145,845
|
|
15,815,869
|
|
|
3,309,192
|
|
5,719,658
|
|
9,354,380
|
|
9,841,818
|
|
44,966,161
|
Loss
before interest expense
|
|
(3,305,054)
|
|
(5,203,089)
|
|
(9,340,326)
|
|
(8,718,216)
|
|
(41,237,719)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(1,602,615)
|
|
(1,668,322)
|
|
(3,289,322)
|
|
(3,318,817)
|
|
(16,641,452)
|
Net
loss for the period
|
$
|
(4,907,669)
|
$
|
(6,871,411)
|
$
|
(12,629,648)
|
$
|
(12,037,033)
|
$
|
(57,879,171)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$
|
(0.08)
|
$
|
(0.12)
|
$
|
(0.21)
|
$
|
(0.20)
|
|
|
Weighted average common shares outstanding
|
|
60,281,104
|
|
59,471,005
|
|
60,148,164
|
|
59,414,941
|
|
|
GOLD RESERVE INC.
(A Development Stage Enterprise)
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Expressed
in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
January 1, 2010
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
through
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
June 30, 2012
|
Net
loss for the period
|
$
|
(4,907,669)
|
$
|
(6,871,411)
|
$
|
(12,629,648)
|
$
|
(12,037,033)
|
$
|
(57,879,171)
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on marketable securities
|
|
(250,315)
|
|
(265,185)
|
|
(267,149)
|
|
(375,804)
|
|
1,066,137
|
Adjustment
for realized gains included in net loss
|
|
–
|
|
(313,477)
|
|
(7,373)
|
|
(511,668)
|
|
(1,021,692)
|
Other
comprehensive income (loss)
|
|
(250,315)
|
|
(578,662)
|
|
(274,522)
|
|
(887,472)
|
|
44,445
|
Comprehensive loss for the period
|
$
|
(5,157,984)
|
$
|
(7,450,073)
|
$
|
(12,904,170)
|
$
|
(12,924,505)
|
$
|
(57,834,726)
|
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 Six Months Ended June 30, 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 (Loss)
|
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
|
|
|
|
|
|
(12,629,648)
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(274,522)
|
|
Stock option compensation
|
|
|
|
|
1,856,990
|
|
|
|
Fair value of options exercised
|
|
|
63,137
|
|
(63,137)
|
|
|
|
Common shares issued for:
|
|
|
|
|
|
|
|
|
Option exercises ($1.56/share avg.)
|
52,500
|
|
81,925
|
|
|
|
|
|
Services ($3.03/share avg.)
|
702,500
|
|
2,128,575
|
|
|
|
|
|
Balance, June 30, 2012
|
59,798,972
|
500,236
|
$ 246,296,902
|
$ 5,171,603
|
$ 18,937,131
|
$(304,813,634)
|
$ (232,780)
|
$ -
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
through
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
June 30, 2012
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
$
|
(4,907,669)
|
$
|
(6,871,411)
|
$
|
(12,629,648)
|
$
|
(12,037,033)
|
$
|
(57,879,171)
|
Adjustments
to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
715,784
|
|
485,489
|
|
1,856,990
|
|
1,940,279
|
|
4,680,099
|
Depreciation
|
|
5,569
|
|
16,465
|
|
11,662
|
|
40,446
|
|
212,537
|
Gain on extinguishment of debt
|
|
–
|
|
–
|
|
–
|
|
–
|
|
(1,304)
|
Gain on sale of equipment
|
|
–
|
|
(185,787)
|
|
–
|
|
(546,995)
|
|
(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
|
|
234,073
|
|
261,024
|
|
513,509
|
|
504,220
|
|
2,607,265
|
Net gain on disposition of marketable securities
|
|
–
|
|
(313,477)
|
|
(7,373)
|
|
(511,668)
|
|
(1,021,692)
|
Shares issued for compensation
|
|
841,448
|
|
813,271
|
|
1,621,773
|
|
1,124,671
|
|
3,652,347
|
Changes
in non-cash working capital:
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits and advances
|
|
(1,421,283)
|
|
(291,834)
|
|
(1,757,398)
|
|
(249,157)
|
|
(1,475,874)
|
Net
increase (decrease) in accounts payable and accrued expenses
|
|
(1,802,802)
|
|
1,977,175
|
|
(332,112)
|
|
3,237,627
|
|
(2,045,989)
|
Net
cash used in operating activities
|
|
(6,334,880)
|
|
(4,109,085)
|
|
(10,722,597)
|
|
(6,497,610)
|
|
(49,050,724)
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from disposition of marketable securities
|
|
–
|
|
658,808
|
|
13,645
|
|
1,217,749
|
|
12,839,183
|
Purchase
of marketable securities
|
|
–
|
|
(200,894)
|
|
–
|
|
(655,842)
|
|
(1,726,718)
|
Purchase
of property, plant and equipment
|
|
(50,010)
|
|
(30,431)
|
|
(51,719)
|
|
(32,944)
|
|
(9,598,889)
|
Proceeds
from sales of equipment
|
|
–
|
|
303,255
|
|
450,000
|
|
8,640,395
|
|
25,822,156
|
Decrease
in restricted cash
|
|
–
|
|
–
|
|
–
|
|
–
|
|
9,489,777
|
Deconsolidation
of subsidiaries
|
|
–
|
|
–
|
|
–
|
|
–
|
|
(1,429,655)
|
Net
cash (used in) provided by investing activities
|
|
(50,010)
|
|
730,738
|
|
411,926
|
|
9,169,358
|
|
35,395,854
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from the issuance of common shares
|
|
72,825
|
|
12,153
|
|
81,925
|
|
15,778
|
|
141,364
|
Extinguishment
of convertible notes
|
|
(16,900,000)
|
|
–
|
|
(16,900,000)
|
|
–
|
|
(16,900,683)
|
Net
cash (used in) provided by financing activities
|
|
(16,827,175)
|
|
12,153
|
|
(16,818,075)
|
|
15,778
|
|
(16,759,319)
|
Change
in Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
(23,212,065)
|
|
(3,366,194)
|
|
(27,128,746)
|
|
2,687,526
|
|
(30,414,189)
|
Cash
and cash equivalents - beginning of period
|
|
53,760,689
|
|
64,240,198
|
|
57,677,370
|
|
58,186,478
|
|
60,962,813
|
Cash
and cash equivalents - end of period
|
$
|
30,548,624
|
$
|
60,874,004
|
$
|
30,548,624
|
$
|
60,874,004
|
$
|
30,548,624
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 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 (See Note 7). 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. Deferred 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 deferred 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. Deferred 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, 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 Bilateral Investment Treaty (“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. Our claim as last updated in our
July 2011 reply submission 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 submission) 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 Approach, (2) the Comparable
Publicly Traded Company Approach, and (3) the Comparable Transaction 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 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 the 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.
Subsequently, on July 25, 2012, the Tribunal issued a procedural order
requesting the production of further evidence related to quantum issues to be
delivered as a joint report of the Parties’ experts. It is typical for
tribunals in this type of arbitration to require six to eighteen months from
the date of the oral hearing (the historical average is approximately 1.2
years) to finalize and issue its decision.
The Board of Directors approved a Bonus Pool Plan
(“Bonus Plan”) in May 2012, which is intended to reward the participants in the
Bonus Plan, including named executive officers, employees, directors and
consultants, for their past and future contributions including their efforts
related to the development of the Brisas Project, execution of the arbitration
claim and the collection of an award, if any. The bonus pool under the Bonus
Plan will generally be comprised of the gross proceeds or the fair value of any
consideration related to such transactions less applicable taxes times 1% of
the first $200 million and 5% thereafter. Participation in the Bonus Plan vests
upon the participant’s selection by the Committee of independent directors, subject
to voluntary termination of employment or termination for cause.
Note 4. Cash
and Cash Equivalents:
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
|
|
2012
|
|
2011
|
US Treasury bills
|
|
|
|
|
$
|
–
|
$
|
40,000,000
|
Bank deposits
|
|
|
|
|
|
6,348,782
|
|
12,238,554
|
Money market funds
|
|
|
|
|
|
24,199,842
|
|
5,438,816
|
Total
|
|
|
|
|
$
|
30,548,624
|
$
|
57,677,370
|
At June 30, 2012
and December 31, 2011, the Company had cash of approximately $7,000 and $88,000
respectively, in Venezuela.
Note 5. Marketable Securities:
|
|
|
|
|
|
June
30,
|
|
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
|
|
|
|
|
|
(267,149)
|
|
(403,475)
|
Fair value at balance sheet date
|
|
|
|
|
$
|
611,477
|
$
|
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 June 30, 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
June 30, 2012
|
Level 1
|
Level 2
|
Level 3
|
Marketable
securities
|
|
$ 611,477
|
$ 611,477
|
–
|
–
|
|
|
|
|
|
|
|
|
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
|
June 30, 2012
|
|
|
|
|
|
|
Machinery and
equipment
|
$
|
18,985,828
|
$
|
–
|
$
|
18,985,828
|
Furniture and
office equipment
|
|
518,944
|
|
(474,265)
|
|
44,679
|
Leasehold
improvements
|
|
41,190
|
|
(41,190)
|
|
–
|
Venezuelan
property and equipment
|
|
1,397,625
|
|
(1,312,459)
|
|
85,166
|
Mineral
property
|
|
50,010
|
|
–
|
|
50,010
|
|
$
|
20,993,597
|
$
|
(1,827,914)
|
$
|
19,165,683
|
|
|
|
|
|
|
|
|
|
|
|
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.
In May 2012 the Company entered
into 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 an option to acquire an
additional 9% interest in the property for $2,000,000. Upon signing, the
Company made an initial $50,010 option payment and at the end of July 2012 the
Company made an additional $100,000 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.
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
In order to comply with the requirements of the TSX Venture Exchange (“TSXV”), the Company adopted and the shareholders approved on June 27, 2012, the 2012 Equity Incentive Plan (the “2012 Plan”) to replace the Company’s previous equity incentive plans; the 1997 Equity Incentive Plan (the “1997 Plan”) and the 2008 Venezuelan Equity Incentive Plan (the “Venezuelan plan”). Upon shareholder approval, all awards previously granted pursuant to the 1997 Plan and the Venezuelan Plan became subject to the 2012 Plan and the previous plans were terminated. The 2012 Plan permits the grants of stock options of up to 10% of the issued and outstanding common shares of the Company on a rolling basis. Since the previous plans had a combined number of options outstanding in excess of 10% of the common shares outstanding, the Company currently is unable to grant any additional options. The Company provides newly issued shares to satisfy stock option exercises. The grants are made for terms of up to ten years with vesting periods as required by the TSXV and as may be determined by a committee established pursuant to the 2012 Plan, or in certain cases, by the Company’s board of directors.
Share option transactions for the six months ended June 30, 2012 and 2011, as combined, 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
|
(52,500)
|
1.56
|
|
(33,167)
|
0.48
|
|
Options expired
|
–
|
–
|
|
(257,913)
|
4.83
|
|
Options forfeited
|
–
|
–
|
|
–
|
–
|
|
Options granted
|
1,620,500
|
2.89
|
|
3,793,000
|
1.85
|
|
Options outstanding - end of period
|
6,753,188
|
1.77
|
|
6,680,022
|
2.00
|
|
|
|
|
|
|
|
|
Options exercisable - end of period
|
3,334,788
|
1.33
|
|
3,597,772
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table relates to stock options at June 30, 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
|
$3,453,402
|
1.43
|
|
1,079,188
|
$0.29
|
$3,453,402
|
1.43
|
$0.73 - $0.73
|
468,500
|
$0.73
|
1,293,060
|
1.72
|
|
468,500
|
$0.73
|
1,293,060
|
1.72
|
$1.82 - $1.82
|
2,635,000
|
$1.82
|
4,400,450
|
3.51
|
|
1,297,500
|
$1.82
|
2,166,825
|
3.51
|
$1.92 - $1.92
|
950,000
|
$1.92
|
1,491,500
|
8.94
|
|
-
|
-
|
-
|
-
|
$2.89 - $2.89
|
1,620,500
|
$2.89
|
972,300
|
4.59
|
|
489,600
|
$2.89
|
293,760
|
4.59
|
$0.29 - $2.89
|
6,753,188
|
$1.77
|
$11,610,712
|
4.08
|
|
3,334,788
|
$1.33
|
$7,207,047
|
2.74
|
During
the six months ended June 30, 2012 and 2011, the Company granted approximately 1.6
million and 3.8 million options, respectively. The Company recorded non-cash compensation
expense during 2012 and 2011 of $1.86 million and $1.94 million, respectively,
for stock options granted in 2012 and prior periods. As of June 30, 2012,
compensation expense of $1.2 million related to unvested options remains to be
recognized over the remaining vesting period.
The weighted average grant
date fair value of options granted during the six months ended June 30, 2012
and 2011 was calculated at $1.39 and $1.23, 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%
|
1.63%
|
Expected
Term
|
2.9 years
|
4.0 years
|
Expected
volatility
|
65%
|
97%
|
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.
Restricted Stock
During the six months
ended June 30, 2012 and 2011, the Company granted 0.7 million and 0.2 million
shares of restricted stock, respectively to employees and directors of the
Company. The fair value of restricted stock issued as compensation is based on
the grant date market value and expensed over the vesting period. The Company
recorded non-cash compensation expense during 2012 and 2011 of $1.6 million and
$1.1 million, respectively, for stock granted in 2012 and prior periods.
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 June 30, 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 Inc. (“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 June 30, 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
Energies Inc. (“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 June 30, 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 2012, the
shareholders approved certain amendments to the Rights Plan including
continuing the Shareholder Rights Plan until June 30, 2015 and amending certain
provisions of the Rights Plan which would exempt the Large Note Holders from
triggering the Plan as a result of the Restructuring (See Note 14. Subsequent
Events). 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 remained outstanding prior to June 15, 2012. Convertible
notes with a face value of $1,153,000 were previously settled in cash or
repurchased by the Company in the open market at a total cost of approximately
$452,000. The unsecured notes, bear interest at a rate of 5.50% annually, pay
interest semi-annually in arrears and mature on June 15, 2022.
Key Indenture terms include:
§
Any outstanding notes are convertible, at the option of the note
holder, 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). Unless there was continuing an
event of default under the Company’s indenture, conversion could be affected at
the Company’s option by delivering common shares, cash or a combination thereof.
§
The note holders also had a one-time option (the “Put 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 at the option of the Company, by delivering cash and/or common
shares.
§
Beginning on June 16, 2012, the Company, at its option, can redeem
all or part of the notes for cash at a redemption price equal to 100% of the
principal amount being redeemed plus accrued and unpaid interest.
§
The covenants contained in the 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.
On May 16, 2012, the Company
notified the convertible note holders, as required by the Indenture, that they
had the right to require the Company to purchase all or a portion of their notes
on June 15, 2012 and that the Company would pay, in cash, any notes validly
surrendered. On June 15, 2012, pursuant to the Put Option, note holders elected
to surrender $16.9 million of the notes to the Company for cash.
The remaining notes outstanding
as of June 30, 2012 are as follows:
|
Face Value
of Notes
|
Beginning notes outstanding
prior to June 15, 2012
|
$102,347,000
|
Less redemption: June 15,
2012 Put Option
|
16,900,000
|
Remaining notes outstanding
at June 30, 2012
|
85,447,000
|
Notes outstanding:
short-term
(1)
|
17,955,500
|
Notes outstanding: long-term
|
$ 67,491,500
|
(1)
Based on the terms of the Restructuring (described
below) and managements estimate of the mix of cash and/or common shares to be
utilized for the remaining redemptions expected to be consummated in the third
quarter.
Concurrent 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”)
, who held
approximately 88% of the outstanding notes. In connection with the
Restructuring, the Company incurred certain legal and other transaction costs. These
costs have been deferred as part of Deposits, advances and other, pending
completion of the Restructuring. See Note 14. Subsequent Event.
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, 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.
Note 13. Litigation:
The Company is a party to
litigation in the Ontario Superior Court of Justice related to a breach of
fiduciary responsibility during the course of 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:
Concurrent with the Put Option (see
Note 12 to the consolidated financial statements), the Company announced the Restructuring
agreement (the “Restructuring”), subject to shareholder approval, with its
Large Note holders
, who held
approximately 88% of the outstanding notes. The holders of the remaining 12% of
Company’s outstanding notes are herein referred to as the “Other Note Holders”.
The Company and the Large Note Holders signed the Amended and Restated
Subordinated Note Restructuring Agreement on July 3, 2012 which, among other
terms, provided for the redemption of the remaining notes held by the Large Note
Holders that were not previously surrendered to the Company pursuant to the Put
Option as follows:
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 were
exchanged for: (i) $200.00 in cash, (ii) 147.06 Common Shares, (iii) a pro
rata portion of the aggregate 5% Contingent Value Right (“CVR”); and (iv) a minimum
fee of $500,000 up to $1 million payable based on the percent of Other Note
Holders that elect to participate in this Restructuring which is payable to
each holder based on a pro rata percentage of notes restructured.
$300 principal of notes remain outstanding and represent
the same continuing indebtedness, subject to certain amended terms including: (i)
maturity date is 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.
The CVR entitles each Large Note
holder to receive, net of certain deductions (including income tax calculation),
a pro rata portion of an 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. 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 Notes
held by the Large Note holders that were not previously surrendered to the
Company pursuant to the Put Option were redeemable pursuant to the
Restructuring as follows:
|
Face Value
|
Redeemed for
|
|
of Notes
|
Cash
|
Shares #
|
Shares $
|
Modified Notes
|
Large Note Holders
|
$ 77,187,000
|
$ 15,439,500
|
11,351,029
|
$ 38,593,500
|
$ 23,154,000
|
Management expects to offer the
same restructuring terms to the Other Note Holders during the third quarter and
until such offer is concluded, it is unclear to what extent the Other Note
Holders will elect to participate. To the extent the Other Note Holders do not
elect or do not respond to the Offer, the Company expects to redeem the notes
for cash.
The $15,439,500 shown in the table
above was paid to the Large Note Holders on or about July 3, 2012. The Shares
and Modified Notes issuable to the Large Note Holders pursuant to the
Restructuring have not been issued as of the date of this report. Such Shares
and Modified Notes will be issued in the third quarter along with those Shares
and Modified Notes issuable to the Other Note Holders, the sum of which is
subject to their election.
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 have
enter into one-time Waiver Agreements, whereby such individuals waived their
rights to receive change of control payments that would otherwise be triggered
pursuant to the Restructuring. In return for the waiver the effected
individuals were paid in June a total of approximately $350,000.
In conjunction with the Restructuring, the Directors
proposed and shareholders approved at a shareholders meeting held on June 27,
2012 the continuation and certain amendments to the Company’s Shareholder
Rights Plan which would exempt the Large Note Holders from triggering the Rights
Plan as a result of the Restructuring (See Note 11 to the consolidated financial
statements).
Exhibit
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
August 28, 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.
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.
In April 2008, the Venezuelan government revoked our right to develop the
Brisas Project. 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.
Management’s primary 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 while minimizing costs and, to the extent possible, pursue an
amicable settlement with Venezuela that may include a monetary agreement and/or
project participation; (3) redeem, restructure or otherwise modify the terms of
the 5.50% convertible notes; and (4) dispose of remaining assets previously
purchased for 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. On July 25, 2012 the Tribunal issued a procedural order
requesting the production of further evidence related to quantum issues to be
delivered as a joint report of the Parties’ experts. 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 and November 2011, the
Company was advised by the NYSE MKT (the “NYSE”) and the Toronto Stock Exchange
(the “TSX”), respectively, that it intended to delist the Company’s common
shares. The seizure of the Brisas Project by the Venezuelan authorities in
October 2009, led both exchanges to conclude that the Company “no longer complied”
with its listing rules. Pursuant to the terms of an appeal the Company received
notice that the NYSE had accepted the Company’s plan to regain compliance with its
listing standards (the “Plan”) by a targeted completion date of December 20,
2012 while continuing the Company’s listing pursuant to the extension of the
exception to the NYSE Listing Standards. 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.
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. 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 May 2012 the Company entered
into 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 an option to acquire an
additional 9% interest in the property for $2,000,000. Upon signing, the
Company made an initial $50,010 option payment and at the end of July 2012 the
Company made an additional $100,000 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 convertible note holders (See Note 12 to the consolidated
financial statements), as required by the Indenture, that they had the right to
require the Company to purchase all or a portion of their Notes on June 15,
2012 and that the Company would pay, in cash, any notes validly surrendered. On
June 15, 2012, pursuant to the Put Option, note holders elected to surrender
$16.9 million of notes to the Company for cash. Considering the Put Option election,
the balance of the remaining notes outstanding at June 30, 2012 was
$85,447,000.
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”)
, who held
approximately 88% of the outstanding Notes. The holders of the remaining 12% of
Company’s outstanding notes are herein referred to as the “Other Note Holders”.
Management considered various options for the redemption of the convertible
notes with the primary objective being, while taking into account the Company’s
cash position, to ensure the following:
§
mitigating the potential of an equity related “Death Spiral”,
§
limiting equity dilution,
§
controlling the amount of cash expended,
§
limiting “deal sweeteners” in order to consummate the
transaction,
§
resolving any Change of Control triggers related to both to the
Shareholder’s Rights Plan as well as Change of Control Agreements with
management
The Company and the Large Note
Holders signed the Amended and Restated Subordinated Note Restructuring
Agreement on July 3, 2012 which, among other terms, provided for the redemption
of the remaining notes held by the Large Note Holders that were not previously
surrendered to the Company pursuant to the Put Option as follows:
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
were exchanged for: (i) $200.00 in cash, (ii) 147.06 Common Shares, (iii) a
pro rata portion of the aggregate 5% Contingent Value Right (“CVR”); and (iv) a
minimum fee of $500,000 up to $1 million payable based on the percent of Other
Note Holders that elect to participate in this Restructuring and is payable to
each holder based on a pro rata percentage of notes restructured.
$300
principal of notes remain outstanding and represent the same continuing
indebtedness, subject to certain amended terms including: (i) maturity date is
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.
The CVR entitles each Large Note
holder to receive, net of certain deductions, a pro rata portion of an
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. 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 Notes
held by the Large Note holders that were not previously surrendered to the
Company pursuant to the Put Option were redeemable pursuant to the
Restructuring as follows:
|
Face Value
|
Redeemed for
|
|
of Notes
|
Cash
|
Shares #
|
Shares $$
|
Modified Notes
|
Large Note Holders
|
$ 77,187,000
|
$ 15,439,500
|
11,351,029
|
$ 38,593,500
|
$ 23,154,000
|
Management expects to offer the
same restructuring terms to the Other Note Holders during the third quarter and
until such offer is concluded, it is unclear to what extent the Other Note
Holders will elect to participate. To the extent the Other Note Holders do not
elect or do not respond to the Offer, the Company expects to redeem the notes
for cash.
The $15,439,500 shown in the
table above was paid to the Large Note Holders on or about July 3, 2012. The
Shares and Modified Notes issuable to the Large Note Holders pursuant to the
Restructuring have not been issued as of the date of this report. Such Shares
and Modified Notes will be issued in the third quarter along with those Shares
and Modified Notes issuable to the Other Note Holders the sum of which is
subject to their election.
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 have
entered into one-time Waiver Agreements, whereby such individuals waived their
rights to receive change of control payments that would otherwise be triggered
pursuant to the Restructuring. In return for the waiver the effected
individuals were paid in June a total of approximately $350,000.
In conjunction with the
Restructuring the Directors proposed and shareholders approved at a
shareholders meeting held on June 27, 2012 the continuation and certain
amendments to the Company’s Shareholder Rights Plan which would exempt the
Large Note Holders from triggering the Plan as a result of the Restructuring (See
Note 11 to the consolidated financial statements).
In addition to the Company’s Option
Agreement with Soltoro, management has identified a number of other 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. We are focusing 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.
The Company’s current financial
position and continuing results of operations are a product of 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 as well as the impact of the Restructuring described above
and in note 14 to the consolidated financial statements.
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 June 30,
2012, the Company had cash and cash equivalents of approximately $30.5, million
which represents a decrease from December 31, 2011 of approximately $27.1
million. The net decrease was primarily due to cash used for redemption of
convertible notes of $16.9 million and cash used by operations of $10.8 million
partially 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
|
$ 30,548,624
|
$ 57,677,370
|
$ (27,128,746)
|
As of June 30, 2012, our total
financial resources, which include cash and cash equivalents and marketable securities,
totaled approximately $31.2 million. In addition, 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) at
its estimated fair value of approximately $19 million.
On June 15, 2012, pursuant to the
Put Option (See Overview and Note 12 to the consolidated financial statements),
note holders elected to surrender $16.9 million of notes to the Company for
cash. Considering the Put Option election, the balance of the remaining notes
outstanding at June 30, 2012 was $85,447,000.
On July 3, 2012, the Company and
the Large Note Holders signed the Amended and Restated Subordinated Note
Restructuring Agreement (See Overview and Note 14 to the consolidated financial
statements) which, among other terms, provided for the redemption of the
remaining notes held by the Large Note Holders that were not previously
surrendered to the Company pursuant to the Put Option as follows:
|
Face Value
|
Redeemed for
|
|
of Notes
|
Cash
|
Shares #
|
Shares $$
|
Modified Notes
|
Large Note Holders
|
$ 77,187,000
|
$ 15,439,500
|
11,351,029
|
$ 38,593,500
|
$ 23,154,000
|
Management expects to offer the same restructuring terms to the Other Note Holders during the third quarter and until such offer is concluded, it is unclear to what extent the Other Note Holders will elect to participate. To the extent the Other Note Holders do not elect or do not respond to the Offer, the Company expects to redeem the notes for cash.
The $15,439,500 shown in the table above was paid to the Large Note Holders on or about July 3, 2012. The Shares and Modified Notes issuable to the Large Note Holders pursuant to the Restructuring have not been issued as of the date of this report. Such Shares and Modified Notes will be issued in the third quarter along with those Shares and Modified Notes issuable to the Other Note Holders, the sum of which is subject to their election.
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 the Other Note Holders participate in the proposed Restructuring as more fully described above, 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 August 28, 2012, we had approximately $15 million in cash and investments, which are held primarily in US dollar denominated accounts.
Operating Activities
Cash flow used by operating activities for the six months ended June 30, 2012 and 2011 was approximately $10.7 million and $6.5 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 to 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 half of 2012 increased from the prior comparable period primarily due to professional fees and expenses connected with the arbitration, the Restructuring and various corporate administrative issues as well as the liquidation of amounts recorded in accounts payable as of March 31, 2012.
Investing Activities
During the three and six months ended June 30, 2012, net cash provided by investing activities decreased approximately $0.8 million and $8.8 million from the comparable periods in 2011. Investing activities primarily consist of the sale of Brisas Project related equipment and to a lesser extent transactions in marketable securities. As of June 30, 2012, the Company held approximately $19 million of Brisas project related equipment intended for future sale.
|
|
3 months
|
|
|
6 months
|
|
|
2012
|
2011
|
Change
|
2012
|
2011
|
Change
|
Proceeds (net of purchases) of marketable securities
|
$ -
|
$ 457,914
|
$ (457,914)
|
$ 13,645
|
$ 561,907
|
$ (548,262)
|
Purchase of property, plant and equipment
|
(50,010)
|
(30,431)
|
(19,579)
|
(51,719)
|
(32,944)
|
(18,775)
|
Proceeds from sale of equipment
|
-
|
303,255
|
(303,255)
|
450,000
|
8,640,395
|
(8,190,395)
|
|
$ (50,010)
|
$ 730,738
|
$ (780,748)
|
$ 411,926
|
$ 9,169,358
|
$ (8,757,432)
|
Financing Activities
During the second quarter of 2012, the Company redeemed $16.9 million of its convertible notes (See Notes 12 and 14 to the consolidated financial statements). The Company had no other significant financing activities in the first half of 2012 and 2011. Net proceeds from the issuance of common shares relate to the exercise of employee stock options and totaled $81,925 and $15,778 during the six months ended June 30, 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 June 30, 2012:
|
Payments due by Period
|
|
Total
|
Less than 1 Year
|
1-3 Years
|
4-5 Years
|
More Than 5 Years
|
Convertible Notes
(1)
|
$85,447,000
|
$17,955,500
|
|
–
|
$67,491,500
|
Interest
|
46,995,850
|
$4,699,585
|
$9,399,170
|
$9,399,170
|
23,497,925
|
|
$132,442,850
|
$22,655,085
|
$9,399,170
|
$9,399,170
|
$90,989,425
|
1
In May 2007, the Company issued $103,500,000 aggregate principal amount of Senior subordinated convertible notes, of which $102,347,000 remained outstanding prior to June 15, 2012. Convertible notes with a face value of $1,153,000 were previously settled in cash or repurchased by the Company in the open market at a total cost of approximately $452,000. The unsecured notes, bear interest at a rate of 5.50% annually, pay interest semi-annually in arrears and mature on June 15, 2022.
On June 15, 2012, pursuant to the Put Option, note holders elected to surrender $16.9 million of the notes to the Company for cash. (See Note 12 to the consolidated financial statements and management’s discussion and analysis)
Under the terms of the Restructuring (See Note 14 to the consolidated financial statements and management’s discussion and analysis) which was approved by shareholders on June 27, 2012, the remaining notes held by the Large Note Holders that were not previously surrendered to the Company pursuant to the Put Option were redeemable in July 2012 and, as a result, are not included in the table above.
Results of Operations
Summary Results of Operations
Consolidated net loss for the three and six months ended June 30, 2012 was approximately $4.9 million and $12.6 million, respectively, compared to $6.9 million and $12.0 million in the comparable periods in 2011.
|
|
3 months
|
|
|
6 months
|
|
|
2012
|
2011
|
Change
|
2012
|
2011
|
Change
|
Other Income
|
$ 4,138
|
$ 516,569
|
$ (512,431)
|
$ 14,054
|
$ 1,123,602
|
$ (1,109,548)
|
Total expenses
|
(4,911,807)
|
(7,387,980)
|
2,476,173
|
(12,643,702)
|
(13,160,635)
|
516,933
|
Net Loss
|
$ (4,907,669)
|
$ (6,871,411)
|
$ 1,963,742
|
$(12,629,648)
|
$(12,037,033)
|
$ (592,615)
|
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.
|
|
3 months
|
|
|
6 months
|
|
|
2012
|
2011
|
Change
|
2012
|
2011
|
Change
|
Interest
|
$ 12,614
|
$ 42,753
|
$ (30,139)
|
$ 13,844
|
$ 86,801
|
$ (72,957)
|
Gain on disposition of marketable securities
|
-
|
313,477
|
(313,477)
|
7,373
|
511,668
|
(504,295)
|
Gain on sale of equipment
|
-
|
185,787
|
(185,787)
|
-
|
546,995
|
(546,995)
|
Foreign currency gain (loss)
|
(8,476)
|
(25,448)
|
16,972
|
(7,163)
|
(21,862)
|
14,699
|
|
$ 4,138
|
$ 516,569
|
$ (512,431)
|
$ 14,054
|
$ 1,123,602
|
$ (1,109,548)
|
Expenses
Total expenses for the three and six months ended June 30, 2012 decreased $2.5 million and $0.5 million, respectively over the comparable periods in 2011. The decreases were primarily due to decreases in arbitration costs, equipment holding costs and Venezuelan expenses partially offset by increases in legal and general and administrative costs, including exploration costs.
With the completion of the oral hearing in the Company’s arbitration against Venezuela in the first quarter of 2012, the Company was able to significantly reduce arbitration costs in the second quarter. Equipment holding costs have decreased as the Company has sold some of the equipment originally intended for the Brisas project and Venezuelan costs have decreased as the Company has significantly reduced its operations there. General and administrative expense increased primarily due to a non-cash increase in equity-based compensation and legal increased due to corporate and tax planning issues.
|
|
3 months
|
|
|
6 months
|
|
|
2012
|
2011
|
Change
|
2012
|
2011
|
Change
|
Corporate general and administrative
|
$ 1,984,731
|
$ 1,621,381
|
$ 363,350
|
$ 4,320,474
|
$ 4,325,742
|
$ (5,268)
|
Venezuelan expenses
|
160,193
|
401,016
|
(240,823)
|
514,570
|
748,757
|
(234,187)
|
Corporate communications
|
284,114
|
196,754
|
87,360
|
494,083
|
379,974
|
114,109
|
Legal and accounting
|
496,591
|
215,431
|
281,160
|
597,979
|
302,939
|
295,040
|
|
2,925,629
|
2,434,582
|
491,047
|
5,927,106
|
5,757,412
|
169,694
|
Arbitration
|
179,684
|
2,810,820
|
(2,631,136)
|
2,866,863
|
3,145,845
|
(278,982)
|
Equipment holding costs
|
203,879
|
474,256
|
(270,377)
|
560,411
|
938,561
|
(378,150)
|
Interest expense
|
1,602,615
|
1,668,322
|
(65,707)
|
3,289,322
|
3,318,817
|
(29,495)
|
Total Expenses for the Period
|
$ 4,911,807
|
$ 7,387,980
|
$ (2,476,173)
|
$ 12,643,702
|
$ 13,160,635
|
$ (516,933)
|
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 Inc. (“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 June 30, 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 Energies Inc. (“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 June 30, 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 June 30, 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 June 30, 2012 that
has materially affected, or is reasonably likely to materially affect, the
issuer’s ICFR.
Date:
August 28, 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 June 30, 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 June 30, 2012 that
has materially affected, or is reasonably likely to materially affect, the
issuer’s ICFR.
Date:
August 28, 2012
/s/Robert
A. McGuinness
Robert A. McGuinness
Chief Financial Officer
Exhibit 99.5 Gold
Reserve Inc. Bonus Plan
GOLD RESERVE
INC.
BONUS PLAN
OBJECTIVES
The Gold Reserve Inc. Bonus Plan is intended to reward
the Participants for their contributions related to:
-
the development of the Brisas Project to the construction
stage and subsequent issuance of the environmental permit to commence
construction of the Brisas Project;
-
the manner in which the Brisas Project development
effort was carried out allowing the Company to present a compelling and
vigorous defense of its arbitration claim;
-
the support of the Company’s execution of the
Arbitration Proceedings through the filing of numerous memorandum and
exhibits as well as the oral hearings; and
-
the on-going efforts to assist with positioning the
Company, in the most optimum manner, to have an Event
as management considers in
the best interest of all stakeholders.
1. DEFINITIONS
As used in this Plan, the terms set forth below shall
have the following respective meanings:
“
Applicable Taxes
” means the Company’s then
current marginal tax rates with consideration of deductions or adjustments
included in the Company’s formal tax return, which among other things may
include net operating losses, write-offs and periodic operating expense
deductions and other deductions provided for in the relevant tax code.
“
Arbitration
Award
” means any settlement, award, or other payment made or other
consideration transferred to the Company or any of its subsidiaries arising out
of, in connection with or with respect to the Arbitration Proceedings,
including, but not limited to the proceeds received by the Company or its
subsidiaries from a sale, pledge, transfer or other disposition, directly or
indirectly, of the Company’s rights with respect to the Arbitration
Proceedings.
Any pledge, mortgage,
hypothecation or grant of a security interest made by the Company for the
purpose of financing the Company’s operating expenses and/or expenses incurred
in connection with the Arbitration Proceedings shall not be deemed to be an
Arbitration Award.
“Arbitration
Proceedings
” means that certain
arbitration proceeding commenced by the Company against the Bolivarian Republic of Venezuela pending before the International Centre for Settlement of
Investment Disputes (“ICSID”) in Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1))
in
relation to the Company's claims against the
Bolivarian Republic of Venezuela concerning its
investments in the Brisas Project and Choco 5 exploration stage
property
.
"Arbitration Proceeds”
means all present and future
proceeds, after reduction for Applicable Taxes, paid, recovered or otherwise
received by the Company or any
of its subsidiaries pursuant to or in respect of any settlement, award,
collection, sale, disposition or any other monetization of or relating to the
Arbitration P
roceedings
or any other present or future claim, action, arbitration, litigation or other
proceeding relating to the Company's claims against the Bolivarian Republic of
Venezuela in respect of its
investments in the Brisas Project and Choco 5 exploration stage
property (excluding any p
ledge, mortgage, hypothecation or grant of a security interest made by
the Company for the purpose of financing the Company’s operating expenses
and/or expenses incurred in connection with the Arbitration Proceedings).
For the avoidance of doubt,
Arbitration Proceeds may include cash, commodities, bonds, shares or any other
consideration received by the Company or any of its subsidiaries
"Board of Directors"
means the Board of Directors of
the Company.
“
Bonus Amount
” means the percentage or pro-rata
amount of the Bonus Pool to be allocated to each Participant as determined by
the Committee.
"Bonus Pool"
means an amount determined in
accordance with the following:
1.
Upon the occurrence of an Event that is an Arbitration
Collection Event, an amount equal to one percent of the first $200 million of
the Arbitration Proceeds, plus five percent of the Arbitration Proceeds in
excess of $200 million.
2.
Upon the occurrence of an Event
that is a Mining Data Sale Collection Event, an amount equal to one percent of
the first $200 million of the Mining Data Sale Proceeds, plus five percent of
the Mining Data Sales Proceeds in excess of $200 million.
3.
Upon the occurrence of an Event
that is an Enterprise Sale Collection Event, an amount equal to one percent of
the first $200 million of the Enterprise Sale Consideration, plus five percent
of the Enterprise Sale Consideration in excess of $200 million.
For the avoidance of doubt,
the first $200 million threshold referred to above is to be applied to proceeds
or consideration received pursuant to all Events on a cumulative basis. The
Bonus Pool may include such other amounts as the Company or the Committee may
determine from time to time in its sole discretion.
“Cause”
means willful engaging in misconduct that is materially
injurious to the Company and/or any of its subsidiaries, monetarily or
otherwise.
“Change of Control Payments”
means amounts paid or payable to
employees and/or directors of the Company and its subsidiaries under those
certain Change of Control Agreements and Retention Unit Award Agreements by and
between the Company and certain employees and directors of the Company,
excluding any amounts paid or payable under such Change of Control Agreements
that are “Excess Parachute Gross-Up Payments” or “Deferred Compensation
Gross-Up Payments”, as each such term is defined under such agreements.
“Committee”
means the committee composed of one or more independent
members of the Board of Directors appointed from time to time by the Board of
Directors to administer the Plan.
"Company"
means Gold
Reserve Inc.
“Effective
Date”
means May
9, 2012.
“
Enterprise
Sale
” means the consummation of (A) a merger, plan of arrangement or other
business combination transaction involving the Company or any of its
subsidiaries, (B) a sale, pledge, transfer or other disposition of 85% or more
of the Company’s then outstanding shares of common stock, or (C) a sale,
pledge, transfer or other disposition, directly or indirectly, of all or
substantially all of the assets of the Company, that:
(i) includes the sale, pledge, transfer or other disposition,
directly or indirectly, of the Company’s rights with respect to an Arbitration
Award or the Arbitration Proceedings, provided that: (a) the Company has not
received Arbitration Proceeds, (b) the Company continues to hold rights with
respect to the Arbitration Proceedings, and (c) in the event that the Company
or its subsidiary has entered into an agreement or other arrangement with
respect to, or which constitutes, an Arbitration Award, (x) such agreement or
other arrangement provides for payments or other transfers of assets or other
non-cash consideration to the Company or its subsidiaries over time and (y) the
Company has not yet received all of such payments or transfers of assets or
non-cash consideration, and/or
(ii) includes the sale,
pledge, transfer, or other disposition, directly or indirectly, of the
Company’s rights with respect to the Mining Data, provided that: (a) the
Company has not received Arbitration Proceeds, (b) the Company continues to
hold rights with respect to the Mining Data, and (c) in the event that the
Company or its subsidiary has entered into an agreement or other arrangement
with respect to the sale, pledge, transfer or other disposition, directly or
indirectly, of all or any portion of the Mining Data, (x) such agreement or
other arrangement provides for payments or other transfers of assets or other
non-cash consideration to the Company or its subsidiaries over time and (y) the
Company has not yet received all of such payments or transfers of assets or
non-cash consideration.
Any pledge, mortgage, hypothecation or grant of a
security interest made by the Company for the purpose of financing the
Company’s operating expenses and/or expenses incurred in connection with the
Arbitration Proceedings shall not be deemed to be an Enterprise Sale.
"Enterprise Sale Consideration”
means the value of all present
and future consideration paid or otherwise
received by the Company or its shareholders pursuant to
or in respect of an Enterprise Sale, before Applicable Taxes, if any, and after
reduction for any Change of Control Payments. For the avoidance of doubt,
Enterprise Sale Consideration may include cash, commodities, bonds, shares,
dividends or any other consideration received by the Company or any of its
shareholders, including the value of all debt (or debt-like liabilities)
assumed by the buyer in the sale if it is effected as an asset sale.
“Event”
means a collection event described in clause (I), (II)
or (III) below, whichever is applicable:
(I) The collection of Arbitration Proceeds (an
“Arbitration Collection Event”), or
(II) The collection of Mining Data Sales Proceeds (a
“Mining Data Sale Collection Event”), or
(III) The collection of Enterprise Sale Consideration
(an “Enterprise Sale Collection Event”).
“Good Reason”
means any of the following conditions
arising without the consent of the Participant:
(i) a material diminution in the Participant’s base
compensation;
(ii) a material diminution in the Participant’s authority, duties
or responsibilities;
(iii) a material diminution in the authority, duties or
responsibilities of the supervisor to whom the Participant is required to
report, including a requirement that the Participant report to a corporate
officer or employee instead of reporting directly to the board of directors of
a corporation (or similar governing body with respect to an entity other than a
corporation);
(iv) a material change in the geographic location at which the
Participant must perform the services; or
(v)
any other action or
inaction that constitutes a material breach by the Company or any of its
subsidiaries of the agreement under which the Participant provides services.
Notwithstanding
the foregoing, termination of service by the Participant shall not be
considered a termination of service for Good Reason unless (A) the termination
of service occurs within two years following the initial existence of one of
more of the above conditions arising without the consent of the Participant;
(B) the Participant provides notice to the Company or its subsidiary of the
existence of the condition described above within 90 days of the initial
existence of the condition; and (C) the Board (or similar governing body of the
Company’s subsidiary) has a period of 30 days during which it may remedy the
condition. The failure of the Participant to terminate service for Good Reason
due to one of the initial conditions described above shall not affect his
entitlement to terminate service for Good Reason as to any other such condition
of Good Reason.
“
Mining
Data
” means the mine data base relating to the Brisas Project consisting of
over 900 core drill holes and assay certificates with a calculated proven and
probable 43-101 compliant audited ore reserve.
"Mining Data Sale Proceeds”
means all present and future
proceeds paid or otherwise
received by the Company or its shareholders pursuant to or in respect
of any
sale,
pledge, transfer or other disposition, directly or indirectly, of all or any
portion of the Mining Data (
excluding a
ny
pledge, mortgage, hypothecation or grant of a security interest made by the
Company for the purpose of financing the Company’s operating expenses and/or
expenses incurred in connection with the Arbitration Proceedings) after
reduction for Applicable Taxes.
For the avoidance of doubt, Mining Data Sale Proceeds
may include cash, commodities, bonds, shares, dividends or any other
consideration received by the Company or any of its shareholders, including
the value of all debt (or debt-like liabilities) assumed by the buyer in the
sale if it is effected as an asset sale.
"Participant"
means an
employee, consultant, or director of the Company or any of its subsidiaries who
is designated in writing by the Committee to be a participant in the Plan. The
Participant’s right of participation and the Company’s obligation to pay the
Bonus Amount pursuant to the Plan is unconditional on the date the Committee
selects the Participant and fixes his or her Bonus Amount, except as otherwise
provided in Section 3.1.
"Plan"
means the Gold
Reserve Inc. Bonus Plan.
2. ADMINISTRATION
OF THE PLAN
2.1 The Plan will be administered by the Committee. The Committee
shall be responsible for the operation and administration of the Plan and for
carrying out its provisions. Any declaration or act by the Committee hereunder
shall be by a resolution passed by a majority of the members of the Committee
at a duly constituted meeting of the Committee or a written resolution signed
by all members of the Committee.
2.2 The Committee in its discretion shall determine who will
participate in the Plan and fix each Participant’s Bonus Amount, of which the
aggregate of all Participants’ Bonus Amounts shall equal 100% of the Bonus Pool
as of the Effective Date. Any Bonus Amount forfeited by any Participant
pursuant to Section 3.1 below may be reallocated by the Committee, in whole or
in part, to one or more other Participants or may remain unallocated, in which
case it will be returned to the Company in accordance with Section 2.6. In
determining each Participant’s Bonus Amount, the Committee will consider the
following factors, among others:
2.2.1 the amount of time and energy spent by the Participant in
advancing the Brisas Project and/or the Arbitration Proceedings;
2.2.2 the personal and legal risks incurred by the Participant in
light of the security situation in the Bolivarian Republic of Venezuela and the general position of the Company;
2.2.3 the scale and scope of the balance of the compensation package
otherwise provided by the Company or its subsidiary to the Participant;
2.2.4 the amount of any severance the Participant would receive on
termination of service if such termination is reasonably foreseeable; and
2.2.5 any other relevant matter.
2.3 Any decision of the Committee in the operation, interpretation
or administration of this Plan shall lie within its absolute discretion and
shall be final, conclusive and binding on all parties concerned.
2.4 No member of the Committee shall be liable for anything done
or omitted to be done by such member, or by any other member of the Committee,
in connection with the performance of any duties under this Plan, except those
liabilities which arise from such member's own willful misconduct or except as
otherwise expressly provided by applicable law.
2.5 All reasonable administrative costs of the Plan shall be paid
by the Company.
2.6 The Committee shall not distribute an aggregate amount in
excess of the Bonus Pool for the applicable calendar year. Any balance
remaining in the Bonus Pool after the payment of Bonus Amounts for the
applicable calendar year shall be returned to the Company.
2.7 If a member of the
Committee is also a Participant in the Plan, such member’s participation in the
Plan shall be determined by a majority vote of the Board of Directors.
3. ELIGIBILITY FOR BONUS
AMOUNTS, DETERMINATION THAT AMOUNTS ARE PAYABLE, AND EFFECT OF DEATH
3.1 A Participant shall be eligible to receive Bonus Amounts
attributable to the Bonus Pool for the applicable calendar year, except that a
Participant whose employment or service with the Company and its subsidiaries
is terminated by the Company for Cause, or whose employment or service
terminates for a reason other than death, disability or termination by the
Participant for Good Reason, shall cease to be a Participant and shall cease to
be eligible to receive Bonus Amounts paid or payable on or after his or her
termination date.
3.2 The Committee shall have absolute discretion to determine the
Bonus Pool for each calendar year and whether any Bonus Amount is payable, and
without limitation to the foregoing, to determine whether the conditions for
the payment of Bonus Amounts have been satisfied.
3.3 Upon or following the death of a Participant, Bonus Amounts
allocated and awarded by the Committee shall be paid to the person or persons
to whom the Participant’s rights shall have passed under the Participant’s will
or pursuant to law.
3.4
Upon the occurrence of
an Event, the Company shall (a) provide written notice of such Event to each
Participant as promptly as practicable and in any event no less than two
business days following such receipt, and (b) deliver to each Participant a
reasonably detailed written statement of the Company’s calculation of the
amount of the Bonus Pool for the applicable calendar year. Such written
statement shall be certified by an officer of the Company that (x) the
calculation (and the numerical components thereof) is true and correct in all
material respects and (y) the fair market value of any non-cash assets as
determined by the Board of Directors and set forth in such written statement,
if any, is a true and correct statement of the determination made by the Board
of Directors in all material respects and the basis for such determination, if
any, as set forth in such written statement, is a true and correct description
thereof in all material respects.
P
rior to the consummation of any Enterprise Sale,
and notwithstanding anything to the contrary in Section 3.5, the Company shall
make appropriate provision so that, simultaneously with the consummation of the
Enterprise Sale, each Participant shall receive his or her Bonus Amount
attributable to the Bonus Pool for the calendar year in which such Enterprise
Sale occurs.
3.5 The Bonus Pool for the applicable calendar year, and Bonus
Amounts attributable thereto, shall be distributed as soon as reasonably
practicable during such calendar year and no later than the last day of such calendar
year.
4. NON-ASSIGNABILITY
4.1 No benefits or rights of any person under this Plan shall be
assignable or otherwise transferable, except as specifically provided in
Section 3.3 of this Plan upon the death of a Participant or as may be required
by the tax withholding provisions or other provisions of any applicable law.
5. TAX
WITHHOLDING AND SET OFF
5.1 For all purposes of this Plan and in its administration and in
connection with the declaration and payment of Bonus Amounts, the Committee may
take all such measures as it may deem appropriate or necessary to comply with
applicable laws, including, without limitation, income tax laws and regulations
and the rules of regulatory authorities having jurisdiction over the Company or
any of its subsidiaries. Without limitation to the foregoing, the Committee and
the Company, acting in good faith, may withhold and remit to the appropriate
tax authorities such sums which might otherwise be due or payable by the
Company to the recipient of a Bonus Amount, if such withholding and remittance
are required under applicable law.
5.2 Payment of a Bonus
Amount may be delayed, at the discretion of the Committee, until the Committee
is satisfied that the requirements of applicable laws and regulations, and
applicable rules of regulatory authorities, have been met.
6. GENERAL
PROVISIONS
6.1 The validity, construction and effect of this Plan, the
administration of this Plan, the award and distribution of Bonus Amounts, any
rules and regulations relating to this Plan, and all declarations and
determinations made and actions taken pursuant to this Plan, shall be governed
by and construed in accordance with the laws of State of Washington, other than
its conflicts of laws provisions.
6.2 If any provision of this Plan is or becomes, or is deemed to
be, invalid, illegal or unenforceable in any jurisdiction or as to any person,
or would disqualify this Plan under any law deemed applicable by the Committee,
such provision shall be construed or deemed amended to conform to the applicable
laws, or if it
cannot be
construed or deemed amended without,
in the determination of the Committee, materially altering the intent of this
Plan, such provision shall be stricken as to such jurisdiction or person and
the remainder of this Plan shall remain in full force and effect.
6.3 All payments made pursuant to this Plan shall be calculated
and paid in United States dollars.
6.4 Headings are given to the sections of this Plan solely as a
convenience to facilitate reference.
Such headings shall not be deemed in any way material
or relevant to the
construction
or interpretation of the Plan or any provision thereof.
6.5 Nothing in this Plan shall confer upon the Participant any
right to continue in employment or service with the Company or any of its
subsidiaries or shall interfere with or restrict in any way the rights of the
Company or any subsidiary, which are hereby reserved, to discharge the
Participant at any time for any reasons whatsoever, with or without Cause.
6.6 The Plan shall be binding on the Company, its subsidiaries
and its and their successors and permitted assigns.
6.7 There shall be no duplication of benefits hereunder. A
Participant’s receipt of a Bonus Amount arising out of, in connection with or
with respect to an Enterprise Sale Collection Event shall be in lieu of the
Participant’s right to receive a Bonus Amount arising out of, in connection
with or with respect to an Arbitration Collection Event and/or a Mining Data
Sale Collection Event.
7. AMENDMENT
AND TERMINATION OF THE PLAN
7.1 The Plan is effective as of May 9, 2012. The Company may
amend any provision of the Plan or terminate the Plan at any time with the
written consent of at least 50 percent of the Participants.
8. CODE SECTIONS 409A AND 457A
8.1 This Plan and the Bonus Amounts provided
hereunder are intended to qualify for an exemption from Section 409A of the
U.S. Internal Revenue Code of 1986, as amended (the “Code”), and from Code
Section 457A, provided that if any Bonus Amount awarded under the Plan is not
so exempt, such Bonus Amount is intended to comply with such Code Sections to
the extent applicable thereto. Notwithstanding any provision of the Plan to
the contrary, the Plan shall be interpreted and construed consistent with this
intent. Notwithstanding the expressed intent to qualify for exemption from
Code Section 409A and from Code Section 457A or otherwise to comply with Code
Sections 409A and 457A, the Company shall not be required to assume any
increased economic burden in connection therewith. Although the Company and
the Committee intend to administer the Plan so that the Plan and the Bonus
Amounts awarded hereunder qualify for an exemption from Code Section 409A and
from Code Section 457A, if the Plan and any Bonus Amount granted under the Plan
are not so exempt, neither the Company nor the Committee represents or warrants
that the Plan or such Bonus Amount awarded hereunder will
comply
with Code Sections 409A and 457A or any other provision of federal, state, local,
or non-United States law. Neither the Company, its subsidiaries, nor its
respective directors, officers, employees or advisers shall be liable to any
Participant (or any other individual claiming a benefit through the
Participant) for any tax, interest, or penalties the Participant may owe as a
result of participation in the Plan, and the Company and its subsidiaries shall
have no obligation to indemnify or otherwise protect any Participant from the
obligation to pay any taxes pursuant to Code Sections 409A or 457A.
8.2 If any Bonus Amount awarded under the Plan
is not exempt from Code Section 409A, then this Section 8.2 shall apply.
“Employment or service terminates”, “employment or service is terminated”,
“terminates”, “termination”, “termination of service” and similar references
shall mean a separation from service as defined in U.S. Treasury Regulation
Section 1.409A-1(h). The time or schedule of any payment of any Bonus Amount
may not be accelerated except as otherwise
permitted under Code Section 409A.
Notwithstanding anything herein to
the contrary, no payment of a Bonus Amount that is payable upon a Participant’s
termination of service shall be made to any Participant who is a “specified
employee” for purposes of Code Section 409A until the earlier to occur of the
date that is six months and one day after such Participant’s termination of
service or the date of such Participant’s death (the “Delay Period”). Upon the
expiration of the Delay Period, all payments delayed pursuant to this Section
8.2 shall be paid to the Participant.
9. GROSS
UP PAYMENT
9.1 In the event any amount paid
or payable by the Company to or for the benefit of the Participant hereunder
(the “Bonus Payment”) would be subject to the additional tax or additional
interest imposed by Code Section 409A or Code Section 457A, or any interest or
penalties are incurred by the Participant with respect to such additional tax
under Code Section 409A or Code Section 457A or with respect to any Section
409A or Section 457A Underpayment (as defined below) (such additional tax and
additional interest, together with any such interest and penalties, is
collectively referred to as the “Deferred Compensation Tax”), the Company shall
pay to the Participant an additional payment (the “Deferred Compensation
Gross-Up Payment”) in an amount such that after payment by the Participant of
all taxes (including any interest or penalties imposed with respect to such
taxes), the Participant retains an amount of the Deferred Compensation Gross-Up
Payment equal to the Deferred Compensation Tax imposed on the Participant’s
Bonus Payment. For purposes of this Section 9, “Section 409A or Section 457A
Underpayment” means any underpayment of tax had the Bonus Payment been
includible in the Participant’s gross income for the taxable year in which
first deferred or, if later, the first taxable year in which such deferred
compensation was not subject to a substantial risk of forfeiture.
9.2 An independent public
accounting firm, law firm or professional consulting services provider
reasonably acceptable to the Company and the Participant (the “Accountants”)
shall make in writing in good faith all calculations and determinations under
this Section 9, including the assumptions to be used in arriving at any calculations.
For purposes of making the calculations and determinations under this Section
9, the Accountants and each other party may make reasonable assumptions and
approximations concerning the application of Sections 409A and 457A of the
Code. The Company and the affected Participant shall furnish to the
Accountants and each other such information and documents as the Accountants
and each other may reasonably request to make the calculations and
determinations under this Section 9. The Company shall bear all costs the
Accountants incur in connection with any calculations contemplated hereby. As
a result of the uncertainty in the application of Sections 409A and 457A of the
Code at the time of the initial determination by the Accountants hereunder, it
is possible that a Deferred Compensation Gross-Up Payment which will not have
been made by the Company should have been made (the “Underpayment”), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9.3 and the Participant
thereafter is required to make a payment of the Deferred
Compensation
Tax, the Accountants shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Participant.
9.3 The Participant shall notify
the Company in writing of any claim by the U.S. Internal Revenue Service that,
if successful, would require the payment by the Company of the Deferred
Compensation Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Participant is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Participant shall not pay such claim prior to the expiration of the 30-day
period following the date on which the Participant gives such notice to the
Company (or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Participant in
writing prior to the expiration of such period that it desires to contest such
claim, the Participant shall:
9.3.1 give the Company any
information reasonably requested by the Company relating to such claim,
9.3.2 take such action in
connection with contesting such claim as the Company shall reasonably request
in writing from time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company,
9.3.3 cooperate with the Company in
good faith in order effectively to contest such claim, and
9.3.4 permit the Company to
participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Participant
harmless, on an after-tax basis, for any Deferred Compensation Tax or federal,
state, local or foreign income tax (including interest and penalties with
respect thereto) imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions of this
Section 9.3, the Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole discretion, either pay
the tax claimed to the appropriate taxing authority on behalf of the
Participant and direct the Participant to sue for a refund or contest the claim
in any permissible manner, and the Participant agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, if the Company pays such claim and directs the
Participant to sue for a refund, the Company shall indemnify and hold the
Participant harmless, on an after-tax basis, from any Deferred Compensation Tax
or federal, state, local or foreign income tax (including interest or
penalties) imposed with respect to such payment or with respect to any imputed
income in connection with such payment; and provided, further, any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Participant with respect to which such contested amount is claimed to be
due is limited solely to such contested amount. Furthermore, the Company’s
control of the contest shall be limited to issues with respect to which the
Deferred Compensation Gross-Up Payment would be payable hereunder and the
Participant shall be entitled to settle or contest, as the case may be, any
other issue raised by the U.S. Internal Revenue Service or any other taxing
authority.
9.4 If,
after the receipt by the Participant of an amount advanced by the Company
pursuant to Section 9.3, the Participant becomes entitled to receive any refund
with respect to such claim, the Participant shall (subject to the Company’s
complying with the requirements of Section 9.3) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Participant of
an amount advanced by the Company pursuant to Section 9.3, a determination is
made that the Participant shall not be entitled to any refund with respect to
such claim and the Company does not notify the Participant in writing of its
intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of the Deferred Compensation Gross-Up Payment
required to be paid.
9.5 Notwithstanding anything to
the contrary in the foregoing provisions of this Section 9, (i) payment of any
Deferred Compensation Gross-Up Payment shall not be made later than December 31
of the year next following the year in which the Deferred Compensation Tax is
remitted to the taxing authority, and (ii) reimbursement of expenses incurred
due to a tax audit or litigation addressing the existence or amount of a tax
liability, whether federal, state, local or foreign, shall not be made later
than the end of the year following the year in which the taxes that are the
subject of the audit or litigation are remitted to the taxing authority, or
where as a result of such audit or litigation no taxes are remitted, the end of
the year following the year in which the audit is completed or there is a final
non-appealable settlement or other resolution of the litigation.
IN WITNESS WHEREOF, the
Company has executed this Plan through its duly authorized officer this 17
th
day of July 2012.
GOLD
RESERVE INC.
By:
/s/
Rockne J. Timm
Name:
Rockne J. Timm
Title:
Chief Executive Officer
Gold Reserve (AMEX:GRZ)
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