Gold Reserve Ltd 6-K, filed Aug 5, 2020
Gold Reserve Ltd (GDRZF)
About this 6-K
Gold Reserve Ltd filed this 6-K on August 5, 2020.
Exhibit 99.1
GOLD RESERVE INC.
June 30, 2020
Interim Consolidated Financial Statements
U.S. Dollars
(unaudited)
GOLD RESERVE INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited - Expressed in U.S. dollars)
|
June 30, 2020 |
December 31, 2019 | ||||||
| ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents (Note 4) | $ | $ | |||||
| Marketable securities (Note 5) | |||||||
| Income tax receivable (Note 10) | |||||||
| Prepaid expense and other | |||||||
| Total current assets | |||||||
| Property, plant and equipment, net (Note 6) | |||||||
| Deferred tax asset (Note 10) | |||||||
| Right of use asset | |||||||
| Total assets | $ | $ | |||||
| LIABILITIES | |||||||
| Current Liabilities: | |||||||
| Accounts payable and accrued expenses (Note 3) | $ | $ | |||||
| Lease liability | |||||||
| Contingent value rights (Note 3) | |||||||
| Total current liabilities | |||||||
| Lease liability | |||||||
| Total liabilities | |||||||
| SHAREHOLDERS' EQUITY | |||||||
| Serial preferred stock, without par value | |||||||
| Authorized: | Unlimited | ||||||
| Issued: | |||||||
| Common shares (Note 11) | |||||||
| Class A common shares, without par value | |||||||
| Authorized: | Unlimited | ||||||
| Issued and outstanding: | 2020… | 2019… | |||||
| Contributed surplus | |||||||
| Stock options (Note 9) | |||||||
| Accumulated deficit | ( |
( | |||||
| Total shareholders' equity | |||||||
| Total liabilities and shareholders' equity | $ | $ | |||||
Contingencies (Note 3)
The accompanying notes are an integral part of the interim consolidated financial statements.
Approved by the Board of Directors:
/s/ J.C. Potvin /s/ James P. Geyer
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited - Expressed in U.S. dollars)
| Three Months Ended | Six Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| INCOME (LOSS) | ||||||||
| Interest income | $ | $ | $ | |
$ | |||
| Gain (loss) on marketable equity securities | ( |
( | ||||||
| Foreign currency gain (loss) | ( |
|||||||
| Total Other Income | ||||||||
| EXPENSES | ||||||||
| Corporate general and administrative (Note 3) | ||||||||
| Contingent value rights (Note 3) | ||||||||
| Siembra Minera Project costs (Note 7) | ||||||||
| Exploration costs | ||||||||
| Legal and accounting | ||||||||
| Arbitration and settlement (Note 3) | ||||||||
| Equipment holding costs | ||||||||
| Total Expense | ||||||||
| Net loss before income tax | ( |
( |
( |
( | ||||
| Income tax benefit (Note 10) | ||||||||
| Net loss and comprehensive loss for the period | $ | ( |
$ | ( |
$ | ( |
$ | ( |
| Net loss per share, basic and diluted | ( |
( |
$ | ( |
$ | ( | ||
| Weighted average common shares outstanding, basic and diluted | ||||||||
The accompanying notes are an integral part of the interim consolidated financial statements.
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited - Expressed in U.S. dollars)
| Common Shares | Contributed Surplus | Stock Options | Accumulated Deficit | ||
| Number | Amount | ||||
| Balance, December 31, 2019 | $ |
$ |
$ |
$ ( | |
| Net loss for the period | – | ( | |||
| Balance, March 31, 2020 | |
|
|
( | |
| Net loss for the period | – | ( | |||
| Balance, June 30, 2020 | $ |
$ |
$ |
$ ( | |
| Common Shares | Contributed Surplus | Stock Options | Accumulated Deficit | ||
| Number | Amount | ||||
| Balance, December 31, 2018 | $ |
$ |
$ |
$( | |
| Net loss for the period | – | ( | |||
| Stock option compensation (Note 9) | – | ||||
| Balance, March 31, 2019 | |
|
|
( | |
| Net loss for the period | – | ( | |||
| Return of capital (Note 11) | – | ( |
|||
| Balance, June 30, 2019 | $ |
$ |
$ |
$ ( | |
The accompanying notes are an integral part of the interim consolidated financial statements.
GOLD RESERVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Expressed in U.S. dollars)
| Three Months Ended | Six Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2020 | 2019 | 2020 | 2019 | |||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss for the period | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Stock option compensation | ||||||||
| Depreciation | ||||||||
| Loss (gain) on marketable equity securities | ( |
( |
||||||
| Deferred tax | ( |
( |
||||||
| Changes in non-cash working capital: | ||||||||
| Decrease in income tax receivable | ||||||||
| Net
decrease (increase) in prepaid expense and other |
( |
( |
( |
|||||
| Net increase in payables and accrued expenses |
||||||||
| Net cash used in operating activities | ( |
( |
( |
( | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property, plant and equipment | ( |
( | ||||||
| Net cash used in investing activities | ( |
( | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Return of capital | ( |
( | ||||||
| Net cash used in financing activities | ( |
( | ||||||
| Change in Cash and Cash Equivalents: | ||||||||
| Net decrease in cash and cash equivalents | ( |
( |
( |
( | ||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | $ | $ | ||||
The accompanying notes are an integral part of the interim consolidated financial statements.
Note 1. The Company and Significant Accounting Policies:
Gold Reserve Inc. ("Gold Reserve", the "Company", "we", "us", or "our") is engaged in the business of acquiring, exploring and developing mining projects and was incorporated in 1998 under the laws of the Yukon Territory, Canada and continued to Alberta, Canada in September 2014.
Gold Reserve Inc. is the successor issuer to Gold Reserve Corporation which was incorporated in 1956. A significant portion of our recent activities relate to the execution of the July 2016 settlement agreement, (as amended, the "Settlement Agreement") with the Bolivarian Republic of Venezuela ("Venezuela") in regards to the payment of the Award (as defined herein) and the acquisition of our Mining Data by Venezuela, identifying our legal options associated with the collection of the unpaid balance of the Award and developing our future operational strategies associated with post-sanctions development of the Siembra Minera Project.
The U.S. and Canadian governments have imposed various sanctions targeting Venezuela (the "Sanctions"). The Sanctions implemented by the U.S. government generally block all property of the Venezuelan government and state-owned/controlled entities such as Siembra Minera. In addition, U.S. Sanctions prohibit U.S. persons from dealing with Specially Designated Nationals ("SDNs") and targets corruption in, among other identified sectors, the gold sector of the Venezuela economy. The Sanctions implemented by the Canadian government generally include asset freezes and impose prohibitions on dealings with certain named Venezuelan officials under the Special Economic Measures (Venezuela) Regulations of the Special Economic Measures Act and the Justice for Victims of Corrupt Foreign Officials Regulations of the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law). In addition, on March 26, 2020, the U.S. Government indicted Venezuelan President Nicolas Maduro and a number of key associates for drug trafficking. (See Note 3, Arbitral Award, Settlement Agreement and Mining Data Sale and Note 7, Empresa Mixta Ecosocialista Siembra Minera, S.A.).
Basis of
Presentation and Principles of Consolidation. These interim consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP"). The statements principally include the accounts of
the Company, Gold Reserve Corporation and three Barbadian subsidiaries one of which was formed to hold our equity interest in Siembra
Minera which is beneficially owned
Cash and Cash Equivalents. We consider 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. We manage the exposure of our cash and cash equivalents to credit risk by diversifying our holdings into various major 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. Mineral 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. Mineral 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 is recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, except for equipment not yet placed into use. Included in property, plant and equipment is certain equipment, relating to the Brisas Project that is not being depreciated as it is not in use. The ultimate recoverable value of this equipment may be different than management's current estimate. We have additional property, plant and equipment which are recorded at cost less accumulated depreciation. Replacement costs 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. Furniture, office equipment and leasehold improvements are depreciated using the straight-line method over five to ten years. The remaining property, plant and equipment are fully depreciated.
Impairment of Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the expected future net cash flows to be generated from the use or eventual 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 based on a determination of the asset's fair value. Fair value is generally determined by discounting estimated cash flows based on market participant expectations of those future cash flows, or applying a market approach that uses market prices and other relevant information generated by market transactions involving comparable assets.
Foreign Currency. The U.S. dollar is our (and our 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.
Income Taxes. We use 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.
Marketable Securities. The Company's marketable securities consist of debt securities that were classified as held for trading, and equity securities. Equity securities are reported at fair value with changes in fair value included in the statement of operations. Trading debt securities are reported at fair value with any changes in fair value included in the statement of operations.
Equity accounted investments. Investments in incorporated entities in which the Company has the ability to exercise significant influence over the investee are accounted for by the equity method.
Financial Instruments. Marketable securities are measured at fair value at each reporting date, with the change in value recognized in the statement of operations as a gain or loss. Cash and cash equivalents, prepaid expense, deposits, advances and receivables are accounted for at amortized cost which approximates fair value. Accounts payable and contingent value rights are recorded at amortized cost which approximates fair value.
Note 2. New Accounting Policies:
Recently issued accounting pronouncements
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). This update is intended to clarify certain interactions between Topics which guide the accounting for certain equity securities and investments under the equity method of accounting. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. This update is effective for us commencing with the annual period beginning after December 15, 2020, including interim periods within that year. We do not expect the adoption of this standard will have a significant impact on our financial statements.
Note 3. Arbitral Award, Settlement Agreement and Mining Data Sale:
In October 2009 we
initiated a claim (the "Brisas Arbitration") under the Additional Facility Rules of the International Centre for the
Settlement of Investment Disputes ("ICSID") to obtain compensation for the losses caused by the actions of Venezuela
that terminated our previous mining project known as the "Brisas Project." On September 22, 2014, we were granted an
Arbitral Award (the "Award") totaling $
In July 2016, we
signed the Settlement Agreement, subsequently amended, whereby Venezuela agreed to pay us a total of approximately $
To date, the Company
has received payments of approximately $
In addition to other constraints, the Sanctions restrict the Company from working with those Venezuelan government officials responsible for the payment and transfer of funds associated with the Settlement Agreement which adversely impacts our ability to collect the remaining balance of the Award plus interest and/or amounts due pursuant to the Settlement Agreement from Venezuela.
We have Contingent
Value Rights ("CVRs") outstanding that entitle the holders to an aggregate of
We maintain a bonus
plan (the "Bonus Plan") which is intended to compensate the participants, including executive officers, employees, directors
and consultants for their past and present contributions to the Company. The bonus pool under the Bonus Plan is comprised of the
gross proceeds collected or the fair value of any consideration realized less applicable taxes multiplied by
In March 2020, the U.S. Congress passed legislation which allows companies to carryback net operating losses incurred in 2018, 2019 and 2020 to offset income earned in prior years. In response to this legislation, management reduced its estimate of the income tax due on amounts received in 2018 from the sale of Mining Data and collection of the Award. The effect of this change in estimate was to increase the net proceeds from the sale of the Mining Data and collection of the Award subject to the CVR and the Bonus Plan and as a result, the Company recorded an increase in its obligation to the CVR holders and Bonus Plan participants by approximately $39 thousand and $45 thousand, respectively.
Due to U.S. and Canadian Sanctions and the uncertainty of transferring the remaining cash held in the Trust Account to bank accounts outside of Venezuela, management only considers those funds received by the Company into its North American bank accounts as funds available for purposes of the CVR and Bonus Plan cash distributions.
Following receipt, if any, of additional funds pursuant to the Settlement Agreement and after applicable payments to CVR holders and Bonus Plan participants, we expect to distribute to our shareholders a substantial majority of any remaining amounts, subject to applicable regulatory requirements and retaining sufficient reserves for operating expenses, contractual obligations, accounts payable and income taxes, and any obligations arising as a result of the collection of the remaining amount owed by Venezuela (See Note 11, Return of Capital).
Note 4. Cash and Cash Equivalents:
| Schedule of Cash and Cash Equivalents | June 30, | December 31, | ||||||
| 2020 | 2019 | |||||||
| Bank deposits | $ | $ | ||||||
| Short term investments | ||||||||
| Total | $ | $ |
Short term investments include money market funds and US treasury bills which mature in three months or less.
Payments made by Venezuela
associated with the Settlement have been deposited into a trust account (the "Trust Account") for the benefit of the
Company at Banco de Desarrollo Económico y Social de Venezuela ("Bandes Bank"), a Venezuelan state-owned development
bank. As Bandes Bank has been designated as an SDN, in 2018 the Company recorded an impairment loss on the remaining balance in
the account and considers the Trust Account to be blocked property and not recoverable for accounting purposes. The Trust Account
and the approximately $
Note 5. Marketable Securities:
| June 30, | December 31, | |||||||
| Schedule of Marketable Securities Value | 2020 | 2019 | ||||||
| Equity securities | ||||||||
| Fair value at beginning of period | $ | $ | ||||||
| Increase (decrease) in fair value | ( | |||||||
| Fair value at balance sheet date | $ | $ | ||||||
Marketable equity securities are classified as trading securities and accounted for at fair value, based on quoted market prices with unrealized gains or losses recorded in the Consolidated Statements of Operations.
Accounting Standards Codification ("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. The fair values of the Company's marketable equity securities as at the balance sheet date are based on Level 1 inputs.
Note 6. Property, Plant and Equipment:
| Schedule of Property Plant and Equipment | Accumulated | |||||
| Cost | Depreciation | Net | ||||
| June 30, 2020 | ||||||
| Machinery and equipment | $ | $ | $ | |||
| Furniture and office equipment | ( |
|||||
| Transportation equipment | ( |
|||||
| Leasehold improvements | ( |
|||||
| Mineral property | ||||||
| $ | $ | ( |
$ | |||
| Accumulated | ||||||
| Cost | Depreciation | Net | ||||
| December 31, 2019 | ||||||
| Machinery and equipment | $ | $ | $ | |||
| Furniture and office equipment | ( |
|||||
| Transportation equipment | ( |
|||||
| Leasehold improvements | ( |
|||||
| Mineral property | ||||||
| $ | $ | ( |
$ |
Machinery and equipment consists of infrastructure and milling equipment originally intended for use on the Brisas Project. We evaluate our equipment to determine whether events or changes in circumstances have occurred that may indicate that the carrying amount may not be recoverable. We regularly obtain comparable market data for similar equipment as evidence that fair value less cost to sell is in excess of the carrying amount. No impairment write-downs of property, plant and equipment were recorded during the six months ended June 30, 2020 and 2019.
In October 2016, together with an affiliate of the government of Venezuela, we established Siembra Minera. The primary purpose of this entity is to develop the Siembra Minera Project, as defined below.
Siembra Minera
is beneficially owned
On March 16, 2018,
the Company announced the completion of a technical report for the Preliminary Economic Assessment ("PEA") for the Siembra
Minera Project in accordance with Canadian National Instrument 43-101 - Standards of Disclosure
for Mineral Projects which included, among other information, resource estimates, pit design, mine plan, flowsheet design, design
criteria, project layout, infrastructure requirements, capital and operating estimates. The Company has directly incurred the costs
associated with the Siembra Minera Project outside of Siembra Minera, which beginning in 2016 through June 30, 2020, amounted to
a total of approximately $
In addition to other constraints, the Sanctions restrict the Company from working with those Venezuelan government officials responsible for the operation of Siembra Minera and the development of the Siembra Minera Project which, until Sanctions are lifted, obstructs our ability to develop the Siembra Minera Project as originally planned.
Note 8. KSOP Plan:
The KSOP Plan, adopted
in 1990 for retirement benefits of employees, is comprised of two parts, (1) a salary reduction component, and a 401(k) which includes
provisions for discretionary contributions by us, and (2) an employee share ownership component, or ESOP. Allocation of Class A
common shares or cash to participants' accounts, subject to certain limitations, is at the discretion of the Board. There have
been no Class A common shares allocated to the KSOP Plan since 2011. Cash contributions for plan year 2019 were approximately $
Equity Incentive Plans
The Company's equity
incentive plan provides for the grant of stock options to purchase up to a maximum of
Stock option transactions for the six months ended June 30, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||
| Options outstanding - beginning of period | $ |
$ |
||||
| Options expired | ( |
|
||||
| Options outstanding - end of period | $ |
$ |
||||
| Options exercisable - end of period | $ |
$ |
||||
Stock Options Outstanding and Exercisable
| Outstanding Options | Exercisable Options | ||||||||
| Exercise Price | 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) | |
| $ |
$ |
$ |
$ |
$ |
|||||
| $ |
$ |
$ |
|||||||
| $ |
$ |
$ |
|||||||
| $ |
$ |
$ |
|||||||
| $ |
$ |
$ |
|||||||
| $ |
$ |
$
|
$ |
$
|
|||||
No options were
granted during the six month periods ended June 30, 2020 and 2019. The Company recorded non-cash compensation expense during the
six months ended June 30, 2020 and 2019 of approximately
Change of Control Agreements
The Company maintains
change of control agreements with certain officers and employees. A Change of Control is generally defined as one or more of the
following: the acquisition by any individual, entity or group, of beneficial ownership of the Company of 25 percent of the voting
power of the outstanding Common Shares; a change in the composition of the Board that causes less than a majority of the current
directors of the Board to be members of the incoming board; reorganization, merger or consolidation or sale or other disposition
of all or substantially all of the assets of the Company; liquidation or dissolution of the Company; or any other event the Board
reasonably determines constitutes a Change of Control. As of June 30, 2020, the amount payable under the change of control agreements,
in the event of a Change of Control, was approximately $
Note 10. Income Tax:
Income tax benefit for the six months ended June 30, 2020 and 2019 differs from the amount that would result from applying Canadian tax rates to net income before taxes. These differences result from the items noted below:
| 2020 | 2019 | |||
| Amount | % | Amount | % | |
| Income tax benefit based on Canadian tax rates | $ |
$ |
||
| Decrease due to: | ||||
| Different tax rates on foreign subsidiaries | ( |
( |
( |
( |
| Non-deductible expenses | ( |
( |
||
| Change in valuation allowance and other | ( |
( |
( |
( |
| $ |
$ - | |||
The Company recorded income
tax benefit of $
The components of the Canadian and U.S. deferred income tax assets and liabilities as of June 30, 2020 and December 31, 2019 were as follows:
| June 30, | December 31, | |||
| 2020 | 2019 | |||
| Deferred income tax assets | ||||
| Net operating loss carry forwards | $ | $ | ||
| Property, Plant and Equipment | ||||
| Other | ||||
| Valuation allowance | ( |
( | ||
| $ | |
$ | | |
| Deferred income tax liabilities | ||||
| Other | ( |
( | ||
| Net deferred income tax asset | $ | $ |
At June 30, 2020, we had the following U.S. and Canadian tax loss carry forwards stated in U.S. dollars.
| U.S. | Canadian | Expires | ||
| $ | $ |
2026 | ||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| 2031 | ||||
| 2032 | ||||
| 2033 | ||||
| 2034 | ||||
| 2035 | ||||
| 2036 | ||||
| 2037 | ||||
| 2038 | ||||
| 2039 | ||||
| 2040 | ||||
| - | ||||
| $ | $ |
Note 11. Return of Capital:
In June 2019, the Company completed a return of capital transaction by way of a court-approved plan of arrangement transaction under the Business Corporations Act (Alberta) which required approval by the Alberta Court of Queen’s Bench and at least two-thirds of the votes of shareholders. Pursuant to the plan of arrangement, the Company returned to holders of its Class A common shares approximately million or per Class A Share.