UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-17106
LKA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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91-1428250
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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3724 47
th
Street Ct. N.W.
Gig Harbor, Washington 98335
(Address of principal executive offices)
(253) 514-6661
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:
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Large accelerated filer [ ]
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Accelerated filed [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second quarter.
The market value of the voting and non-voting common stock is $8,385.85, based on 8,385,845 shares held by non-affiliates. Because there is no “established public market” for the issuer’s common stock, the issuer has arbitrarily valued these shares at par value of $0.001 per share.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Not applicable.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
As of March 27, 2012, the registrant had 16,534,422 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Part IV, Item 15.
PART I
FORWARD LOOKING STATEMENTS
In this Annual Report, references to “LKA International,” “LKA,” the “Company,” “we,” “us,” “our” and words of similar import) refer to LKA International, Inc., a Delaware corporation, the registrant.
Statements made in this Form 10-K which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of LKA. Such forward-looking statements include those that are preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in this Annual Report: general economic or industry conditions nationally and/or in the communities in which we conduct business; fluctuations in global gold and silver markets; legislation or regulatory requirements, including environmental requirements; conditions of the securities markets; competition; our ability to raise capital; changes in accounting principals, policies or guidelines;
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financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory and technical factors affecting our operations, products, services and prices.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. LKA does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
ITEM 1. BUSINESS
Business Development
LKA International, Inc. was incorporated on March 15, 1988, in the State of Delaware. Since our inception, our authorized capital has been 100,000,000 shares, consisting of 50,000,000 shares of common stock with a par value of one mill ($0.001) per share, and 50,000,000 shares of preferred stock, also with a par value of one mill per share. LKA owns certain real and personal property interests including patented and unpatented mining claims, water rights, buildings, fixtures, improvements, equipment, and permits situated near Lake City, Colorado, which are described below. LKA's activities associated with these properties have been sporadic since they were acquired by its predecessor in December, 1982.
Effective as of July 2, 2009, LKA and PanAmerica Capital Group, a Panama corporation (“PanAmerica”) executed a Subscription Agreement by which LKA issued to PanAmerica a promissory note in the principal amount of $545,090, and bearing interest at 10 percent per year (the “Promissory Note”). The outstanding principal and interest on the Promissory Note are payable in five equal installments. The first installment was due on January 4, 2010, and each subsequent installment was due on the date that was three months after the due date of the immediately preceding installment. In lieu of the payment of principal and interest as outlined above, PanAmerica may elect to receive all or a portion of each installment in cash amounts equivalent to the value of 140 troy ounces of gold as determined by the closing spot price of gold on COMEX on the business day immediately preceding the due date of such installment. LKA’s obligations under the Promissory Note are secured by the Company’s mining properties.
As of the date of this Report, the Company has paid 60% of the amount owing to PanAmerica under the first installment on the Promissory Note. Interest is accumulating on the remaining 40%. LKA is currently delinquent on all remaining principal and interest payments on the Promissory Note, and as of the date of this Report, PanAmerica has not declared LKA in default and has refrained from any formal collection or foreclosure efforts.
The Lake City, Colorado Properties.
The Ute-Ule silver mine and milling facility and the Golden Wonder gold mine (respectively, the "Ute-Ule Property" and the "Golden Wonder Property" or, collectively, the "Properties"), consist of certain patented and unpatented mining claims and a milling facility located in Hinsdale County, Colorado. In December, 1982, our predecessor, LKA Holdings, Inc., a Utah corporation ("LKA Utah") acquired a 51% interest in the Properties from Lake City Mines, Inc., a Colorado corporation ("Lake City Mines"), which retained the remaining 49% interest. Immediately after the acquisition, LKA Utah assigned 90% of its interest in the future proceeds that it had the right to receive from the Properties to Caldera Partners Limited Partnership, a Washington limited partnership ("Caldera") in return for approximately $1.6 million, which LKA used to develop the Properties. As a result, Caldera owned a 45.9% interest in the future proceeds that LKA Utah had the right to receive on the Properties. LKA's President, Kye A. Abraham, is Caldera's Managing Partner. Subsequent to a bankruptcy filing by Lake City Mines in February 1984, LKA acquired Lake City Mine’s interest in the Properties through a Sheriff’s sale.
On March 1, 2005, the Company completed the acquisition of Caldera's 45.9% interest in the Golden Wonder and Ute Ule mines. Per the terms of the agreement, the Company agreed to issue Caldera 6,434,042 "unregistered" and "restricted" shares of common stock in exchange for Caldera's interest in the mines and the full satisfaction of all receivables due to Caldera from the Company. Caldera was also relieved of any future obligations to contribute further exploration and construction funds. For more information on this transaction, see the Company's Current
Report on Form 8-K, dated March 3, 2005, and filed with the Securities and Exchange Commission on March 4, 2005.
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Description of Business
LKA is currently engaged in an intensive exploration program at the Golden Wonder mine with the objective of returning the mine to a commercial producing status. The exploration program, which began in November, 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. Exploration efforts are aimed at extending the zones (veins) within the mine that previously produced over 133,701 ozs. (82% of which came during the period of 2002-2006 at an average ore grade of 16.01 ozs. gold per ton). As the Golden Wonder vein system typically pinches and swells, horizontally as well as vertically, LKA’s objective/challenge will be to locate consistent vein widths within these high-grade zones to establish significant reserves to resume commercial production. Drilling and drifting along the vein structure has been the primary method of exploration to date. LKA expects to incorporate geochemical analysis, mapping (surface and underground) and other methods of exploration as its budget permits. Since resuming operations in the first quarter of 2009, LKA has, as of the date of this Report, shipped and/or sold 13 bulk ore samples containing over 2,040 ounces of gold derived from exploratory mining operations. Ore shipments for 2009, 2010 and 2011 are as follows:
Tons
Oz/ton
Gold (Oz)
2009 88 3.82 337
2010 559 1.07 599
2011
539 1.46 787
Ore shipments in transit or process may not result in receivables or finalized payment (“settlement”) at year end. Details of any such shipments will be reported in the subsequent quarter. Sales of ore have offset a significant portion of the cost of the current exploration program. To date, all ore shipments have been made to Teck, Yukon- Nevada Gold and Kinross. Currently there are no established reserves and all of LKA’s efforts are exploratory in nature. In August, 2010, LKA entered into a Mine Operating Agreement (the “Operating Agreement”) with Coal Creek Construction (“Coal Creek”). The Operating Agreement calls for Coal Creek to provide mine operating services, including mining and underground construction, blasting, crushing, bagging, hauling, loading and transporting of ore and associated waste material to locations specified by LKA. Per the Operating Agreement, Coal Creek is to pay all Mine Operator Services Expenses and is entitled to reimbursement for such expenses from LKA, provided LKA has received sufficient monies from ore sales. LKA is responsible for payment of costs associated with vehicles it provides for the project (including insurance and maintenance) property and production taxes, mining claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation bonds. LKA will also pay all liabilities associated with the Golden Wonder Property which were incurred prior to the date of the Operating Agreement. In exchange for providing Mine Operator Services
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Coal Creek is entitled to a payment equal to twenty percent of the project's net profits, or Net Smelter Receipts less deductions for Mine Operator Services, Royalties and Project-related Expenses, provided that Coal Creek has performed its service obligations and is current with its financial obligations and all other terms of its agreement with LKA. During the calendar years ended December 31, 2011, and 2010, LKA paid Coal Creek $529,000 and $226,708, respectively, in advances toward Mine Operator Services and accrued an additional $83,289 and $123,931 in estimated remaining reimbursable expense related to its ore shipment in December 2011 and 2010.
Principal Products or Services and their Markets
We do not currently have any products or services.
Distribution Methods of the Products or Services
None; not applicable.
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Status of any Publicly Announced New Product or Service
None; not applicable.
Competitive Business Conditions and Our Competitive Position in the Industry and Methods of Competition
Management believes that there are literally thousands of non-operating mining companies such as LKA. We believe that our competitive position in the industry will be very insignificant.
Sources and Availability of Raw Materials and Names of Principal Suppliers
We do not use any raw materials, as we do not directly conduct any material operations.
Dependence on One or a Few Major Customers
None; not applicable.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including
Duration
We have obtained "110d" limited impact permits from the Colorado Division of Reclamation Mining and Safety and have posted reclamation bonds to ensure the clean-up of environmental disturbances on the Ute-Ule and Golden Wonder Properties. Storm water and discharge permits have also been issued for the above properties by the Colorado Department of Public Health and Environment. We are currently in compliance with all applicable permit and bonding requirements.
Need for any Governmental Approval of Principal Products or Services
None; not applicable.
Effect of Existing or Probable Governmental Regulations on our Business
We are subject to the following regulations of the SEC and applicable securities laws, rules and regulations:
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K applicable to larger companies.
Sarbanes/Oxley Act
We are also subject to the Sarbanes/Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act has substantially increased our legal and accounting costs.
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Exchange Act Reporting Requirements
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders at special or annual meetings thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.
We are also required to file Annual Reports on SEC Form 10-K and Quarterly Reports on SEC Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on SEC Form 8-K.
Research and Development Costs During the Last Two Fiscal Years
We have not spent any money on research and development in the past five years and we do not plan to make any such expenditures in the foreseeable future.
Cost and Effects of Compliance with Environmental Laws
As the owner of permits pertaining to the Properties, we are subject to many federal, state and local laws and regulations relating to environmental quality. For example, any mining operations conducted on the Properties must comply with federal and state laws and regulations that protect the quality of surface water and groundwater.
The Colorado Division of Reclamation Mining and Safety (the "Division") requires mine operators to have permits to conduct mining activities in Colorado. The Division also requires operators to obtain a reclamation bond to ensure the clean-up of disturbances on mining properties and conducts regular inspections to make sure that the operators are in compliance with applicable environmental laws and regulations. We have obtained all necessary bonds and permits required by the State of Colorado and believe that we are in compliance with all laws and regulations in this regard. However, we can provide no assurance as to the impact on LKA of any future environmental laws or regulations or any governmental interpretation of existing or future laws or regulations.
The Federal Bureau of Land Management (the "BLM") has advised us of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that we do not own. The BLM has commissioned and obtained an engineering evaluation and cost analysis ("EE/CA") report on the Ute-Ule and the neighboring public lands. This EE/CA, which was prepared by Harding ESE, Inc., analyzes the current environmental state of the Ute-Ule Property and other properties in the area. The EE/CA has identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present. The total clean-up costs on all of these properties are estimated at approximately $7 million, with the projected clean-up cost of the Ute-Ule alone estimated at approximately $4,317,000. A later report commissioned by the BLM entitled “
Value Engineering Study on the Ute Ulay Mine/Mill Site – Final Report” dated January 5, 2006 projected these costs to be approximately $2.1 million. Management believes that due to LKA’s status as a de minimus participant, the Company’s actual costs associated with this effort will be substantially below BLM estimates. Under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the BLM and EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the owner.
As of the date of this Report, management has had several meetings with the BLM and the Solicitor General's office in an effort to negotiate a settlement of this matter. The Company and the BLM remain in the process of discussing and deliberating the purported environmental impacts as discussed in the engineering evaluation and cost analysis report commissioned by the BLM. No determination of an overall site clean-up plan has yet been made by the BLM. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA's share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. We can not accurately predict what our ultimate liability, if any, will be. If we are unsuccessful in reaching a cost effective
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arrangement with the BLM and are held responsible for the entire amounts associated with the cleanup the financial consequences could render the Company insolvent.
Number of Total Employees and Number of Full Time Employees
Kye A. Abraham is LKA's only full-time employee. Nanette K. Abraham is a part-time employee and assists with bookkeeping and administrative work.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for smaller reporting companies.
ITEM 2: PROPERTIES
We own a 100% interest in the Ute-Ule and Golden Wonder Properties. The Company is entitled to receive all lease and royalty payments on these Properties. We are currently engaged in exploration and limited production at the Golden Wonder mine.
Both the Ute-Ule silver mine and the Golden Wonder gold mine are vein type deposits associated with volcanic activity occurring millions of years ago during a turbulent period known in geology as Tertiary time. During this violent geologic era, most of the known precious metal mines in the State of Colorado were formed along a southwest to northeast channel or narrow band approximately 20 miles wide, which stretches in a diagonal trend from Durango in the southwest to Boulder County in the northeast. This zone has been called the Colorado Mineral Belt. Lake City, Colorado lies astride this mineral belt in a topographical cul de sac 57 miles southwest of Gunnison, Colorado.
Each Property is described below.
Ute-Ule Group.
The Ute-Ule Property consists of 23 patented mining
claims located approximately four miles west of Lake City, Colorado. These are highly mineralized silver-lead-zinc mines with excellent access via a gravel road that is maintained year-round by the County of Hinsdale. This road goes from the Property to Lake City and from Lake City a blacktop road (State Highway 149) extends northward approximately 46 miles to an intersection with U.S. 50, about nine miles west of Gunnison, Colorado.
This Property has a long history of mineral extraction dating back to the nineteenth century. Most of this extraction (silver, lead and zinc) occurred between 1874 and 1903. Currently, LKA has no plans to resume mining operations at this property and is engaged in discussions with Hinsdale County, Colorado to donate certain of the historic buildings on the site. To date, no formal agreements have reached and we cannot predict what, if any, benefits to the Company would be realized.
The Ute-Ule Property is the subject of an EE/CA which identifies certain environmental hazards on the property. We are in the process of negotiating a settlement of this matter with the Bureau of Land Management and the Solicitor General. See the heading “Costs and Effects of Compliance with Environmental Laws” of Part I, Item 1 of this Report; and the caption “Legal Proceedings,” Part I, Item 3 of this Report.
On November 23, 2011, LKA signed a non-binding Letter of Intent to transfer ownership of the historic Ute-Ulay town & mill sites to Hinsdale County, Colorado. The properties are located on the Company's Ute-Ulay mining claims just off Engineer Pass approximately four miles west of the town of Lake City, CO. The agreement, which is a non-binding statement of intent, calls for LKA's donation of the land, historic buildings, and structures that comprise the original Ute-Ulay mining camp to the County for preservation and public display purposes. The initial
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phase of the donation would involve a four-acre parcel of land located within LKA's 285-acre, historic Ute-Ulay Mine complex on Henson Creek and referred to as the Ute-Ulay "Townsite." The site includes the mine's original boarding house, two log cabins, various storage buildings, mine headframe, and an original redwood water tank. The second phase of the donation, expected later this year, will consist of the land, buildings and structures known as the Ute "Millsite" and includes the original blacksmith shop, assay lab, powerhouse and mill buildings. Some of these structures date back to the late 1800s when 250-300 miners worked the rich silver veins of Ute and Ulay mines, the first significant silver discovery in the Lake City mining district. The mines and mill were the primary catalyst for the establishment of Lake City, the seat of Hinsdale County, and home to most of the miners who worked the mines intermittently from 1874-1940. The intent of LKA's donation is to enable Hinsdale County to restore and preserve one of the only remaining mining camps left in Colorado. The property transfer and restoration process is becoming a reality through the on-going cooperative efforts of certain key people within state, county, and federal agencies, notably the Hinsdale County Commissioners, Colorado Department of Public Health & Environment, Division of Reclamation Mining & Safety, Bureau of Land Management, and the EPA. It is not yet clear as to what, if any, impact this will have on LKA’s on-going discussions with the BLM concerning the reclamation of these properties.
The Ute Mill.
A 100 ton-per-day flotation mill, including various equipment and support facilities, exists on the Ute-Ule Property. The mill is located at the level of the main haulage tunnel of the Ute mine. It is in satisfactory condition and was used effectively by LKA Utah to mill ore from the Golden Wonder mine during a 1984 pilot production program. The mill is also ideally suited for the processing of ore from the Ute-Ule mines.
Since the mill is the only one in the Lake City mining district and construction of another mill of this size would be possible only at substantial cost and subject to considerable environmental constraints, management believes that LKA could derive income from custom milling or the sale of the mill if mining is successfully revived in the district.
Water for milling and the power needs of the mill has historically been available through water rights pertaining to the Property. Although we believe the Property is currently in compliance with applicable laws and regulations, any future operations at the mill may require additional settling ponds and additional treatment of waste water may be required to preserve water quality. We do not believe that these requirements would impose an undue burden on us. Substantial additional funding would be required to make the mill operational. The Company has no current plans in this regard. The Ute mine and milling facility are currently inactive and the Company has no immediate plans to resume operations. The status of these properties however could change based upon certain business and regulatory conditions. Permits for these properties are in a state of “temporary cessation.”
Golden Wonder.
Geology
Physical, structural and petrologic characteristics of this rhyolite intrusion observed in the underground workings of the Golden Wonder mine demonstrates features characteristic of both an extrusive and intrusive magma, and it is believed that the workings of the Golden Wonder mine are located in the upper reaches of the rhyolitic intrusion where it “welled out” from its vent source, gradually becoming more intrusive in character with depth. It undoubtedly extends downward along its vent source to the original magma chamber from whence it was derived. As observed in the underground workings of the Golden Wonder mine. Based on extensive underground and field work, it would appear that the intrusion of the Golden Wonder host rock occurred in a series of pulses. Molten magma moved upward along the vent structure wherein it was emplaced, and solidified. Oftentimes it appears that the rock unit was only partially solidified when it was deformed by another upward pulse of magma, thereby creating very complex flow-banding within the partially solidified rock. In some instances, the rock unit appears to have been completely solidified, only to have been brecciated by a later pulse of magmatic injection, with fluid magma flowing around these brecciated fragments. In all instances observed, the composition of the magma remained essentially the same throughout its entire emplacement, suggesting the vein structure and the characteristics of the vein mineralization at the Golden Wonder mine is very much different from nearly all the other base-metal mines of the Lake City area, and even differs from that which apparently existed at the Golden Fleece mine. Instead of being of the classic fracture-filling type, where a more-or-less well-defined linear fracture, or set of open fractures, has been filled with ore minerals and gangue, the vein structure at the Golden Wonder mine usually
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does not follow a well-defined fracture, but in detail is often quite sinuous, enlarging and contracting along its course. Very commonly, the vein dies out completely and most often, a similar en echelon vein segment is located a relatively short distance away. The vein structure typically ranges from only a fraction of an inch thick to several feet across, but may enlarge significantly within ore shoots.
The Golden Wonder, near Lake City, Colorado, is located in the historic “Colorado Mineral Belt” from which over 25 million ounces of gold have been produced dating back to the mid 1800s.
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History
The Golden Wonder Property consists of three patented and 25 unpatented mining claims located approximately 2- 1/2 miles south of Lake City, Colorado The mine has been worked intermittently since its discovery in 1880. The mine is at an elevation of 10,323 feet and is situated on a hill slope approximately 1,500 feet above the valley floor. The initial discovery was made after finding high grade float in the surface containing free gold. A limited body of ore was mined prior to 1889. The Golden Wonder Property was generally unworked through 1930. From 1930 to 1969, sporadic mining and exploration efforts were conducted, some of which resulted in the extraction of an undetermined amount of gold bearing ore.
During the summer of 1969, Southern Union Production Company ("Supron") began an exploration program at the Golden Wonder. Out of this, the SUPCO winze (a steeply inclined passageway connecting the mine workings) was started in the winter of 1970-1971 and completed to a depth of approximately 150 feet below the third level of the mine, with lateral drifting along the course of mineralization off the winze on the fourth level. Work was halted on the property in 1972, when Supron decided to discontinue all its metallic mineral operations in the western United States and South America. In 1973, Rocky Mountain Ventures secured a lease on the Property and shipped a small tonnage of dump material to a mill then operating at Crested Butte, Colorado for processing. Lake City Mines, Inc. acquired the property from Supron in 1977 and conducted extensive underground work including the driving of the 1,600’ sixth level crosscut. LKA acquired an undivided 51% interest in the property in 1982 and commenced exploration shortly thereafter. During this exploration program a limited amount of ore was produced and shipped to the Ute mill for concentrating and later sold to ASARCO as a part of a pilot production program. The mine was shut down shortly thereafter due to falling gold prices. In 1997, Au Mining leased the mine from LKA and commercially produced ore through the second quarter of 2006. Upon terminating its relationship with Au Mining, LKA received an $18 million joint venture proposal from Cambior, Inc. to conduct exploration, establish reserves and, assuming success, resume commercial production. Cambior was acquired by IAM Gold in late 2006, before the joint venture agreement was finalized. In 2007, LKA was offered and finalized a similar joint venture arrangement ($18 million for 50% interest) with Richmont Mines, Inc. In 2008, a program of underground drilling and drifting was proposed and commenced but never completed by Richmont due to cost overruns and inconclusive results from initial drilling efforts. LKA resumed exploration efforts on its own in late 2008, which continue to the present date. Substantial underground drilling and drifting has been performed, resulting in the sale of limited quantities of ore containing over 2000, ounces of gold. Ore sales have been made to Teck Resources, Kinross and Yukon-Nevada Gold. To date, no commercial reserves have been established. Power for mining operations is generated on site. Unpatented claims
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held by LKA (which may vary in number from year to year) are maintained on Bureau of Land Management property through payment of annual assessment fees.
Commercial Ore Production
The Golden Wonder has been explored and developed by drifts on six different levels, with raises and winzes connecting the lower levels. In 1984, LKA conducted a five-month pilot production program that resulted in the sale of approximately $590,000 of gold concentrates to ASARCO. The average grade of the ore produced during the pilot program was 0.96 ounces of gold per ton and the average gold price at that time was $325 per ounce. The majority of this production was derived from two stopes on the mine's fourth level, which consistently averaged one ounce of gold per ton. Commercial quantities of gold were also taken from the mine's fifth level. From 1997 until the second quarter of 2006, commercial mining operations were conducted by Au Mining, LLC, which leased the mine from LKA. During this period, approximately 8,349 tons of ore containing 133,701 ounces of gold were produced from the mine's fifth, sixth and seventh levels. The average grade of the ore produced during this period was 16.01 ounces of gold per ton. The average gold price during the period in which the ore was sold was $337.76. Total gold production from the mine under LKA’s ownership has been approximately 137,558 ounces. The average grade of all ore produced during this period was 14.15 ounces per ton.
Office Space.
We currently lease approximately 750 square feet of office space located at 3724 47th Street Ct. N.W., Gig Harbor, Washington. Effective as of January 1, 2005, we paid monthly rent of $1,300 to Abraham & Co., Inc. a FINRA member broker/dealer which is controlled by our President, Kye A. Abraham. This rent includes the use of the office space, bookkeeping services, telephone, office supplies, utilities, internet, computers and photocopiers. The lease arrangement is a month-to-month oral lease with Abraham & Co. and the payment amount increased to $1,500 per month in 2007 to keep pace with increased costs.
ITEM 3: LEGAL PROCEEDINGS
Except as discussed below, LKA is not the subject of any pending legal proceedings and, to the knowledge of management, no proceedings are presently contemplated against LKA by any federal, state or local governmental agency.
As of the date of this Report, management has had several meetings with the BLM and the Solicitor General's office in an effort to negotiate a settlement of the Ute-Ule – BLM remediation matter. The Company and the BLM remain in the process of discussing and deliberating the purported environmental impacts as discussed in the engineering evaluation and cost analysis report commissioned by the BLM. No determination of an overall site clean-up plan has yet been made by the BLM. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA's share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. We are currently in the negotiating stages of this process and we can not accurately predict what our ultimate liability, if any, will be. If we are unsuccessful in reaching a cost effective arrangement with the BLM and are held responsible for the entire amounts associated with the cleanup the financial consequences could render the Company insolvent.
ITEM 4: MINE SAFETY DISCLOSURES
None; not applicable.
10
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There is no “established trading market” for our shares of common stock. Our shares of common stock are quoted by the OTC Markets Group Inc. of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “LKAI”; however, management does not expect any established trading market to develop in our shares of common stock unless and until we have material operations. In any event, no assurance can be given that any market for our common stock will develop or be maintained. If a public market ever develops in the future, the sale of shares of our common stock that are deemed to be “restricted securities” pursuant to Rule 144 of the SEC by members of management or others may have a substantial adverse impact on any such market. All current holders of shares of our common stock have satisfied the six-month holding period requirement of Rule 144; these listed persons’ shares are subject to the resale limitations outlined below under the heading “Rule 144.”
Set forth below are the high and low closing bid prices for our common stock for each quarter of 2009 and 2010. These bid prices were obtained from OTC MarketsGroup Inc. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
|
|
| |
|
Period
|
High
|
Low
|
|
|
|
|
|
January 1, 2010 through March 31, 2010
|
$0.60
|
$0.25
|
|
|
|
|
|
April 1, 2010 through June 30, 2010
|
$1.24
|
$0.43
|
|
|
|
|
|
July 1, 2010 through September 30, 2010
|
$0.91
|
$0.52
|
|
|
|
|
|
October 1, 2010 through December 31, 2010
|
$1.07
|
$0.60
|
|
|
|
|
|
January 1, 2011 through March 31, 2011
|
$0.85
|
$0.40
|
|
|
|
|
|
April 1, 2011 through June 30, 2011
|
$0.65
|
$0.22
|
|
|
|
|
|
July 1, 2011 through September 30, 2011
|
$0.40
|
$0.1111
|
|
|
|
|
|
October 1, 2011 through December 31, 2011
|
$0.65
|
$0.30
|
Rule 144
The following is a summary of the current requirements of Rule 144:
|
|
| |
|
|
Affiliate or Person Selling on Behalf of an Affiliate
|
Non-Affiliate (and has not been an Affiliate During the Prior Three Months)
|
|
Restricted Securities of Reporting Issuers
|
During six-month holding period
– no resales under Rule 144 Permitted.
After Six-month holding period
– may resell in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for equity securities, and
·
Filing of Form 144.
|
During six- month holding period
– no resales under Rule 144 permitted.
After six-month holding period but before one year
– unlimited public resales under Rule 144 except that the current public information requirement still applies.
After one-year holding period
– unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
|
|
Restricted Securities of Non-Reporting Issuers
|
During one-year holding period
– no resales under Rule 144 permitted.
After one-year holding period
– may resell in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for equity securities, and
·
Filing of Form 144.
|
During one-year holding period
– no resales under Rule 144 permitted.
After one-year holding period
– unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
|
Holders
The number of record holders of the Company’s common stock as of the date of this Report is approximately 499, not including an indeterminate number who may hold shares in “street name.”
Dividends
LKA has not declared any cash dividends with respect to its common stock and does not intend to declare dividends in the foreseeable future. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
LKA INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
| |
|
|
Year Ended
|
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
$
|
(1,572,005)
|
|
$
|
(1,001,036)
|
|
Items to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation expense
|
|
35,458
|
|
|
50,750
|
|
Accretion of asset retirement obligation
|
|
3,652
|
|
|
3,396
|
|
Realized (gain) loss on investments
|
|
-
|
|
|
6
|
|
Investment proceeds
|
|
-
|
|
|
33
|
|
Loss on derivate liability
|
|
-
|
|
|
99,369
|
|
Amortization of deferred debt issue costs
|
|
-
|
|
|
36,537
|
|
Common stock options, warrants and shares issued for
services and officer bonus
|
|
1,116,451
|
|
|
-
|
|
Common stock issued for debt default expense
|
|
-
|
|
|
358,897
|
|
Amortization of debt discount
|
|
-
|
|
|
3,974
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Decrease in money market accounts
|
|
-
|
|
|
678
|
|
(Increase) decrease in prepaid and other assets
|
|
3,864
|
|
|
(10,238)
|
|
(Increase) in accounts receivable
|
|
89,384
|
|
|
(89,384)
|
|
Increase (decrease) in accounts payable and accounts payable - related party
|
|
73,912
|
|
|
78,361
|
|
Increase in accrued expenses
|
|
372,531
|
|
|
134,622
|
|
Net Cash Provided (Used) by Operating Activities
|
|
123,247
|
|
|
(334,035)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes payable – related party
|
|
-
|
|
|
(47,642)
|
|
Proceeds from convertible notes payable
|
|
-
|
|
|
200,000
|
|
Payments on derivative liability
|
|
-
|
|
|
(16,644)
|
|
Common stock issued for cash
|
|
-
|
|
|
5,000
|
|
Net Cash Provided by Financing Activities
|
|
-
|
|
|
140,714
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
123,247
|
|
|
(193,321)
|
|
CASH AT BEGINNING OF PERIOD
|
|
20,084
|
|
|
213,405
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
$
|
143,331
|
|
$
|
20,084
|
|
|
|
|
|
|
|
|
CASH PAID FOR:
|
|
|
|
|
|
|
Interest
|
$
|
300
|
|
$
|
30,505
|
|
Income Taxes
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
Reclassification of derivative liability to note payable
|
$
|
84,283
|
|
$
|
184,591
|
|
Warrants issued with convertible note
|
$
|
-
|
|
$
|
28,137
|
The accompanying notes are an integral part of these consolidated financial statements.
21
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements presented are those of LKA International, Inc. (LKA), a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation. LKA was incorporated on March 15, 1988, under the laws of the State of Delaware. LKA owns certain real and personal property interests including patented and unpatented mining claims, water rights, buildings, fixtures, improvements, equipment, and permits situated in Lake City, Colorado. LKA's activities associated with these properties have been sporadic since they were acquired by its predecessor in December, 1982. LKA exited the development stage in September 2003 as a result of the reacquisition of its interest in an operating mine near Lake City, Colorado and is currently engaged in efforts to re-establish reserves and resume commercial production in addition to seeking additional investment opportunities (See Note 11).
a.
Accounting Methods
LKA’s financial statements are prepared using the accrual method of accounting. LKA has elected a calendar year-end.
b.
Basic and Diluted Loss Per Share
LKA presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible securities, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. LKA had net losses as of December 31, 2011 and 2010, so the diluted EPS excluded all dilutive potential shares in the diluted EPS because there effect is anti-dilutive.
c.
Mine Exploration Costs
Mine exploration costs are capitalized and amortized by the units of production method over estimated total recoverable proven and probable reserves. Amortization of mineral rights is provided by the units of production method over estimated total recoverable proven and probable reserves. Costs related to locating and evaluating mineral and ore deposits, as well as determining the economic mineability of such deposits, are expensed as incurred. All costs related to mine exploration and expense were expensed due to there being no proven and probable reserves.
d.
Asset Retirement Obligations
LKA recognizes legal obligations associated with the retirement of long-lived assets at fair value at the time the obligations are incurred. Upon initial recognition of a liability, the costs are capitalized as part of the carrying amount of the related long-lived asset (see Note 3).
e.
Income Taxes
LKA files income tax returns in the U.S. federal jurisdiction, and the state of Colorado. LKA’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
22
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
e.
Income Taxes
Net deferred tax assets consist of the following components as of December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
| |
|
|
|
2011
|
2010
|
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carry forward
|
$
|
974,318
|
$
|
847,104
|
|
Accrued expenses
|
|
83,732
|
|
58,020
|
|
Valuation allowance
|
|
(1,058,050)
|
|
(905,124)
|
|
Net deferred tax asset
|
$
|
-
|
$
|
-
|
The federal income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations for the years ended December 31, 2011 and 2010 due to the following:
|
|
|
|
| |
|
|
2011
|
2010
|
|
Pre-tax book income (loss)
|
$
|
(537,482)
|
$
|
(340,352)
|
|
Meals and entertainment
|
|
721
|
|
730
|
|
Common stock, options and warrants issued for services and debt discount
|
|
379,593
|
|
123,376
|
|
Related party accruals
|
|
25,712
|
|
23,800
|
|
Penalties and other
|
|
-
|
|
262
|
|
Accretion
|
|
1,242
|
|
1,155
|
|
Net operating loss carry forward
|
|
974,317
|
|
847,104
|
|
Valuation allowance
|
|
(844,103)
|
|
(656,075)
|
|
Federal Income Tax
|
$
|
-
|
$
|
-
|
LKA had net operating losses of approximately $2,866,000 that expire 20 years from when incurred. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
f.
Cash Equivalents
LKA considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
g.
Principles of Consolidation
The consolidated financial statements include those of LKA International, Inc., a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation. All significant intercompany accounts and transactions have been eliminated.
h.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
23
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
i.
Revenue Recognition Policy
The Company recognizes revenue when persuasive evidence of an arrangement exists, goods have been delivered and title has transferred, the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue is generated through the sale of gold and silver ore and is recognized upon acceptance of ore delivery from the smelter. During the years ended December 31, 2011 and 2010, LKA recognized $851,561 and $528,845 from the delivery of gold and silver ore from the Golden Wonder mine, respectively.
j.
Securities and Investments
LKA applies the provisions of Accounting Standards Codification (“ASC”) 320, “Investments – Debt and Equity Securities”, regarding marketable securities. LKA invests in securities that are intended to be bought and held principally for the purpose of selling them in the near term, and as a result, classifies such investments as trading securities. Trading securities are recorded at fair value on the balance sheet with changes in fair value being reflected as unrealized gains or losses in the current period. In addition, LKA classifies the cash flows from purchases, sales, and maturities of trading securities as cash flows from operating activities.
k.
Stock-Based Compensation
LKA records stock-based compensation using the fair value method. Equity instruments issued to employees and the cost of the services received as consideration are accounted for in accordance with ASC 718 “Stock Compensation” and are measured and recognized based on the fair value of the equity instruments issued. All transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for in accordance with ASC 515 “Equity-Based Payments to Non-Employees”, based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
l.
Fair Value of Financial Instruments
In April 2009, the FASB extended disclosure requirements on the fair value of financial instruments to interim financial statements of publicly traded companies. The requirements are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance does not require disclosures for the earlier periods presented for comparative purposes at initial adoption. The guidance requires comparative disclosures only for periods ending after the initial adoption.
LKA adopted the new provisions related to fair value measurements and disclosures effective January 1, 2008. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the
“exit price”
) in an orderly transaction between market participants at the measurement date.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by the FASB and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.
24
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
l.
Fair Value of Financial Instruments (Continued)
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Fair valued assets that are generally included in this category are stock warrants for which there are market-based implied volatilities, unregistered common stock and thinly traded common stock.
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets carried at fair value and included in this category include stock warrants for which market-based implied volatilities are not available.
m.
New Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
n.
Reclassification of Prior Period Balances
Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2011, with no effect on previously reported net income or stockholder’s equity (deficit).
o.
Accounting for Derivative Instruments
LKA accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet.
LKA uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, LKA’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for LKA’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, LKA seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
LKA categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.
p.
Long Lived Assets
Periodically the Company assesses potential impairment of its long-lived assets, which include property, equipment and acquired intangible assets, in accordance with the provisions of ASC Topic 360, “Property, Plant and Equipment.” The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such losses recognized during 2011 or 2010.
25
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 2 -
FIXED ASSETS
Property and equipment are carried at cost, less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing assets. Maintenance and repairs are charged to current operations as incurred. Upon sale, retirement, or other disposition of these assets, the costs and related accumulated depreciation are removed from the respective accounts, and any gain or loss on the disposition is included in other income.
Depreciation expense is computed using the straight-line method over the following estimated useful lives:
|
| |
|
Description
|
Useful Life
|
|
|
|
|
Land improvements
|
Estimated life of mine
|
|
Mining equipment
|
3 – 5 years
|
|
Vehicles
|
5 years
|
Fixed assets and accumulated depreciation are as follows:
|
|
|
|
|
| |
|
|
December 31,
|
|
|
2011
|
|
|
2010
|
|
Fixed assets:
|
|
|
|
|
|
|
Land
|
$
|
376,442
|
|
$
|
376,442
|
|
Mining claims
|
|
12,137
|
|
|
12,137
|
|
Land improvements
|
|
121,846
|
|
|
121,846
|
|
Automobile
|
|
66,923
|
|
|
66,923
|
|
Mining equipment
|
|
124,976
|
|
|
123,976
|
|
Unamortized asset retirement obligation (Note 3)
|
|
98,027
|
|
|
98,027
|
|
Less: Accumulated depreciation
|
|
(218,541)
|
|
|
(183,083)
|
|
Total fixed assets
|
$
|
581,810
|
|
$
|
617,268
|
Depreciation expense for the years ended December 31, 2011 and 2010 was $35,458 and $50,750, respectively.
NOTE 3 -
ASSET RETIREMENT OBLIGATIONS
ASC 410, “Asset Retirement and Environmental Obligations”, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. LKA’s asset retirement obligations (AROs) consist of estimated costs related to the reclamation of the Golden Wonder and Ute Ule mines in correspondence with federal and state reclamation laws as defined by each applicable mine permit. The obligation and corresponding asset have been recognized in the period in which the liability was incurred. Changes in estimates could occur due to mine plan revisions, changes in estimated costs, and changes in the timing of the performance of reclamation activities.
LKA calculated its initial estimated AROs for final reclamation and mine closure based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work. Spending estimates have been escalated for inflation at 1.93% per annum, then discounted at the credit-adjusted risk-free rate of 4.09% per annum at September 18, 2003. LKA recorded an ARO asset associated with the liability and amortizes the asset over its expected life using the straight-line depreciation method. The ARO liability is being accreted to the projected spending date.
During the fourth quarter of 2004, LKA revised its assessment of the anticipated productivity of the Ute Ule mine, and determined that the mine would not be subject to further exploration or mining activity. As a result, the entire ARO asset associated with the Ute Ule mine was written off.
26
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 3 -
ASSET RETIREMENT OBLIGATIONS (CONTINUED)
On October 9, 2008, LKA received approval of its plan to add 6.4 acres to its mining permit with the State of Colorado on the Golden Wonder mine. As a result, LKA has recorded an additional asset retirement obligation totaling $41,106, which consist of estimated additional costs related to the reclamation of the Golden Wonder mine in correspondence with federal and state reclamation laws as defined by each applicable mine permit.
The Company calculated its estimated ARO for additional final reclamation and mine closure costs based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work. Spending estimates were escalated for inflation at 2.29% per annum and discounted at a credit-adjusted risk-free rate of 7.54% per annum. The Company recorded an ARO asset associated with the liability and will amortize the asset over its expected life of seven years using the straight-line depreciation method. The ARO liability addition will be accreted based on the initial projected reclamation completion date of September 30, 2016. Changes in estimates could occur due to mine plan revisions, changes in estimated costs and changes in the timing of the performance of anticipated reclamation activities.
As of December 31, 2011 and 20
10
, LKA holds reclamation bonds totaling $123,597 and $113,120, respectively, in the name of the State of Colorado (the State) for both the Ute Ule and Golden Wonder mines. These amounts are being held by the State until the mines are closed and reclamation activities begin.
Accretion expense on asset retirement obligations for the years ended December 31, 2011 and 2010 was $3,652 and $3,396, respectively.
NOTE 4 -
RELATED PARTY TRANSACTIONS
Notes Payable
Cognitive Associates Limited Partnership
LKA owes Cognitive Associates Limited Partnership $56,828 in unpaid principal from a note dated December 31, 1986. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2011. Accrued interest related to this note totaled $76,337 and $70,654 as of December 31, 2011 and 2010, respectively.
LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2011. Accrued interest related to this note totaled $9,693 and $9,096 as of December 31, 2011 and 2010, respectively.
PanAmerican Capital Group, Inc.
On July 2, 2009, LKA issued a promissory note (the Note) to PanAmerican Capital Group, Inc. (PanAmerican), a related party company, in exchange for cash of $545,090. The Note accrues interest at 10% per annum, is secured by a first charge over LKA mining property and claims in Hinsdale County, Colorado and is due in five installments, the first due the first business day of January 2010, with the remaining four due in three months intervals through January 2011. The amount of the payments are to be determined as the higher of either (i) the value of 140 ounces of gold as determined by the closing spot price on the Commodity Exchange, Inc. (COMEX) on the business day immediately preceding the installment due date, or (ii) one-fifth (1/5) of the total principal amount, together with accrued interest thereon.
During January 2010, LKA made a partial payment of $92,064 on the Note, of which $16,644 was applied against the derivative liability (see Note 7), $27,778 was applied against accrued interest and $47,642 was applied to principal.
27
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 4 -
RELATED PARTY TRANSACTIONS (CONTINUED)
Notes Payable
(Continued)
PanAmerican Capital Group, Inc. (Continued)
LKA paid commissions and due diligence fees totaling $54,509 related to obtaining the funding. Debt issue costs have been deferred and were being amortized over the life of the Note as interest expense. Amortization of debt issuance costs was $0 and $36,537 for the years ended December 31, 2011 and 2010, respectively.
Due to delays in mine production, PanAmerica agreed to allow LKA to defer a portion of the first installment payment due January 4, 2010. The second installment payment due April 5, 2010 and third installment due on July 5, 2010, were also deferred until August 15, 2010. In consideration for these payment deferrals LKA agreed to make certain additional interest payments and to provide additional collateral/security on any unpaid balances due as of August 15, 2010. LKA and PanAmerican entered into a Waiver Agreement on June 10, 2010 whereby PanAmerican waived its Enforcement Rights with respect to the delinquent payments on the Note in consideration for the following:
(a)
LKA must pay all amounts payable in respect of the installment payments otherwise due under the Note on January 4, 2010, April 5, 2010 and July 5, 2010 to PanAmerican on or before August 15, 2010;
(b)
on or before August 15, 2010, LKA must pay to PanAmerican, in addition to the amounts otherwise payable under subsection (a) above, an amount equal to 2% per month of any unpaid installment payments, calculated with respect to any such unpaid installment payment, from the date such installment payment was otherwise due; and
(c)
(i) LKA must issue to PanAmerican one unregistered
and restricted
share of LKA common stock for each dollar of unpaid installment payments otherwise due as of the date of the Waiver Agreement; and (ii) on July 5, 2010, issue to the PanAmerican one unregistered and restricted
share of LKA common stock for each dollar of the installment payment otherwise due as of July 5, 2010. The shares are to be held by PanAmerican as security and are to be surrendered to LKA for cancellation upon satisfaction of the Borrower of the obligations set forth in (a) and (b) above. In circumstances where such obligations are not satisfied the Holder shall be entitled to retain such Shares as beneficial owner thereof provided that such retention shall not otherwise relieve the Borrower from its obligations under the Note or the Waiver Agreement.
As a result of LKA’s failure to pay the required installment payment on August 15, 2010, 220,453 and 169,652 shares of LKA common stock were surrendered to PanAmerican with a fair value of $358,897. The fair value of these shares was recorded as debt default expense for the year ended December 31, 2010.
LKA failed to make the required final note installment payment due January 4, 2011. To-date, PanAmerican has not made any demands on the past due installments and LKA continues to pursue a resolution with the debt holder. As a result of the Waiver Agreement and payment defaults, LKA has reclassified a total of $268,873 in accrued derivative liability related to the past due Note payments to the remaining original $497,448 note principal and has accrued interest at a rate of 2% per month, for the period from the dates of note defaults through December 31, 2011. Total accrued interest on the Waiver Agreement and past due note balance was $258,478 and $74,560 at December 31, 2011 and 2010, respectively. Interest expense on the Note totaled $183,917 and $91,496 for the years ended December 31, 2011 and 2010, respectively.
.
Office Space
LKA pays a company owned by an officer and shareholder $1,500 per month for office rent and expenses. The affiliated Company, (Abraham & Co., Inc. a Financial Industry Regulatory Authority member and registered investment advisor) also executes LKA’s securities transactions and manages its investment portfolio. At December 31, 2011 and 2010, LKA owes Abraham & Co $31,000 and $13,500 on this obligation
, respectively
.
28
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 4 -
RELATED PARTY TRANSACTIONS (CONTINUED)
Accounts and Wages Payable
At December 31, 2011 and 2010, LKA owes $36,205 and $747, respectively, for purchases made on the personal credit card of LKA’s president, Kye Abraham. Additionally, LKA owed Kye Abraham $12,500 and $0 for non-interest bearing, short-term operating loans to LKA at December 31, 2011 and 2010, respectively, and $166,567 and $61,335 in unpaid salary at December 31, 2011 and 2010, respectively,
Stock Options
On December 28, 2007, LKA’s board of directors authorized the issuance of options to purchase 1,000,000 shares of LKA’s common stock to an officer and shareholder for services previously rendered. The options have an exercise price of $0.40 per share, and have a five-year term from the date of grant (See Note 9).
On October 26, 2011, LKA’s board of directors authorized the issuance of 500,000 shares and options to purchase 1,000,000 shares of LKA’s common stock to an officer and shareholder for services previously rendered. The options have an exercise price of $0.50 per share, and have a three-year term from the date of grant (See Note 9).
NOTE 5 -
SIGNIFICANT EVENTS
During August 2010, LKA entered into a Mine Operating Agreement (Operating Agreement) with Coal Creek Construction (Coal Creek). The Operating Agreement calls for Coal Creek to provide mine operating services, including mining and underground construction, blasting, crushing
,
bagging, hauling, loading and transporting of ore and associated waste material to locations specified by LKA in the vicinity of the property, maintenance of roads to the Property and working areas for the mining of the Property
.
Per the Operating Agreement, Coal Creek is to pay all Mine Operator Services Expenses
and is entitled to reimbursement for such expenses from LKA provided LKA has received sufficient monies from ore/metals sales. LKA is responsible for payment of costs associated with vehicles it provides for the Project (including insurance and maintenance) property and production taxes, mining claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation bonds. LKA shall also pay all liabilities associated with the Property which were incurred prior to the date of the Operating Agreement
.
In exchange for providing Mine Operator Services
,
Coal Creek is entitled to a payment equal to twenty percent of the project's net profits, or Net Smelter Receipts less deductions for Mine Operator Services, Royalties and Project-related Expenses, provided that Coal Creek has performed its service obligations and is current with its financial obligations and all other terms of its agreement with LKA. During the years ended December 31, 2011 and 2010, LKA paid Coal Creek $529,000 and $226,708 for Mine Operator Services and accrued an additional $83,289 in remaining reimbursable expense related to ore shipments.
NOTE 6 -
NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION
During the fall of 2002, the Federal Bureau of Land Management (the "BLM") advised LKA of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that LKA does not own.
The BLM has commissioned and obtained an engineering evaluation and cost analysis (“EE/CA”) report on the Ute-Ule and the neighboring public lands. The EE/CA, which was released for a 30 day public comment period in December of 2002, has identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present. The total clean-up costs on all of these properties are estimated at approximately $7 million, with the projected clean-up cost of the Ute-Ule alone estimated at approximately $4,317,000. The BLM has prepared a written response to the public comments received concerning the EE/CA and is in the process of selecting an overall site clean-up plan and is determining the final engineering plans. Once these tasks are completed, the BLM will then enter into the process of implementing those plans. As of
29
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 6 -
NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION (CONTINUED)
December 31, 2011, LKA and the BLM remain in the process of discussing and deliberating the reported environmental impacts as previously reported within the EE/CA. No determination of an overall site clean-up plan has yet been made by the BLM.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the BLM and EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the owner. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA’s share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. However, LKA is in the early stages of this process and cannot accurately predict a range of what the ultimate liability, if any, will be.
NOTE 7 -
DERIVATIVE LIABILITY
As a result of the repayment terms of the Note with PanAmerican Capital Group, Inc. being indexed to the closing spot price of gold on COMEX at each repayment date (see Note 4), the Note is considered to be a hybrid debt instrument with an embedded derivative liability. Accordingly, the embedded derivative liability is required to be bifurcated from the debt host agreement and recorded as a liability at its fair value as of the consolidated balance sheet date. The changes in fair value of the liability are being recorded as current period gains or losses in the consolidated statement of operations.
The fair market value of the embedded derivative liability was determined using level 1 inputs by applying observable quoted market prices of gold futures on the COMEX market for instruments that settle on or near the related debt payments, multiplying the quoted prices by the underlying number of troy ounces of gold at each repayment date and subtracting the otherwise required cash payment of the underlying note. During the year ended December 31, 2010, LKA recorded a loss from derivative liability of $99,369. During the year ended December 31, 2011,
LKA failed to make the final required payment on the derivative liability at January 4, 2011 and reclassified the remaining $67,826 balance of the liability and $16,457 in related accrued interest to a related party note payable.
The fair market value of LKA’s derivative liability at December 31, 2010 and 2011 is as follows:
|
|
| |
|
Derivative liability at December 31, 2010
|
$
|
67,826
|
|
Reclassification to notes payable – related party
|
|
(67,826)
|
|
Derivative liability at December 31, 2011
|
$
|
-
|
NOTE 8 -
COMMITMENTS AND CONTINGENCIES
Except as discussed above in Note 6, LKA is not the subject of any pending legal proceedings and, to the knowledge of management; no proceedings are presently contemplated against LKA by any federal, state or local governmental agency.
NOTE 9 -
STOCK-BASED COMPENSATION
Common Stock
On August 15, 2010, as a result of LKA’s failure to pay the required installment payment on August 15, 2010, LKA issued 220,453 and 169,652 shares of LKA common stock to PanAmerican with a fair value of $358,897, or $0.92 per share. The fair value of these shares was recorded as debt default expense.
On August 31, 2010, LKA sold 10,000 shares of its common stock for $5,000, or $0.50 per share.
During February 2011, LKA entered into a consulting agreement for investor and public relations services. As a result of this agreement, LKA issued 50,000 shares of its fully vested common stock. LKA recorded $37,500 in consulting expense, or $0.75 per share.
30
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 9 -
STOCK-BASED COMPENSATION (CONTINUED)
Common Stock
(Continued)
During March 2011, LKA issued 20,000 share of its common stock to a consultant for services rendered. LKA recorded $13,600 in consulting expense, or $0.68 per share.
During April 2011, LKA issued a consultant 50,000 shares of its common stock for services rendered and recognized $28,000 in expense, or $0.56 per share.
During April 2011, LKA issued a consultant 15,000 shares of its common stock for services rendered and recognized $4,650 in expense, or $0.31 per share.
During August 2011, LKA issued a consultant 35,000 shares of its common stock for services rendered and recognized $11,550 in expense, or $0.33 per share.
During October 2011, LKA engaged Newport Coast Securities, Inc. as its investment banker to explore financing opportunities for the Company and its Golden Wonder mining project. As a result of this agreement, LKA agreed to issue Newport 150,000 shares of LKA common stock and recognized $97,500 in expense, or $0.65 per share..
During October 2011, LKA issued a consultant 100,000 shares of its common stock for services rendered and recognized $67,000 in expense, or $0.67 per share.
During October 2011, LKA issued its Chairman and CEO 500,000 shares of common stock and options to purchase up to 1,000,000 shares of LKA common stock at $0.50 per share for 3 years. The shares and options were issued for services rendered related to the continued management and operation of the company. Both grants vested immediately. LKA recognized $685,947 in expense related to these issuances.
During December 2011, LKA issued a consultant 34,000 shares of its common stock for services rendered and recognized $15,300 in expense, or $0.45 per share.
Common Stock Options
On December 28, 2007, LKA granted an option to its President to purchase 1,000,000 shares of LKA’s common stock at an exercise price of $0.40 per share, exercisable for five years from the date of grant (the “2007 Options”). The resulting fair value estimate, net of tax, totaled $415,092. This amount was recorded as a current period expense during the fourth quarter of 2007.
During October 2011, LKA issued its Chairman and CEO 500,000 shares of common stock and options to purchase up to 1,000,000 shares of LKA common stock at $0.50 per share for 3 years. The shares and options were issued for services rendered related to the continued management and operation of the company.
The warrants were valued at $360,947 using the Black-Scholes option fair value pricing model using the following assumptions:
|
|
| |
|
Stock price on grant date
|
$
|
0.65
|
|
Exercise price
|
$
|
0.50
|
|
Expected time to exercise
|
|
1.5 years
|
|
Risk free interest rate
|
|
0.69%
|
|
Volatility
|
|
106.56%
|
|
Expected forfeiture rate
|
|
0.00%
|
The following table summarizes the options outstanding and associated activity for the years ended December 31, 2011 and 2010:
31
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 9 -
STOCK-BASED COMPENSATION (CONTINUED)
Common Stock Options
(Continued)
|
|
|
|
|
|
| |
|
|
Number of Options
|
Weighted Average Price
|
|
Weighted Average Remaining Contractual Life
|
|
Options outstanding at December 31, 2009
|
|
1,000,000
|
$
|
0.40
|
|
1
|
|
Granted
|
|
-
|
|
-
|
|
-
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
Forfeited
|
|
-
|
|
-
|
|
-
|
|
Options outstanding at December 31, 2010
|
|
1,000,000
|
$
|
0.40
|
|
1
|
|
Granted
|
|
1,000,000
|
|
0.50
|
|
3
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
Expired
|
|
-
|
|
-
|
|
-
|
|
Options exercisable at December 31, 2011
|
|
2,000,000
|
$
|
0.45
|
|
2
|
The aggregate intrinsic value of stock options was $0 and $510,000 at December 31, 2011 and 2010, respectively.
Common Stock Warrants
During December 2010, LKA granted fully vested warrants to purchase 84,000 share of its common stock for 36 months at $0.93 per share as debt offering costs related to the issuance of convertible notes payable (see Note 10). The warrants were valued at $28,137 using the Black-Scholes option fair value pricing model using the following assumptions:
|
|
| |
|
Stock price on grant date
|
$
|
0.85
|
|
Exercise price
|
$
|
0.93
|
|
Expected time to exercise
|
|
3 years
|
|
Risk free interest rate
|
|
0.80%
|
|
Volatility
|
|
192.45%
|
|
Expected forfeiture rate
|
|
0.00%
|
During April 2011, LKA entered into an interim consulting agreement with Francois Viens to act as a special advisor to the LKA board of directors, with the election of being appointed to a position on the LKA board in the future. As part of the consulting agreement, Mr. Viens is to be paid consulting fees for any work done on projects pre-approved by the LKA board of directors. An initial incentive compensation for his services, LKA agreed to issues Mr. Viens warrants to purchase up to 500,000 shares of LKA stock in three tranches on a three-year vesting schedule as follows:
Warrant I for 200,000 shares exercisable at $0.80 per share, to be issued as of May 1, 2011.
Warrant II for 150,000 shares exercisable at $1.20 per share, to be issued one year later, or May 1, 2012.
Warrant III for 150,000 shares exercisable at $1.80 per share, to be issued one year later, or May 1, 2013.
Each warrant has a term of two and one-half years. In the event the shares underlying the warrants, and the closing price of the common stock of the Company has been $3.00 per share or higher for 10 trading days within a 30 day trading period subject to minimum trading volumes, LKA shall be able to redeem the Warrants at $0.001 per warrant.
32
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 9 -
STOCK-BASED COMPENSATION (CONTINUED)
Common Stock Warrants
(Continued)
The Warrant I - III tranches were valued at $91,905, $64,955 and $60,586 using the Black-Scholes option fair value pricing model using the following assumptions:
|
|
| |
|
Stock price on grant date
|
$
|
0.59
|
|
Exercise price
|
$
|
0.80 – 1.80
|
|
Expected time to exercise
|
|
2.5 years
|
|
Risk free interest rate
|
|
0.69%
|
|
Volatility
|
|
164.93%
|
|
Expected forfeiture rate
|
|
0.00%
|
During the year ended December 31, 2011, LKA expensed $91,905 related to Warrant I and $43,304 and $20,195for Warrants II and III, respectively. The value of Warrants II and II are being recognized ratably over the vesting term of one and two years, respectively.
The following table summarizes the warrants outstanding and associated activity for the years ended December 31, 2010 and 2011:
|
|
|
|
|
|
| |
|
|
Number of Options
|
Weighted Average Price
|
|
Weighted Average Remaining Contractual Life
|
|
Warrants outstanding at December 31, 2009
|
|
400,000
|
$
|
1.00
|
|
1.5
|
|
Granted
|
|
84,000
|
|
0.93
|
|
3.0
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
Forfeited
|
|
(400,000)
|
|
(1.00)
|
|
-
|
|
Warrants outstanding at December 31, 2010
|
|
84,000
|
$
|
0.93
|
|
2.93
|
|
Granted
|
|
200,000
|
|
0.80
|
|
2.5
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
Expired
|
|
-
|
|
-
|
|
-
|
|
Warrants exercisable at December 31, 2011
|
|
284,000
|
$
|
0.84
|
|
1.16
|
NOTE 10 -
NOTES AND CONVERTIBLE NOTES PAYABLE
During December 2010, LKA issued a convertible note payable for cash of $150,000. The convertible note accrued interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011 and is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. During June 2011, the convertible note payable became past due and pursuant to the terms of the note, the to-date interest and commission expense of $18,000 as of June 1, 2011 was reclassified to note principle and the total then began to accrue interest at 15% per annum. Accrued interest on the convertible note totaled $14,705 and $2,466 at December 31, 2011 and 2010, respectively.
During December 2010, LKA issued a convertible note payable for cash of $50,000. The convertible note accrued interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011 and is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. During June 2011, the convertible note payable became past due and pursuant to the terms of the note, the to-date interest and commission expense of $6,000 as of June 1, 2011 was reclassified to note principle and the total then began to accrue interest at 15% per annum. Accrued interest
33
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 10 -
NOTES AND CONVERTIBLE NOTES PAYABLE (CONTINUED)
on the convertible note totaled $4,902 and $822 at December 31, 2011 and 2010, respectively. Debt offering costs of $24,163 were amortized to interest expense during the year ended December 31, 2011.
Notes and convertible notes payable consisted of the following at December 31:
2011
2010
Note payable to an individual, 12% interest
per annum, unsecured, due upon demand
$
10,000
$
10,000
Note payable to related parties, 10% interest per
annum, unsecured, due upon demand (Note 4)
62,803
62,803
Note payable to a related company, 24% interest per
annum, secured by asset of LKA, due upon demand (Note 4)
766,321
573,020
Note payable to a related company, 10% interest per
annum, secured by asset of LKA, due January 4, 2011
(Note 4)
-
109,018
Convertible note payable to a company, 15% interest
per annum, unsecured, due upon demand
56,000
25,837
Convertible note payable to a company, 15% interest
per annum, unsecured, due upon demand
168,000
150,000
Total Notes and Convertible Notes Payable
$
1,063,124
$
930,678
Maturities on notes and convertible notes payable are as follows:
Year ended December 31:
2011
$
1,063,124
2012
-
2013
-
2014
-
2015
-
Total
$
1,063,124
NOTE 11 -
GOING CONCERN
LKA's consolidated financial statements are prepared using Generally Accepted Accounting Principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, LKA has recently accumulated significant losses and has negative working capital. All of these items raise substantial doubt about its ability to continue as a going concern. Management's plans with respect to alleviating the adverse financial conditions that caused management to express substantial doubt about the LKA's ability to continue as a going concern are as follows:
34
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2011 and 2010
NOTE 11 -
GOING CONCERN (CONTINUED)
LKA is currently engaged in an intensive exploration program at the Golden Wonder mine with the objective of returning the mine to a producing status. The exploration program, which began in November, 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. During this evaluation period, sampling and analysis of exposed veins yielded encouraging results and some precious metals revenues. While encouraging, no conclusion can be drawn at this time about the commercial viability of the mine and LKA continues to pursue potential third party operator or lease agreements for the property.
In order to support continued operation of the mine, LKA entered into several financing transactions during the year ended December 31, 2011 and plans on raising additional funding during 2012 to support the continued exploration of the Golden Wonder mine. If LKA is not successful in the resumption of mine operations which produce positive cash flows from operations, LKA may be forced to continue to raise additional equity or debt financing to fund its ongoing obligations or risk ceasing doing business.
There can be no assurance that LKA will be able to achieve its business plans, raise any more required capital or secure the financing necessary to achieve its current operating plan. The ability of LKA to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 12 -
SUBSEQUENT EVENTS
During January 2012, LKA settled a shipment of ore for $193,893, which was shipped in December 2011, but not processed until January 2012.
During April 2011, LKA entered into an agreement with Rauno Perttu to act as Chief Geologist and special advisor to the LKA board of directors, with the election of being appointed to a position on the LKA board in the future. As part of the agreement, Mr. Perttu is to be paid consulting fees for any work done on projects pre-approved by the LKA board of directors. An initial incentive compensation for his services, LKA agreed to issues Mr. Perttu warrants to purchase up to 500,000 shares of LKA stock in three tranches on a three-year vesting schedule as follows:
Warrant I for 200,000 shares exercisable at $0.40 per share, to be issued as of March 1, 2012.
Warrant II for 150,000 shares exercisable at $0.60 per share, to be issued one year later, or March 1, 2013.
Warrant III for 150,000 shares exercisable at $0.80 per share, to be issued one year later, or March 1, 2014.
Each warrant has a term of two and one-half years.
35
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None; not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our President and our Treasurer concluded that our disclosure controls and procedures as of the end of the period covered by the Annual Report were effective and that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President and our Treasurer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of the President and the Treasurer, evaluated the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on this evaluation, our management, with the participation of the President and acting CFO, concluded that, as of December 31, 2011, our internal controls over financial reporting were effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of our 2011 fiscal year, there were no changes in our internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None; not applicable.
36
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.
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Name
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Positions Held
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Date of Election or Designation
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Date of Termination or Resignation
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Kye A. Abraham
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President
Chairman of the Board
Director
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03/88
03/88
03/88
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*
*
*
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Nanette Abraham
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Secretary
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1990
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*
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Director
Treasurer
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1990
12/02
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*
*
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·
These persons presently serve in the capacities indicated.
Background and Business Experience
Kye Abraham, President, Chairman of the Board Mr. Abraham is 53 years old. He has been the President of LKA since 1988. Mr. Abraham is also the President, Chairman of the Board and sole shareholder of Abraham & Co., Inc., a registered FINRA broker/dealer. Mr. Abraham is also the Managing Partner of Caldera.
Nanette Abraham, Secretary/Treasurer and Director. Ms. Abraham, age 54, and, until recently was employed as a Research Associate by the Russell Investment Group Company, a worldwide financial consulting company, since 1991. She has been the Secretary and Director of LKA for over 10 years, and was appointed to the office of Treasurer in December, 2002.
Significant Employees
LKA has no employees who are not executive officers, but who are expected to make a significant contribution to its business.
Family Relationships
Our President, Kye Abraham, is the husband of Nanette Abraham, who is our Secretary/Treasurer.
Involvement in Other Public Companies Registered Under the Exchange Act
None; not applicable.
Involvement in Certain Legal Proceedings
During the past ten years, no director, promoter or control person:
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has filed a petition under federal bankruptcy laws or any state insolvency laws, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
·
was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic
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violations and other minor offenses);
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was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting the following activities:
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
Engaging in any type of business practice; or
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
·
was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in the preceding bullet point, or to be associated with persons engaged in any such activity;
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was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;
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was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
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was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
any Federal or State securities or commodities law or regulation; or
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
any law or regulation prohibiting mail or wire fraud in connection with any business activity; or
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was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, or any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Promoters and control person.
See the heading “Transactions with Related Persons” below.
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Section 16(a) Beneficial Ownership Reporting Compliance
Our shares of common stock are registered under the Exchange Act, and therefore our officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a) which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2011, the following were filed timely:
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Name
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Type
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Filed
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Kye A. Abraham
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Form 4
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November 1, 2011
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Code of Ethics
We have adopted a Code of Conduct for our President and Secretary/Treasurer. A copy of the Code of Conduct was attached as Exhibit 14 to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2003. See Part IV, Item 15 of this Report.
Corporate Governance
Nominating Committee
We have not established a Nominating Committee because we believe that our Board of Directors is able to effectively manage the issues normally considered by a Nominating Committee. During the calendar year ended December 31, 2011, there were no changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.
Audit Committee
We have not adopted an audit committee separate from our Board of Directors because the Board of Directors consists of only Mr. and Mrs. Abraham.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the Company for services rendered during the periods indicated:
SUMMARY COMPENSATION TABLE
