UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-QSB
______________
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to____________
Commission File No. 000-17106
LKA INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | 91-1428250 |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
3724 47th Street Ct. N.W.
Gig Harbor, Washington 98335
(Address of Principal Executive Offices)
(253) 851-7486
(Issuer’s Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Not applicable.
Check whether the Issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No.
1
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Issuer’s classes of common equity, as of the latest practicable date: November 19, 2007 - 12,890,317 shares of common stock.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of LKA International, Inc., a Delaware corporation (referred to as "LKA," the “Company,” "we," "us," "our" or words of similar import in this Quarterly Report), required to be filed with this 10-QSB Quarterly Report were prepared by management, and commence on the following page, together with related notes. In the opinion of management, the financial statements fairly present the financial condition of LKA for the periods then ended.
2
LKA INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006
3
LKA INTERNATIONAL, INC.
Consolidated Balance Sheets
ASSETS
September 30, 2007 |
| December 31, 2006 | |||
CURRENT ASSETS | (Unaudited) |
|
|
| |
|
|
|
|
|
|
Cash | $ | 143,796 |
| $ | 403,467 |
Money market funds |
| 98,727 |
|
| 113,619 |
Receivable |
| 227 |
|
| - |
Prepaid expenses |
| 1,351 |
|
| 23,041 |
Due from affiliates |
| 64,526 |
|
| 64,400 |
Notes receivable |
| 115,793 |
|
| 115,793 |
Accrued interest receivable |
| 15,559 |
|
| 8,197 |
Deferred tax asset |
| 49,071 |
|
| 18,030 |
Investments in trading securities |
| 1,006,856 |
|
| 1,182,594 |
Total Current Assets |
| 1,495,906 |
|
| 1,929,141 |
|
|
|
|
|
|
FIXED ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Land, equipment and mining claims |
| 512,424 |
|
| 512,424 |
Accumulated depreciation |
| (75,393) |
|
| (59,770) |
Total Fixed Assets, Net of Accumulated Depreciation |
| 437,031 |
|
| 452,654 |
|
|
|
|
|
|
OTHER NON-CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Reclamation Bonds |
| 63,835 |
|
| 63,835 |
Deferred tax asset |
| 5,525 |
|
| 5,525 |
Total Other Non-Current Assets |
| 69,360 |
|
| 69,360 |
TOTAL ASSETS | $ | 2,2002,297 |
| $ | 2,451,155 |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
LKA INTERNATIONAL, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
| September 30, 2007 |
| December 31, 2006 | ||
CURRENT LIABILITIES | (Unaudited) |
|
|
| |
|
|
|
|
|
|
Accounts payable | $ | 48,215 |
| $ | 73,114 |
Settlement payable (Note 6) |
| 530,000 |
|
| - |
Note payable |
| 10,000 |
|
| 10,000 |
Notes payable - related party |
| 62,803 |
|
| 62,803 |
Accrued interest |
| 2,192 |
|
| - |
Accrued interest payable - related party |
| 59,338 |
|
| 54,628 |
Income taxes payable |
| 88,647 |
|
| 57,605 |
Total Current Liabilities |
| 801,195 |
|
| 258,150 |
|
|
|
|
|
|
NON-CURRENT LIABILITIES |
|
|
|
|
|
Asset retirement obligation |
| 62,984 |
|
| 61,693 |
Total Non-Current Liabilities |
| 62,984 |
|
| 61,693 |
Total Liabilities |
| 864,179 |
|
| 319,843 |
|
|
|
|
|
|
Commitments and Contingencies (note 4) |
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0.001 par value, 50,000,000 shares authorized, no shares issued or outstanding |
| - |
|
| - |
Common stock; $0.001 par value, 50,000,000 shares authorized, 12,890,498 and 12,740,498 shares issued and outstanding, respectively |
| 12,891 |
|
| 12,741 |
Additional paid-in capital |
| 6,808,970 |
|
| 6,699,120 |
Treasury stock; 79,297 and 63,927shares at cost, respectively |
| (79,415) |
|
| (60,986) |
Accumulated deficit |
| (5,604,328) |
|
| (4,519,563) |
Total Stockholders' Equity |
| 1,138,118 |
|
| 2,131,312 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,002,297 |
| $ | 2,451,155 |
The accompanying notes are an integral part of these consolidated financial statements.
5
LKA INTERNATIONAL, INC.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||
| 2007 |
| 2006 |
| 2007 |
| 2006 | ||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue | $ | - |
| $ | - |
| $ | - |
| $ | 821,637 |
Total Revenues |
| - |
|
| - |
|
| - |
|
| 821,637 |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
| 97,823 |
|
| 96,325 |
|
| 410,538 |
|
| 228,420 |
Settlement expense |
| 530,000 |
|
| - |
|
| 530,000 |
|
| - |
Exploration, development and related costs |
| 31,548 |
|
| 89,520 |
|
| 154,125 |
|
| 137,802 |
Officer salaries and bonus |
| 37,500 |
|
| 24,870 |
|
| 112,500 |
|
| 84,870 |
Total Operating Expenses |
| 696,871 |
|
| 210,715 |
|
| 1,207,163 |
|
| 451,092 |
OPERATING INCOME (LOSS) |
| (696,871) |
|
| (210,715) |
|
| (1,207,163) |
|
| 370,545 |
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| (4,159) |
|
| (1,870) |
|
| (8,221) |
|
| (5,610) |
Interest income |
| 3,816 |
|
| 6,610 |
|
| 11,760 |
|
| 18,250 |
Gain on sale of assets |
| - |
|
| - |
|
| - |
|
| 2,204 |
Realized gain (loss) on securities |
| 32,566 |
|
| (79,451) |
|
| 43,843 |
|
| (55,012) |
Unrealized gain (loss) on securities |
| (101,017) |
|
| 43,659 |
|
| 21,839 |
|
| (31,197) |
Other investment income |
| 13,374 |
|
| 9,329 |
|
| 53,177 |
|
| 33,513 |
Total Other Income (Expense) |
|
(55,420) |
|
| (21,723) |
|
| 122,398 |
|
| (37,852) |
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE TAXES |
| (752,291) |
|
| (232,438) |
|
| (1,084,765) |
|
| 332,693 |
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE |
| - |
|
| 64,066 |
|
| - |
|
| (170,893) |
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) | $ | (752,291) |
| $ | (168,372) |
| $ | (1,084,765) |
| $ | 161,800 |
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET INCOME (LOSS) PER SHARE | $ | (0.06) |
| $ | (0.01) |
| $ | (0.08) |
| $ | 0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
| 12,862,237 |
|
| 12,731,411 |
|
| 12,828,410 |
|
| 12,796,885 |
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) PER SHARE | $ | (0.06) |
| $ | (0.01) |
| $ | (0.07) |
| $ | 0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
| 12,862,237 |
|
| 12,731,411 |
|
| 14,828,410 |
|
| 14,796,885 |
The accompanying notes are an integral part of these consolidated financial statements.
6
LKA INTERNATIONAL, INC.
Consolidated Statements of Stockholders’ Equity
| Common Stock | Treasury Stock | Additional Paid-in | Accumulated | ||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | ||||
Balance, December 31, 2005 | 12,860,498 | $ | 12,861 | (22,387) | $ | (12,187) | $ | 6,686,700 | $ | (4,575,548) |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services at $0.91 per share | 30,000 |
| 30 | - |
| - |
| 27,270 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of common stock | (150,000) |
| (150) | - |
| - |
| (14,850) |
| - |
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock | - |
| - | (41,540) |
| (48,799) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2006 | - |
| - | - |
| - |
| - |
| 55,985 |
Balance, December 31, 2006 | 12,740,498 | 12,741 | (63,927) | (60,986) | 6,699,120 | (4,519,563) | ||||
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services at $.80 per share (unaudited) | 100,000 |
| 100 | - |
| - |
| 79,900 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services at $.060 per share (unaudited) | 50,000 |
| 50 | - |
| - |
| 29,950 |
| - |
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock (unaudited) | - |
| - | (15,370) |
| (18,429) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended September 30, 2007 (unaudited) | - |
| - | - |
| - |
| - |
| (1,084,765) |
Balance, September 30, 2007 (unaudited) | 12,890,498 | $ | 12,891 | (79,297) | $ | (79,415) | $ | 6,808,970 | $ | (5,604,328) |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
LKA INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended September 30, | ||||
| 2007 |
| 2006 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
Net income (loss) from operations | $ | (1,084,765) |
| $ | 161,800 |
Items to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Accretion of environmental remediation costs |
| 1,291 |
|
| 1,241 |
Depreciation and amortization |
| 15,623 |
|
| 15,622 |
Unrealized (gain) loss on investments |
| (21,839) |
|
| 31,197 |
Realized (gain) loss on investments |
| (43,843) |
|
| 55,012 |
Investment purchases |
| (804,006) |
|
| (800,081) |
Investment proceeds |
| 1,045,426 |
|
| 521,801 |
Treasury stock repurchased |
| (18,429) |
|
| (48,367) |
Common stock issued for services |
| 110,000 |
|
| 27,300 |
Changes in operating assets and liabilities |
|
|
|
|
|
(Increase) in receivable |
| (227) |
|
| (333,420) |
(Increase) in interest receivable |
| (7,362) |
|
| (7,257) |
Decrease in prepaid and other assets |
| 21,690 |
|
| 12,260 |
Increase (decrease) in accounts payable |
| (24,899) |
|
| 52,965 |
(Increase) decrease in margin account |
| 14,892 |
|
| 32,320 |
Increase in accrued expenses |
| 317,818 |
|
| 156,922 |
Changes in deferred tax assets and liabilities |
| (31,041) |
|
| (6,319) |
Net Cash Used by Operating Activities |
| (509,671) |
|
| (127,004) |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
Repayments of notes receivable |
| - |
|
| 5,685 |
Net Cash Provided by Investing Activities |
| - |
|
| 5,685 |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
Issuance of new notes receivable |
| 250,000 |
|
| - |
Net Cash Provided by Financing Activities |
| 250,000 |
|
| - |
|
|
|
|
|
|
DECREASE IN CASH |
| (259,671) |
|
| (121,319) |
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD |
| 403,467 |
|
| 369,321 |
CASH AT END OF PERIOD | $ | 143,796 |
| $ | 248,002 |
|
|
|
|
|
|
CASH PAID FOR: |
|
|
|
|
|
|
|
|
|
|
|
Interest | $ | 1,319 |
| $ | 900 |
Income taxes | $ | 5,238 |
| $ | - |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements presented are those of LKA International, Inc. (the Company), a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation. The Company was incorporated on March 15, 1988, under the laws of the State of Delaware. The Company was engaged in several natural resource projects, but ceased operations shortly thereafter due to high capital investments and the risk of no return. The Company exited the development stage in September 2003 as a result of the reacquisition of its interest in an operating mine near Lake City, Colorado (See Notes 2 and 6). The Company is currently engaged in efforts to expand mine production and continues to seek additional investment opportunities.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements include normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’ ;s most recent audited financial statements. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
NOTE 2 -
RELATED PARTY TRANSACTIONS
Related Party Debt
The Company 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 nine months ended September 30, 2007. Accrued interest related to this note totaled $52,184 and $47,922 as of September 30, 2007, and December 31, 2006, respectively.
The Company 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 nine months ended September 30, 2007. Accrued interest related to this note totaled $7,154 and $6,706 as of September 30, 2007, and December 31, 2006, respectively.
9
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 2 -
RELATED PARTY TRANSACTIONS (Continued)
Due From Affiliates
Since 2002, the Company advanced $64,526 to various parties in the form of legal payments. These advances are secured by company stock owned by the president of the Company, due upon demand and non-interest bearing.
Other Related Party Transactions
The Company 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 NASD member and registered investment advisor) also executes the Company’s securities transactions and manages its investment portfolio.
During the quarter ended March 31, 2006, the Company sold a sapphire gem to an officer and shareholder in exchange for $2,204 in cash. The gem has been in the possession of the company for over fifteen years and had previously been written-off for financial reporting purposes. As such, the entire cash receipt was recorded as a current period gain on sale.
On December 31, 2003, the Company’s board of directors authorized the issuance of options to purchase 2,000,000 shares of the Company’s common stock to an officer and shareholder for services previously rendered. The shares were granted in two tranches of 1,000,000 options on December 31, 2004, and 1,000,000 options on December 31, 2005. The 2004 and 2005 grants had an exercise price of $0.25 and $0.55 per share, respectively, and have a three-year term from the date of grant. See Note 5.
NOTE 3 -
NOTES RECEIVABLE
In October 2003, the Company loaned $99,997 to seven individuals. These notes accrued interest at 8.5% per annum and were due in full by December 15, 2004. On December 15, 2004, all seven of the notes receivable were exchanged for new notes totaling $110,164. The new notes extended the term of the previous notes through December 15, 2005 and had face values equivalent to the full value of all prior notes plus all associated accrued interest collectively totaling $119,938. On March 1, 2006, all seven of the notes were again exchanged for new notes. The new notes extended the term of the previous notes through March 1, 2007, and had face values equivalent to the full value of all prior notes plus all associated accrued interest. On May 16, 2006, one of the notes receivable was paid in full in the amount of $5,785, including accrued interest.
The total remaining principal amount of these notes receivable plus related accrued interest totaled $131,352 and $123,990 at September 30, 2007, and December 31, 2006, respectively. All of the replacement notes are secured by common stock owned by the president of the Company, accrue interest at 8.5% per annum, and were due in full on March 1, 2007. The Company has verbally agreed to extend these notes through December 31, 2007.
10
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 4 -
COMMITMENTS AND CONTINGENCIES
Notification of Possible Environmental Remediation
During the fall of 2002, the Federal Bureau of Land Management (the "BLM") advised the Company of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that the Company 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 September 30, 2007, the Company and the BL M 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 the Company will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and the Company’s share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and the Company intends to vigorously defend itself. However, the Company is in the early stages of this process and cannot accurately predict a range of what the ultimate liability, if any, will be.
NOTE 5 -
STOCK-BASED COMPENSATION
In April 2007, the Company’s Board of Directors concluded that the Company’s financial statements for the calendar years ended December 31, 2004, and December 31, 2005, did not properly disclose: (i) the granting to the Company’s President, Kye A. Abraham, on December 31, 2004, of an option to purchase up to one million shares of the Company’s common stock at a price of $0.25 per share, exercisable for three years (the “2004 Options”); or (ii) the granting to Mr. Abraham on December 31, 2005, of an option to purchase up to one million shares of the Company’s common stock at a price of $0.55 per share, exercisable for three years (the “2005 Options”).
11
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 5 -
STOCK-BASED COMPENSATION (Continued)
At its annual meeting held on December 31, 2003, the Company’s Board of Directors authorized the grant of the 2004 Options in 2004 and the grant of the 2005 Options in 2005, but due solely to administrative oversight, neither the grant of the 2004 Options nor the grant of the 2005 Options were ever formally documented in the years that they were intended to be granted. As a result, neither the Company’s audited financial statements for the calendar years ended December 31, 2004, and December 31, 2005, nor its Annual Reports on Form 10-KSB for those calendar years indicated that either the 2004 Options or the 2005 Options had been granted. The Company will amend the disclosure in these Annual Reports accordingly.
Options Outstanding
As noted above, the Company’s board of directors authorized the issuance of options to purchase 2,000,000 shares of the Company’s common stock to an officer and shareholder for services previously rendered on December 31, 2003. The options were granted in two tranches of 1,000,000 options on December 31, 2004, and 1,000,000 options on December 31, 2005. The 2004 and 2005 grants had an exercise price of $0.25 and $0.55 per share, respectively, and have a three-year term from the date of grant. None of the options have been exercised as of September 30, 2007.
Treatment and Pro Forma Results
On January 1, 2006, the Company adopted SFAS No. 123(R), requiring measurement and recognition of expense for all share-based payment awards to employees and directors based on estimated fair values. SFAS No. 123R supersedes SFAS No. 123 and APB No. 25. Prior to January 1, 2006, the Company accounted for stock option plans under the recognition and measurement provisions of APB No. 25 and related interpretations, as permitted by SFAS No. 123, which did not require compensation cost be recognized for the Company’s stock options provided the option exercise price was established at 100% (or greater) of the common stock fair market value on the date of the grant. Awards granted after January 1, 2006, are valued at fair value in accordance with the provisions of SFAS No. 123R and recognized on a straight line basis over the service periods of each award. Additionally, SFAS No. 123R requires companies to record compensation expense for the un vested portion of previously granted awards as they continue to vest, as calculated previously and recorded in accordance with the provisions of SFAS No. 148, “ Accounting for Stock-Based Compensation-Transition and Disclosure .” There were no unvested amounts associated with previously issued (employee) options as of January 1, 2006. As such, the adoption of this new accounting guidance did not have an impact to the Company’s current or previously reported financial information.
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 5 -
STOCK-BASED COMPENSATION (Continued)
Treatment and Pro Forma Results (continued)
As of January 1, 2006, and through September 30, 2007, the Company had two (employee) option awards outstanding, representing a total of 2,000,000 options to purchase shares of the Company’s common stock. The Company estimated the fair values of these stock option awards granted on December 31, 2004, and December 31, 2005, using a Black-Scholes option pricing model and the following assumptions: expected stock price volatility of 110% and 138%, risk-free interest rates ranging from 3.2% to 4.4%, weighted average expected option lives of 3 years, and no dividend yield. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility.
The following table summarizes the options outstanding and associated activity for the nine months ended September 30, 2007 and the year ended December 31, 2006:
|
|
|
|
|
| Number of Options | Weighted Average Price | ||
Options outstanding at December 31, 2005 |
| 2,000,000 | $ | 0.39 |
|
|
|
|
|
Granted |
| - |
| - |
Exercised |
| - |
| - |
Forfeited |
| - |
| - |
Options outstanding at December 31, 2006 |
| 2,000,000 |
| 0.39 |
|
|
|
|
|
Granted |
| - |
| - |
Exercised |
| - |
| - |
Forfeited |
| - |
| - |
Options outstanding at June 30, 2007 |
| 2,000,000 | $ | 0.39 |
NOTE 6 -
SETTLEMENT OF LITIGATION
On August 24, 2007, the Company entered into a settlement agreement with Au Mining, Inc., a Colorado corporation. Under the terms of the agreement, Au Mining agreed to release all rights to the Golden Wonder Mine and the Ute Ule Mine, including all mining rights thereto, that it had under the 2003 Lease Agreement between the parties and/or Au Mining's option exercise under the parties' 1997 Lease Agreement. The Company agreed to pay to Au Mining the sum of $280,000 within 60 days of the date of the agreement, with the payment of an additional $250,000 payable 12 months from the date of the Agreement.
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 6 -
SETTLEMENT OF LITIGATION (Continued)
On August 24, 2007, the Company executed a promissory note evidencing the obligation to make the $250,000 payment, which note bears interest at the rate of eight percent, with a late fee of five percent of the balance due, and no prepayment penalty. As of September 30, 2007, the Company has recorded associated interest expense (and liability) of $2,192.
Au Mining has agreed to pay to Hinsdale County, Colorado: (i) the sum of $97,733.51 as Au Mining's share of the 2005 production taxes that were assessed in 2006; and (ii) the sum of $340.80 for 2006 property taxes on the Company's patented mining claims. In addition, Au Mining is to pay to Hinsdale County its share of the 2006 production taxes that are assessed in 2007.
In connection with the agreement, the Company has executed a Royalty Agreement under which it is to pay to Au a net smelter royalty of six percent on all future proceeds received from materials produced from the Golden Wonder Mine, with all royalty payments to cease once Au Mining has received total royalty payments of $12,647,505. The parties have further agreed to dismiss with prejudice all claims and counterclaims made in Case No. 2006 CV 05, filed in the District Court of Colorado, Hinsdale County. In addition, Au Mining has agreed to grant the Company subterranean access to the Golden Wonder Mine through its Red Cloud patented mining claim for an annual fee of $1,000 during the years that such easement is used.
NOTE 7 -
OTHER SIGNIFICANT EVENTS
On February 22, 2007, the Company issued 100,000 shares of common stock, at $0.80 per share, to consultants for services rendered during the first quarter of 2007.
On February 22, 2007, the Company authorized the issuance of 200,000 warrants to consultants for the purchase of equivalent shares of the Company’s common stock at $0.80 per share. The grant of these warrants is contingent upon the completion of certain activities related to exploration and remediation milestones related to the Company’s Golden Wonder and Ute Ulay mines in Hinsdale County, Colorado. As of September 30, 2007, these contingencies have not been met, and, therefore, the warrants have not been granted. The warrants will expire five years from the date of their issuance.
On August 21, 2007, the Company issued 50,000 shares of common stock, at $0.60 per share, to an attorney for services rendered in relation to the Au Mining litigation.
NOTE 8 -
SUBSEQUENT EVENT
On November 5, the Company entered into an agreement with Richmont Mines Inc. which grants Richmont an option to earn a 50% joint-venture interest in the Company’s Golden Wonder Mine located near Lake City, Colorado. Richmont will have sixty days from the date of the Agreement in which to complete its evaluation of the Golden Wonder and exercise an option to enter into a joint venture with the Company for the further development and exploration of the Mine and surrounding property.
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
September 30, 2007 and December 31, 2006
NOTE 8 -
SUBSEQUENT EVENT (Continued)
In exchange for granting the option, the Company will receive an initial payment of $150,000 and another $150,000 at the end of the sixty-day evaluation period if Richmont elects to exercise its option.
The terms of the proposed joint venture will include, but are not limited to, three consecutive investment/funding periods by Richmont of $6 million each totaling $18 million over a 63 month period. Richmont will have the option, after the first investment/funding period, to proceed with the two subsequent investment/funding segments or withdraw from the joint venture. Richmont will not be entitled to retain any interest in the Golden Wonder until its full investment of $18 million has been contributed toward the development of the Mine or paid to the Company. Detailed terms of the joint venture will be publicly announced after the initial evaluation period has been completed and Richmont elects to exercise its option to proceed.
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Item 2. Management’s Discussion and Analysis or Plan of Operation.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations.
For The Three Months Ended September 30, 2007 Compared to The Three Months Ended September 30, 2006.
During the quarterly periods ended September 30, 2007 and September 30, 2006, we received no royalty revenues.
Operating expenses increased from $210,715 in the quarterly period ended September 30, 2006, to $696,871 in the quarterly period ended September 30, 2007. This 231% increase was primarily due to $530,000 in settlement expenses related to our litigation with Au Mining. Exploration, development and related costs decreased to $31,548 in the quarter ended September 30, 2007, from $89,520 in the year-ago quarter. Officer salaries and bonus increased to $37,500 in the three months ended September 2007, from $24,870 in 2006. With a combination of decreased revenues and increased operating expenses, we realized an operating loss of $696,871 during the quarter ended September 30, 2007, as compared to operating loss of $210,715 in the comparable period in 2006.
Interest income decreased to $3,816 in the third quarter of 2007, from $6,610 in the third quarter of 2006. Interest expense totaled $4,159 and $1,870 in 2007 and 2006, respectively. We realized a $32,566 gain on securities in the third quarter of 2007, as compared to a loss of $79,451 in the 2006 period. Unrealized gain (loss) on securities were ($101,017) and $43,659, respectively, in these periods. We received $13,374 in other investment income in 2007, versus $9,329 in 2006.
After taking into account income tax expense of $0 and $64,066, respectively, in 2007 and 2006, net income (loss) totaled $(752,291), or $(0.06) per share, and $168,372, or $0.01 per share, respectively, during these periods.
For The Nine Months Ended September 30, 2007 Compared to The Nine Months Ended September 30, 2006.
During the nine months ended September 30, 2007, we received no royalty revenues, as compared to royalty revenue of $821,637 in the nine months ended September 30, 2006. Due to our dispute with Au Mining, royalty revenues ceased in late 2006.
Operating expenses increased from $451,092 in the nine months ended September 30, 2006, to $1,207,163 in the nine months ended September 30, 2007. This 168% increase was primarily due to $530,000 in settlement expenses related to the litigation with Au Mining. Exploration, development and related costs increased to $154,125 in the nine months ended September 30, 2007, from $137,802 in the year-ago quarter. Officer salaries and bonus also increased to $112,500 in the first nine months of 2007, from $84,870 in 2006. With a combination of decreased revenues and increased operating expenses, we realized an operating loss of $1,207,163 during the nine months ended September 30, 2007, as compared to operating income of $370,545 in the comparable period in 2006.
Interest income decreased to $11,760 in the first nine months of 2007, from $18,250 in the first nine months of 2006. Interest expense totaled $8,221 and $5,610 in 2007 and 2006, respectively. We had a gain on sale of assets in 2006 of $2,204, with no comparable gain in 2007. We realized a $43,843 gain on securities in the first nine months of 2007, as compared to a loss of $55,012 in the 2006 period. Unrealized gain (loss) on securities were $21,839 and ($31,197), respectively, in these periods. We received $53,177 in other investment income in 2007, versus $33,513 in 2006.
After taking into account income tax expense of $0 and $170,893, respectively, in 2007 and 2006, net income (loss) totaled $(1,084,765), or $(0.08) per share, and $161,800, or $0.01 per share, respectively, during these periods.
Liquidity and Capital Resources
Current assets at September 30, 2007, included $143,796 in cash and $98,727 in money market funds, as compared to $403,467 and $113,619 at December 31, 2006.
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During the nine months ended September 30, 2007, our operating activities used net cash of $509,671. In the comparable period in 2006, operating activities used net cash of $127,004. Again, this difference is due to Au Mining’s cessation of operations on our properties in late 2006.
At September 30, 2007, the Company had working capital of $694,711, as compared to working capital of $1,670,991 at December 31, 2006.
Off-Balance Sheet Arrangements
We had no off balance sheet arrangements during the quarter ended September 30, 2007.
Forward-looking Statements
Statements made in this Form 10-QSB 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; 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 3. Controls and Procedures.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, we concluded that information required to be disclosed is not appropriately recorded, processed, summarized, communicated and reported to allow for required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives; however, we have concluded that our disclosure controls and procedures are not effective to a reasonable assurance level of achieving such objectives.
In connection with the preparation of our financial statements for the year ended December 31, 2006, we identified a deficiency that existed in the design or operation of our internal control over financial reporting that we consider to be a “material weakness.” The Public Company Accounting Oversight Board has defined a material weakness as a “significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement on the annual or interim financial statements will not be prevented or detected.”
The material weakness identified relates to our recording, review and control of material information required to be included in our periodic Securities and Exchange Commission reports and our communication of such material information to our attorneys and accountants such that it can be properly disclosed in our periodic reports. During the first calendar quarter of our 2007 fiscal year, we took the following step to remediate this weakness:
· communication with corporate counsel prior to the adoption of any corporate resolution providing for the issuance of shares of our common stock, the granting of options and other material events that require disclosure in our
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periodic Securities and Exchange Commission reports, and quarterly conferences with our counsel to ensure that all corporate actions undertaken during the prior quarter have been properly documented.
The Company will continue to monitor, assess and work to improve the effectiveness of its internal control procedures related to internal controls and financial reporting in order to comply with Section 404 of the Sarbanes Oxley Act of 2002.
Changes in internal control over financial reporting
We had no changes in internal control over financial reporting during the quarter ended September 30, 2007.
PART II - OTHER INFORMATION
Item 1. 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.
1. LKA International, Inc. v. Au Mining, Inc. On August 27, 2007, we entered into a Settlement Agreement and Release with Au Mining, Inc. Under the terms of the Agreement, Au Mining agreed to release all rights to the Golden Wonder Mine and the Ute Ule Mine, including all mining rights thereto, that it had under the 2003 Lease Agreement between the parties and/or Au Mining's option exercise under the parties 1997 Lease Agreement. For more information regarding this Settlement Agreement see our 8-K Current Report dated August 24, 2007.
2. Ute-Ule - BLM remediation matter. 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 most recent such meeting was held in March, 2007. 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 acc urately 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.
In the first quarter of 2007, the Company filed a “Notice of Intent” (NOI) with the BLM for the purpose of driving a 4,600’ exploratory drift from the Company’s unpatented claims at the valley floor into Gold Hill in the hope of intersecting the Golden Wonder vein system. In May, 2007, the BLM informed us that this project, as proposed by the Company, does not qualify for the “NOI” process and that it wants the Company to proceed by filing a comprehensive “Plan of Operations,” which is considerably more expensive and time-consuming. The Company believes it is clearly entitled to use the NOI process for exploratory projects of this nature and has appealed the local BLM decision to the “Interior Board of Land Appeals” (IBLA). The Administrative Law Judge ordered that hearings/proceedings be suspended until the end of November, 2007, to give the parties time to reach a compromise. We are currently engaged in this process. No settlement has yet been reached.
None of this directly effects the Company’sability to continue mining the Golden Wonder from the current working areas where it maintains active permits.
To the knowledge of management, no director or executive officer is party to any action in which any has an interest adverse to the Company. To the knowledge of management, no director or executive officer is party to any action in which any has an interest adverse to LKA.
On May 16, 2007, the Company learned of a lawsuit filed by Barrick GoldStrike Mines, Inc. (“Barrick”) against Au Mining and its officers, alleging that Au Mining “salted” Golden Wonder mine assay samples to indicate
18
considerably higher gold content than was actually contained in the ore that it delivered to Au Mining in May/June, 2006. Based on Barrick’s sampling protocol and the fact that the grade of ore in the contested shipment, while high, was not inconsistent with ore grades produced from the Golden Wonder and shipped to various processors over a period of nine years, LKA believes that it is hightly unlikely that Au Mining could have carried out such a scheme. However, if Barrick is able to substantiate its allegations, it could call into question the grade of the gold in the Golden Wonder mine. On May 18, 2007, we filed a Current Report on Form 8-K with respect to this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the quarterly period ended September 30, 2007, we issued the following unregistered securities:
To Whom | Number of Shares | Date Issued | Consideration |
Nancy Bentson-Essex | 50,000 | 8/21/07 | $3,000 in legal services |
Use of Proceeds of Registered Securities
We did not have any proceeds from the sale of any registered securities during the quarterly period ended September 30, 2007.
Purchases of Equity Securities by Us and Affiliated Purchasers
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased Under the Plans or Programs |
Month #1 July 1, 2007 through July 31, 2007 | 0 | $0 | 0(1) | (1) |
Month #2 August 1, 2007 through August 31, 2007 | 500 | $1.21 | 0(1) | (1) |
Month #3 September 1, 2007 through September 30, 2007 | 800 | $1.13 | 0(1) | (1) |
Total | 1300 |
| 0 (1) | (1) |
(1) These shares were purchased other than through a publicly announced plan or program. They were purchased in open-market transactions.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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None; not applicable.
Item 5. Other Information.
(a)
On November 5, 2007, we entered into a letter agreement by which we agreed to grant to Richmont Mines, Inc., an option to acquire a 50% undivided interest in its Gold Wonder mine located in Hinsdale County, Colorado, in exchange for Richmont's payment of (i) $150,000 within 10 days of the date of the Letter Agreement; and (ii) an additional $150,000 within 60 days of the date of the Letter Agreement. For more information on this Letter Agreement see our 8-K Current Report dated November 5, 2007.
(b)
During the quarterly period ended September 30, 2007, there were no changes in the procedures by which security holders may recommend nominees to the Company's Board of Directors.
Item 6. Exhibits
(a) Exhibits and index of exhibits.
Exhibit Number | Description |
|
|
31.1 | 302 Certification of Kye Abraham |
31.2 | 302 Certification of Nanette Abraham |
32 | 906 Certification |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LKA INTERNATIONAL, INC.
Date: | November 19, 2007 |
| By: | /s/Kye Abraham |
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|
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| Kye Abraham, President, Chairman of the Board and Director |
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|
Date: | November 19, 2007 |
| By: | /s/Nanette Abraham |
|
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| Nanette Abraham, Secretary, Treasurer and Director |
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