Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
LKA Gold, Inc.
Gig Harbor, Washington
We have audited the consolidated balance sheets of LKA Gold Inc. and its subsidiary, (collectively, the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LKA Gold Inc. and its subsidiary as of December 31, 2015 and 2014 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that LKA Gold Inc. will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, LKA Gold Inc. has accumulated significant losses, has a working capital deficit and has negative cash flows from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 15. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
April 13, 2016
LKA GOLD, INC.
Consolidated Balance Sheets
ASSETS
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
150,068
|
|
|
$
|
698,745
|
|
Restricted cash
|
|
|
22,500
|
|
|
|
-
|
|
Accounts receivable
|
|
|
995
|
|
|
|
203,645
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
173,563
|
|
|
|
902,390
|
|
|
|
|
|
|
|
|
|
|
FIXED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land, equipment, mining claims and asset retirement obligations
|
|
|
849,140
|
|
|
|
811,085
|
|
Accumulated depreciation
|
|
|
(359,175
|
)
|
|
|
(327,705
|
)
|
|
|
|
|
|
|
|
|
|
Total Fixed Assets, Net of Accumulated Depreciation
|
|
|
489,965
|
|
|
|
483,380
|
|
|
|
|
|
|
|
|
|
|
OTHER NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation Bonds
|
|
|
123,597
|
|
|
|
123,597
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
787,125
|
|
|
$
|
1,509,367
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LKA GOLD, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
December 31,
|
|
|
2015
|
2014
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
69,042
|
|
$
|
278,354
|
|
Accounts payable – related party
|
|
|
15,309
|
|
|
6,533
|
|
Wastewater discharge liability
|
|
|
75,000
|
|
|
-
|
|
Derivative liability
|
|
|
256,278
|
|
|
-
|
|
Note payable
|
|
|
10,000
|
|
|
10,000
|
|
Accrued interest payable
|
|
|
5,517
|
|
|
-
|
|
Accrued wages and advances payable to officer
|
|
|
75,757
|
|
|
76,067
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
506,903
|
|
|
370,954
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable – related party, net of $11,679 in debt issue costs and $228,786 in debt discount
|
|
|
9,535
|
|
|
-
|
|
Convertible note payable, net of $2,336 in debt issue costs and $46,715 in debt discount
|
|
|
949
|
|
|
-
|
|
Asset retirement obligation
|
|
|
117,761
|
|
|
112,876
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
635,148
|
|
|
483,830
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0.001 par value, 50,000,000 shares authorized, 0 and 0 shares issued and outstanding, respectively
|
|
|
-
|
|
|
-
|
|
Common stock; $0.001 par value, 50,000,000 shares authorized, 19,165,152 and 19,165,152 shares issued, 19,121,528 and 19,121,528 shares outstanding, respectively
|
|
|
19,165
|
|
|
19,165
|
|
Additional paid-in capital
|
|
|
17,963,315
|
|
|
17,963,315
|
|
Treasury stock; 43,624 and 43,624 shares at costs, respectively
|
|
|
(86,692
|
|
|
(86,692
|
)
|
Accumulated deficit
|
|
|
(17,743,811
|
|
|
(16,870,251
|
)
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
151,977
|
|
|
1,025,537
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
787,125
|
|
$
|
1,509,367
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LKA GOLD, INC.
Consolidated Statements of Operations
|
|
Year Ended
|
|
|
December 31,
|
|
|
2015
|
|
2014
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Sales - precious metals
|
|
$
|
170,549
|
|
$
|
906,400
|
|
|
|
|
|
|
|
|
|
|
EXPLORATION COSTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration and related costs
|
|
|
(685,383
|
)
|
|
(887,549
|
)
|
|
|
|
|
|
|
|
|
|
GROSS (DEFICIT) MARGIN
|
|
|
(514,834
|
)
|
|
18,851
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
86,915
|
|
|
230,881
|
|
General and administrative
|
|
|
133,046
|
|
|
199,349
|
|
Officer salaries and bonus
|
|
|
150,000
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
369,961
|
|
|
580,230
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(884,795
|
)
|
|
(561,379
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derivative
|
|
|
43,722
|
|
|
-
|
|
Interest expense, net
|
|
|
(32,487
|
)
|
|
(6,205
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
11,235
|
|
|
(6,205
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(873,560
|
)
|
$
|
(567,584
|
)
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET LOSS PER COMMON SHARE
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
19,165,152
|
|
|
14,704,961
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LKA GOLD, INC.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
1,800
|
|
$
|
2
|
|
14,976,556
|
|
$
|
14,977
|
|
43,624
|
|
$
|
86,692
|
|
$
|
16,428,239
|
|
$
|
(16,302,667)
|
|
$
|
53,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock converted into common
|
(1,800)
|
|
|
(2)
|
|
45,000
|
|
|
45
|
|
-
|
|
|
-
|
|
|
(43)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash, net of issuance costs
|
-
|
|
|
-
|
|
7,200,000
|
|
|
7,200
|
|
-
|
|
|
-
|
|
|
1,630,756
|
|
|
-
|
|
|
1,637,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for stock issuance costs
|
-
|
|
|
-
|
|
320,965
|
|
|
321
|
|
-
|
|
|
-
|
|
|
(321)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
-
|
|
|
-
|
|
364,000
|
|
|
364
|
|
-
|
|
|
-
|
|
|
156,740
|
|
|
-
|
|
|
157,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for related party debt
|
-
|
|
|
-
|
|
108,631
|
|
|
108
|
|
-
|
|
|
-
|
|
|
45,517
|
|
|
-
|
|
|
45,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cancelled in share settlement
|
-
|
|
|
-
|
|
(3,850,000)
|
|
|
(3,850)
|
|
-
|
|
|
-
|
|
|
(296,150)
|
|
|
-
|
|
|
(300,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends paid
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(3,107)
|
|
|
-
|
|
|
(3,107)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants issued for services
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
1,684
|
|
|
-
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2014
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(567,584)
|
|
|
(567,584)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
-
|
|
|
-
|
|
19,165,152
|
|
|
19,165
|
|
43,624
|
|
|
86,692
|
|
|
17,963,315
|
|
|
(16,870,251)
|
|
|
1,025,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2015
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(873,560)
|
|
|
(873,560)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
-
|
|
$
|
-
|
|
19,165,152
|
|
$
|
19,165
|
|
43,624
|
|
$
|
86,692
|
|
$
|
17,963,315
|
|
$
|
(17,743,811)
|
|
$
|
151,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LKA GOLD, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2015 and 2014
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(873,560
|
)
|
|
$
|
(567,584
|
)
|
Items to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
31,470
|
|
|
|
34,849
|
|
Accretion of asset retirement obligation
|
|
|
4,885
|
|
|
|
4,541
|
|
Amortization of debt issuance costs
|
|
|
985
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
24,499
|
|
|
|
-
|
|
Gain on derivative
|
|
|
(43,722
|
)
|
|
|
-
|
|
Common stock options, warrants and shares issued for services and officer bonus
|
|
|
-
|
|
|
|
158,788
|
|
Loss on settlement of related party debt for common stock
|
|
|
-
|
|
|
|
9,125
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
202,650
|
|
|
|
(165,007
|
)
|
Increase in accounts payable
|
|
|
(203,795
|
)
|
|
|
(37,132
|
)
|
Increase (decrease) in accounts payable - related party
|
|
|
8,776
|
|
|
|
(16,557
|
)
|
Increase in wastewater discharge liability
|
|
|
75,000
|
|
|
|
-
|
|
Decrease in asset retirement obligations
|
|
|
-
|
|
|
|
(18,975
|
)
|
Decrease in accrued expenses
|
|
|
(310
|
)
|
|
|
(85,799
|
)
|
Net Cash Used by Operating Activities
|
|
|
(773,122
|
)
|
|
|
(683,751
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
(22,500
|
)
|
|
|
42,907
|
|
Purchase of building
|
|
|
(38,055
|
)
|
|
|
(4,000
|
)
|
Net Cash (Used In) Provided by Investing Activities
|
|
|
(60,555
|
)
|
|
|
38,907
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of convertible notes payable – related party
|
|
|
250,000
|
|
|
|
-
|
|
Issuance of convertible note payable
|
|
|
50,000
|
|
|
|
-
|
|
Cash paid for debt issuance costs
|
|
|
(15,000
|
)
|
|
|
-
|
|
Common stock issued for cash, net of $162,044 in issuance
costs
|
|
|
-
|
|
|
|
1,637,956
|
|
|
|
|
|
|
|
|
|
|
Payment of preferred stock dividends
|
|
|
-
|
|
|
|
(3,107
|
)
|
Cash paid for stock right settlement
|
|
|
-
|
|
|
|
(300,000
|
)
|
Net Cash Provided by Financing Activities
|
|
|
285,000
|
|
|
|
1,334,849
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
(548,677
|
)
|
|
|
690,005
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
698,745
|
|
|
|
8,740
|
|
CASH AT END OF PERIOD
|
|
$
|
150,068
|
|
|
$
|
698,745
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,200
|
|
|
$
|
6,207
|
|
Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Discount on convertible notes payable
|
|
$
|
300,000
|
|
|
$
|
-
|
|
Common stock issued for accounts payable – related party
|
|
$
|
-
|
|
|
$
|
36,500
|
|
Common stock issued for preferred stock conversion
|
|
$
|
-
|
|
|
$
|
45
|
|
Common stock issued for preferred stock issuance costs
|
|
$
|
-
|
|
|
$
|
6,080
|
|
Common stock issued for finders fees
|
|
$
|
-
|
|
|
$
|
138,300
|
|
The accompanying notes are an integral part of these consolidated financial statements.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements presented are those of LKA Gold, Inc, a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation (LKA). 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 12).
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 debt instrument, 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, 2015 and 2014, so the diluted EPS excluded all 600,000 dilutive potential shares in the diluted EPS because the effect would be 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.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Income Taxes (Continued)
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.
Net deferred tax assets consist of the following components as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
1,596,014
|
|
|
$
|
1,295,892
|
|
Accrued expenses
|
|
|
30,857
|
|
|
|
29,739
|
|
Valuation allowance
|
|
|
(1,626,871
|
)
|
|
|
(1,325,631
|
)
|
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, 2015 and 2014 due to the following:
|
|
2015
|
|
|
2014
|
|
Pre-tax book income (loss)
|
|
$
|
(303,547
|
)
|
|
|
(192,787
|
)
|
Meals and entertainment
|
|
|
646
|
|
|
|
1,193
|
|
Common stock, options and warrants issued for services and debt discount
|
|
|
-
|
|
|
|
62,421
|
|
Related party accruals
|
|
|
1,119
|
|
|
|
(59,465
|
)
|
Accretion
|
|
|
1,661
|
|
|
|
1,544
|
|
Valuation allowance
|
|
|
300,121
|
|
|
|
187,094
|
|
Federal Income Tax
|
|
$
|
-
|
|
|
|
-
|
|
LKA had net operating losses of approximately $4,694,159 that expire in years through 2025. 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. In accordance with the statute of limitations for federal tax returns, the Company’s federal tax returns for the years 2011 through 2014 are subject to examination.
f. Cash Equivalents
LKA considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
g. Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are amounts due on gold sales, are unsecured and are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus accounts receivable do not bear interest. Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Principles of Consolidation
The consolidated financial statements include those of LKA Gold, Inc., a Delaware corporation and its wholly-owned subsidiary LKA International, Inc., a Nevada corporation. All significant intercompany accounts and transactions have been eliminated.
i. 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.
j. 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 collectability is reasonably assured. Revenue is generated through the sale of gold-bearing vein material and is recognized upon acceptance of this material by the smelter, or other ore processors. During the years ended December 31, 2015 and 2014, LKA recognized $170,549 and $906,400 from the delivery of gold-bearing material from the Golden Wonder mine, respectively.
During 2015 and 2014 100% and 26% of revenue recognized was from one source, Klondex Mines, Ltd. in Reno, Nevada (Klondex). During 2014, $478,295, or 53% of revenue recognized was from TCB International, Inc. in Phoenix, Arizona, while $195,351, or 21% of revenue recognized was from Echo Bay Minerals Company in Republic, Washington. Precious metal sales receivables were $995 and $203,645 at December 31, 2015 and 2014, respectively and were due from Klondex.
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
ASC 820, “Fair Value Measurements” (ASC 820) and ASC 825, “Financial Instruments” (ASC 825)
,
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 -
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 -
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
l. Fair Value of Financial Instruments (Continued)
Level 3
- Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The carrying values of cash, accounts payable, and accrued liabilities approximate fair value. Pursuant to ASC 820 and 825, the fair value of cash is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2015:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
256,278
|
|
|
$
|
256,278
|
|
m. New Accounting Pronouncements
LKA has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. During the fourth quarter of 2015, LKA adopted FASB Accounting Standards Update (ASU) 2015-03 “Interest – Imputation of Interest (Subtopic 835-30)”, which was issued April 2015 and adopted by the Company for the year ended December 31, 2015. In accordance with ASU 2015-03, LKA presents debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability.
The Company 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, 2015, with no effect on previously reported net income or stockholder’s equity.
o. 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 2015 or 2014.
p. Debt Issuance Costs
The Company accounts for debt issuance costs in accordance with the provisions of ASU 2015-03, presenting debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
q. Accounting for Derivative Instruments
LKA accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” (ASC 815) 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. Changes in fair value are recognized in the period incurred as either gains or losses.
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
|
Building
|
15 years
|
Mining equipment
|
3 – 5 years
|
Vehicles
|
5 years
|
Fixed assets and accumulated depreciation are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Fixed assets:
|
|
|
|
|
|
|
Land
|
|
$
|
376,442
|
|
|
$
|
376,442
|
|
Mining claims
|
|
|
12,137
|
|
|
|
12,137
|
|
Land improvements
|
|
|
128,580
|
|
|
|
128,580
|
|
Automobile
|
|
|
66,923
|
|
|
|
66,923
|
|
Mining equipment
|
|
|
124,976
|
|
|
|
124,976
|
|
Buildings
|
|
|
42,055
|
|
|
|
-
|
|
Unamortized asset retirement obligation (Note 3)
|
|
|
98,027
|
|
|
|
98,027
|
|
Construction in-process
|
|
|
-
|
|
|
|
4,000
|
|
Less: Accumulated depreciation
|
|
|
(359,175
|
)
|
|
|
(327,705
|
)
|
Total fixed assets
|
|
$
|
489,965
|
|
|
$
|
483,380
|
|
Depreciation expense for the years ended December 31, 2015 and 2014 was $31,470 and $34,849, respectively.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
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 Ulay 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.
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, 2015 and 2014, LKA holds reclamation bonds totaling $123,597 in the name of the State of Colorado (the State) for the Golden Wonder mine. This amount is 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, 2015 and 2014 was $4,885, and $4,541, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
Office Space
LKA pays a company owned by an officer and shareholder $1,500 per month for office rent, equipment, services 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, 2015 and 2014, LKA owes Abraham & Co $15,000 and $6,000 on this obligation, respectively.
During February 2014, LKA issued 108,631 shares of common stock to Abraham & Co., Inc. for payment of $36,500 in amounts payable from LKA. LKA recognized a loss on settlement of debt of $9,125 as a result of the value of the stock issued being greater than the debt extinguished.
Accounts and Wages Payable
At December 31, 2015 and 2014, LKA owes $309 and $533, respectively, for purchases made on the personal credit card of LKA’s president, Kye Abraham. Additionally, LKA owed Kye Abraham $75,757 and $76,067 in unpaid salary at December 31, 2015 and 2014, respectively.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 4 - RELATED PARTY TRANSACTIONS (CONTINUED)
Convertible Notes Payable
During September 2015, LKA issued two 7.5% Convertible Debentures (Debentures) for a total of $250,000 in cash to beneficial owners of more than 10% of the voting interests in LKA common stock. The Debentures accrue interest at 7.5% per annum, are unsecured, due in three years from the dates of issuance and are convertible into shares of LKA common stock at any time at the option of the holder at a rate of $0.50 per share. Interest is due in semi-annual payments and LKA is required to maintain a reserve of proceeds equal to the first two semi-annual payments. As such, LKA has designated $18,750 as restricted cash at December 31, 2015.
If any event of default occurs, the interest rate increases to 15% per annum and the conversion rate shall be decreased to $0.25 per share. As a result of the potential variable conversion rate, the conversion options embedded in these instruments are classified as liabilities in accordance with ASC 815 and LKA recognized a debt discount of $250,000 (see Note 6).
LKA incurred $12,500 in debt issuance costs on the Debenture issuances. The debt issuance costs are being amortized over the three year terms of the Debentures. During the year ended December 31, 2015, LKA recognized $821 of interest expense from the amortization of debt issuance costs.
LKA’s convertible notes payable consist of the following at December 31, 2015:
7.5% Convertible Debenture, interest at 7.5% per annum, unsecured, due September 29, 2018
|
|
$
|
125,000
|
|
7.5% Convertible Debenture, interest at 7.5% per annum, unsecured, due September 29, 2018
|
|
|
125,000
|
|
Total
|
|
$
|
250,000
|
|
Maturities under the Debentures are as follows at December 31, 2015:
2016
|
|
$
|
-
|
|
2017
|
|
|
-
|
|
2018
|
|
|
250,000
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
250,000
|
|
NOTE 5 - CONVERTIBLE NOTE PAYABLE
During October 2015, LKA issued a 7.5% convertible debenture for $50,000 in cash. The convertible debenture accrues interest at 7.5% per annum, is unsecured, due in three years from the date of issuance and is convertible into shares of LKA common stock at any time at the option of the holder at a rate of $0.50 per share. Interest is due in semi-annual payments and LKA is required to maintain a reserve of proceeds equal to the first two semi-annual payments. As such, LKA has designated $3,750 as restricted cash at December 31, 2015.
If any event of default occurs, the interest rate increases to 15% per annum and the conversion rate shall be decreased to $0.25 per share. As a result of the potential variable conversion rate, the conversion option embedded in this instrument is classified as a liability in accordance with ASC 815 and LKA recognized a debt discount of $50,000 (see Note 6).
LKA incurred $2,500 in debt issuance costs on the convertible debenture issuance. The debt issuance costs are being amortized over the three year term of the convertible debenture. During the year ended December 31, 2015, LKA recognized $164 of interest expense from the amortization of debt issuance costs.
NOTE 6 - DERIVATIVE LIABILITIES
LKA analyzed the conversion options embedded in the convertible notes payable and convertible notes payable related party (Convertible Notes) for derivative accounting consideration under ASC 815 and determined that the instruments embedded in the above referenced Convertible Notes should be classified as liabilities and recorded at fair value due to the potentially variable conversion prices.
The fair value of the conversion options was determined to be $358,006 as of the issuance date using a Black-Scholes option-pricing model. Upon the date of issuance of the Convertible Notes, $300,000 was recorded as debt discount and $58,006 was recorded as day one loss on derivative liability. During the year ended December 31, 2015, $101,728 was recorded as a net gain on mark-to-market of the conversion options.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
The following table summarizes the derivative liabilities included in the balance sheet at December 31, 2015:
|
|
|
|
Balance, December 31, 2014
|
|
$
|
-
|
|
Day one loss due to convertible debt
|
|
|
58,006
|
|
Debt discount
|
|
|
300,000
|
|
Gains on change in fair value
|
|
|
(101,728
|
)
|
Balance, December 31, 2015
|
|
$
|
256,278
|
|
The following table summarizes the loss on derivative liabilities included in the income statement for the period ended December 31, 2015:
|
|
|
|
Day one loss due to convertible debt
|
|
$
|
(58,006
|
)
|
Gains on change in fair value
|
|
|
101,728
|
|
Gain on derivative liabilities
|
|
$
|
43,722
|
|
The Company valued its derivatives liabilities using the Black-Scholes option-pricing model. Assumptions used during the year ended December 31, 2015 include (1) risk-free interest rates of 0.99%, (2) lives of between 2.79 and 3.04 years, (3) expected volatility of between 379% to 411%, (4) zero expected dividends, (5) conversion prices as set forth in the related instruments, and (6) the common stock price of the underlying share on the valuation dates.
NOTE 7 - MINE OPERATING AGREEMENT
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 gold enriched vein material 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 gold 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 and as of the years ended December 31, 2015 and 2014, LKA paid Coal Creek $431,822 and $725,602 for Mine Operator Services and accrued an additional $9,770 and $122,742 in remaining reimbursable expense related to gold shipments, respectively.
NOTE 8 - MINE EXPLORATION AND OPTION AGREEMENT
On July 9, 2015, LKA entered into an Exploration Agreement & Option (Agreement) with Kinross Gold U.S.A., Inc. for the purpose of expanding its Golden Wonder Mine exploration beyond LKA’s active workings. The Agreement, amongst its other other provisions, grants Kinross a five-year exclusive right to explore, and if successful, develop any mineral resource(s) containing 50,000 or more ounces of gold on LKA’s properties above and adjacent to the Golden Wonder Mine. If such a resource, or multiple resources, is discovered, LKA will have the option to enter into a joint venture with Kinross for the purpose of developing such resource(s) by reimbursing 40.25% of Kinross’ exploration expenses in return for a 35% interest in the joint venture. If a joint venture is formed, LKA’s contribution will also include all of LKA’s Golden Wonder properties.
During the five-year exploration period, Kinross will, but is not obligated to, conduct exploration, at its own expense, while LKA will retain the exclusive right to continue exploration and development of any resources within a “Carve-Out Area” which is LKA’s current area of operation.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 9 - NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION LIABILITY
In 2002 the Federal Bureau of Land Management (the "BLM") advised LKA of its desire to extend to the Ute-Ulay Property certain environmental clean-up (“remediation”) activities that it is conducting on neighboring properties that LKA does not own. The BLM commissioned and obtained three engineering evaluation and cost analysis ("EE/CA") studies/reports on the Ute-Ulay and the neighboring public lands in 2002-2006. These EE/CA studies analyzed the current environmental state of the Ute-Ulay property and other properties in the area. The studies 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 BLM’s most recent study, “Value Engineering Study on the Ute Ulay Mine/Mill Site – Final Report” dated January 5, 2006, projected the costs of remediation and property stabilization on the Ute-Ulay property to be approximately $2.1 million. Based upon discussions with Hinsdale County, Colorado officials, Colorado Department of Public Health & Environment Ute-Ulay project supervisor, the Federal Environmental Protection Agency’s (the “EPA”) regional manager, and legal counsel, the actual costs associated with this effort are expected to be approximately $1.2 million; substantially below previous BLM estimates. Under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the 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 property owner and previous owners. While it cannot be determined with absolute certainty until the project is completed, LKA’s status as a “
de minimis”
participant and the fact that remediation activities are focused on property located largely outside of LKA’s permitted operating area, LKA management expects this project will have a negligible impact on the LKA’s financial condition. Accordingly, pursuant to Generally Accepted Accounting Principles, and all discussions with the above named agencies to date, LKA management believes it is unlikely there will be a material impact to its financial statements and no liability for this project has been recorded as of the year ended December 31, 2015. Actual completion of remediation work at the site was completed in late 2013 by the EPA. The EPA has not yet issued its notice of final determination.
Except as discussed above, 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 10 - WASTEWATER DISCHARGE LIABILITY
During the fourth quarter of 2014, LKA received a Notice of Violation (NOV) from the Colorado Department of Health and Environment (CDPHE) for failure to meet certain requirements of the Company’s wastewater discharge permit. During 2015, the Company undertook all corrective actions specified in the NOV, under CDPHE oversight, and believes it is in compliance with the terms of its permit. LKA believes it is probable that that there will be a financial penalty assessed, and that range will be between $75,000 and $150,000. As a result, LKA has accrued a liability of $75,000 as of December 31, 2015 since there is no better estimate of the amount of loss within this range.
NOTE 11 - CONVERTIBLE PREFERRED STOCK
Between August and December 2013, LKA issued a total of 11,500 shares of convertible preferred stock (Preferred Stock). The Preferred Stock was convertible into shares of common stock at a rate based on the average closing price of LKA common shares for the 10 trading days prior to the receipt of the notice of conversion less a 15% discount, but not less than $0.40 per share.
Between September 2013 and February 2014 all holders of convertible preferred stock elected to convert their shares into 209,643 shares of common stock.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 12 - COMMON STOCK
During January 2014, LKA issued 25,000 shares of common stock for services to a consultant. LKA recognized $12,748 in non-cash consulting expense, or $0.51 per share.
During February 2014, LKA issued a total of 339,000 shares of common stock for services to four consultants. LKA recognized $157,104 in non-cash consulting expense
During February 2014, LKA issued 108,631 shares of common stock for accrued office space rent to Abraham & Co., Inc., a related party entity, valued at $45,625, for accrued amounts of $36,500 and an additional expense of $9,125.
During February 2014, the holder of 1,800 shares of Preferred Stock elected to convert all of the Preferred Stock into 45,000 shares of common stock.
During June 2014, LKA issued 20,965 shares of common stock to Abraham & Co. for commissions related to the issuance of convertible preferred stock. The value of the common shares of $6,080, or $0.29 per share, was recorded as convertible preferred stock issuance costs.
During August 2014, LKA completed a private placement of 7,200,000 shares of common stock with Koski Family Limited Partnership (“KFLP”) at a price of $.25 per share. The private placement agreement also calls for LKA to purchase the Brannon Limited Partnership ("Brannon") rights to receive 4,200,000 shares of LKA common stock. Brannon received $300,000 in cash and 650,000 shares of LKA common stock in exchange for its rights to receive future distributions from the remaining 3,850,000 shares reserved by the Company for this purpose. LKA cancelled the remaining shares.
LKA also entered into an Investment Advisory and Finder’s Fee Agreement as part of the private placement agreement (“Advisory Agreement”). The Advisory Agreement provided for a cash payment of $150,000 and the issuance of 300,000 shares of LKA common stock valued at $138,300, or $0.46 per share. The above mentioned cash and stock payments, as wells as an additional $12,044 paid for stock issuance closing costs totaling $162,044 was recorded as common stock issue costs against additional paid-in capital.
NOTE 13 - COMMON STOCK OPTIONS AND WARRANTS
Common Stock Options
During October 2011, LKA issued its Chairman and CEO 250,000 shares of common stock and options to purchase up to 500,000 shares of LKA common stock at $1.00 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 common stock options were allowed to expire unexercised on December 31, 2014. No expense was recognized on these stock options during the year ended December 31, 2014.
The following table summarizes the options outstanding and associated activity for the years ended December 31, 2015 and 2014:
|
|
Number of Options
|
|
|
Weighted Average Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Options exercisable at December 31, 2013
|
|
|
500,000
|
|
|
$
|
1.00
|
|
|
|
0.83
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(500,000
|
)
|
|
|
1.00
|
|
|
|
-
|
|
Options exercisable at December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercisable at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
During 2013, LKA granted 2,000,000 performance restricted common stock options, whereby, it’s Chief Executive Officer has the ability to earn the options upon the issuance of a notice of final determination of the above referenced remediation liability with the EPA that results in no, or a de minimums, assessment. LKA believes this is a remote possibility and none of the common stock options have been earned as of December 31, 2015.
Common Stock Warrants
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 an initial incentive compensation for his services, LKA issued Mr. Viens warrants to purchase up to 250,000 shares of LKA stock in three tranches on a three-year vesting. 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 $6.00 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. The value of the warrants was recognized as expense ratably over the vesting term.
The Viens warrant three-year vesting schedule is as follows:
Warrant I for 100,000 shares exercisable at $1.60 per share, to be issued as of May 1, 2011
Warrant II for 75,000 shares exercisable at $2.40 per share, to be issued one year later, or May 1, 2012
Warrant III for 75,000 shares exercisable at $3.60 per share, to be issued one year later, or May 1, 2013
During the years ended December 31, 2015 and 2014, 75,000 and 75,000 warrants related to the above agreement expired unexercised, respectively.
During February 2012, 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 an initial incentive compensation for his services, LKA agreed to issue Mr. Perttu warrants to purchase up to 250,000 shares of LKA stock in three tranches on a three-year vesting schedule. 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 $6.00 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. The value of the warrants was recognized as expense ratably over the vesting term. During the year ended December 31, 2014, LKA expensed $1,684 related to the warrants.
The Perttu warrant three-year vesting schedule is as follows:
Warrant I for 100,000 shares exercisable at $0.80 per share, to be issued as of March 1, 2012.
Warrant II for 75,000 shares exercisable at $1.20 per share, to be issued one year later, or March 1, 2013.
Warrant III for 75,000 shares exercisable at $1.60 per share, to be issued one year later, or March 1, 2014.
During the years ended December 31, 2015 and 2014, 75,000 and 100,000 warrants related to the above agreement expired unexercised.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
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 $6.00 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.
The Warrant I - III tranches were valued at $44,792, $29,769 and $26,947 using the Black-Scholes option fair value pricing model using the following assumptions:
Stock price on grant date
|
|
$
|
0.70
|
|
Exercise price
|
|
$
|
0.80 – 1.60
|
|
Expected time to exercise
|
|
2.5 years
|
|
Risk free interest rate
|
|
|
0.35
|
%
|
Volatility
|
|
|
121.02
|
%
|
Expected forfeiture rate
|
|
|
0.00
|
%
|
The following table summarizes the outstanding warrants and associated activity for the years ended December 31, 2015 and 2014:
|
|
Number of Warrants Outstanding
|
|
|
Weighted Average Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance, December 31, 2013
|
|
|
400,000
|
|
|
$
|
1.85
|
|
|
|
1.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(175,000
|
)
|
|
|
(1.49
|
)
|
|
|
-
|
|
Balance, December 31, 2014
|
|
|
225,000
|
|
|
|
2.13
|
|
|
|
1.08
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(150,000
|
)
|
|
|
(2.40
|
)
|
|
|
-
|
|
Balance, December 31, 2015
|
|
|
75,000
|
|
|
$
|
1.60
|
|
|
|
0.67
|
|
NOTE 14 - NOTE SETTLEMENT AGREEMENT
Effective as of August 14, 2012, LKA, executed a Letter Agreement with Brannon, whereby, the parties agreed to settle the entire unpaid principal balance of $766,321 and accrued interest of $365,762 on a note payable through the issuance of a total of six million shares of LKA common stock at a then pre-split settlement price of $0.1886 per share.
Under the Letter agreement, LKA was required to deliver to Brannon a stock certificate representing 400,000 shares of common stock and Brannon was to provide LKA written notice of its election when to issue the remaining 5,200,000 common shares of LKA. The 5,200,000 shares of issued, but not outstanding common shares to Brannon
were not subject to a 1:2 reverse stock split. As such, upon the 1-for-2 reverse-split of its common stock in 2013, LKA recognized an additional $2,756,000 in non-cash stock based expense for the exclusion of 5,200,000 pre-split (2,600,000 post-split) issued but not yet outstanding common shares related to October 2012 debt conversions. The expense was calculated based on the market price of $1.06 per share on the 2,600,000 post-split shares as of March 15, 2013.
LKA was required, within 90 days of the date of the Letter Agreement and Note Settlement Agreement, to proceed with the court hearing process for the Settlement Shares to be issued pursuant to the exemption from registration provided by Section 3(a)(10) of the Securities Act of 1933, as amended. On October 15, 2012, the Circuit Court of the Eighteenth Judicial Circuit in and for Seminole County, Florida, issued its Consent Final Judgment with respect to the issuance to the five recipients of a total of 887,111 post-split shares of LKA common stock and with respect to Brannon, a total of 6,000,000 common shares, of which 2,150,000 were issued at December 31, 2014. The remaining 3,850,000 common shares were returned to LKA as part of the August 2014 private placement of 7,200,000 shares of common stock with KFLP (see Note 9). The private placement agreement called for LKA to purchase the Brannon rights to receive 4,200,000 shares of LKA common stock. Brannon received $300,000 in cash and 650,000 shares of LKA common stock in exchange for its rights to receive future distributions from the remaining 3,850,000 shares reserved by the Company for this purpose. LKA cancelled the remaining shares.
LKA GOLD, INC.
Notes to the Consolidated Financial Statements
NOTE 15 - 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,
has a working capital deficit and has negative cash flows from operations, which 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:
LKA is currently engaged in an 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. 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 evaluate potential merger, joint venture or lease agreements for the property.
In order to support continued operation of the mine, LKA completed a $300,000 capital funding raise in September and October 2015 (see Notes 4 and 5). 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.