APPENDIX A
Comment/Response #
1. See attached page 3
2. See attached pages 3, 5, 15, 20, 23
4. See attached pages 9 & 10
5. See attached page 9
6. See attached page 4
7. See attached page 4
8. See attached page 4
financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory
and technical factors affecting our operations, products, services and prices.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-
looking statements speak only as of the date they are made. LKA does not undertake, and specifically disclaims, any
obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of
such statements.
ITEM 1. BUSINESS
Business Development
LKA International, Inc. was incorporated on March 15, 1988, in the State of Delaware. Since our inception, our
authorized capital has been 100,000,000 shares, consisting of 50,000,000 shares of common stock with a par value
of one mill ($0.001) per share, and 50,000,000 shares of preferred stock, also with a par value of one mill per share.
LKA owns certain real and personal property interests including patented and unpatented mining claims, water
rights, buildings, fixtures, improvements, equipment, and permits situated near Lake City, Colorado, which are
described below. LKA's activities associated with these properties have been sporadic since they were acquired by
its predecessor in December, 1982.
Effective as of July 2, 2009, LKA and PanAmerica Capital Group, a Panama corporation (“PanAmerica”) executed
a Subscription Agreement by which LKA issued to PanAmerica a promissory note in the principal amount of
$545,090, and bearing interest at 10 percent per year (the “Promissory Note”). The outstanding principal and
interest on the Promissory Note are payable in five equal installments. The first installment was due on January 4,
2010, and each subsequent installment was due on the date that was three months after the due date of the
immediately preceding installment. In lieu of the payment of principal and interest as outlined above, PanAmerica
may elect to receive all or a portion of each installment in cash amounts equivalent to the value of 140 troy ounces
of gold as determined by the closing spot price of gold on COMEX on the business day immediately preceding the
due date of such installment. LKA’s obligations under the Promissory Note are secured by the Company’s mining
properties.
As of the date of this Report, the Company has paid 60% of the amount owing to PanAmerica under the first
installment on the Promissory Note. Interest is accumulating on the remaining 40%. LKA is currently delinquent
on all remaining principal and interest payments on the Promissory Note, and as of the date of this Report,
PanAmerica has not declared LKA in default and has refrained from any formal collection or foreclosure efforts.
The Lake City, Colorado Properties.
The Ute-Ule silver mine and milling facility and the Golden Wonder gold mine (respectively, the "Ute-Ule
Property" and the "Golden Wonder Property" or, collectively, the "Properties"), consist of certain patented and
unpatented mining claims and a milling facility located in Hinsdale County, Colorado. In December, 1982, our
predecessor, LKA Holdings, Inc., a Utah corporation ("LKA Utah") acquired a 51% interest in the Properties from
Lake City Mines, Inc., a Colorado corporation ("Lake City Mines"), which retained the remaining 49% interest.
Immediately after the acquisition, LKA Utah assigned 90% of its interest in the future proceeds that it had the right
to receive from the Properties to Caldera Partners Limited Partnership, a Washington limited partnership ("Caldera")
in return for approximately $1.6 million, which LKA used to develop the Properties. As a result, Caldera owned a
45.9% interest in the future proceeds that LKA Utah had the right to receive on the Properties. LKA's President, Kye
A. Abraham, is Caldera's Managing Partner. Subsequent to a bankruptcy filing by Lake City Mines in February
1984, LKA acquired Lake City Mine’s interest in the Properties through a Sheriff’s sale.
On March 1, 2005, the Company completed the acquisition of Caldera's 45.9% interest in the Golden Wonder and
Ute Ule mines. Per the terms of the agreement, the Company agreed to issue Caldera 6,434,042 "unregistered" and
"restricted" shares of common stock in exchange for Caldera's interest in the mines and the full satisfaction of all
receivables due to Caldera from the Company. Caldera was also relieved of any future obligations to contribute
further exploration and and construction funds. For more information on this transaction, see the Company's
3
Current Report on Form 8-K, dated March 3, 2005, and filed with the Securities and Exchange Commission on
March 4, 2005.
Description of Business
LKA is currently engaged in an intensive exploration program at the Golden Wonder mine with the objective of
returning the mine to a commercial producing status. The exploration program, which began in November, 2008,
has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the
mine. Exploration efforts are aimed at extending the zones (veins) within the mine that previously produced over
133,701 ozs. (82% of which came during the period of 2002-2006 at an average ore grade of 16.01 ozs. gold per
ton). As the Golden Wonder vein system typically pinches and swells, horizontally as well as vertically, LKA’s
objective/challenge will be to locate consistent vein widths within these high-grade zones to establish significant
reserves to resume commercial production. Drilling and drifting along the vein structure has been the primary
method of exploration to date. LKA expects to incorporate geochemical analysis, mapping (surface and
underground) and other methods of exploration as its budget permits. Since resuming operations in the first quarter
of 2009, LKA has shipped/sold ten bulk ore samples containing 1,424 ounces of gold derived from exploratory
mining operations. Ore shipments for 2009 and 2010 are as follows:
Tons
Oz/ton
Gold (Oz)
2009
88
3.82
337
2010
559
1.07
599
TOTAL
647
1.45
936
Ore shipments in transit or process may not result in receivables or finalized payment (“settlement”) at year end.
Details of any such shipments will be reported in the subsequent quarter. Sales of ore have offset a significant
portion of the cost of the current exploration program. To date, all ore shipments have been made to Teck, Yukon-
Nevada Gold and Kinross. Currently there are no established reserves and all LKA efforts are exploratory in nature.
In August, 2010, LKA entered into a Mine Operating Agreement (the “Operating Agreement”) with Coal Creek
Construction (“Coal Creek”). The Operating Agreement calls for Coal Creek to provide mine operating services,
including mining and underground construction, blasting, crushing, bagging, hauling, loading and transporting of
ore and associated waste material to locations specified by LKA. Per the Operating Agreement, Coal Creek is to
pay all Mine Operator Services Expenses and is entitled to reimbursement for such expenses from LKA, provided
LKA has received sufficient monies from ore sales. LKA is responsible for payment of costs associated with
vehicles it provides for the project (including insurance and maintenance) property and production taxes, mining
claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation
bonds. LKA will also pay all liabilities associated with the Golden Wonder Property which were incurred prior to
the date of the Operating Agreement. In exchange for providing Mine Operator Services, Coal Creek is entitled to a
payment equal to twenty percent of the project's net profits, or Net Smelter Receipts less deductions for Mine
Operator Services, Royalties and Project-related Expenses, provided that Coal Creek has performed its service
obligations and is current with its financial obligations and all other terms of its agreement with LKA. During the
calendar year ended December 31, 2010, LKA paid Coal Creek $226,708 in advances toward Mine Operator
Services and accrued an additional $123,931 in estimated remaining reimbursable expense related to its ore
shipment in December 2010.
Principal Products or Services and their Markets
We do not currently have any products or services.
Distribution Methods of the Products or Services
None; not applicable.
Status of any Publicly Announced New Product or Service
4
None; not applicable.
Competitive Business Conditions and Our Competitive Position in the Industry and Methods of Competition
Management believes that there are literally thousands of non-operating mining companies such as LKA. We
believe that our competitive position in the industry will be very insignificant.
Sources and Availability of Raw Materials and Names of Principal Suppliers
We do not use any raw materials, as we do not directly conduct any material operations.
Dependence on One or a Few Major Customers
From 1998 through the second quarter of 2006, our revenues consisted of production royalties from the commercial
mining activities at the Golden Wonder mine. Mining operations were conducted during this period by Au Mining,
Inc., a private Colorado corporation under the terms of a mine lease agreement with the Company. In the third
quarter of 2006, Au Mining ceased production due to the depletion of the established ore body. Since that time,
LKA’s source of revenue has been the limited sale of ore from its exploration program and investment income.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including
Duration
We have obtained "110d" limited impact permits from the Colorado Division of Reclamation Mining and Safety and
have posted reclamation bonds to ensure the clean-up of environmental disturbances on the Ute-Ule and Golden
Wonder Properties. Storm water and discharge permits have also been issued for the above properties by the
Colorado Department of Public Health and Environment. We are currently in compliance with all applicable permit
and bonding requirements.
Need for any Governmental Approval of Principal Products or Services
None; not applicable.
Effect of Existing or Probable Governmental Regulations on our Business
We are subject to the following regulations of the SEC and applicable securities laws, rules and regulations:
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting
company.” That designation will relieve us of some of the informational requirements of Regulation S-K applicable
to larger companies.
Sarbanes/Oxley Act
We are also subject to the Sarbanes/Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent
accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor
independence. It also requires steps to enhance the direct responsibility of senior members of management for
financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory
rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates
guidelines for audit committee members’ appointment, compensation and oversight of the work of public
companies’ auditors; management assessment of our internal controls; auditor attestation to management’s
conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires
companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities
fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act has substantially
increased our legal and accounting costs.
5
future operations at the mill may require additional settling ponds and additional treatment of waste water may be
required to preserve water quality. We do not believe that these requirements would impose an undue burden on us.
Substantial additional funding would be required to make the mill operational. The Company has no current plans in
this regard. The Ute mine and milling facility are currently inactive and the Company has no immediate plans to
resume operations. The status of these properties however could change based upon certain business and regulatory
conditions. Permits for these properties are in a state of “temporary cessation.”
Golden Wonder.
Geology
Physical, structural and petrologic characteristics of this rhyolite intrusion observed in the underground workings of
the Golden Wonder mine demonstrates features characteristic of both an extrusive and intrusive magma, and it is
believed that the workings of the Golden Wonder mine are located in the upper reaches of the rhyolitic intrusion
where it “welled out” from its vent source, gradually becoming more intrusive in character with depth. It
undoubtedly extends downward along its vent source to the original magma chamber from whence it was derived.
As observed in the underground workings of the Golden Wonder mine. Based on extensive underground and field
work, it would appear that the intrusion of the Golden Wonder host rock occurred in a series of pulses. Molten
magma moved upward along the vent structure wherein it was emplaced, and solidified. Oftentimes it appears that
the rock unit was only partially solidified when it was deformed by another upward pulse of magma, thereby
creating very complex flow-banding within the partially solidified rock. In some instances, the rock unit appears to
have been completely solidified, only to have been brecciated by a later pulse of magmatic injection, with fluid
magma flowing around these brecciated fragments. In all instances observed, the composition of the magma
remained essentially the same throughout its entire emplacement, suggesting the vein structure and the
characteristics of the vein mineralization at the Golden Wonder mine is very much different from nearly all the other
base-metal mines of the Lake City area, and even differs from that which apparently existed at the Golden Fleece
mine. Instead of being of the classic fracture-filling type, where a more-or-less well-defined linear fracture, or set of
open fractures, has been filled with ore minerals and gangue, the vein structure at the Golden Wonder mine usually
does not follow a well-defined fracture, but in detail is often quite sinuous, enlarging and contracting along its
course. Very commonly, the vein dies out completely and most often, a similar en echelon vein segment is located a
relatively short distance away. The vein structure typically ranges from only a fraction of an inch thick to several
feet across, but may enlarge significantly within ore shoots.
The Golden Wonder, near Lake City, Colorado, is located in the historic “Colorado Mineral Belt” from which over
25 million ounces of gold have been produced dating back to the mid 1800s.
History
9
The Golden Wonder Property consists of three patented and 25 unpatented mining claims located approximately 2-
1/2 miles south of Lake City, Colorado The mine has been worked intermittently since its discovery in 1880. The
mine is at an elevation of 10,323 feet and is situated on a hill slope approximately 1,500 feet above the valley floor.
The initial discovery was made after finding high grade float in the surface containing free gold. A limited body of
ore was mined prior to 1889. The Golden Wonder Property was generally unworked through 1930. From 1930 to
1969, sporadic mining and development efforts were conducted, some of which resulted in the extraction of an
undetermined amount of gold bearing ore.
During the summer of 1969, Southern Union Production Company ("Supron") began an exploration program at the
Golden Wonder. Out of this, the SUPCO winze (a steeply inclined passageway connecting the mine workings) was
started in the winter of 1970-1971 and completed to a depth of approximately 150 feet below the third level of the
mine, with lateral drifting along the course of mineralization off the winze on the fourth level. Work was halted on
the property in 1972, when Supron decided to discontinue all its metallic mineral operations in the western United
States and South America. In 1973, Rocky Mountain Ventures secured a lease on the Property and shipped a small
tonnage of dump material to a mill then operating at Crested Butte, Colorado for processing. Lake City Mines, Inc.
acquired the property from Supron in 1977 and conducted extensive underground work including the driving of the
1,600’ sixth level crosscut. LKA acquired an undivided 51% interest in the property in 1982 and commenced
exploration shortly thereafter. During this exploration program a limited amount of ore was produced and shipped to
the Ute mill for concentrating and later sold to ASARCO as a part of a pilot production program. The mine was shut
down shortly thereafter due to falling gold prices. In 1997, Au Mining leased the mine from LKA and commercially
produced ore through the second quarter of 2006. Upon terminating its relationship with Au Mining LKA received
an $18 million joint venture proposal from Cambior, Inc. to conduct exploration, establish reserves and, assuming
success, resume commercial production. Cambior was acquired by IAM Gold in late 2006 before the joint venture
agreement was finalized. In 2007 LKA was offered and finalized a similar joint venture arrangement ($18 million
for 50% interest) with Richmont Mines, Inc. In 2008 program of underground drilling and drifting was proposed and
commenced but never completed by Richmont due to cost overruns and inconclusive results from initial drilling
efforts. LKA resumed exploration efforts on its own in late 2008 that continues to the present date. Substantial
underground drilling and drifting has been preformed resulting in the sale of limited quantities of ore containing
over 1,400 ounces of gold. Ore sales have been made to Teck Resources, Kinross and Yukon-Nevada Gold. To date,
no commercial reserves have been established. Power for mining operations is generated on site. Unpatented claims
held by LKA (which may vary in number from year to year) are maintained on Bureau of Land Management
property through payment of annual assessment fees.
Commercial Ore Production
The Golden Wonder has been explored and developed by drifts on six different levels, with raises and winzes
connecting the lower levels. In 1984, LKA conducted a five-month pilot production program that resulted in the sale
of approximately $590,000 of gold concentrates to ASARCO. The average grade of the ore produced during the
pilot program was 0.96 ounces of gold per ton and the average gold price at that time was $325 per ounce. The
majority of this production was derived from two stopes on the mine's fourth level, which consistently averaged one
ounce of gold per ton. Commercial quantities of gold were also taken from the mine's fifth level. From 1997 until
the second quarter of 2006, commercial mining operations were conducted by Au Mining, LLC who leased the mine
from LKA. During this period approximately 8,349 tons of ore containing 133,701 ounces of gold were produced
from the mine's fifth, sixth and seventh levels. The average grade of the ore produced during this period was 16.01
ounces of gold per ton. The average gold price during the period in which the ore was sold was $337.76. Total gold
production from the mine under LKA’s ownership has been approximately 137,558 ounces. The average grade of all
ore produced during this period was 14.15 ounces per ton.
Office Space.
We currently lease approximately 750 square feet of office space located at 3724 47th Street Ct. N.W., Gig Harbor,
Washington. Effective as of January 1, 2005, we paid monthly rent of $1,300 to Abraham & Co., Inc. a FINRA
member broker/dealer which is controlled by our President, Kye A. Abraham. This rent includes the use of the office
space, bookkeeping services, telephone, office supplies, utilities, internet, computers and photocopiers. The lease
arrangement is a month-to-month oral lease with Abraham & Co. and the payment amount increased to $1,500 per
month in 2007 to keep pace with increased costs.
10
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward-looking Statements
Statements made in this Form 10-K which are not purely historical are forward-looking statements with respect to
the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and
business of LKA. Such forward-looking statements include those that are preceded by, followed by or that include
the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans",
"intends", "targets" or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are
beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking
statements, including the following, in addition to those contained in this Annual Report: general economic or
industry conditions nationally and/or in the communities in which we conduct business; fluctuations in global gold
and silver markets; legislation or regulatory requirements, including environmental requirements; conditions of the
securities markets; competition; our ability to raise capital; changes in accounting principals, policies or guidelines;
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.
Liquidity and Capital Resources
Current assets at December 31, 2010, totaled $123,809. As of that date, we had $20,084 in cash, $89,384 in
accounts receivable, and $14,341 in prepaid expenses.
During fiscal 2010, our operating activities used net cash of $334,035. In 2009, by contrast, operating activities
used net cash of $597,083. Net cash used by investing activities decreased to $0 in 2010, from $188,077 in the prior
year. Net cash provided for financing activities decreased to $140,714 in 2010, compared to $815,581 in 2009.
At December 31, 2010, the Company had negative working capital of $1,304,136, as compared to $597,948,
negative working capital at December 31, 2009.
Results of Operations
Year Ended December 31, 2010, Compared to Year Ended December 31, 2009
During the calendar year ended December 31, 2010, we received $528,845 from the sale of gold ore, compared to
$236,757 in 2009. These limited ore sales resulted from our exploration activities at the Golden Wonder mine.
Operating expenses decreased from $1,365,277 in 2009 to $927,333 in 2010. Exploration, and related costs
decreased $132,810, professional fees decreased $305,391, royalty expense increased $15,137 and general and
administrative expenses decreased $14,880 in 2010. Officer salaries remained the same at $150,000 in 2010, and
2009. With a combination of increased revenues and decreased operating costs, we had operating loss of $398,488
during the calendar year ended December 31, 2010, as compared to operating loss of $1,128,520 in 2009.
Our total other expense increased to $602,528 in 2010, from $216,248 in the prior year. Loss on derivative was
$99,369 in 2010 compared to $169,692 in 2009. We had debt extension/restructuring expense of $358,897 in 2010.
Interest expense increased to $144,303 in 2010 from $56,106 in 2009. Interest income decreased to $27 in 2010,
from $48 in 2009. We had $0 in unrealized loss on securities, $6 in realized loss on securities and $0 in dividend
and other investment income in 2010. This compares to unrealized gain of $4,046, realized gain of $1,055 and
$4,401 in dividend and other investment income in 2009.
15
LKA INTERNATIONAL, INC.
Consolidated Statements of Operations
December 31,
2010
2009
REVENUES
Sales - precious metals
$
528,845
$
236,757
Total Revenues
528,845
236,757
OPERATING EXPENSES
Exploration, and related costs
497,983
630,793
Professional fees
67,231
372,622
Royalty expense
26,384
11,247
General and administrative
185,735
200,615
Officer salaries
150,000
150,000
Total Operating Expenses
927,333
1,365,277
OPERATING INCOME (LOSS)
(398,488)
(1,128,520)
OTHER INCOME (EXPENSE)
Loss on derivative
(99,369)
(169,692)
Debt default expense
(358,897)
-
Interest expense
(144,303)
(56,106)
Interest income
27
48
Unrealized gain on securities
-
4,046
Realized gain (loss) on securities
(6)
1,055
Dividend and other investment income
-
4,401
Total Other Income (Expense)
(602,548)
(216,248)
LOSS PRIOR TO INCOME TAX EXPENSE
(1,001,036)
(1,344,768)
INCOME TAX EXPENSE
-
-
NET LOSS
$
(1,001,036)
$
(1,344,768)
BASIC AND DILUTED NET LOSS PER COMMON SHARE
$
(0.07)
$
(0.10)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED
15,141,332
13,871,265
The accompanying notes are an integral part of these consolidated financial statements.
20
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements presented are those of LKA International, Inc. (LKA), a Delaware corporation and
its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation. LKA was incorporated on March 15, 1988,
under the laws of the State of Delaware. LKA owns certain real and personal property interests including patented and
unpatented mining claims, water rights, buildings, fixtures, improvements, equipment, and permits situated in Lake City,
Colorado. LKA's activities associated with these properties have been sporadic since they were acquired by its predecessor
in December, 1982. LKA exited the development stage in September 2003 as a result of the reacquisition of its interest in
an operating mine near Lake City, Colorado and is currently engaged in efforts to expand mine production and continues
to seek additional investment opportunities (See Note 11).
a.
Accounting Methods
LKA’s financial statements are prepared using the accrual method of accounting. LKA has elected a calendar year-end.
b.
Basic and Diluted Loss Per Share
LKA presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed
by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares
outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible
securities, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS
excludes all dilutive potential shares if their effect is anti-dilutive. LKA had net losses as of December 31, 2010 and 2009,
so the diluted EPS excluded all dilutive potential shares in the diluted EPS because there effect is anti-dilutive.
c.
Mine Exploration and Related Costs
Mine exploration costs are capitalized and amortized by the units of production method over estimated total recoverable
proven and probable reserves. Amortization of mineral rights is provided by the units of production method over estimated
total recoverable proven and probable reserves. Costs related to locating and evaluating mineral and ore deposits, as well
as determining the economic mineability of such deposits, are expensed as incurred. All costs related to mine exploration
and expense were expensed due to there being no proven and probable reserves.
d.
Asset Retirement Obligations
LKA recognizes legal obligations associated with the retirement of long-lived assets at fair value at the time the
obligations are incurred. Upon initial recognition of a liability, the costs are capitalized as part of the carrying amount of
the related long-lived asset (see Note 3).
e.
Income Taxes
LKA files income tax returns in the U.S. federal jurisdiction, and the state of Colorado. LKA’s policy is to recognize
interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards 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.
23