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 in 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 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 development funds. For more information on this transaction, see the Company's Current
Report on Form 8-K, dated March 3, 2005, and filed with the Securities and Exchange Commission on March 4, 2005.
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. Since resuming operations in the first quarter of 2009, LKA has shipped/sold seven bulk ore samples containing more than 1,200 ounces of gold derived from exploratory mining operations. Ore containing another 226 ounces was shipped during February and March 2011. 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.
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 in the vicinity of the property, maintenance of roads to the Golden Wonder Property and working areas for the mining of that Property. Per the Operating Agreement, Coal Creek is to pay all Mine Operator Services Expenses and is entitled to reimbursement for such expenses from LKA, provided LKA has received sufficient monies from ore/metals sales. LKA is responsible for payment of costs associated with vehicles it provides for the project (including insurance and maintenance) property and production taxes, mining claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation bonds. LKA 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
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 sale of ore from exploration and development efforts 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.
Exchange Act Reporting Requirements
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders at special or annual meetings thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.
We are also required to file Annual Reports on SEC Form 10-K and Quarterly Reports on SEC Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on SEC Form 8-K.
Research and Development Costs During the Last Two Fiscal Years
We have not spent any money on research and development in the past five years and we do not plan to make any such expenditures in the foreseeable future.
Cost and Effects of Compliance with Environmental Laws
As the owner of permits pertaining to the Properties, we are subject to many federal, state and local laws and regulations relating to environmental quality. For example, any mining operations conducted on the Properties must comply with federal and state laws and regulations that protect the quality of surface water and groundwater.
The Colorado Division of Reclamation Mining and Safety (the "Division") requires mine operators to have permits to conduct mining activities in Colorado. The Division also requires operators to obtain a reclamation bond to ensure the clean-up of disturbances on mining properties and conducts regular inspections to make sure that the operators are in compliance with applicable environmental laws and regulations. We have obtained all necessary bonds and permits required by the State of Colorado and believe that we are in compliance with all laws and regulations in this regard. However, we can provide no assurance as to the impact on LKA of any future environmental laws or regulations or any governmental interpretation of existing or future laws or regulations.
The Federal Bureau of Land Management (the "BLM") has advised us of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that we do not own. The BLM has commissioned and obtained an engineering evaluation and cost analysis ("EE/CA") report on the Ute-Ule and the neighboring public lands. This EE/CA, which was prepared by Harding ESE, Inc., analyzes the current environmental state of the Ute-Ule Property and other properties in the area. The EE/CA has identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present. The total clean-up costs on all of these properties are estimated at approximately $7 million, with the projected clean-up cost of the Ute-Ule alone estimated at approximately $4,317,000. A later report commissioned by the BLM entitled “Value Engineering Study on the Ute Ulay Mine/Mill Site - Final Report” dated January 5, 2006 projected these costs to be approximately $2.1 million. Management believes that due to LKA’s status as a de minimus participant, the Company’s actual costs associated with this effort will be substantially below BLM estimates. Under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the BLM and EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the owner.
As of the date of this Report, management has had several meetings with the BLM and the Solicitor General's office in an effort to negotiate a settlement of this matter. The Company and the BLM remain in the process of discussing and deliberating the purported environmental impacts as discussed in the engineering evaluation and cost analysis report commissioned by the BLM. No determination of an overall site clean-up plan has yet been made by the BLM. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA's share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. We can not accurately predict what our ultimate liability, if any, will be. If we are unsuccessful in reaching a cost effective arrangement with the BLM and are held responsible for the entire amounts associated with the cleanup the financial consequences could render the Company insolvent.
Number of Total Employees and Number of Full Time Employees
Kye A. Abraham is LKA's only full-time employee. Nanette K. Abraham is a part-time employee and assists with bookkeeping and administrative work.
ITEM 1A.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for smaller reporting companies.
ITEM 2:
ITEM 2: PROPERTIES
We own a 100% interest in the Ute-Ule and Golden Wonder Properties. The Company is entitled to receive all lease and royalty payments on these Properties. We are currently engaged in exploration and limited production at the Golden Wonder mine.
Both the Ute-Ule silver mine and the Golden Wonder gold mine are vein type deposits associated with volcanic activity occurring millions of years ago during a turbulent period known in geology as Tertiary time. During this violent geologic era, most of the known precious metal mines in the State of Colorado were formed along a southwest to northeast channel or narrow band approximately 20 miles wide, which stretches in a diagonal trend from Durango in the southwest to Boulder County in the northeast. This zone has been called the Colorado Mineral Belt. Lake City, Colorado lies astride this mineral belt in a topographical cul de sac 57 miles southwest of Gunnison, Colorado.
Each Property is described below.
Ute-Ule Group.
The Ute-Ule Property consists of 23 patented mining claims located approximately four miles west of Lake City, Colorado. These are highly mineralized silver-lead-zinc mines with excellent access via a gravel road that is maintained year-round by the County of Hinsdale. This road goes from the Property to Lake City and from Lake City a blacktop road (State Highway 149) extends northward approximately 46 miles to an intersection with U.S. 50, about nine miles west of Gunnison, Colorado.
This Property has a long history of mineral extraction dating back to the nineteenth century. Most of this extraction (silver, lead and zinc) occurred between 1874 and 1903. Currently, LKA no plans to resume mining operations at this property and is engaged in discussions with Hinsdale County, Colorado to donate certain of the historic buildings on the site. To date, no formal agreements have reached and we cannot predict what, if any, benefits to the Company would be realized.
The Ute-Ule Property is the subject of an EE/CA which identifies certain environmental hazards on the property. We are in the process of negotiating a settlement of this matter with the Bureau of Land Management and the Solicitor General. See the heading “Costs and Effects of Compliance with Environmental Laws” of Part I, Item 1 of this Report; and the caption “Legal Proceedings,” Part I, Item 3
ITEM 3: LEGAL PROCEEDINGS
Except as discussed below, LKA is not the subject of any pending legal proceedings and, to the knowledge of management, no proceedings are presently contemplated against LKA by any federal, state or local governmental agency.
As of the date of this Report, management has had several meetings with the BLM and the Solicitor General's office in an effort to negotiate a settlement of the Ute-Ule - BLM remediation matter. The Company and the BLM remain in the process of discussing and deliberating the purported environmental impacts as discussed in the engineering
evaluation and cost analysis report commissioned by the BLM. No determination of an overall site clean-up plan has yet been made by the BLM. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA's share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. We are currently in the negotiating stages of this process and we can not accurately predict what our ultimate liability, if any, will be. If we are unsuccessful in reaching a cost effective arrangement with the BLM and are held responsible for the entire amounts associated with the cleanup the financial consequences could render the Company insolvent.
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” certain Golden Wonder mine assay samples to indicate considerably higher gold content than was actually contained in the ore that it delivered to Barrick 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 highly unlikely that Au Mining could have carried out such a scheme. LKA was not a party to this lawsuit. On May 18, 2007, we filed a Current Report on Form 8-K with respect to this matter. In July, 2010, after a jury trial held in Gunnison Colorado, Au Mining and its officers prevailed in this lawsuit.
ITEM 4:
ITEM 4: (REMOVED AND RESERVED)
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There is no “established trading market” for our shares of common stock. Our shares of common stock are quoted by the OTC Markets Group Inc. of the Financial Industry Regulatory Authority, Inc. (“FINRA”) under the symbol “LKAI”; however, management does not expect any established trading market to develop in our shares of common stock unless and until we have material operations. In any event, no assurance can be given that any market for our common stock will develop or be maintained. If a public market ever develops in the future, the sale of shares of our common stock that are deemed to be “restricted securities” pursuant to Rule 144 of the SEC by members of management or others may have a substantial adverse impact on any such market. All current holders of shares of our common stock have satisfied the six-month holding period requirement of Rule 144; these listed persons’ shares are subject to the resale limitations outlined below under the heading “Rule 144.”
Set forth below are the high and low closing bid prices for our common stock for each quarter of 2009 and 2010. These bid prices were obtained from OTC MarketsGroup Inc. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
Period
High
Low
January 1, 2009, through March 31, 2009
$0.39
$0.08
April 1, 2009, through June 30, 2009
$1.05
$0.1402
July 1, 2009, through September 30, 2009
$0.75
$0.20
October 1, 2009, through December 31, 2009
$0.95
$0.22
January 2, 2010 through March 31, 2010
$0.60
$0.25
April 1, 2010 through June 30, 2010
$1.24
$0.43
July 1, 2010 through September 30, 2010
$0.91
$0.52
October 1, 2010 through December 31, 2010
$1.07
$0.60
Rule 144
The following is a summary of the current requirements of Rule 144:
Affiliate or Person Selling on Behalf of an Affiliate
Non-Affiliate (and has not been an Affiliate During the Prior Three Months)
Restricted Securities of Reporting Issuers
During six-month holding period - no resales under Rule 144 Permitted.
After Six-month holding period - may resell in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for equity securities, and
·
Filing of Form 144.
During six- month holding period - no resales under Rule 144 permitted.
After six-month holding period but before one year - unlimited public resales under Rule 144 except that the current public information requirement still applies.
After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
Restricted Securities of Non-Reporting Issuers
During one-year holding period - no resales under Rule 144 permitted.
After one-year holding period - may resell in accordance with all Rule 144 requirements including:
·
Current public information,
·
Volume limitations,
·
Manner of sale requirements for equity securities, and
·
Filing of Form 144.
During one-year holding period - no resales under Rule 144 permitted.
After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
Holders
The number of record holders of the Company’s common stock as of the date of this Report is approximately 497, not including an indeterminate number who may hold shares in “street name.”
Dividends
LKA has not declared any cash dividends with respect to its common stock and does not intend to declare dividends in the foreseeable future. There are no material restrictions limiting, or that are likely to limit, our ability to pay dividends on our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
(a)
(b)
(c)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
1,000,000
$0.40
Total
1,000,000
$0.40
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On July 12, 2010, and August 15, 2010, respectively, as a result of LKA’s failure to pay the required installment payment on August 15, 2010, LKA issued 220,453 and 169,652 shares of its common stock to PanAmerican with a fair value of $358,897, or $0.92 per share. The fair value of these shares was recorded as debt restructuring expense.
On August 31, 2010, LKA sold 10,000 shares of its common stock for $5,000, or $0.50 per share.
During December 2010, LKA issued a convertible note payable for cash of $150,000. The convertible note accrues interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011, or $7,500 in interest and $10,500 in commission expense. The convertible note is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. Due to the contingent nature of the conversion price, no beneficial
conversion feature was ascribed to the conversion feature. Accrued interest on the convertible note totaled $2,466 at December 31, 2010.
During December 2010, LKA issued a convertible note payable and warrants to purchase 84,000 shares of LKA common stock for cash of $50,000. Accordingly, the total proceed received of $50,000 was allocated to debt and equity based on their relative fair values of $21,863 and $28,137, respectively. The convertible note accrues interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011, or $2,500 in interest and $3,500 in commission expense. The convertible note is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. Due to the contingent nature of the conversion price, no beneficial conversion feature was ascribed to the conversion feature. Accrued interest on the convertible note totaled $2,466 at December 31, 2010. Debt offering costs as a result of the issuance of attached warrants of $3,974 were recognized during the year ending December 31, 2010.
We believe that the offer and sale of these securities was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the SEC and from various similar state exemptions. In connection with the sale of these securities, the Company relied on the fact that there were fewer than 35 “non-accredited” recipients. In addition, neither the Company nor anyone acting on its behalf offered or sold these securities by any form of general solicitation or general advertising.
Use of Proceeds of Registered Securities
During the year ended December 31, 2010, we did not receive any proceeds from the sale of registered securities.
Purchases of Equity Securities by Us and Affiliated Purchasers
Period
(a) Total Number of Shares (or Units) Purchased (1)
(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
October 1, 2010, through October 31, 2010
November 1, 2010, through November 30, 2010
December 1, 2010, through December 31, 2010
Total
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
ITEM 7:
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, development 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.
After taking into account income tax expense of $0 for 2009 and 2010, net loss totaled $1,001,036, or a loss of $0.07 per share, and $1,344,768, or a loss $0.10 per share, respectively, during these periods. Our stockholders' deficit of $689,255 at December 31, 2010, represented a significant increase from stockholders' deficit of $80,253 at December 31, 2009, mainly as a result of significant current year losses, partially offset by issuances of equity instruments for debt delinquency fees.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements of any kind for the year ended December 31, 2010.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
C O N T E N T S
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors
LKA International Inc.
Gig Harbor, WA
We have audited the consolidated balance sheets of LKA International Inc. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), 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 International Inc. as of December 31, 2010 and 2009 and the consolidated results of their operations and 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 International Inc. will continue as a going concern. As discussed in Note 11 to the consolidated financial statements, LKA International Inc. suffered losses from operations and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 11. 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
March 31, 2011
LKA INTERNATIONAL, INC.
Consolidated Balance Sheets
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
LKA INTERNATIONAL, INC.
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
The accompanying notes are an integral part of these consolidated financial statements.
LKA INTERNATIONAL, INC.
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
LKA INTERNATIONAL, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
The accompanying notes are an integral part of these consolidated financial statements.
LKA INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
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 Development and Exploration Costs
Mine development 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 development 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.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
e.
Income Taxes
Net deferred tax assets consist of the following components as of December 31, 2010 and 2009:
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, 2010 and 2009 due to the following:
LKA had net operating losses of approximately $2,491,000 that expire 20 years from when incurred. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
f.
Cash Equivalents
LKA considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
g.
Principles of Consolidation
The consolidated financial statements include those of LKA International, Inc., a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation. All significant intercompany accounts and transactions have been eliminated.
h.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
i.
Revenue Recognition Policy
The Company recognizes revenue when persuasive evidence of an arrangement exists, goods have been delivered and title has transferred, the sales price is fixed or determinable, and collectibility is reasonably assured. Revenue is generated through the sale of gold and silver ore and is recognized upon acceptance of ore delivery from the smelter. During the years ended December 310, 2010 and 2009, LKA recognized $528,845 and $236,757 from the delivery of gold and silver ore from the Golden Wonder mine, respectively.
j.
Securities and Investments
LKA applies the provisions of Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities”, regarding marketable securities. LKA invests in securities that are intended to be bought and held principally for the purpose of selling them in the near term, and as a result, classifies such investments as trading securities. Trading securities are recorded at fair value on the balance sheet with changes in fair value being reflected as unrealized gains or losses in the current period. In addition, LKA classifies the cash flows from purchases, sales, and maturities of trading securities as cash flows from operating activities.
k.
Stock-Based Compensation
LKA records stock-based compensation using the fair value method. Equity instruments issued to employees and the cost of the services received as consideration are accounted for in accordance with ASC 718 “Stock Compensation” and are measured and recognized based on the fair value of the equity instruments issued. All transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for in accordance with ASC 515 “Equity-Based Payments to Non-Employees”, based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
l.
Fair Value of Financial Instruments
In April 2009, the FASB extended disclosure requirements on the fair value of financial instruments to interim financial statements of publicly traded companies. The requirements are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance does not require disclosures for the earlier periods presented for comparative purposes at initial adoption. The guidance requires comparative disclosures only for periods ending after the initial adoption.
LKA adopted the new provisions related to fair value measurements and disclosures effective January 1, 2008. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by the FASB and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
l.
Fair Value of Financial Instruments (Continued)
Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Fair valued assets that are generally included in this category are stock warrants for which there are market-based implied volatilities, unregistered common stock and thinly traded common stock.
Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets carried at fair value and included in this category include stock warrants for which market-based implied volatilities are not available.
m.
New Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
n.
Reclassification of Prior Period Balances
Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2010, with no effect on previously reported net income or stockholder’s equity (deficit).
o.
Accounting for Derivative Instruments
LKA accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet.
LKA uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, LAK’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for LKA’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, LKA seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
LKA categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.
p.
Long Lived Assets
Periodically the Company assesses potential impairment of its long-lived assets, which include property, equipment and acquired intangible assets, in accordance with the provisions of ASC Topic 360, “Property, Plant and Equipment.” The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
p.
Long Lived Assets (Continued)
asset or an estimate based on the best information available in the circumstances. There were no such losses recognized during 2010 or 2009.
NOTE 2 -
FIXED ASSETS
Property and equipment are carried at cost, less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing assets. Maintenance and repairs are charged to current operations as incurred. Upon sale, retirement, or other disposition of these assets, the costs and related accumulated depreciation are removed from the respective accounts, and any gain or loss on the disposition is included in other income.
Depreciation expense is computed using the straight-line method over the following estimated useful lives:
Description
Useful Life
Land improvements
Estimated life of mine
Mining equipment
3 - 5 years
Vehicles
5 years
Fixed assets and depreciation for the period are as follows:
Depreciation expense for the years ended December 31, 2010 and 2009 was $50,750 and $31,883, respectively.
NOTE 3 -
ASSET RETIREMENT OBLIGATIONS
ASC 410, “Asset Retirement and Environmental Obligations”, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. LKA’s asset retirement obligations (AROs) consist of estimated costs related to the reclamation of the Golden Wonder and Ute Ule mines in correspondence with federal and state reclamation laws as defined by each applicable mine permit. The obligation and corresponding asset have been recognized in the period in which the liability was incurred. Changes in estimates could occur due to mine plan revisions, changes in estimated costs, and changes in the timing of the performance of reclamation activities.
LKA calculated its initial estimated AROs for final reclamation and mine closure based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work. Spending estimates have been escalated for inflation at 1.93% per annum, then discounted at the credit-adjusted risk-free rate of 4.09% per annum at September 18, 2003. LKA recorded an ARO asset associated with the liability and amortizes the asset over its expected life using the straight-line depreciation method. The ARO liability is being accreted to the projected spending date.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 3 -
ASSET RETIREMENT OBLIGATIONS (CONTINUED)
During the fourth quarter of 2004, LKA revised its assessment of the anticipated productivity of the Ute Ule mine, and determined that the mine would not be subject to further development or mining activity. As a result, the entire ARO asset associated with the Ute Ule mine was written off.
On October 9, 2008, LKA received approval of its plan to add 6.4 acres to its mining permit with the State of Colorado on the Golden Wonder mine. As a result, LKA has recorded an additional asset retirement obligation totaling $41,106, which consist of estimated additional costs related to the reclamation of the Golden Wonder mine in correspondence with federal and state reclamation laws as defined by each applicable mine permit.
The Company calculated its estimated ARO for additional final reclamation and mine closure costs based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work. Spending estimates were escalated for inflation at 2.29% per annum and discounted at a credit-adjusted risk-free rate of 7.54% per annum. The Company recorded an ARO asset associated with the liability and will amortize the asset over its expected life of seven years using the straight-line depreciation method. The ARO liability addition will be accreted based on the initial projected reclamation completion date of September 30, 2016. Changes in estimates could occur due to mine plan revisions, changes in estimated costs and changes in the timing of the performance of anticipated reclamation activities.
As of December 31, 2010 and 2009, LKA holds reclamation bonds totaling $113,120 in the name of the State of Colorado (the State) for both the Ute Ule and Golden Wonder mines. These amounts are being held by the State until the mines are closed and reclamation activities begin.
Accretion expense on asset retirement obligations for the years ended December 31, 2010 and 2009 was $3,396 and $5,023, respectively.
NOTE 4 -
RELATED PARTY TRANSACTIONS
Notes Payable
Cognitive Associates Limited Partnership
LKA owes Cognitive Associates Limited Partnership $56,828 in unpaid principal from a note dated December 31, 1986. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2010. Accrued interest related to this note totaled $70,654 as of December 31, 2010.
LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2010. Accrued interest related to this note totaled $9,096 as of December 31, 2010.
PanAmerican Capital Group, Inc.
On July 2, 2009, LKA issued a promissory note (the Note) to PanAmerican Capital Group, Inc. (PanAmerican), a related party company, in exchange for cash of $545,090. The Note accrues interest at 10% per annum, is secured by a first charge over LKA mining property and claims in Hinsdale County, Colorado and is due in five installments, the first due the first business day of January 2010, with the remaining four due in three months intervals through January 2011. The amount of the payments are to be determined as the higher of either (i) the value of 140 ounces of gold as determined by the closing spot price on the Commodity Exchange, Inc. (COMEX) on the business day immediately preceding the installment due date, or (ii) one-fifth (1/5) of the total principal amount, together with accrued interest thereon.
During January 2010, LKA made a partial payment of $92,064 on the Note, of which $16,644 was applied against the derivative liability (see Note 7), $27,778 was applied against accrued interest and $47,642 was applied to principal.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 4 -
RELATED PARTY TRANSACTIONS (CONTINUED)
Notes Payable (Continued)
PanAmerican Capital Group, Inc. (Continued)
LKA paid commissions and due diligence fees totaling $54,509 related to obtaining the funding. Debt issue costs have been deferred and are being amortized over the life of the Note as interest expense. Amortization of debt issuance costs was $36,537 and $17,972 for the years ended December 31, 2010 and 2009, respectively.
Due to delays in mine production, PanAmerica agreed to allow LKA to defer a portion of the first installment payment due January 4, 2010. The second installment payment due April 5, 2010 and third installment due on July 5, 2010, were also deferred until August 15, 2010. In consideration for these payment deferrals LKA agreed to make certain additional interest payments and to provide additional collateral/security on any unpaid balances due as of August 15, 2010. LKA and PanAmerican entered into a Waiver Agreement on June 10, 2010 whereby PanAmerican waived its Enforcement Rights with respect to the delinquent payments on the Note in consideration for the following:
(a)
LKA must pay all amounts payable in respect of the installment payments otherwise due under the Note on January 4, 2010, April 5, 2010 and July 5, 2010 to PanAmerican on or before August 15, 2010;
(b)
on or before August 15, 2010, LKA must pay to PanAmerican, in addition to the amounts otherwise payable under subsection (a) above, an amount equal to 2% per month of any unpaid installment payments, calculated with respect to any such unpaid installment payment, from the date such installment payment was otherwise due; and
(c)
(i) LKA must issue to PanAmerican one unregistered and restricted share of LKA common stock for each dollar of unpaid installment payments otherwise due as of the date of the Waiver Agreement; and (ii) on July 5, 2010, issue to the PanAmerican one unregistered and restricted share of LKA common stock for each dollar of the installment payment otherwise due as of July 5, 2010. The shares are to be held by PanAmerican as security and are to be surrendered to LKA for cancellation upon satisfaction of the Borrower of the obligations set forth in (a) and (b) above. In circumstances where such obligations are not satisfied the Holder shall be entitled to retain such Shares as beneficial owner thereof provided that such retention shall not otherwise relieve the Borrower from its obligations under the Note or the Waiver Agreement.
As a result of LKA’s failure to pay the required installment payment on August 15, 2010, 220,453 and 169,652 shares of LKA common stock were surrendered to PanAmerican with a fair value of $358,897. The fair value of these shares was recorded as debt default expense for the year ended December 31, 2010.
To-date, PanAmerican has not made any demands on the past due installments and LKA continues to pursue a resolution with the debt holder. As a result of the Waiver Agreement and default on its payment due October 5, 2010, LKA reclassified a total of $184,590 in accrued derivative liability related to the past due Note payments to the original $436,072 note principal and accrued $80,594 in interest payable, at a rate of 2% per month, for the period from the date of the Waiver Agreement and October 5, 2010 due date through December 31, 2010. Total accrued interest on the Waiver Agreement and past due note balance was $74,560 and $21,744 at December 31, 2010 and 2009, respectively.
The remaining future Note installment payment of $109,018 due January 4, 2011 continues to accrue interest at 10% per annum. Accrued interest on this installment payment totaled $16,338 and $5,436 at December 31, 2010 and 2009, respectively.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 4 -
RELATED PARTY TRANSACTIONS (CONTINUED)
Office Space
LKA pays a company owned by an officer and shareholder $1,500 per month for office rent and expenses. The affiliated Company, (Abraham & Co., Inc. a Financial Industry Regulatory Authority member and registered investment advisor) also executes LKA’s securities transactions and manages its investment portfolio. At December 31, 2010 and 2009, LKA owes Abraham & Co $13,500 and $0 on this obligation, respectively.
Accounts Payable
At December 31, 2010 and 2009, LKA owes $1,247 and $4,715, respectively, for purchases made on the personal credit card of LKA’s president, Kye Abraham.
Stock Options
On December 28, 2007, LKA’s board of directors authorized the issuance of options to purchase 1,000,000 shares of LKA’s common stock to an officer and shareholder for services previously rendered. The options have an exercise price of $0.40 per share, and have a five-year term from the date of grant (See Note 9).
NOTE 5 -
SIGNIFICANT EVENTS
During August 2010, LKA entered into a Mine Operating Agreement (Operating Agreement) with Coal Creek Construction (Coal Creek). The Operating Agreement calls for Coal Creek to provide mine operating services, including mining and underground construction, blasting, crushing, bagging, hauling, loading and transporting of ore and associated waste material to locations specified by LKA in the vicinity of the property, maintenance of roads to the Property and working areas for the mining of the Property.
Per the Operating Agreement, Coal Creek is to pay all Mine Operator Services Expenses and is entitled to reimbursement for such expenses from LKA provided LKA has received sufficient monies from ore/metals sales. LKA is responsible for payment of costs associated with vehicles it provides for the Project (including insurance and maintenance) property and production taxes, mining claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation bonds. LKA shall also pay all liabilities associated with the Property which were incurred prior to the date of the Operating Agreement.
In exchange for providing Mine Operator Services, Coal Creek is entitled to a payment equal to twenty percent of the project's net profits, or Net Smelter Receipts less deductions for Mine Operator Services, Royalties and Project-related Expenses, provided that Coal Creek has performed its service obligations and is current with its financial obligations and all other terms of its agreement with LKA. During the year ended December 31, 2010, LKA paid Coal Creek $226,708.40 for Mine Operator Services and accrued an additional $123,931 in remaining reimbursable expense related to ore shipments.
NOTE 6 -
NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION
During the fall of 2002, the Federal Bureau of Land Management (the "BLM") advised LKA of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that LKA does not own.
The BLM has commissioned and obtained an engineering evaluation and cost analysis (“EE/CA”) report on the Ute-Ule and the neighboring public lands. The EE/CA, which was released for a 30 day public comment period in December of 2002, has identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present. The total clean-up costs on all of these properties are estimated at approximately $7 million, with the projected clean-up cost of the Ute-Ule alone estimated at approximately $4,317,000. The BLM has prepared a written response to the public comments received concerning the EE/CA and is in the process of selecting an
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 6 -
NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION (CONTINUED)
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 December 31, 2010, LKA and the BLM remain in the process of discussing and deliberating the reported environmental impacts as previously reported within the EE/CA. No determination of an overall site clean-up plan has yet been made by the BLM.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the BLM and EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the owner. The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA’s share of the total cost, still to be determined. The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself. However, LKA is in the early stages of this process and cannot accurately predict a range of what the ultimate liability, if any, will be.
NOTE 7 -
DERIVATIVE LIABILITY
As a result of the repayment terms of the Note with PanAmerican Capital Group, Inc. being indexed to the closing spot price of gold on COMEX at each repayment date (see Note 4), the Note is considered to be a hybrid debt instrument with an embedded derivative liability. Accordingly, the embedded derivative liability is required to be bifurcated from the debt host agreement and recorded as a liability at its fair value as of the consolidated balance sheet date. The changes in fair value of the liability are being recorded as current period gains or losses in the consolidated statement of operations.
The fair market value of the embedded derivative liability was determined using level 1 inputs by applying observable quoted market prices of gold futures on the COMEX market for instruments that settle on or near the related debt payments, multiplying the quoted prices by the underlying number of troy ounces of gold at each repayment date and subtracting the otherwise required cash payment of the underlying note. During the years ended December 31, 2010 and 2009, LKA recorded a loss from derivative liability of $99,369 and $169,692, respectively.
The fair market value of LKA’s derivative liability at December 31, 2009 and 2010 is as follows:
Derivative liability at December 31, 2009
$
169,692
Repayment in cash
(16,644)
Loss on mark-to-market
99,369
Reclassification to notes payable - related party
(184,591)
Derivative liability at December 31, 2010
$
67,826
NOTE 8 -
COMMITMENTS AND CONTINGENCIES
Except as discussed above in Note 6, LKA is not the subject of any pending legal proceedings and, to the knowledge of management; no proceedings are presently contemplated against LKA by any federal, state or local governmental agency.
NOTE 9 -
STOCK-BASED COMPENSATION
Common Stock
During May 2009, LKA entered into a consulting agreement with SDK Investments, LLC (SDK). SDK was engaged to furnish advisory and consulting services to LKA for possible venture capital transactions. As an initial retainer, LKA issued 400,000 common shares and granted fully vested warrants to purchase 400,000 common shares for 18 months at $1.00 per share. Additionally, SDK was afforded the opportunity to earn up to an additional 400,000 common shares upon the sale of 1,000,000 common shares in a public or private financing at $0.25 per share. As a result of entering into the consulting agreement, LKA recognized $160,000 in consulting expense from the issuance of common stock and $140,898 in consulting expense from the issuance of warrants.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 9 -
STOCK-BASED COMPENSATION (CONTINUED)
Common Stock (Continued)
On June 11, 2009, LKA sold 700,000 common shares in a private financing for $175,000, or $0.25 per share. Additionally, LKA issued SDK 280,000 common shares for stock offering costs valued at $175,000, which was recognized as an offset to additional paid-in capital as stock offering.
On October 15, 2009, LKA sold 600,000 common shares in a private financing for $150,000, or $0.25 per share. Additionally, LKA issued SDK the remaining available 120,000 common shares for stock offering costs valued at $24,000, which was recognized as an offset to additional paid-in capital as stock offering.
On August 15, 2010, as a result of LKA’s failure to pay the required installment payment on August 15, 2010, LKA issued 220,453 and 169,652 shares of LKA common stock to PanAmerican with a fair value of $358,897, or $0.92 per share. The fair value of these shares was recorded as debt default expense.
On August 31, 2010, LKA sold 10,000 shares of its common stock for $5,000, or $0.50 per share.
Common Stock Options
On December 28, 2007, LKA granted an option to its President to purchase 1,000,000 shares of LKA’s common stock at an exercise price of $0.40 per share, exercisable for five years from the date of grant (the “2007 Options”). The resulting fair value estimate, net of tax, totaled $415,092. This amount was recorded as a current period expense during the fourth quarter of 2007.
The following table summarizes the options outstanding and associated activity for the years ended December 31, 2010 and 2009:
The aggregate intrinsic value of stock options was $510,000 at December 31, 2010.
Common Stock Warrants
During May 2009, LKA granted fully vested warrants to purchase 400,000 share of its common stock for 18 months at $1.00 per share as advisory fees. The warrants were valued at $140,898 using the Black-Scholes option fair value pricing model using the following assumptions:
Stock price on grant date
$
0.40
Exercise price
$
1.00
Expected time to exercise
1.5 years
Risk free interest rate
0.71%
Volatility
288.01%
Expected forfeiture rate
0.00%
The aggregate intrinsic value of stock warrants was $0 at December 31, 2010.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 9 -
STOCK-BASED COMPENSATION (CONTINUED)
Common Stock Warrants (Continued)
During December 2010, LKA granted fully vested warrants to purchase 84,000 share of its common stock for 36 months at $0.93 per share as debt offering costs related to the issuance of convertible notes payable (see Note 10). The warrants were valued at $28,137 using the Black-Scholes option fair value pricing model using the following assumptions:
Stock price on grant date
$
0.85
Exercise price
$
0.93
Expected time to exercise
3 years
Risk free interest rate
0.80%
Volatility
192.45%
Expected forfeiture rate
0.00%
The following table summarizes the warrants outstanding and associated activity for the years ended December 31, 2010 and 2009:
NOTE 10 -
NOTES AND CONVERTIBLE NOTES PAYABLE
During December 2010, LKA issued a convertible note payable for cash of $150,000. The convertible note accrues interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011, or $7,500 in interest and $10,500 in commission expense. The convertible note is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. Due to the contingent nature of the conversion price, no beneficial conversion feature was ascribed to the conversion feature. Accrued interest on the convertible note totaled $2,466 at December 31, 2010.
During December 2010, LKA issued a convertible note payable and warrants to purchase 84,000 shares of LKA common stock for cash of $50,000. Accordingly, the total proceed received of $50,000 was allocated to debt and equity based on their relative fair values of $21,863 and $28,137, respectively. The convertible note accrues interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011, or $2,500 in interest and $3,500 in commission expense. The convertible note is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing. Due to the contingent nature of the conversion price, no beneficial conversion feature was ascribed to the conversion feature. Accrued interest on the convertible note totaled $2,466 at December 31, 2010. Debt offering costs as a result of the issuance of attached warrants of $3,974 were recognized during the year ending December 31, 2010.
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 10 -
NOTES AND CONVERTIBLE NOTES PAYABLE (CONTINUED)
Notes and convertible notes payable consisted of the following at December 31:
Note payable to an individual, 12% interest
per annum, unsecured, due upon demand
$
10,000
$
10,000
Note payable to related parties, 10% interest per
annum, unsecured, due upon demand (Note 4)
62,803
62,803
Note payable to a related company, 24% interest per
annum, secured by asset of LKA, due upon demand (Note 4)
573,020
-
Note payable to a related company, 10% interest per
annum, secured by asset of LKA, due January 4, 2011
(Note 4)
109,018
545,090
Convertible note payable to a company, 10% interest
per annum, 14% commission rate per annum, unsecured,
principal, interest and commissions totaling $56,000 due on
or before June 1, 2010
25,837
-
Convertible note payable to a company, 10% interest
per annum, 14% commission rate per annum, unsecured,
principal, interest and commissions totaling $168,000 due on
or before June 1, 2010
150,000
-
Total Notes and Convertible Notes Payable
$
930,678
$
617,893
Maturities on notes and convertible notes payable are as follows:
Year ended December 31:
$
930,678
-
-
-
-
Total
$ 930,678
NOTE 11 -
GOING CONCERN
LKA's consolidated financial statements are prepared using Generally Accepted Accounting Principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, LKA has recently accumulated significant losses and has negative working capital. All of these items raise substantial doubt about its ability to continue as a going concern. Management's plans with respect to alleviating the adverse financial conditions that caused management to express substantial doubt about the LKA's ability to continue as a going concern are as follows:
LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 11 -
GOING CONCERN (CONTINUED)
LKA is currently engaged in an intensive exploration program at the Golden Wonder mine with the objective of returning the mine to a producing status. The exploration program, which began in November, 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. During this evaluation period, sampling and analysis of exposed veins yielded encouraging results and some precious metals revenues. While encouraging, no conclusion can be drawn at this time about the commercial viability of the mine and LKA continues to pursue potential third party operator or lease agreements for the property.
In order to support continued operation of the mine, LKA has entered into several financing transactions during the year ended December 31, 2010 (see Notes 4 and 9). If LKA is not successful in the resumption of mine operations which produce positive cash flows from operations, LKA may be forced to raise additional equity or debt financing to fund its ongoing obligations or risk ceasing doing business.
There can be no assurance that LKA will be able to achieve its business plans, raise any more required capital or secure the financing necessary to achieve its current operating plan. The ability of LKA to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 12 -
SUBSEQUENT EVENTS
During February 2011, LKA entered into a consulting agreement for investor and public relations services. As a result of this agreement, LKA was required to issue 50,000 shares of its fully vested common stock.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None; not applicable.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our President and our Treasurer concluded that our disclosure controls and procedures as of the end of the period covered by the Annual Report were effective and that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President and our Treasurer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of the President and the Treasurer, evaluated the effectiveness of our internal controls over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this evaluation, our management, with the participation of the President and acting CFO, concluded that, as of December 31, 2010, our internal controls over financial reporting were effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of our 2010 fiscal year, there were no changes in our internal control over financial reporting.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
None; not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.
Name
Positions Held
Date of Election or Designation
Date of Termination or Resignation
Kye A. Abraham
President
Chairman of the Board
Director
03/88
03/88
03/88
*
*
*
Nanette Abraham
Secretary
*
Director
Treasurer
12/02
*
*
·
These persons presently serve in the capacities indicated.
Background and Business Experience
Kye Abraham, President, Chairman of the Board Mr. Abraham is 52 years old. He has been the President of LKA since 1988. Mr. Abraham is also the President, Chairman of the Board and sole shareholder of Abraham & Co., Inc., a registered FINRA broker/dealer. Mr. Abraham is also the Managing Partner of Caldera.
Nanette Abraham, Secretary/Treasurer and Director. Ms. Abraham, age 53, and, until recently was employed as a Research Associate by the Russell Investment Group Company, a worldwide financial consulting company, since 1991. She has been the Secretary and Director of LKA for over 10 years, and was appointed to the office of Treasurer in December, 2002.
Significant Employees
LKA has no employees who are not executive officers, but who are expected to make a significant contribution to its business.
Family Relationships
Our President, Kye Abraham, is the husband of Nanette Abraham, who is our Secretary/Treasurer.
Involvement in Other Public Companies Registered Under the Exchange Act
None; not applicable.
Involvement in Certain Legal Proceedings
During the past ten years, no present or former director, executive officer or person nominated to become a director or an executive officer of ours:
(1) A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
(4) Such person was the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
(5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
(7) Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
(i) Any Federal or State securities or commodities law or regulation; or
(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Promoters and control person.
See the heading “Transactions with Related Persons” below.
Section 16(a) Beneficial Ownership Reporting Compliance
Our shares of common stock are registered under the Exchange Act, and therefore our officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a) which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2010, the following were filed timely:
Name
Type
Filed
Kye A. Abraham
Form 4
November 24, 2010
Code of Ethics
We have adopted a Code of Conduct for our President and Secretary/Treasurer. A copy of the Code of Conduct was attached as Exhibit 14 to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2003. See Part IV, Item 15 of this Report.
Corporate Governance
Nominating Committee
We have not established a Nominating Committee because we believe that our Board of Directors is able to effectively manage the issues normally considered by a Nominating Committee. During the calendar year ended December 31, 2010, there were no changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.
Audit Committee
We have not adopted an audit committee separate from our Board of Directors because the Board of Directors consists of only Mr. and Mrs. Abraham.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the Company for services rendered during the periods indicated:
SUMMARY COMPENSATION TABLE
Name and Principal Position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Stock Awards
($)
(e)
Option Awards
($)
(f)
Non-Equity Incentive Plan Compensation
($)
(g)
Nonqualified Deferred Compensation
($)
(h)
All Other Compensation
($)
(i)
Total
Earnings
($)
(j)
Kye Abraham, President, Director
12/31/10
12/31/09
12/31/08
$138,000
$138,000
$141,000
$
$0
$0
$138,000
$138,000
$141,000
Nannette Abraham Sec./Treas
Director
12/31/10
12/31/09
12/31/08
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Beginning in October, 2006, Kye Abraham began receiving a salary of $12,500 per month for his services to LKA. Prior to that, his salary was $10,000 per month. We do not have any employment agreements with Mr. Abraham or with any other party.
Outstanding Equity Awards at Fiscal Year End
Option Awards Stock Awards
Name
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities underlying Unexercised Options (#) Unexercisable
Equity Incentive Plan Awards Number of Securities Underlying Unexercised Unearned Options (#)
Option Exercise Price
($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested (#)
Market Value of Shares or Units of Stock That Have Not Vested
($)
Equity Incentive Plan Awards: Number of Unearned Shares, Vested Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Kye Abraham
1,000,000
(1)
(1)
Nanette
Abraham
(1) Effective December 28, 2007, our Board of Directors resolved to grant to Mr. Abraham an option to purchase up to 1,000,000 “unregistered” and “restricted” shares of our common stock at a price of $0.40 per share, exercisable for five years.
Compensation of Directors
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Kye Abraham
Nanette Abraham
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following tables set forth the share holdings of those persons who were principal shareholders of the Company’s common stock.
Ownership of Principal Shareholders
Title Of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner
Percent of Class
Common Stock
Kye Abraham
8,516,228(1)
52%(2)
(1) Consists of 946,792 shares that are held directly by Mr. And Ms. Abraham and 6,434,042 shares that are owned by Caldera Partners Limited, of which Mr. Abraham is the Managing Director and 135,394 shares that are owned by Abraham & Co., which is controlled by Mr. Abraham. This figure also includes 1,000,000 shares underlying options to purchase shares of our common stock at $0.40 per share.
(2) Based on a total of 16,450,422 shares outstanding, which includes 1,000,000 shares underlying options to purchase our common stock at $0.40 per share.
Security Ownership of Management
The following table sets forth the share holdings of the Company’s directors and executive officers as of March 22, 2011:
Ownership of Officers and Directors
Title of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner
Percent of Class
Common Stock
Kye Abraham
8,516,228(1)
52% (2)
Common Stock
Nanette Abraham
(3)
(1) Consists of 946,792 shares that are held directly by Mr. And Ms. Abraham and 6,434,042 shares that are owned by Caldera Partners Limited, of which Mr. Abraham is the Managing Director and 135,394 shares that are owned by Abraham & Co., which is controlled by Mr. Abraham. This figure also includes 1,000,000 shares underlying options to purchase shares of our common stock at $0.40 per share.
(2) Based on a total of 16,450,422 shares outstanding, which includes 1,000,000 shares underlying options to purchase our common stock at $0.40 per share.
(3) As the spouse of Kye A. Abraham, Nanette Abraham may be deemed to beneficially own all 8,516,228 shares that Mr. Abraham beneficially owns.
Changes in Control
To the knowledge of management, there are no present arrangements or pledges of LKA's securities which may result in a change in its control.
Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plan Information
Plan Category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
(a)
(b)
(c)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
1,000,000
$0.40
Total
1,000,000
$0.40
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
Transactions with Related Persons
Except as indicated below, during the past fiscal year, the Company has not entered into any transaction, and there is no currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years.
Effective as of July 2, 2009, the Company and PanAmerica Capital Group, a Panama corporation (“PanAmerica”) executed a Subscription Agreement by which the Company 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 shall be payable in five equal installments, with the first installment due on January 1, 2010, and each subsequent installment due on the date that is 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.
The Promissory Note is secured by a first charge over the Company’s patented claims.
PanAmerica’s principal is the brother of the Company’s President, Kye A. Abraham. Mr. Abraham disclaims any beneficial interest whatsoever in the Promissory Note or other assets of PanAmerica and further disclaims any affiliate relationship therewith.
Due to delays in mine production, PanAmerica agreed to allow LKA to defer a portion of the first installment payment due January 4, 2010. The second installment payment due April 5, 2010 and third installment due on July 5, 2010, were also deferred until August 15, 2010. In consideration for these payment deferrals LKA agreed to make certain additional interest payments and to provide additional collateral/security on any unpaid balances due as of August 15, 2010. LKA and PanAmerican entered into a Waiver Agreement on June 10, 2010 whereby PanAmerican waived its Enforcement Rights with respect to the delinquent payments on the Note in consideration for the following:
·
LKA must pay all amounts payable in respect of the installment payments otherwise due under the Note on January 4, 2010, April 5, 2010 and July 5, 2010 to PanAmerican on or before August 15, 2010;
·
on or before August 15, 2010, LKA must pay to PanAmerican, in addition to the amounts otherwise payable under subsection (a) above, an amount equal to 2% per month of any unpaid installment payments, calculated with respect to any such unpaid installment payment, from the date such installment payment was otherwise due; and
·
LKA must issue to PanAmerican one unregistered and restricted share of LKA common stock for each dollar of unpaid installment payments otherwise due as of the date of the Waiver Agreement; and (ii) on July 5, 2010, issue to the PanAmerican one unregistered and restricted share of LKA common stock for each dollar of the installment payment otherwise due as of July 5, 2010. The shares are to be held by PanAmerican as security and are to be surrendered to LKA for cancellation upon satisfaction of the Borrower of the obligations set forth in (a) and (b) above. In circumstances where such obligations are not satisfied the Holder shall be entitled to retain such Shares as beneficial owner thereof provided that such retention shall not otherwise relieve the Borrower from its obligations under the Note or the Waiver Agreement.
As a result of LKA’s failure to pay the required installment payment on August 15, 2010, 220,453 and 169,652 shares of LKA common stock were surrendered to PanAmerican with a fair value of $358,897. The fair value of these shares was recorded as debt deferment expense for the year ended December 31, 2010.
To-date, PanAmerican has not declared LKA to be in default and has not made any demands on the past due installments. LKA continues to pursue a resolution of this matter with PanAmerica. As a result of the Waiver Agreement and failure to make its payment due October 5, 2010, LKA reclassified a total of $184,590 in accrued derivative liability related to the past due Note payments to note principal and accrued $80,594 in interest payable, at a rate of 2% per month, for the period from the date of the Waiver Agreement and October 5, 2010 due date through December 31, 2010. Total accrued interest on the Waiver Agreement and past due note balance was $74,560 and $21,744 at December 31, 2010 and 2009, respectively.
The remaining future Note installment payment of $109,018 due January 4, 2011 continues to accrue interest at 10% per annum. Accrued interest on this installment payment totaled $16,338 and $5,436 at December 31, 2010 and 2009, respectively.
LKA pays a company owned by an officer and shareholder $1,500 per month for office rent and expenses. The affiliated Company, (Abraham & Co., Inc. a FINRA member and registered investment advisor) also executes LKA’s securities transactions and manages its investment portfolio.
LKA owes Cognitive Associates Limited Partnership $56,828 in unpaid principal from a note dated December 31, 1986. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2010. Accrued interest related to this note totaled $70,654 as of December 31, 2010.
LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the year ended December 31, 2010. Accrued interest related to this note totaled $9,096 as of December 31, 2010.
Promoters and Certain Control Persons
See the heading “Transactions with Related Persons” above.
Parents of the Smaller Reporting Company
LKA has no parents, except to the extent that Mr. Abraham may be deemed to be its parent by virtue of his beneficial ownership of approximately 52% of its currently outstanding shares.
Director Independence
We do not have any independent directors serving on our Board of Directors.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended December 31, 2010, and 2009:
Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”
Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)(2) Financial Statements. See the audited financial statements for the year ended December 31, 2010 contained in Item 8 above which are incorporated herein by this reference.
(a)(3) Exhibits. The following exhibits are filed as part of this Annual Report:
Exhibits
Exhibit Number
Description (1)
3.1
Certificate of Incorporation (2)
3.2
By-laws (2)
10.1
Notice of Termination from Richmont Mines, Inc. (3)
Code of Conduct (4)
31.1
302 Certification of Kye Abraham
31.2
302 Certification of Nanette Abraham
906 Certification
DOCUMENTS INCORPORATED BY REFERENCE
(1) Summaries of all exhibits contained within this Report are modified in their entirety by reference to these exhibits.
(2) Incorporated by reference to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2001, filed with the SEC on February 11, 2003.
(3) Incorporated by reference to our Current Report on Form 8-K dated October 22, 2008, filed with the SEC on October 24, 2008.
(4) Incorporated by reference to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2003, filed with the SEC on March 29, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LKA INTERNATIONAL, INC.
Date:
March 31, 2010
By:
/s/Kye Abraham
Kye Abraham, President, Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
LKA INTERNATIONAL, INC.
Date:
March 31, 2010
By:
/s/Kye Abraham
Kye Abraham, President, Chairman of the Board and Director
Date:
March 31, 2010
By:
/s/Nanette Abraham
Nanette Abraham, Secretary, Treasurer and Director