UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission File No. 000-17106
LKA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 91-1428250 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
3724 47th Street Ct. N.W.
Gig Harbor, Washington 98335
(Address of Principal Executive Offices)
(253) 851-7486
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: May 10, 2010 - 14,903,251 shares of common stock.
PART I
Item 1. Financial Statements
The Financial Statements of the Registrant required to be filed with this 10-Q Quarterly Report were prepared by management and commence below, together with related notes. In the opinion of management, the Financial Statements fairly present the financial condition of the Registrant.
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LKA INTERNATIONAL, INC.
Consolidated Balance Sheets
(Unaudited)
ASSETS
| March 31, 2010 |
| December 31, 2009 | ||
CURRENT ASSETS: |
|
|
|
|
|
Cash | $ | 9,509 |
| $ | 213,405 |
Margin trading account |
| 678 |
|
| 678 |
Prepaid expenses |
| 1,460 |
|
| 4,103 |
Deferred debt issue costs |
| 27,650 |
|
| 36,043 |
Investments in trading securities |
| 34 |
|
| 39 |
|
|
|
|
|
|
Total Current Assets |
| 39,331 |
|
| 254,268 |
|
|
|
|
|
|
FIXED ASSETS |
|
|
|
|
|
Land, equipment and mining claims |
| 800,351 |
|
| 800,351 |
Accumulated deprecation |
| (145,021) |
|
| (132,333) |
|
|
|
|
|
|
Total Fixed Assets, Net of Accumulated Depreciation |
| 655,330 |
|
| 668,018 |
|
|
|
|
|
|
OTHER NON-CURRENT ASSETS |
|
|
|
|
|
Reclamation Bonds |
| 113,120 |
|
| 113,120 |
Deferred debt issue costs |
| - |
|
| 494 |
|
|
|
|
|
|
Total Other Non-Current Assets |
| 113,120 |
|
| 113,614 |
|
|
|
|
|
|
TOTAL ASSETS | $ | 807,781 |
| $ | 1,035,900 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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LKA INTERNATIONAL, INC.
Consolidated Balance Sheets (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
| March 31, 2010 |
| December 31, 2009 | ||
CURRENT LIABILITIES |
|
|
|
|
|
Accounts Payable | $ | 75,282 |
| $ | 115,808 |
Note payable |
| 10,000 |
|
| 10,000 |
Notes payable - related party |
| 560,251 |
|
| 498,875 |
Accrued interest payable - related party |
| 86,760 |
|
| 100,649 |
Derivative liability |
| 186,512 |
|
| 126,884 |
|
|
|
|
|
|
Total Current Liabilities |
| 918,805 |
|
| 852,216 |
|
|
|
|
|
|
NON-CURRENT LIABILITIES |
|
|
|
|
|
Derivative liability long term |
| - |
|
| 42,808 |
Notes payable - related party long term |
| - |
|
| 109,018 |
Asset retirement obligation |
| 112,960 |
|
| 112,111 |
|
|
|
|
|
|
Total Non-Current Liabilities |
| 112,960 |
|
| 263,937 |
|
|
|
|
|
|
Total Liabilities |
| 1,031,765 |
|
| 1,116,153 |
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
STOCKHOLDERS' (DEFICIT) |
|
|
|
|
|
Preferred stock; $0.001 par value, 50,000,000 shares authorized, no shares Issued or outstanding |
| - |
|
| - |
Common stock, $0.001 par value, 50,000,000 shares authorized, 14,990,498 shares issued and 14,903,251 shares outstanding respectively |
| 14,991 |
|
| 14,991 |
Additional paid-in capital |
| 7,847,860 |
|
| 7,847,860 |
Treasury stock; 87,247 and 87,247 shares at cost, respectively |
| (86,692) |
|
| (86,692) |
Accumulated deficit |
| (8,000,143) |
|
| (7,856,412) |
|
|
|
|
|
|
Total Stockholders' (Deficit) |
| (223,984) |
|
| (80,253) |
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFECIT) | $ | 807,781 |
| $ | 1,035,900 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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LKA INTERNATIONAL, INC.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended March 31, | |||
| 2010 | 2009 | ||
|
|
|
|
|
REVENUES |
|
|
|
|
Sales - precious metals | $ | 96,133 | $ | - |
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
General and administrative |
| 50,321 |
| 51,626 |
Exploration, development and related costs |
| 72,089 |
| 45,512 |
Officer salaries and bonus |
| 37,500 |
| 37,500 |
Professional and consulting |
| 23,192 |
| 35,123 |
Total Operating Expenses |
| 183,102 |
| 169,761 |
OPERATING LOSS |
| (86,969) |
| (169,761) |
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
Loss on derivative |
| (33,464) |
| - |
Interest expense |
| (23,321) |
| (2,055) |
Interest income |
| 27 |
| 47 |
Realized gain on securities |
| - |
| 1,058 |
Unrealized gain (loss) on securities |
| (4) |
| 4,027 |
Other investment income |
| - |
| 3,709 |
Total Other Income (Expense) |
| (56,762) |
| 6,786 |
|
|
|
|
|
NET LOSS | $ | (143,731) | $ | (162,975) |
BASIC NET LOSS PER COMMON SHARE | $ | (0.01) | $ | (0.01) |
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED |
| 14,990,498 |
| 12,890,498 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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LKA INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended March 31, | |||
| 2010 | 2009 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
Net loss | $ | (143,731) | $ | (162,975) |
Items to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
Accretion of asset retirement obligation |
| 849 |
| 1,255 |
Depreciation and amortization |
| 12,688 |
| 4,814 |
Unrealized (gain) loss on investments |
| 5 |
| (4,027) |
Realized gain on investments |
| - |
| (1,058) |
Investment purchases |
| - |
| (3,528) |
Investment proceeds |
| - |
| 71,496 |
Loss on derivative |
| 33,464 |
| - |
Amortization of deferred debt issue costs |
| 8,887 |
| - |
Changes in operating assets and liabilities |
|
|
|
|
Decrease in prepaid and other assets |
| 2,643 |
| 7,770 |
(Increase) decrease in money market funds |
| - |
| 15,788 |
(Decrease) in accounts payable |
| (40,526) |
| (41,465) |
Increase in accrued expenses |
| (13,889) |
| 1,570 |
Net Cash Provided (Used) by Operating Activities |
| (139,610) |
| (110,360) |
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
Purchase of construction equipment |
| - |
| (62,831) |
Net Cash Used by Investing Activities |
| - |
| (62,831) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
Payments on notes payable |
| (47,642) |
| - |
Payments on derivative liability |
| (16,644) |
| - |
Net Cash Used in Financing Activities |
| (64,286) |
| - |
|
|
|
|
|
INCREASE (DECREASE) IN CASH |
| (203,896) |
| (173,191) |
|
|
|
|
|
CASH AT BEGINNING OF PERIOD |
| 213,405 |
| 182,984 |
|
|
|
|
|
CASH AT END OF PERIOD | $ | 9,509 | $ | 9,793 |
|
|
|
|
|
CASH PAID FOR: |
|
|
|
|
Interest | $ | 28,077 | $ | 375 |
Income taxes | $ | - | $ | - |
|
|
|
|
|
NON CASH TRANSACTIONS Reclassification of debt |
|
|
|
|
from Long term debt to Short term debt |
| $109,018 |
| $- |
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Unaudited Financial Statements
March 31, 2010
NOTE 1 -
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
LKA is currently engaged in efforts to expand mine production and continues to seek additional investment opportunities.
The accompanying unaudited condensed consolidated financial statements have been prepared by LKA pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements include normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with LKAs most recent audited financial statements. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 -
RELATED PARTY TRANSACTIONS
Related Party Debt
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 three months ended March 31, 2010. Accrued interest related to this note totaled $66,392 and $64,971 as of March 31, 2010 and December 31, 2009, respectively.
LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum. No payments have been made during the three months ended March 31, 2010. Accrued interest related to this note totaled $8,647 and $8,498 as of March 31, 2010 and December 31, 2009, respectively.
PanAmerican Capital Group
On July 2, 2009, LKA issued a promissory note (the Note) to PanAmerican Capital Group, Inc., 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 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.
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Unaudited Financial Statements
March 31, 2010
NOTE 2 -
RELATED PARTY TRANSACTIONS (CONTINUED)
During January 2010, LKA made a partial payment of $92,064 on the Note, of which, $16,644 was applied against the derivative liability, $27,777 was applied against accrued interest and $47,642 was applied to principle. Accrued interest totaled $11,721 and $27,180 at March 31, 2010 and December 31, 2009, respectively.
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. Debt issue costs totaled Amortization of debt issuance costs was $8,887 for the period ending March 31, 2010. The balance of deferred debt issue costs was $27,650 and $36,537 at March 31, 2010 and December 31, 2009, respectively.
Other Related Party Transactions
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 LKAs securities transactions and manages its investment portfolio.
NOTE 3 -
SIGNIFICANT EVENTS
Precious Metals Sales
During March 2010, LKA received $96,133 for net smelter proceeds from the delivery of gold and silver ore from the Golden Wonder mine.
Derivative Liability
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, LAKs 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 LKAs 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 models 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 based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels are as follows:
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LKA INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements
March 31, 2010
NOTE 3 -
SIGNIFICANT EVENTS (CONTINUED)
·
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices;
·
Level 2 Inputs from active markets, other than quoted prices for identical instruments, are used to model fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued; and
·
Level 3 Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs.
As a result of the repayment terms of the Note with PanAmerican Capital Group, Inc. (see Note 2) being indexed to the closing spot price of gold on COMEX at each repayment date, 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 by applying 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 three months ending March 31, 2010, LKA paid $16,644 towards the balance of the liability and recorded a loss from derivative liability of $33,464 as a result of increases in the spot prices of gold. The fair market value of LKAs derivative liability at March 31, 2010 is $186,512 the total balance is now short term.
NOTE 4 -
SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after March 31, 2010 the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report 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 our business, including, without limitation, (i) our ability to raise capital, and (ii) statements 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, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, international gold prices, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
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. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Results of Operations
For The Three Months Ended March 31, 2010 Compared to The Three Months Ended March 31, 2009.
During the quarterly period ended March 31, 2010, we received $96,133 in revenues from gold sales. During the March 31, 2009, quarter, we were engaged in exploratory mining operations but recorded no revenues.
Operating expenses increased somewhat from $169,761 in the quarterly period ended March 31, 2009, to $183,102 in the quarterly period ended March 31, 2010. This increase was mainly due to increased costs associated with exploration, mine development and bulk sampling activities as well as infrastructure expenditures. Exploration, development and related costs increased to $72,089 in the quarter ended March 31, 2010, from $45,512 in the year-ago quarter. General and administrative expenses decreased slightly to $50,321 from $51,626 in the quarterly periods ended 2010 and 2009, respectively. Officer salaries and bonus remained $37,500 in both of these three month periods. Professional and consulting expenses decreased to $23,192 in the three months ended March 31, 2010, compared to $35,123 in the 2009 period. We realized an operating loss of $86,969 during the quarter ended March 31, 2010, as compared to operating loss of $169,761 in the comparable period in 2009.
We had a $33,464 loss on the booking of a derivative liability in the three months ended March 31, 2010. Interest expense totaled $23,321 and $2,055 in the quarterly periods ended March 31, 2010, and 2009, respectively. Interest income decreased to $27 in the three months ended March 31,2010, from $47 in the three months ended March 31, 2009. We realized no gains on securities in the quarter ended March 31, 2010, compared to $1,058 in the quarter ended March 31, 2009. Unrealized loss on securities was $4 for the three months ended March 31, 2010, compared to unrealized gains of $4,027 for the three months ended March 31, 2009. We received $0 in other investment income in 2010, compared to $3,709 in 2009.
Net loss totaled $143,731, or $0.01 per share in the three months ended March 31, 2010, compared to $162,975, or $0.01 per share in the three months ended March 31, 2009.
Liquidity
Current assets at March 31, 2010, totaled $39,331. As of that date, we had $9,509 in cash, as compared to $213,405 at December 31, 2009.
During the three months ended March 31, 2010, our operating activities used net cash of $139,610. In the comparable 2009 period, by contrast, operating activities used net cash of $110,360. Investing activities had no effect on our cash flows in the three months ended March 31, 2010, as compared to $62,831 cash used by investing activities in the three
10
months ended March 31, 2009. Cash used by financing activities totaled $64,286 in the three months ended March 31, 2010, with no cash provided or used by financing activities during the three months ended March 31, 2009.
At March 31, 2010, the Company had a working capital deficit of $879,474, as compared to working capital deficit of $597,948 at December 31, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4T. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2010, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
Our management, with the participation of the chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None; not applicable.
Item 1A. Risk Factors.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None; not applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. (Removed and Reserved).
11
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits.
Exhibit No. Identification of Exhibit
SIGNATURES
Pursuant to the requirements 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: | May 13, 2010 |
| By: | /s/Kye Abraham |
|
|
|
| Kye Abraham, President, Chairman of the Board and Director |
|
|
|
|
|
Date: | May 13, 2010 |
| By: | /s/Nanette Abraham |
|
|
|
| Nanette Abraham, Secretary, Treasurer and Director |
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