Quarterly Report (10-q)

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 September 30, 2017

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 ( d ) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to____________

Commission File No. 000-17106

LKA GOLD INCORPORATED

(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 47 ^th Street Ct. N.W.

Gig Harbor, Washington 98335

(Address of principal executive offices)

[phone]

(Registrant's 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 [X] 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 [X] Smaller reporting company [ ] Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

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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 issuer's classes of common stock, as of the latest practicable date:  November 20, 2017  – 19,261,717 shares of common stock.

PART I

Item 1.  Financial Statements

The Financial Statements of LKA Gold Incorporated, a Delaware corporation (the "Registrant," the "Company" or "LKA") 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 GOLD INCORPORATED

Consolidated Balance Sheets

(Unaudited)

ASSETS

		September 30, 2017				December 31, 2016
CURRENT ASSETS
Cash		$	-			$	-
Restricted cash			28,945				1,101
Prepaid expenses			3,333				625
Total Current Assets			32,278				1,726
FIXED ASSETS
Land, equipment, mining claims and asset retirement liabilities			849,140				849,140
Accumulated deprecation			(388,094	)			(381,621	)
Total Fixed Assets, Net of Accumulated Depreciation			461,046				467,519
OTHER NON-CURRENT ASSETS
Reclamation bonds			100,042				100,042
TOTAL ASSETS		$	593,366			$	569,287

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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LKA GOLD INCORPORATED

Consolidated Balance Sheets (Continued)

(Unaudited)

LIABILITIES AND STOCKHOLDERS' DEFICIT

		September 30, 2017				December 31, 2017
CURRENT LIABILITIES
Accounts payable		$	92,843			$	80,668
Accounts payable – related party			19,341				40,095
Note Payable – related party			-				5,500
Wastewater discharge liability			120,416				75,000
Derivative liability			774,439				659,622
Note payable			10,000				10,000
Accrued interest payable			30,542				7,404
Accrued wages and advances payable to officer			75,757				163,257
Convertible notes payable – related party, net of $227,713 and $0      in debt issuance costs and debt discount, respectively			22,287				-
Total Current Liabilities			1,145,625				1,041,546
LONG-TERM LIABILITIES
Convertible notes payable – related party, net of $312,687 and $247,710      in debt issuance costs and debt discount, respectively			37,313				2,290
Convertible note payable, net of $186,667 and $145,949 in debt issuance      costs and debt discount, respectively			13,333				4,051
Asset retirement obligation			122,950				122,950
Total Liabilities			1,319,221				1,170,837
STOCKHOLDERS' DEFICIT
Preferred stock; $0.001 par value, 50,000,000 shares authorized, 0 and      0 shares issued and outstanding, respectively			-				-
Common stock, $0.001 par value, 50,000,000 shares authorized,       19,261,717 and 19,165,152 shares issued and 19,197,259 and 19,121,528        shares outstanding, respectively			19,262				19,165
Additional paid-in capital			18,020,363				17,963,315
Treasury stock; 43,624 and 43,624 shares at cost, respectively			(86,692	)			(86,692	)
Accumulated deficit			(18,678,788	)			(18,497,338	)
Total Stockholders' Deficit			(725,855	)			(601,550	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	593,366			$	569,287

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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LKA GOLD INCORPORATED

Consolidated Statements of Operations

(Unaudited)

		For the Three months Ended September 30,								For the Nine months Ended September 30,
		2017				2016				2017				2016
OPERATING EXPENSES
Exploration costs			-				15,279				89,769				52,248
General and administrative			26,921				27,682				107,695				97,061
Officer salaries			37,500				37,500				112,500				112,500
Professional and consulting			1,256				12,653				55,268				46,721
Total Operating Expenses			65,677				93,114				365,232				308,530
OPERATING LOSS			(65,677	)			(93,114	)			(365,232	)			(308,530	)
OTHER INCOME (EXPENSES)
Gain (loss) on derivatives			599,871				139,979				285,183				(28,124	)
Other income			-				-				12,205				-
Interest expense, net			(49,456	)			(10,085	)			(113,606	)			(39,810	)
Total Other Income (Expenses)			550,415				129,894				183,782				(67,934	)
NET INCOME (LOSS)		$	484,738			$	36,780			$	(181,450	)		$	(376,464	)
BASIC NET INCOME (LOSS) PER SHARE		$	0.03			$	0.00			$	(0.01	)		$	(0.02	)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			19,198,845				19,121,528				19,181,832				19,121,528
FULLY DILUTED NET INCOME (LOSS) PER SHARE		$	(0.00	)		$	(0.00	)		$	(0.02	)		$	(0.02	)
FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			22,398,845				19,921,528				22,381,832				19,121,528

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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LKA GOLD INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

		For the Nine months Ended September 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(181,450	)		$	(376,464	)
Items to reconcile net loss to net cash used in operating activities:
Accretion of asset retirement obligation			-				3,892
Depreciation and amortization			6,473				20,288
Amortization of debt issuance costs			5,138				13,750
Amortization of debt discount			68,954				4,490
(Gain) loss on derivative			(285,183	)			28,124
Common stock issued for expenses			21,645				-
Changes in operating assets and liabilities
(Increase) decrease in prepaid expenses and other assets			(2,708	)			21,055
Increase (decrease) in accounts payable and accrued expenses			80,729				(1,684	)
Increase in accounts payable – related party			4,746				12,254
Increase in accrued wages			62,500				50,000
Net Cash Used in Operating Activities			(219,156	)			(224,295	)
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash			(27,844	)			3,750
Net Cash (Used in) Provided by Investing Activities			(27,844	)			3,750
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash			10,000				-
Proceeds from convertible debt			50,000				100,000
Proceeds from convertible debt, related party			200,000				-
Proceeds from notes payable, related party			1,100				-
Payments on notes payable, related party			(6,600	)			-
Cash paid for debt issuance costs			(7,500	)			(10,000	)
Net Cash Provided by Financing Activities			247,000				90,000
INCREASE (DECREASE) IN CASH			-				(130,545	)
CASH AT BEGINNING OF PERIOD			-				150,068
CASH AT END OF PERIOD		$	-			$	19,523
CASH PAID FOR:
Interest		$	15,899			$	12,246
Income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Discount on convertible notes payable		$	400,000			$	99,369
Convertible debt issued for accrued wages		$	150,000			$	-
Common stock issued for debt and expenses		$	25,500			$	-

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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LKA GOLD INCORPORATED

Notes to the Unaudited Consolidated Financial Statements

September 30, 2017

NOTE 1 -      ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

LKA Gold Incorporated ("LKA" or the "Company") is currently engaged in efforts to expand mine production and continues to seek additional investment opportunities.

The accompanying unaudited 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 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 consolidated financial statements be read in conjunction with LKA's most recent audited financial statements. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 -      RELATED PARTY TRANSACTIONS

Related Party Debt – 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 FINRA member and registered investment advisor) also executes LKA's securities transactions and manages its investment portfolio. During the nine months ended September 30, 2017, Abraham & Co., Inc. agreed to exchange $25,500 in outstanding accounts payable for 56,818 shares of LKA common stock valued at the market price on the grant date and recognized $25,500 in accounts payable extinguishment and $10,863 in expense related to market discount. LKA owed Abraham & Co. $19,305 and $31,500 as of September 30, 2017 and December 31, 2016, respectively.

Related Party Debt – Notes, Accounts and Wages Payable

At September 30, 2017 and December 31, 2016, LKA owes $0 and $5,500, respectively, for short-term operating capital notes payable to LKA's President, Kye Abraham.  During the nine months ended September 30, 2017, LKA borrowed an additional $1,100 and repaid the entire $6,600.

At September 30, 2017 and December 31, 2016, LKA owes $36 and $8,595, respectively, for purchases made on the personal credit card of LKA's President, Kye Abraham.  

During the nine months ended September 30, 2017, LKA's President, Kye Abraham agreed to convert $150,000 in accrued unpaid salary into a convertible debenture. At September 30, 2017 and December 31, 2016, LKA owed Kye Abraham $75,757 and $163,257 in unpaid salary, respectively.

Convertible Debentures

On September 29, 2015, LKA issued two convertible debentures (Convertible Debentures), each in the amount of $125,000, or a total of $250,000 to members of the Koski family, the Company's largest shareholders. Principal on the Convertible Debentures is due September 29, 2018. Interest accrues at 7.5% per annum and interest is due on a semi-annual basis. The Convertible Debentures are convertible at any time into shares of LKA common stock at $0.50 per share.

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On March 15, 2017, LKA issued a convertible debenture in the amount of $150,000 to members of the Koski family, the Company's largest shareholders. Principal on the Convertible Debenture is due March 15, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders. As such, LKA has designated $11,250 as restricted cash at September 30, 2017.

On March 17, 2017, LKA issued a convertible debenture in the amount of $150,000 to its President and Chairman, Kye Abraham in exchange for $150,000 in accrued and unpaid wages. Principal on the Convertible Debenture is due March 17, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders. As such, LKA has designated $11,250 as restricted cash at September 30, 2017.

On March 31, 2017, LKA issued a convertible debenture in the amount of $50,000 to an entity controlled by LKA's President and Chairman, Kye Abraham. Principal on the Convertible Debenture is due June 30, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders. As such, LKA has designated $3,750 as restricted cash at September 30, 2017.

If any event of default occurs, the interest rate increases to 15% per annum and the conversion rate shall be decreased to $0.25 per share. As a result of the potential variable conversion rate, the conversion option embedded in this instrument is classified as a liability in accordance with Accounting Series Codification Topic 815, "Derivatives and Hedging" (ASC 815) on the date of issuance and during the nine months ended September 30, 2017, LKA recognized debt discounts totaling $350,000. During the nine months ended September 30, 2017 and 2016, LKA recognized $60,295 and $1,383 of interest expense from the amortization of the debt discounts, respectively.

LKA incurred $12,500 in debt issuance costs on the convertible debenture issuances in September 2015. The debt issuance costs are being amortized over the three year term of the convertible debenture. During the nine months ended September 30, 2017 and 2016, LKA recognized $4,515 and $3,125 of interest expense from the amortization of debt issuance costs, respectively.

Convertible debenture holders were notified November 6, 2017 that the current bi-annual interest payments in the amount of $22,499 would be delayed while the Company is working on new financing arrangements. During November 2017, all related party convertible debenture holders agreed to defer the semi-annual past due payment until the next scheduled payment in 2018.

NOTE 3 -     CONVERTIBLE DEBENTURES

During October 2015, LKA issued a 7.5% Convertible Debenture for $50,000 in cash. The Convertible Debenture accrues interest at 7.5% per annum due in semi-annual payments, is unsecured, due in three years from the date of issuance and is convertible into shares of LKA common stock at any time at the option of the holder at a rate of $0.50 per share.

During April 2016, LKA issued two $50,000 Convertible Debentures for $100,000 in cash.  The Convertible Debentures accrue interest at 7.5% per annum due in semi-annual payments, are unsecured, due in three years from the dates of issuance and are convertible into shares of LKA common stock at any time at the option of the holder at a rate of $0.50 per share. Interest is due in semi-annual payments.

On April 26, 2017, LKA issued a convertible debenture in the amount of $50,000 for cash. Principal on the Convertible Debenture is due April 26, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders. As such, LKA has designated $3,750 as restricted cash at September 30, 2017.

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If any event of default occurs, the interest rate increases to 15% per annum and the conversion rate shall be decreased to $0.25 per share. As a result of the potential variable conversion rate, the conversion option embedded in this instrument is classified as a liability in accordance with ASC 815 and LKA recognized a debt discount of $199,369 on all the above mentioned Convertible Debentures. During the nine months ended September 30, 2017 and 2016, LKA recognized 8,659 and $3,107 of interest expense from the amortization of the debt discount.

LKA incurred $12,500 in debt issuance costs on the convertible debenture issuance. The debt issuance costs are being amortized over the three year term of the convertible debenture. During the nine months ended September 30, 2017 and 2016, LKA recognized $623 and $10,625 of interest expense from the amortization of debt issuance costs.

Convertible debenture holders were notified November 6, 2017 that the current bi-annual interest payments in the amount of $7,500 would be delayed while the Company is working on new financing arrangements. During November 2017, the Caldera Partners Limited Partnership, a related party entity, agreed to extend a financing arrangement with LKA for the purpose paying off this past due interest and the amounts were subsequently paid in full by LKA on November 17, 2017.

NOTE 4 -      DERIVATIVE LIABILITY

LKA analyzed the conversion options embedded in the convertible notes payable and convertible notes payable related party for derivative accounting consideration under ASC 815 and determined that the instruments embedded in the above referenced Convertible Notes should be classified as liabilities and recorded at fair value due to the potentially variable conversion prices.  

 

The fair value of the conversion options for Convertible Debentures issued during the nine months ended September 30, 2017 was determined to be $609,812 as of the issuance date using a Black-Scholes option-pricing model.   Upon the date of issuance of the Convertible Notes, $400,000 was recorded as debt discount and $209,812 was recorded as day one loss on derivative liability.  During the nine months ended September 30, 2017 , $494,995 of gain was recorded on mark-to-market of the conversion options, respectively.

The following table summarizes the derivative liabilities included in the consolidated balance sheets at September 30, 2017 and December 31, 2016:

Balance, December 31, 2016		$	659,622
Day one loss due to convertible debt			209,812
Debt discount			400,000
Gain on change in fair value			(494,995	)
Balance, September 30, 2017		$	774,439

The Company valued its derivatives liabilities using the Black-Scholes option-pricing model.  Assumptions used during the nine months ended September 30, 2017 include (1) risk-free interest rates of between 1.31% and 1.93%, (2) lives of between 1.01 and 4.06 years, (3) expected volatility between 214% - 446%, (4) zero expected dividends, (5) conversion prices as set forth in the related instruments, and (6) the common stock price of the underlying share on the valuation dates.

 

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NOTE 5-       FAIR VALUE OF FINANCIAL INSTRUMENTS  

ASC 820, "Fair Value Measurements" (ASC 820) and ASC 825, "Financial Instruments" (ASC 825) , requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:

Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The carrying values of cash, accounts payable, and accrued liabilities approximate fair value. Pursuant to ASC 820 and 825, the fair value of cash is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that are measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:

		Level 1				Level 2				Level 3				Total
September 30, 2017:
Liabilities:
Derivative financial instruments		$	-			$	-			$	774,439			$	774,439
December 31, 2016
Liabilities:
Derivative financial instruments		$	-			$	-			$	659,622			$	659,622

NOTE 5 -      NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION

In 2002 the Federal Bureau of Land Management (the "BLM") advised LKA of its desire to extend to the Ute-Ulay Property certain environmental clean-up ("remediation") activities that it is conducting on neighboring properties that LKA does not own.  The BLM commissioned and obtained three engineering evaluation and cost analysis ("EE/CA") studies/reports on the Ute-Ulay and the neighboring public lands in 2002-2006.  These EE/CA studies analyzed the current environmental state of the Ute-Ulay property and other properties in the area.  The studies identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present.  The BLM's most recent study, "Value Engineering Study on the Ute Ulay Mine/Mill Site – Final Report" dated January 5, 2006, projected the costs of remediation and property stabilization on the Ute-Ulay property to be approximately $2.1 million.  Based upon discussions with Hinsdale County, Colorado officials, Colorado Department of Public Health & Environment Ute-Ulay project supervisor, the Federal Environmental Protection Agency's (the "EPA") regional manager, and legal counsel, the actual costs associated with this effort are expected to be approximately $1.2 million; substantially below previous BLM estimates.  Under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the property owner and previous owners.  While it cannot be determined with absolute certainty until the project is completed, LKA's status as a " de minimis" participant and the fact that remediation activities are focused on property located largely outside of LKA's permitted operating area, LKA management expects this project will have a negligible impact on the LKA's financial condition.  Accordingly, pursuant to Generally Accepted Accounting Principles, and all discussions with the above named agencies to date, LKA management believes it is unlikely there will be a material impact to its financial statements and no liability for this project has been recorded as of September 30, 2017. Actual completion of remediation work at the site was completed in late 2013 by the EPA. The EPA has not yet issued its notice of final determination.

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NOTE 6 -     WASTEWATER DISCHARGE LIABILITY

During the fourth quarter of 2014, LKA received a Notice of Violation (NOV) from the Colorado Department of Health and Environment (CDPHE) for failure to meet certain requirements of the Company's wastewater discharge permit. During 2016, the Company undertook all corrective actions specified in the NOV, under CDPHE oversight, and believes it is in compliance with the terms of its permit. Additional work is going to be required to modify and upgrade the mine's water treatment process in 2017 to meet regulatory requirements and bring LKA back into compliance with its discharge permit requirements. Until this work is completed to the satisfaction of CDPHE, the Company is considered to be in a "non-compliance" status with the terms of its discharge permit and additional penalties could be assessed beyond those described (anticipated) above.  It is currently expected that discussions with the CDPHE will be concluded by the end of 2017 and that any financial penalty assessed and any further corrective actions will not likely cost less than $75,000 but not more than $150,000. If LKA is unsuccessful is achieving full compliance with permit requirements, it may be subject to additional penalties or revocation of its discharge permit. As a result, LKA has accrued a liability of $120,416 and $75,000 as of September 30, 2017 and December 31, 2016, respectively, as there is no better estimate of the amount of loss within this range. During the nine months ended September 30, 2017, due to an increase in estimated costs to meet proposed corrective actions, LKA increase the accrual by $75,000. During the nine months ended September 30, 2017, LKA spent approximately $29,584 in remediation expenses and the liability balance is $120,416 at September 30, 2017.

NOTE 7 -     MINE EXPLORATION AND OPTION AGREEMENT

On July 9, 2015, LKA entered into an Exploration Agreement & Option (Agreement) with Kinross Gold U.S.A., Inc. for the purpose of expanding its Golden Wonder Mine exploration beyond LKA's active workings. The Agreement, amongst its other provisions, granted Kinross a five-year exclusive right to explore, and if successful, develop any mineral resource(s) containing 50,000 or more ounces of gold on LKA's properties above and adjacent to the Golden Wonder Mine. On or about September 20, 2017, Kinross gave LKA notice of termination of the Agreement.

NOTE 8 -      COMMON STOCK

During February 2017, Abraham & Co., Inc. agreed to exchange $25,500 in outstanding accounts payable for 56,818 shares of LKA common stock valued at the market price on the grant date and recognized $25,500 in accounts payable extinguishment and $10,863 in expense related to market discount.

During June 2017, LKA issued 18,913 shares of common stock for services valued at the market price on the grant date of $10,782, or $0.57 per share.

During July 2017, LKA commenced a limited private Offering to sell to certain accredited investors, "Units" priced at $0.48 each, with a minimum investment of $10,000 and additional investment in increments of $5,000. Each Unit consists of one share of LKA Gold common stock and a "Warrant" to purchase an additional LKA Gold share of common at $0.60 for a period of two years from date of original subscription.

During July 2017, LKA issued 20,834 shares of common stock and warrants to purchase an additional 20,834 shares of common stock at an exercise price $0.60 per share for cash of $10,000.

NOTE 9 -      GOING CONCERN

LKA's consolidated financial statements are prepared using Generally Accepted Accounting Principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business.  However, LKA has recently accumulated significant losses,   has a working capital deficit and has negative cash flows from operations, which raise substantial doubt about its ability to continue as a going concern.  Management's plans with respect to alleviating the adverse financial conditions that caused management to express substantial doubt about the LKA's ability to continue as a going concern are as follows:

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During the third quarter of 2015, LKA shifted its focus from exploratory mining to prepare for another surface and/or underground drilling program. The new program will be designed to locate new high-grade structures near or within the Carve-Out Area defined by the exploration agreement between LKA and Kinross. Until additional high-grade targets are located, LKA has suspended exploratory mining operations. Accordingly, cash flow from gold sales is not expected until exploratory mining is resumed. The exploration program, which began in November 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. During this evaluation period, sampling and analysis of exposed veins yielded encouraging results and some precious metals revenues. While encouraging, no conclusion can be drawn at this time about the commercial viability of the mine and LKA continues to evaluate potential merger, joint venture or lease agreements for the property.

In order to support continued operation of the mine, LKA completed a $200,000 capital funding raise in March 2017, an additional $50,000 in April 2017 and during July 2017, entered into a limited private offering of its common stock to sell to certain accredited investors, "Units" priced at $0.48 each with a minimum investment of $10,000 with additional investment in increments of $5,000. Each Unit consists of one share of LKA Gold common stock and a "Warrant" to purchase an additional LKA Gold share of common at $.60 (exercise price) for a period of two years from date of original subscription. During September, in conjunction with the termination of the Kinross exploration agreement, LKA terminated the limited private offering (see Note 7). 

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 9 -      SUBSEQUENT EVENTS

During November 2017, LKA and the Caldera Partners Limited Partnership, a related party entity, agreed to extend a financing arrangement with LKA for the purpose paying off past due interest on convertible debentures totaling $7,500 (see Note 2) while the Company is working on new financing arrangements.

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Item 2.   Management's 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 September 30, 2017 Compared to the Three Months Ended September 30, 2016

During the three months ended September 30, 2017 and 2016, we did not recognize any revenue.

Exploration expenses decreased $15,279, or approximately 100%, in the three months ended September 30, 2017 due to the cessation of mine operations during 2017. Professional fees decreased by $11,397, or approximately 90% as a result of decreased legal and professional expenses, while general and administrative expenses remained flat in the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Officer salaries remained flat in the three months ended September 30, 2017, compared to the three months ended September 30, 2016.

We incurred an operating loss of $65,677 during the three months ended September 30, 2017, as compared to an operating loss of $93,114 in the three months ended September 30, 2016. The $27,437, or approximately 29%, decrease is mainly due to a $15,279 decrease in exploration and $11,397 decrease in professional fees during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The decreases are a result of decreases mine exploration activity.

We incurred total other income of $550,415 during the three months ended September 30, 2017, as compared to $129,894 in the three months ended September 30, 2016. The $420,521, or approximately 324% increase is mainly due to the recognition of $599,871 in gain on derivatives during the three months ended September 30, 2016, compared to a $139,979 derivative gain for the three months ended September 30, 2017. Interest expense increased to $49,456 during the three months ended September 30, 2017 as compared to $10,085 in the three months ended September 30, 2016.  The increase is mainly due to the issuance of convertible debentures totaling $400,000 bearing interest at 7.5% per annum and the related debt discount and issuance costs.

Net income totaled $484,738, in the three months ended September 30, 2017, compared to net income of $36,780 in the three months ended September 30, 2016. The increase is mainly due to the increase in other income as discussed above.

For The Nine months Ended September 30, 2017 compared to the Nine months Ended September 30, 2016

During the nine months ended September 30, 2017 and 2016, we did not recognize any revenue.

Exploration expenses increased $37,521, or approximately 72%, from $52,248 in the nine months ended September 30, 2016, to $89,769 in the nine months ended September 30, 2017. The increase was mainly due to a $75,000 increase in estimate for wastewater discharge liability as well as the issuance of 18,913 shares of common stock for services valued at $10,782 during the nine months ended September 30, 2017.

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Professional fees increased by $8,547 during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, or approximately 18%, as a result of increased legal expenses incurred for mining operations. General and administrative expenses increased by $10,634 and officer salaries remained flat in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.

We incurred an operating loss of $365,232 during the nine months ended September 30, 2017, as compared to an operating loss of $308,530 in the nine months ended September 30, 2016. The $56,702, or approximately 18% increase is mainly due to the increase in exploration and legal expenses, as discussed above, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

We incurred total other income of $183,782 during the nine months ended September 30, 2017, as compared to total other expense of $67,934 in the nine months ended September 30, 2016. The $251,716, or approximately 371% increase is mainly due to a $313,307 increase in gain on derivatives compared to the comparable period. Interest expense increased to $113,606 during the nine months ended September 30, 2017 as compared to $39,810 in the nine months ended September 30, 2016, or $73,796.  The increase in interest expense is mainly due to the issuance of convertible debentures totaling $400,000 bearing interest at 7.5% per annum and the related debt discount and issuance costs.

Net loss totaled $181,450, or $0.01 per share, in the nine months ended September 30, 2017, compared to a net loss of $376,464, or $0.02 per share in the nine months ended September 30, 2016. As discussed above, the decrease in net loss is mainly due to the $251,716 increase in other income, partially offset by an increase in operating expenses of $56,702 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Liquidity

Current assets at September 30, 2017 totaled $32,278.  As of that date, we had $28,945 in restricted cash, and $3,333 in prepaid expenses, as compared to $1,101 in restricted cash and $625 in prepaid expenses at December 31, 2016.

During the nine months ended September 30, 2017, our operating activities used net cash of $219,156, compared to $224,295 in the comparable 2016 period. Investing activities used cash of $27,844 during the nine months ended September 30, 2017, compared to cash provided of $3,750 in the 2016 period, all related to the fluctuation in restricted cash for interest payments on convertible notes payable.  Financing activities provided $247,000 in cash during the nine months ended September 30, 2017, mainly from the issuance of three convertible debentures for cash totaling $250,000 and $10,000 from the sale of common stock, compared to $100,000 in convertible debenture proceeds in the comparable 2016 period.

At September 30, 2017, the Company had a working capital deficit of $1,113,347, as compared to $1,039,820 at December 31, 2016.

Focus Shift

During the third quarter of 2015, LKA shifted its focus from exploratory mining to prepare for another surface and/or underground drilling program. The new program will be designed to locate new high-grade structures near or within the Carve-Out Area defined by the exploration agreement between LKA and Kinross. Until additional high-grade targets are located, LKA has suspended exploratory mining operations. Accordingly, cash flow from gold sales is not expected until exploratory mining is resumed.  On or about September 20, 2017, Kinross gave LKA notice of termination of the Agreement.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not required.

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Item 4.  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 September 30, 2017, our disclosure controls and procedures were not effective as the Company lacks appropriate segregation of duties and has an insufficient number of employees responsible for the accounting and financial reporting functions.  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.

Changes in internal control over financial reporting

Our management, with the participation of the chief executive officer and chief financial officer, has concluded that 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.

On March 15, 2017, LKA issued a convertible debenture in the amount of $150,000 to members of the Koski family, the Company's largest shareholders. Principal on the Convertible Debenture is due March 15, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders.

On March 17, 2017, LKA issued a convertible debenture in the amount of $150,000 to its President and Chairman, Kye Abraham in exchange for $150,000 in accrued and unpaid wages. Principal on the Convertible Debenture is due March 17, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders.

On March 31, 2017, LKA issued a convertible debenture in the amount of $50,000 to an entity controlled by LKA's President and Chairman, Kye Abraham. Principal on the Convertible Debenture is due March 31, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders.

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On February 16, 2017, Abraham & Co., Inc. an affiliated company controlled by our President and Chairman, Kye Abraham, agreed to exchange $25,500 in outstanding accounts payable for 56,818 shares of LKA common stock.

On April 26, 2017, LKA issued a convertible debenture in the amount of $50,000 for cash. Principal on the Convertible Debenture is due April 26, 2021. The Convertible Debenture accrues interest at 7.5% and is convertible at any time into shares of LKA common stock at $0.50 per share. Interest is due on a semi-annual basis and LKA is required to retain a reserve amount of the proceeds to pay the first two semi-annual interest payments, which, if the Convertible Debentures are converted within one year, will be paid to the Convertible Debenture holders.

On June 12, 2017, LKA issued 18,913 shares of common stock for services valued at the market price on the grant date of $10,782, or $0.57 per share.

During July 2017, LKA issued 20,834 shares of common stock and warrants to purchase an additional 20,834 shares of common stock at an exercise price of $0.60 per share for cash of $10,000.

Item 3. Defaults Upon Senior Securities.

None; not applicable

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

During the nine months ended September 30, 2017, there were no material changes to the procedures by which security holders may recommend nominees to the Registrant's Board of Directors.

Item 6. Exhibits.

Exhibit No.                         Identification of Exhibit

31.1   31.2   32

Certification of Kye Abraham Pursuant to Section 302 of the Sarbanes-Oxley Act.   Certification of Nanette Abraham Pursuant to Section 302 of the Sarbanes-Oxley Act.   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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 GOLD INCORPORATED

Date:	November 20, 2017		By:	/s/Kye Abraham
				Kye Abraham, President, Chairman of the Board and Director
Date:	November 20, 2017		By:	/s/Nanette Abraham
				Nanette Abraham, Secretary, Treasurer and Director

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