10-Q 1 lkaitenqjunseventeen.htm LKAI 10Q JUN 2017
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 June 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 47th Street Ct. N.W.
Gig Harbor, Washington 98335
(Address of principal executive offices)

(253) 514-6661
(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]

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:  August 18, 2017  – 19,261,717 shares of common stock.
 
1


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.





2

LKA GOLD INCORPORATED
Consolidated Balance Sheets
(Unaudited)

ASSETS

   
June 30,
2017
   
December 31, 2016
 
CURRENT ASSETS
           
     Cash
 
$
71,141
   
$
-
 
     Restricted cash
   
30,000
     
1,101
 
     Prepaid expenses
   
5,833
     
625
 
          Total Current Assets
   
106,974
     
1,726
 
 
FIXED ASSETS
               
     Land, equipment, mining claims and asset retirement liabilities
   
849,140
     
849,140
 
     Accumulated deprecation
   
(385,937
)
   
(381,621
)
          Total Fixed Assets, Net of Accumulated Depreciation
   
463,203
     
467,519
 
 
OTHER NON-CURRENT ASSETS
               
     Reclamation bonds
   
100,042
     
100,042
 
                 
          TOTAL ASSETS
 
$
670,219
   
$
569,287
 
                 

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3

LKA GOLD INCORPORATED
Consolidated Balance Sheets (Continued)
(Unaudited)


LIABILITIES AND STOCKHOLDERS' DEFICIT

 
CURRENT LIABILITIES
   June 30, 2017      December 31, 2016  
     Accounts payable
 
$
103,625
   
$
80,668
 
     Accounts payable – related party
   
17,639
     
40,095
 
     Note Payable – related party
   
-
     
5,500
 
     Wastewater discharge liability
   
137,265
     
75,000
 
     Derivative liability
   
1,374,310
     
659,622
 
     Note payable
   
10,000
     
10,000
 
     Accrued interest payable
   
15,419
     
7,404
 
     Accrued wages and advances payable to officer
   
63,257
     
163,257
 
          Total Current Liabilities
   
1,721,515
     
1,041,546
 
 
LONG-TERM LIABILITIES
               
Convertible notes payable – related party, net of $563,891 and $247,710
in debt issuance costs and debt discount, respectively
   
36,109
     
2,290
 
Convertible note payable, net of $189,762 and $145,949 in debt issuance
costs and debt discount, respectively
   
10,238
     
4,051
 
     Asset retirement obligation
   
122,950
     
122,950
 
Total Liabilities
   
1,890,812
     
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,
      19,240,883 and 19,165,152 shares issued and 19,197,259 and 19,121,528
       shares outstanding, respectively
   
19,241
     
19,165
 
     Additional paid-in capital
   
18,010,384
     
17,963,315
 
     Treasury stock; 43,624 and 43,624 shares at cost, respectively
   
(86,692
)
   
(86,692
)
     Accumulated deficit
   
(19,163,526
)
   
(18,497,338
)
            Total Stockholders' Deficit
   
(1,220,593
)
   
(601,550
)
                 
            TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
670,219
   
$
569,287
 

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4

LKA GOLD INCORPORATED
Consolidated Statements of Operations
(Unaudited)

   
For the Three months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
OPERATING EXPENSES
                       
Exploration costs
   
15,076
     
11,143
     
91,233
     
36,969
 
General and administrative
   
45,804
     
39,688
     
79,310
     
69,379
 
Officer salaries
   
37,500
     
37,500
     
75,000
     
75,000
 
Professional and consulting
   
28,839
     
10,090
     
54,012
     
34,068
 
     Total Operating Expenses
   
127,219
     
98,421
     
299,555
     
215,416
 
                                 
OPERATING LOSS
   
(127,219
)
   
(98,421
)
   
(299,555
)    
(215,416
)
                                 
OTHER INCOME (EXPENSES)
                               
Loss on derivatives
   
(74,034
)
   
(112,297
)
   
(314,688
)
   
(168,103
)
Other income
   
-
     
-
     
12,205
     
-
 
Interest expense, net
   
(50,539
)
   
(22,105
)
   
(64,150
)
   
(29,725
)
     Total Other Income (Expenses)
   
(124,573
)
   
(134,402
)
   
(366,633
)
   
(197,828
)
                                 
NET LOSS
 
$
(251,792
)
 
$
(232,823
)
 
$
(666,188
)
 
$
(413,244
)
 
BASIC AND DILUTED NET LOSS PER SHARE
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.02
)
 
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
   
19,236,343
     
19,121,528
     
19,153,314
     
19,121,528
 

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

LKA GOLD INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)

   
For the Six months Ended
June 30,
 
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(666,188
)
 
$
(413,244
)
Items to reconcile net loss to net cash used in operating activities:
               
   Accretion of asset retirement obligation
   
-
     
2,594
 
   Depreciation and amortization
   
4,316
     
13,525
 
   Amortization of debt issuance costs
   
2,478
     
12,490
 
   Amortization of debt discount
   
37,528
     
3,528
 
   Loss on derivative
   
314,688
     
168,103
 
   Common stock issued for expenses
   
21,645
     
-
 
Changes in operating assets and liabilities
               
   (Increase) decrease in prepaid expenses and other assets
   
(5,208
)
   
19,180
 
   Increase (decrease) in accounts payable and accrued expenses
   
93,237
     
(11,559
)
   Increase in accounts payable – related party
   
3,044
     
8,691
 
   Increase in accrued wages
   
50,000
     
25,000
 
      Net Cash Used in Operating Activities
   
(144,460
)
   
(171,692
)
                 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
      Change in restricted cash
   
(28,899
)
   
3,750
 
         Net Cash (Used in) Provided by Investing Activities
   
(28,899
)
   
3,750
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
      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
   
-
     
(10,000
)
         Net Cash Provided by Financing Activities
   
244,500
     
90,000
 
                 
INCREASE (DECREASE) IN CASH
   
71,141
     
(77,942
)
                 
CASH AT BEGINNING OF PERIOD
   
-
     
150,068
 
                 
CASH AT END OF PERIOD
 
$
71,141
   
$
72,126
 
                 
CASH PAID FOR:
               
   Interest
 
$
15,599
   
$
11,946
 
   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.
6

LKA GOLD INCORPORATED
Notes to the Unaudited Consolidated Financial Statements
June 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 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 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 six months ended June 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 six months ended June 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. $15,000 and $31,500 as of June 30, 2017 and December 31, 2016, respectively.

Related Party Debt – Notes, Accounts and Wages Payable

At June 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 six months ended June 30, 2017, LKA borrowed an additional $1,100 and repaid the entire $6,600.

At June 30, 2017 and December 31, 2016, LKA owes $2,639 and $8,595, respectively, for purchases made on the personal credit card of LKA's President, Kye Abraham.  

During the six months ended June 30, 2017, LKA's President, Kye Abraham agreed to convert $150,000 in accrued unpaid salary into a convertible debenture. At June 30, 2017 and December 31, 2016, LKA owed Kye Abraham $63,257 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.

7

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 June 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 June 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 June 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 six months ended June 30, 2017, LKA recognized debt discounts totaling $350,000. During the six months ended June 30, 2017 and 2016, LKA recognized $31,754 and $624 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 six months ended June 30, 2017 and 2016, LKA recognized $2,065 and $2,075 of interest expense from the amortization of debt issuance costs, respectively.

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 June 30, 2017.

8


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 six months ended June 30, 2017 and 2016, LKA recognized $5,774 and $776 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 six months ended June 30, 2017 and 2016, LKA recognized $413 and $415 of interest expense from the amortization of debt issuance costs.

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 six months ended June 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 six months ended June 30, 2017, $104,876 of loss 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 June 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
 
Loss on change in fair value
   
104,876
 
Balance, June 30, 2017
 
$
1,374,310
 

The Company valued its derivatives liabilities using the Black-Scholes option-pricing model.  Assumptions used during the six months ended June 30, 2017 include (1) risk-free interest rates of between 1.38% and 1.93%, (2) lives of between 1.27 and 4.06 years, (3) expected volatility between 218% - 248%, (4) zero expected dividends, (5) conversion prices as set forth in the related instruments, and (6) the common stock price of the underlying share on the valuation dates.

NOTE 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 June 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.

9

NOTE 6 -        WASTE WATER 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 $137,265 and $75,000 as of June 30, 2017 and December 31, 2016, respectively, as there is no better estimate of the amount of loss within this range. During the six months ended June 30, 2017, due to an increase in estimated costs to meet proposed corrective actions, LKA increase the accrual by $75,000. During the six months ended June 30, 2017, LKA spent approximately $12,735 in remediation expenses.

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, grants Kinross a five-year exclusive right to explore, and if successful, develop any mineral resource(s) containing 50,000 or more ounces of gold on LKA's properties above and adjacent to the Golden Wonder Mine. If such a resource, or multiple resources, is discovered, LKA will have the option to enter into a joint venture with Kinross for the purpose of developing such resource(s) by reimbursing 40.25% of Kinross' exploration expenses in return for a 35% interest in the joint venture. If a joint venture is formed, LKA's contribution will also include all of LKA's Golden Wonder properties.

During the five-year exploration period, Kinross will, but is not obligated to, conduct exploration, at its own expense, while LKA will retain the exclusive right to continue exploration and development of any resources within a "Carve-Out Area" which is LKA's current area of operation.

NOTE 8 -        COMMON STOCK

During the six months ended June 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.

During the six months ended June 30, 2017, LKA issued 18,913 shares of common stock valued at the market price on the grant date of $10,782, or $0.57 per share.

10

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 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:

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 (see Note 3) 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 $0.60 (exercise price) for a period of two years from date of original subscription.  

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 10 -
SUBSEQUENT EVENTS

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 $0.60 per share for $10,000.


 
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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 June 30, 2017 Compared to The Three Months Ended June 30, 2016

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

Exploration expenses increased $3,933, or approximately 35%, from $11,143 in the three months ended June 30, 2016, to $15,076 in the three months ended June 30, 2017, mainly due to the issuance of 18,913 shares of common stock for services values at $10,782 during the three months ended June 30, 2017. Professional fees increased by $18,749, or approximately 186% as a result of increased legal expenses incurred for mining operations, while general and administrative expenses increased by $6,116, or approximately 15% in the three months ended June 30, 2017. The increase was mainly due to increased investor relation and promotional expenses. Officer salaries remained flat in the three months ended June 30, 2017, compared to the three months ended June 30, 2016

We incurred an operating loss of $127,219 during the three months ended June 30, 2017, as compared to an operating loss of $98,421 in the three months ended June 30, 2016. The $28,798, or approximately 29%, increase is mainly due to the $18,749 increase in professional fees during the three months ended June 30, 2017 compared to the three months ended June 30, 2016.

We incurred total other expenses of $124,573 during the three months ended June 30, 2017, as compared to $134,402 in the three months ended June 30, 2016. The $9,829, or approximately 7% decrease is mainly due to the recognition of $112,297 in loss on derivatives during the three months ended June 30, 2016, compared to a $74,034 derivative loss for the three months ended June 30, 2017. Interest expense increased to $50,539 during the three months ended June 30, 2017 as compared to $22,105 in the three months ended June 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 loss totaled $251,792, or $0.01 per share, in the three months ended June 30, 2017, compared to a net loss of $232,823, or $0.01 per share, in the three months ended June 30, 2016.

For The Six months Ended June 30, 2017 compared to The Six months Ended June 30, 2016

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

Exploration expenses increased $54,264, or approximately 147%, from $36,969 in the six months ended June 30, 2016, to $91,233 in the six months ended June 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 values at $10,782 during the six months ended June 30, 2017.

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Professional fees increased by $19,944 during the six months ended June 30, 2017, compared to the six months ended June 30, 2016, or approximately 59%, as a result of increased legal expenses incurred for mining operations. General and administrative expenses increased by $9,931 and officer salaries remained flat in the six months ended June 30, 2017, compared to the six months ended June 30, 2016.

We incurred an operating loss of $299,555 during the six months ended June 30, 2017, as compared to an operating loss of $215,416 in the six months ended June 30, 2016. The $84,139, or approximately 39% increase is mainly due to the increase in exploration and legal expenses, as discussed above, during the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

We incurred total other expenses of $366,633 during the six months ended June 30, 2017, as compared to $197,828 in the six months ended June 30, 2016. The $168,805, or approximately 85% increase is mainly due to a $146,585 increase in loss on derivatives compared to the comparable period. Interest expense increased to $64,150 during the six months ended June 30, 2017 as compared to $29,725 in the six months ended June 30, 2016, or $34,425.  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 $666,188, or $0.03 per share, in the six months ended June 30, 2017, compared to a net loss of $413,244, or $0.02 per share in the six months ended June 30, 2016. As discussed above, the increase in net loss is mainly due to the $84,139 increase in operating expenses and $168,805 increase in other expenses.

Liquidity

Current assets at June 30, 2017 totaled $106,974.  As of that date, we had $71,141 in cash, $30,000 in restricted cash and $5,833 in prepaid expenses, as compared to $0 in cash, $1,101 in restricted cash and $625 in prepaid expenses at December 31, 2016.

During the six months ended June 30, 2017, our operating activities used net cash of $144,460, compared to $171,692 in the comparable 2016 period. Investing activities used cash of $28,899 during the six months ended June 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 $244,500 in cash during the six months ended June 30, 2017, mainly from the issuance of three convertible debentures for cash totaling $250,000 compared to $100,000 in the comparable 2016 period.

At June 30, 2017, the Company had a working capital deficit of $1,614,541, 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.

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 June 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.

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.

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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.

Item 3. Defaults Upon Senior Securities.

None; not applicable

Item 4. Mine Safety Disclosures.
 
The Company is the owner of the Golden Wonder Mine (the "Mine") located near Lake City, Colorado.  The Mine is subject to the jurisdiction and regulation of the Mine Safety and Health Administration, ("MSHA") a division of the U.S. Department of Labor.   During periods of operation the mine is inspected on a quarterly basis for compliance with safety regulations by MSHA.
 
As of the date of this report, the Mine is in compliance with all requirements of MSHA.

Item 5. Other Information.

During the six months ended June 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.
 
101.INS
XBRL Instance Document*
101.PRE.
XBRL Taxonomy Extension Presentation Linkbase*
101.LAB
XBRL Taxonomy Extension Label Linkbase*
101.DEF
XBRL Taxonomy Extension Definition Linkbase*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase*
101.SCH
XBRL Taxonomy Extension Schema*

*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed "furnished" and not "filed" or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, or deemed "furnished" and not "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under these sections.

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:
August 18, 2017
 
By:
/s/Kye Abraham
       
Kye Abraham, Principle Executive Officer
         
Date:
August 18, 2017
 
By:
/s/Nanette Abraham
       
Nanette Abraham, Principle Financial Officer
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