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 SeptemberJune 30, 20172018
[ ] 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 [ ][X]
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 [ ][X] 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: November 20, 2017August 14, 2018 – 19,261,71727,641,361 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.
LKA GOLD INCORPORATED
Consolidated Balance Sheets
(Unaudited)
ASSETS
| | September 30, 2017 | | | December 31, 2016 | | | June 30, 2018 | | | December 31, 2017 | |
CURRENT ASSETS | | | | | | | | | | | | |
Cash | | $ | - | | | $ | - | | | $ | 245,610 | | | $ | - | |
Restricted cash | | | 28,945 | | | | 1,101 | | | | 1,875 | | | | - | |
Prepaid expenses | | | 3,333 | | | | 625 | | | | 5,833 | | | | 833 | |
Total Current Assets | | | 32,278 | | | | 1,726 | | | | 253,318 | | | | 833 | |
FIXED ASSETS | | | | | | | | | | | | | | | | |
Land, equipment, mining claims and asset retirement liabilities | | | 849,140 | | | | 849,140 | | | | 849,140 | | | | 849,140 | |
Accumulated deprecation | | | (388,094 | ) | | | (381,621 | ) | | | (394,568 | ) | | | (390,252 | ) |
Total Fixed Assets, Net of Accumulated Depreciation | | | 461,046 | | | | 467,519 | | | | 454,572 | | | | 458,888 | |
OTHER NON-CURRENT ASSETS | | | | | | | | | | | | | | | | |
Reclamation bonds | | | 100,042 | | | | 100,042 | | | | 134,388 | | | | 100,042 | |
| | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 593,366 | | | $ | 569,287 | | | $ | 842,278 | | | $ | 559,763 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
LKA GOLD INCORPORATED
Consolidated Balance Sheets (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICITEQUITY (DEFICIT)
| | September 30, 2017 | | | December 31, 2017 | | | June 30, 2018 | | | December 31, 2017 | |
CURRENT LIABILITIES | | | | | | | | | | | | |
Accounts payable | | $ | 92,843 | | | $ | 80,668 | | | $ | 74,590 | | | $ | 92,633 | |
Accounts payable – related party | | | 19,341 | | | | 40,095 | | | | 3,342 | | | | 23,905 | |
Cash overdraft | | | | - | | | | 981 | |
Note Payable – related party | | | - | | | | 5,500 | | | | 12,702 | | | | 7,500 | |
Wastewater discharge liability | | | 120,416 | | | | 75,000 | | | | 99,974 | | | | 99,974 | |
Derivative liability | | | 774,439 | | | | 659,622 | | | | 75,621 | | | | 341,285 | |
Convertible notes payable – related party, net of debt issue costs and debt discount of $0 and $209,339, respectively | | | | - | | | | 40,661 | |
Convertible note payable, net of debt issue costs and debt discount of $107,542 and $41,868, respectively | | | | 42,458 | | | | 8,132 | |
Note payable | | | 10,000 | | | | 10,000 | | | | 10,000 | | | | 10,000 | |
Accrued interest payable | | | 30,542 | | | | 7,404 | | | | 5,071 | | | | 38,166 | |
Accrued wages and advances payable to officer | | | 75,757 | | | | 163,257 | | | | 24,989 | | | | 113,257 | |
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 | | | | 348,747 | | | | 776,494 | |
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 | | |
Convertible notes payable – related party, net of $0 and $328,570 in debt issuance costs and debt discount, respectively | | | | - | | | | 21,430 | |
Convertible note payable, net of $45,300 and $139,288 in debt issuance costs and debt discount, respectively | | | | 4,700 | | | | 10,712 | |
Asset retirement obligation | | | 122,950 | | | | 122,950 | | | | 122,950 | | | | 122,950 | |
Total Liabilities | | | 1,319,221 | | | | 1,170,837 | | | | 476,397 | | | | 931,586 | |
STOCKHOLDERS' DEFICIT | | | | | | | | | |
STOCKHOLDERS' EQUITY (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 | | |
Common stock, $0.001 par value, 50,000,000 shares authorized, 27,641,308 and 19,261,717 shares issued and 27,597,684 and 19,218,093 shares outstanding, respectively | | | | 27,641 | | | | 19,262 | |
Additional paid-in capital | | | 18,020,363 | | | | 17,963,315 | | | | 20,070,487 | | | | 18,020,363 | |
Treasury stock; 43,624 and 43,624 shares at cost, respectively | | | (86,692 | ) | | | (86,692 | ) | | | (86,692 | ) | | | (86,692 | ) |
Accumulated deficit | | | (18,678,788 | ) | | | (18,497,338 | ) | | | (19,645,555 | ) | | | (18,324,756 | ) |
Total Stockholders' Deficit | | | (725,855 | ) | | | (601,550 | ) | |
Total Stockholders' Equity (Deficit) | | | | 365,881 | | | | (371,823 | ) |
| | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 593,366 | | | $ | 569,287 | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | $ | 842,278 | | | $ | 559,763 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
LKA GOLD INCORPORATED
Consolidated Statements of Operations
(Unaudited)
| | For the Three months Ended September 30, | | | For the Nine months Ended September 30, | | | For the Three months Ended June 30, | | | For the Six Months Ended June 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | |
Exploration costs | | | - | | | | 15,279 | | | | 89,769 | | | | 52,248 | | |
Exploration and related costs | | | | 11,627 | | | | 15,076 | | | | 11,627 | | | | 91,233 | |
General and administrative | | | 26,921 | | | | 27,682 | | | | 107,695 | | | | 97,061 | | | | 58,851 | | | | 45,804 | | | | 78,911 | | | | 79,310 | |
Officer salaries | | | 37,500 | | | | 37,500 | | | | 112,500 | | | | 112,500 | | | | 37,500 | | | | 37,500 | | | | 276,425 | | | | 75,000 | |
Professional and consulting | | | 1,256 | | | | 12,653 | | | | 55,268 | | | | 46,721 | | | | 51,334 | | | | 28,839 | | | | 54,109 | | | | 54,012 | |
Total Operating Expenses | | | 65,677 | | | | 93,114 | | | | 365,232 | | | | 308,530 | | | | 159,312 | | | | 127,219 | | | | 421,072 | | | | 299,555 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING LOSS | | | (65,677 | ) | | | (93,114 | ) | | | (365,232 | ) | | | (308,530 | ) | | | (159,312 | ) | | | (127,219 | ) | | | (421,072 | ) | | | (299,555 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSES) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gain (loss) on derivatives | | | 599,871 | | | | 139,979 | | | | 285,183 | | | | (28,124 | ) | |
Other income | | | - | | | | - | | | | 12,205 | | | | - | | | | - | | | | - | | | | - | | | | 12,205 | |
Loss on debt conversion | | | | - | | | | - | | | | (309,406 | ) | | | - | |
Derivative gain (loss) | | | | 5,370 | | | | (74,034 | ) | | | 2,339 | | | | (314,688 | ) |
Interest expense, net | | | (49,456 | ) | | | (10,085 | ) | | | (113,606 | ) | | | (39,810 | ) | | | (21,647 | ) | | | (50,539 | ) | | | (592,660 | ) | | | (64,150 | ) |
Total Other Income (Expenses) | | | 550,415 | | | | 129,894 | | | | 183,782 | | | | (67,934 | ) | | | (16,277 | ) | | | (124,573 | ) | | | (899,727 | ) | | | (366,633 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | |
NET LOSS | | | $ | (175,589 | ) | | $ | (251,792 | ) | | $ | (1,320,799 | ) | | $ | (666,188 | ) |
BASIC AND DILUTED NET LOSS PER SHARE | | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.03 | ) |
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | | | | 27,459,841 | | | | 19,236,343 | | | | 23,716,935 | | | | 19,153,314 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
LKA GOLD INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)
| | For the Nine months Ended September 30, | | | For the Six months Ended June 30, | |
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
Net loss | | $ | (181,450 | ) | | $ | (376,464 | ) | | $ | (1,320,799 | ) | | $ | (666,188 | ) |
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 | | | | 4,316 | | | | 4,316 | |
Amortization of debt issuance costs | | | 5,138 | | | | 13,750 | | | | 9,383 | | | | 2,478 | |
Amortization of debt discount | | | 68,954 | | | | 4,490 | | | | 556,840 | | | | 37,528 | |
(Gain) loss on derivative | | | (285,183 | ) | | | 28,124 | | |
Common stock issued for expenses | | | 21,645 | | | | - | | |
(Gain) Loss on derivative | | | | (2,339 | ) | | | 314,688 | |
Loss on debt conversion | | | | 309,406 | | | | - | |
Common stock issued for compensation expenses | | | | 201,425 | | | | - | |
Common stock issued for services | | | | 18,970 | | | | 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 prepaid expenses and other assets | | | | (5,000 | ) | | | (5,208 | ) |
Increase in accounts payable and accrued expenses | | | | 2,259 | | | | 93,237 | |
Increase in accounts payable – related party | | | 4,746 | | | | 12,254 | | | | 3,241 | | | | 3,044 | |
Increase in accrued wages | | | 62,500 | | | | 50,000 | | | | (12,890 | ) | | | 50,000 | |
Net Cash Used in Operating Activities | | | (219,156 | ) | | | (224,295 | ) | | | (235,188 | ) | | | (144,460 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
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 paid for reclamation bond | | | | (34,346 | ) | | | - | |
Net Cash Used in Operating Activities | | | | (34,346 | ) | | | - | |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | |
Common stock issued for cash | | | 10,000 | | | | - | | |
Cash overdraft | | | | (981 | ) | | | - | |
Proceeds from convertible debt | | | 50,000 | | | | 100,000 | | | | - | | | | 50,000 | |
Proceeds from convertible debt, related party | | | 200,000 | | | | - | | | | - | | | | 200,000 | |
Proceeds from notes payable, related party | | | 1,100 | | | | - | | | | 18,000 | | | | 1,100 | |
Payments on notes payable, related party | | | (6,600 | ) | | | - | | | | - | | | | (6,600 | ) |
Cash paid for debt issuance costs | | | (7,500 | ) | | | (10,000 | ) | |
Common stock issued for cash | | | | 500,000 | | | | - | |
Net Cash Provided by Financing Activities | | | 247,000 | | | | 90,000 | | | | 517,019 | | | | 244,500 | |
| | | | | | | | | | | | | | | | |
INCREASE (DECREASE) IN CASH | | | - | | | | (130,545 | ) | |
INCREASE IN CASH AND RESTRICTED CASH | | | | 247,485 | | | | 100,040 | |
| | | | | | | | | | | | | | | | |
CASH AT BEGINNING OF PERIOD | | | - | | | | 150,068 | | |
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD | | | | - | | | | 1,101 | |
| | | | | | | | | | | | | | | | |
CASH AT END OF PERIOD | | $ | - | | | $ | 19,523 | | |
CASH AND RESTRICTED CASH AT END OF PERIOD | | | $ | 247,485 | | | $ | 101,141 | |
| | | | | | | | | | | | | | | | |
CASH PAID FOR: | | | | | | | | | | | | | | | | |
Interest | | $ | 15,899 | | | $ | 12,246 | | | $ | 6,225 | | | $ | 15,599 | |
Income taxes | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Common stock issued for related party payable and accrued wages | | | $ | 120,379 | | | $ | 25,500 | |
Common stock issued for convertible debt and interest – related parties | | | $ | 644,998 | | | $ | - | |
Derivative liability reclassified to equity upon conversion | | | $ | 263,325 | | | $ | - | |
Discount on convertible notes payable | | $ | 400,000 | | | $ | 99,369 | | | $ | - | | | $ | 400,000 | |
Convertible debt issued for accrued wages | | $ | 150,000 | | | $ | - | | | $ | - | | | $ | 150,000 | |
Common stock issued for debt and expenses | | $ | 25,500 | | | $ | - | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
LKA GOLD INCORPORATED
Notes to the Unaudited Consolidated Financial Statements
SeptemberJune 30, 20172018
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 ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.
ReclassificationsDuring May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition" and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts." The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application.
ASC 606 requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. LKA performed a review of its sales history and compared historical accounting policies and practices to the new standard, electing to utilize the modified retrospective transition method effective January 1, 2018, with no impact to LKA's financial statements due to no sales in the past two years.
Certain prior yearDuring November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230)" ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period to total amounts shown on the statement of cash flows.
LKA had previously excluded restricted cash from the "Total Cash" and included the change in restricted cash balances in investing activities. As such, amounts presented in the six months ended June 30, 2017 statement of cash flows have been reclassifiedchanged to conform toinclude $30,000 in restricted cash in the current year presentation.newly titled "Total Cash and Restricted Cash Ending Balance" as of June 30, 2017. Additionally, $1,101 in restricted cash as of December 31, 2016 is now reflected in the "Cash and Restricted Cash at Beginning of Period" balance.
Net Income (Loss) per Common Share
Basic net income (loss) per share is computed on the basis of the weighted average number of common shares outstanding during each year. Diluted net income (loss) per share is computed similar to basic net income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
For the three and six months ended June 30, 2018 and 2017, the Company realized a net loss, resulting in outstanding warrants, and outstanding convertible debt having an antidilutive effect.
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 ninesix months ended SeptemberJune 30, 2017,2018, Abraham & Co., Inc. agreed to exchange $25,500$23,805 in outstanding accounts payable and $1,785 in accrued interest for 56,818127,952 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.$0.20 per share. LKA owedowes Abraham & Co. $19,305, Inc. $3,000 and $31,500$23,805 as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
Related Party DebtPayables – Notes, Accounts and Wages Payable
At SeptemberJune 30, 20172018 and December 31, 2016,2017, LKA owes $0$342 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,$100, respectively, for purchases made on the personal credit card of LKA's President, Kye Abraham.
During the nine months ended September 30, 2017,March 2018, LKA's President, Chairman of the Board and Director, Kye Abraham, agreedelected to convert $150,000$75,378 in accrued unpaid salarywages and $5,653 in accrued interest into a convertible debenture.405,157 shares of LKA common stock, or $0.20 per share. At SeptemberJune 30, 20172018 and December 31, 2016,2017, LKA owed Kye Abraham $75,757$24,989 and $163,257$113,257 in unpaid salary, respectively.
During the six months ended June 30, 2018, an affiliated entity lent LKA $18,000 on a short-term note, due upon demand. During March 2018, the affiliate entity elected to convert $12,798 in note principal and $960 in interest into 68,789 shares of common stock, or $0.20 per share.
Convertible DebenturesCommon Stock
On September 29, 2015,During March 2018, LKA issued two convertible debentures (Convertible Debentures), each in the amount1,750,000 shares of $125,000,common stock to its President and Chairman, Kye Abraham, as a performance bonus valued at $201,425, or a total$0.12 per share.
During April 2018, LKA sold 2,702,703 shares of $250,000its common stock 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.shareholders ("Koski"), for $500,000 cash.
OnDuring March 15, 2017, LKA issued a convertible debenture in the amount of $150,000 to2018, 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 itsLKA's 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 accruesAbraham, elected to convert a total of $600,000 in convertible debt principal and $44,998 in accrued interest at 7.5% and is convertible at any time into 3,224,990 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 amountprice 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$0.20 per share. As a result of June 30, 2018 and December 31, 2017, there was $0 and $600,000 in outstanding convertible debentures, respectively. As the potential variableconversion price was lower than the stated conversion rate in the convertible debt instruments, LKA recognized a loss on debt 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$309,406 during the ninesix months ended SeptemberJune 30, 2018.
During the six months ended June 30, 2018 and 2017, LKA recognized debt discounts totaling $350,000. During the nine months ended September 30, 2017$8,970 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$2,065 of interest expense from the amortization of debt issuance costs, respectively. During the six months ended June 30, 2018 and 2017, LKA recognized $528,939 and $31,754 of interest expense from the amortization of debt discounts, 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 2018.8
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. Interest is due in semi-annual payments and LKA is required to maintain a reserve of proceeds equal to the first two semi-annual payments, which were paid in 2016.
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.payments and LKA is required to maintain a reserve of proceeds equal to the first two semi-annual payments, which were paid in 2016 and 2017.
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, 2021.2020. 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-annualsemiannual 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.
IfFor all the above noted convertible debentures, 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$152,587 during the above mentioned Convertible Debentures.six months ended June 30, 2018. During the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, LKA recognized 8,659$27,901 and $3,107$5,774 of interest expense from the amortization of the debt discount.discount, respectively.
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 ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, LKA recognized $623$413 and $10,625$413 of interest expense from the amortization of debt issuance costs.costs, respectively.
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 Convertibleconvertible notes (see Notes $400,0002 and 3), $350,000 was recorded as debt discount and $209,812$162,046 was recorded as day one loss on derivative liability. liability
During the ninesix months ended SeptemberJune 30, 20172018, $494,995holders of $600,000 in convertible notes payables elected to convert their outstanding principal into common stock (see Note 2). Upon conversion of the debt principal, the related derivative liabilities were extinguished to additional paid-in capital.
During the six months ended June 30, 2018, LKA recorded a gain was recordedof $2,339 on mark-to-market of the conversion options, respectively.options. During the six months ended June 30, 2017, LKA recorded a loss of $104,876 on mark-to-market of the conversion options.
The following table summarizes the derivative liabilities included in the consolidated balance sheets at SeptemberJune 30, 20172018 and December 31, 2016:2017:
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 | |
Balance, December 31, 2017 | | $ | 341,285 | |
Reclass to equity conversion | | | (263,325 | ) |
Gain on change in fair value | | | (2,339 | ) |
Balance, June 30, 2018 | | $ | 75,621 | |
The Company valued its derivatives liabilities using the Black-Scholes option-pricing model. Assumptions used during the ninesix months ended SeptemberJune 30, 20172018 include (1) risk-free interest rates of between 1.31% and 1.93% - 2.63%, (2) lives of between 1.010.31 and 4.063.07 years, (3) expected volatility between 214%176% - 446%266%, (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- 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 SeptemberJune 30, 2017.2018. Actual completion of remediation work at the site was completed in late 20132014 by the EPA. The EPA has not yet issued its notice of final determination.
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 20172018 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 isin 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$99,974 and $75,000$99,974 as of SeptemberJune 30, 20172018 and December 31, 2016,2017, 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 AGREEMENT10
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 87 - COMMON STOCK
During February 2017,March 2018, Abraham & Co., Inc., an affiliate entity, agreed to exchange $25,500$23,805 in outstanding accounts payable and $1,785 in accrued interest for 56,818127,952 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.$0.20 per share.
During June 2017,March 2018, LKA's President, Chairman of the Board and Director, Kye Abraham, elected to convert $75,378 in accrued wages and $5,653 in accrued interest into 405,157 shares of LKA issued 18,913common stock, or $0.20 per share.
During March 2018, an affiliated entity elected to convert $12,798 in note principal and $960 in interest into 68,789 shares of common stock, or $0.20 per share.
During March 2018, members of the Koski family, the Company's largest shareholders, LKA's President and Chairman, Kye Abraham, and an entity controlled by LKA's President and Chairman, Kye Abraham, elected to convert a total of $600,000 in convertible debt principal and $44,998 in accrued interest into 3,224,990 shares of common stock at a price of $0.20 per share.
During April 2018, LKA sold 2,702,703 shares of common stock for $500,000, or $0.185 per share to related parties. Funds are to be used to restart exploration activity at the Golden Wonder mine.
During April 2018, LKA issued 100,000 shares of common stock for consulting services valued at $18,970, or the fair market price on the grant datevalue of $10,782, or $0.57$0.19 per share.
During July 2017,the six months ended June 30, 2018, LKA commenced a limited private Offering to sell to certain accredited investors, "Units" priced at $0.48 each, with a minimum investmentrecognized $309,406 in loss on debt conversion based on the fair market value of $10,000 and additional investment in increments of $5,000. Each Unit consists of one share of LKA Goldthe common stock issued compared to debt 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.interest converted.
NOTE 98 - 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:
DuringLKA is currently engaged in an exploration program at the third quarterGolden Wonder mine with the objective of 2015, LKA shifted its focus from exploratory miningreturning the mine 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. a commercial producing status. The exploration program, which began in November 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. 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$500,000 capital funding raise in March 2017, anApril 2018 and will need raise additional $50,000 in April 2017 andfunds to support operations 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).2018.
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.
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 SeptemberJune 30, 20172018 Compared to theThe Three Months Ended SeptemberJune 30, 20162017
DuringLKA had no revenues during the three months ended SeptemberJune 30, 20172018 and 2016, we did not recognize any revenue.2017.
Exploration expenses decreased $15,279,$3,449, or approximately 100%23%, to $11,627 in the three months ended SeptemberJune 30, 20172018 compared to $15,076 during the three months ended June 30, 2017. Exploration expenses are minimal due to the temporary cessation of mine operations during 2017. exploration activity in late 2017.
Professional fees decreasedincreased by $11,397,$22,495, or approximately 90% as a result78%, to $51,334 during the three months ended June 30, 2018, compared to $28,839 during the three months ended June 30, 2017. The increase is mainly due to the recognition of decreased legal and professional$28,500 in consulting expenses while generalin the current year related to efforts to resume exploration activities that were not incurred in the comparable prior year period.
General and administrative expenses remained flatincreased by $13,047, or approximately 28% in the three months ended SeptemberJune 30, 20172018, compared to the three months ended SeptemberJune 30, 2016. 2017, mainly due to a $15,219 increase in promotional expenses.
Officer salaries remained flat inand bonuses were $37,500 during the three months ended SeptemberJune 30, 2017, compared to the three months ended September 30, 2016.2018 and 2017.
We incurred an operating loss of $65,677$159,312 during the three months ended SeptemberJune 30, 2017,2018, as compared to an operating loss of $93,114$127,219 in the three months ended SeptemberJune 30, 2016.2017. The $27,437,$32,093, 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. The25% increase, is mainly due to the increase in other incomeprofessional fees and general and administrative expenses as discussed above.
ForWe incurred total other expenses of $16,277 during the three months ended June 30, 2018, as compared to $124,573 in the three months ended June 30, 2017. The Nine$108,296, or approximately 87% decrease is mainly due to a $79,404 decrease in loss on derivatives during the three months Ended Septemberended June 30, 20172018 compared to the Ninethree months ended June 30, 2017. Additionally, there was a $28,892, or approximately 57% decrease in interest expense during the three months ended June 30, 2018 compared to the comparable period in 2017 due to the reduction of related party convertible debt and debt discount amortization.
Net loss totaled $175,589, or $0.01 per share, in the three months ended June 30, 2018, compared to a net loss of $251,792, or $0.01 per share in the three months ended June 30, 2017. The $76,203, or approximately 30% decrease, is mainly due to the $108,296 decrease in other expenses, partially offset by a $32,093 increase in operating expenses, as discussed above.
For The Six Months Ended SeptemberJune 30, 20162018 Compared to The Six Months Ended June 30, 2017
DuringLKA had no revenues during the ninethree months ended SeptemberJune 30, 20172018 and 2016, we did not recognize any revenue.2017.
Exploration expenses increased $37,521,decreased $79,606, or approximately 72%87%, from $52,248to $11,627 in the ninesix months ended SeptemberJune 30, 2016,2018 compared to $89,769$91,233 during the six months ended June 30, 2017. Exploration expenses are minimal due to the temporary cessation of exploration activity in late 2017 and early 2018.
Professional fees remained flat at $54,109 during the six months ended June 30, 2018, compared to $54,012 during the six months ended June 30, 2017.
General and administrative expenses remained flat at $78,911 in the ninesix months ended SeptemberJune 30, 2018, compared to $79,310 during the six months ended June 30, 2017.
Officer salaries and bonuses increased $201,425, or 269% during the six months ended June 30, 2018, compared to $75,000 during the six months ended June 30, 2017. The increase was mainlyis due to a $75,000 increase in estimate for wastewater discharge liability as well as the issuancevaluation of 18,9131,750,000 shares of common stock for services valued at $10,782issued to our President and Chairman as a bonus during the ninesix months ended SeptemberJune 30, 2017.
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, 2016.2018.
We incurred an operating loss of $365,232$421,072 during the ninesix months ended SeptemberJune 30, 2017,2018, as compared to an operating loss of $308,530$299,555 in the ninesix months ended SeptemberJune 30, 2016.2017. The $56,702,$121,517, or approximately 18%41% increase, is mainly due to the increase in explorationvaluation of 1,750,000 shares of common stock issued to our President and legal expenses,Chairman as a bonus valued at $201,425 during the six months ended June 30, 2018 as discussed above, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.above.
We incurred total other incomeexpenses of $183,782$899,727 during the ninesix months ended SeptemberJune 30, 2017,2018, as compared to total other expense of $67,934$366,633 in the ninesix months ended SeptemberJune 30, 2016.2017. The $251,716,$533,094, or approximately 371%145% increase is mainly due to a $313,307$528,510 increase in gain on derivativesin interest expense during the six months ended June 30, 2018 compared to the comparable period. Interest expense increased to $113,606 during the nine months ended September 30,period in 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 issuanceearly conversion of related party convertible debentures totaling $400,000 bearing interest at 7.5% per annumdebt and recognition of the remaining related debt discount and issuance costs.to interest expenses. Additionally, there was a $309,406 one-time loss on debt conversion during the six months ended June 30, 2018, offset by a loss on derivative of $314,688 during the six months ended June 30, 2017 compared to a gain of $2,339 during the six months ended June 30, 2018.
Net loss totaled $181,450,$1,320,799, or $0.01$0.06 per share, in the ninesix months ended SeptemberJune 30, 2017,2018, compared to a net loss of $376,464,$666,188, or $0.02$0.03 per share in the ninesix months ended SeptemberJune 30, 2016. As discussed above, the decrease in net loss2017. The $654,611, or approximately 98% increase, is mainly due to the $251,716$533,094 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.as discussed above.
Liquidity
Current assets at SeptemberJune 30, 20172018 totaled $32,278. As$253,318 and is mostly comprised of that date, we had $28,945 in$247,485 of cash and restricted cash and $3,333as well as $5,833 in prepaid expenses, as compared to $1,101 in restricted cash and $625$833 in prepaid expenses at December 31, 2016.2017.
During the ninesix months ended SeptemberJune 30, 2017,2018, our operating activities used net cash of $219,156,$235,188, compared to $224,295$144,460 in the comparable 20162017 period. InvestingCash flows from investing activities used cash of $27,844 during the ninesix months ended SeptemberJune 30, 2017, compared to2018 were from the payment of $34,346 for reclamation bonds, there were no cash provided of $3,750flows from investing activities in the 2016 period, all related to the fluctuation in restricted cash for interest payments on convertible notes payable.comparable 2017 period. Financing activities provided $247,000cash of $517,019 and $244,500 during the six months ended June 30, 2018 and 2017, respectively. The increase in cash provided from financing activities is mainly due to the issuance of 2,702,703 shares of common stock for $500,000 cash during the ninesix months ended SeptemberJune 30, 2017, mainly2018, compared to proceeds of $250,000 from the issuance of three convertible debentures for cash totaling $250,000related and $10,000 from the sale of common stock, compared to $100,000 in convertible debenture proceedsthird party debt in the comparable 20162017 period.
At SeptemberJune 30, 2017,2018, the Company had a working capital deficit of $1,113,347,$95,429, as compared to $1,039,820$775,661 at December 31, 2016.2017.
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.
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 SeptemberJune 30, 2017,2018, 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.
OnDuring March 15, 2017,2018, Abraham & Co., Inc., an affiliate entity, agreed to exchange $23,805 in outstanding accounts payable and $1,785 in accrued interest for 127,952 shares of LKA issued a convertible debenturecommon stock at $0.20 per share.
During March 2018, LKA's President, Chairman of the Board and Director, Kye Abraham, elected to convert $75,378 in the amountaccrued wages and $5,653 in accrued interest into 405,157 shares of $150,000LKA common stock, or $0.20 per share.
During March 2018, an affiliated entity elected to convert $12,798 in note principal and $960 in interest into 68,789 shares of common stock, or $0.20 per share.
During March 2018, 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 itsshareholders, LKA's 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 accruesAbraham, elected to convert a total of $600,000 in convertible debt principal and $44,998 in accrued interest at 7.5% and is convertible at any time into 3,224,990 shares of LKA common stock at $0.50a price of $0.20 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 ofDuring April 2018, 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 18,913sold 2,702,703 shares of common stock for $500,000, or $0.185 per share to related parties. Funds are to be used to restart exploration activity at the Golden Wonder mine.
During April 2018, LKA issued 100,000 shares of common stock for consulting services valued at $18,970, or the fair market price on the grant datevalue of $10,782, or $0.57$0.19 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.None, not applicable.
Item 5. Other Information.
During the ninesix months ended SeptemberJune 30, 2017,2018, 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* |
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*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: | NovemberAugust 20, 20172018 | | By: | /s/Kye Abraham |
| | | | Kye Abraham, President, Chairman of the Board and Director |
| | | | |
Date: | NovemberAugust 20, 20172018 | | By: | /s/Nanette Abraham |
| | | | Nanette Abraham, Secretary, Treasurer and Director |
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