Timberline Resources Corp - Quarter Report: 2019 March (Form 10-Q)

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

Page 

FINANCIAL STATEMENTS:

Consolidated balance sheets4 

Consolidated statements of operations5 

Consolidated statements of cash flows6 

Notes to consolidated financial statements8 - 15 

3

See accompanying notes to consolidated financial statements.

4

See accompanying notes to consolidated financial statements.

5

See accompanying notes to consolidated financial statements.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS:

Timberline Resources Corporation (“Timberline” or “the Company) was incorporated in August of 1968 under the laws of the State of Idaho as Silver Crystal Mines, Inc., for the purpose of exploring for precious metal deposits and advancing them to production. In 2008, the Company reincorporated into the State of Delaware, pursuant to a merger agreement approved by its shareholders.

Basis of Presentation - The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three and six-month periods ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019.

For further information refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the financial statements.

a. Going Concern – The accompanying consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. The Company has incurred losses since its inception. The Company does not have sufficient cash to fund normal operations and meet all of its obligations for the next 12 months without raising additional funds. The Company currently has no historical recurring source of revenue, and its ability to continue as a going concern is dependent on its ability to raise capital to fund future exploration and working capital requirements, or the Company’s ability to profitably execute its business plan. The Company’s plans for the long-term return to and continuation as a going concern include financing its future operations through sales of common stock and/or debt and the eventual profitable exploitation of its mining properties. Additionally, the current capital markets and general economic conditions in the United States and Canada are significant obstacles to raising the required funds. While the Company has been successful in the past in obtaining financing, there is no assurance that it will be able to obtain adequate financing in the future or that such financing will be on terms acceptable to the Company. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 

The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

b. New Accounting Pronouncements - In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of implementing this update on the consolidated financial statements. 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation, Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 expands the scope of Accounting Standards Codification (ASC) 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

c. Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Staccato Gold Resources, Ltd.; BH Minerals USA, Inc.; Wolfpack Gold (Nevada) Corp.; and Talapoosa Development Corp., after elimination of intercompany accounts and transactions. 

d. Reclassifications - Certain reclassifications have been made to conform prior period’s data to the current presentation. These reclassifications have no effect on the results of reported operations or stockholders’ equity or cash flows. 

e. Royalties – Royalty payments received on properties are offset to Property and mineral rights to the extent that basis in those properties is available to do so. When basis in not available, royalties are recognized as income on the Consolidated Statements of Operations. Royalties received during the six months and quarter ended March 31, 2018 were offset to property basis. 

f. Exploration Expenditures – All exploration expenditures are expensed as incurred. Significant property acquisition payments for active exploration properties are capitalized. If no mineable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. When it is determined that a mineral deposit can be economically developed as a result of establishing proven and probable reserves, the costs incurred after such determination will be capitalized and amortized over their useful lives. To date, the Company has not established the commercial feasibility of its exploration prospects; therefore, all exploration costs are being expensed. 

g. Property Holding Costs – Holding costs to maintain a property, excluding mineral lease payments, are expensed in the period they are incurred. These costs include security and maintenance expenses, claim fees and payments, and environmental monitoring and reporting costs. 

h. Fair Value of Financial Instruments – When required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date. 

At March 31, 2019 and September 30, 2018, the Company had no assets or liabilities accounted for at fair value on a recurring basis or nonrecurring basis.

The carrying amounts of financial instruments, including note payable, approximate fair value at March 31, 2019 and September 30, 2018.

i. Cash Equivalents – For the purposes of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Balances are insured by the Federal Deposit Insurance Corporation up to $250,000 for accounts at each financial institution. 

j. Reclamation Bonds – Bonds paid to assure reclamation of properties covered by exploration permits are capitalized in the period paid, reduced as refunds are received or expensed as they are applied to reclamation obligations. 

k. Estimates and Assumptions – The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management assumptions and estimates relate to asset impairments, asset retirement obligations, and stock based compensation. Actual results could differ from these estimates and assumptions and could have a material effect on the Company’s reported financial position and results of operations. 

l. Property and Equipment – Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which ranges from two to seven years. Maintenance and repairs are charged to operations as incurred. Significant improvements are capitalized and depreciated over the useful life of the assets. Gains or losses on disposition or retirement of property and equipment are recognized in operating expenses. 

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

m. Review of Carrying Value of Property, Mineral Rights and Equipment for Impairment – The Company reviews the carrying value of property, mineral rights, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, the effects of obsolescence, demand, competition, and other economic factors.  

n. Asset Retirement Obligations – The Company accounts for asset retirement obligations by following the methodology for accounting for estimated reclamation and abandonment costs as prescribed by GAAP. This guidance provides that the fair value of a liability for an asset retirement obligation (“ARO”) will be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and a contractual obligation exists. The ARO is capitalized as part of the carrying value of the assets to which it is associated, and depreciated over the useful life of the asset. Adjustments are made to the liability for changes resulting from passage of time and changes to either the timing or amount of the original estimate underlying the obligation. The Company has an asset retirement obligation associated with its exploration program at the Lookout Mountain exploration project on its Eureka property (see Note 3). 

o. Provision for Income Taxes – Income taxes are provided based upon the liability method of accounting. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against the deferred tax asset, if management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. 

p. Translation of Foreign Currencies – All amounts in the financial statements are presented in US dollars, and the US dollar is the Company’s functional currency. The Company has a Canadian subsidiary, but this subsidiary has no operations, assets, or liabilities in Canada for the quarters ended March 31, 2019 and 2018, respectively. The US-based operations of the Company incur certain expenses in Canada, and the foreign translation and transaction gains and losses relating to such expenses incurred in Canada have been included in the Company’s net loss as a component of other income (expense).  

q. Stock-based Compensation – The Company estimates the fair value of its stock-based option compensation using the Black-Scholes model, which requires the input of some subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected life”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”), employee forfeiture rate, the risk-free interest rate and the dividend yield. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation.  

The value of common stock awards is determined based upon the closing price of the Company’s stock on the grant date of the award. Compensation expense for grants that vest is recognized ratably over the vesting period. The fair value of stock unit or stock awards is determined by the closing price of the Company’s common stock on the date of the grant.

r. Net Income (Loss) per Share – Basic earnings per share (“EPS”) is computed as net income (loss) available to common shareholders divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities.  

The dilutive effect of convertible and outstanding securities as of March 31, 2019 and 2018 is as follows:

At March 31, 2019 and 2018, the effect of the Company’s common stock equivalents would have been anti-dilutive. Accordingly, only basic EPS is presented.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

NOTE 3 – PROPERTY, MINERAL RIGHTS, AND EQUIPMENT:

The following is a summary of property, mineral rights, and equipment and accumulated depreciation at March 31, 2019 and September 30, 2018, respectively:

Depreciation expense for the quarters ended March 31, 2019 and 2018, was nil and nil, respectively.

During the year ended September 30, 2018, the Company’s management and Board of Directors determined that certain payments received by the Company from a party of interest in two of the Company’s leases beginning in August 2017, which had been held and not recorded as royalty income or deposited pending an expected resolution of circumstances relating to two historic leases at the Company’s Eureka property, should be deposited. The payments had been received from a third party with whom the Company is in discussions to resolve matters that had been under negotiation since the Company acquired the Eureka property in 2010. The total amount of these payments received for the quarter ended March 31, 2019 was $25,593 and $51,118 for the six-month period ended March 31, 2019. Monthly payments in the amount of approximately $8,500 are expected to continue to be received, recorded and deposited until the situation concerning the leases is resolved. These receipts are recorded as a reduction to property, mineral rights, and equipment.

Elder Creek property:

On May 23, 2018, the Company executed a definitive agreement with AGEI (the “Definitive Agreement”) for the purchase of interests in two mineral properties in Nevada (the “Transaction”). The mineral properties include the Elder Creek project, currently owned by McEwen Mining Inc., which includes an option to acquire up to 65% of the project interest, and an approximate 73.7% interest in the Paiute property (formerly ICBM), with LAC Minerals (USA) LLC, a wholly owned subsidiary of Barrick Gold Corporation. The Company is the operator at both of these projects.

The consideration for the Transaction consisted of ten million shares of the Company’s common stock, valued at $0.0806 per share, or $806,000, and five million non-transferrable Class D-2 share purchase warrants, with each warrant exercisable to acquire one share of the Company’s common stock for $0.24 for a period of three years. The warrants were fair valued at $240,000 on the transaction date. On June 18, 2018, the Company entered into an amendment to the Definitive Agreement wherein the Company agreed, upon closing of the Transaction, to reimburse AGEI for the initial payment of $100,000 due under the Elder Creek agreement with McEwen Mining. During the fourth quarter of the 2018 fiscal year, the Company paid the $100,000. Total consideration given during the year ended September 30, 2018 for the Transaction was $1,146,000 in the form of cash, common stock and warrants.

In addition, the amendment to the Definitive Agreement required the Company to deliver to AGEI, subject to any required regulatory approval, an additional 5,000,000 common stock purchase warrants with the same terms and in the same form as the Consideration Warrants if and when the earlier of the following occurs: (i) the Company enters into an arrangement with a funding partner for the advancement of the Elder Creek Joint Venture, or (ii) the Company has met the 2018 work commitment of $500,000. The Company met the 2018 work commitment, and issued 5,000,000 Class G warrants, fair valued at $176,000 on the date the commitment was satisfied. (See Note 7 for valuation assumptions).

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

NOTE 4 – RELATED-PARTY TRANSACTIONS:

In connection with the Definitive Agreement with AGEI for the purchase of two joint venture interests during the fiscal year ended September 30 2018, Mr. Donald J. McDowell and Mr. Dave Mathewson were appointed to the Company’s Board of Directors on June 21, 2018. Mr. McDowell is the majority owner of AGEI and is the beneficial owner of the majority of the consideration for the Transaction. Therefore, he is the beneficial owner of the majority of the 5,000,000 Class G warrants issued to AGEI as described in Note 3 – Property, Mineral Rights and Equipment.

During the quarter ended December 31, 2018, the Board of Directors agreed to issue 100,000 stock options to acquire shares of common stock of the Company to Mr. Ted R. Sharp, the Company’s Chief Financial Officer, appointed to the position in September of 2018. The options were fair valued at $5,000 based upon the closing price of the Company’s shares of common stock at December 31, 2018 (See Note 7 for valuation assumptions).

During the quarter ended December 31, 2018, two executive officers participated in a private placement offering of Units of the Company, purchasing 1,062,500 units for total proceeds of $85,000. Each Unit was priced at $0.08 and consisted of one share of common stock of the Company and one common share Class E Warrant, with each warrant exercisable to acquire an additional share of common stock of the Company at a price of $0.14 per share until April 30, 2021.

During the quarter ended March 31, 2019, three executive officers participated in a private placement offering of Units of the Company, purchasing 900,000 units for total proceeds of $72,000. Each Unit was priced at $0.08 and consisted of one share of common stock of the Company and one common share Class H Warrant, with each warrant exercisable to acquire an additional share of common stock of the Company at a price of $0.14 per share until March 22, 2022. The participation of the executive officers of the Company in these private placements was done at the same terms as the other investors in the private placement offering. The Board of Directors approved the insiders’ participation in the private placements.

NOTE 5 – PAYMENT OBLIGATION:

On September 12, 2017, the Company entered into an agreement (the “Payment Agreement”) with a creditor (the “Creditor”) to pay by way of a payment plan an existing obligation of $250,000 (the “Payment Obligation”) related to a potential corporate transaction in 2015 that was not completed. Pursuant to the Payment Agreement, the Company agreed to pay the Payment Obligation to the Creditor, including interest, on or before September 12, 2020. Interest accrues on the unpaid principal amount of the Payment Obligation at the Wells Fargo Bank prime rate (5.25% at March 31, 2019), as such rate may change from time to time, plus 3% per annum. The Company agreed to pay the Creditor 5% of the gross proceeds of any funds raised, whether through equity sales, borrowings or sales of assets. If the gross proceeds of any equity financing are at least $1 million, then the Company agreed to also commence monthly installment payments of $10,000 until the Payment Obligation is paid.

During the quarter and six months ended March 31, 2019, the Company paid $30,000 (5% of the $600,000 private placement) to the Creditor, which included $9,727 of interest. The balance of the Payment Obligation at March 31, 2019 and September 30, 2018 was $178,533 and $198,806, respectively.

NOTE 6 – SENIOR UNSECURED NOTE PAYABLE:

On July 30, 2018, the Company entered into a binding loan agreement and promissory note with William Matlack (the “Lender”). Under the loan agreement, the Lender loaned the Company $300,000 in the form of a senior unsecured note, with the principal bearing interest at an annual rate of 18%, compounded monthly. The loan is unsecured and the principal and accrued interest will become due for repayment on January 20, 2020, but may be repaid early without penalty. Amounts drawn under the loan agreement were used for exploration expenditures, annual property holding costs, and working capital requirements of the Company.

Pursuant to the terms of the loan agreement, the Company issued to the Lender 3,265,500 non-transferrable Series F Warrants to purchase common shares of the Company. The exercise price of the warrants is $0.09, and the warrants contain a provision restricting their exercise in the event any such exercise would cause the Lender to own 10% or more of the Company’s outstanding common shares. The relative fair value of the warrants issued in connection with the senior unsecured note was estimated at $110,900, based upon a total fair value as calculated by a Black-Scholes option-pricing model. The relative fair value of the warrants was recorded as a discount of the note, with $19,744 amortized to interest expense in the quarter ended March 31, 2019 and $39,815 for the six months ended March 31, 2019. At March 31, 2019, the note payable was $236,247, net of the unamortized discount of $63,753.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

NOTE 7 – COMMON STOCK, WARRANTS AND PREFERRED STOCK:

Common Shares - Private Placement

On October 18, 2018, and on December 3, 2018, the Company closed two tranches of a private placement offering of 7,500,000 Units of the Company at a price of US$0.08 per Unit for net proceeds of $600,000. Each Unit in the offering consisted of one share of common stock of the Company and one Class E Warrant, with each warrant exercisable to acquire an additional share of common stock of the Company at a price of US$0.14 per share until the warrant expiration date of October 29, 2021.

Warrants

During the six-month period ended March 31, 2019, 14,500,000 warrants were issued, 7,500,000 and 2,000,000 pursuant to the private placement offerings, and another 5,000,000 warrants issued to AGEI under the terms of the Elder Creek purchase of mineral rights (See Note 3).

The fair value of the 5,000,000 warrants issued in connection with the purchase of mineral rights was estimated at $176,000 on the date of issuance with a Black-Scholes option-pricing model. The assumptions used to calculate fair values are noted in the following table:

There were 51,106,373 and 36,606,373 warrants outstanding as of March 31, 2018 and September 30, 2018, respectively. The warrants expire from October 29, 2021 through March 22, 2022.

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value. The Company’s board of directors is authorized to issue the preferred stock from time to time in series, and is further authorized to establish such series, to fix and determine the variations in the relative rights and preferences as between series, to fix voting rights, if any, for each series, and to allow for the conversion of preferred stock into common stock. There is no preferred stock issued as of March 31, 2019.

NOTE 8 – STOCK-BASED AWARDS:

During the quarter ended December 31, 2018, the Company’s shareholders approved and the Company’s Board of Directors adopted of the Company’s 2018 Stock and Incentive Plan. This plan replaced the Company’s 2015 Equity Incentive Plan. The aggregate number of shares that may be issued to employees, directors, and consultants under all stock-based awards made under the 2018 Stock and Incentive Plan is 8 million shares of the Company’s common stock. Upon exercise of options or other awards, shares are issued from the available authorized shares of the Company. Option awards are granted with an exercise price equal to the fair value of the Company’s stock at the date of grant.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

During the quarter ended December 31, 2018, the Board of Directors agreed to issue 100,000 stock options to the Chief Financial Officer. The fair value of the option awards granted during the quarter ended December 31, 2018 was $5,000 and measured on the date of the issuance with a Black-Scholes option-pricing model using the assumptions noted in the following table:

During the six-month period ended March 31, 2019, 100,000 options were terminated as a result of the resignation of a member of the Board of Directors.

The following is a summary of options issued and outstanding at March 31, 2018:

The aggregate of options exercisable as of March 31, 2018 had an intrinsic value of nil, based on the closing price of $0.17 per share of the Company’s common stock on March 31, 2018.

The following is a summary of options issued and outstanding at March 31, 2019:

The aggregate of options exercisable as of March 31, 2019 had an intrinsic value of nil, based on the closing price of $0.06 per share of the Company’s common stock on March 29, 2019.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019 (Unaudited)

NOTE 9 – COMMITMENTS AND CONTINGENCIES:

Mineral Exploration

A portion of the Company’s mining claims on the Company’s properties are subject to lease and option agreements with various terms, obligations, and royalties payable in certain circumstances.

The Company pays federal and county claim maintenance fees on unpatented claims that are included in the Company’s mineral exploration properties. Should the Company continue to explore all of the Company’s mineral properties, it expects annual fees to total approximately $255,500 per year in the future, of which $105,778 is for the two joint venture mineral property interests (See Note 3).

Real Estate Lease Commitments

As of March 31, 2019, the Company has real estate lease commitments for certain mineral properties totaling $82,000. The Company’s office in Coeur d’Alene, Idaho and its facilities in Eureka, Nevada are rented on a month-to-month basis. Lease expense for mineral exploration and real estate lease expense is included in the following line items in the Consolidated Statements of Operations:

NOTE 10 – SUBSEQUENT EVENTS:

On May 7, 2019, the Company’s Board of Directors approved entering into a loan with William Matlack for $250,000 on terms similar to the existing Senior unsecured note payable. Completion of the loan and its terms, including interest rate, maturity date and warrant issue are subject to certain conditions, including receipt of all necessary regulatory approvals.

On May 9, 2019, the Company announced that it has entered into a non-binding Letter of Intent to form a joint venture (the ''Agreement'') with PM & Gold, Inc. (''PM&G'') for the advanced exploration of its Lookout Mountain Gold project. PM&G is a private firm incorporated in Nevada with an interest to explore and advance gold projects to production. The parties will work diligently to execute a binding definitive joint venture agreement (the ''Definitive Agreement'') following completion of business and technical due diligence.

The Agreement also provides PM&G the ability to invest in a private placement in Timberline at an at-market price to acquire up to 4.99% of Timberline's common shares.

The Agreement calls for PM&G to fund exploration and advancement activities in two stages for earned equity in the project. Timberline will contribute the claims that constitute the Lookout Mountain project and adjacent historic Oswego Mine area (the ''Project'') to the joint venture company in exchange for its ownership position. Timberline will manage the joint venture at least through Stage I of investment. PM&G shall retain the right to manage all Stage II activities with or without Timberline's participation.

PM&G may earn 51% of the Project in consideration of incurring exploration expenditures of US$6 million to be directed towards advancement of the oxide and high-grade refractory mineralization over a two-year period. Additionally, PM&G may earn a 70% interest in the Project when a bankable feasibility study is completed. PM&G would fund tasks at its sole expense to support the feasibility study including initiating permitting, metallurgical studies, trade-off studies, and other technical work deemed reasonable and appropriate, along with annual holding fees, if Stage I has been completed.

Each partner would have the option to vary its participation percentage beyond the first $6 million by some combination of electing to increase or reduce its funding, reduce its interest to a 10% net profit interest or a 2% net smelter royalty, or other possible combinations to be addressed in the Definitive Agreement. The Definitive Agreement includes a mutual right of refusal for each party should the other party wish to divest of its interest in the Project.

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As used in herein, the terms “Timberline,” the “Company,” “we,” “us,” and “our” refer to Timberline Resources Corporation.

This discussion and analysis contains forward-looking statements that involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except for historical information, the matters set forth herein, which are forward-looking statements, involve certain risks and uncertainties that could cause actual results to differ. Potential risks and uncertainties include, but are not limited to, unexpected changes in business and economic conditions; significant increases or decreases in gold prices; changes in interest and currency exchange rates; unanticipated grade changes; metallurgy, processing, access, availability of materials, equipment, supplies and water; results of current and future exploration and production activities; local and community impacts and issues; timing of receipt and maintenance of government approvals; accidents and labor disputes; environmental costs and risks; competitive factors, including competition for property acquisitions; and availability of external financing at reasonable rates or at all, and those set forth under the heading “Risk Factors” in our Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”) on December 27, 2018. Forward- looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues” or the negative of these terms or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made based on management’s beliefs, estimates, and opinions on the date the statements are made, and the Company undertakes no obligation to update such forward-looking statements if these beliefs, estimates, and opinions should change, except as required by law.

This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our consolidated financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its consolidated financial statements and require the most difficult, subjective and complex judgments are outlined below in “Critical Accounting Policies” and have not changed significantly.

Corporate Overview

Our business is mineral exploration in Nevada with a focus on district-scale gold, and copper-gold projects such as our Eureka and Elder Creek projects, respectively.

Eureka Project

In June 2010, we acquired Staccato Gold Resources Ltd. (“Staccato”), a Canadian-based resource company listed on the TSX Venture Exchange that was in the business of acquiring, exploring and developing mineral properties with a focus on gold exploration in the dominant gold producing trends in Nevada. As a result of this acquisition, we obtained Staccato’s Eureka Property, which included their flagship gold exploration project, the Lookout Mountain Project (“Lookout Mountain”) and the Windfall project, along with several other projects at various stages of exploration in the Battle Mountain/Eureka gold trend in Nevada, along with Staccato’s wholly owned U.S. subsidiary, BH Minerals USA, Inc.

Elder Creek Project

On August 14, 2018, we finalized the acquisition of the Elder Creek property as part of a two-property acquisition from Americas Gold Exploration Inc. to purchase the latter’s rights, title and interest in, to, and under the Elder Creek Joint Venture (JV Agreement) with a subsidiary of McEwen Mining (McEwen). The Elder Creek property is located in northern

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Nevada, 8 miles west-northwest of Battle Mountain in Lander and Humboldt Counties immediately west of Battle Mountain (see figure below). The project lies within the Battle Mountain mining district, covers approximately 9,600 acres (15 miles square) and includes 583 unpatented lode mining claims.

The major styles of mineralization recognized in the Elder Creek area are calc-alkaline, porphyry copper style mineralization and associated peripheral gold-silver-bearing base-metal vein systems. The hydrothermal alteration zoning pattern indicates the presence of a large magmatic-hydrothermal center(s) to the Elder Creek porphyry system. The stockwork quartz veined core of the system is northeasterly-elongate and exceeds 1 by 2 miles (~1.5 by 3 km), which compares favorably to other global porphyry copper systems and regional systems such as Robinson, Yerington, Butte, and Bingham.

Figure 1. Elder Creek Project Location

The underlying Elder Creek JV with McEwen grants Timberline, as operator of the project, terms of earn-in to acquire a 51% ownership for $2.6 M expenditure over 4 years by December 31, 2021, and a 65% ownership for an additional $2.5M expenditure for a total commitment of $5.1M over 6 years by December 31, 2023. The agreement includes industry standard dilution to a 2% NSR following earn-in. Upon completion of the 65% earn-in expenditures, if McEwen elects to participate, the parties will form a joint venture (the “Joint Venture”), and each party would contribute to further exploration spending according to their ownership interest. There are no underlying royalties on the property.

On November 28, 2018 the Company announced completion of a NI43-101 Technical Report on the Elder Creek Copper-Gold Project. The report provides a comprehensive description of the project.

The Elder Creek property has no known reserves, as defined under Guide 7, and the proposed program for the property is exploratory in nature.

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Other Projects / Properties

In August 2014, we acquired Wolfpack Gold (Nevada) Corp. (“Wolfpack”), a U.S. company that was in the business of acquiring, exploring, and developing mineral properties with a focus on gold exploration in the dominant gold producing trends in Nevada. As a result of this acquisition, we obtained cash and several projects at various stages of exploration in the gold trends of Nevada.

We commenced our exploration stage in January 2004 with the change in the management of the Company. From January 2004 until March 2006, we were a mineral exploration company.

During 2014, we advanced our business plan with the acquisition of Wolfpack Gold (Nevada) Corp., and we have continued to focus our business model on mineral exploration and development, with future revenues and cash flows, if any, to be derived from any future mineral production.

On March 12, 2015, we entered into a property option agreement with Gunpoint Exploration Ltd. (“Gunpoint”), which closed on March 31, 2015. Gunpoint granted us an exclusive and irrevocable option (“Option”) to purchase a 100% interest in Gunpoint’s Talapoosa project in western Nevada. Pursuant to the agreement, we had the right to exercise the Option at any time beginning on March 31, 2015 and ending within thirty (30) months of March 12, 2015, unless sooner terminated. On October 19, 2016, we amended the terms of the Option agreement (the “Amended Agreement”) with Gunpoint. The Amended Agreement still granted us an exclusive and irrevocable option (“Option”) to purchase a 100% interest in the Property in western Nevada. Pursuant to the Amended Agreement, we had the right to exercise the Option through March 31, 2019 (“Amended Option Period”), subject to certain interim payments and cumulative project expenditures.

On March 31, 2017, we paid the Talapoosa option payment of $1 million, and on April 13, 2017, we issued 1 million common shares, both of which were interim payments due to a subsidiary of Gunpoint pursuant to our option agreement to acquire a 100% interest in the Talapoosa project in western Nevada. We did not make the required payment of $2 million nor issue the one million common shares of the Company by March 31, 2018, as required by the Amended Agreement, and, therefore, the Amended Agreement was terminated per its terms on March 31, 2018. We have no future plans or obligations related to the Talapoosa project.

Mineral Exploration

Our exploration focus to date during fiscal 2019 is on the Elder Creek project.

Cautionary Note to U.S. Investors: The Lookout Mountain Technical Report uses the terms “mineral resource,” “measured mineral resource,” “indicated mineral resource” and “inferred mineral resource”. We advise investors that these terms are defined in and required to be disclosed by Canadian regulations (NI 43-101); however, these terms are not defined terms under Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. As a reporting issuer in Canada, we are required to prepare reports on our mineral properties in accordance with NI 43-101. We reference the Lookout Mountain Technical Report in this Quarterly Report on Form 10-Q for informational purposes only, and the Lookout Mountain Technical Report is not incorporated herein by reference. Investors are cautioned not to assume that all or any part of a mineral deposit in the above categories will ever be converted into Guide 7 compliant reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable.

Elder Creek Project:

Timberline’s Elder Creek and adjacent Paiute copper-gold properties lie within the prolific Battle Mountain District of Nevada, approximately 11 miles (18 km) north of Newmont’s Phoenix mining complex. Data compiled from over 40-plus years of exploration on the property documents only shallow, historic drilling within a pronounced magnetic low considered to be the core of a large porphyry copper-gold hydrothermal system. Furthermore, only shallow drilling occurred along the north and northeastern magnetic zone and primarily targeted gold. Geologic and geophysical characteristics and rock geochemical sampling results evident at Elder Creek (see press release dated June 18, 2018 at http://timberlineresources.co/press-releases/) are common to major porphyry copper deposits.

The Elder Creek Project, which covers a claim group of approximately 39 square kilometers (km), demonstrates geologic, geochemical, and geophysical characteristics common to major porphyry copper-gold deposits. The core of the Elder Creek porphyry target covers approximately 4.5 square km, and has multiple intrusive phases which form two granodiorite

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porphyry centers within altered Harmony Formation arkosic sandstone and shale. The intrusive rocks are similar in age to those at Newmont’s Phoenix gold-copper mine located 18 km (11 miles) to the south. The porphyry core of the system is characterized by intense quartz veining and elevated copper and molybdenum values in rock and soil samples, and is flanked by proximal potassic alteration and distal biotite-pyrite-pyrrhotite hornfels. It forms a pronounced magnetic low that is ringed by a strongly magnetic “donut” high of hornfels. Large areas of gold-copper veining occur within the hornfels to the south and east of the porphyry core, and copper oxide is exposed in outcrop immediately peripheral to the core.

Since acquiring the project, we have completed three drill holes within the multi-stage hydrothermal system. The first hole, RCEC18-01, was drilled by reverse circulation (RC) at the Valmy pit copper oxide occurrence (Figure 2). It intersected hornfels after Harmony Formation shales and arkosic quartzite, and porphyritic intrusive rock, and contains 0.21% copper over its entire 500 foot (152 m) length, including 0.44% copper over 110 feet (34 m), and 0.55% copper, 0.331 g/t gold and 13 g/t silver over 15 feet (4.6m), and bottomed in strong mineralization (Table 1).

Drilling at a second site located 3,250 feet (1 km) to the south (Figure 2) within the non-magnetic portion of the system was initiated as an RC hole and subsequently deepened by core drilling. Available assays from core hole CCEC18-02 show an intersection of 46.5 feet (14.2 meters) grading 1.20% copper, 0.31% molybdenum, 25.5 g/t silver, and 0.126 g/t gold (Table 1) within a broader zone of anomalous copper-molybdenum mineralization (see press release dated November 26, 2018 at http://timberlineresources.co/press-releases/).

In follow-up to successful drilling at Elder Creek, we contracted Zonge Geophysics of Reno, Nevada to complete an Induced Polarization/Resistivity (“IP”) survey at Elder Creek. The survey was designed to characterize the rocks for signatures associated with concentration of sulfides (IP), associated silicification (Resistivity) as hydrothermal alteration, and identification of major fault zones within the project area.

As reported in Form 8-K filed with the SEC on January 8, 2019, during the quarter ended December 31, 2108, we completed the IP geophysical survey (Figure 2) at the Elder Creek Project in Nevada’s Battle Mountain mining district. A strong IP anomaly was identified, the edge of which appears to have been intersected in drill hole CCEC18-02 at a depth (Figure 3) where coincident with the best mineralization in the core hole. The RC hole was terminated above the IP anomaly due to drilling difficulties.

Figure 2. Elder Creek Project Area Geology, Alteration Zoning, and IP Anomaly

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Table 1. Summary of Elder Creek 2018 Drilling Results

IP/Resistivity Survey

Zonge Geophysics of Reno, Nevada completed the IP survey using the dipole-dipole method which is effective in mapping subsurface concentrations of metallic sulfide minerals. The method was selected with generally 400-meter line spacing and 200-meter dipole separation to give a subsurface survey depth limit of approximately 500 meters. The first survey line was completed over core hole CCEC18-02 to calibrate the geophysical response to sulfide mineralization intersected in the drill hole. Parallel survey lines were positioned to overlap the zoned porphyry-style stockwork quartz veins and hydrothermal biotite mineral alteration which help define the large size of the system.

The IP data were processed by Zonge with a 2-dimensional Smooth-Model Inversion and presented in sequential depth sections (Figure 3) along the survey lines (Figure 2). The priority anomaly, as defined by high chargeability, extends from near surface to at least 500 m depth in places over a trend length of 1,600 m. The anomalies are generally open beyond the depth extent allowed by data processing.

Figure 3. Elder Creek IP Chargeability along Vertical Sections

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Our drilling (hole CCEC18-02) along Line 3,600 N (Figure 4) appears to have clipped the western edge of the priority IP anomaly where pervasively altered hornfels (after Harmony Formation greywacke and arkosic sandstones), porphyritic intrusive rocks, and hydrothermal breccias were intersected. Sulfides occur throughout the hole, but are most concentrated from 400.5 – 414.6 meters (1,313.5 - 1,360 feet) where they occur primarily as irregular veinlets, and as quartz-sulphide matrix to breccia which cross-cuts potassic-altered hornfels and associated porphyritic intrusions. The mineralization is polymetallic with sulfides of iron, copper and molybdenum.

The abundance of iron and sulfur in the drill hole CCEC18-02 intercept correlates well with the strongest chargeability (Figure 4) giving confidence that the IP method is successfully mapping a large sulfide body. Historic drill holes (see Elder Creek NI43-101 Technical Report at http://timberlineresources.co/ ) along Line 3600N stopped short of testing the IP anomaly, but nonetheless intercepted anomalous copper and iron sulfides above the IP anomaly.

Figure 4. Line 3600N IP Chargeability Anomaly and Drill Hole CCEC18-02 and Historic Drill Holes

Near the north end of the survey area, our drilling in hole RCEC18-01 between IP Line 4400N and Line 4800N (Figure 2) was terminated above the IP anomaly due to difficult drilling conditions. Nonetheless, drilling intersected 34 m (110 feet) of 0.44% copper in near-surface, altered hornfels within a broader interval (152 m; 500 feet) of 0.21% copper (see press release dated September 27, 2018 at http://timberlineresources.co/press-releases/), much of which is oxidized. The IP anomaly in this area is considered to remain untested by drilling.

In summary, key conclusions of the IP survey include:

The IP maps a distinct body of sulfide mineralization ≥1,600 m long and 500 - 800 m wide (Figures 1 and 2) within a very large (4 km) circular copper-molybdenum-gold-silver porphyry mineral system; 

The IP suggests that, although well mineralized, Timberline’s drill holes did not test the strongest part of the large mineral system. Furthermore, historic drilling was too shallow (typically <200m depth) to intersect the anomaly. As such, the IP anomaly remains largely untested by drilling. 

Our exploration during the quarter also included reprocessing of historic magnetic and gravity data for the Elder Creek project area. This work was completed by Zonge Geophysics with results documenting the occurrence of distinct magnetic and density (gravity) anomalies which in part appear to be spatially related to the IP anomaly.

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Exploration Plans

We plan to resume drilling at Elder Creek with targeting to focus on the priority IP anomaly and offsets of previous drill intercepts. Historic drilling was clearly focused on near-surface targets with only rare drill holes deeper than 200 meters vertical depth, leaving the IP anomaly (Figure 2) effectively untested. The project is fully permitted with the US Bureau of Land Management for an additional 43 sites for drilling. Pending available financing, geophysics and drilling will resume in the second calendar quarter of 2019.

In addition to Elder Creek, additional exploration is planned at the Paiute and Eureka Projects. Drilling is planned at both projects pending available financing.

Our exploration plans and budgets are dependent upon the availability of capital. As financial markets improve and we are able to attract additional investment dollars, we will expand our exploration plans accordingly.

Results of Operations for the three months ended March 31, 2019 and 2018

Consolidated Results

Our consolidated net loss for the three months ended March 31, 2019 was $217,924, compared to a consolidated net loss of $3,695,795 for the three months ended March 31, 2018. The year-over-year reduction in net loss is due to the abandonment of mineral rights at Talapoosa in the prior year, increased exploration expenses, accretion of discount on senior note payable, reduction of professional fees and interest expense, offset by decreased non-cash stock option expense, salaries and benefits expenses, and other general and administrative expenses. Professional fees were higher and salaries and benefits were lower as a result of our Chief Financial Officer functions being outsourced to a firm with an internal reduction in employee headcount. Other general and administrative expenditures were lower in 2018 primarily related to the non-recurrence of consulting fees aimed at increasing our market exposure and supporting our marketing efforts during the quarter ended March 31, 2019. These same factors drove a decrease in net loss for the six-month period ended March 31, 2019. Exploration expenditures during the six months ended March 31, 2019 increased compared to the same period in 2018 due to significant exploration activity performed on Elder Creek, a new property to us acquired in later quarters of 2018.

Subject to adequate funding in 2019, we expect to continue to incur exploration expenses for the advancement of Elder Creek and exploration at Eureka.

Financial Condition and Liquidity

At March 31, 2019, we had assets of $15,620,950, consisting of cash in the amount of $146,669; property, mineral rights and equipment of $15,087,229, net of depreciation, reclamation bonds of $307,286, and deposits and other assets in the amount of $79,766.

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On March 31, 2019, we had total liabilities of $793,027 and total assets of $15,620,950. This compares to total liabilities of $740,421 and total assets of $15,394,921 on September 30, 2018. As of March 31, 2019, our liabilities consist of $164,555 for asset retirement obligations, $236,247 of senior unsecured note payable, net of discount, $178,533 of payment obligation, and $213,692 of trade payables and accrued liabilities. Of these liabilities, $449,939 are due within twelve months. The increase in liabilities compared to September 31, 2018 is largely due to the senior unsecured note payable, offset by a reductions in the payment obligation and accounts payable and accrued liabilities. The increase in total assets was due to additions to the Elder Creek property as a result of the fair value of warrants issued for the 2018 work requirement being met during the six-month period ended March 31, 2019. Increases in cash and prepaid expenses also contributed to the increase in assets for the six-month period ended March 31, 2019.

On March 31, 2019 we had negative working capital of $229,204 and stockholders’ equity of $14,827,923 compared to negative working capital of $29,077 and stockholders’ equity of $14,654,500 for the year ended September 30, 2018. Working capital experienced an unfavorable change because of the senior unsecured note payable becoming due within the coming 12 months, offset partially by an increase in cash associated with a private placements of our equity, an increase in prepaid expenses and a decrease in accrued expenses.

During the quarter ended March 31, 2019, we used cash from operating activities of $718,077 compared to $782,376 used for the quarter ended March 31, 2018. Net loss of $767,577 for the six-month period ended March 31, 2019 compared to net loss of $4,024,957 for the quarter ended March 31, 2018. The causal factors are disclosed above in the comparative table above.

During the six-month period ended March 31, 2019, cash of $15,188 was provided by investment activities, compared with cash used of $53,500 for the six-month period ended March 31, 2018. We paid $36,000 to purchase mineral properties, while receiving $51,188 for lease payments to us for company-owned mineral properties. During the six-month period ended March 31, 2018, we paid $53,500 for mineral properties.

During the six-month period ended March 31, 2019, cash of $739,727 was provided by financing activities, compared to cash of $784,040 provided during the six-month period ended March 31, 2018. For the six-month period ended March 31, 2019, cash of $760,000 was provided through the sale of stock and warrants, net of offering costs, and $20,273 used for payment of the payment obligation. This compares to cash of $812,767 provided through the sale of stock and warrants, net of offering costs, and $37,727 used for payment of the payment obligation for the six-month period ended March 31, 2018.

During the six-month period ended March 31, 2019, we closed the sale of two equity financings. We sold a total of 9,500,000 Units at a price of $0.08 per unit for net proceeds of $760,000.

These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of our assets and the settlement of our liabilities in the normal course of our operations. Disruptions in the credit and financial markets over the past several years have had a material adverse impact on a number of financial institutions and investors and have limited access to capital and credit for many companies. In addition, commodity prices and mining equities have seen significant volatility which increases the risk to precious metal investors. Market disruptions and alternative investment options, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all. If we are unable to obtain financing through equity investments, we will seek multiple solutions including, but not limited to, asset sales, corporate transactions, credit facilities or debenture issuances in order to continue as a going concern.

At March 31, 2019, we had negative working capital of $229,204. As of the date of this Quarterly Report on Form 10-Q, we have approximately $449,939 outstanding in current liabilities and a cash balance of $146,669. We do not anticipate that we will be able to continue as a going concern for the next twelve months without receiving significant additional financing. Therefore, we expect to engage in financial transactions to increase our cash balance or decrease our cash obligations in the near term, which may include equity financings, corporate transactions, joint venture agreements, sales of assets, credit facilities or debenture issuances, or other strategic transactions.

The audit opinion and notes that accompany our consolidated financial statements for the year ended September 30, 2018 disclose a ‘going concern’ qualification to our ability to continue in business. The accompanying consolidated financial statements have been prepared under the assumption that we will continue as a going concern. We have incurred losses since our inception. We do not have sufficient cash to fund normal operations and meet all of our obligations for the next 12 months without deferring payment on certain current liabilities and/or raising additional funds. The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We believe that the going concern condition cannot be removed with confidence until the Company has entered

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into a business climate where funding of its activities is more assured. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

We recognize that we will not be able to execute our operating plans with our current cash balances. With our current cash balance, our anticipated ability to acquire additional capital by way of asset sales and/or financing transactions, and our ability to curtail discretionary exploration expenditures as needed; however, we believe that we will be able to generate sufficient working capital to meet our ongoing, non-discretionary operating expenses for the next 12 months and maintain our primary mineral properties. We recognize that additional capital will be required shortly and may be obtained through financing transactions such as asset sales, corporate transactions, equity investments, joint ventures, debt facilities, or other types of strategic arrangements.

We plan, as funding allows, to follow up on our positive results for drilling and the Induced Polarization (IP)/Resistivity survey on our Elder Creek prospect, and further surface preparations and tests at our Paiute prospect. Also, subject to available capital, we may continue prudent exploration programs on our material exploration properties and/or fund some exploratory activities on early-stage properties. Our current working capital is not sufficient to meet our currently planned exploration costs and general corporate and administrative expenses for the next 12 months, and we will require additional funding and/or reductions in exploration and administrative expenditures.

Given current market conditions, we cannot provide assurance that necessary financing transactions will be available on terms acceptable to us, or at all. Without additional financing, we would have to further curtail our exploration and other expenditures while we seek alternative funding arrangements to provide sufficient capital to meet our ongoing, non-discretionary expenditures for the next 12 months and maintain our primary mineral properties. If we cannot obtain sufficient additional financing, we may be unable to make required property payments on a timely basis and be forced to return some or all of our leased or optioned properties to the underlying owners.

Financing Activities

Private Placements:

On October 18, 2018, and on December 3, 2018, we closed two tranches of a private placement offering of 7,500,000 Units of the Company at a price of $0.08 per Unit for net proceeds of $600,000. Each Unit in the offering consisted of one share of common stock of the Company and one Class E Warrant, with each warrant exercisable to acquire an additional share of our common stock at a price of $0.14 per share until the warrant expiration date of October 29, 2021.

The private placement offering was completed under Rule 506(b) of Regulation D promulgated by the SEC under the Securities Act of 1933, as amended, solely to persons who qualified as accredited investors. Subscribers who were resident in Canada were required to qualify as accredited investors under Canadian National Instrument 45-106 Prospectus Exemptions.

On February 5, 2019, the Company announced a private placement offering of 6,250,000 Units of the Company at a price of $0.08 per Unit for net proceeds of $500,000, with an over-allotment of up to $100,000, or an additional 1,250,000 Units. Each Unit in the offering consisted of one share of common stock of the Company and one Class H Warrant, with each warrant exercisable to acquire an additional share of common stock of the Company at a price of $0.14 per share until the warrant expiration date.

On March 29, 2019, we closed the sale of the first tranche of a private placement offering of Units of the Company at a price of US$0.08 per Unit. Each Unit consists of one share of our common stock and one common share purchase Class H warrant, with each warrant exercisable to acquire an additional share of our common stock at a price of US$0.14 per share until March 30, 2022. Accredited investors subscribed for 2,000,000 Units on a private placement basis at a price of US$0.08 per unit for total proceeds of US$160,000.  The Offering is authorized for up to 7.5 million Units for a total of US$600,000 was expected to close in April 2019, subject to the satisfaction of certain regulatory requirements.

The Units were offered and sold solely to persons who qualify as “accredited investors” as defined in Rule 501(a) of Regulation D promulgated by the SEC under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Rule 506(b) under the Securities Act based on documentation and representations provided by the investors to the Company reasonably confirming their status as accredited investors.

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2018 Stock and Incentive Plan

On December 1, 2018, we held a Special Meeting of Stockholders, with the following matters voted on:

Proposal #1: To ratify the appointment of DeCoria, Maichel & Teague P.S. to serve as the Company’s independent registered public accounting firm for the 2019 fiscal year. 

Proposal #2: To approve the adoption of the Company’s 2018 Stock and Incentive Plan. 

Proposal #3: To allow the purchase of shares of common stock of the Company by Americas Gold Exploration Inc. (AGEI), of which Donald McDowell, a director of AGEI, is the principal shareholder, the Company’s Vice President of Corporate Development and a director of the Timberline, the result of which will be Mr. McDowell owning over 20% of the Company’s issued and outstanding shares of common stock. 

Proposal #4: To approve an amendment the Company’s Certificate of Incorporation to change the name of the Company from “Timberline Resources Corporation” to a name to be selected by the Board of Directors of the Company. 

Our executive officers and directors are participants in the 2018 Stock and Incentive Plan. A description of the material terms of the 2018 Stock and Incentive Plan is set forth under the heading “Proposal 2 – Approval of the Adoption of the 2018 Incentive Plan” in our definitive proxy statement on Schedule 14A as filed with the Commission on October 22, 2018 as is incorporated herein by reference.

Proxies were solicited under the proxy statement filed with the Securities and Exchange Commission on October 22, 2018. Our appointment of DeCoria, Maichel & Teague P.S. to serve as the Company’s independent registered public accounting firm for the 2019 fiscal year was ratified. The proposal to approve the adoption of the Timberline 2018 Stock and Incentive Plan was approved. The proposal to allow Americas Gold Exploration Inc. to purchase shares of common stock resulting in Don McDowell owning over 20% of the Company was approved. The proposal allow the Board of Directors to amend the Company’s Certificate of Incorporation to change the name of the Company was approved.

Subsequent Events

On May 7, 2019, our Board of Directors approved entering into a loan with William Matlack for $250,000 on terms similar to the existing Senior unsecured note payable. Completion of the loan and its terms, including interest rate, maturity date and warrant issue are subject to certain conditions, including receipt of all necessary regulatory approvals.

On May 9, 2019, we announced that we have entered into a non-binding Letter of Intent to form a joint venture (the ''Agreement'') with PM & Gold, Inc. (''PM&G'') for the advanced exploration of our Lookout Mountain Gold project. PM&G is a private firm incorporated in Nevada with an interest to explore and advance gold projects to production. The parties will work diligently to execute a binding definitive joint venture agreement (the ''Definitive Agreement'') following completion of business and technical due diligence. Completion of the Definitive Agreement will be subject to certain conditions, including receipt of all necessary regulatory approvals.

The Agreement also provides PM&G the ability to invest in a private placement in Timberline at an at-market price to acquire up to 4.99% of our common shares.

The Agreement calls for PM&G to fund exploration and advancement activities in two stages for earned equity in the project. We will contribute the claims that constitute the Lookout Mountain project and adjacent historic Oswego Mine area (the ''Project'') to the joint venture company in exchange for its ownership position. We will manage the joint venture at least through Stage I of investment. PM&G shall retain the right to manage all Stage II activities with or without our participation.

Stage I - Earn 51%: PM&G will earn 51% of the Project in consideration of incurring exploration expenditures of US$6 million to be directed towards the advancement of the oxide and high-grade refractory mineralization over a two year period. The primary focus of the expenditure will seek to identify any near term production potential (oxide/high-grade mineralization). This exploration will also test expansion of both high-grade and oxide mineralization outside the defined mineralization. The plan and effort is to be formulated and agreed upon in a joint Technical Committee to be appointed by us and PM&G.

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Stage II - Earn 70%: PM&G will earn a 70% interest in the Project when a bankable feasibility study is completed. PM&G would fund tasks at its sole expense to support the feasibility study including initiating permitting, metallurgical studies, trade-off studies, and other technical work deemed reasonable and appropriate, along with annual holding fees if Stage I has been completed. Work towards the feasibility study will be completed within 3 years of completing Stage I or as mutually agreed upon by both companies. To ensure the Project continues to advance, the Technical Committee will prepare an annual budget to implement prudent and appropriate activities.

Timberline Option to Participate 51 - 49% - When the $6 million expenditure is reached (Stage I), we have the option to participate in subsequent expenditures at the 49% level. Should we determine to participate, all future costs incurred to bring the Project to production will be split on a pro-rata basis.

If we choose not to participate, we will be further diluted and PM&G will earn 70% ownership by completing the above activities defined as Stage II.

Timberline Option to Participate 70 - 30%: At the end of Stage II, we may elect to participate in subsequent expenditures at the 30% level or may elect one of the following options:

Reduce our interest to a 10% net profit interest (''NPI'') or a 2% net smelter royalty (''NSR''), or 

Sell our remaining interest in the Project to PM&G at a price agreed between the parties following completion and evaluation of Stage I and Stage II exploration, per terms of the Mutual Right of First Refusal (''ROFR'') defined below. 

If PM&G determines not to advance beyond the 51% following completion of Stage I, it may elect one of the following options:

Participate at the 51 percent level or be diluted to a 30 percent interest by TLRS completing the Stage II activities as defined above or 

Reduce its interest to a 10% NPI or a 2% NSR payable in gold, or 

Sell its remaining interest in the Project to us at a price agreed between the parties following completion and evaluation of Stage I exploration, per terms of the Mutual ROFR defined below. 

Mutual Right of First Refusal (ROFR) - The Agreement will include a mutual ROFR wherein either JV partner may acquire the other partner's interest at fair market value or as mutually agreed. Both partners will have a right to exercise the ROFR should either receive a 3rd party offer.

The Lookout Mountain project is located within our 23 square-mile Eureka property which is strategically located within the greater Eureka Mining District. The Eureka property is comprised of three extensive gold bearing structural trends. The Lookout Mountain project covers the western-most trend, which along with the southern part of the central Oswego trend will be included in the joint venture assets. The northern part of Oswego, and the eastern-most Windfall trend are not part of the joint venture. A detailed description and maps are available at http://timberlineresources.co/projects/.

A full updated technical report on the Lookout Mountain Project can be seen at http://timberlineresources.co/wp-content/uploads/2015/07/LookoutMt_-43-101_2013.pdf.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Critical Accounting Policies and Estimates

See Note 2 to the financial statements contained in this Quarterly Report for a summary of the significant accounting policies used in the presentation of our financial statements. We are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses. We believe that our most critical accounting estimates are related to asset impairments and asset retirement obligations.

Our critical accounting policies and estimates are as follows:

Asset Impairments

Significant property acquisition payments for active exploration properties are capitalized. The evaluation of our mineral properties for impairment is based on market conditions for minerals, underlying mineralized material associated with the properties, and future costs that may be required for ultimate realization through mining operations or by sale. If no

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mineable ore body is discovered, or market conditions for minerals deteriorate, there is the potential for a material adjustment to the value assigned to such mineral properties.

We review the carrying value of equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment or abandonment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the equipment is used, and the effects of obsolescence, demand, competition, and other economic factors.

Asset Retirement Obligations

We have an obligation to reclaim our properties after the surface has been disturbed by exploration methods at the site. As a result, we have recorded a liability for the fair value of the reclamation costs we expect to incur at our Lookout Mountain Project. We estimate applicable inflation and credit-adjusted risk-free rates as well as expected reclamation time frames. To the extent that the estimated reclamation costs change, such changes will impact future reclamation expense recorded. A liability is recognized for the present value of estimated environmental remediation (asset retirement obligation) in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The offsetting balance is charged to the related long-lived asset. Adjustments are made to the liability for changes resulting from passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation.

Not applicable.

Conclusions of Management Regarding Effectiveness of Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a – 15(e) and Rule 15d – 15(e) under the Exchange Act as of the end of the period covered by this report). Based on that evaluation, our management, including the Principal Executive Officer and the Principal Financial Officer, has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective in ensuring that: (i) information required to be disclosed by the Company in reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

Management determined that the Company’s disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting due primarily to minimal staffing at the Company and the resulting weakness related to appropriate segregation of duties. While the Company does adhere to a system of internal controls and processes that were designed and implemented by a respected national accounting firm, it is difficult with a very limited staff to maintain appropriate segregation of duties in the initiating and recording of transactions, thereby creating a segregation of duties weakness. Subject to available capital, we anticipate improving the effectiveness of our disclosure controls and procedures on a long-term basis by increasing staffing levels and segregating certain duties.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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We are not aware of any material pending litigation or of any proceedings known to be contemplated by governmental authorities which are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole. No director, officer or affiliate of Timberline and no owner of record or beneficial owner of more than 5% of our securities or any associate of any such director, officer or security holder is a party adverse to Timberline or has a material interest adverse to Timberline in reference to any currently pending litigation.

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2018, which was filed with the SEC on December 27, 2018.

All sales of unregistered equity securities during the fiscal quarter covered by this Quarterly Report on Form 10-Q were previously reported on Form 8-K.

None.

We consider health, safety and environmental stewardship to be a core value for the Company.

Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities with respect to mining operations and properties in the United States that are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). During the quarter ended March 31, 2019, our U.S. exploration properties were not subject to regulation by the MSHA under the Mine Act.

None.

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* - Filed herewith

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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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