Timberline Resources Corp - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from ___________ to ___________   

Commission file number: 001-34055

(208) 664-4859

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value, (Title of Class)

Trading symbols and exchanges: TLRS, OTCQB TBR, TSX-V

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 past 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     ☐ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes     ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised 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

Number of shares of issuer’s common stock outstanding at August 15, 2022: 159,676,152

INDEX

COVID-19

In March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. Its rapid spread around the world and throughout the United States prompted many countries, including the United States, to institute restrictions on travel, public gatherings and certain business operations. These restrictions did not significantly disrupt economic activity in Timberline Resource’s business.

As of June 30, 2022, the pandemic had not materially impacted our financial statements. However, if the severity of the COVID-19 pandemic continues, the negative financial impact due to limitations in conducting geologic field work and exploration activities could be significantly greater in future periods. In addition, the economic disruptions caused by COVID-19 could adversely impact the impairment risks for certain long-lived assets and equity method investments. Timberline Resources evaluated these impairment considerations and determined that no such impairments occurred as of June 30, 2022.

The effects of the continued outbreak of COVID-19 and related government responses could also include extended disruptions to supply chains and capital markets, reduced availability of contractors and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts on the Company, including its ability to conduct exploration activities. As of June 30, 2022, there were no material adverse impacts on the Company’s operations due to COVID-19.

The Company has taken steps to mitigate the potential risks to suppliers and employees posed by the spread of COVID-19, including work from home policies where appropriate. The Company will continue to monitor developments affecting both its workforce and contractors, and will take additional precautions as necessary. The ultimate impact of COVID-19 depends on factors beyond management’s knowledge or control, including its duration and third-party actions to contain its spread and mitigate its public health effects. Therefore, the Company cannot estimate the potential future impact to its financial position, results of operations and cash flows, but the impacts could be material.

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

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.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The dilutive effect of convertible and outstanding securities as of June 30, 2022 and 2021 is as follows:

At June 30, 2022 and 2021, the effect of the Company’s common stock equivalents would have been anti-dilutive. Accordingly, only basic EPS is presented.

NOTE 3 – PROPERTY, MINERAL RIGHTS, AND EQUIPMENT:

The following is a summary of property, mineral rights, and equipment and accumulated depreciation at June 30, 2022 and September 30, 2021, respectively:

For the nine months ended June 30, 2022 and 2021, the Company received mineral lease payments of $nil and $78,571, respectively, from a third party on two property blocks the Company leases at the Company’s Eureka property. These receipts are recorded as a reduction to property, mineral rights, and equipment.

NOTE 4 – RELATED-PARTY TRANSACTIONS:

A senior unsecured note payable and interest accrued thereon payable to William Matlack, a shareholder and director of the Company, is disclosed in Note 5.

The Company reimburses the health insurance premiums for a former director. At June 30, 2022 and September 30, 2021, the Company owed $19,790 and $3,536, respectively, for related party expenses. No remittance was made during the nine months ended June 30, 2022, and $16,254 was recognized as expense during the period.

NOTE 5 – SENIOR UNSECURED NOTE PAYABLE – RELATED PARTY:

On July 30, 2018, the Company entered into a loan agreement and promissory note with William Matlack, a significant shareholder and a director as of October 29, 2019, (the “Lender”), thereafter becoming a related party. Under the loan agreement, the Lender loaned the Company $300,000 in the form of a senior unsecured note payable, with the principal bearing interest at an annual rate of 18%, compounded monthly. The loan is unsecured and has a maturity date of January 20, 2023.

At June 30, 2022 and at September 30, 2021, the senior unsecured note payable was $270,991.

The accrued interest on the senior unsecured note payable was $43,482 and $4,145 at June 30, 2022 and September 30, 2021, respectively. Interest expense related to the senior unsecured note payable to this related party was $13,701 and $22,035 for the three months ended June 30, 2022 and June 30, 2021, respectively, and $39,337 and $64,658 for the nine months ended June 30, 2022 and June 30, 2021, respectively.

The $270,991 senior unsecured note payable would be senior to any other debt obtained by the Company subsequent to September 30, 2021. The note requires that when the Company enters into any other financings, 25% of the proceeds of such financings will be paid toward reduction of the principal and interest accrued on the note. At August 30, 2021, the Lender provided a waiver of default on the Note that would otherwise have existed due to a non-payment under this contract term for the note. Payment of the remainder of the note’s principal balance will not be required until the next qualifying financing, whether debt or equity. On August 30, 2021, $250,000 was paid to the Lender in conjunction with the common stock private placement financing that occurred in June 2021, consisting of $29,009 of principal and $220,991 of interest. At June 30, 2022, the Lender provided a verbal waiver of default on the note that would otherwise have existed due to a non-payment under this contract term for the note. The Company is completing an operating budget to determine an amount that can be remitted toward the note under this verbal waiver agreement.

NOTE 6 – COMMON STOCK AND WARRANTS:

At the Annual General Meeting of shareholders held on April 14, 2021, the shareholders approved an increase in the number of authorized common shares of the Company from 200,000,000 to 500,000,000, with no change in par value and no split or other modification to any outstanding shares. The Certificate of Incorporation of the Company in the State of Delaware was amended to reflect that change in October 2021.

On May 2, 2022, the Company closed a non-brokered private placement of the Company to accredited investors at a price of $0.25 per common share. The Company issued 18,933,705 common shares for cash proceeds of $4,733,426. Finders fees in the amount of $293,839 and 1,016,022 Series N Warrants were paid and issued, respectively, to licensed brokers and consultants in association with the offering. The warrants have a term of 18 months and are exercisable at $0.25 per common share.

During the nine months ended June 30, 2022, 6,825,000 Series E warrants, 5,000,000 Series G warrants and 4,446,016 Series H warrants expired. Also, holders of Series H Warrants exercised 1,546,425 warrants for $0.14 per share to acquire 1,546,425 shares of the Company’s common stock for total cash proceeds of $146,499 and a subscription receivable of $70,000 to the Company. The warrant holder decided not to exercise the 500,000 warrants subscribed, the $70,000 was refunded and the warrants expired, resulting in a total of 1,046,425 shares being issued.

On June 25, 2021, the Company closed on total subscriptions for a private placement offering for 23,070,798 Units of the Company at a price of $0.20 per Unit. Each Unit consisted of one share of common stock of the Company and one-half common share purchase Series M Warrant (each whole such warrant a “Warrant”), with each Warrant exercisable to acquire an additional share of common stock of the Company at a price of $0.30 per share until the Warrant expiration date of May 31, 2023. A total of 8,941,666 shares and 5,304,166 Warrants were paid for and issued during the quarter ended June 30, 2021, for net proceeds of $1,788,334 to the Company. Another $333,333 was received for shares subscribed but not yet issued as of the end of the quarter. Additionally, 102,000 broker Warrants were issued for finders fees. No cash was paid for finders fees during the quarter ended June 30, 2021. The units subscribed but not yet paid for at June 30, 2021 were accounted for as subscriptions receivable of $2,492,493. Subsequent to the close of the quarter ended June 30, 2021, and prior to the issuance of the financial statements for that period, cash of $2,375,393, net of $117,100 finders fees, was received and 14,129,132 shares and 6,725,481 Warrants were issued to complete the private placement transactions, including 494,248 Warrants issued for finders fees.

During the three months ended June 30, 2021, holders of Series D Warrants exercised 1,775,000 warrants for $0.14 per share to acquire 1,775,000 shares of the Company’s common stock for total cash proceeds of $248,500 to the Company. Also, holders of Series H Warrants exercised 375,000 warrants for $0.14 per share to acquire 375,000 shares of the Company’s common stock for total cash proceeds of $52,500 to the Company. During the three months ended June 30, 2021, 9,000,000 Series D warrants expired.

During the nine months ended June 30, 2021, holders of Series D Warrants exercised 3,500,000 warrants for 0.14 per share to acquire 3,500,000 shares of the Company’s common stock for total cash proceeds of $490,000 to the Company. Also, holders of Series E Warrants exercised 537,500 warrants for $0.14 per share to acquire 537,500 shares of the Company’s common stock for total cash proceeds of $75,250 to the Company. Also, holders of Series H Warrants exercised 375,000 warrants for $0.14 per share to acquire 375,000 shares of the Company’s common stock for total cash proceeds of $52,500 to the Company.

At June 30, 2022, the Company has a total of 57,414,898 warrants outstanding with a weighted average exercise price of $0.22 with a weighted average remaining contractual term of 0.87 year.

NOTE 7 – STOCK-BASED AWARDS:

During the year ended September 30, 2021, the Company’s shareholders approved an increase to the number of shares of common stock reserved for issuance under the Plan to 15,000,000 shares of common stock, including 10,000,000 shares of common stock reserved for incentive stock options. 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 trading price of the Company’s stock at the date of grant.

On October 8, 2020, the Company granted a total of 750,000 options to purchase shares of the Company’s common stock that vest over a three-year period. These vesting options had a total fair value of $177,284, with $44,321 recognized immediately and $44,321 being recognized on each of the three grant anniversary dates.

On May 6, 2021, the Company granted a total of 2,785,000 options to employees, consultants, officers and directors to purchase shares of the Company’s common stock that expire in five years with an exercise price of $0.25. These granted options had a total fair value of $519,400. All options vested upon grant.

The share-based compensation recognized for the option awards vested during the nine months ended June 30, 2022 and 2021 was $44,321 and $519,400, respectively. No options were granted during the three months ended June 30, 2022 or 2021. The unvested options will be recognized as compensation expense in the amount of $44,321 in each of the following two years covered by the vesting period. Fair values of options issued were measured on the date of the grant with a Black-Scholes option-pricing model using the assumptions noted in the following table:

The following is a summary of activity for the fiscal year ended September 30, 2021 and the nine months ended June 30, 2022:

The aggregate of options exercisable as of June 30, 2022 had an intrinsic value of $222,000, based on the closing price of $0.16 per share of the Company’s common stock on June 30, 2022.

NOTE 8 – COMMITMENTS AND CONTINGENCIES:

The Company has the following 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 including advance minimum royalty payments, with various terms, obligations, and royalties payable in certain circumstances. Total mining claim lease, option agreements and royalty agreements total $82,000 per year.

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 $236,277 per year in the future.

Real Estate Lease Commitments

At June 30, 2022, the Company’s office in Coeur d’Alene, Idaho and its facilities in Eureka, Nevada are rented on a month-to-month basis.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 20, 2021. 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 projects such as our district-scale Eureka Project, where we are focused on delivering high-grade Carlin-type gold discoveries. The Eureka property includes the historic Lookout Mountain and Windfall Mines in a total property position of approximately 24 square miles (62 square kilometers). The Eureka mineral resource was reported in compliance with Canadian NI 43-101 in an Updated Technical Report on the Lookout Mountain Project by Mine Development Associates, Effective March 1, 2013, filed on SEDAR April 12, 2013:

Effective January 1, 2021, the Securities and Exchange Commission (“SEC”) adopted amendments to modernize the property disclosure requirements for mining registrants and related guidance, which are currently set forth in Item 102 of Regulation S-K Subpart 1300 under the Securities Act of 1933 and the Securities Exchange Act of 1934. The amendments more closely align the SEC’s disclosure requirements and policies for mining properties with current industry and global regulatory practices and standards.

We are also operator of the Paiute Joint Venture Project with Nevada Gold Mines in the Battle Mountain District. These properties all lie on the prolific Battle Mountain-Eureka gold trend. We also control the Seven Troughs Project in northern Nevada, which is one of the state’s highest-grade former gold producers. We control over 43 square miles (111 square kilometers) of mineral rights in Nevada. Detailed maps and mineral resource estimates for the Eureka Project and NI 43-101 technical reports for its projects may be viewed at http://timberlineresources.co/.

Summary of the exploration activities for the three months ended June 30, 2022:

Summary of the exploration activities for the three months ended June 30, 2022:

Exploration activities during the quarter ending June 30, 2022 focused on the Eureka Project, where a sizable drill campaign concluded during the middle of January 2022. That drilling was concentrated on the Water Well Zone (WWZ), near the Lookout Mountain Resource, and the Oswego target, approximately 1km to the east. The Company received, interpreted, and reported results from that program through May 2022. Having reported strong drill results that the Company believed warranted follow-up, work began during the quarter to plan the 2022 drill campaign. Timberline worked with its environmental and permitting contractor to update the work program within its Lookout Mountain plan of operations with the Bureau of Land Management.

Highlights of the 2021-2022 exploration program completed during January 2022 include:

During the quarter ending March 31, 2022, the Company reported the majority of the drill results from the 2021 drill campaign, including the following highlights:

During the quarter ending June 30, 2022, Timberline reported the final results from the 2021-2022 drilling campaign, these included several drill holes from the Oswego target, one hole from the WWZ, and final multielement results from one hole into the Graben Zone.

Drilling

Due to a lack of availability of drill crews in Nevada, we were forced to split our 2021 drill program into two phases. The first phase was comprised of five RC holes that were completed during July and August 2021; we reported those results on October 27, 2021. The RC drill rig returned to the property in October and drilled until mid-December 2021. A diamond core rig joined the drill program in November and worked until mid-January 2022. The assay results from this second phase of drilling were reported during the quarters ending March 31 and June 30, 2022.

This second phase of drilling included completion of 23 drill holes totaling 4,859 meters (15,942 feet) aimed primarily at the WWZ and Oswego Targets. (Figure 1). A summary of the drill program RC, diamond core (core), and RC with core tails is included in Table 1.

The WWZ is immediately adjacent to the Lookout Mountain Resource and has the potential to significantly expand the resource at higher gold grades. Fourteen new drill holes, including six core holes, in the second phase of this drill program have added many more gold assays and much more geologic information to the WWZ target. We also drilled a core hole to the east of the WWZ as a test of the significant IP anomaly in the Graben Zone. We also completed nine RC holes at the Oswego Target, approximately one kilometer east of the WWZ, testing the downdip extension of the high-grade surface sampling reported in December (see our news release dated December 6, 2021).

Table 1. Compilation of 2021-2022 Phase 2 Drilling, Eureka Project (October – January)

The RC cuttings and drill core were logged in the Company’s Eureka, Nevada facility. Approximately 3,300 samples were collected and submitted to ALS Global, in Elko, Nevada for preparation and analysis.

Water Well Zone

The WWZ emerged during the last two quarters as hosting significant higher-grade gold intercepts over a large area. Repeated drill hole intercepts through the base of the Dunderberg Shale have yielded strong gold mineralization associated with a well-developed breccia horizon that has been intensely altered with increased presence of carbon, silica, and sulfides. Core holes BHSE-220C and 212C are the best holes drilled to date in the WWZ and they are separated by approximately 400 meters north to south. BHSE-220C is the northernmost hole in the WWZ and the intercept is open to the north and east. BHSE-212C is the farthest south hole in the WWZ, and the intercept is open to the south and east. We also reported results from a core hole approximately midway between these two holes (BHSE-192C). This hole confirmed a strong interval of gold mineralization in the same geologic unit (the base of the Dunderberg Shale). This mineralized interval is also open to the east. The current footprint of the WWZ is shown in Figure 1. Timberline’s objectives for ongoing exploration in the WWZ will be to both improve our understanding of the continuity of the zone and to grow it beyond its current footprint. To achieve these objectives, Timberline is planning to add more drill holes within this footprint and beyond it to the north, south, and east.

We also documented during the last two quarters that some of the RC drilling into the WWZ may have been biased low with respect to gold grade. The Company’s February 24, 2022, and March 24, 2022 news releases described comparative results from RC and core drilling in the northern portion of the WWZ. BHSE-220C was a core twin of BHSE-205, which was a RC hole. The final results from BHSE-220C indicated that core drilling recovered significantly higher grades from mineralized intervals than corresponding RC drilling.

This part of the WWZ mineralization is below the water table, which can affect sample quality in RC drilling. Fine-grained material may be washed away during the drilling and sampling process, and drill cuttings may be washed downhole from higher up. Either circumstance could result in under-reporting of gold grades when sampling with RC drilling below the water table. Core drilling is generally regarded as superior to RC drilling for the quality of both assays and geological information, but it is also much more costly.

The initial indication from incomplete and expedited assays was that the core drilling yielded considerably higher-grade gold than did the RC drilling. The complete results for BHSE-220C confirmed that both drill holes encountered a zone of very similar geology and thickness, and the grades over the full interval are significantly higher in the drill core.

Table 2 – Comparison of Average Mineralized Intervals in Twinned* Drill Holes

Figure 1. Location of 2021-2022 Drilling at the Eureka Project, the Water Well Zone and Oswego Targets

The additional assays received since the earlier news release were from a lower-grade interval below the previously reported high-grade. Both the RC and core drilling encountered this lower-grade zone, and a direct comparison between the assays in the two drill holes is shown in Figure 2. The overall grade of the core interval also increased slightly from the February report due to the inclusion of one overlimit assay (a repeat assay on samples that assay above 10 g/t in the initial analysis).

Much of the drilling in the WWZ encountered significant groundwater inflow during drilling. As previously reported in October 2021, Timberline increased the proportion of core drilling in the WWZ during this program to evaluate the reliability of gold grades and increase the confidence of geological interpretations. This newly discovered part of the WWZ is much thicker and higher grade than expected, and it is wide open for follow-up drilling to the north, northwest, and east. The intercept from BHSE-220C, which is 400m south from BHSE-220C, confirmed the highest grade and thickness yet drilled in the WWZ (See Company news release dated March 9, 2022).

Figure 2 - Comparison of Geology & Gold in Twinned Holes at WWZ

This phenomenon of drill sampling below the water table is well known in the gold exploration industry, as anecdotal reports and some comprehensive studies have demonstrated higher gold grades from core drilling in comparison to twin RC drill holes. The difference reported here is higher than expected, but this result is from only one pair of twin holes. The data so far suggest that the recent RC drilling in the WWZ may have underestimated the actual gold grade. The Company continues to assess the geology, assay, and quality control data before drawing conclusions from these data but plans to twin additional RC holes during 2022.

At the time of this writing, the Company has commenced its 2022 drill program but has not yet reported new results. The current drill plan includes additional core holes in close proximity to RC holes that encountered significant gold during the 2020 or 2021 drill programs. In addition, the 2022 drill plan includes primarily core drilling within the WWZ footprint, though RC drilling has been used to drill the upper portions of several of these core holes (above the water table). This technique, known as pre-collaring, saves considerable expense by utilizing cheaper RC drilling for the upper part of deeper drill holes. It should also be noted that Timberline has also changed RC drilling contractors for the 2022 drill program. Our technical team will continue to evaluate the efficacy and appropriateness of RC drilling at the Water Well Zone, but the less expensive drilling method clearly has a place in a well managed exploration project.   

Oswego Target

The Oswego Target lies approximately 1.0km from the eastern margin of the WWZ, or 1.2km from the Lookout Mountain Resource. Oswego is a historic gold showing with limited historic mining (late 19^th and/or early 20^th century) and exploration during the early 1990s. The area is cut by a large north-south fault zone known as the Dugout Tunnel Fault (DTF). The DTF is analogous to the Lookout Mountain Fault zone that occurs just west of Timberline’s Lookout Mountain resource. Surface sampling at Oswego has repeatedly returned high-grade gold from the fault itself, where the Eldorado Dolomite is highly silicified. During the 2021 program, we drilled 9 RC holes in and around the Oswego Target area. The 2021 drilling was aimed at confirming historic drill results and testing the downdip continuity of the surface gold zone.

Prior to the drilling, we also completed systematic channel sampling at the Oswego Target during the quarter ending December 31, 2021. Our geologists collected 67 channel and rock samples along the 65-meter strike length of an exposed fault scarp, where historic results had indicated the presence of high-grade gold. Sampling was focused along the Trench Fault and associated cross structures. There is a zone of alteration and mineralization approximately 10 meters wide, which is pervasively oxidized at surface. The sampling consisted of continuous chip and channel samples utilizing diamond saws and hammer drills. However, due to limited access and cliff-forming outcrops, some of the samples are along the strike of the fault in highly silicified Eldorado Dolomite (channel samples). Where possible, we employed an excavator to cut trenches across the structure. In the trenches, the sampling likely represents true width of mineralization perpendicular to the fault (trench samples).  

The results from the surface sampling at Oswego corroborate historic sampling that indicated a long zone of outcropping structure containing 12 to 13 g/t gold (See Company news release dated June 12, 2018). The newer data provided better information on the continuity and dimensions of the mineralized structure. The results are summarized in Figure 3.

Oswego is separated from the Lookout – WWZ trend by a basin with volcanic rocks at surface and underlain by extensive faulting, potential host rocks for Carlin-type gold, and fine-grained altered intrusive rocks (see Company news release dated March 24, 2022). This structural corridor includes both Cambrian and Ordovician aged host rocks that Timberline intends to drill test. These rocks include the Dunderberg Shale, the host of Carlin-type mineralization at the WWZ and Lookout Mountain, and the Goodwin and Ninemile Formations, which are prolific hosts of gold at the Ruby Hill Mine (i80 Gold Corp.) in the north of the Eureka District. We completed nine shallow RC holes into the Oswego alteration zone to test the downdip extension of the surface mineralization.

Timberline reported the results of the 2021 drilling at Oswego in May of 2022, some highlights are shown below:

Figure 3 – Geology, Sampling, and Drilling at the Oswego Target

Most of the 2021 Oswego drill holes (BHSE-202, 207, and 213 – 217) were positioned west of the fault zone and drilled at an angle to undercut surface mineralization and cut across the structure. The logs of the drill cuttings indicate that most of these holes were collared in the Secret Canyon Formation, which consists of platy brown to orange chips of argillaceous material (shale) with a high carbonate content. Drilling progressed through the shale into an apparent faulted contact with the Eldorado Dolomite, which was normally brown to reddish-brown or black, very fine-grained jasperoid (silicified sedimentary rock). The relationship of the fault to the shale and dolomite is complex, but all of the drill holes in this area bottomed in the dolomite.

The gold mineralization at Oswego is most often associated with, or centered upon, the silicified fault (jasperoid). However, some of the highest gold grades occur in altered dolomite or in sediments at the margins of the jasperoid. Drillholes BHSE-213 and -207 tested the southern extent of high gold in surface samples. The shallow gold zone appears to be cut off on the south, and additional mapping and sampling is required to understand the controls of gold in that area. All the drillholes in this area encountered highly anomalous gold (>0.100 g/t) well into the Eldorado Dolomite. None of the drill holes reached sufficient depth to test other favorable host rocks that are interpreted to lie at depth along this structure, such as the Ninemile Formation.

The 2022 drill program will include several drill holes at the Oswego target, aimed at testing for downdip and lateral extensions of the shallow mineralization reported in 2021 and early 2022. There may also be deeper drilling into the graben west of Oswego to examine possible connections between Oswego and the Lookout/WWZ zones and possibly linked to the geophysical anomalies in this area.

Results of Operations for the nine months ended June 30, 2022 and 2021

Consolidated Results

Our consolidated net loss for the three months ended June 30, 2022 was $1,450,949, compared to a consolidated net loss of $1,263,259 for the three months ended June 30, 2021. Total exploration expenses of $896,465 were recorded on our statement of operations for the three months ended June 30, 2022, compared with $427,908 for the three months ended June 30, 2021. The year-over-year increase in net loss is due to the significant increase in exploration expenses made possible by the infusion of cash that occurred in May 2022, an increase in professional fees related to that financing, and increases in foreign exchange losses resulting from our private placement of May 2022, offset by reduced share-based compensation during the three months ended June 30, 2022 compared with June 30, 2021. Insurance expense was somewhat higher in the comparative period due to the normal increases the industry is experiencing.

Our consolidated net loss for the nine months ended June 30, 2022 was $3,772,895, compared to a consolidated net loss of $3,332,531 for the nine months ended June 30, 2021. Total exploration expenses of $2,696,797 were recorded on our statement of operations for the nine months ended June 30, 2022, compared with $1,827,980 for the nine months ended June 30, 2021. The year-over-year increase in net loss is due to the significant increase in exploration expenses made possible by the infusion of cash that occurred near the close of fiscal year 2020, exercises of warrants during the period and the May 2022 private placement, and increases in foreign exchange losses resulting from our private placement of May 2022. These were offset by a decrease in share-based compensation with no new stock options issued to directors, officers and consultants. Insurance expense was somewhat higher in the first nine months of 2021 due to the normal increases the industry is experiencing.

Subject to adequate funding in 2022, we expect to continue to incur exploration expenses for the advancement of our Eureka Project.

Financial Condition and Liquidity

At June 30, 2022, we had assets of $18,637,789, consisting of cash of $4,182,930, property, mineral rights and equipment of $13,875,085, net of depreciation, reclamation bonds of $528,643, and prepaid expenses, deposits and other assets in the amount of $51,131.

On June 30, 2022, we had total liabilities of $634,015 and total assets of $18,637,789. This compares to total liabilities of $570,144 and total assets of $17,716,406 on September 30, 2021. As of June 30, 2022, our liabilities consist of $122,681 for asset retirement obligations, $270,991 of senior unsecured note payable – related party, and $177,071 of trade payables and accrued liabilities and $63,272 of interest and expenses payable to related parties. Of these liabilities, $511,334 are due within twelve months. The liabilities compared to September 30, 2021, have changed as a result of a slight decrease in accrued payables offset by increases in accrued liabilities and accrued interest - related party. The increase in total assets was due to the increase in -cash from warrant exercises and the May 2022 private placement, with small increases to prepaid expense and other assets and mineral rights.

On June 30 2022, we had working capital of $3,717,027 and stockholders’ equity of $18,003,774 compared to working capital of $3,170,019 and stockholders’ equity of $17,146,262 for the year ended September 30, 2021. Working capital experienced a favorable change because of the increase in cash associated equity infusions and an increase in accounts payable and increases in accrued expenses – related party and accrued interest - related party. These were offset somewhat by a decrease in accrued expenses.

During the nine months ended June 30, 2022, we used cash from operating activities of $3,686,561, compared to cash used of $2,715,608 for the nine months ended June 30, 2021. The use of cash from operating activities results primarily from the net loss of $3,772,895 for the nine-month period ended June 30, 2022 compared to net loss of $3,332,531 for the nine months ended June 30, 2021. Each of the comparable periods experienced significantly different non-cash effects as a result of changes in stock-based compensation. Changes to the net loss for the comparative periods are described above.

During the nine-month period ended June 30, 2022, cash of $43,947 was used by investment activities, compared with cash of $14,571 provided for the nine-month period ended June 30, 2022. During the nine months ended June 30, 2021, we paid $54,000 for mineral rights and received a refund on our reclamation bonds of $10,053, compared to at June 30, 2021, we received $78,571 for lease payments to us for company-owned mineral properties offset by $64,000 paid for mineral rights.

During the nine-month period ended June 30, 2022, $4,586,086 was provided by financing activities, compared to cash of $2,739,417 provided during the nine-month period ended June 30, 2021. For the nine-month period ended June 30, 2022, cash of $4,439,587 was provided through the sale of stock and warrants, net of issuance costs, and $146,499 was provided by the exercise of warrants. For the nine-month period ended June 30, 2021, cash of $1,788,334 was provided through the sale of stock and warrants, $617,750 provided by the exercise of warrants and $333,333 from the proceeds from stock subscriptions paid for which stock had not yet been issued.

Going Concern:

The audit opinion and notes that accompany our consolidated financial statements for the year ended September 30, 2021 disclose a ‘going concern’ qualification to our ability to continue in business. 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.

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 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.

At June 30, 2022, we had working capital of $3,717,027. We have a cash balance of $4,182,930 and $634,015 outstanding in total liabilities. As of the date of this report on Form 10-Q, we have sufficient cash to meet our normal operating commitments for the next 12 months. Therefore, we do not expect to be required to engage in financial transactions to increase our cash balance or decrease our cash obligations in the near term. However, we are an exploration company with exploration programs that require significant cash expenditures. A significant drilling program, such as those we have planned, will result in depletion of cash and return us to a position of insufficient cash to support normal operations for the following 12 months. Cash-raising efforts may include equity financings, corporate transactions, joint venture agreements, sales of assets, credit facilities or debenture issuances, or other strategic transactions.

We plan, as funding allows, to follow up on our positive drill results on our Eureka and Paiute Projects. Principally, we plan to execute drilling as part of the ongoing exploration program at Eureka. 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.

We will require additional funding and/or reductions in exploration and administrative expenditures in future periods. Given current economic 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 curtail our exploration and other expenditures while we seek alternative funding arrangements to provide sufficient capital to meet our ongoing, non-discretionary expenditures, 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

On May 2, 2022, we closed a non-brokered private placement of the Company to accredited investors at a price of $0.25 per common share. We issued 18,933,705 common shares for cash proceeds of $4,733,426. Finders fees in the amount of $293,839 and 1,016,022 Series N Warrants were paid to licensed brokers and consultants in association with the offering. The warrants have a term of 18 months and are exercisable at $0.25 per common share.

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 - Carrying Value of Property, Mineral Rights and Equipment

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 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 Target on our Eureka Project, and our Paiute 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Conclusions of Management Regarding Effectiveness of Disclosure Controls and Procedures

At the end of the period covered by this Form 10-Q, an evaluation was carried out under the supervision of 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 upon that evaluation, it was concluded that our disclosure controls were effective as of the end of the period covered by this report, to ensure that: (i) information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within required time periods specified by the Securities & Exchange Commission rules and forms, and (ii) material information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow for accurate and timely decision regarding required disclosure.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system has been designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair statement of the Company’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management has assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe that, as of June 30, 2022, the Company’s internal control over financial reporting is not effective, due to the current inability to segregate duties inherent with limited staffing.

Management’s Remediation Initiatives

Management’s remediation initiatives included implementing additional controls over cash receipt and payment transactions through reviews and approvals performed by our Chief Executive Officer and Chief Financial Officer. These detective controls significantly mitigate segregation of duties issues that exist by one person having the ability to enter payments and receipts into the accounting software, process payment and deposits into the accounting software and reconciling bank statements. The Company has three employees, and management has concluded that anticipated business growth and the accompanying expansion of staffing will improve effectiveness of the Company’s internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting in the nine months ended June 30, 2022.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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.

ITEM 1A. RISK FACTORS

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, 2021, which was filed with the SEC on December 20, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES

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 nine months ended June 30, 2022, our U.S. exploration properties were not subject to regulation by the MSHA under the Mine Act.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS.

* - Filed herewith

SIGNATURES

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.