At June 30, 2019 and 2018, the saleeffect of securities are recognized on a specific identification basis.

e.

New accounting pronouncements:

Leases - In February 2016, the FASB issued ASU No. 2016-02, “Leases.” 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 assessing the adoption of this standard’s impact on its financial statements.

Statement of cash flows – Restricted cash - In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." ASU No. 2016-18 requires that restricted cash or restricted cashCompany’s common stock equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing the adoption of this standard’s impact on its financial statements.

Compensation – Stock compensation – In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation." ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU No. 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company believes adoption of this standard will not have a material impact on its financial statements.

f.

Restricted cash – Cash that is restricted as to withdrawal or use under the terms of certain contractual arrangements, generally with regulatory agencies, is recorded inOther Assets asRestricted cash on our balance sheet.

g.

Reclassifications - Certain reclassificationswould have been made to prior periods’ balances to conform with the current period’s presentation.  These reclassifications have no effect on previously reported results from operations or net equity as previously disclosed.anti-dilutive. Accordingly, only basic EPS is presented.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

NOTE 3 – FAIR VALUE MEASUREMENTS:PROPERTY, MINERAL RIGHTS, AND EQUIPMENT:

The table below sets forth our financial assetsfollowing is a summary of property, mineral rights, and liabilities that were accounted forequipment and accumulated depreciation at fair value on a recurring basis and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category.

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Any expenses paid prior to the related services being rendered will be recorded as prepaid expenses.  At June 30, 2019 and September 30, 2018, prepaid expenses and other current assets included $125,000 related to a prepaid marketing consulting agreement, $95,759 related to land holding fees paid in June 2018respectively:

Depreciation expense for the Elder Creek property joint venture interest that the Company has agreed to acquire, with the remainder related to prepaid conference fees, prepaid insurance premiums,three- and prepaid annual exchange listing fees.nine-month periods ended June 30, 2019 and 2018, was nil and nil, respectively.

NOTE 5 – PROPERTY AND MINERAL RIGHTS:

During the three monthsyear ended JuneSeptember 30, 2018, ourthe 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 ourthe Company’s Eureka property, should be deposited. The payments had been received from a third party with whom we arethe Company is in discussions to resolve matters that had been under negotiation since wethe Company acquired the Eureka property.property in 2010. The total amount of these payments received throughfor the quarter ended June 2018 was $87,424.30, 2019 were $25,664 and $76,782 for the nine-month period ended June 30, 2019. Monthly payments in the amount of $8,326approximately $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.

ICBM SaleElder Creek property:

On May 23, 2018, we sold a participating interest in a joint venture on the ICBM Project (“ICBM”), a mineral interest located in Humboldt and Lander counties, Nevada.  The purchaser was Americas Gold Exploration, Inc. (“AGEI”) and the consideration we received for the sale was $100,000 cash, which was recorded as a decrease to mineral interests.  The total consideration also included a 0.5% net smelter return royalty on the gross production of all minerals extracted from the ICBM Project properties.  In connection with a concurrent definitive agreement with AGEI to acquire an additional joint venture interest, we decided to re-acquire this joint venture interest, now renamed as the Paiute property joint venture, as a component of the AGEI transaction.

AGEI Definitive Agreement

On May 23, 2018, weCompany executed a definitive agreement with Americas Gold Exploration, Inc. (“AGEI”)AGEI (the “Definitive Agreement”) for the purchase of interests in two joint venture ownership interests (the “JV Interests”)mineral properties in Nevada (the “Transaction”). As of June 30, 2018, we had not yet closed on the Transaction; however we expect to close on the Transaction upon completion of a financing that provides sufficient capital to meet the obligations of the two joint venture agreements for at least six months, and the receipt of final approval for the Transaction from the TSX Venture Exchange.  The JV Interestsmineral properties include the Elder Creek property joint venture withproject, 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 joint venture(formerly ICBM), with LAC Minerals (USA) LLC, a wholly owned subsidiary of Barrick Gold Corporation. Upon closing of the Transaction, we expect to beThe Company is the operator at both of these joint venture projects.

The consideration for the Transaction is expected to consistconsisted 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, (the “Consideration Warrants”), with each warrant exercisable to acquire one share of the Company’s common stock for US$0.24$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, we willthe 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) Timberlinethe Company enters into an arrangement with a funding partner for the advancement of the Elder Creek Joint Venture, or (ii) Timberline hasthe Company 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).

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

Joint Venture on Lookout Mountain Gold Project:

On June 18, 2018, weMay 9, 2019, the Company entered into an amendmenta non-binding Letter of Intent to form a joint venture (the “Agreement”) with PM & Gold Mines, Inc. (“PM&G”) for the Definitive Agreement wherein we agreed, upon closingadvanced exploration, and if determined feasible, the development of the Transaction, to reimburse AGEI forCompany’s Lookout Mountain Gold project, located on the initial paymentsouthern end of $100,000 due under the Elder Creek JV agreement.  Upon executing the DefinitiveBattle Mountain-Eureka Trend near Eureka, Nevada. A final Agreement it was our intention to pay this initial payment, but becausereceived regulatory approval from the TSX Venture Exchange had not provided final approvalon July 27, 2019, subsequent to the close of the quarter ended June 30, 2019. PM&G is a private firm incorporated in Nevada with an interest to explore and advance gold projects to production. The parties executed a binding definitive joint venture agreement (the “Definitive Agreement”) on July 3, 2019 following completion of business and technical due diligence.

The Definitive Agreement calls for the Transaction whenCompany’s partner PM&G to fund exploration and development activities in two stages for earned equity in the initial payment was due, AGEI paidproject. Timberline will contribute the initial payment,claims that constitute the Lookout Mountain project and weadjacent historic Oswego Mine area (the “Project”) to the joint venture company in exchange for its ownership position. Timberline will reimburse AGEI formanage the $100,000 payment upon TSX-V approvaljoint 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.

Subsequent to June 30, 2019, and closingconcurrent with completion of the Transaction.  Agreement, PM&G also participated in investment in a private placement in Timberline at an above-market price to acquire 4.99% of Timberline’s common shares. The placement will include the right of PM&G to maintain its position in Timberline by pro-rata participation in future financings and includes a full warrant for a period of 3 years.

On June 29, 2018, we paidStage I – Earn 51%: PM&G will earn 51% of the property holding costs for the Elder Creek property which were dueProject in consideration of incurring exploration expenditures of $6 million dollars to be paiddirected towards advance of the low-grade oxide and high-grade oxide and refractory mineralization over a two-year period. The primary focus of the expenditure will seek to McEwen Mining on or before June 30, 2018.  Given thatidentify any near-term production potential (oxide/high-grade mineralization). This exploration will also test expansion of both high-grade and oxide mineralization outside the Transaction had not closed as of June 30, 2018,defined resource. The plan and effort have been developed and agreed upon through a joint Management Committee appointed by the property holding cost payment of $95,759 was recorded as other current assets at June 30, 2018.Company and PM&G.

Talapoosa Option Agreement (Terminated)Stage II – Earn 70%:

On March 12, 2015 (the “Effective Date”), we entered into PM&G will earn a property option agreement (“Agreement”) with Gunpoint Exploration Ltd. (“Gunpoint”), which closed on March 31, 2015 and was amended on October 19, 2016 (“Amended Agreement”).  Pursuant to the Agreement, Gunpoint granted us an exclusive and irrevocable option (“Option”) to purchase a 100%70% interest in Gunpoint’s Talapoosa project (the “Project”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), Timberline has the option to participate in subsequent expenditures at the 49% level. Should Timberline determine to participate, all future costs incurred to bring the Project to production will be split on a pro-rata basis.

If Timberline should choose not to participate, the Company 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, Timberline may elect to participate in subsequent expenditures at the 30% level or may elect one of the following options:

Reduce its interest to a 10% net profit interest (“NPI”) or a 2% net smelter royalty (“NSR”), or

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

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.

NOTE 5 – PROPERTY AND MINERAL RIGHTS (continued):

Pursuant to the Amended Agreement, during the Amended Option Period, we were required to pay $2 million and issue one million common shares of the Company by March 31, 2018.  We did not make the payment of $2 million nor issue the one million common shares of the Company by March 31, 2018, and, therefore, the Amended Agreement was terminated per its terms on March 31, 2018.  As a result, on March 31, 2018, we wrote off our entire investment of $3,231,700.  

NOTE 64 – RELATED-PARTY TRANSACTIONS:

In connection with the definitive agreementDefinitive 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 ourthe Company’s Board of Directors on June 21, 2018. Mr. McDowell is the majority owner of AGEI and will beis 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 inNote 3 – Property, Mineral Rights and Equipment.

During the quarter ended June 30,December 31, 2018, the Company granted 200,000Board of Directors agreed to issue 100,000 stock options to acquire shares of common stock of the Company to Mr. McDowell and Mr. Mathewson, our newlyTed R. Sharp, the Company’s Chief Financial Officer, appointed Directors.to the position in September of 2018. The options were granted by our Board of Directors and werefair valued at $16,000$5,000 based upon the closing price of ourthe Company’s shares of common stock on the date the options were granted.at December 31, 2018 (See Note 7 for valuation assumptions).

During the quarter ended June 30,December 31, 2018, two executive officers participated in a private placement offering of Units of the Company, purchasing in the aggregate, 250,0001,062,500 units for total proceeds of $20,000.  Subsequent to the closing of the private placement offering of Units, one participating investor has been appointed to the Company’s Board of Directors.  He purchased 625,000 Units for proceeds of $50,000.$85,000. Each Unit was priced at $0.08 and consisted of one share of common stock of the Company and one common share purchase warrant (each a “Warrant”),Class E Warrant, with each Warrantwarrant 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 quarters ended March 31, 2019 and June 30, 2019, three executive officers participated in private placement offerings of Units of the Company, purchasing 1,100,000 units for total proceeds of $88,000. 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 and a person who has subsequently been appointed to the Company’s Board of Directors,in these private placements was done at the same terms as the other investors in the private placement offering.offerings. The Audit Committee of the Board of Directors approved the insiders’ participation in the private placement.        placements.

NOTE 7 – ACCRUED EXPENSES:

As of June 30, 2018 and September 30, 2017, we had accrued $7,939 and $9,923 in expenses, respectively.  

The components of the accrued expenses are:   

NOTE 85 – PAYMENT OBLIGATION:

On September 12, 2017, wethe 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, wethe 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 June 30, 2019), as such rate may change from time to time, plus 3% per annum. WeThe Company agreed to pay the Creditor 5% of the gross proceeds of any funds raised, whether thoughthrough equity sales, Payment Obligation,borrowings or sales of assets. If the gross proceeds of any equity financing are at least $1 million, then wethe Company agreed to also commence monthly installment payments of $10,000 until the Payment Obligation is paid.

During the three monthsquarter and nine months ended June 30, 2018, we2019, the Company paid $20,000 and $63,213, respectively,$30,000 (5% of the $600,000 private placement) to the Creditor.  DuringCreditor, which included $9,727 of interest. The balance of the threePayment Obligation at June 30, 2019 and September 30, 2018 was $178,533 and $198,806, respectively. At June 30, 2019, an additional $4,000 is due and payable (5% of the $80,000 private placement) to the Creditor, which will be applied to accrued interest payable when paid.

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.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

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 $19,462 amortized to interest expense in the quarter ended June 30, 2019 and $59,277 for the nine months ended June 30, 2019. At June 30, 2019, the note payable was $255,709, net of the unamortized discount of $44,291.

On May 8, 2019, the Company entered into an additional binding loan agreement and promissory note with William Matlack. Under the loan agreement, the Lender loaned the Company $250,000 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 November 7, 2020, but may be repaid early without penalty.

Pursuant to the terms of the loan agreement, the Company issued to the Lender 3,543,600 non-transferrable Series I Warrants to purchase common shares of the Company. The exercise price of the warrants is $0.07, with a term of eighteen months, 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 $94,300, 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 $6,174 amortized to interest expense in the quarter and nine months ended June 30, 2018, $13,468 and $51,194, respectively,2019. At June 30, 2019, the note payable was applied to principal$161,874, net of the Payment Obligation and $6,532 and $12,019, respectively, was applied to interest.  Interest on the Payment Obligation, in the amountunamortized discount of $1,332, was included in accrued expenses at June 30, 2018.  The obligation to commence monthly installment payments of $10,000 until the Payment Obligation is paid has not yet been triggered because we have not completed a financing with gross proceeds of at least $1 million.$88,126.

NOTE 97 – COMMON STOCK, WARRANTS AND PREFERRED STOCK:

Common Shares - Private Placement

On May 8,October 18, 2018, weand 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 $0.08 per Unit for grossnet proceeds of $600,000 (the "May 2018 Offering").$600,000. Each Unit in the May 2018 Offeringoffering consisted of one share of common stock of the Company and one common share purchase warrant (each a “Warrant”),Class E Warrant, with each Warrantwarrant 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 of April 30,October 29, 2021.

On December 21, 2017, weMarch 29, 2019, the Company closed the sale of 2,000,000 Units, the first tranche of a private placement offering of 2,880,867up to 7,500,000 Units of the Company at a price of $0.30$0.08 per Unit, for grosstotal proceeds of $864,260 (the "December 2017 Offering").$160,000. Each Unit inof the December 2017 Offering consistedoffering consists of one share of common stock of the Company and one common share purchase Class H warrant, (each a “Warrant”), with each Warrantwarrant exercisable to acquire an additional share of common stock of the Company at a price of $0.45$0.14 per share until March 30, 2022. As a result, 2,000,000 shares of the warrant expiration dateCompany’s common stock and 2,000,000 Warrants were issued.

On June 14, 2019, the Company closed the sale of October 31, 2022.

During1,000,000 Units, the three months ended June 30, 2018, we soldsecond tranche of a private placement offering of up to 7,500,000 Units of the Company at a price of $0.08 per unitUnit, for gross and nettotal proceeds of $600,000 as no finder’s fees$80,000. Each Unit of the offering consists of one share of common stock of the Company and one common share purchase 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 30, 2022. As a result, 1,000,000 shares of the Company’s common stock and 1,000,000 Warrants were paid.issued.

Warrants

During the nine monthsnine-month period ended June 30, 2018, we closed the sale of two private placement offerings.  In the aggregate, we sold a total of 10,380,867 Units at prices of $0.30 per unit (as to 2,880,867 units) and $0.08 per unit (as to 7,500,000 units) for gross proceeds of $1,464,260 and net proceeds, net of offering costs, of $1,421,767.     

Warrants

During the nine months ended June 30, 2018, 10,380,8672019, 18,843,600 warrants were issued, 7,500,000, 2,000,000 and 800,000 pursuant to two separatethe private placement offerings.  Noofferings, 3,543,600 issued pursuant to the Senior unsecured note payable, and another 5,000,000 warrants expired duringissued to AGEI under the three or nine months ended Juneterms 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. The fair value of the 3,543,600 warrants issued with a Senior unsecured note payable was $151,400 (with a relative fair value of $94,300) on the date of issuance. The fair value of warrants was determined with a Black-Scholes option-pricing model. The assumptions used to calculate fair values are noted in the following table:

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018.  At June 30, 2018, there were 9,960,006 warrants outstanding with an exercise2019 (Unaudited)

On May 31, 2019; 8,000,0002019, 9,960,006 3-year Class A warrants outstanding with an exercise price of $0.40 per share that expire on January 31, 2020; 2,880,867expired. There were 45,489,967 and 36,606,373 warrants outstanding with an exercise price of $0.45 that expire on October 31, 2022; and 7,500,000 warrants outstanding with an exercise price of $0.14 that expire on April 30, 2021.  In aggregate, as of June 30, 2019 and September 30, 2018, there were 28,340,873respectively. The warrants outstanding at aexpire from January 31, 2020 through March 22, 2022. The weighted average exercise price was $0.21 and $0.26 as of $0.284.June 30, 2019 and September 30, 2018, respectively.

Preferred Stock

We areThe Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value. OurThe 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 June 30, 2018.2019.

NOTE 108 – STOCK-BASED AWARDS:

During the three monthsquarter ended June 30,December 31, 2018, 200,000 stockthe 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 of $0.10 and a five-year term where grantedequal to new directors.  All of the awarded stock options vested immediately.  The fair value of allthe Company’s stock at the date of the options that were granted and vested during the three months ended June 30, 2018 was $16,000 ($0.08 per option).  grant.

During the three monthsquarter ended June 30, 2017, noDecember 31, 2018, the Board of Directors agreed to issue 100,000 stock options were granted; however 62,500 options that were granted on March 15, 2017 vested perto the quarterly vesting schedule.Chief Financial Officer. The fair value of the options that vested during the three months ended June 30, 2017 was $15,000.

During the nine months ended June 30, 2018, 1,800,000 stock options with an average weighted exercise price of $0.16 and a five-year term where granted to employees and directors.  All of the awarded stock options vested immediately.  The fair value of all of the options that vested during the nine months ended June 30, 2018 was $223,000, including the fair value ($15,000) of 62,500 options that were granted on March 15, 2017 and vested on December 15, 2017.  

During the nine months ended June 30, 2017, 250,000 stock options with an exercise price of $0.33 and a three-year term where granted to a consultant.  The awarded stock options vested quarterly with 25% of the options vesting each quarter beginning on March 15, 2017.  The fair value of the options that vested during the nine months ended June 30, 2017 was $30,000.

NOTE 10 – STOCK-BASED AWARDS (continued):

The cost of options granted to employees is recorded as salaries and benefits, and the cost of options granted to directors and consultants is recorded as other general and administrative expenses.  The total compensation cost of options vested under the plan, charged against operations, is included in the consolidated statements of operations as follows:

The value of the optionsoption awards granted during the three months and nine monthsquarter ended June 30,December 31, 2018 was estimated$5,000 and measured on the date of grantthe issuance with a Black-Scholes option-pricing model using the assumptions noted in the following table:

During the nine-month period ended June 30, 2019, 100,000 options were terminated as a result of the resignation of a member of the Board of Directors.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

The following is a summary of our options issued under the Amended 2005 Equity Incentive Plan and the 2015 Stock and Incentive Plan:outstanding at June 30, 2018:

The aggregate of options exercisable as of June 30, 2018 had an intrinsic value of $4,000,nil, based on the closing price of $0.12$0.17 per share of ourthe Company’s common stock on June 30, 2018.

The following is a summary of options issued and outstanding at June 30, 2019:

The aggregate of options exercisable as of June 30, 2019 had an intrinsic value of nil, based on the closing price of $0.08 per share of the Company’s common stock on June 28, 2019.

NOTE 119 – COMMITMENTS AND CONTINGENCIES:

Mineral Exploration

In addition to the commitment we have relating to our purchase of joint venture interests from AGEI (see Note 5) we have the following commitments and contingencies:

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

Pursuant to the Amended Option Agreement at Talapoosa (see Note 5), we had an obligation to make a payment of $2 million by March 31, 2018, which payment was not made and, therefore, the Amended Option Agreement was terminated per its terms on March 31, 2018.  We have no future obligations related to the Amended Option Agreement at Talapoosa.  

We payThe Company pays federal and county claim maintenance fees on unpatented claims that are included in ourthe Company’s mineral exploration properties. Should wethe Company continue to explore all of ourthe Company’s mineral properties, we expectit expects annual fees to total approximately $158,000$255,500 per year in the future.future, of which $105,778 is for the two joint venture mineral property interests (See Note 3).

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

While we recognize that we will not be able to meet these payments with our current cash balances, we do expect to make these payments with proceeds from expected capital raises.  We expect to obtain additional capital through refunds of excess restricted cash held for exploration bonds and financing transactions such as equity investments, asset sales, joint ventures, debt facilities, or other types of strategic arrangements.JUNE 30, 2019 (Unaudited)

Real Estate Lease Commitments

As of June 30, 2018,2019, the Company has no real estate lease commitments.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.

Total office Lease expense for mineral exploration and real estate lease and rental expense from continuing operations is included in the following line items in the consolidated statementsConsolidated Balance Sheets and Consolidated Statements of operations and comprehensive income (loss):Operations:

Employment Agreements

The Company has employment agreements with two executive employees that require certain termination benefits and payments in defined circumstances.

NOTE 1210 – SUBSEQUENT EVENTS:

On July 30, 2018, we11, 2019, the Company entered into a binding commitment letter (the “Loan Agreement”)the Definitive Agreement to form the joint venture with PM & Gold Mines, Inc. (“PM&G” and promissory note (the “Note”)together with William Matlack (“Lender”).  Under the Loan Agreement, the Lender purchased from Timberline, the principal amount of US$300,000“JV Partners”) whereby the JV Partners formed a limited liability company to conduct operations on the Company’s Lookout Mountain Project in Nevada (the “Principal Sum”“Project”) of senior unsecured notespursuant to a limited liability company agreement (the “Notes”“Agreement”), with the Principal Sum bearing interest at an annual rate of 18%, compounded monthly. The loan is unsecured and the Principal Amount and accrued interest will become due for repayment on January 20, 2020, but may be repaid early without penalty. The Lender is an arm’s length party to the Company.  Amounts drawn under the Loan Agreement will be used for exploration expenditures, annual property holding costs, and working capital requirements of the Company.

. Pursuant to the termsAgreement, PM&G can earn an initial 51% interest in the project, which is located on the southern end of the LoanBattle Mountain-Eureka Trend, by expending $6 million on exploration and development over a 2-year period. 

In connection with the Agreement the Company issued to the Lender 3,265,500 non-transferrable common share purchase warrants of the Company (the “Warrants”), which is equal to 100% warrant coverage of the Principal Sum, determinedas approved by dividing the Principal Sum by the Company’s last closing share price on the TSX Venture Exchange, (CND$0.12)further to Timberline’s February 8, 2019 news release announcing a $500,000 non-brokered private placement of Timberline units at a price of $0.08 per unit (the “Offering”), convertedPM&G has subscribed for a 4.99% ownership position in the Company under the Offering. Pursuant to U.S. dollars, prior toadditional Offering subscriptions received, the effective dateCompany closed the Offering on a fully subscribed basis following TSX Venture Exchange approval of the LoanOffering and Agreement. The exercise priceTotal shares issued under the Agreement was 3,367,441, with a like number of the Warrants is US$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 morewarrants, for cash proceeds of our outstanding common shares.$269,395.

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.

The followingThis 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 ourthe accompanying unaudited condensed interim consolidated financial statements as at and forrelated notes. The discussion and analysis of the threefinancial condition and nine months ended June 30, 2018 andresults of operations are based upon the related notes thereto,unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted accounting principles in the United States (“U.S. GAAP”). This discussion and analysis contains forward-lookingof America. The preparation of financial statements and forward-looking information that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements and information as a result of many factors, including, but not limited to, those set forth elsewhereconformity with accounting principles generally accepted in this Quarterly Report on Form 10-Q. See section heading “Note Regarding Forward-Looking Statements” below.

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the United States Exchange Act of 1934, as amended,America requires the Company to make estimates and “forward-looking information” withinassumptions that affect the meaningreported amounts of applicable Canadian securities legislation, collectively “forward-looking statements.”  Such forward-looking statements concern our anticipated resultsassets and developments in our operations in future periods, planned explorationliabilities, disclosure of any contingent liabilities at the financial statement date and developmentreported amounts of our properties, plans related to our businessrevenue 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 mattersassumptions that may occur in the future.  These statements relateCompany believes to analyses and other information thatbe reasonable under the circumstances. Actual results are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.  These statements include, but are not limited to, comments regarding:

·the establishment and estimates of mineralization and reserves;

·the grade of mineralization and reserves;

·anticipated expenditures and costs in our operations;

·planned exploration activities and the anticipated timing and outcomes of such exploration activities;

·planned production of technical reports, economic assessments, and feasibility studies on our properties;

·plans and anticipated timing for obtaining permits and licenses for our properties;

·expected future financing, strategic and other transactions and the anticipated outcomes;

·plans and anticipated timing regarding production dates;

·anticipated gold and silver prices;

·anticipated liquidity to meet expected operating costs and capital requirements;

·our ability to obtain financing to fund our estimated expenditure and capital requirements; and

·factors expected to impact our results of operations

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements.  Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or resultslikely to differ from those expressedestimates under different assumptions or implied byconditions, but the forward-looking statements, including, without limitation:

·risks related toCompany does not believe such differences will materially affect our limited operating history;

·risks related to our ability to continue as a going concern;

·risks related to our historyconsolidated financial position or results of losses and our expectation of continued losses;

·risks related to our properties being inoperations. Critical accounting policies, the exploration or, if warranted, development stage;

·risks related to our bringing our projects into production;

·risks related to our mineral operations being subject to government and environmental regulations;

·risks related to future legislation and administrative changes to mining laws;

·risks related to future legislation regarding climate change

·risks related to our ability to obtain additional capital for exploration or to develop our reserves, if any;

·risks related to land reclamation requirements and costs;

·risks related to mineral exploration and development activities being inherently hazardous;

·risks related to our insurance coverage for operating risks;

·risks related to cost increases for our exploration and development projects;

·risks related to a shortage of skilled personnel, equipment, & supplies adversely affecting our ability to operate;

·risks related to mineral resource and economic estimates;

·risks relatedpolicies the Company believes are most important to the fluctuationpresentation of prices for preciousits consolidated financial statements and base metals, such as gold, silverrequire the most difficult, subjective and copper;complex judgments are outlined below in “Critical Accounting Policies” and have not changed significantly.

·risks related to the competitive industry of mineral exploration;Corporate Overview

·risks related to our title and rights in our mineral properties;

·risks related to integration issues with acquisitions;

·risks related to our common stock trading on the Over-the-Counter markets

·risks related to joint ventures and partnerships;

·risks related to potential conflicts of interest with our management;

·risks related to our dependence on key management;

·risks related to our Lookout Mountain, Windfall, Seven Troughs, and other acquired growth projects;

·risks related to our potential acquisition of joint venture interests in the Paiute and Elder Creek projects;