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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

Contents

Page 

FINANCIAL STATEMENTS:

Consolidated balance sheets4 

Consolidated statements of operations5 

Consolidated statements of stockholders’ equity6

Consolidated statements of cash flows67 

Notes to consolidated financial statements78 - 1417 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018JUNE 30, 2019 (Unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS:

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

Basis of Presentation - The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three-month periodthree and nine-month periods ended December 31, 2018June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019.

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

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

b.New Accounting Pronouncements -In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of implementing this update on the consolidated financial statements.statements for its fiscal year beginning October 1, 2019. 

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

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018JUNE 30, 2019 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):

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

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

e.Royalties – Royalty payments received on properties are offset to Property and mineral rights to the extent that basis in those properties inis available to do so. When basis in not available, royalties are recognized as income on the Consolidated Statements of Operations. Royalties received during the nine months and quarter ended December 31, 2018June 30, 2019 were offset to property basis. 

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

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

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

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

The carrying amounts of financial instruments, including loanssenior unsecured notes payable, approximate fair value at December 31, 2018June 30, 2019 and September 30, 2018.

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

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

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

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

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

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

p.Translation of Foreign Currencies – All amounts in the financial statements are presented in US dollars, and the US dollar is the Company’s functional currency. The Company has a Canadian subsidiary, but this subsidiary has no operations, assets, or liabilities in Canada for the quartersthree- and nine-month periods ended December 31,June 30, 2019 and 2018, and 2017, respectively. The US-based operations of the Company incur certain expenses in Canada, and the foreign translation and transaction gains and losses relating to such expenses incurred in Canada have been included in the Company’s net loss as a component of other income (expense). 

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

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

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

The dilutive effect of convertible and outstanding securities as of June 30, 2019 and 2018 is as follows:

At June 30, 2019 and 2018, the effect of the Company’s common stock equivalents would have been anti-dilutive. Accordingly, only basic EPS is presented.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018JUNE 30, 2019 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued):

The dilutive effect of convertible and outstanding securities as of December 31, 2018 and 2017 is as follows:

At December 31, 2018 and 2017, 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 December 31, 2018June 30, 2019 and September 30, 2018, respectively:

Depreciation expense for the quartersthree- and nine-month periods ended December 31,June 30, 2019 and 2018, and 2017, was nil and nil, respectively.

During the year ended September 30, 2018, the Company’s management and Board of Directors determined that certain payments received by the Company from a party of interest in two of the Company’s leases beginning in August 2017, which had been held and not recorded as royalty income or deposited pending an expected resolution of circumstances relating to two historic leases at the Company’s Eureka property, should be deposited. The payments had been received from a third party with whom the Company is in discussions to resolve matters that had been under negotiation since the Company acquired the Eureka property in 2010. The total amount of these payments received for the quarter ended December 31, 2018 was $25,594.June 30, 2019 were $25,664 and $76,782 for the nine-month period ended June 30, 2019. Monthly payments in the amount of approximately $8,500 are expected to continue to be received, recorded and deposited until the situation concerning the leases is resolved. These receipts are recorded as a reduction to property, mineral rights, and equipment.

Elder Creek property:

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 (Unaudited)

NOTE 3 – PROPERTY, MINERAL RIGHTS, AND EQUIPMENT (continued):

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

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

Joint Venture on Lookout Mountain Gold Project:

On May 9, 2019, the Company entered into a non-binding Letter of Intent to form a joint venture (the “Agreement”) with PM & Gold Mines, Inc. (“PM&G”) for the advanced exploration, and if determined feasible, the development of the Company’s Lookout Mountain Gold project, located on the southern end of the Battle Mountain-Eureka Trend near Eureka, Nevada. A final Agreement received regulatory approval from the TSX Venture Exchange on 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 Company’s partner PM&G to fund exploration and development activities in two stages for earned equity in the project. Timberline will contribute the claims that constitute the Lookout Mountain project and adjacent historic Oswego Mine area (the “Project”) to the joint venture company in exchange for its ownership position. Timberline will manage the joint venture at least through Stage I of investment. PM&G shall retain the right to manage all Stage II activities with or without Timberline’s participation.

Subsequent to June 30, 2019, and concurrent with completion of the 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.

Stage I – Earn 51%: PM&G will earn 51% of the Project in consideration of incurring exploration expenditures of $6 million dollars to be directed 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 identify any near-term production potential (oxide/high-grade mineralization). This exploration will also test expansion of both high-grade and oxide mineralization outside the defined resource. The plan and effort have been developed and agreed upon through a joint Management Committee appointed by the Company and PM&G.

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

Timberline Option to Participate 51- 49%: – When the $6 million expenditure is reached (Stage I), 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 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 4 – 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 the Company’s Board of Directors on June 21, 2018. Mr. McDowell is the majority owner of AGEI and is the beneficial owner of the majority of the consideration for the Transaction. Therefore, he is the beneficial owner of the majority of the 5,000,000 Class G warrants issued to AGEI as described inNote 3 – Property, Mineral Rights and Equipment.

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

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

During the 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 in these private placements was done at the same terms as the other investors in the private placement offering.offerings. The Board of Directors approved the insiders’ participation in the private placement.  placements.

NOTE 5 – PAYMENT OBLIGATION:

On September 12, 2017, the Company entered into an agreement (the “Payment Agreement”) with a creditor (the “Creditor”) to pay by way of a payment plan an existing obligation of $250,000 (the “Payment Obligation”) related to a potential corporate transaction in 2015 that was not completed.

Pursuant to the Payment Agreement, the Company agreed to pay the Payment Obligation to the Creditor, including interest, on or before September 12, 2020. Interest accrues on the unpaid principal amount of the Payment Obligation at the Wells Fargo Bank prime rate (5%(5.25% at SeptemberJune 30, 2018)2019), as such rate may change from time to time, plus 3% per annum. The Company agreed to pay the Creditor 5% of the gross proceeds of any funds raised, whether through equity sales, payment obligation,borrowings or sales of assets. If the gross proceeds of any equity financing are at least $1 million, then the Company agreed to also commence monthly installment payments of $10,000 until the Payment Obligation is paid. The balance of the Payment Obligation was $198,806 at both December 31, 2018 and September 30, 2018.

During the quarter and nine months ended December 31, 2018, the Company made no payments to the Creditor. The obligation to commence monthly installment payments of $10,000 until the Payment Obligation is paid has not yet been triggered because the Company has not completed a financing with gross proceeds of at least $1 million. Subsequent to the end of the quarter,June 30, 2019, the Company paid $30,000 (5% of athe $600,000 private placement) to the Creditor, which included $9,728$9,727 of interest. The balance of the Payment 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.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 (Unaudited)

NOTE 6 – SENIOR UNSECURED NOTE PAYABLEPAYABLE::

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

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 common share purchase 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 $20,071$19,462 amortized to interest expense in the quarter ended December 31, 2018.June 30, 2019 and $59,277 for the nine months ended June 30, 2019. At December 31, 2018,June 30, 2019, the note payable was $216,503,$255,709, net of the unamortized discount of $83,497.$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, 2019. At June 30, 2019, the note payable was $161,874, net of the unamortized discount of $88,126.

NOTE 7 – COMMON STOCK, WARRANTS AND PREFERRED STOCK:

Common Shares - Private Placement

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

On March 29, 2019, the Company closed the sale of 2,000,000 Units, the first tranche of a private placement offering of up to 7,500,000 Units of the Company at a price of $0.08 per Unit, for total proceeds of $160,000. 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, 2,000,000 shares of the Company’s common stock and 2,000,000 Warrants were issued.

On June 14, 2019, the Company closed the sale of 1,000,000 Units, the second tranche of a private placement offering of up to 7,500,000 Units of the Company at a price of $0.08 per Unit, for total proceeds of $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 issued.

Warrants

During the quarternine-month period ended December 31, 2018, 12,500,000June 30, 2019, 18,843,600 warrants were issued, a total of 7,500,000, 2,000,000 and 800,000 pursuant to the private placement offering,offerings, 3,543,600 issued pursuant to the Senior unsecured note payable, and another 5,000,000 warrants issued to AGEI under the terms of the Elder Creek purchase of mineral rights (See Note 3).

The fair value of the 5,000,000 warrants issued in connection with the purchase of mineral rights was estimated at $176,000 on the date of issuanceissuance. 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:

There were 49.106,373 and 36,606,373 warrants outstanding as of December 31, 2018 and September 30, 2018, respectively.

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018JUNE 30, 2019 (Unaudited)

NOTE 7 – COMMON STOCK, WARRANTS AND PREFERRED STOCK (continued):

On May 31, 2019, 9,960,006 3-year Class A warrants expired. There were 45,489,967 and 36,606,373 warrants outstanding as of June 30, 2019 and September 30, 2018, respectively. The warrants expire from January 31, 2020 through March 22, 2022. The weighted average exercise price was $0.21 and $0.26 as of June 30, 2019 and September 30, 2018, respectively.

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value. The Company’s board of directors is authorized to issue the preferred stock from time to time in series, and is further authorized to establish such series, to fix and determine the variations in the relative rights and preferences as between series, to fix voting rights, if any, for each series, and to allow for the conversion of preferred stock into common stock. There is no preferred stock issued as of December 31, 2018.June 30, 2019.

NOTE 8 – STOCK-BASED AWARDS:

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

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

During the quarternine-month period ended December 31, 2018,June 30, 2019, 100,000 options were terminated as a result of the resignation of a member of the Board of Directors.

The following is a summary of options issued and outstanding at December 31, 2017:

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018JUNE 30, 2019 (Unaudited)

NOTE 8 – STOCK-BASED AWARDS (continued):The following is a summary of options issued and outstanding at June 30, 2018:

The aggregate of options exercisable as of December 31, 2017June 30, 2018 had an intrinsic value of nil, based on the closing price of $0.23$0.17 per share of the Company’s common stock on December 31, 2017.June 30, 2018.

The following is a summary of options issued and outstanding at December 31, 2018:June 30, 2019:

The aggregate of options exercisable as of December 31, 2018June 30, 2019 had an intrinsic value of nil, based on the closing price of $0.06$0.08 per share of the Company’s common stock on December 31, 2018.June 28, 2019.

NOTE 9 – COMMITMENTS AND CONTINGENCIES:

Mineral Exploration

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

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

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019 (Unaudited)

Real Estate Lease Commitments

As of December 31, 2018,June 30, 2019, the Company has real estate lease commitments for certain mineral properties totaling $82,000. The Company’s office in Coeur d’Alene, Idaho and its facilities in Eureka, Nevada are rented on a month-to-month basis.

Commitments Lease expense for mineral exploration and real estate lease expense is included in the following line items in the Consolidated Balance Sheets and Consolidated Statements of Operations:

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 (Unaudited)

NOTE 10 – SUBSEQUENT EVENTS:

Subsequent

On July 11, 2019, the Company entered into the Definitive Agreement to form the joint venture with PM & Gold Mines, Inc. (“PM&G” and together with Timberline, the “JV Partners”) whereby the JV Partners formed a limited liability company to conduct operations on the Company’s Lookout Mountain Project in Nevada (the “Project”) pursuant to a limited liability company agreement (the “Agreement”). Pursuant to the Agreement, PM&G can earn an initial 51% interest in the project, which is located on the southern end of the quarter, the Company paid $30,000 (5% ofBattle Mountain-Eureka Trend, by expending $6 million on exploration and development over a $600,000 private placement) to the Creditor, which included $9,728 of interest.2-year period. 

OnIn connection with the Agreement as approved by the TSX Venture Exchange, further to Timberline’s February 5,8, 2019 the Company announcednews release announcing a $500,000 non-brokered private placement offering of 6,250,000 Units of the CompanyTimberline units at a price of $0.08 per Unitunit (the “Offering”), PM&G has subscribed for neta 4.99% ownership position in the Company under the Offering. Pursuant to additional Offering subscriptions received, the Company closed the Offering on a fully subscribed basis following TSX Venture Exchange approval of the Offering and Agreement. Total shares issued under the Agreement was 3,367,441, with a like number of warrants, for cash proceeds of $500,000, with an over-allotment of up to $100,000, or an additional 1,250,000 Units. Each Unit in the offering consisted of one share of common stock of the Company and one Class H Warrant, with each warrant exercisable to acquire an additional share of common stock of the Company at a price of $0.14 per share until the warrant expiration date.$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.

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

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

Corporate Overview

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

Eureka Project

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

Elder Creek Project

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

Nevada, 8 miles west-northwest of Battle Mountain in Lander and Humboldt Counties immediately west of Battle Mountain (Figure 1). The project lies within the Battle Mountain mining district, covers approximately 9,600 acres (15 miles square) and includes 583 unpatented lode mining claims.

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

Figure 1. Elder Creek Project Location

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

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

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

Other Projects / Properties

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

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

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

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

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

Mineral Exploration

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

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

Elder Creek Project:

Timberline’s Elder Creek and adjacent Paiute copper-gold properties lie within the prolific Battle Mountain District of Nevada, approximately 11 miles (18 km) north of Newmont’s Phoenix mining complex.complex (Figure 1). Data compiled from over 40-plus years of exploration on the property documents only shallow, historic drilling within a pronounced magnetic low considered to be the core of a large porphyry copper-gold hydrothermal system. Furthermore, only shallow drilling occurred along the north and northeastern magnetic zone and primarily targeted gold. Geologic and geophysical characteristics and rock geochemical sampling results evident at Elder Creek (see press release dated June 18, 2018 at http://timberlineresources.co/press-releases/) are common to major porphyry copper deposits.

The Elder Creek Project, which covers a claim group of approximately 39 square kilometers (km), demonstrates geologic, geochemical, and geophysical characteristics common to major porphyry copper-gold deposits. The core of the Elder

Creek porphyry target covers approximately 4.5 square km, and has multiple intrusive phases which form two granodiorite porphyry centers within altered Harmony Formation arkosic sandstone and shale. The intrusive rocks are similar in age to those at Newmont’s Phoenix gold-copper mine located 18 km (11 miles) to the south. The porphyry core of the system is characterized by intense quartz veining and elevated copper and molybdenum values in rock and soil samples, and is flanked by proximal potassic alteration and distal biotite-pyrite-pyrrhotite hornfels. It forms a pronounced magnetic low that is ringed by a strongly magnetic “donut” high of hornfels. Large areas of gold-copper veining occur within the hornfels to the south and east of the porphyry core, and copper oxide is exposed in outcrop immediately peripheral to the core.

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

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

Table 1. Summary of Elder Creek 2018 7 2019 Drilling Results

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

WithIn follow-up to successful drilling at the exploration success to dateinitial two sites at Elder Creek, we have contracted Zonge Geophysics of Reno, Nevada to complete a 10 kman Induced Polarization (IP)/Polarization/Resistivity (“IP”) survey at Elder Creek.(Figure 2). The survey iswas designed to characterize the rocks for signatures associated with concentration of sulfides (IP), associated silicification (Resistivity) as hydrothermal alteration, and identification of major fault zones within the project area. The project is fully permitted with the BLM for additional drilling, which is planned after completion of the geophysical work.

As reported in Form 8-K filed with the SEC on January 8, 2019, during the quarter ended December 31, 2108, we completed an Induced Polarization /Resistivity (IP)the IP geophysical survey (Figure 1)2) at the Elder Creek Project in Nevada’s Battle Mountain mining district. The IP survey was completed in follow-up to drilling of core hole CCEC18-02 which intersected 14.2 meters (m) of 1.82% Cu, 0.31% Mo, 0.126 g/t Au, and 25.5 g/t Ag (Table 1) and, one kilometer to the northwest, reverse circulation (RC) drill hole RCEC18-01 which intersected 33.5 m of 0.44% Cu and 5.0 g/t Ag (see press release dated November 26, 2018 at http://timberlineresources.co/press-releases/). TheA strong IP anomaly was identified, the edge of which appears to have been intersected in drill hole CCEC18-02 at a depth (Figure 2) concurrent3) where coincident with the best mineralization in the core hole. The RC hole was terminated above the IP anomaly due to drilling difficulties. Key conclusions of the IP survey include:

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

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

Figure 1. Elder Creek Project Area Geology, Alteration Zoning, and IP Anomaly

Table 1. Summary of Elder Creek 2018 Drilling Results

IP/Resistivity Survey

Zonge Geophysics of Reno, Nevada completed 6 lines (Figure 1) with approximately 13 km ofthe IP survey using the dipole-dipole method which is effective in mapping subsurface concentrations of metallic sulfide minerals. The method was selected with generally 400-meter line spacing and 200-meter dipole separation to give a subsurface survey depth limit of approximately 500 meters. The first survey line was completed over core hole CCEC18-02 to calibrate the geophysical response to sulfide mineralization intersected in the drill hole. Parallel survey lines were positioned to overlap the zoned porphyry-style stockwork quartz veins and hydrothermal biotite mineral alteration which help define the large size of the system.

The IP data were processed by Zonge with a 2D2-dimensional Smooth-Model Inversion and presented in sequential depth sections (Figure 2)3) along the survey lines (Figure 1)2). The priority anomaly, as defined by high chargeability, extends from near surface to at least 500 m depth in places over a trend length of 1,600 m. The anomalies are generally open beyond the depth extent allowed by data processing.

Figure 2.3. Elder Creek IP Chargeability along Vertical Sections

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

The abundance of iron and sulfur in the drill hole CCEC18-02 intercept correlates well with the strongest chargeability (Figure 3)4) giving confidence that the IP method is successfully mapping a large sulfide body. Historic drill holes (see Elder Creek NI43-101 Technical Report at http://timberlineresources.co/ ) along Line 3600N stopped short of testing the IP anomaly, but nonetheless intercepted anomalous copper and iron sulfides above the IP anomaly.

Figure 3.4.Line 3600N IP Chargeability Anomaly and Drill Hole CCEC18-02 and Historic Drill Holes

Near the north end of the survey area, our drilling in hole RCEC18-01 between IP Line 4400N and Line 4800N (Figure 1)2) was terminated above the IP anomalyat 152 m (500 feet) due to difficult drilling conditions.conditions and did not effectively penetrate the IP anomaly. Nonetheless, drilling intersected 34 m (110 feet) of 0.44% copper in near-surface, altered hornfels within a broader interval (152 m; 500 feet) of 0.21% copper (see press release dated September 27, 2018 at http://timberlineresources.co/press-releases/), much of which is oxidized. The IP anomaly in this area is considered to remain untested by drilling.

In summary, key conclusions of the IP survey include:

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

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

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

A fourth drill hole, reverse circulation (RC) hole RCEC19-01 was drilled to a depth of 1,960 feet (600 meters) to target the core of the IP/resistivity (IP) geophysical anomaly identified in December, 2018 (Figure 2)(see press release dated July 9, 2019 at http://timberlineresources.co/press-releases/).

RCEC19-01 intercepted approximately 590 feet (180 m) of intensely stockwork quartz-veined, altered (quartz-biotite ± sericite) Harmony Formation quartzite and hornfels and an underlying thick section of 1,361 ft (415 m) of intensely-altered, quartz-feldspar, variably porphyritic intrusive rock (Figure 5). Alteration of the intrusion is dominated by quartz-sericite with variable chlorite and biotite. Porphyry style mineralization is visible throughout and is especially notable within the intrusive phase as pyrite-chalcopyrite ± molybdenite, with anomalous copper, molybdenum, and silver (Table 1). 

Phase I drilling of two holes (Figure 1) in 2018 intercepted material amounts of copper-molybdenum-gold-silver mineralization over long intervals (Table 1). These holes were later determined to be located within (Hole RCEC18-01) and on the periphery of (CCEC18-02) the IP anomaly (Figure 2) identified by the geophysical survey later that year.

Figure 5.Cross Section Line 3600N showing Hole RCEC19-01 drill test of IP Chargeability Anomaly

Relative to Hole CCEC18-02, RCEC19-01 intercepted a much thicker section of porphyry-style altered intrusive rock (Figure 5), with notably increased quartz-sericite alteration and overall increased sulfide mineral content primarily as pyrite (iron sulfide). The distribution of increased sulfide content in RCEC19-01 relative to CCEC18-02 correlates well with the center of the IP anomaly, and the intrusive rock correlates well with magnetic and gravity signatures as previously reported (see Figures 5 and 6 of press release dated March 27, 2019 at http://timberlineresources.co/press-releases/). The intrusive rock is interpreted to represent an apophysis which extends upward from a large intrusion at depth. The distribution of sulfide minerals in the drill holes may reflect zoning within and along the margins of the intrusive apophysis as is common in mineralized porphyry systems. 

Exploration Plans

We plan to expand the IP survey at Elder Creek and to resumeFuture drilling with targeting to focus on the priority IP anomaly and offsets of previous drill intercepts. Historic drilling was clearly focused on near surface targets with only rarewill include proposed drill holes deeper than 200 m vertical depth leavingtesting the IP anomaly (Figure 1) effectively untested.margins of the intrusive phases. The project is fully permitted with the US Bureau of Land Management (BLM) for an additional 43 sites for drilling. Pendingpending available financing, geophysics and drilling will resume in the firstfourth calendar quarter of 2019.

In addition to Elder Creek, additional exploration is planned at the Paiute and Eureka Projects.  Drilling is planned at both projectsProject pending available financing. Drilling at Elder Creek and Paiute are fully permitted with the US Bureau of Land Management for an additional 43 sites, and 3 sites, respectively.

Drilling is also planned at Eureka as part of a fully-funded Joint Venture Agreement on Lookout Mountain project.

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

Joint Venture on Lookout Mountain Gold Project

On May 9, 2019, we entered into a non-binding Letter of Intent to form a joint venture (the “Agreement”) with PM & Gold Mines, Inc. (“PM&G”) for the advanced exploration, and if determined feasible, the development of our Lookout Mountain Gold project, located on the southern end of the Battle Mountain-Eureka Trend near Eureka, Nevada. A final Agreement received regulatory approval on July 27, 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 Agreement calls for the Company’s partner PM&G to fund exploration and development activities in two stages for earned equity in the project. Timberline will contribute the claims that constitute the Lookout Mountain project and adjacent historic Oswego Mine area (the “Project”) to the joint venture company in exchange for its ownership position. Timberline will manage the joint venture at least through Stage I of investment. PM&G shall retain the right to manage all Stage II activities with or without Timberline’s participation.

Concurrent with completion of the 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. Total shares issued under the Agreement was 3,367,441, with a like number of warrants, for cash proceeds of $269,395.The placement includes 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.

Stage I – Earn 51%: PM&G will earn 51% of the Project in consideration of incurring exploration expenditures of $6 million dollars to be directed 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 identify any near-term production potential (oxide/high-grade mineralization). This exploration will also test expansion of both high-grade and oxide mineralization outside the defined resource. The plan and effort have been developed and agreed upon through a joint Management Committee appointed by the Company and PM&G.

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

Timberline Option to Participate 51- 49%: – When the $6 million expenditure is reached (Stage I), 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 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. 

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

The Lookout Mountain project lies within Timberline’s 23 square-mile Eureka property which is strategically located within the greater Eureka Mining District (see a detailed description and maps at http://timberlineresources.co/projects/). Lookout Mountain is a large “Carlin-style” gold-system with a defined gold resource (see Updated Technical Report on the Lookout Mountain Project, MDA, Effective March 1, 2013, filed on SEDAR April 12, 2013) and drill-indicated mineralization which extends over a north-south trend of approximately 3 miles (~ 5 km). High-grade gold mineralization near the historical open pit occurs on a northwest-southeast trend within the resource area and includes 17 intercepts ranging from 0.136 ounces gold per ton (“opt”) to 2.250 opt gold (Table 1) (see press release dated July 10, 2018 at http://timberlineresources.co/press-releases). The mineralization is associated with extensive zones of fault breccias, as well as variably carbonaceous collapse-breccias, and with orpiment and realgar (arsenic sulfides) (Figure 1) which are commonly found in many major Carlin-style gold deposits.

Completion of the Definitive Agreement will be subject to certain conditions, including receipt of all necessary regulatory approvals.

Timberline has previously reported a gold resource estimate at Lookout Mountain, which was prepared by Mine Development Associates (“MDA”) of Reno, Nevada. The MDA resource estimates are summarized below at the noted cut-off grades:

Lookout Mountain Gold Resource (2)(3) 

Notes:

(1)0.006 opt (0.21 g/t) cut-off applied to oxidized material to capture mineralization potentially available to open pit extraction and heap leach processing. 0.030 opt (1.03 g/t) cut-off applied to unoxidized material to capture mineralization potentially available to open pit extraction and lower heap leach recoveries or sulfide processing.

(2)Rounding may cause apparent discrepancies.

(3)The effective date of the Lookout Mountain updated gold resources is February 20, 2013.

The full MDA Resource Estimate with various cut-off grades can be seen at http://timberlineresources.co/wp-content/uploads/2015/07/LookoutMt_-43-101_2013.pdf.

On July 11, 2019, we entered into the Definitive Agreement to form the joint venture with PM & Gold Mines, Inc. (“PM&G” and together with Timberline, the “JV Partners”) whereby the JV Partners formed a limited liability company to conduct operations on the Company’s Lookout Mountain Project in Nevada (the “Project”) pursuant to a limited liability company agreement (the “Agreement”) . Pursuant to the Agreement, PM&G can earn an initial 51% interest in the project, which is located on the southern end of the Battle Mountain-Eureka Trend, by expending $6 million on exploration and development over a 2-year period, as further described below. 

In connection with the Agreement as approved by the TSX Venture Exchange, 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”), PM&G has subscribed for a 4.99% ownership position in the Company under the Offering. Pursuant to additional Offering subscriptions received, the Company closed the Offering on a fully subscribed basis following TSX Venture Exchange approval of the Offering and Agreement.

Lookout Mountain Gold Mineralization

Table 1.  Representative High-Grade Gold Drill Intercepts from the Lookout Mountain Deposit

Timberline’s current gold resource estimate (Table 2) at Lookout Mountain, which was prepared by Mine Development Associates (“MDA”) of Reno, Nevada, includes:

Table 2. Lookout Mountain Gold Resource^(1)(2)(3)

Notes:

1)006 opt (0.21 g/t) cut-off applied to oxidized material to capture mineralization potentially available to open pit extraction and heap leach processing. 0.030 opt (1.03 g/t) cut-off applied to unoxidized material to capture mineralization potentially available to open pit extraction and lower heap leach recoveries or sulfide processing.

2)Rounding may cause apparent discrepancies.

3)Refer to Updated Technical Report on the Lookout Mountain Project, MDA, effective March 1, 2013, Filed on SEDAR April 12, 2013.

The full MDA resource estimate with various cut-off grades can be seen at http://timberlineresources.co/wp-content/uploads/2015/07/LookoutMt_-43-101_2013.pdf.

Figure 1. High-Grade Gold Mineralized Drill Core from Lookout Mountain showing Collapse Breccia including Arsenic-sulfides (Realgar (red) and Orpiment (yellow)). 

Results of Operations for the three and nine months ended December 31,June 30, 2019 and 2018 and 2017

Consolidated Results

Our consolidated net loss for the three months ended December 31, 2018June 30, 2019 was $549,653,$519,841, compared to a consolidated net loss of $329,162$329,318 for the three months ended December 31, 2017.June 30, 2018. The year-over-year differenceincrease in net loss is due to increased exploration expenses, accretion of discount on senior note payable, and increased professional fees and interest expense, in 2018, offset by decreased non-cash stock option expense, salaries and benefits expenses, and other general and administrative expenses. Professional fees were higher and salaries and benefits were lower as a result of our Chief Financial Officer functions being outsourced to a firm with an internal reduction in employee headcount. Other general and administrative expenditures were lower in 20182019 primarily related to the non-recurrence of consulting fees aimed at increasing our market exposure and supporting our marketing efforts during the quarter ended December 31, 2017.June 30, 2019. These same factors, and the abandonment of the Talapoosa property in 2018, drove a decrease in net loss for the nine-month period ended June 30, 2019. Exploration expenditures during the threenine months ended December 31, 2018June 30, 2019 increased compared to the same period in 20172018 due to significant exploration activity performed on Elder Creek, a new property to us acquired in later quarters of 2018.

Subject to adequate funding in 2018,2019, we expect to continue to incur exploration expenses for the advancement of Elder Creek and exploration at Eureka.

Financial Condition and Liquidity

At December 31, 2018,June 30, 2019, we had assets of $15,686,530,$15,551,042, consisting of cash in the amount of $185,688;$114,322; property, mineral rights and equipment of $15,079,636, net of depreciation, of $15,094,823, reclamation bonds of $307,286, and prepaid expenses, deposits and other assets in the amount of $98,733.$49,798.

On December 31, 2018June 30, 2019, we had total liabilities of $800,683$1,068,660 and total assets of $15,686,530.$15,551,042. This compares to total liabilities of $740,421 and total assets of $15,394,921 on September 30, 2017.2018. As of December 31, 2018,June 30, 2019, our liabilities consist of $162,523$166,587 for asset retirement obligations, $216,503$417,583 of senior unsecured note payable, net of discount, $198,806$178,533 of payment obligation, and $222,851$305,957 of trade payables and accrued liabilities. Of these liabilities, $222,851$561,666 are due within twelve months. The increase in liabilities compared to DecemberSeptember 31, 20172018 is largely due to the increase in senior unsecured notenotes payable with an increase alsoand accounts payable and accrued liabilities, offset by a reduction in accrued expenses.the payment obligation. The increase in total assets was due to additions to the Elder Creek property as a result of the fair value of warrants issued for the 2018 work requirement being met during the quarternine-month period ended December 31, 2018,June 30, 2019. Increases in cash and prepaid expenses also contributed to the increase in assets for the quarternine-month period ended December 31, 2018.June 30, 2019.

On December 31, 2018June 30, 2019 we had negative working capital of $55,870$403,246 and a stockholders’ equity of $14,885,847$14,482,382 compared to negative working capital of $29,077 and stockholders’ equity of $14,654,500 for the year ended September 30, 2018. Working capital experienced a favorablean unfavorable change because of a senior unsecured note payable becoming due within the coming 12 months and increases in accounts payable and accrued expenses, offset partially by an increase in cash relative to aassociated with private placementplacements of our equity offset byand an increase in accruedprepaid expenses.

During the quarter ended December 31, 2018,June 30, 2019, we used cash from operating activities of $532,642$1,088,923 compared to $593,123$1,250,227 used for the quarter ended December 31, 2017.June 30, 2018. Net loss of $549,653$1,287,418 for the quarternine-month period ended December 31, 2018June 30, 2019 compared to net loss of $329,162$4,354,275 for the quarter ended December 31, 2017.June 30, 2018. The causal factors are disclosed above in the comparative table.table above.

During the quarternine-month period ended December 31, 2018,June 30, 2019, cash of $7,594$22,782 was provided by investment activities, compared with cash usedprovided of $25,500$115,924 for the quarternine-month period ended December 31, 2017.June 30, 2018. We paid $18,000$54,000 to purchase mineral properties, while receiving $25,594$76,782 for lease payments to us for company-owned mineral properties. During the quarternine-month period ended December 31, 2017,June 30, 2018, we paid $25,500$71,500 for mineral properties while receiving $100,000 for proceeds from the sale of property and $87,424 for lease payments to us for company-owned mineral properties.