TLRS Timberline Resources Corporation (QB)

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

FORM 10-QSB/A

Amendment No. 1

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2007
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             

Commission file number: 000-51549

TIMBERLINE RESOURCES CORPORATION

 (Exact Name of Registrant as Specified in its Charter)

IDAHO		82-0291227
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
101 EAST LAKESIDE AVENUE
COEUR D’ALENE, IDAHO		83814
(Address of Principal Executive Offices)		(Zip Code)

 

(208) 664-4859

(Registrant’s Telephone Number, including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes   o  No

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes x   No

Number of shares of issuer’s common stock outstanding at February 8, 2008:      27,270,103

Transitional Small Business format (check one): o Yes   x   No

 

 

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INTRODUCTORY NOTE

This amendment incorporates certain revisions to the Company’s disclosure under “Item 3. Disclosure Control and Procedures” under the subsection headings “Disclosure Controls and Procedures” and “Changes in Internal Control Over Financial Reporting”.  These revisions are being made to clarify the Company’s disclosure regarding material weaknesses in its internal control over financial reporting, but is not intended to update any other information presented in the Quarterly Report on Form 10-QSB as originally filed with the SEC.  Please see the Company’s subsequently filed Current Reports, Quarterly Reports, and Annual Reports, as filed with the SEC, for a discussion of events occurring subsequent to this Quarterly Report on Form 10-QSB/A.

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INDEX

  

	Page No.(s)

 

PART I - FINANCIAL INFORMATION

 

	Item 1.	Consolidated Financial Statements (Unaudited)

 

		Consolidated Balance Sheet at December 31, 2007	6

 

		Consolidated Statements of Operations for the three months ended December  31, 2007 and 2006	7

 

		Consolidated Statements of Cash Flows for the three months ended December 31, 2007 and 2006	8

 

		Notes to Unaudited Consolidated Financial Statements	9

 

	Item 2.	Management’s Discussion and Analysis	17

 

	Item 3.	Controls and Procedures	20

 

PART II - OTHER INFORMATION

 

	Item 1.	Legal Proceedings.	22

 

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	22

 

	Item 3.	Defaults Upon Senior Securities.	22

 

	Item 4.	Submission of Matters to Vote of Security Holders.	22

 

	Item 5.	Other Information	22

 

	Item 6.	Exhibits	22

 

SIGNATURES		23

 

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2007 and 2006

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
						December 31,		September 30,
						2007		2007
						(unaudited)		(audited)
ASSETS
	CURRENT ASSETS:
		Cash		$	5,287,039	$	3,949,988
		Accounts receivable			1,738,257		3,882,275
		Employee receivable			12,155		7,073
		Materials and supplies inventory			2,498,936		1,925,392
		Prepaid expenses			480,537		373,288
			TOTAL CURRENT ASSETS			10,016,924		10,138,016
	PROPERTY, MINERAL RIGHTS AND EQUIPMENT:
		Property, mineral rights and equipment, net of accumulated depreciation			9,208,619		8,008,928
	OTHER ASSETS:
		Restricted cash			800,000		802,860
		Deposits and other assets			203,948		147,058
		Intangible assets, net of amortization			88,891		105,557
		Goodwill			2,808,524		2,808,524
			TOTAL OTHER ASSETS			3,901,363		3,863,999
	TOTAL ASSETS		$	23,126,906	$	22,010,943
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY
	CURRENT LIABILITIES:
		Note payable to bank		$	599,065	$	599,065
		Accounts payable			2,882,411		3,617,165
		Accrued expenses			985,021		944,627
		Notes payable - related parties			60,000		787,000
		Deferred revenue			118,332		250,000
		Current portion of capital leases			480,952		476,032
		Current portion of notes payable			313,842		300,638
			TOTAL CURRENT LIABILITIES			5,439,623		6,974,527
	LONG-TERM LIABILITIES:
		Capital leases, net of current portion			642,165		647,416
		Notes payable, net of current portion			629,606		571,534
			TOTAL LONG-TERM LIABILITIES			1,271,771		1,218,950
	COMMITMENTS AND CONTINGENCIES			-		-
	TEMPORARY EQUITY
		Series A Preferred stock, $0.01 par value; liquidation and redemption
			value $2,737,741; 5,000,000 shares authorized, 4,700,000 issued
			and outstanding			1,880,000		1,880,000
	STOCKHOLDERS' EQUITY:
		Preferred stock, $0.01 par value; 5,000,000 shares authorized,
			none issued and outstanding			-		-
		Common stock, $0.001 par value; 100,000,000 shares
			authorized, 26,504,103 and 24,801,108  shares issued
			and outstanding, respectively			26,503		24,801
		Common stock subscribed			-		(802,761)
		Additional paid-in capital			24,220,756		20,433,478
		Accumulated deficit			(9,711,747)		(7,718,052)
			TOTAL STOCKHOLDERS' EQUITY			14,535,512		11,937,466
	TOTAL LIABILITIES, TEMPORARY EQUITY AND
		STOCKHOLDERS' EQUITY		$	23,126,906	$	22,010,943
See accompanying notes to consolidated financial statements.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
					Quarter Ended
					December 31,		December 31,
					2007		2006
					(unaudited)		(unaudited)
REVENUES		$	6,435,125	$	3,208,337
COST OF REVENUES			4,949,665		2,844,189
GROSS PROFIT			1,485,460		364,148
OPERATING EXPENSES:
	Mineral exploration expenses			576,752		82,957
	Other general and administrative expenses			2,915,765		1,344,761
	Loss (gain) on sale of equipment			(14,641)		4,379
		TOTAL OPERATING EXPENSES			3,477,876		1,432,097
LOSS FROM OPERATIONS			(1,992,416)		(1,067,949)
OTHER INCOME (EXPENSE):
	Other income			69,200		8,727
	Interest income			75,089		1,808
	Interest expense			(145,568)		(81,628)
		TOTAL OTHER INCOME (EXPENSE)			(1,279)		(71,093)
NET LOSS BEFORE INCOME TAXES			(1,993,695)		(1,139,042)
INCOME TAX EXPENSE			-		-
NET LOSS		$	(1,993,695)	$	(1,139,042)
NET LOSS PER SHARE AVAILABLE TO COMMON
	STOCKHOLDERS, BASIC AND DILUTED		$	(0.08)	$	(0.10)
WEIGHTED AVERAGE NUMBER
	OF COMMON SHARES OUTSTANDING,
	BASIC AND DILUTED			25,781,215		11,025,909
See accompanying notes to consolidated financial statements.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
					Quarter Ended
					December 31,		December 31,
					2007		2006
					(unaudited)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss		$	(1,993,695)	$	(1,139,042)
	Adjustments to reconcile net loss to net cash
	provided (used) by operating activities:
		Depreciation and amortization			204,288		313,740
		Loss (gain) on sale of equipment			(14,641)		4,379
		Common stock issued for consulting			70,898		36,249
		Share based compensation			610,444		68,350
	Changes in assets and liabilities:
		Accounts receivable			1,543,123		692,891
		Materials and supplies inventory			(573,544)		(332,617)
		Prepaid expenses, deposits, and other assets			(114,139)		(89,789)
		Employee receivable			(5,082)		(10,270)
		Accounts payable			(734,754)		(125,207)
		Accrued expenses			40,593		(93,456)
		Deferred revenue			(131,668)		-
		Accrued interest - related party payables			-		(2,154)
		Deferred lease income			-		(8,727)
		Net cash used by operating activities			(1,098,177)		(685,653)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of equipment			(519,276)		(117,921)
	Change in restricted cash			2,660		-
	Purchase of investment in equity security			(50,000)		-
	Proceeds from sale of equipment			14,641		8,536
		Net cash used by investing activities			(551,975)		(109,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from line of credit			-		596,065
	Proceeds from related party notes payable			60,000		-
	Payments on related party notes payable			(787,000)		(329,439)
	Payments on notes payable			(79,265)		(41,688)
	Payments on capital leases			(116,934)		(127,328)
	Proceeds from exercise of warrants			817,273		-
	Proceeds from issuances of stock and warrants,
	net of stock offering costs			3,093,129		2,665,000
		Net cash provided by financing activities			2,987,203		2,762,610
	Net increase in cash			1,337,051		1,967,572
CASH AT BEGINNING OF PERIOD			3,949,988		732,245
CASH AT END OF PERIOD		$	5,287,039	$	2,699,817
NON-CASH FINANCING AND INVESTING ACTIVITIES:
	Account receivable exchanged for equipment		$	600,895	$	-
	Capital lease for equipment purchase			228,672		-
	Note payable issued for equipment purchase			38,472		17,560
See accompanying notes to consolidated financial statements.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS:

Timberline Resources Corporation (“Timberline” or “the Company”) was incorporated in August of 1968 under the laws of the state of Idaho as Silver Crystal Mines, Inc., for the purpose of exploring for precious metal deposits and advancing them to production.

During the first quarter of 2006, the Company acquired Kettle Drilling, Inc. (“Kettle Drilling” or “Kettle”) and its Mexican subsidiary, World Wide Exploration S.A. de C.V. (“World Wide”). Kettle provides drilling services to the mining and mineral exploration industries across North America and worldwide.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a . Basis of presentation – The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 period ended December 31, 2007 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2008.

 

For further information refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2007.

b. Principles of consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Kettle Drilling and World Wide after elimination of the intercompany accounts and transactions.

c. 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.  

d. Estimates and assumptions – The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. 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.

e . Reclassifications – Certain amounts in the prior-period financial statements have been reclassified for comparative purposes to conform to current period presentation with no effect on previously reported net loss.

f. Investments – The Company owns 1,000,000 restricted shares of Rae Wallace Mining Company, a public corporation.  The investment is recorded at cost which management estimates approximates fair market value at December 31, 2007.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

g . Provision for Taxes – Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109,  “Accounting for Income Taxes” (hereafter “SFAS No. 109”). 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 (See Note 9).

h. Stock-based compensation – The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-based Payment (“SFAS 123(R)”), at the beginning of fiscal year 2007, which requires the measurement of the cost of employee services received in exchange for an award of an equity instrument on the grant-date fair value of the award. The Company has chosen to use the modified prospective transition method under SFAS 123(R). The Company’s financial statements for the year ended September 30, 2007 and the quarter ended December 31, 2007 reflect the impact of this adoption.

Under SFAS 123(R), the Company is required to select a valuation technique or option-pricing model that meets the criteria as stated in the standard. At present, the Company is continuing to use 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 term”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”), 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.

i. Net loss per share – Statement of Financial Accounting Standards No. 128, Earnings per Share requires dual presentation of basic earnings per share (“EPS”) and diluted EPS on the face of all income statements issued after December 15, 1997, for all entities with complex capital structures. Basic EPS is computed as net income (loss) 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.  

Cumulative but undeclared dividends on the Series A Preferred Stock (Note 6) for the three months ended December 31, 2007 have been considered in the EPS computation.

The dilutive effect of convertible and exercisable securities, in periods of future income as of December 31, 2007, is as follows:

Stock options                            3,020,001

Warrants                                 3,223,649

Convertible preferred stock       4,700,000

    Total possible dilution         10,943,650

At December 31, 2007 and 2006, the effect of the Company’s outstanding options and common stock equivalents would have been anti-dilutive.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

j. New accounting pronouncements – In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements , (SFAS 157), which will become effective in our 2008 financial statements. SFAS 157 establishes a framework for measuring fair value and expands disclosure about fair value measurements, but does not require any new fair value measurements. The Company has not yet determined the effect that adoption of SFAS 157 may have on the results of operations or financial position.

The FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115, in the first quarter 2007. The statement allows entities to value financial instruments and certain other items at fair value. The statement provides guidance over the election of the fair value option, including the timing of the election and specific items eligible for the fair value accounting. Changes in fair values would be recorded in earnings. The Company is evaluating the impact the adoption of this statement will have, if any, on its financial statements.

On October 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Tax Positions (“FIN48”).  FIN48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken in income tax returns.  FIN48 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions.  In the course of our assessment, we determined that we were subject to examination of our income tax filings in the United States and various state jurisdictions for the 2003 – 2006 tax years.  Within each of these jurisdictions we examined our material tax positions to determine whether we believed they would be sustained under the more-likely-than-not guidance provided by FIN48.  If interest and penalties were to be assessed, we would charge interest to interest expense, and penalties to other operating expense.  As a result of our assessment, we have concluded that the adoption of FIN48 had no significant impact on the Company’s results of operations or balance sheet for the quarter ended December 31, 2007, and required no adjustment to opening balance sheet accounts as of October 1, 2007.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In December 2007, the FASB revised SFAS No. 141 “Business Combinations”.  The revised standard is effective for transactions where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141(R) will change the accounting for the assets acquired and liabilities assumed in a business combination.

· Acquisition costs will be generally expensed as incurred;

· Non-controlling interests (formally known as “minority interests”) will be valued at fair value at the acquisition date;

· Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

· In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date

· Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

· Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

The adoption of SFAS No. 141(R) does not currently have a material effect on our Consolidated Financial Statements. However, any future business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 will be accounted for in accordance with this statement.

NOTE 3 – RELATED PARTY TRANSACTIONS:

In 2006, Kettle Drilling entered into loan agreements with its officers, David Deeds and Doug Kettle.  These loans totaled $160,000 and $627,000, respectively as of September 30, 2007. David Deeds is the Chief Executive Officer of Kettle Drilling and a shareholder of the Company.  Mr. Kettle is the President of Kettle Drilling and a shareholder of the Company. The loans bear interest at 10% and are due on demand. There was no accrued interest outstanding as of December 31, 2007 and September 30, 2007.

Related party notes payable consist of the following at December 31, 2007 and September 30, 2007:

		Dec. 31, 2007		Sep. 30, 2007
Doug & Brenda Kettle	$	60,000	$	627,000
David Deeds		0		160,000
Less current portion		(60,000)		(787,000)
	$	0	$	0

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – COMMON STOCK AND WARRANTS:

During September, 2007, the Company initiated a private placement of the Company’s restricted common stock. Under the private placement subscription agreement, the Company can sell up to 2,545,455 units for a total of $7,000,000, plus up to 5% in over-subscriptions. Each unit consists of one share of common stock and one half of one Class A Warrant; with each whole warrant exercisable to acquire one additional share of common stock at an exercise price of $3.50 per share for the period of twenty-four months from the Issue Date. The units were sold for $2.75 each, representing management’s estimate of the fair value of the Company’s unregistered common stock and warrants at the time of sale. In connection with this offering, the Company agreed to use commercially reasonable efforts to file a resale registration on Form SB-2 (or such other available form) no later than 60 days after the Closing Date and cause such registration to be declared effective no later than 120 days of the Closing Date (150 days if reviewed by the SEC).  The registration statement is to register for resale the shares of common stock and the shares of common stock acquirable upon exercise of the warrants.  The Company sold a total of 2,626,694 units for total proceeds of $7,223,408; with 1,780,972 units for proceeds of $4,897,673 closing on September 30, 2007, 288,182 units for proceeds of $792,500 closing on October 1, 2007, and 557,540 units for proceeds of $1,533,235 closing on October 11, 2007.  As of December 31, 2007, there are 1,313,348 warrants outstanding from this placement.

During the quarter ended December 31, 2007, the Company granted 40,000 restricted shares to an executive of the company as compensation.  The shares were valued at the Company’s common stock trading price as of the close of business on the date of issuance which resulted in the recording of $136,000 to expense.

During the quarter ended December 31, 2007, the Company issued 817,273 shares of common stock as a result of warrants exercised.  The warrants were granted pursuant to a private placement during 2006 and were exercised at a price of $1.00 per warrant.  

The following is a summary of the Company’s warrants outstanding:

	Warrants		Weighted Average Exercise Price
Outstanding at September 30, 2007	3,618,061	$	1.62
Issued	422,861		3.50
Exercised	(817,273)		(1.00)
Outstanding at December 31, 2007	3,223,649		2.02

These warrants expire as follows:

Warrants	Price	Expiration Date
811,501	$1.00	January 31, 2008
1,098,800	$1.00	December 31, 2008
1,313,348	$3.50	September 30, 2009
3,223,649

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – STOCK OPTIONS:

The Company has established a stock incentive plan as amended August 31, 2006, to authorize the granting of up to 2,750,000 stock options to employees, directors and consultants.  The plan documents include a provision for all options granted to be exercised through a cashless exercise.

During October 2007, the Company granted 1,230,000 options to purchase common stock to directors and employees of the company as compensation for services rendered. The options have an exercise price of $3.40, the market price of the common stock on that date, and vest over the next two years.  These options expire five years from the grant date.  The fair value of the options granted was estimated on their grant date using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value: risk-free interest rate of 3.75%; volatility of 82.3%; expected life of three years; dividend yield of zero. The options were valued at $1.87 per share. 493,336 of these options vested immediately, however only 267,500 were available under the reserve limit of the plan.  Accordingly, an expense relating to those that were available under the reserve of the plan was recognized during the quarter in the amount of $500,225 and is included in Other general and administrative expenses.  The expense was allocated on a pro-rata basis according to the number of options that vested immediately on the grant date.  The remaining 225,836 options that did not vest because they were in excess of the reserve limit of the plan will only vest upon shareholder approval of an increase in the reserve limit.  An additional 82,918 options vested during the quarter ended December 31, 2007 and an expense of $45,118 was taken related to those vested options.  

The current number of securities to be issued upon exercise of outstanding options exceeds the authorized shares to be issued under the Amended 2005 Equity Incentive Plan which was approved by shareholders on September 22, 2006.  The Company plans to seek an increase in the number of authorized shares to be issued under the Amended 2005 Equity Incentive Plan at its next annual shareholder’s meeting.  If the requested increase in the number of authorized shares is not approved, only 2,750,000 options will vest and may be exercised.  If the requested increase in the number of authorized shares to be issued under the Plan is approved, the expense related to the remaining options that were to vest immediately upon grant will be recognized in the period where shareholder approval is obtained.  The Company cancelled 283,332 options during the quarter ended December 31, 2007 pursuant to the terms of the Amended 2005 Equity Incentive Plan.  There are 926,255 options vested as of December 31, 2007 while 2,093,746 remain unvested and vest over the next 3 years.  

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – STOCK OPTIONS (continued):

The following is a summary of the Company’s options issued under the Amended 2005 Equity Incentive Plan:

								Weighted
								Average
								Exercise
				Options		Price
	Outstanding at September 30, 2007			2,073,333		$	2.13
		Granted			1,230,000			3.40
		Exercised			-0-			-0-
		Expired / Cancelled			283,332			1.03
	Outstanding at December 31, 2007			3,020,001 (1)		$	2.75
	Exercisable at December 31, 2007			700,419		$	1.87
	Weighted average fair value of options granted during the period ended
		December 31, 2007					$	1.87

The average remaining contractual term of the options outstanding and exercisable at December 31, 2007 is 4.20 and 3.36 years, respectively.

⁽¹⁾ As discussed above, options granted that are in excess of the reserve limit of the Company’s Amended 2005 Equity Incentive Plan are subject to shareholder approval of an increased reserve limit.

NOTE 6 – PREFERRED STOCK:

Timberline is authorized to issue up to 10,000,000 shares of preferred stock, $.01 par value. The Board of Directors of Timberline 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.

On February 26, 2006, our Board of Directors adopted a resolution creating a series of Five Million Shares (5,000,000) shares of voting, convertible Preferred Stock designated as Series A Preferred Stock.  The Preferred Stock was issued to the Doug Kettle and Dave Deeds (the “Kettle Shareholders”) as a part of the consideration delivered to them for the acquisition of Kettle Drilling.

As of December 31, 2007, there is $152,741 of cumulative but undeclared dividends on the Series A Preferred Stock and the conversion price remains $0.40.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – PREFERRED STOCK (continued):

The Company has determined that the preferred stock of the Company should be classified as a temporary equity item on the Company’s balance sheet.  As a result, the preferred stock is classified in a “mezzanine” section of temporary equity presented between total liabilities and stockholders’ equity.  

NOTE 7 – COMMITMENTS AND CONTINGENCIES:

Real Estate Lease Commitments

The Company has real estate lease commitments related to its main office in Coeur d’Alene, Idaho, a facility in Butte, Montana, offices of Kettle Drilling in Coeur d’Alene, Idaho, a storage shop in Rathdrum, Idaho, and its operational facility in Elko, Nevada. The Company’s Mexico subsidiary also leases facilities for its administrative office and warehouse under defined term lease agreements which are for one year. Total office and storage rental expense aggregated $51,805 and $31,682 for quarters ended December 31, 2007 and 2006, respectively.

Environmental Contingencies

The Company has in past years been engaged in mining in northern Idaho, which is currently the site of a federal Superfund cleanup project. Although the Company is no longer involved in mining in this or other areas at present, the possibility exists that environmental cleanup or other environmental restoration procedures could remain to be completed or mandated by law, causing unpredictable and unexpected liabilities to arise. At the date of these financial statements, the Company is not aware of any environmental issues or litigation relating to any of its current or former properties.

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TIMBERLINE RESOURCES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SEGMENT INFORMATION:

The Company has three operating segments at December 31, 2007: drilling revenues from Kettle Drilling; drilling revenues in Mexico through Kettle’s subsidiary, World Wide Exploration; and Timberline’s exploration activities.

Segment information (after intercompany eliminations) for the quarters ended December 31, 2007 and 2006 is as follows:

Revenues:		2007		2006
Timberline	$	-	$	-
Kettle Drilling		4,942,179		2,641,110
World Wide Exploration		1,492,946		567,227
Total revenues	$	6,435,125	$	3,208,337
Income / (Loss) before income taxes:
Timberline	$	(1,678,877)	$	(534,094)
Kettle Drilling		(325,415)		(617,463)
World Wide Exploration		10,597		12,515
Income / (Loss) before income taxes	$	(1,993,695)	$	(1,139,042)
Total assets:
Timberline	$	18,012,087	$	9,210,326
Kettle Drilling		4,204,515		2,187,322
World Wide Exploration		910,304		713,237
Total assets	$	23,126,906	$	12,110,885

The accounting policies of the segments are the same as those described in the notes to the consolidated financial statements included in the Company’s annual report filed on Form 10-KSB for the fiscal year ended September 30, 2007, after considering newly adopted accounting pronouncements described elsewhere herein. Separate management of each segment is required because each business unit is subject to different marketing, production, and technology strategies.

During the quarter ended December 31, 2007, revenues from transactions with four customers each amounted to 10% or more of our total revenues.  One such customer accounted for revenue of $1,393,576, another customer accounted for revenue of $1,286,734, another customer accounted for revenue of $754,673, and another customer accounted for revenue of $579,916.  The revenue for all four of those customers is reported through Kettle Drilling.  

The assets of Timberline are located in the United States.  The assets of Kettle Drilling are also located in the United States and their revenues are derived from drilling contracts in the United States.  The assets of World Wide Exploration are located in Mexico and their revenues are derived from drilling contracts in Mexico.  

Timberline is not an operating entity at this point insofar as they are not generating revenues from the sales of their properties, but they are actively exploring several properties for their mining potential.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this quarterly report.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors and Uncertainties” in our Annual Report on Form 10-KSB, filed with the SEC on January 14, 2008.

Overview 

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 strictly a mineral exploration company.  Beginning with the management appointments of John Swallow and Paul Dircksen and our acquisition of a drilling services company, Kettle Drilling, Inc. (“Kettle”), in March 2006, we have advanced a new, aggressive business plan.  Prior to our new business model, the addition of new management, and the purchase of Kettle, the Company had no reported revenues and accumulated losses.

Our corporate objective is to provide investors with significant exposure to both the ‘picks and shovels’ and ‘blue sky’ aspects of our industry.  We believe that our business model is highly scalable and uniquely well-positioned to take advantage of the environment that currently exists in the mining and exploration industries.  We have the people and knowledge base to continue to evaluate growth opportunities – either organically or through mergers and acquisitions. 

During the quarter we completed the final tranches of our earlier offering, raising an additional $2.32-million, added Ron Guill and Jim Moore to our Board of Directors and announced the signing of a non-binding Letter of Intent (LOI) to acquire Small Mine Development, LLC (“SMD”), one of the largest underground mine contractors in the United States.  We believe that upon receipt of shareholder approval and closing, the acquisition of SMD will roughly quadruple our revenue and provide us with the “critical mass” to be a significant player in the North American mining services industry.  Furthermore, it is the opinion of management that the expansion of our Board of Directors and announcing the Letter of Intent to acquire SMD, LLC demonstrates our belief that a strong presence in both mining services and exploration are likely to provide excellent returns to our shareholders over the long term.

Additionally, during the quarter we accelerated our exploration, permitting and drilling activity and our expenditures are representative of our commitment to ramp up exploration activity during 2008 on a number of our properties.  During the quarter we initiated a seven-hole drill program at our Butte Highlands project.  As part of the Butte Highlands program, permitting was completed, access roads and drill pads constructed and a drill was mobilized to the site, however the onset of bad weather prevented completion of the first hole.  The program is planned to be both resumed and expanded as weather and drill rig availability allows early in 2008.  Also during the quarter, we received the approval to do a five-hole drill program on our Downeyville property in the Walker Lane area of Nevada.  Drilling on that project began subsequent to the end of the quarter.    

Kettle and its subsidiary, World Wide Exploration S.A. de C.V. (“WWE”), provide both surface and underground drilling services but specialize in underground, hard rock core drilling.  Their clients include both mining and exploration companies in the United States and Mexico. 

Results of Operations for Three Months Ended December 31, 2007 and 2006

Combined Results – Timberline Corporate, Timberline Exploration, Kettle Drilling and WWE

For the three months ended December 31, 2007, we reported $6,435,125 in revenue compared to $3,208,337 in the same period of 2006.  Our revenues are derived entirely from our drilling subsidiaries and comprised of $4,942,179 from Kettle Drilling and $1,492,946 from WWE.  Our revenue increase was primarily due to the growth in the number of drill rigs operating this year versus last year.  Gross profit from Kettle and WWE was $1,187,805 and $297,655, respectively for the three months ended December 31, 2007.

  

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Our overall after tax net loss for the three months ended December 31, 2007 was $1,993,695 compared to an overall net loss of $1,139,042 for the three months ended December 31, 2006.  Our net loss for the three months ended December 31, 2007 is comprised of $1,678,877 for Timberline Corporate and Exploration, $325,415 for Kettle Drilling and offset by a gain of $10,597 at WWE.

Timberline Corporate and Exploration Division

The after tax net loss of $1,678,877 for the combined Timberline Corporate and the Exploration division is comprised of non-cash charges of $708,332, exploration expenditures of $576,752, and other general and administrative costs of $393,793.  Included in the non-cash charges are expenses related to common stock issuances for consulting services, stock based compensation, and for stock options that vested during the quarter.  Also included in the non-cash charges is $26,990 in Depreciation and Amortization.

Kettle Drilling and WWE

For the three months ended December 31, 2007, Kettle Drilling had revenues of $4,942,179 as compared to $2,641,110 for the three months ended December 31, 2006.  WWE had revenues of $1,492,946 for the three months ended December 31, 2007 as compared to $567,227 for the three months ended December 31, 2006.  The increase in revenues is attributable to the growth in the number of operating drill rigs at each company.

For the three months ended December 31, 2007, net loss before taxes from Kettle was $325,415 while net income at WWE was $10,597, as compared to a net loss of $617,463 for Kettle and net income of $12,515 for WWE for the three months ended December 31, 2006.  At Kettle, the reduced loss from last year is attributable to stabilizing our growth, while the net income at WWE remained nearly the same as the corresponding quarter in 2006 in spite of substantial revenue growth due to the expenses related to the increased activity and number of drill rigs in Mexico.

Financial Condition and Liquidity

At December 31, 2007, we had assets of $23,126,906 consisting of cash in the amount of $5,287,039; accounts receivable in the amount of $1,738,257; inventories valued at $2,498,936; property, plant, and equipment, net of depreciation of $9,208,619; and other assets of $4,394,055.  

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

See Note 2 to the financial statements contained elsewhere in this Quarterly Report for a complete summary of the significant accounting policies used in the presentation of our financial statements. The summary is presented to assist the reader in understanding the financial statements. The accounting policies used conform to accounting principals generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Our critical accounting policies are as follows:

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.  

Revenue Recognition

Generally, the Company recognizes drilling service revenues as the drilling services are provided to the customer based on the actual amount drilled for each contract. In some cases, the customer is responsible for mobilization and “stand by” costs when the Company deploys its personnel and equipment to a specific drilling site, but for reasons beyond the Company’s control, drilling activities are not able to take place. Usually, the specific terms of each drilling job are agreed to by the customer and the Company prior to the commencement of drilling.

Intangible Assets

Intangible assets from the acquisition of Kettle Drilling, including employment contracts, and customer drilling contracts, are stated at the estimated value at the date of acquisition.  Amortization of employment contracts is calculated on a straight-line basis over a useful life of three years.  Amortization of the drilling contracts is calculated on a straight-line basis over the life of the contracts (typically one year or less).  The value of employment and customer drilling contracts will be periodically tested for impairment. Any impairment loss revealed by this test would be reported in earnings for the period during which the loss occurred.  

Inventories

The Company values its inventories at the lower of average cost or market, using the first-in-first-out (FIFO) method.  Allowances are recorded for inventory considered to be in excess or obsolete. Inventories consist primarily of parts, operating supplies, drill rods and drill bits. The value of inventory previously used in drilling and still considered useable, is valued at 25-90% of cost depending on remaining life expectancy.

Review of Carrying Value of Property and Equipment for Impairment

The Company reviews the carrying value of property 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 the asset. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.

Goodwill

Goodwill relates to the acquisition of Kettle Drilling.  In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” at least annually goodwill is tested for impairment by applying a fair value based test.  In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and a discounted cash flow analysis is used to determine fair value. There was no impairment loss revealed by this test as of September 30, 2007.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.  Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, we use the Black-Scholes option pricing model to value the derivative instruments.

 

_________________________________________________________________________________________

Certain information contained in this “Management Discussion and Analysis” constitutes forward looking

information and actual results could differ from estimates, expectations or beliefs contained in such statements.

 

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NOTE: Certain parts of the following Item 3. Disclosure Controls and Procedures reflect revisions incorporated by the Company to clarify its disclosure regarding material weaknesses in its internal control over financial reporting. Apart from revisions relating to this clarified disclosure, this Item 3 has not been revised for new events and developments occurring after the original filing date of February 19, 2008. Please see the Company’s subsequently filed Current Reports, Quarterly Reports, and Annual Reports, as filed with the SEC, for a discussion of events occurring subsequent to this Quarterly Report on Form 10-QSB/A.

ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

At the end of the quarter covered by this report, an evaluation was carried out under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) and Rule15d – 15(e) under the Exchange Act). Based on that evaluation the CEO and the CFO have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported  within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

The CEO and the CFO reached this conclusion with respect to the Company's disclosure controls and procedures notwithstanding the fact that we determined that there were material weaknesses with respect to the Company's internal control over financial reporting, as discussed below. While the CEO and CFO believe there is overlap between disclosure controls and procedures and internal control over financial reporting, they have concluded that a material weakness in internal controls limited to those discussed below does not cause the Company's disclosure controls and procedures to be ineffective. The Company's  CEO and CFO believe that the inter-relation of disclosure controls and procedures and internal control over financial reporting is specific to the particular control policies adopted by the Company and the Company's CEO and CFO have carefully considered such inter-relation of the Company's specific policies in reaching this conclusion.  Specifically, the CEO and the CFO have considered whether the material weakness in internal controls over financial reporting, as discussed below, stemmed from or was indicative of a lapse in the Company's disclosure policies related to inter-company reporting policies and financial statement preparation policies.

As a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act of 1934, as amended, the Company is not required to provide management’s report on internal control over financial reporting until its annual report for the fiscal year ended September 30, 2008.  Further, the Company’s independent registered public accounting firm is not required to provide an attestation on the Company’s internal control over financial reporting until the Company’s annual report for the fiscal year ended September 30, 2009.  The Company’s management has not completed a review of internal control over financial reporting necessary to comply with the requirements for providing a management’s report on internal control over financial reporting and the material weaknesses determined to exist by management are not the result of such a review.

Changes in Internal Control Over Financial Reporting

In reviewing our internal controls over financial reporting, the Company’s management has determined that there were material weaknesses in our internal control over financial reporting.  These material weaknesses have been conveyed to our Audit Committee.  Management’s assessment is that these weaknesses are primarily the result of not having enough sufficiently qualified accounting personnel involved in the preparation of the Company’s consolidated financial statements.

Management is addressing these issues through increased utilization of the accounting system that was implemented at the Company’s operating subsidiaries and by hiring more qualified accounting personnel for the Company and its operating subsidiaries to aid in the preparation and reporting of financial information. During the quarter covered by this report the Company continued recruiting a qualified and knowledgeable corporate controller. Subsequent to the end of the current quarter, we hired a corporate controller and a controller for our Kettle Drilling subsidiary and will continue to devote additional resources to developing processes and strengthening internal controls to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles.

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

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PART II — OTHER INFORMATION

 

  ITEM 1. LEGAL PROCEEDINGS.

 

Timberline is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated.

No director, officer or affiliate of Timberline and no owner of record or beneficial owner of more than 5.0% of our securities or any associate of any such director, officer or security holder is a party adverse to Timberline or has a material interest adverse to Timberline in reference to pending litigation.

 

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

 

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.  OTHER INFORMATION.

 

None.

ITEM 6. EXHIBITS.

31.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of1934, as amended

 

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

 

 

 

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SIGNATURES

 

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

 

	TIMBERLINE RESOURCES CORPORATION

 

	By:  /s/ Randal Hardy        ___________________________________        Randal Hardy        Chief Executive Officer and Chief Financial Officer        (On behalf of the registrant and as        Principal Executive Officer and Principal Accounting and  Financial Officer) Date:  July 21, 2008

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