As filed
with the Securities and Exchange Commission on
February
27, 2009
Registration Statement No.
333-?
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
TIMBERLINE RESOURCES CORPORATION
(Exact name of registrant as
specified in its charter)
Delaware
|
|
1040
|
|
82-0291227
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(Primary Standard
Industrial
Classification Code Number)
|
|
(I.R.S. Employer Identification
No.)
|
101 East Lakeside Avenue
Coeur DAlene, Idaho 83814
(208) 664-4859
(Address, including zip code, and telephone
number, including area code, of registrants principal executive offices)
Dorsey & Whitney LLP
Republic Plaza Building, Suite
4700
370 Seventeenth Street
Denver, CO 80202-5647
(303)
629-3400
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
Copies to:
Kenneth G. Sam,
Esq.
Dorsey & Whitney LLP
Republic Plaza Building, Suite 4700
370
Seventeenth Street
Denver, CO 80202-5647
From time to time after the effective date of this registration
statement
(Approximate date of commencement of
proposed sale to public)
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box:
x
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement number of
the earlier registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. (Check one):
Large
Accelerated Filer
¨
Accelerated Filer
¨
Non-Accelerated Filer
¨
Smaller Reporting Company
x
CALCULATION OF
REGISTRATION FEE
Title of each class
of securities to be
registered
|
Amount
to be
registered
|
Proposed
maximum offering
price per unit
|
Proposed
maximum
aggregate offering
price
|
Amount of
registration
fee
|
Common Stock to be
offered for resale by
selling shareholders
|
5,556,556
|
$0.29(1)
|
$1,611,401.24
|
$64
|
Common Stock
issuable upon
conversion of
convertible note to
be offered for resale
by selling
shareholders
|
3,333,333
|
$1.50(2)
|
$4,999,999.50
|
$197
|
Common Stock
issuable upon
conversion of put
rights to be offered
for resale by selling
shareholders
|
535,652
|
$0.46(3)
|
$246,399.92
|
$10
|
TOTAL
|
9,425,541
|
--
|
$6,857,800.66
|
$271
|
(1)
Estimated pursuant to Rule 457(c) under the Securities Act of
1933, as amended, solely for purposes of calculating amount of registration fee,
based on the average of the high and low sales prices of the Registrants common
stock on February 26, 2009, as quoted on the NYSE Alternext U.S.
(2)
Estimated pursuant to Rule 457(c) and (g) under the Securities Act
of 1933, as amended, solely for purposes of calculating amount of registration
fee, based on the actual conversion price of the convertible note of $1.50 per
share.
(3)
Estimated pursuant to Rule 457(c) and (g) under the Securities Act
of 1933, as amended, solely for purposes of calculating amount of registration
fee, based on the actual conversion price of the put rights of $0.46 per
share.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information contained in this prospectus is not complete
and may be changed. The selling security holders may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell
these shares, and the
selling security holders are not
soliciting an offer to buy these shares in any state where the offer or sale is
not permitted.
.
PRELIMINARY PROSPECTUS
Subject To
Completion: Dated
February 27, 2009
TIMBERLINE RESOURCES CORPORATION
9,425,541
SHARES OF COMMON
STOCK
This prospectus
relates to the sale, transfer or distribution of up to
9,425,541
shares of the common stock, par value
$0.001 per share, of Timberline Resources Corporation by the selling security
holders described herein. The price at which the selling security holders
may sell the shares will be determined by the prevailing market price for the
shares or in negotiated transactions. The shares of common stock
registered for sale are as follows:
·
5,556,556 shares of common stock held by selling security
holders;
·
3,333,333 shares of common stock acquirable upon conversion of a
10% convertible note in principal amount of $5.0 million due October 31, 2010 at
a deemed conversion price of $1.50 per share
; and
·
535,652 shares of common stock acquirable upon conversion of put
rights in principal amount of $246,400 at a deemed conversion price of $0.46 per
share.
We will not receive any proceeds from the
sale or distribution of the common stock by the selling security holders.
Our common stock is quoted on the NYSE
Alternext U.S. under the symbol TLR. On February 26, 2009, the closing
sale price for our common stock was $
0.30 on the NYSE
Alternext U.S..
Investing in our common stock involves
risks. See Risk Factors and Uncertainties beginning on page 6.
These securities have not been approved
or disapproved by the SEC or any state securities commission nor has the SEC or
any state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
THE DATE OF THIS PROSPECTUS IS
FEBRUARY 27, 2009
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
2
SUMMARY INFORMATION
3
RISK FACTORS AND
UNCERTAINTIES
6
USE OF PROCEEDS
14
SELLING SECURITY HOLDERS
14
PLAN OF DISTRIBUTION
17
DESCRIPTION OF SECURITIES TO
BE REGISTERED
18
INTEREST OF NAMED EXPERTS AND
COUNSEL
18
DESCRIPTION OF THE
BUSINESS
19
DESCRIPTION OF PROPERTY
22
LEGAL PROCEEDINGS
27
MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER
MATTERS
28
FINANCIAL STATEMENTS
31
MANAGEMENTS DISCUSSION AND
ANALYSIS
75
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
85
DIRECTORS, EXECUTIVE OFFICERS,
AND CONTROL PERSONS
85
EXECUTIVE COMPENSATION
87
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
91
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
93
CORPORATE GOVERNANCE
96
THE SECS POSITION ON
INDEMNIFICATION FOR
96
SECURITIES ACT LIABILITIES
96
TRANSFER AGENT AND
REGISTRAR
96
LEGAL MATTERS
96
WHERE YOU CAN FIND MORE
INFORMATION
96
GLOSSARY OF CERTAIN MINING
TERMS
97
FORWARD-LOOKING STATEMENTS
This prospectus and the exhibits attached
hereto contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
concern the Companys anticipated results and developments in the Companys
operations in future periods, planned exploration and development of its
properties, plans related to its business and other matters that may occur in
the future. These statements relate to analyses and other information that
are based on forecasts of future results, estimates of amounts not yet
determinable and assumptions of management.
Any statements that express or involve
discussions with respect to predictions, expectations, beliefs, plans,
projections, objectives, assumptions or future events or performance (often, but
not always, using words or phrases such as expects or does not expect, is
expected, anticipates or does not anticipate, plans, estimates or
intends, or stating that certain actions, events or results may, could,
would, might or will be taken, occur or be achieved) are not statements of
historical fact and may be forward-looking statements. Forward-looking
statements are subject to a variety of known and unknown risks, uncertainties
and other factors which could cause actual events or results to differ from
those expressed or implied by the forward-looking statements, including,
without limitation:
·
risks related to our properties being in the exploration
stage;
·
risks related our mineral operations being subject to government
regulation;
·
risks related to our ability to obtain additional capital to
develop our resources, if any;
·
risks related to mineral exploration and development
activities;
·
risks related to our insurance coverage for operating risks;
·
risks related to the fluctuation of prices for precious and base
metals, such as gold, silver and copper;
·
risks related to the competitive industry of mineral
exploration;
·
risks related to our title and rights in our mineral
properties;
·
risks related to our limited operating history;
·
risks related the possible dilution of our common stock from
additional financing activities;
·
risks related to potential conflicts of interest with our
management;
·
risks related to our subsidiaries activities; and
·
risks related to our shares of common stock.
This list is not exhaustive of the factors
that may affect our forward-looking statements. Some of the important risks and
uncertainties that could affect forward-looking statements are described further
under the section headings Risk Factors and Uncertainties, Description
of the Business and Managements Discussion and Analysis of this prospectus.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, believed, estimated or expected. We caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. We disclaim any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
We qualify all the
forward-looking statements contained in this prospectus by the foregoing
cautionary statements.
2
You should rely
only on the information contained in this prospectus. We have not authorized
anyone to provide you with information different from the information contained
in this prospectus. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of when this prospectus is
delivered or when any sale of our common stock occurs.
This summary does not contain all of the
information you should consider before buying shares of our common stock. You
should read the entire prospectus carefully, especially the Risk Factors and
Uncertainties section and our consolidated financial statements and the related
notes before deciding to invest in shares of our common stock.
SUMMARY INFORMATION
The Offering
This is an offering of up to 9,425,541
shares of our common stock by certain selling security holders.
Shares Offered By the Selling Shareholders
|
9,425,541 shares of common stock,
$0.001 par value per share, including:
·
5,556,556 shares of common stock held by selling security
holders;
·
3,333,333 shares of common stock acquirable upon conversion
of a 10% convertible note in principal amount of $5.0 million due October
31, 2010 at a deemed conversion price of $1.50 per share; and
·
535,652 shares of common stock acquirable upon conversion of
put rights in principal amount of $246,400 at a deemed conversion price of
$0.46 per share.
|
Offering Price
|
Determined at the time of sale by the
selling security holders
|
Common Stock Outstanding as of February 27, 2009
|
34,369,459 common shares
|
Use of Proceeds
|
We will not receive any of the
proceeds of the shares offered by the selling security holders.
|
Dividend Policy
|
We currently intend to retain any
future earnings to fund the development and growth of our business.
Therefore, we do not currently anticipate paying cash dividends.
|
NYSE Alternext Trading Symbol
|
TLR
|
The number of shares of our common stock
that will be outstanding immediately after this offering includes 34,369,459
shares of common stock outstanding as of
February 27, 2009.
This calculation excludes:
·
6,401,668 shares of common stock issuable upon
exercise of options outstanding as of
February 27,
2009;
·
1,313,348 shares of common stock acquirable
upon exercise of Class A Warrants at $3.50 until October 11, 2009;
·
24,586 shares of common stock acquirable upon
exercise of Class A Broker Warrants at $3.50 until October 11, 2009;
·
535,652 shares of common stock acquirable upon
conversion of put rights in principal amount of $246,400 at a deemed conversion
price of $0.46 per share; and
·
3,333,333 shares of common stock acquirable
upon conversion of a 10% convertible note in principal amount of $5.0 million
due October 31, 2010 at a deemed conversion price of $1.50 per
share.
3
Summary of Our Business
Unless otherwise indicated, any reference
to Timberline, or as we, us, or our refers to Timberline Resources
Corporation and/or its wholly owned subsidiary, Timberline Drilling
Incorporated.
We were incorporated in the State of Idaho
on August 28, 1968 under the name Silver Crystal Mines, Inc., to engage in the
business of exploring for precious metal deposits and advancing them toward
production. We ceased exploration activities during the 1990s and became
virtually inactive. In December 2003, a group of investors purchased 80
percent of the issued and outstanding common stock from the then-controlling
management team. In January 2004, we affected a one-for-four reverse split
of our issued and outstanding shares of common stock and increased our
authorized common stock to 100 million with a par value of $.001. Unless
otherwise indicated, all references herein to shares outstanding and share
issuances have been adjusted to give effect to the aforementioned stock split.
On February 2, 2004, our name was changed to Timberline Resources
Corporation. On August 27, 2008, we reincorporated into the State of
Delaware pursuant to a merger agreement approved by our shareholders on August
22, 2008.
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 Timberline Drilling Incorporated (formerly,
Kettle Drilling Inc., which we refer to herein as Timberline Drilling), 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 Timberline
Drilling, the Company had accumulated losses and no reported revenues.
In March 2006,
Timberline acquired Kettle Drilling, Inc., which in September 2008 changed its
name to Timberline Drilling Incorporated. Timberline Drilling provides
core drilling services to mining and mineral exploration companies throughout
North America, combining state of the art equipment, world-class technical
expertise, innovative thinking, and a strong safety record. Timberline
Drilling specializes in underground drilling services in support of active
mining operations and advanced exploration projects. Working primarily
with established companies, its business is less cyclical than that of surface
drillers at early-stage exploration sites, where supplies, infrastructure, and
project funding are less predictable.
In July 2007, Timberline closed its
purchase of the Butte Highlands Gold Project. In October 2008, the Company
announced that it had agreed to form a 50/50 joint venture with Small Mine
Development (SMD) at the Butte Highlands project. Under terms of the proposed
agreement, Timberline will be carried to production by SMD, which will fund all
mine development costs and begin development in the summer of 2009.
Timberline Drillings
long-term strategies of aggressive expansion, drill fleet modernization, and
underground focus have resulted in revenue growth. Timberline Drilling,
along with its wholly-owned Mexican subsidiary, World Wide Exploration, S.A. de
C.V. (which we refer to as World Wide or WWE), now have a combined fleet of 26
drill rigs which generated revenues of more than $31 million for the 2008 fiscal
year.
Timberline has taken the complementary
businesses of mine development, contract mining, drilling and mineral
exploration and combined them into a unique, forward-thinking investment
vehicle. The Timberline business model provides investors exposure to both
the picks and shovels and blue sky aspects of the mining industry. The
picks and shovels aspect of our business includes the mining services provided
by Timberline Drilling. We use the term blue sky to mean the potential
of our exploration properties. Because of the nature of exploration for
precious metals, a propertys exploration potential is not known until a
significant amount of geologic information has been generated. As the work
progresses, the potential of the property becomes more and more clear. If
the exploration results are favorable, the value of the property may increase
significantly, and the term blue sky refers to the upside potential of that
value.
Our business model offers the opportunity
to participate both the picks and shovels and blue sky aspects of the
businesswe can participate in the surging markets for precious and base metal
mining without the degree of risk inherent to mine operation and/or sole
reliance on speculative early-stage drill-plays.
The Companys shares began trading on the
NYSE Alternext U.S. (NYSE Alternext) on May 12, 2008.
On February 13, 2009 the Company
received a notice from the NYSE Alternext indicating that the Company was not in
compliance with the continued listing requirements of the exchange. See
the disclosure under the section heading Market for Common Equity and Related
Shareholder Matters below.
4
Selected Financial Data
The selected financial information
presented below as of and for the periods indicated is derived from our
financial statements contained elsewhere in this prospectus and should be read
in conjunction with those financial statements.
Statement of
Operations Data
|
Year Ended
September 30, 2008
|
Year Ended
September 30, 2007
|
Three Months Ended
December 31, 2008
(Unaudited)
|
Three Months Ended
December 31, 2007
(Unaudited)
|
|
|
|
|
|
Revenue
|
$ 31,728,617
|
$ 19,233,406
|
$
4,690,696
|
$
6,435,125
|
Cost of Revenue
|
$ 24,939,499
|
$ 14,741,588
|
$
4,908,046
|
$
4,949,665
|
Total Operating
Expenses
|
$ 15,055,688
|
$
6,747,251
|
$
3,505,164
|
$
3,477,876
|
Net
(Loss)
|
$ (10,103,696)
|
$ (2,688,378)
|
$ (4,735,273)
|
$ (1,993,695)
|
(Loss) per
Common
share*
|
$
(0.60)
|
$
(0.15)
|
$
(0.16)
|
$
(0.08)
|
Weighted Average
Number
of common
shares
Outstanding*
|
27,212,826
|
19,155,693
|
29,478,617
|
25,781,215
|
|
|
|
|
|
* Basic and diluted.
|
|
|
|
|
Balance Sheet
Data
|
At September 30,
2008
|
At September 30,
2007
|
At December 31,
2008
(Unaudited)
|
At December 31,
2007
(Unaudited)
|
|
|
|
|
|
Working Capital
(Deficiency)
|
$
(13,982)
|
$
3,163,489
|
$ (1,541,595)
|
$
4,577,301
|
Total Assets
|
$
20,369,787
|
$ 22,010,943
|
$
17,779,738
|
$
23,126,906
|
Accumulated (Deficit)
|
$ (17,821,748)
|
$ (7,718,052)
|
$ (22,557,021)
|
$ (9,711,747)
|
Stockholders
Equity
|
$
3,550,407
|
$
11,937,466
|
$
4,619,331
|
$
14,535,512
|
5
RISK
FACTORS AND UNCERTAINTIES
An investment in a mine service and an
exploration stage mining company with a short history of operations such as ours
involves an unusually high amount of risk, both unknown and known, present and
potential, including, but not limited to the risks enumerated below.
Our failure to successfully address the
risks and uncertainties described below would have a material adverse effect on
our business, financial condition and/or results of operations, and the trading
price of our common stock may decline and investors may lose all or part of
their investment. We cannot assure you that we will successfully address
these risks or other unknown risks that may affect our business.
Estimates of mineralized material are
forward-looking statements inherently subject to error. Although resource
estimates require a high degree of assurance in the underlying data when the
estimates are made, unforeseen events and uncontrollable factors can have
significant adverse or positive impacts on the estimates. Actual results will
inherently differ from estimates. The unforeseen events and uncontrollable
factors include: geologic uncertainties including inherent sample variability,
metal price fluctuations, variations in mining and processing parameters, and
adverse changes in environmental or mining laws and regulations. The timing and
effects of variances from estimated values cannot be accurately predicted.
Risks
Associated With Mining and The Exploration Portion of Our Business
All of our properties are in the exploration stage. There is
no assurance that we can establish the existence of any mineral reserve on any
of our properties in commercially exploitable quantities. Until we can do so, we
cannot earn any revenues from these properties and if we do not do so we will
lose all of the funds that we expend on exploration. If we do not discover any
mineral reserve in a commercially exploitable quantity, the exploration
component of our business could fail.
Despite exploration work on our mineral
properties, we have not established that any of them contain any mineral reserve
according to recognized reserve guidelines, nor can there be any assurance that
we will be able to do so. A mineral reserve is defined by the Securities
and Exchange Commission in its Industry Guide 7
(http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7) as that part
of a mineral deposit, which could be economically and legally extracted or
produced at the time of the reserve determination. The probability of an
individual prospect ever having a "reserve" that meets the requirements of the
Securities and Exchange Commission's Industry Guide 7 is extremely remote; in
all probability our mineral property does not contain any 'reserve' and any
funds that we spend on exploration will probably be lost. Even if we do
eventually discover a mineral reserve on one or more of our properties, there
can be no assurance that they can be developed into producing mines and extract
those minerals. Both mineral exploration and development involve a high degree
of risk and few properties, which are explored, are ultimately developed into
producing mines.
The commercial viability of an established
mineral deposit will depend on a number of factors including, by way of example,
the size, grade and other attributes of the mineral deposit, the proximity of
the mineral deposit to infrastructure such as a smelter, roads and a point for
shipping, government regulation and market prices. Most of these factors will be
beyond our control, and any of them could increase costs and make extraction of
any identified mineral deposit unprofitable.
Mineral operations are subject to applicable law and
government regulation. Even if we discover a mineral reserve in a commercially
exploitable quantity, these laws and regulations could restrict or prohibit the
exploitation of that mineral reserve. If we cannot exploit any mineral reserve
that we might discover on our properties, our business may fail.
Both mineral exploration and extraction
require permits from various foreign, federal, state, provincial and local
governmental authorities and are governed by laws and regulations, including
those with respect to prospecting, mine development, mineral production,
transport, export, taxation, labor standards, occupational health, waste
disposal, toxic substances, land use, environmental protection, mine safety and
other matters. Regarding our future ground disturbing activity on federal
land, we will be required to obtain a permit from the US Forest Service or the
Bureau of Land Management prior to commencing exploration. There can
be no assurance that we will be able to obtain or maintain any of the permits
required for the continued exploration of our mineral properties or for the
construction and operation of a mine on our properties at economically viable
costs. If we cannot accomplish these objectives, our business could face
difficulty and/or fail.
We believe that we are in compliance with
all material laws and regulations that currently apply to our activities but
there can be no assurance that we can continue to do so. Current laws and
regulations could be amended and we might not be
6
able to comply with them, as amended.
Further, there can be no assurance that we will be able to obtain or maintain
all permits necessary for our future operations, or that we will be able to
obtain them on reasonable terms. To the extent such approvals are required and
are not obtained, we may be delayed or prohibited from proceeding with planned
exploration or development of our mineral properties.
Environmental hazards unknown to us, which
have been caused by previous or existing owners or operators of the properties,
may exist on the properties in which we hold an interest. In past years we
have been engaged in exploration in northern Idaho, which is currently the site
of a Federal Superfund cleanup project. Although the Company is no longer
involved in this or other areas at present, it is possible 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 this Annual Report, the Company is not aware of
any environmental issues or litigation relating to any of its current or former
properties.
Future legislation and administrative changes to the mining
laws could prevent us from exploring our properties.
New state and U.S. federal laws and
regulations, amendments to existing laws and regulations, administrative
interpretation of existing laws and regulations, or more stringent enforcement
of existing laws and regulations, could have a material adverse impact on our
ability to conduct exploration and mining activities. Any change in the
regulatory structure making it more expensive to engage in mining activities
could cause us to cease operations.
If
we establish the existence of a mineral reserve on any of our properties in a
commercially exploitable quantity, we will require additional capital in order
to develop the property into a producing mine. If we cannot raise this
additional capital, we will not be able to exploit the reserve, and our business
could fail.
If we do discover mineral reserves in
commercially exploitable quantities on any of our properties, we will be
required to expend substantial sums of money to establish the extent of the
reserve, develop processes to extract it and develop extraction and processing
facilities and infrastructure. Although we may derive substantial benefits from
the discovery of a major deposit, there can be no assurance that such a resource
will be large enough to justify commercial operations, nor can there be any
assurance that we will be able to raise the funds required for development on a
timely basis. If we cannot raise the necessary capital or complete the necessary
facilities and infrastructure, our business may fail.
Mineral exploration and development is subject to
extraordinary operating risks. We do not currently insure against these risks.
In the event of a cave-in or similar occurrence, our liability may exceed our
resources, which would have an adverse impact on our Company.
Mineral exploration, development and
production involve many risks, which even a combination of experience, knowledge
and careful evaluation may not be able to overcome. Our operations will be
subject to all the hazards and risks inherent in the exploration, development
and production of resources, including liability for pollution, cave-ins or
similar hazards against which we cannot insure or against which we may elect not
to insure. Any such event could result in work stoppages and damage to property,
including damage to the environment. We do not currently maintain any insurance
coverage against these operating hazards. The payment of any liabilities that
arise from any such occurrence would have a material, adverse impact on our
Company.
Estimates of mineralized material are subject to evaluation
uncertainties that could result in project failure.
Our exploration and future mining
operations, if any, are and would be faced with risks associated with being able
to accurately predict the quantity and quality of mineralized material within
the earth using statistical sampling techniques. Estimates of any
mineralized material on any of our properties would be made using samples
obtained from appropriately placed trenches, test pits and underground workings
and intelligently designed drilling. There is an inherent variability of
assays between check and duplicate samples taken adjacent to each other and
between sampling points that cannot be reasonably eliminated.
Additionally, there also may be unknown geologic details that have not
been identified or correctly appreciated at the current level of accumulated
knowledge about our properties. This could result in uncertainties that cannot
be reasonably eliminated from the process of estimating mineralized material. If
these estimates were to prove to be unreliable, we could implement an
exploitation plan that may not lead to commercially viable operations in the
future.
Mineral prices are subject to dramatic and unpredictable
fluctuations.
Other than from our drilling services
subsidiaries, we expect to derive revenues, if any, from the eventual extraction
and sale of precious and base metals such as gold, silver and copper. The price
of those commodities has fluctuated widely in recent years, and is affected by
numerous factors beyond our control including international, economic and
political trends, expectations of inflation, currency exchange fluctuations,
interest rates, global or regional consumptive patterns, speculative activities
and increased production due to new extraction developments and improved
extraction and
7
production methods. The effect of these
factors on the price of base and precious metals, and, therefore, the economic
viability of any of our exploration projects, cannot accurately be predicted.
The mining industry is highly competitive and there is no
assurance that we will continue to be successful in acquiring mineral claims. If
we cannot continue to acquire properties to explore for mineral resources, we
may be required to reduce or cease exploration activity and/or operations.
The mineral exploration, development, and
production industry is largely un-integrated. We compete with other exploration
companies looking for mineral resource properties and the resources that can be
produced from them. While we compete with other exploration companies in the
effort to locate and license mineral resource properties, we do not compete with
them for the removal or sales of mineral products from our properties if we
should eventually discover the presence of them in quantities sufficient to make
production economically feasible. Readily available markets exist worldwide for
the sale of gold and other mineral products. Therefore, we will likely be able
to sell any gold or mineral products that we identify and produce.
There are hundreds of public and private
companies that are actively engaged in mineral exploration. Furthermore, since
the mineral exploration sphere is so diverse and there are virtually no similar
exploration companies with a revenue producing drilling subsidiary, it is quite
difficult to identify specific primary competitors and make comparisons to our
Company. A representative sample of exploration companies that are similar
to our Company in size, financial resources and primary objective include such
publicly traded mineral exploration companies as Goldrich Mining Company (GRMC),
General Moly, Inc. (GMO), Energold Drilling (EGD), Cabo Drilling (CBE), Klondex
Mining (KBX) and Mines Management (MGN).
Many of our competitors have greater
financial resources and technical facilities. Accordingly, we will attempt to
compete primarily through the knowledge and experience of our management.
This competition could adversely affect our ability to acquire suitable
prospects for exploration in the future. Accordingly, there can be no assurance
that we will acquire any interest in additional mineral resource properties that
might yield reserves or result in commercial mining operations.
Third parties may challenge our rights to our mineral
properties or the agreements that permit us to explore our properties may expire
if we fail to timely renew them and pay the required fees.
In connection with the acquisition of our
mineral properties, we sometimes conduct only limited reviews of title and
related matters, and obtain certain representations regarding ownership.
These limited reviews do not necessarily preclude third parties from
challenging our title and, furthermore, our title may be defective.
Consequently, there can be no assurance that we hold good and marketable
title to all of our mining concessions and mining claims. If any of our
concessions or claims were challenged, we could incur significant costs and lose
valuable time in defending such a challenge. These costs or an adverse
ruling with regards to any challenge of our titles could have a material adverse
affect on our financial position or results of operations. There can be no
assurance that any such disputes or challenges will be resolved in out favor.
We are not aware of challenges to the
location or area of any of our mining claims. There is, however, no guarantee
that title to the claims will not be challenged or impugned in the future.
Risks
Related To Our Company
We
have a limited operating history on which to base an evaluation of our business
and prospects.
Although we have been in the business of
exploring mineral resource properties since our incorporation in 1968, we were
inactive for many years prior to our new management in January 2004. Since
January 2004, we have not yet located any mineral reserve. As a result, we have
not had any revenues from our exploration division, however we do have a
drilling services wholly owned subsidiary which has generated revenues in past
fiscal years and which we expect to generate revenues in the future. In
addition, our operating history has been restricted to the acquisition and
exploration of our mineral properties and this does not provide a meaningful
basis for an evaluation of our prospects if we ever determine that we have a
mineral reserve and commence the construction and operation of a mine. Other
than through conventional and typical exploration methods and procedures, we
have no additional way to evaluate the likelihood of whether our mineral
properties contain any mineral reserve or, if they do that they will be operated
successfully. We anticipate that we will continue to incur operating costs
without realizing any revenues (from exploration) during the period when we are
exploring our properties.
During the fiscal year ending September 30,
2008, we (the parent company) had losses of $7,966,645 in connection with the
maintenance and exploration of our mineral properties and the operation of our
exploration business. We therefore expect to continue to incur significant
losses into the foreseeable future. We recognize that if we are unable to
generate
8
significant revenues from mining operations
and dispositions of our properties, we will not be able to earn profits or
continue operations. At this early stage of our operation, we also expect to
face the risks, uncertainties, expenses and difficulties frequently encountered
by companies at the start up stage of their business development. We cannot be
sure that we will be successful in addressing these risks and uncertainties and
our failure to do so could have a materially adverse effect on our financial
condition. There is no history upon which to base any assumption as to the
likelihood that we will prove successful and we can provide investors with no
assurance that we will generate any operating revenues or ever achieve
profitable operations.
Investors interests in our Company will be diluted and
investors may suffer dilution in their net book value per share if we issue
additional employee/director/consultant options or if we sell additional shares
to finance our operations.
We have not generated
revenue from exploration since the commencement of our exploration stage in
January 2004. However our business model includes our revenue generating and
wholly owned drilling services subsidiaries. In order to further expand our
company and objectives above that provided through the anticipated revenues of
our revenue producing subsidiaries, any additional growth and/or expanded
exploration activity may need to be financed through sale of and issuance of
additional shares. Furthermore, to finance any acquisition activity, should that
activity be properly approved, and depending on the outcome of our exploration
programs, we may also need to issue additional shares to finance future
acquisitions, growth and/or additional exploration programs of any or all of our
projects or to acquire additional properties. We may also in the future grant to
some or all of our directors, officers, insiders, and key employees options to
purchase our common shares as non-cash incentives. The issuance of any equity
securities could, and the issuance of any additional shares will, cause our
existing shareholders to experience dilution of their ownership interests.
If we issue additional
shares or decide to enter into joint ventures with other parties in order to
raise financing through the sale of equity securities, investors' interests in
our Company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. As of
the date of the filing of this registration statement there are also outstanding
approximately 1,337,934 common share purchase warrants (exercisable into
approximately 1,337,934 shares of common stock), options granted that are
exercisable into 6,401,668 common shares, debt convertible into 3,333,333 common
shares, and put rights convertible into 535,652 common shares. If all of these
were exercised or converted, these would represent approximately 25% of our
issued and outstanding shares. If all of these warrants and options are
exercised and the underlying shares are issued, such issuance will cause a
reduction in the proportionate ownership and voting power of all other
shareholders. The dilution may result in a decline in the market price of our
shares.
Recent market
events and conditions, including disruptions in the U.S. and international
credit markets and other financial systems and the deterioration of the U.S. and
global economic conditions, could, among other things, impede access to capital
or increase the cost of capital, which would have an adverse effect on our
ability to fund our working capital and other capital requirements.
In 2007 and into 2008, the U.S. credit
markets began to experience serious disruption due to a deterioration in
residential property values, defaults and delinquencies in the residential
mortgage market (particularly, subprime and non-prime mortgages) and a decline
in the credit quality of mortgage backed securities. These problems led to
a slow-down in residential housing market transactions, declining housing
prices, delinquencies in non-mortgage consumer credit and a general decline in
consumer confidence. These conditions continued and worsened in 2008,
causing a loss of confidence in the broader U.S. and global credit and financial
markets and resulting in the collapse of, and government intervention in, major
banks, financial institutions and insurers and creating a climate of greater
volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions.
Notwithstanding various actions by the U.S. and foreign governments,
concerns about the general condition of the capital markets, financial
instruments, banks, investment banks, insurers and other financial institutions
caused the broader credit markets to further deteriorate and stock markets to
decline substantially. In addition, general economic indicators have
deteriorated, including declining consumer sentiment, increased unemployment and
declining economic growth and uncertainty about corporate earnings.
These unprecedented disruptions in the
current credit and financial markets have had a significant material adverse
impact on a number of financial institutions and have limited access to capital
and credit for many companies. These disruptions could, among other things, make
it more difficult for us to obtain, or increase our cost of obtaining, capital
and financing for our operations. Our access to additional capital may not
be available on terms acceptable to us or at all.
9
Dividend Record
We have no dividend record. We have not
paid dividends on our common shares since incorporation and do not anticipate
doing so in the foreseeable future.
Conflicts of Interest
Certain of our officers and directors may
be or become associated with other businesses, including natural resource
companies that acquire interests in mineral properties. Such
associations may give rise to conflicts of interest from time to time. Our
directors are required by Delaware Corporation law to act honestly and in good
faith with a view to our best interests and to disclose any interest, which they
may have in any of our projects or opportunities. In general, if a conflict of
interest arises at a meeting of the board of directors, any director in a
conflict will disclose his interest and abstain from voting on such matter or,
if he does vote, his vote will not be counted.
We have not adopted any separate formal
corporate policy regarding conflicts of interest; however other corporate
governance measures have been adopted, such as creating a directors audit
committee requiring independent directors. Additionally, our Code of
Ethics does address areas of possible conflicts of interest. As of the
date of filing of this registration statement, we had three independent
directors on our board of directors (Jim Moore, Vance Thornsberry and Eric
Klepfer). In January 2008, we formed three committees to ensure our
compliance with the requirements of the NYSE Alternext US LLC. We
established an independent audit committee consisting of three independent
directors, all of whom were determined to be financially literate and one of
whom was designated as the financial expert. We also formed a
compensation committee and a corporate governance and nominating committee, both
of which are comprised entirely of independent directors. At this time, we
feel that these committees and our Code of Ethics provide sufficient corporate
governance for our purposes and will meet the specific requirements of the NYSE
Alternext US LLC.
Dependence on Key Management Employees
The nature of both sides of our business,
our ability to continue our exploration and development activities and to
develop a competitive edge in the marketplace depends, in large part, on our
ability to attract and maintain qualified key management personnel. Competition
for such personnel is intense, and there can be no assurance that we will be
able to attract and retain such personnel. Our development now and in the future
will depend on the efforts of key management figures, such as Randal Hardy, John
Swallow, Paul Dircksen, Craig Crowell, Martin Lanphere or Paul Elloway. The loss
of any of these key people could have a material adverse effect on our business.
In this regard, we have attempted to reduce the risk associated with the loss of
key personnel and have obtained directors and officers insurance coverage. In
addition, we have expanded the provisions of our equity incentive plan so that
we can provide incentives for our key personnel.
We do not believe
that we have adequate internal control over financial reporting as of the end of
the period covered by this Registration Statement and in the future we
will be required to provide an auditors attestation on the effectiveness of our
internal control over financial reporting under Section 404 of the
Sarbanes-Oxley Act of 2002-- any adverse results from such attestation could
result in a loss of investor confidence in our financial reports and have an
adverse effect on the price of our shares of common stock.
Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, we have furnished a report by management on our
internal control over financial reporting in our Annual Report on Form 10-KSB
for the year ended September 30, 2008. Such report contains, among other
matters, an assessment of the effectiveness of our internal control over
financial reporting, including a statement as to whether or not our internal
control over financial reporting is effective.
For our annual report on Form 10-K
for the fiscal year ended September 30, 2010, such report must also contain a
statement that our auditors have issued an attestation report on the
effectiveness of such internal controls.
We have evaluated our internal control over
financial reporting and have concluded that our internal control over financial
reporting is not effective. While we believe that the material weaknesses
in our internal control over financial reporting can be rectified in the next
fiscal year, our auditors have not conducted the evaluation necessary to provide
an attestation report on the effectiveness of our internal control over
financial reporting. During the auditors evaluation and testing process,
they may identify one or more material weaknesses in our internal control over
financial reporting, and they will be unable to attest that such internal
control is effective. If we are unable to rectify the current material
weaknesses in our internal control over financial reporting or our auditors are
unable to attest that our internal control over financial reporting is effective
as of September 30, 2010, we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have a material adverse
effect on our stock price.
10
Failure to comply with
the new rules may make it more difficult for us to obtain certain types of
insurance, including director and officer liability insurance, and we may be
forced to accept reduced policy limits and coverage and/or incur substantially
higher costs to obtain the same or similar coverage. The impact of these events
could also make it more difficult for us to attract and retain qualified persons
to serve on our board of directors, on committees of our board of directors, or
as executive officers.
Certain Risks Associated with Operation of Our Wholly Owned
Subsidiary, Timberline Drilling, Incorporated.
Our subsidiary derives all of its revenues from companies in
the mining exploration and production industry, a historically cyclical
industry.
Our subsidiary derives all its revenues
from companies in the mining exploration and production industry, a historically
cyclical industry. Any prolonged reduction in the overall level of exploration
and development activities, can adversely impact our subsidiary in many ways by
negatively affecting:
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Its revenues, cash
flows and profitability;
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Its ability to
maintain or increase our borrowing capacity;
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Its ability to
obtain additional capital to finance our business and make acquisitions,
and the cost of that capital;
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Its ability to
retain skilled drilling personnel whom we would need in the event of an
upturn in the demand for our services; and
|
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the fair market
value of its rig fleet.
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Timberline Drilling may be unable to attract and retain
qualified, skilled employees necessary to operate its business.
Timberline Drillings success depends in
large part on its ability to attract and retain skilled and qualified personnel.
The inability of Timberline Drilling officers and management to hire, train and
retain a sufficient number of qualified employees could impair the ability to
manage and maintain our business. Drilling and drilling related work requires
skilled employees who can perform physically demanding work. Shortages of
qualified personnel are occurring in this industry. As a result of the
volatility of the drilling industry and the demanding nature of the work,
potential employees may choose to pursue employment in fields that offer a more
desirable work environment at wage rates that are competitive with ours. If
Timberline Drilling should suffer any material loss of personnel to competitors
or management is unable to employ additional or replacement personnel with the
requisite level of training and experience to adequately operate its equipment,
its operations could be materially and adversely affected. With a reduced pool
of workers, it is possible that it will have to raise wage rates to attract
workers from other fields and to retain its current employees. If Timberline
Drilling is not able to increase its service rates to its customers to
compensate for wage-rate increases, its profitability and other results of
operations may be adversely affected.
Shortages in equipment and supplies could limit Timberline
Drillings drilling operations and jeopardize its relations with customers.
The materials and supplies Timberline
Drilling uses in its drilling operations include fuels to operate our drilling
equipment, drilling mud, drill pipe, drill collars, drill bits and cement.
Shortages in equipment supplies could limit its drilling operations and
jeopardize its relations with customers. Timberline Drilling does not rely on a
single source of supply for any of these items. From time to time there have
been shortages of drilling equipment and supplies during periods of high demand,
which we believe could reoccur. Shortages could result in increased prices for
drilling equipment or supplies that Timberline Drilling may be unable to pass on
to customers. In addition, during periods of shortages, the delivery times for
equipment and supplies can be substantially longer. Any significant delays in
its obtaining drilling equipment or supplies could limit drilling operations and
jeopardize our relations with customers. In addition, shortages of drilling
equipment or supplies could delay and adversely affect Timberline Drillings
ability to obtain new contracts for its drills, which could negatively impact
its revenues and profitability.
The mining services industry is a competitive
industry.
Contract drilling is a highly competitive
industry, where numerous competitors tender bids for contracts. Timberline
Drillings ongoing ability to continue to secure contracts at a profitable level
cannot be assured.
11
Cyclical downturns in the mining industry could negatively
impact Timberline Drillings business.
The most significant operating risk is the
potential downturn in demand for minerals and metals which would directly impact
the need for drilling services. To mitigate this risk the Timberline Drilling is
exploiting its competitive advantage in underground drilling.
As the mining cycle lengthens and activity
levels increase, the requirement for working capital, particularly accounts
receivable and inventory, grows. Accounts receivable levels from junior mining
companies typically increase. Junior mining companies are heavily dependent on
the capital markets and any change in outlook of the mining sector, or lack of
success of their exploration activities, can quickly affect their ability to
carry on drilling programs. Timberline Drilling manages this risk by closely
monitoring accounts receivable aging and the activity of junior mining companies
in the capital markets. Deposits and letters of credit are required in some
instances.
Levels of inventory increase from increased
revenue activity and, potentially, an increase in activity in remote locations.
In the event of a sudden downturn Timberline Drilling may be exposed to
inventory carrying costs and possible obsolescence. Furthermore it may be
difficult and costly to relocate this inventory to other regions. In order to
minimize exposure to this risk, Timberline Drilling works closely with its
customers to anticipate and plan for scheduled reductions in their drilling
programs.
Timberline
Drillings operations in foreign countries expose us to a variety of political
and business risks.
Timberline Drilling has expanded its
operations outside of North America into Mexico. With this comes the risk of
dealing in a variety of business and political jurisdictions. The risks include,
but are not limited to, political instability and violence, terrorism, military
repression, extreme fluctuations in currency exchange rates, labor unrest,
changing fiscal regions, changes to royalty and tax regions, uncertainty
regarding enforceability of contractual rights and judgments, and high rates of
inflation. Changes in resource development or investment policies or shifts in
political attitude in Mexico may adversely affect our business. Operations may
be affected in varying degrees by government regulations with respect to
restrictions on production, price controls, export controls, income taxes,
expropriation of property, maintenance of claims, environmental legislation,
land use, land claims of local people, water use and mine safety. The effect of
these factors cannot be predicted.
The availability of an adequate workforce cannot be
guaranteed and may affect our ability to timely and profitably fulfill our
contracts.
From time to time our industry has
experienced a shortage of qualified drillers. The industry has gone through
downturns that saw many qualified drillers move to other industries. The demand
for similar skilled workers in the mining, oil and gas and construction
industries also adds to the shortage of qualified people for the drilling
services business.
Timberline Drilling has implemented a
number of initiatives to retain existing employees and attract new employees,
but cannot guarantee that an adequate workforce will be available in the future
to meet Timberline Drillings needs.
Reliance on key accounts.
Timberline Drilling has a number of
accounts that make up a significant portion of overall revenue and gross
profits. When a contract expires or is terminated there is no guarantee that
Timberline Drilling has sufficient replacement contracts. Timberline Drilling
continues to work with its existing client base and is actively pursuing new
clients in order to minimize exposure in this area.
Fluctuations in business costs may affect the profitability
of long term contracts.
Timberline Drilling may enter into long
term contracts with customers at fixed prices. Timberline Drillings expenses
may vary significantly over a contract period due to fluctuations in the cost of
labor, materials and equipment, consequently creating variations in the
profitability of these contracts with fixed prices. Timberline Drilling
mitigates this risk by anticipating an escalation in costs when bidding on
projects or providing for cost escalation in the contract. However, significant
price fluctuations without warning could negatively impact Timberline Drillings
margins.
12
Extreme weather
conditions in certain areas in which Timberline Drilling operates could impact
its operations.
Timberline Drilling has
operations in the western United States that are subject to extreme weather
conditions which can have a significant impact on its operations. In addition,
natural and other disasters could have an adverse impact on Timberline
Drillings operations.
Currency fluctuations.
The majority of Timberline Drillings
business is conducted in United States dollars. Timberline Drilling has
operations in Mexico and Timberline Drilling at times may receive payments in
foreign currency. In order to reduce its exposure to foreign exchange risks
Timberline Drilling contracts in U.S. dollars. This may negatively impact a
projects profitability due to currency exchange volatility. Margin performance
however is less affected by currency fluctuations as a large portion of costs
are typically in the same currency as revenues.
Risks
Associated With Our Common Stock
Our stock price has been volatile and your investment in our
common stock could suffer a decline in value.
Our common stock is traded on the NYSE
Alternext US LLC, formerly known as the American Stock Exchange. The
market price of our common stock may fluctuate significantly in response to a
number of factors, some of which are beyond our control. These factors include
price fluctuations of precious metals, government regulations, disputes
regarding mining claims, broad stock market fluctuations and economic conditions
in the United States.
We may lose our listing on the NYSE
Alternext and your investment in our common stock could suffer a decline in
value.
On February 13, 2009, we received a notice
from the NYSE Alternext US LLC (the Alternext) indicating that we were not in
compliance with Section 1003(a)(ii) of the Alternext Company Guide (the Company
Guide) due to our stockholders equity being less than $4,000,000 and our
having losses from continuing operations and net losses in three of its four
most recent fiscal years and Section 1003(a)(iii) of the Company Guide due to
our stockholders equity being less than $6,000,000 and our having losses from
continuing operations and net losses in its five most recent fiscal years.
Therefore we have become subject to Section 1009 of the Company Guide regarding
continued listing evaluations.
In order to maintain our Alternext listing,
we must submit a plan of compliance to the Alternext by March 13, 2009 (the
Plan), addressing how we intend to regain compliance with Sections 1003(a)(ii)
and 1003(a)(iii) of the Company Guide within a maximum of 18 months (the Plan
Period). The NYSE Alternext Corporate Compliance Department management will
evaluate the Plan, including any supporting documentation, and make a
determination as to whether we have made a reasonable demonstration in the Plan
of an ability to regain compliance with the continued listing standards within
the specified timeframes, in which case the Plan will be accepted. If the Plan
is accepted, we may be able to continue our listing during the Plan Period,
during which time we will be subject to periodic review to determine whether we
are making progress consistent with the Plan. If we do not submit a Plan, if we
submit a Plan that is not accepted or if the Plan is accepted but we are not in
compliance with the continued listing standards at the conclusion of the Plan
Period or do not make progress consistent with the Plan during the Plan Period,
we may become subject to delisting proceedings in accordance with Section 1010
and Part 12 of the Company Guide.
We intend to submit a Plan by March 13,
2009. We are working diligently to formulate the structure of the Plan to bring
our stockholders equity into compliance with the continued listing standards in
the Company Guide. We can provide no assurance that our Plan will be
acceptable to the NYSE Alternext Corporate Compliance Department management or
that, if accepted, we will be able to meet all the requirements of the Plan
during the Plan Period. If we become subject to delisting proceedings
and/or our common stock is delisted from the NYSE Alternext our common stock
could suffer from decreased liquidity and your investment in our common stock
could decrease in valule.
Because we may not pay any dividends on our common
shares, investors seeking short-term dividend income or liquidity should not
purchase our shares.
We do not currently anticipate declaring
and paying dividends to our shareholders in the near future. It is our current
intention to apply net earnings, if any, in the foreseeable future to increasing
our working capital. Prospective investors seeking or needing dividend income or
liquidity should, therefore, not purchase our common stock. While our wholly
owned drilling subsidiary provides revenues, we currently have no revenues and a
history of losses from our exploration activity, so there can be no assurance
that we will ever have sufficient earnings to declare and pay dividends to the
holders
13
of our shares, and in any event, a decision
to declare and pay dividends is at the sole discretion of our board of
directors, who currently do not intend to pay any dividends on our common shares
for the foreseeable future.
Our stock is a penny stock. Trading of our stock may be
restricted by the SEC's penny stock regulations, which may limit a stockholder's
ability to buy and sell our stock.
Our stock is a penny
stock. The Securities and Exchange Commission has adopted Rule 15g-9 which
generally defines "penny stock" to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by
the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC, which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
Financial Industry Regulatory Authority (FINRA) sales
practice requirements may also limit a stockholder's ability to buy and sell our
stock.
In addition to the "penny stock" rules
promulgated by the Securities and Exchange Commission (see above for discussions
of penny stock rules), the FINRA has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
Shares Eligible for Sale Could Depress the Market for Common
Stock
Of our issued and
outstanding shares of common stock, a large majority of those shares are
restricted securities. In general, Rule 144 of the Securities Act of 1933, as
amended, indicates that a person is entitled to sell restricted shares into the
public market if at least six months has passed since the purchase of such
shares from the issuer of an affiliate of an issuer, subject to the satisfaction
of certain other conditions. A significant number of the restricted shares of
our common stock outstanding were purchased more than six months ago.
Accordingly, those shares are eligible for sale into the public market. Along
with this registration statement, the Company has filed a resale registration
statement on Form S-1/A with the Securities and Exchange Commission that was
declared effective on October 16, 2008. This registration statement covers
a number of shares issued in recent private placements and underlying warrants
from these placements. Sales of substantial amounts of those restricted or
registered shares, or even the perception that such sales could occur, could
adversely affect prevailing market prices of our common stock, and could impair
our ability to raise capital through an offering of our equity securities.
USE OF
PROCEEDS
We will not receive any proceeds from the
sale or distribution of the common stock by the selling security holders.
SELLING SECURITY HOLDERS
This prospectus covers the offering of up
to 9,425,541 shares of our common stock by selling security holders - this
includes shares of our common stock acquirable upon debt and put rights
convertible within 60 days of February 27, 2009.
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The shares issued to the selling security
holders are restricted shares under applicable federal and state securities
laws and are being registered to give the selling security holders the
opportunity to sell their shares. The registration of such shares does not
necessarily mean, however, that any of these shares will be offered or sold by
the selling security holders. The selling security holders may from time
to time offer and sell all or a portion of their shares in the over-the-counter
market, in negotiated transactions, or otherwise, at market prices prevailing at
the time of sale or at negotiated prices.
The registered shares may be sold directly
or through brokers or dealers, or in a distribution by one or more underwriters
on a firm commitment or best efforts basis. To the extent required, the
names of any agent or broker-dealer and applicable commissions or discounts and
any other required information with respect to any particular offer will be set
forth in an accompanying prospectus supplement. See Plan of
Distribution.
Each of the selling security holders
reserves the sole right to accept or reject, in whole or in part, any proposed
purchase of the registered shares to be made directly or through agents.
The selling security holders and any agents or broker-dealers that
participate with the selling security holders in the distribution of their
registered shares may be deemed to be underwriters within the meaning of the
Securities Act of 1933, and any commissions received by them and any profit on
the resale of the registered shares may be deemed to be underwriting commissions
or discounts under the Securities Act of 1933.
We will receive no proceeds from the sale
of the registered shares. We have agreed to bear the expenses of
registration of the shares, other than commissions and discounts of agents or
broker-dealers and transfer taxes, if any.
Selling Security Holders
Information
The following is a list of the selling
security holders who own or have the right to acquire an aggregate of 9,425,541
shares of our common stock covered in this prospectus. Certain selling
security holders have the right to acquire shares of our common stock upon debt
and put rights sold in our private placements. See Transactions with
Selling Security Holders.
At February 27, 2009 we had 34,369,459
shares of common stock issued and outstanding.
|
Before Offering
|
|
After Offering
|
|
Total Number
of Shares
Beneficially
Owned
(1)
|
Percentage
of Shares
Owned
(1)
|
Number of
Shares
Offered
(2)
|
Shares Owned
After
Offering
(3)
|
Percentage of
Shares owned
After
Offering
(3)
|
Ronald M.
and Stacey L. Guill
(4)
967 E. Park
Center Boulevard
Boise, Idaho
83706
|
8,889,889
|
23.25%
|
8,889,889
|
0
|
0%
|
Auramet
Trading LLC
(5)
2 Executive
Drive, Suite 645
Fort Lee, New
Jersey 07024
|
695,652
|
1.82%
|
535,652
|
160,000
|
**
|
Total
|
9,585,541
|
25.07%
|
9,425,541
|
160,000
|
**
|
**-
Designates of percentage of ownership of less than 1%
(1)
All percentages are based on 34,369,459 shares of common stock
issued and outstanding on
February 27, 2009.
Beneficial ownership is calculated by the number of shares of common stock
that each selling security holder owns or controls or has the right to acquire
within 60 days of
February 27, 2009.
(2)
This table assumes that each shareholder will sell all of its
shares available for sale during the effectiveness of the registration statement
that includes this prospectus. Selling security holders are not required
to sell their shares. See Plan of Distribution beginning on page
16.
(3)
Assumes that all shares registered for resale by this prospectus
have been issued and sold.
(4)
Includes 5,556,556 shares of common stock and 3,333,333 shares of
common stock acquirable upon conversion of a 10% convertible note of principal
amount of $5 million due October 31, 2010 at a conversion price of $1.50 per
share held by Small Mine Development, which is wholly-owned by the named selling
shareholders. Ronald M. and Stacey L. Guill hold shared voting control and
dispositive power over these securities.
(5)
Includes 535,652 shares of common stock acquirable upon conversion
of put rights in principal amount of $246,400 at a price per share of $0.46.
Justin Sullivan of Auramet Trading LLC exercises sole voting control and
dispositive power over these securities.
Except as
otherwise provided in the footnotes to the Selling Security Holders Table above,
each of the selling securityholders has represented to us that it is not a
broker-dealer and is not affiliated with any broker-dealer in the United States.
Except as otherwise provided in this prospectus, none of the selling
security holders are affiliated or have been affiliated with us, any of our
predecessors or affiliates during the past three years.
15
Transactions with Selling Security
Holders
Transactions with Ronald M. and Stacey L. Guill
On October 31, 2008, the Company entered
into two convertible notes (as described below), one with Ron Guill, a director
of the Company, and his wife, Stacey Guill, and the other with Small Mine
Development (SMD), a company owned by Mr. Guill. Each of the notes was
made for a principal amount of $5 million dollars for an aggregate of $10
million, and both are convertible into the Companys common stock, as described
below. The Company used the proceeds of the notes to pay off the $8.0
million loan (plus any applicable interest) previously provided to the Company
by Auramet Trading, LLC (Auramet) and described in the Companys Form 8-K
filed on July 3, 2008 (such loan is hereafter referred to as the Auramet Loan)
and for general working capital purposes.
The Convertible Term Note
On October 31, 2008, the Company entered
into a series of agreements with SMD in connection with a $5 million loan from
SMD. The loan documents included: a convertible note (the Convertible Term
Note), a credit agreement (the Credit Agreement), a collateral assignment and
pledge of stock and security agreement (the Pledge Agreement), a security
agreement (the Security Agreement) and a right of first refusal over the
Companys Butte Highlands property (the Right of First Refusal).
The Convertible Term Note has a principal
amount of $5.0 million and is secured pursuant to the Security Agreement by a
pledge of all of the stock of Timberline Drilling, pursuant to the Pledge
Agreement, the shares of which were previously pledged to Auramet but were
released upon payment of the Auramet Loan on October 31, 2008, and a deed
of trust to be entered into covering the Companys Butte Highlands property in
Silver Bow county, Montana (the Butte Highlands Property).
Pursuant to the terms of the Credit
Agreement, the Convertible Term Note bears interest at 10% annually, compounded
monthly, with interest payments due at maturity. The Convertible Term Note is
convertible by SMD at any time prior to payment of the note in full, at a
conversion price of $1.50 per share. SMD may also convert all or any portion of
the outstanding amount under the Convertible Term Note into any equity security
other than the Company's common stock issued by the Company at the issuance
price. The Convertible Term Note must be repaid on or before October 31, 2010,
and may be prepaid in whole or in part at any time without premium or penalty.
If the Company defaults on the Convertible Term Note or any of the related
agreements, SMD may declare the Convertible Term Note immediately due and
payable, and the Company must pay SMD an origination fee in the amount of
$50,000.
Under the Right of First Refusal, the
Company granted SMD a right of first refusal to purchase the Butte Highlands
Property on the same terms as those of any bona fide offer from a third-party
upon 60 days notice from the Company of any such offer. In addition, the
Company granted SMD a right to develop the Butte Highlands Property on the same
terms as those of any bona fide offer to develop the property from a third-party
upon 60 days notice from the Company of any such offer.
The Short-Term Convertible Note
In addition, on October 31, 2008, the
Company entered into a short-term convertible note (the Short-Term Convertible
Note), a subscription agreement (the Subscription Agreement), a collateral
assignment and pledge of stock and security agreement (the STN Pledge
Agreement), and a security agreement (the STN Security Agreement) with Ron
and Stacey Guill in connection with a loan for $5 million dollars. Upon
approval for listing of the shares issuable under the Short-Term Convertible
Note from the NYSE Alternext, the Short-Term Convertible Note was automatically
converted into common stock as described below.
The Short-Term Convertible Note
automatically converted into 5,555,556 shares of Company stock (valued at $0.90
per share) upon approval of the issuance of the additional shares for listing by
the NYSE Alternext US LLC on December 19, 2008. Under the Subscription
Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556 shares of the
Companys common stock at a price of $0.90 per share as accredited investors
as defined under Regulation D of the Securities Act of 1933, as amended. Should
the Company decide to issue and sell any equity securities or securities
convertible into equity securities, the Subscription Agreement also obligates
the Company to offer a pro rata share of such securities to Mr. and Mrs. Guill
on the same terms and conditions as the proposed sale and issuance.
.
Transactions with Auramet Trading
LLC
On June 27, 2008
Auramet Trading LLC (Auramet) provided
Timberline $8.0 million (the Loan) pursuant to the terms of a term sheet (the
Term Sheet), dated June 24 2008, by an between Timberline and Auramet, and the
terms of a
16
promissory note (the Promissory Note),
dated June 27, 2008, by and between Timberline and Auramet. Pursuant to
the Term Sheet, Timberline paid Auramet a fee equal to 4% of the principal
amount of the Loan and issued to Auramet 160,000 shares of Timberline common
stock (the Fee Shares). Pursuant to the section of the Term Sheet
entitled Closing Fee to Lender, Auramet was granted a put right (the Put
Right) of $2.00 on the Fee Shares, entitling Auramet to payment of $320,000
(the Put Value) from Timberline upon notice of exercise of the Put Right to
Timberline. Auramet submitted a notice of exercise of its Put Right to
Timberline on January 9, 2009.
On February 10, 2009, Timberline and
Auramet entered into a Stock Purchase and Put Right Release Agreement (the
Agreement), stating that the Put Right could be converted into shares on
common stock of the Company at a deemed conversion price of $0.46 per share.
Timberline and Auramet further agreed that the previously issued 160,000
common shares could be credited to the Put Value, leaving the Put Value at
$246,400, which will be converted by the Company by issuance of 535,652 shares
of common stock of Timberline immediately upon final approval of the NYSE
Alternext US LLC.
The common shares, convertible notes, put
right conversion of the above transactions were not registered under the
Securities Act, or the laws of any state, and are subject to resale restrictions
and may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. The common shares
convertible notes, and put right conversion were placed pursuant to exemptions
from registration requirements of the Securities Act provided by Section 506 of
Regulation D and/or section 4(2) of the Securities Act, such exemption being
available based on information obtained from the investors to the private
placement.
PLAN OF DISTRIBUTION
We are registering the shares of common
stock on behalf of the selling security holders. When we refer to selling
security holders, we intend to include donees and pledgees selling shares
received from a named selling security holder after the date of this prospectus.
All costs, expenses and fees in connection with this registration of the
shares offered under this registration statement will be borne by us.
Brokerage commissions and similar selling expenses, if any, attributable
to the sale of shares will be borne by the selling security holders. Sales
of shares may be effected by the selling security holders from time to time in
one or more types of transactions (which may include block transactions) on the
over-the-counter market, in negotiated transactions, through put or call options
transactions relating to the shares, through short sales of shares, or a
combination of such methods of sale, at market prices prevailing at the time of
sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling security holders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling security holders.
The selling security holders may effect
such transactions by selling shares directly to purchasers or through
broker-dealers, which may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions, or commissions from
the selling security holders and/or purchasers of shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling security holders and any
broker-dealers that act in connection with the sale of shares might be deemed to
be underwriters within the meaning of Section 2(11) of the Securities Act, and
any commissions received by such broker-dealers and any profit on the resale of
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. The
selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against some liabilities arising under the Securities Act.
Because the selling security holders may be
deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act, the selling security holders will be subject to the prospectus
delivery requirements of the Securities Act. We have informed the selling
security holders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the market.
In the event that the registration
statement is no longer effective, the selling security holders may resell all or
a portion of the shares in open market transactions in reliance upon Rule 144
under the Securities Act, provided they meet the criteria and conform to the
requirements of such Rule, including the minimum one year holding period.
Upon being notified by any selling security
holder that any material arrangement has been entered into with a broker-dealer
for the sale of shares through a block trade, special offering, exchange
distribution or secondary distribution or a
17
purchase by a broker or dealer, we will
file a supplement to this prospectus, if required, under Rule 424(b) of the Act,
disclosing:
the name of each selling security holder(s) and of the
participating broker-dealer(s),
the number of shares involved,
the price at which the shares were sold,
the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
that the broker-dealer(s) did not conduct any investigation to
verify information set out or incorporated by reference in this prospectus;
and
other facts
material to the transaction.
DESCRIPTION OF SECURITIES TO BE
REGISTERED
Common Stock
The Company is authorized to issue
100,000,000 shares of common stock. The common stock has a par value of
$0.001. As of February 27, 2009, there were 34,369,459 shares of common
stock issued and outstanding. Each record holder of common stock is
entitled to one vote for each share held on all matters properly submitted to
the stockholders for their vote. Cumulative voting for the election of directors
is not permitted by the Companys Articles of Incorporation.
Holders of outstanding
shares of common stock are entitled to such dividends as may be declared
from time to time by the board of directors out of legally available funds.
Furthermore, in the event of liquidation, dissolution or winding up of the
affairs of the Company, holders of common stock are entitled to receive,
ratably, the net assets of the Company available to stockholders after
distribution is made to the preferred stockholders, if any, who are given
preferred rights upon liquidation. Holders of outstanding shares of
common stock have no preemptive, conversion or redemptive rights.
All of the issued and outstanding shares of common stock are,
and all un-issued shares when offered and sold will be duly authorized, validly
issued, fully paid, and non-assessable. To the extent that additional
shares of the Companys common stock are issued, the relative
interests of then existing stockholders may be diluted.
Preferred
Stock
The total number of shares of preferred
stock that the Company has authority to issue is 10,000,000 (Ten Million). The
preferred stock has a par value of $0.01. As of February 27, 2009, there were no
outstanding preferred shares. The preferred stock shall be entitled to
preference over the common stock with respect to the distributions of assets of
the Company in the event of liquidation, dissolution, or winding up of the
Company, whether voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for the purpose of
winding up its affairs. Shares of preferred stock of the Company may be issued
from time to time in one or more series, each of which series shall have such
distinctive designation or title and such number of shares as shall be fixed by
the board of directors prior to the issuance of any shares thereof.
Each such series of preferred stock shall
have such voting powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue of such
series of preferred stock as may be adopted from time to time by the board of
directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in it. The board of directors is further authorized to
increase or decrease (but not below the number of shares then outstanding) the
number of shares of any series of preferred stock subsequent to the issuance of
shares of that series. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status of
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
INTEREST OF NAMED
EXPERTS AND COUNSEL
None.
18
DESCRIPTION OF THE BUSINESS
General
We were incorporated in the State of Idaho
on August 28, 1968 under the name Silver Crystal Mines, Inc., to engage in the
business of exploring for precious metal deposits and advancing them toward
production. We ceased exploration activities during the 1990s and became
virtually inactive. In December 2003, a group of investors purchased
80-percent of the issued and outstanding common stock from the then-controlling
management team. In January 2004, we affected a one-for-four reverse split
of our issued and outstanding shares of common stock and increased the number of
our authorized shares of common stock to 100 million with a par value of $.001.
Unless otherwise indicated, all references herein to shares outstanding
and share issuances have been adjusted to give effect to the aforementioned
stock split. On February 2, 2004, our name was changed to Timberline
Resources Corporation. Since the reorganization, we have been in an
exploration stage evaluating, acquiring and exploring mineral prospects with
potential for economic deposits of precious and base metals. A prospect is
defined as a mining property, the value of which has not been determined by
exploration. On August 27, 2008 we reincorporated into the State of Delaware
pursuant to a merger agreement approved by our shareholders on August 22,
2008.
On March 6, 2006, we acquired Kettle
Drilling, Inc. (which we refer to as Kettle) as a wholly owned subsidiary.
Kettle was formed in 1996 and provides drilling services to the mining and
mineral exploration industries across North America and worldwide. In September
2008, Kettle Drilling, Inc. changed its name to Timberline Drilling Incorporated
(which we refer to as Timberline Drilling).
In July 2007, Timberline closed its
purchase of the Butte Highlands Gold Project. In October 2008, the Company
announced that it had agreed to form a 50/50 joint venture with Small Mine
Development (SMD) at the Butte Highlands project. Under terms of the proposed
agreement, Timberline will be carried to production by SMD, which will fund all
mine development costs and begin development in the summer of 2009.
Unless otherwise indicated, any reference
to Timberline, or we, us, our, etc. refers to Timberline Resources
Corporation and/or its wholly owned subsidiary, Timberline Drilling.
Our
Competition
Both the mineral exploration and drilling
industries are intensely competitive in all phases. In our mineral
exploration activities, we will compete with many companies possessing greater
financial resources and technical facilities than us for the acquisition of
mineral concessions, claims, leases and other mineral interests as well as for
the recruitment and retention of qualified employees. We must overcome
significant barriers to enter into the business of mineral exploration as a
result of our limited operating history.
Similarly, in our drilling business, our
competition includes many companies with significantly greater experience,
larger client bases, and substantially greater financial resources. There are
significant barriers to entry including large capital requirements and the
recruitment and retention of qualified, experienced employees.
We cannot assure you that we will be able
to compete in any of our business areas effectively with current or future
competitors or that the competitive pressures faced by us will not have a
material adverse effect on our business, financial condition and operating
results.
Our
Offices and Other Facilities
Timberline currently maintains its
administrative office at 101 East Lakeside Ave., Coeur dAlene, ID 83814.
The telephone number is (208) 664-4859. Timberline Drilling maintains its
administrative office at 2775 Howard Street, Suite 2, Coeur dAlene, ID 83815.
Timberline Drillings telephone number is 208-665-7211. In addition,
Timberline Drilling maintains a shop facility in Coeur dAlene, ID and an
operational facility in Elko, NV. Timberline Drillings Mexican
subsidiary, World Wide Exploration, S.A. de C.V., maintains an administrative
office and warehouses in Hermosillo and Torreon, Mexico.
Our
Employees
Timberline, the parent company, is an
exploration company and currently has six employees, including certain officers
and directors. Management expects to hire staff and additional management
as necessary as implementation of our business plan requires.
19
Our subsidiaries, Timberline Drilling and
World Wide Exploration, have approximately 65 full-time employees in the U.S.
and 60 full-time employees in Mexico, respectively. We believe that our
relationship with our employees is good.
Regulation
The exploration, drilling and mining
industries operate in a legal environment that requires permits to conduct
virtually all operations. Thus permits are required by local, state and
federal government agencies. Federal agencies that may be involved
include: The U.S. Forest Service (USFS), Bureau of Land Management (BLM),
Environmental Protection Agency (EPA), National Institute for Occupational
Safety and Health (NIOSH), the Mine Safety and Health Administration (MSHA) and
the Fish and Wildlife Service (FWS). Individual states also have various
environmental regulatory bodies, such as Departments of Ecology and so on.
Local authorities, usually counties, also have control over mining
activity. The various permits address such issues as prospecting,
development, production, labor standards, taxes, occupational health and safety,
toxic substances, air quality, water use, water discharge, water quality, noise,
dust, wildlife impacts, as well as other environmental and socioeconomic issues.
Prior to receiving the necessary permits to
explore or mine, the operator must comply with all regulatory requirements
imposed by all governmental authorities having jurisdiction over the project
area. Very often, in order to obtain the requisite permits, the operator
must have its land reclamation, restoration or replacement plans pre-approved.
Specifically, the operator must present its plan as to how it intends to restore
or replace the affected area. Often all or any of these requirements can cause
delays or involve costly studies or alterations of the proposed activity or time
frame of operations, in order to mitigate impacts. All of these factors
make it more difficult and costly to operate and have a negative and sometimes
fatal impact on the viability of the exploration or mining operation. Finally,
it is possible that future changes in these laws or regulations could have a
significant impact on our business, causing those activities to be economically
reevaluated at that time.
Overview of Timberline Drilling, Incorporated Our
Wholly-Owned Subsidiary
In March 2006, Timberline acquired Kettle
Drilling, Inc., which in September 2008 changed its name to Timberline Drilling
Incorporated. Timberline Drilling provides core drilling services to
mining and mineral exploration companies throughout North America, combining
state of the art equipment, world-class technical expertise, innovative
thinking, and a strong safety record. Timberline Drilling specializes in
underground drilling services in support of active mining operations and
advanced exploration projects. Working primarily with established
companies, its business is less cyclical than that of surface drillers at
early-stage exploration sites, where supplies, infrastructure, and project
funding are less predictable.
Timberline Drillings long-term strategies
of aggressive expansion, drill fleet modernization, and underground focus have
resulted in revenue growth. Timberline Drilling, along with its
wholly-owned Mexican subsidiary, World Wide Exploration, S.A. de C.V. (which we
refer to as World Wide or WWE), now have a combined fleet of 26 drill rigs which
generated revenues of approximately $7.2-million in the quarter ending September
2008, raising overall revenue for the 2008 fiscal year to more than $31
million.
Looking ahead to the 2009 fiscal year, the
current credit and financial crisis affects the ability of some of our potential
clients to raise funds for drilling programs. Our underground drilling
operations in support of operating mines continue to perform well both in the
U.S. and Mexico, however in recent months, even active mining operations -
typically more resistant to market volatility - are in a mode of restraint and
in some cases temporarily closing even though gold prices have remained more
stable than many other commodities. Due to the downturn in surface
drilling contracts, revenues at Timberline Drilling are expected to be lower in
the foreseeable future. However, improved cash flows are expected as
management focuses on profitability and customer service at Timberline
Drilling.
Overview of Our Mineral Exploration Business
Our parent company is a mineral exploration
company. Mineral exploration is essentially a research activity that does
not produce a product. Successful exploration often results in increased
project value that can be realized through the optioning or selling of the
claimed site to larger companies. As such, we acquire properties which we
believe have potential to host economic concentrations of minerals, particularly
gold, silver and copper. These acquisitions have and may take the form of
unpatented mining claims on federal land, or leasing claims, or private property
owned by others. An unpatented mining claim is an interest that can be
acquired to the mineral rights on open lands of the federally owned public
domain. Claims are staked in accordance with the Mining Law of 1872,
recorded with the federal government pursuant to laws and regulations
established by the Bureau of Land Management (the Federal agency that
administers Americas public lands), and grant the holder of the claim a
possessory interest in the mineral rights, subject to the paramount title of the
United States.
20
We will perform basic geological work to
identify specific drill targets on the properties, and then collect subsurface
samples by drilling to confirm the presence of mineralization (the presence of
economic minerals in a specific area or geological formation). We may
enter into joint venture agreements with other companies to fund further
exploration work. It is our plan to focus on assembling a high quality
group of mid-stage mineral (gold, silver, and copper) exploration prospects,
using the experience and contacts of the management group. By such
prospects, we mean properties that may have been previously identified by third
parties, including prior owners such as exploration companies, as mineral
prospects with potential for economic mineralization. Often these
properties have been sampled, mapped and sometimes drilled, usually with
indefinite results. Accordingly, such acquired projects will either have
some prior exploration history or will have strong similarity to a recognized
geologic ore deposit model. Geographic emphasis will be placed on the
western United States.
The focus of our activity has been to
acquire properties that we believe to be undervalued; including those that we
believe to hold previously unrecognized mineral potential. Properties have
been acquired through the location of unpatented mining claims (which allow the
claimholder the right to mine the minerals without holding title to the
property), or by negotiating lease/option agreements. Our Vice-President
of Exploration, Paul Dircksen, has experience in evaluating, staking and filing
unpatented mining claims, and in negotiating and preparing mineral lease
agreements in connection with those mining claims.
The geologic potential and ore deposit
models have been defined and specific drill targets identified on the majority
of our properties. Our property evaluation process involves using basic
geologic fieldwork to perform an initial evaluation of a property. If the
evaluation is positive, we seek to acquire it, either by staking unpatented
mining claims on open public domain, or by leasing the property from the owner
of private property or the owner of unpatented claims. Once acquired, we
then typically make a more detailed evaluation of the property. This
detailed evaluation involves expenditures for exploration work which may include
rock and soil sampling, geologic mapping, geophysics, trenching, drilling, or
other means to determine if economic mineralization is present on the property.
Portions of our mineral properties are
owned by third parties, and leased to us. These agreements are held by
David Miller and Howard Adams, Jim Ebisch, Sedi-Met, Inc, Hecla Mining Company,
Snowshoe Mining Company and Diversified Inholdings. The contract with Mr.
Ebisch, a former director, is an assignment of lease; the state of Idaho is the
underlying owner. In addition, we own a number of unpatented mining claims
outright. Approximately 38 of these claims are located near our Snowstorm
Project in Shoshone County, Idaho, and have been included in the earn-in
agreement with Hecla Mining Company. An earn-in agreement requires one
party to spend a certain amount of money, usually in mineral exploration
expenditures, to earn a specified percentage ownership in the property. On
February 1, 2006, pursuant to the agreement, Hecla elected to withdraw from the
venture but retains four percent (4%) net smelter return royalty on any mineral
production from the subject claims. In conjunction with this withdrawal, Hecla
assigned approximately 750 acres of mineral rights in the area to us. Four
additional groups of unpatented claims owned by the Company are located in
Sanders and Lincoln counties, Montana. Additionally, also in
Montana, the Butte Highlands Property is located in Silver Bow County and is
comprised of 8 patented and 61 unpatented claims. The contract on the East
Camp Douglas property in Mineral County, Nevada is comprised of 115 unpatented
claims.
All of the leases are contracts with varied
terms, all of which provide for us to earn an interest in the property or
receive a royalty. See Description of Property below.
Our strategy with properties deemed to be
of higher risk or those that would require very large exploration expenditures
is to present them to larger companies for joint venture. Our joint
venture strategy is intended to maximize the abilities and skills of the
management group, conserve capital, and provide superior leverage for investors.
If we present a property to a major company and they are not interested,
we will continue to seek an interested partner.
For our prospects where drilling costs are
reasonable and the likelihood of success seems favorable, we will undertake our
own drilling. The target depths, the tenor of mineralization on the
surface, and the general geology of the area are all factors that determine the
risk as calculated by us in conducting a drilling operation. Mineral
exploration is a research and development activity and is, by definition, a high
risk business that relies on numerous untested assumptions and variables.
Accordingly, we make our decisions on a project by project basis. We
do not have any steadfast formula that we apply in determining the
reasonableness of drilling costs in comparison to the likelihood of success,
i.e. in determining whether success seems favorable.
The
Commodities Market
The prices of gold, silver and copper have
fluctuated during the last several years. The price of gold has risen
steadily for the last few years. Through 2006, gold traded in a fairly
narrow price range between roughly $520 and $720 per ounce, based on the London
PM Fix Price. In 2007, gold traded between approximately $600 and $840,
and in 2008 to date, gold has traded between approximately $690 and $1,025
(based on the London PM Fix Price). The price of gold based on the
21
London PM Fix Price closed at $835.75 on
December 19, 2008. In 2006, the price of silver per ounce ranged from
approximately $8.80 to $14.90, based on the London Fix Price. In
2007, the price of silver ranged from $11.70 to $15.80 per ounce, and in 2008,
silver traded between approximately $8.80 and 20.90 (based on the London Fix
Price). The price of silver based on the London Fix Price closed at $10.61
on December 19, 2008. During 2007, the approximate price per pound of
copper ranged from $2.50 to $3.75, and in 2008, the approximate price per pound
of copper ranged from approximately $1.20 to 4.10. The price of copper closed at
$1.28 per pound on December 19, 2008, based on the London Metal Exchange price.
.
DESCRIPTION OF PROPERTY
Summary of Timberlines Mineral Exploration Prospects
As of February 2009, Timberline has
acquired mineral prospects for exploration in Montana, Nevada and Idaho mainly
for target commodities of gold, silver, zinc and copper. The prospects are held
by both patented and unpatented mining claims owned directly by the Company or
through legal agreements conveying exploration and development rights to the
Company. Most of our prospects have had a prior exploration history and
this is typical in the mineral exploration industry. Most mineral
prospects go through several rounds of exploration before an economic ore body
is discovered and prior work often eliminates targets or points to new ones.
Also, prior operators may have explored under a completely different
commodity price structure or technological regime. Mineralization which was
uneconomic in the past may be ore grade at current market prices when extracted
and processed with modern technology.
Montana Gold Properties
Butte Highlands
Gold Project
In July 2007, Timberline closed its
purchase of the Butte Highlands Gold Project. The project is located 15
miles south of Butte in southwestern Montana within a favorable geologic domain
that has hosted several multi-million ounce gold deposits including Butte,
Golden Sunlight, Montana Tunnels, and Virginia City.
Gold mineralization at Butte Highlands is
hosted primarily in lower Paleozoic Wolsey shale with higher-grade
mineralization occurring within the sediments proximal to diorite sills and
dikes. Between 1988 and 1996, prior operators Placer Dome, Battle
Mountain, ASARCO, and Orvana Minerals demonstrated the presence of a wide and
continuous mineralized zone by drilling 46 core holes (36,835 feet) and 132
reverse-circulation holes (61,338 feet) within the district. The vast
majority of this drilling was conducted in the Nevin Hill area which is included
in the Timberline property. Best gold intercepts achieved at Butte
Highlands include 49.8 feet of 0.651 ounces per ton (oz/t) and 11.5 feet of
1.996 oz/t from surface and 31.0 feet of 1.060 oz/t from underground.
Since signing the Purchase Agreement for
Butte Highlands in May, Timberline has expanded its land position to cover
additional drill targets and has retained Klepfer Mining Services
(Eric Klepfer, as affiliate of Klepfer Mining Services, is
also a director to Timberline)
to perform the environmental
and permitting services necessary to advance the project. Timberline
management believes that there is excellent potential to increase the historic
resource estimates at Butte Highlands, both along strike and down-dip, as well
as a realistic opportunity for near-term production.
Timberline purchased the Butte Highlands
property, including 100-percent ownership of mineral rights, from Butte
Highlands Mining Company for $405,000 cash and 108,000 shares of Timberline
common stock.
In 2008, Timberline completed the first
four holes (totaling 6,757 feet) of its planned 17-hole surface core drilling
program before the early onset of heavy snowfall forced the cessation of
exploration activities for the season. Assays have been received for the
first three holes with results confirming known mineralized zones and
identifying a new high-grade gold zone to the northwest. The program was
designed to validate and expand the historic estimates, to obtain material for
petrographic and metallurgical evaluation, and to assess 3-D control for
planning and permitting the exploration decline and, ultimately, a producing
mine.
The most encouraging hole to-date, BH-DDH
08-03, was drilled 100 feet northwest of previously-tested mineralization
boundaries. The hole returned several mineralized gold intervals,
including 2.0 feet of 0.62 ounces per ton (oz/t), 37.0 feet of 0.22 oz/t, 5.0
feet of 0.26 oz/t, 9.0 feet of 0.43 oz/t, and 35.0 feet of 0.14 oz/t.
These results demonstrate the northwest extension of the Upper, Middle,
and Lower zones, while the latter two intervals comprise a new discovery at
depth, a potential offset portion of previously-identified zones. Both the
extension and the discovery have the potential to greatly increase
mineralization estimates at Butte Highlands.
22
Results for BH-DDH 08-02, intended to test
a narrow gold zone proximal to a diorite dike, were also positive and
encouraging. In addition to a 7.2-foot interval grading 0.11 oz/t gold
within typical Wolsey shale host rock, the hole also intercepted a 267-foot zone
of mineralized diorite with grades up to 0.18 oz/t gold, including 25.0 feet
grading 0.10 oz/t. It is important to note that the identification of
slightly higher-grade diorite material, or the delineation of similarly wide
zones of lower-grade material with underground bulk mining potential, could have
a significant positive impact on mineralization estimates as they do not
currently include diorite-hosted gold. Additional testing of diorite
targets will be considered for future drilling phases, most likely from
underground.
2008 Butte Highlands Drilling
Highlights
Drill Hole
|
From
(ft)
|
To
(ft)
|
Length
(ft)
|
Gold
(oz/t)
|
BH-DDH 08-01
|
1335.6
|
1337.0
|
1.4
|
0.27
|
BH-DDH 08-02
|
1171.4
|
1178.6
|
7.2
|
0.11
|
|
1321.0
|
1588.0
|
267.0
|
up to 0.18
|
Including
|
1326.0
|
1351.0
|
25.0
|
0.10
|
BH-DDH 08-03
|
1207.0
|
1209.0
|
2.0
|
0.62
|
|
1242.0
|
1279.0
|
37.0
|
0.22
|
Including
|
1242.0
|
1260.0
|
18.0
|
0.24
|
Including
|
1272.7
|
1279.0
|
6.3
|
0.41
|
|
1294.0
|
1299.0
|
5.0
|
0.26
|
|
1404.0
|
1409.0
|
5.0
|
0.11
|
NW Extension
|
1560.2
|
1569.2
|
9.0
|
0.43
|
NW Extension
|
1580.0
|
1615.0
|
35.0
|
0.14
|
In October 2008, the Company announced that
it had agreed to form a 50/50 joint venture with Small Mine Development (SMD) at
the Butte Highlands project. Under terms of the proposed agreement, Timberline
will be carried to production by SMD, which will fund all mine development costs
and begin development in the summer of 2009. Both Timberlines and SMDs
50-percent share of costs will be paid out of proceeds from future mine
production.
Nevada Gold Properties
The Long Canyon Prospect
In July 2006, Timberline signed a Letter of
Intent to enter a Lease / Option to Purchase Agreement on the Long Canyon
Project, along the Walker Lane Mineral Belt in south-central Nevada. Long
Canyon is located 7 miles southeast of Mina in Mineral County, Nevada and 9
miles east-southeast of the East Camp Douglas Project.
The Long Canyon project covers 22 mining
claims and represents the upper levels of a low-sulfidation, quartz-adularia
gold system within the same positive structural setting as East Camp Douglas.
The project area contains a series of narrow quartz veins grading up to
3.9 grams per tonne (g/t) gold and 529 g/t silver, cutting a broad, undefined,
zone of gold bearing siliceous breccias associated with a poorly defined
intrusive mafic sill. Additionally, a regional rhyolite dike swarm appears
to control some of the gold mineralization. The property demonstrates the
potential for porphyry-style mineralization similar to other systems found along
Walker Lane.
A recent magnetic survey has revealed
significant magnetic highs on the property, indicating a possible structural
control for mineralization. The survey, combined with geologic mapping and
sampling results, has led to the selection of drill targets which will be tested
later this year.
The Agreement requires Timberline to make
annual advance royalty payments of $20,000 increasing $5,000 annually to a cap
of $50,000. Upon a production decision, Timberline may purchase the
Property for $500,000 subject to a 2-percent Net Smelter Returns (NSR) royalty,
of which 1-percent may be purchased for $1,000,000.
23
Idaho
Copper-Silver Property
The Snowstorm Prospect
The Snowstorm Project is located in north
Idahos Silver Valley and features the Snowstorm Mine, a historic operation
that produced 800,000 tons of ore averaging 4-percent copper and 6 ounces per
ton (oz/t) silver. Snowstorm mineralization occurred as disseminated
copper and silver found in the same Revett Formation quartzites that host the
Troy, Rock Creek, and Montanore deposits on the Montana Copper Sulfide Belt, but
was of a much higher grade. The Snowstorm property, which is 2 miles
northeast of the Lucky Friday Mine near Mullan in Shoshone County, Idaho, lies
in the southwest corner of the Montana Copper Sulfide Belt where it overlaps the
northeast corner of the Coeur d'Alene Mining District. Timberline controls
100-percent of the Snowstorm Project.
Exploration work has been conducted in the
project area for decades. U.S. Borax conducted a program focusing on the
nearby Military Gulch area during the 1980s. Later, Silver Mountain Lead
Mines, The Bunker Hill Company, and Hecla held the project area and also
conducted significant exploration. Timberline has obtained access to most
of this data, which represents hundreds of thousands of dollars worth of work.
This data was reviewed and assembled to aid in the development of the 2005
exploration program.
In late-2005, Timberline completed a Phase
I exploration program at Snowstorm, designed as an initial evaluation of the
potential for copper-silver mineralization in Upper Revett quartzite within the
large project area. The program consisted of 10 core holes totaling 4,104
feet, drilled at nine widely-spaced sites along the projected mineralized
horizon at depths ranging from 149 to 712 feet.
Mineralization was found to occur within
the lower unit of the Upper Revett quartzite, with all ten drill holes
encountering the quartzite in thicknesses varying from 37 to 57 feet. Six
holes encountered narrow irregular bands of mineralization grading up to
0.8-percent copper and 1.4 oz/t silver over a two-foot interval within the
stratigraphic unit, with two additional holes returning anomalous values.
Although the continuity of the stratigraphy and the mineralized horizon
was demonstrated, bulk grades across the horizon were sub-economic, with copper
values typically less than 0.3-percent and silver values typically less than
0.25 oz/t. Much of the mineralization in the shallower intercepts was
oxidized with leaching contributing to the lower grades. In the sulfide
zones, chalcopyrite was the predominate sulfide rather than bornite or
chalcocite. Results of the drilling were reported in the Companys 8-K
report dated January 3, 2006.
Timberline submitted a technical report on
the Phase I exploration program at Snowstorm, along with a Phase II exploration
proposal, to Hecla as required by an earn-in agreement. Hecla has
subsequently elected not to participate in future expenditures at Snowstorm and
thus retains a 4-percent net smelter returns (NSR) royalty on any future
production from the project. Timberline now controls 100-percent of the
Snowstorm prospect.
Timberline plans to reactivate the project
as the Silver Valley experiences investment activity not seen in several
decades, led by Hecla Mining Company at its neighboring Lucky Friday Mine.
The work plans at Snowstorm include the rehabilitation of underground
access to the Snowstorm #3 haulage level, enabling the drill testing of known
copper-silver mineralization that surrounds the historic high-grade stopes, both
peripherally and down-plunge. Past drilling peripheral to the Snowstorm
workings, primarily by Hecla, has demonstrated a halo grading approximately
1-percent (20 pounds per ton) copper and 1 oz/t silver and containing an
estimated 5 to 10 million tons of mineralized material. The future drill
program will seek to confirm and expand this historical resource. The
anticipated cost of this next exploration phase is approximately $250,000 to
$400,000.
The mineralized horizon at the Snowstorm
Mine was discovered in outcrop and subsequently developed with four adits, each
driven at lower elevations to access its nearly vertical structure. The
horizon appears to have been offset by a structure near the lowest adit and
little systematic exploration has been conducted for this lower portion of the
ore body. No stratabound copper-silver deposit has since been discovered
that approached the grades of the Snowstorm.
In May 2005, the Company signed a Mineral
Lease Agreement with Snowshoe for additional ground adjacent to the Snowstorm
project area. The property subject to the Snowshoe Agreement includes the
patented claims of Mineral Survey 2224, encompassing an area of approximately 76
acres, just west of the Snowstorm claims. The Agreement calls for an
initial payment of $8,000, with annual payments increasing to $15,000 by May
2009, and remaining at that level thereafter. The Company will pay a
3-percent NSR royalty on any production from the Snowshoe property, and will
perform a minimum of $10,000 worth of exploration work upon it annually.
The work may be performed on or for the benefit of the Snowshoe claims.
Hecla previously elected to include the Snowshoe claims within the area of
interest, and will consequently receive a 1-percent NSR royalty on any
production from the Snowshoe property.
24
Idaho
Gold Property
The Spencer Prospect
The Spencer prospect covers 640 acres on
the western end of the Kilgore-Spencer Trend, a northeast-trending belt of
rhyolite volcanics known to host epithermal gold-silver mineralization, just
south of a privately-held opal mine about nine miles northeast of near the town
of Spencer, Idaho. The Company believes that the property has the
potential to host both open-pit and underground gold deposits.
The geochemistry at Spencer is
consistent with the upper levels of an epithermal system. Rock
sampling at Spencer has returned values of up to 0.20 ppm gold, 3.6 ppm silver,
8.7 ppm mercury, and 88 ppm arsenic. Although there was considerable
interest in the region during the 1980s and 1990s following the Kilgore
discovery, the Spencer property has never been drill tested.
The Company has performed a phase-one
exploration program consisting of reconnaissance-scale geological mapping along
with rock chip and soil geochemical sampling. Future work may include more
detailed mapping and sampling, and possibly a geophysical survey to help define
drill targets. A geologic correlation model between Spencer and Kilgore is
also proposed, based upon their similar stratigraphy and alteration.
The Spencer Prospect is held by State of
Idaho Department of Lands Mineral Lease No. 9347. The Mineral Lease was issued
to a prior Director of Timberline, who assigned it to the Company for
consideration of common stock and approximately $3,000 in expenses.
The prospect is located in Section 16,
Township 12 North, Range 37 East, in Clark County, Idaho. The lease covers
an area of approximately 640 acres and calls for annual payments to the State of
Idaho of $640. Royalties on production of previous metals are 5-percent of
the gross receipts from the sale of minerals produced, less reasonable
transportation, smelting and treatment costs.
Montana Copper-Silver Properties
The Minton Pass, East Bull, Standard Creek and Lucky Luke
Prospects
In 2004, Timberline acquired four
properties on the Montana Copper Sulfide Belt in Lincoln and Sanders counties,
all of which were then leased to Sterling Mining Company (Sterling). All
four properties are interpreted as sediment-hosted copper-silver occurrences
located in the Revett Formation of the Montana Copper-Silver Belt and are
considered early-stage exploration prospects. The properties were held by
U.S. Borax and its successor company, Kennecott Exploration, during the 1980s
and early-1990s. Timberline has acquired the mapping and sampling data
from the U.S. Borax program. There has been no documented activity in
these areas since 1992.
In the 1970s and 1980s, major exploration
companies identified several copper-silver occurrences within the Montana Copper
Sulfide Belt, and successfully outlined three world-class ore bodies, including
Troy, Rock Creek and Montanore. These quartzite-hosted deposits are
characterized by their lateral extensive size and continuity of mineralization.
The Troy Mine produced 390 million pounds of copper and 44 million ounces
of silver from 1981 to 1993, and the undeveloped Rock Creek deposit is reported
to contain 137 million tons of ore averaging 0.72-percent copper and 1.67 oz/t
silver. Many of the copper-silver occurrences, including those held by the
Company, were evaluated in only a cursory manner during previous exploration.
Metasedimentary rocks of the Precambrian
Belt Supergroup underlie the area. Outcropping rocks consist of a sequence of
argillites, siltstones, and quartzites representing the basal portion of the
Wallace, St. Regis, and Revett formations, along with the upper portion of the
Burke Formation. Locally, these rocks strike northwest with a shallow
westerly dip. Major faulting associated with the mineralization is
generally north-northwest. Disseminated bornite with secondary chrysocolla
and malachite is reported to occur within a specific quartzite horizon of the
Revett Formation.
All claims were staked by Timberline and
are not subject to any underlying production royalty. All of these claims
have been filed with the BLM and their serial numbers can be found in Exhibits
that are included in the Company's Form 10SB and 10SB/A and are incorporated by
reference herein.
The State of Montana has banned the use of
cyanide in mining activities within the state. Cyanide is used in the
mining of gold. Since Timberlines Montana prospects are for silver and copper
only, this ban does not affect our plans for this property in Montana.
25
Minton Pass
Minton Pass is a
copper-silver occurrence first recognized during the early exploration phase of
the Montana Copper-Sulfide Belt, and is comprised of 20 unpatented mining claims
near Trout Creek. The property has been explored intermittently since its
discovery in 1966 with exploration focused on two mineralized horizons.
Mapping, sampling and trenching were conducted to better define the extent
of the mineralization at Minton Pass and there is evidence of several drill
holes on the claims. Rock chip sampling over a 17-foot stratigraphic
thickness averaged 0.70-percent copper and 1.78 oz/t silver. The thickness
and grade of Minton Pass mineralization is consistent with the geologic model,
exhibiting similarities to the Troy and Rock Creek deposits.
Lucky Luke
The Lucky Luke prospect
consists of 20 unpatented mining claims located on U.S. Forest Service property
northwest of Thompson Falls. The property has seen limited historic
production via an adit that was driven on a mineralized quartz vein and
eventually extended for 1,000 feet. Exploration work at Lucky Luke has
included several shallow trenches that crosscut at least two quartz veins with
strike lengths in excess of 3,000 feet. Chip samples from the vein
contained 6 oz/t silver along with significant copper mineralization.
East Bull
The East Bull prospect
consists of 19 unpatented mining claims located on U.S. Forest Service property
about one mile east of the Troy Mine. The primary feature at East Bull is
its potential for stratiform silver-copper mineralization in the Upper or Lower
Revett Formation on either side of the Bull Lake Fault, a large and untested
structure near the Troy Mine.
Standard Creek
The Standard Creek
prospect consists of 29 unpatented mining claims located on U.S. Forest Service
property about six miles east of the Montanore deposit. The property was
staked on the basis of high-grade vein mineralization that has returned assay
values of up to 0.10 oz/t gold, 9.95 oz/t silver, 0.69-percent copper,
3.6-percent lead, and 1.2-percent zinc. In 1987, U.S. Borax mapped and
sampled the property, and then drilled a single 1,450-foot core hole to the
south of the existing claim block that encountered only trace amounts of pyrite,
chalcopyrite and bornite. A drill test to the north, closer to the vein
mineralization, is still warranted
.
Overview of
Regulatory, Economic and Environmental Issues
Hard rock mining and drilling in the United
States is a closely regulated industrial activity. Mining and drilling
operations are subject to review and approval by a wide variety of agencies at
the federal, state and local level. Each level of government requires
applications for permits to conduct operations. The approval process
always involves consideration of many issues including but not limited to air
pollution, water use and discharge, noise issues, and wildlife impacts.
Mining operations always involve preparation of an environmental impact
statement that examines the probable effect of the proposed site development.
Federal agencies that may be involved include: The U.S. Forest Service
(USFS), Bureau of Land Management (BLM), Environmental Protection Agency (EPA),
National Institute for Occupational Safety and Health (NIOSH), the Mine Safety
and Health Administration (MSHA) and the Fish and Wildlife Service (FWS).
Individual states also have various environmental regulatory bodies, such
as Departments of Ecology and so on. Local authorities, usually counties,
also have control over mining activity. An example of such regulation is
the State of Montanas ban on the use of cyanide in mining activities
within the state. Cyanide is used in the mining of gold. However,
since some of our prospects in Montana are for silver and copper this ban does
not affect those properties. Our Butte Highlands project in Montana is
partially on patented ground and is an underground gold prospect. It is
anticipated that any production from this property would be shipped to nearby
mills for processing as opposed to building our own mills and processing
facilities, thus this ban should not affect our plans in Montana. The
Elkhorn project is nearby and similar to Butte Highlands and is following a
similar plan with public support. We are not aware of any other states
that plan to enact similar legislation.
Gold, silver and copper are mined in a wide
variety of ways, both in open pit and underground mines. Open pit mines
require the gold deposit to be relatively close to the surface. These
deposits tend to be low grade (such as 0.01-0.03 ounces per ton gold) and are
mined using large, costly earth moving equipment, usually at very high tonnages
per day.
Open pit operations for gold usually
involve heap leaching as a metallurgical method to remove the gold. Heap
leaching involves stacking the ore on pads which are lined with an impenetrable
surface, then sprinkling the gold with a weak
26
cyanide solution to extract the gold.
The particle impregnated solution is collected and the gold recovered
through further processing.
Underground metal mines generally involve
higher grade ore bodies. Less tonnage is mined underground, and generally
the higher grade ore is processed in a mill or other refining facility.
This process results in the accumulation of waste by-products from the
washing of the ground ore. Mills require associated tailings ponds to capture
waste by-products and treat water used in the milling process.
Capital costs for mine, mill and tailings
pond construction can easily run into the hundreds of millions of dollars. These
costs are factored into the profitability of a mining operation. Metal mining is
sensitive to both cost considerations and to the value of the metal produced.
Metals prices are set on a world-wide market and are not controlled by the
operators of the mine. Changes in currency values or exchange rates can
also impact metals prices. Thus changes in metals prices or operating costs can
have a huge impact on the economic viability of a mining operation.
Environmental protection and remediation is
an increasingly important part of mineral economics. In some cases,
particularly in Montana, with its concern for its grizzly bear population,
mining companies have been required to acquire and donate additional land to
serve as a substitute habitat for this endangered species.
Estimated future costs of reclamation or
restoration of mined land are based principally on legal and regulatory
requirements. Reclamation of affected areas after mining operations may cost
millions of dollars. Often governmental permitting agencies are requiring
multi-million dollar bonds from mining companies prior to granting permits, to
insure that reclamation takes place. All environmental mitigation tends to
decrease profitability of the mining operation, but these expenses are
recognized as a cost of doing business by modern mining and exploration
companies.
Mining and exploration activities are
subject to various laws and regulations governing the protection of the
environment. These laws and regulations are continually changing and are
generally becoming more restrictive. We conduct our operations so as to protect
the public health and environment and believe our operations are in compliance
with applicable laws and regulations in all material respects. We have made, and
expect to make in the future, expenditures to comply with such laws and
regulations, but cannot predict the full amount of such future expenditures.
Every mining activity has an environmental
impact. In order for a proposed mining project to be granted the required
governmental permits, mining companies are required to present proposed plans
for mitigating this impact. In the United States, where our properties are
located, no mine can operate without obtaining a number of permits. These
permits address the social, economic, and environmental impacts of the operation
and include numerous opportunities for public involvement and comment.
We intend to focus on exploration and
discovery of mineral resources, not their production. If we are
successful, the ore bodies discovered will be attractive to production
companies. The mining industry is, like agriculture, a fundamental
component of modern industrial society, and minerals of all sorts are needed to
maintain our way of life. If we are successful in finding an attractive
ore body, be it gold, silver or copper, sufficient value will be created to
reward the Companys shareholders and allow for all production and reclamation
expenses to be paid by the actual producer to whom we convey, assign or joint
venture the project.
.
LEGAL
PROCEEDINGS
On January 16, 2009, the Company filed a
complaint in the United States District Court for the District of Idaho (the
Court) against American Drilling, LLC, American Drilling Corporation (along
with American Drilling, LLC referred to as American Drilling), and Steven
Elloway ("Elloway"). Timberline Drilling alleged that when Elloway left
employment with the Company he immediately started American Drilling, and that
Elloway and American Drilling have subsequently violated Elloway's Supplemental
Income Agreement with Timberline Drilling, which restricted his post-termination
competitive activities. Timberline Drilling also asserted that Elloway and
American Drilling have converted confidential and proprietary Timberline
Drilling information and documents, misappropriated trade secrets, tortiously
and negligently interfered with Timberline Drilling's contractual relations with
its business relationships and its prospective economic advantage, and that
Elloway breached fiduciary duties to Timberline Drilling and unjustly enriched
himself. In addition to seeking monetary damages, Timberline Drilling has
asked the Court to issue an injunction to prohibit future improper competition
or use of Timberline Drilling trade secrets by Elloway or American Drilling.
A temporary restraining order has been issued, and arguments regarding the
entry of a preliminary injunction were heard by the Court on February 11, 2009.
The Court has not yet issued a ruling.
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.
27
MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock was listed on the NYSE
Alternext US LLC, formerly the American Stock Exchange, on May 12, 2008 and is
quoted under the trading symbol TLR.
On February 13, 2009, the Company received
a notice from the NYSE Alternext US LLC (the Alternext) indicating that the
Company was not in compliance with Section 1003(a)(ii) of the Alternext Company
Guide (the Company Guide) due to the Companys stockholders equity being less
than $4,000,000 and the Company having losses from continuing operations and net
losses in three of its four most recent fiscal years and Section 1003(a)(iii) of
the Company Guide due to the Companys stockholders equity being less than
$6,000,000 and the Company having losses from continuing operations and net
losses in its five most recent fiscal years. Therefore the Company has become
subject to Section 1009 of the Company Guide regarding continued listing
evaluations.
In order to maintain its Alternext listing,
the Company must submit a plan of compliance to the Alternext by March 13, 2009
(the Plan), addressing how it intends to regain compliance with Sections
1003(a)(ii) and 1003(a)(iii) of the Company Guide within a maximum of 18 months
(the Plan Period). The NYSE Alternext Corporate Compliance Department
management will evaluate the Plan, including any supporting documentation, and
make a determination as to whether the Company has made a reasonable
demonstration in the Plan of an ability to regain compliance with the continued
listing standards within the specified timeframes, in which case the Plan will
be accepted. If the Plan is accepted, the Company may be able to continue its
listing during the Plan Period, during which time it will be subject to periodic
review to determine whether it is making progress consistent with the Plan. If
the Company does not submit a Plan, if the Company submits a Plan that is not
accepted or if the Plan is accepted but the Company is not in compliance with
the continued listing standards at the conclusion of the Plan Period or does not
make progress consistent with the Plan during the Plan Period, the Company may
become subject to delisting proceedings in accordance with Section 1010 and Part
12 of the Company Guide.
The Company intends to submit a Plan by
March 13, 2009. The Company is working diligently to formulate the structure of
the Plan to bring the Companys stockholders equity into compliance with the
continued listing standards in the Company Guide.
The high and low sale prices for our common
stock as quoted on the NYSE Alternext US LLC and the OTCBB were as follows:
Period
(1)
|
High
|
Low
|
|
|
|
2008
|
|
|
First Quarter
|
$4.35
|
$2.50
|
Second Quarter
(2)
|
$4.40
|
$2.65
|
Third Quarter
|
$2.99
|
$0.80
|
Fourth
Quarter
(3)
|
$1.50
|
$0.23
|
|
|
|
2007
|
|
|
First Quarter
|
$2.94
|
$1.25
|
Second Quarter
|
$4.35
|
$2.21
|
Third Quarter
|
$5.70
|
$3.01
|
Fourth Quarter
|
$5.15
|
$3.03
|
|
|
|
2006
|
|
|
Fourth Quarter
|
$1.55
|
$0.64
|
(1)
(1) Quarters
indicate calendar year quarters.
(2)
(2) Our common
stock began trading on the American Stock Exchange on May 12, 2008
(3)
(3) Through
December 26, 2008
|
The above quotations for the OTCBB reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
28
On February 26, 2009, the closing sale
price for our common stock was $0.26 on the NYSE Alternext US LLC.
As of February 27, 2009, we had 34,369,459
shares of common stock issued and outstanding, held by approximately 750
registered shareholders. In many cases, shares are registered through
intermediaries, making the precise number of shareholders difficult to
obtain.
Dividend Policy
We anticipate that we will retain any
earnings to support operations and to finance the growth and development of our
business. Therefore, we do not expect to pay cash dividends in the foreseeable
future. Any further determination to pay cash dividends will be at the
discretion of our board of directors and will be dependent on the financial
condition, operating results, capital requirements and other factors that our
board deems relevant. We have never declared a dividend.
Purchases of Equity Securities by the Small Business Issuer and
Affiliates
There were no purchases of our equity
securities by us or any of our affiliates during the year ended September 30,
2008.
Stock
Incentive Plans
In February 2004, our Board adopted the
2004 Non-Qualified Stock Grant and Option Plan in order to provide incentives to
Directors, employees and others rendering services to the Company. In
February 2005, our Board adopted the 2005 Stock Incentive Plan which was
approved by a vote of shareholders at our Annual Meeting of Shareholders on
September 23, 2005. On August 31, 2006, our Board of Directors approved an
amendment to the Timberline Resources Corporation 2005 Equity Incentive Plan
(the Amended 2005 Plan) for the purposes of increasing the total number of
shares of common stock that may be issued pursuant to Awards granted under the
original 2005 Plan from seven-hundred and fifty thousand (750,000) shares to two
million (2,750,000) shares and allowing Ten Percent Shareholders (as defined
in the Amended 2005 Plan) to participate in the plan on the same basis of any
other participant. The Amended Plan was approved by a vote of shareholders at
our Annual Meeting of Shareholders on September 22, 2006. See Exhibit
10.19 herein which incorporates by reference Exhibit A of our DEF 14A (Proxy
Statement) filed on September 8, 2006.
On August 22, 2008, our shareholders
approved a proposal for the increase in the total number of shares of common
stock that may be issued pursuant to awards granted under the original 2005 Plan
as previously amended. Following the increase, the plan provides for
7,000,000 shares of common stock for awards under the plan.
Equity Compensation Plans
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants, and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
|
Equity
compensation plans approved by security holders(1)
|
6,401,668 (1)
|
$1.65
|
75,165
|
Equity
compensation plans not approved by security holders
|
|
|
|
TOTAL
|
6.401,668 (1)
|
$1.65
|
75,165
|
(1)
In February 2005, our Board adopted the 2005 Equity Incentive Plan
which was approved by shareholders on September 23, 2005. This plan
authorizes the granting of up to 750,000 non-qualified 10 year stock options to
Officers, Directors and consultants. In August 2006, the Board adopted the
Amended 2005 Equity Incentive Plan which was approved by shareholders on
September 22, 2006. This amended plan increases the number of non-qualified 10
year stock options that are authorized to be issued to Officers, Directors and
consultants to 2,750,000. On August 22, 2008, our shareholders approved a
proposal for the increase in the total number of shares of common stock that may
be issued pursuant to awards granted under the original 2005 Plan as previously
amended. Following the increase, the plan provides for 7,000,000 shares of
common stock for awards under the plan.
As to the options granted to date, there
were none exercised during the year ended September 30, 2008. For the year
ended September 30, 2007, 409,167 options were exercised.
29
Sale
of Unregistered Securities
All sales of unregistered securities were
previously reported in the Companys quarterly and current reports filed with
the Securities and Exchange Commission.
30
FINANCIAL STATEMENTS
TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 2008 and 2007
31
Timberline
Resources Corporation and Subsidiaries
Contents
Page
FINANCIAL
STATEMENTS:
Report
of Independent Auditors
33
Consolidated
balance sheets
34
Consolidated
statements of operations
35
Consolidated
statements of stockholders equity
36-37
Consolidated
statements of cash flows
38-39
Notes
to consolidated financial statements
40-59
32
33
TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2008
|
|
2007
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
737,503
|
$
|
3,949,988
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
|
|
|
|
|
$150,740 and
none , respectively
|
|
3,499,371
|
|
3,882,275
|
|
|
Materials and
supplies inventory
|
|
2,045,223
|
|
1,925,392
|
|
|
Deferred
offering and acquisition costs
|
|
923,957
|
|
-
|
|
|
Deferred
financing cost, net
|
|
202,550
|
|
-
|
|
|
Prepaid expenses
and other current assets
|
|
481,529
|
|
380,361
|
|
|
|
TOTAL CURRENT
ASSETS
|
|
7,890,133
|
|
10,138,016
|
|
|
|
|
|
|
|
|
|
PROPERTY,
MINERAL RIGHTS AND EQUIPMENT:
|
|
|
|
|
|
|
Property,
mineral rights and equipment, net
|
|
9,224,550
|
|
8,008,928
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
Restricted
cash
|
|
286,410
|
|
802,860
|
|
|
Deposits and
other assets
|
|
160,170
|
|
147,058
|
|
|
Intangible
assets, net of accumulated amortization
|
|
-
|
|
105,557
|
|
|
Goodwill
|
|
2,808,524
|
|
2,808,524
|
|
|
|
TOTAL OTHER
ASSETS
|
|
3,255,104
|
|
3,863,999
|
|
TOTAL
ASSETS
|
$
|
20,369,787
|
$
|
22,010,943
|
|
|
|
|
|
|
|
|
LIABILITIES,
TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Note payable to
bank
|
$
|
-
|
$
|
599,065
|
|
|
Accounts
payable
|
|
2,159,857
|
|
3,617,165
|
|
|
Accrued
expenses
|
|
945,809
|
|
220,578
|
|
|
Accrued offering
and acquisition costs
|
|
923,957
|
|
-
|
|
|
Accrued payroll
and benefits
|
|
566,177
|
|
532,591
|
|
|
Notes payable -
related parties
|
|
-
|
|
787,000
|
|
|
Put option on
common stock
|
|
92,336
|
|
-
|
|
|
Accrued
taxes
|
|
2,089,899
|
|
191,458
|
|
|
Accrued
severance
|
|
400,000
|
|
-
|
|
|
Deferred
revenue
|
|
27,315
|
|
250,000
|
|
|
Current portion
of capital leases
|
|
448,127
|
|
476,032
|
|
|
Current portion
of notes payable
|
|
250,638
|
|
300,638
|
|
|
|
TOTAL CURRENT
LIABILITIES
|
|
7,904,115
|
|
6,974,527
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
Bridge loan
financing
|
|
8,000,000
|
|
-
|
|
|
Obligation under
capital leases, net of current portion
|
|
577,534
|
|
647,416
|
|
|
Notes payable,
net of current portion
|
|
337,731
|
|
571,534
|
|
|
|
TOTAL LONG-TERM
LIABILITIES
|
|
8,915,265
|
|
1,218,950
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (NOTE 13)
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
TEMPORARY
EQUITY
|
|
|
|
|
|
|
Series A
Preferred stock, $0.01 par value; liquidation and redemption
|
|
|
|
|
|
|
|
value none and
$2,738,500, respectively; 5,000,000 shares authorized,
|
|
|
|
|
|
|
|
none and
4,700,000 shares issued and outstanding, respectively
|
|
-
|
|
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,
28,739,903 and 24,801,108 shares issued
|
|
|
|
|
|
|
|
and outstanding,
respectively
|
|
28,739
|
|
24,801
|
|
|
Common stock
subscribed
|
|
-
|
|
(802,761)
|
|
|
Additional
paid-in capital
|
|
21,343,416
|
|
20,433,478
|
|
|
Accumulated
deficit
|
|
(17,821,748)
|
|
(7,718,052)
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
3,550,407
|
|
11,937,466
|
|
TOTAL
LIABILITIES, TEMPORARY EQUITY AND
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
$
|
20,369,787
|
$
|
22,010,943
|
See accompanying notes to consolidated
financial statements.
34
TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
31,728,617
|
$
|
19,233,406
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
24,939,499
|
|
14,741,588
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
6,789,118
|
|
4,491,818
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
Mineral exploration expenses
|
|
|
2,387,862
|
|
530,137
|
|
Salaries and benefits
|
|
|
4,639,291
|
|
2,562,214
|
|
Insurance expense
|
|
|
1,502,914
|
|
560,402
|
|
Professional fees
|
|
|
1,207,834
|
|
450,119
|
|
Severance benefits
|
|
|
1,880,590
|
|
-
|
|
Other general and administrative expenses
|
|
|
3,227,753
|
|
2,612,977
|
|
Loss on sale of equipment
|
|
|
209,444
|
|
31,402
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
15,055,688
|
|
6,747,251
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(8,266,570)
|
|
(2,255,433)
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
Other income
|
|
|
59,415
|
|
54,638
|
|
Interest income
|
|
|
167,637
|
|
31,797
|
|
Interest expense
|
|
|
(1,331,928)
|
|
(409,380)
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(1,104,876)
|
|
(322,945)
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(9,371,446)
|
|
(2,578,378)
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
(732,250)
|
|
(110,000)
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(10,103,696)
|
$
|
(2,688,378)
|
|
|
|
|
|
|
|
|
EXCESS CONSIDERATION PAID ON REDEMPTION OF
|
|
|
|
|
|
|
PREFERRED STOCK
|
|
|
(6,090,000)
|
|
-
|
|
|
|
|
|
|
|
|
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS
|
|
$
|
(16,193,696)
|
$
|
(2,688,378)
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE AVAILABLE TO COMMON
|
|
|
|
|
|
|
STOCKHOLDERS, BASIC AND DILUTED
|
|
$
|
(0.60)
|
$
|
(0.15)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER
|
|
|
|
|
|
|
OF COMMON SHARES OUTSTANDING,
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
|
27,212,826
|
|
19,155,693
|
See accompanying notes to consolidated
financial statements.
35
TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
FOR THE YEARS
ENDED SEPTEMBER 30, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Additional
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Subscribed
|
|
Capital
|
|
Deficit
|
|
Equity
|
Balance,
September 30, 2006
|
14,356,921
|
$
|
14,357
|
|
$
|
-
|
$
|
8,479,403
|
$
|
(5,029,674)
|
$
|
3,464,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued for cash
ast $0.65 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unit, net of
offering costs
|
4,200,000
|
$
|
4,200
|
|
$
|
-
|
$
|
2,415,360
|
$
|
-
|
$
|
2,419,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued for cash
at $2.75 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unit, net of
offering costs
|
1,780,972
|
|
1,781
|
|
|
-
|
|
4,858,400
|
|
-
|
|
4,860,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
subscription receivable
|
-
|
|
-
|
|
|
(802,761)
|
|
|
|
|
|
(802,761)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants
exercised
|
|
2,772,271
|
|
2,772
|
|
|
-
|
|
2,658,393
|
|
-
|
|
2,661,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of
Series A preferred stock
|
300,000
|
|
300
|
|
|
-
|
|
119,700
|
|
-
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
exercised
|
|
347,544
|
|
347
|
|
|
-
|
|
20,669
|
|
-
|
|
21,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for services
|
757,600
|
|
758
|
|
|
-
|
|
947,432
|
|
-
|
|
948,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land purchase
payments
|
108,000
|
|
108
|
|
|
-
|
|
215,892
|
|
-
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for mineral rights
|
200,000
|
|
200
|
|
|
|
|
404,800
|
|
-
|
|
405,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land lease
payments
|
|
2,000
|
|
2
|
|
|
-
|
|
4,998
|
|
-
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
bonuses to employees
|
25,800
|
|
26
|
|
|
-
|
|
88,564
|
|
-
|
|
88,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancel duplicate
shares
|
(50,000)
|
|
(50)
|
|
|
-
|
|
50
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested portion
of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
granted
|
|
-
|
|
-
|
|
|
-
|
|
219,817
|
|
-
|
|
219,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
(2,688,378)
|
|
(2,688,378)
|
Balance,
September 30, 2007
|
24,801,108
|
$
|
24,801
|
|
$
|
(802,761)
|
$
|
20,433,478
|
$
|
(7,718,052)
|
$
|
11,937,466
|
See accompanying notes to
consolidated financial statements.
36
TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
FOR THE YEARS
ENDED SEPTEMBER 30, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Additional
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Subscribed
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued for cash
at $2.75 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unit, net of
offering costs
|
845,722
|
|
846
|
|
|
-
|
|
2,190,120
|
|
-
|
|
2,190,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on
stock subscription
|
-
|
|
-
|
|
|
802,761
|
|
-
|
|
-
|
|
802,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess cash paid
on redemption of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
preferred stock
|
-
|
|
-
|
|
|
-
|
|
(6,090,000)
|
|
-
|
|
(6,090,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for warrants exercised
|
1,708,273
|
|
1,708
|
|
|
-
|
|
1,706,565
|
|
-
|
|
1,708,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of
shares outstanding
|
9,800
|
|
9
|
|
|
-
|
|
(10)
|
|
-
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
bonuses to employees
|
40,000
|
|
40
|
|
|
-
|
|
135,960
|
|
-
|
|
136,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for conversion of
|
1,175,000
|
|
1,175
|
|
|
-
|
|
468,825
|
|
-
|
|
470,000
|
|
|
Series A
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bridge loan
financing
|
160,000
|
|
160
|
|
|
-
|
|
484,640
|
|
-
|
|
484,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested portion
of stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
granted
|
|
-
|
|
-
|
|
|
-
|
|
2,013,838
|
|
-
|
|
2,013,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
(10,103,696)
|
|
(10,103,696)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
28,739,903
|
$
|
28,739
|
|
$
|
-
|
$
|
21,343,416
|
$
|
(17,821,748)
|
$
|
3,550,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
37
TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2008
|
|
2007
|
CASH FLOWS
FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,103,696)
|
$
|
(2,688,378)
|
|
Adjustments to
reconcile net loss to net cash
|
|
|
|
|
|
|
used
by operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,445,295
|
|
1,144,695
|
|
|
Allowance for
doubtful accounts
|
|
|
150,740
|
|
-
|
|
|
Loss on sale of
equipment
|
|
|
209,444
|
|
31,402
|
|
|
Inventory
writedown
|
|
|
535,658
|
|
-
|
|
|
Share based
compensation
|
|
|
2,149,839
|
|
1,028,597
|
|
|
Change in fair
value of put option
|
|
|
92,336
|
|
-
|
|
|
Common stock
issued for mineral agreement and leases
|
|
|
-
|
|
5,000
|
|
|
Impairment of
mineral rights
|
|
|
578,391
|
|
-
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(518,396)
|
|
(2,576,779)
|
|
|
Materials and
supplies inventory
|
|
|
(655,489)
|
|
(1,059,826)
|
|
|
Prepaid expenses
and other current assets, deposits and other assets
|
|
|
(64,280)
|
|
(201,509)
|
|
|
Accounts
payable
|
|
|
(1,457,308)
|
|
2,295,313
|
|
|
Accrued
expenses
|
|
|
774,895
|
|
272,325
|
|
|
Accrued payroll
and benefits
|
|
|
33,586
|
|
-
|
|
|
Accrued
taxes
|
|
|
1,898,441
|
|
-
|
|
|
Accrued
severance
|
|
|
400,000
|
|
-
|
|
|
Deferred
revenue
|
|
|
(222,685)
|
|
250,000
|
|
|
Deferred
offering costs
|
|
|
(923,957)
|
|
-
|
|
|
Accrued offering
costs
|
|
|
923,957
|
|
-
|
|
|
Accrued interest
- related party payables
|
|
|
-
|
|
(23,121)
|
|
|
Deferred lease
income
|
|
|
-
|
|
(23,272)
|
|
|
Net
cash used by operating activities
|
|
|
(4,753,229)
|
|
(1,545,553)
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
equipment
|
|
|
(2,044,385)
|
|
(2,246,703)
|
|
Change in
restricted cash
|
|
|
516,450
|
|
(802,860)
|
|
Purchase of
land
|
|
|
(51,477)
|
|
(405,000)
|
|
Purchase of
mineral rights
|
|
|
(139,391)
|
|
(150,000)
|
|
Purchase of
investment in equity security
|
|
|
(50,000)
|
|
-
|
|
Proceeds from
sale of equipment
|
|
|
71,923
|
|
16,294
|
|
|
Net cash used by
investing activities
|
|
|
(1,696,880)
|
|
(3,588,269)
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
bridge loan financing
|
|
|
8,000,000
|
|
-
|
|
Redemption of
Series A preferred stock
|
|
|
(7,500,000)
|
|
-
|
|
Deferred
financing cost
|
|
|
320,000
|
|
-
|
|
Net proceeds
from line of credit
|
|
|
-
|
|
599,065
|
|
Proceeds from
related party notes payable
|
|
|
60,000
|
|
-
|
|
Payments on
related party notes payable
|
|
|
(847,000)
|
|
(660,525)
|
|
Payments on
notes payable
|
|
|
(413,226)
|
|
(254,608)
|
|
Payments on
capital leases
|
|
|
(485,084)
|
|
(491,529)
|
|
Payment of note
payable to bank
|
|
|
(599,065)
|
|
-
|
|
Proceeds from
exercise of options
|
|
|
-
|
|
21,017
|
|
Proceeds from
exercise of warrants
|
|
|
1,608,873
|
|
2,661,165
|
|
Collection of
common stock subscriptions
|
|
|
802,761
|
|
-
|
|
Proceeds from
issuances of stock and warrants,
|
|
|
|
|
|
|
net
of stock offering costs
|
|
|
2,290,364
|
|
6,476,980
|
|
|
Net cash
provided by financing activities
|
|
|
3,237,623
|
|
8,351,565
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash
|
|
|
(3,212,486)
|
|
3,217,743
|
CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
3,949,988
|
|
732,245
|
CASH AND CASH
EQUIVALENTS AT END OF PERIOD
|
|
$
|
737,503
|
$
|
3,949,988
|
See accompanying notes to
consolidated financial statements.
38
TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid in
cash
|
|
$
|
606,000
|
$
|
409,380
|
|
Income taxes
paid in cash
|
|
|
202,964
|
|
-
|
|
|
|
|
|
|
|
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for land
|
|
$
|
-
|
$
|
216,000
|
|
Common stock
issued for mineral rights
|
|
|
-
|
|
405,000
|
|
Common stock
issued for prepaid expenses and deposits
|
|
|
-
|
|
228,000
|
|
Account
receivable exchanged for equipment
|
|
|
700,895
|
|
-
|
|
Capital lease
for equipment purchase
|
|
|
387,297
|
|
412,797
|
|
Note payable
issued for equipment purchase
|
|
|
129,423
|
|
686,416
|
|
Series A
preferred stock exchanged for common stock
|
|
|
470,000
|
|
3,000
|
|
Common stock
issued in connection with bridge loan financing
|
|
|
484,800
|
|
-
|
See accompanying notes to consolidated
financial statements.
39
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.
In
2006, the Company acquired Kettle Drilling, Inc. (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. In September 2008, Kettle Drilling, Inc.
changed its name to Timberline Drilling Incorporated (Timberline
Drilling).
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
a
.
Basis of presentation
This summary of significant
accounting policies is presented to assist in understanding the financial
statements. The financial statements and notes are representations of the
companys management, which is responsible for their integrity and objectivity.
These accounting policies conform to accounting principles generally accepted in
the united states of america and have been consistently applied in the
preparation of the financial statements.
b.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Timberline 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.
Fair Value of Financial Instruments
The Companys
financial instruments include cash, accounts receivable, accounts payable, and
accrued expenses, and are carried at fair value. The carrying value of
restricted cash, notes payable, capital leases, related party notes payable,
bridge loan financing and derivatives approximate fair value based on the
contractual terms of those instruments at September 30, 2008 and 2007.
e.
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 to be cash equivalents. Balances are
insured by the Federal Deposit Insurance Corporation up to $250,000.
f.
Restricted Cash
Restricted cash represents investments in
money market funds and are restricted as collateral for various financing
arrangements and bonds held for exploration permits.
g.
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 Companys reported financial
position and results of operations.
40
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
h.
Investments
We determine the appropriate classification
of our investments at the time of purchase. The Company owns 1,240,000
restricted shares of Rae Wallace Mining Company, a private corporation and
related party. The investment is recorded in deposits and other assets at
cost ($50,000) which management believes approximates fair market value at
September 30, 2008.
i.
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 Companys 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.
j.
Intangible Assets
Intangible assets, including
employment contracts and customer drilling contracts, arose from the acquisition
of Kettle Drilling in 2006 and are stated at estimated fair value at the date of
acquisition. Amortization of employment contracts was initially calculated
on a straight-line basis over a useful life of three years. Amortization
of the drilling contracts was calculated on a straight-line basis over the life
of the contracts (typically one year or less). The value of intangible
assets is periodically tested for impairment. At September 30, 2008 all
intangible assets (excluding goodwill) were fully amortized.
k
.
Accounts Receivable
Accounts receivable are carried at
original invoice amount less an estimate for doubtful accounts. Management
determines the allowance for doubtful accounts by regularly evaluating
individual customer receivables and considering a customers financial
condition, credit history, and current economic conditions. Trade
receivables are written off when deemed uncollectible. Recoveries of receivables
previously written off are recorded as income when received. The allowance
for doubtful accounts was $150,740 and $0 at September 30, 2008 and 2007,
respectively.
l.
Materials and supplies inventory -
The Company values its
materials and supplies inventory at the lower of average cost or market.
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 used inventory, if considered still usable, is
valued at 25-90% of cost depending on remaining life expectancy. During the year
ended September 30, 2008 the Company undertook a detailed materials and supplies
inventory analysis and determined that a charge to cost of revenues of $535,658
was appropriate to reflect the net realizable value of the materials and
supplies inventory. At September 30, 2008 and 2007, the Company had materials
and supplies inventories of $2,045,223 and $1,925,392, respectively.
m.
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 is
approximately three to fifteen 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.
41
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
n.
Assets Held under Capital Leases
Assets held under
capital leases are recorded at the lower of the net present value of the minimum
lease payments or the fair value of the leased assets at the inception of the
lease. Amortization expense is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the period of the related
lease.
o.
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, and the
effects of obsolescence, demand, competition, and other economic factors. Based
on this assessment, it was determined that an impairment in the value of our
Conglomerate Mesa property existed at September 30, 2008. As a result, the
entire carrying value of the property of $578,391 was written off to mineral
exploration expenses during the year. No other properties were determined
to be impaired at September 30, 2008.
p.
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
. 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).
q.
Translation of Foreign Currencies
All amounts are
presented in US dollars. World Wides operations in Mexico are translated at
average rates of exchange for the year. The assets and liabilities of the Mexico
operations are translated at the exchange rate in effect at the balance sheet
date. Foreign translation and transaction gains/(losses) of $(58,865) and
$12,435 for the years ended September 30, 2008 and 2007, respectively, have been
included in the current period net income (loss) as other income (expense).
r.
Stock-based compensation
The Company accounts for its
stock based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-based Payment (SFAS 123(R)) The
Company has chosen to use the modified prospective transition method under SFAS
123(R).
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 life), the estimated volatility of
the Companys 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.
42
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
s.
Goodwill
Goodwill relates to the acquisition of
Timberline Drilling. In accordance with Statement of Financial Accounting
Standards (SFAS) 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 expected cash flow analysis is
used to determine fair value. There was no impairment loss revealed by
this test as of September 30, 2008 or 2007.
t.
Net Loss per Share
Basic 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.
On June 27, 2008, the Company redeemed and cancelled 3,525,000 of
the 4,700,000 Series A Preferred Stock for $7,500,000 (see Note 13). Due
to the lack of retained earnings, the excess amount paid is recorded as a
reduction in Additional Paid-in Capital of $6,090,000. This excess is
treated similarly to a dividend for purposes of calculating EPS.
The dilutive effect of convertible and exercisable securities as
of September 30, 2008, is as follows:
Stock options
|
3,946,668
|
Warrants
|
2,301,734
|
Total possible dilution
|
6,248,402
|
At September 30, 2008 and 2007, the effect of the Companys
outstanding options and common stock equivalents would have been anti-dilutive.
Accordingly, only basic EPS is presented.
u.
Derivative Instruments
The Financial Accounting Standards
Board has issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities and related
amendments and interpretations. These authoritative pronouncements establish
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
They require that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value.
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency risks. For a derivative not designated
as a hedging instrument, the gain or loss is recognized in income in the period
of change. At September 30, 2008 the Company has a written put option related to
a bridge loan financing agreement that is recognized as a liability of $92,336
based on its estimated fair value (See Note 5).
v.
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.
43
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
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.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
(SFAS No. 160). This
statements objective is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require ownership interests in the subsidiaries held by parties
other than the parent be clearly identified. The Statement is effective for
fiscal years beginning on or after December 15, 2008 and is to be applied
prospectively as of the beginning of the fiscal year in which the Statement is
initially applied, except for the presentation and disclosure requirements which
shall be applied retrospectively for all periods presented. Earlier
adoption is not permitted. The Company is currently evaluating the impact
of the adoption of SFAS No. 160.
In December 2007, the FASB issued SFAS No. 141R Business
Combinations effective for fiscal years beginning after December 15, 2008. SFAS
141R, which will replace FAS 141, is applicable to business combinations
consummated after the effective date of December 15, 2008. The Company is
currently evaluating the impact of the adoption of SFAS No. 141R.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities ("SFAS No. 161"). SFAS No.
161 amends and expands the disclosure requirements of FASB Statement 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133")
to require qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit risk related
contingent features in derivative agreements. The Statement is effective
for consolidated financial statements issued for fiscal years and periods
beginning after November 15, 2008. Early application is encouraged.
The Company is currently evaluating the impact of the adoption of SFAS No.
161.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP. SFAS No. 162 is effective 60 days
following the Securities and Exchange Commissions approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles. The
Company is currently evaluating the potential impact of the adoption of SFAS No.
162.
w.
Reclassifications
Certain reclassifications have been
made to the 2007 financial statements in order to conform to the 2008
presentation. These reclassifications have no effect on net loss, total
assets or accumulated deficit as previously reported.
NOTE 3 PROPERTY, MINERAL RIGHTS AND EQUIPMENT:
The
following is a summary of property, mineral rights and equipment and accumulated
depreciation at September 30, 2008 and 2007:
44
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
|
Expected
|
|
|
|
|
|
Useful Lives
(years)
|
|
2008
|
|
2007
|
Equipment and
vehicles
|
5-10
|
$
|
10,421,807
|
$
|
7,652,275
|
Office
equipment and furniture
|
3-10
|
|
258,259
|
|
162,320
|
Land
|
-
|
|
672,477
|
|
621,000
|
Mineral
rights
|
-
|
|
116,000
|
|
555,000
|
Leasehold
improvements
|
5-15
|
|
145,401
|
|
161,450
|
Total property,
mineral rights and
equipment
|
|
|
11,613,944
|
|
9,152,045
|
Less
accumulated depreciation
|
|
|
(2,389,394)
|
|
(1,143,117)
|
Property,
mineral rights and
equipment,
net
|
|
$
|
9,224,550
|
$
|
8,008,928
|
Property and equipment includes assets (primarily core drilling
equipment) held under capital leases of $2,054,038 and $2,156,861 at September
30, 2008 and 2007. Related amortization of assets held under capital leases
included in accumulated depreciation was $482,213 and $229,967 at September 30,
2008 and 2007, respectively (See Note 6).
Depreciation expense for the years ended September 30, 2008 and
2007 was $1,377,488 and $882,196, respectively.
During
the year ended September 30, 2008, the Company acquired $700,895 in equipment
and vehicles in exchange for outstanding accounts receivable from customers.
NOTE 4 LINE OF CREDIT:
The
Company entered into a line of credit agreement for $600,000 with bankcda on
October 13, 2006. The loan bears interest at the banks prime lending rate plus
1%. The loan is collateralized by a money market account. The outstanding
balance on the line of credit at September 30, 2007 was $599,065.
On June
13, 2008, the Company repaid all amounts outstanding and closed the line of
credit as well as the money market account used for collateral.
45
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 5 BRIDGE LOAN FINANCING:
On June
24, 2008, the Company entered into a bridge loan financing arrangement for
$8,000,000 with Auramet Trading, LLC (Auramet) under which the Company could
draw funds at any time before June 30, 2008. On June 27, 2008 the Company
withdrew $8,000,000, net of a loan origination fee equal to 4% of the principal
amount of the loan ($320,000), to redeem the Companys outstanding Series A
Preferred Shares (See Note 13). The origination fee was recorded as
deferred financing costs and is being amortized over the life of the loan.
The
loan bears interest at 12% per annum, with interest payable monthly in arrears
commencing August 1, 2008, and the principal amount outstanding is due October
31, 2008. The loan is secured by the stock of Timberline Drilling, Inc. The loan
agreement includes certain affirmative covenants including a requirement that we
maintain current all tax balances owing by the Company. At September 30,
2008, we were not in compliance with the tax covenant. As discussed below,
the loan was paid in full on October 31, 2008.
Pursuant to the loans terms, the Company also issued 160,000
shares of the Companys common stock to Auramet after the Companys drawdown of
the loan on June 27, 2008. The fair market value of the 160,000 common
shares ($484,800) was recorded on the balance sheet in common stock and
additional paid-in capital and discounted on the face value of the note.
The discount is being ratably charged to interest expense over the term of
the loan. In addition, Aurament received a written put option for the
160,000 shares of common stock issued. Ninety days from the maturity date of the
bridge loan, on January 29, 2009, Auramet has a onetime option to put some or
all of the 160,000 common shares back to the Company at a redemption price of
$2.00 per share. The option had no value at the date of issuance. The
following assumptions were made in estimating fair value: risk-free interest
rate of 0.90%; volatility of 99.00%; expected life of 119 days; dividend yield
of zero. Based upon the Companys share price at September 30, 2008, a liability
of $92,336 for this put option has been recognized by the Company and the change
in fair value of the option was recorded as interest expense. The
effective annual interest rate of the loan, including origination fees, the fair
market value of common shares issued and the fair value of the put option, is
46%
Subsequent to year end, the outstanding bridge loan principal
amount was repaid in full, see Note 15.
NOTE 6 CAPITAL LEASES:
The
Company finances a substantial portion of their core drilling equipment
purchases through capital leases. Future minimum lease payments at
September 30, 2008 for the related obligations under capital leases were:
Year Ending September 30,
|
|
|
|
|
|
2009
|
$
|
516,519
|
2010
|
|
417,916
|
2011
|
|
190,180
|
2012
|
|
5,592
|
Total
minimum lease payments
|
|
1,130,207
|
Less
amount representing interest
|
|
(104,546)
|
Present
value of minimum lease payments
|
|
1,025,661
|
Less
obligations due within one year
|
|
(448,127)
|
Obligations
under capital leases, due after one year
|
$
|
577,534
|
46
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 7 NOTES PAYABLE:
Notes
payable at September 30, 2008 and 2007 consist of the following:
|
|
2008
|
|
2007
|
Notes payable
to various lenders for vehicles and
equipment, in
monthly payments totaling $31,066
per month, at
rates ranging from 0.9% to 9.5%
with a weighted
average interest rate of
approximately
7%. The notes are collateralized
by vehicles,
equipment and restricted cash.
|
$
|
588,369
|
$
|
872,172
|
Less current portion
|
|
(250,638)
|
|
(300,638)
|
|
$
|
337,731
|
$
|
571,534
|
Debt outstanding will mature as follows:
Year ending September 30,
|
|
|
|
|
2009
|
$
|
250,638
|
|
|
2010
|
|
204,191
|
|
|
2011
|
|
106,582
|
|
|
2012
|
|
21,013
|
|
|
2013
|
|
5,945
|
|
|
Total
|
$
|
588,369
|
|
|
NOTE 8 RELATED PARTY TRANSACTIONS:
On March 10, 2008, the Company entered into an agreement with
Douglas Kettle and David and Margaret Deeds providing for severance arrangements
relating to the resignation of Messrs. Kettle and Deeds, the President and CEO,
respectively, of Timberline Drilling.
Messrs. Kettle and Deeds resigned from Timberline Drilling on May
15, 2008. In connection with the resignations, the Company paid each of Mr.
Kettle and Mr. Deeds a cash severance amount of $600,000 at the time of their
resignation, as well as the balance of their 2007 bonuses ($135,822 each) and
will pay additional cash severance of $300,000 in $25,000 installments from June
through November 2008 and a $150,000 payment in December 2008.
Additionally, the Company also transferred certain personal property to
Mr. Kettle and Mr. Deeds.
Related
party notes payable consist of the following at September 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
-
|
Doug & Brenda Kettle
|
$
|
-
|
$
|
627,000
|
David Deeds
|
|
-
|
|
160,000
|
Less current portion
|
|
-
|
|
(787,000)
|
|
$
|
-
|
$
|
-
|
Related party interest expense
|
$
|
15,704
|
$
|
111,004
|
47
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 8 RELATED PARTY TRANSACTIONS,
(continued):
Subsequent to year end, the Company entered into two convertible
notes; one with Ronald Guill, a director of the Company, and his wife Stacey
Guill, and the other with Small Mine Development, LLC (SMD). The Company also
announced its intention to enter into a joint venture agreement, with SMD, a
company wholly owned by Mr. Guill (See Note 15).
NOTE 9 INCOME TAXES:
At
September 30, 2008 and 2007, the Company had a net deferred tax asset calculated
at an expected rate of 41% (34% Federal and 7% Idaho state) of approximately
$7,123,000 and $3,216,000 respectively, principally arising from net operating
loss carryforwards for income tax purposes. As management of the Company cannot
determine that it is more likely than not that the Company will realize the
benefit of the net deferred tax asset, a valuation allowance equal to the net
deferred tax asset has been recorded at September 30, 2008 and 2007.
|
|
2008
|
|
2007
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
14,060,000
|
$
|
9,470,000
|
Deferred tax asset:
|
|
|
|
|
Properties, plants and
equipment
|
|
(242,000)
|
|
(250,000)
|
Allowance for doubtful
accounts
|
|
62,000
|
|
-
|
Put option related to bridge
loan financing
|
|
38,000
|
|
-
|
Deferred compensation
|
|
123,000
|
|
-
|
Intangibles
|
|
22,000
|
|
61,000
|
Vested share-based
compensation
|
|
711,000
|
|
75,000
|
Foreign income tax credit
carryforwards
|
|
643,000
|
|
110,000
|
Net operating losses
|
|
5,766,000
|
|
3,220,000
|
Total
deferred tax asset
|
$
|
7,123,000
|
$
|
3,216,000
|
Deferred tax asset valuation allowance
|
$
|
(7,123,000)
|
$
|
(3,216,000)
|
Income
(loss) from continuing operations before income taxes for September 30, 2008 and
2007 are as follows:
|
|
2008
|
|
2007
|
Current:
|
|
|
|
|
Domestic
|
$
|
(11,367,974)
|
$
|
(3,158,404)
|
Foreign
|
|
1,996,528
|
|
580,026
|
|
$
|
(9,371,446)
|
$
|
(2,578,378)
|
48
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 9 INCOME TAXES, (continued):
Significant components of income tax expense as of September 30,
2008 and 2007 are as follows:
|
|
2008
|
|
2007
|
Current:
|
|
|
|
|
Federal
|
$
|
-
|
$
|
-
|
State
|
|
-
|
|
-
|
Foreign
|
|
732,250
|
|
110,000
|
Total
current income tax provision
|
|
732,250
|
|
110,000
|
|
|
|
|
|
Deferred:
|
|
|
|
|
Federal
|
|
-
|
|
-
|
Foreign
|
|
-
|
|
-
|
Total
deferred income tax provision
|
|
-
|
|
-
|
Total income tax provision
|
$
|
732,250
|
$
|
110,000
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Statutory Federal income tax rate
|
|
34%
|
|
34%
|
|
|
|
|
|
Expected income
tax expense (benefit) based on
statutory
rate
|
$
|
(3,186,300)
|
$
|
(876,650)
|
|
|
|
|
|
Permanent differences
|
|
225,000
|
|
110,000
|
|
|
|
|
|
Non-recognition of tax benefits related to losses
|
|
2,961,300
|
|
766,650
|
|
|
|
|
|
Foreign tax expense
|
|
732,250
|
|
110,000
|
|
|
|
|
|
Total income tax provision
|
$
|
732,250
|
$
|
110,000
|
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 in adopting FIN 48, 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 Companys
results of operations or balance sheet for the year ended September 30, 2008,
and required no adjustment to opening balance sheet accounts as of October 1,
2007.
49
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 9 INCOME TAXES, (continued):
The
recognition and measurement of the current and future tax assets and liabilities
involves dealing with uncertainties in the application of complex tax
regulations in a multitude of jurisdictions and in the assessment of the
recoverability of future tax assets. Potential liabilities are recognized
for anticipated tax audit issues in various tax jurisdictions based on the
Companys estimate of whether, and the extent to which, additional taxes will be
due. If payment of the accrued amounts ultimately proves to be
unnecessary, the elimination of the liabilities would result in tax benefits
being recognized in the period when the Company determines the liabilities no
longer exist. If the estimate of tax liabilities proves to be less than
the ultimate assessment, a further charge to expense will result. In
addition, a valuation allowance has been provided against a portion of the
Companys future tax assets based on a current assessment of recoverability of
these future tax assets. If the Companys assessment changes, any
increases or decreases in the valuation allowance will result in decreases or
increases in net earnings, respectively.
Income
tax payable is included with accrued payroll benefits and taxes at September 30,
2008. At September 30, 2008, the Company has a net operating loss carryforward
of approximately $14,060,000 which will expire in the years September 30, 2009
through September 30, 2027. Additionally, at September 30, 2008 the Company had
$643,000 of foreign tax credit carryforwards that expire in 2012 and 2013.
The Tax
Reform Act of 1986 substantially changed the rules relative to the use of net
operating loss and general business credit carryforwards in the event of an
ownership change of a corporation. Due to the change in ownership during
January 2004, the Company is restricted in the future use of net operating loss
and tax credit carryforwards generated before the ownership change. As of
September 30, 2008, this limitation is applicable to accumulated net operating
losses of approximately $2,040,000
NOTE 10 COMMON STOCK AND WARRANTS:
Private Placements
During
December 2006, the Company initiated a private placement of the Companys
restricted common stock. Under the private placement agreement, the Company can
sell up to 4,200,000 shares of stock for a total of $2,730,000. The stock was
being offered in units, with each unit offered consisting of one share of common
stock and one-half of one common stock purchase warrant, with each full warrant
exercisable to purchase one share of the Companys common stock for $1.00 per
share, through December 31, 2008. The units were sold for $0.65 each,
representing managements estimate of the fair value of the Companys
unregistered common stock and warrants at the time of sale. The Company sold
4,200,000 units for a total of $2,730,000 as of September 30, 2007.
In
connection with the private placement, 477,600 units were granted to a
consultant for services associated with the offering. The units are valued at
$0.65 per unit or $310,440, and were recognized as stock issuance costs in the
year ended September 30, 2007.
50
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 10 COMMON STOCK AND WARRANTS,
(continued):
During
September, 2007, the Company initiated a second private placement of the
Companys 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 managements estimate of the fair value
of the Companys 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. On October 16, 2008 the resale registration was
declared effective by the SEC. The Company sold a total of 2,626,694 units
for total proceeds of $7,223,408; with 1,780,972 units for gross 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 gross proceeds of $1,533,235
closing on October 11, 2007.
Stock Issued for Services
During
the fiscal year ended September 30, 2007, the Company entered into agreements
under which consultants agreed to provide investor relations consulting services
for a twenty-four month period ending on April 30, 2009. As compensation, in
addition to cash, the Company agreed to issue shares of restricted common stock.
As of September 30, 2007, 757,600 shares of restricted common stock have been
issued for consulting services rendered.
The
shares issued were valued at the Companys common stock trading price as of the
close of business on the date of each issuance. As of September 30, 2007, there
was a total of $948,190 recorded to expense.
During
the year ended September 30, 2007, 347,544 shares of common stock were issued
pursuant to exercises of stock options previously issued to employees and
consultants under the 2005 Equity Incentive Plan (Amended). Of the options
exercised, 310,044 were exercised via the cashless exercise provisions of the
plan. Another 37,500 were exercised resulting in proceeds of $21,000 to
the Company
Stock Issued for Property and Mineral Interests
During
the year ended September 30, 2007, the Company purchased the Butte Highlands
Gold Project from Butte Highlands Mining Company. The Company agreed to
pay $405,000 cash and 108,000 shares of common stock in exchange for the Butte
Highlands property. The shares of common stock were valued at $2.00 per
share for a total price of $216,000 based on managements estimate of the fair
value of the shares at the time of issue. The total purchase price was
$621,000.
51
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 10 COMMON STOCK AND WARRANTS,
(continued):
In
2007, the Company finalized a Lease/Option to Purchase Agreement for the
Conglomerate Mesa Project in Inyo County, California. In the first year of the
Agreement, Timberline is obligated to make an option payment of $75,000 and
100,000 shares of its common stock to the property owners. The shares were
valued at $0.75 per share, or $75,000, based on managements estimate of the
fair value of the shares at the time of issue. In September 2007, the
Company issued 100,000 shares as the second annual option share payment.
The shares were valued at $3.30 per share, or $330,000 based on
managements estimate of the fair value of the shares at the time of issue.
During the year ended September 30, 2007, $555,000 of these payments were
capitalized as mineral rights. During the year ended September 30, 2008
the Conglomerate Mesa property was determined to be impaired and these payments
were charged to mineral exploration expense.
Warrants
The
following is a summary of the Companys warrants outstanding:
|
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding at September 30, 2006
|
3,186,045
|
$
|
1.00
|
Issued
|
3,204,287
|
|
1.70
|
Exercised
|
(2,772,271)
|
|
(1.00)
|
Outstanding at September 30, 2007
|
3,618,061
|
|
1.62
|
Issued
|
447,447
|
|
3.50
|
Exercised
|
(1,708,273)
|
|
(1.00)
|
Expired
|
(55,501)
|
|
(1.00)
|
Outstanding at September 30, 2008
(1)
|
2,301,734
|
$
|
2.45
|
(1)
These warrants expire as follows:
Shares
|
Price
|
Expiration Date
|
963,800
|
$1.00
|
December 31, 2008
|
1,337,934
|
$3.50
|
September 30, 2009
|
2,301,734
|
|
|
NOTE 11 STOCK OPTIONS:
The
Company has established an Equity Incentive Plan (as amended August 31, 2006) to
authorize the granting of up to 7,000,000 (as amended by shareholders of the
Company August 22, 2008) stock options to employees, directors and consultants.
Upon exercise of options, shares are issued from the available authorized shares
of the Company. Option awards are generally granted with an exercise price
equal to the market price of the Companys stock at the date of grant. The
fair value of each option award is estimated on the date of grant using the
assumptions noted in the following table.
52
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 11 STOCK OPTIONS, (continued):
|
2008
|
|
2007
|
Expected volatility
|
77.30% -82.30%
|
|
84.70% - 95.00%
|
Weighted-average volatility
|
77.97%
|
|
91.95%
|
Expected dividends
|
-
|
|
-
|
Expected term (in years)
|
3
|
|
2 -
5
|
Risk-free rate
|
1.67% - 3.75%
|
|
4.50% - 4.84%
|
The
following is a summary of the Companys options issued under the Stock Incentive
Plan:
|
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding at
September 30, 2006
|
1,047,500
|
$
|
0.67
|
Granted
|
1,435,000
|
|
2.78
|
Exercised
|
(409,167)
|
|
(0.56)
|
Expired
|
-
|
|
-
|
Outstanding at
September 30, 2007
|
2,073,333
|
$
|
2.13
|
|
|
|
|
Exercisable at
September 30, 2007
|
525,001
|
$
|
0.83
|
Weighted
average fair value of options granted during the
period
ended September 30, 2007
|
|
$
|
1.53
|
|
|
|
|
Outstanding at
September 30, 2007
|
2,073,333
|
$
|
2.13
|
Granted
|
2,475,000
|
|
2.99
|
Exercised
|
-
|
|
-
|
Expired
|
(630,831)
|
|
(2.30)
|
Outstanding at September 30, 2008
|
3,917,502
|
$
|
2.65
|
|
|
|
|
Exercisable at September 30, 2008
|
1,825,428
|
$
|
2.38
|
|
|
|
|
Weighted
average fair value of options granted during the
period
ended September 30, 2008
|
|
$
|
1.07
|
The
weighted average remaining contractual term of options outstanding and
exercisable at September 30, 2008 and 2007 was 3.86 and 3.50 years,
respectively.
Over
the next twelve months, the Company expects to recognize an additional
$1,398,059 in other general and administrative expense for unvested options.
The aggregate intrinsic value of options outstanding and exercisable as of
September 30, 2008 before applicable income taxes was $592,401 and $483,154,
respectively, based on our closing price of $1.70 per common share at September
30, 2008.
53
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 12 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.
Series A Preferred 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 Timberline Drilling in
the following proportion: 1,250,000 shares to David Deeds and Margaret Deeds,
husband and wife, and 3,750,000 shares to Doug Kettle.
In
March 2007, the two holders of the Companys Series A Preferred Stock converted
a total of 300,000 shares of the Companys Series A Preferred Stock into 300,000
shares of Common Stock pursuant to the conversion rights of the Series A
Preferred Stock Resolution. The Series A Preferred Stock were convertible
into common stock at the rate of one share of common stock for one share of
preferred stock subject to certain exceptions and adjustments including
anti-dilution provisions. There was no expense associated with this
conversion.
At
September 30, 2007 the Series A Preferred Stock was classified as temporary
equity on the Companys Balance Sheet because of its redemption provisions.
On June
27, 2008, the Company redeemed and cancelled 3,525,000 of the 4,700,000 Series A
Preferred Stock from the Kettle Shareholders for $7,500,000. The
difference of $6,090,000 between the purchase price and the $1,410,000 carrying
value of the Series A Preferred Stock was recognized as a reduction to
Additional paid-in capital. The remaining 1,175,000 Series A Preferred Stock
were converted to Common Stock by the Kettle Shareholders and sold to a third
party investor.
As of
September 30, 2008, none of the Series A Preferred stock remains outstanding.
NOTE 13 COMMITMENTS AND CONTINGENCIES:
Real Estate Lease Commitments
The Company has real estate lease commitments related to its main
office in Coeur dAlene, Idaho, a facility in Butte, Montana, offices of
Timberline Drilling in Coeur dAlene, Idaho, a storage shop in Coeur dAlene,
Idaho, and its operational facility in Elko, Nevada. The Companys 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 $294,553 and $91,273 for the years ended
September 30, 2008 and 2007, respectively.
Annual lease obligations until the termination of the leases are
as follows:
54
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 13 COMMITMENTS AND CONTINGENCIES,
(continued):
For the year ending September 30,
|
|
2009
|
$304,206
|
2010
|
$177,765
|
2011
|
$107,790
|
2012
|
$101,220
|
2013
|
$ 34,305
|
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.
NOTE 14 SEGMENT INFORMATION:
The
Company has three operating segments at September 30, 2008 and 2007: drilling
revenues from Timberline Drilling; drilling revenues in Mexico through
Timberline Drillings subsidiary, World Wide Exploration; and Timberlines
exploration activities.
Segment
information (after intercompany eliminations) for the years end September 30,
2008, and 2007 is as follows:
55
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 14 SEGMENT INFORMATION (continued):
|
|
2008
|
|
2007
|
Revenues:
|
|
|
|
|
Timberline Resources
|
$
|
-
|
$
|
-
|
Timberline Drilling
|
|
22,660,556
|
|
15,440,806
|
World Wide Exploration
|
|
9,068,061
|
|
3,792,600
|
Total
revenues
|
$
|
31,728,617
|
$
|
19,233,406
|
|
|
|
|
|
Income / (Loss) before income taxes:
|
|
|
|
|
Timberline Resources
|
$
|
(7,966,645)
|
$
|
(2,142,663)
|
Timberline Drilling
|
|
(3,401,329)
|
|
(1,015,741)
|
World Wide Exploration
|
|
1,996,528
|
|
580,026
|
Loss
before income taxes
|
$
|
(9,371,446)
|
$
|
(2,578,378)
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
Timberline Resources
|
$
|
2,803,202
|
$
|
5,994,102
|
Timberline Drilling
|
|
12,456,114
|
|
14,359,200
|
World Wide Exploration
|
|
5,110,471
|
|
1,657,641
|
Total
identifiable assets
|
$
|
20,369,787
|
$
|
22,010,943
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
Timberline Resources
|
$
|
110,896
|
$
|
274,936
|
Timberline Drilling
|
|
1,011,451
|
|
795,035
|
World Wide Exploration
|
|
322,948
|
|
74,724
|
Total
depreciation and amortization
|
$
|
1,445,295
|
$
|
1,144,695
|
|
|
|
|
|
Expenditures for additions to capital assets
|
|
|
|
|
Timberline Resources
|
$
|
261,485
|
$
|
1,437,536
|
Timberline Drilling
|
|
2,527,606
|
|
2,225,183
|
World Wide Exploration
|
|
663,777
|
|
859,197
|
Total expenditures for additions to
capital assets
|
$
|
3,452,868
|
$
|
4,521,916
|
The accounting policies of the segments are the same as those
described in the notes to the consolidated financial statements included in the
Companys annual report filed on Form 10-KSB for the fiscal year ended September
30, 2008, 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 year ended September 30, 2008, revenues from
transactions with five customers each amounted to 10% or more of our
consolidated revenues. Customer A accounted for revenue of $8,229,007,
Customer B accounted for revenue of $6,252,679, Customer C accounted for revenue
of $3,856,818, Customer D accounted for revenue of $3,599,040 and Customer E
accounted for revenue of $3,219,499. The revenue for customers A, C, D and
E is reported through Timberline Drilling, while the revenue for customer B is
reported through World Wide Exploration.
During the year ended September 30, 2007, revenues from
transactions with three customers each amounted to 10% or more of our
consolidated revenues. One such customer accounted for revenue of
$2,707,248 and another accounted for revenue of $2,549,751, both to Timberline
Drilling. One other customer accounted for revenue of $2,933,396 to World
Wide Exploration.
56
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 14 SEGMENT INFORMATION (continued):
The assets of Timberline are located in the United States.
The assets of Timberline 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.
Certain
reclassifications have been made to the 2007 segment information in order to
conform to the 2008 presentation. These reclassifications have no effect
on total revenues, loss before income taxes, depreciation and amortization,
identifiable assets or expenditures for additions to capital assets as
previously reported.
NOTE 15 SUBSEQUENT EVENTS:
On
October 31, 2008, Timberline Resources Corporation (the Company) entered into
two convertible notes as described below; one with Ronald Guill, a director of
the Company, and his wife, Stacey Guill, and the other with Small Mine
Development, LLC (SMD), an Idaho limited liability company owned by Mr. Guill.
The Company used the proceeds of the notes to pay off the $8.0 million bridge
loan previously provided to the Company by Auramet Trading, LLC (Auramet) (See
Note 5) and for general working capital purposes.
Convertible Term Note
On
October 31, 2008, the Company entered into a series of agreements with SMD in
connection with a $5 million loan from SMD. The loan documents included: a
convertible note (the Convertible Term Note), a credit agreement (the Credit
Agreement), a collateral assignment and pledge of stock and security agreement
(the Pledge Agreement), a security agreement (the Security Agreement) and a
right of first refusal over the Companys Butte Highlands property (the Right
of First Refusal).
The
Convertible Term Note has a principal amount of $5.0 million and is secured
pursuant to the Security Agreement by a pledge of all of the stock of Timberline
Drilling, Inc. (TDI), a wholly-owned Company subsidiary incorporated in Idaho,
pursuant to the Pledge Agreement, the shares of which were previously pledged to
Auramet but were released upon payment of the Auramet Loan on October 31,
2008, and a deed of trust to be entered into covering the Companys Butte
Highlands property in Silver Bow county, Montana (the Butte Highlands
Property).
Pursuant to the terms of the Credit Agreement, the Convertible
Term Note bears interest at 10% annually, compounded monthly, with interest
payments due at maturity. The Convertible Term Note is convertible by SMD at any
time prior to payment of the note in full, at a conversion price of $1.50 per
share. SMD may also convert all or any portion of the outstanding amount under
the Convertible Term Note into any equity security other than the Company's
common stock issued by the Company at the issuance price. The Convertible Term
Note must be repaid on or before October 31, 2010, and may be prepaid in whole
or in part at any time without premium or penalty. If the Company defaults on
the Convertible Term Note or any of the related agreements, SMD may declare the
Convertible Term Note immediately due and payable, and the Company must pay SMD
an origination fee in the amount of $50,000.
57
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 15 SUBSEQUENT EVENTS (continued):
Under
the Right of First Refusal, the Company granted SMD a right of first refusal to
purchase the Butte Highlands Property on the same terms as those of any bona
fide offer from a third-party upon 60 days notice from the Company of any such
offer. In addition, the Company granted SMD a right to develop the Butte
Highlands Property on the same terms as those of any bona fide offer to develop
the property from a third-party upon 60 days notice from the Company of any
such offer.
Short-Term Convertible Note
In
addition, on October 31, 2008, the Company entered into a short-term convertible
note (the Short-Term Convertible Note), a subscription agreement (the
Subscription Agreement), a collateral assignment and pledge of stock and
security agreement (the STN Pledge Agreement), and a security agreement (the
STN Security Agreement) with Ronald and Stacey Guill in connection with a loan
for $5 million. Upon approval for listing of the shares issuable under the
Short-Term Convertible Note from the NYSE Alternext, the Short-Term Convertible
Note will be automatically converted into common stock as described below.
The
Short-Term Convertible Note principal automatically converted into 5,555,556
shares of Company stock (valued at $0.90 per share) upon approval of the
issuance of the additional shares for listing by NYSE Alternext US LLC.
Regulatory approval was received December 19, 2008. The Short-Term Convertible
Note is secured pursuant to the STN Security Agreement by a pledge of all stock
of TDI pursuant to the STN Pledge Agreement. The unpaid balance of the
Short-Term Convertible Note bears interest at a rate of 10% per year, compounded
monthly. The Short-Term Convertible Note may be prepaid in whole or in part at
any time without premium or penalty. If the Company defaults under the
Short-Term Convertible Note, the STN Security Agreement, or any related
agreements, the amount owing under the Short-Term Convertible Note will become
immediately due and payable after a 10-day cure period.
Under
the Subscription Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556
shares of the Companys common stock at a price of $0.90 per share. Should
the Company decide to issue and sell any equity securities or securities
convertible into equity securities, the Subscription Agreement also obligates
the Company to offer a pro rata share of such securities to Mr. and Mrs. Guill
on the same terms and conditions as the proposed sale and issuance.
Butte Highlands Joint Venture Agreement
On October 27, 2008 the Company announced it had entered into
discussions with Mr. Guill to form a 50/50 joint venture with SMD at
Timberlines 100-percent owned Butte Highlands Gold Project. Under contemplated
terms of the joint venture, which remains subject to completion of definitive
documentation, SMD will fund all future mine development costs. Development is
anticipated to begin next summer. Both Timberlines and SMDs share of costs
will be paid out of proceeds from future mine production.
58
TIMBERLINE
RESOURCES CORPORATION
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2008
NOTE 15 SUBSEQUENT EVENTS (continued):
Offering Costs Arising From the Proposed Acquisition of
SMD
On October 24, 2008, Timberline Resources Corporation (the
Company) and Ronald Guill mutually agreed by written consent to terminate the
Stock Purchase Agreement (Stock Purchase Agreement) previously entered into
between the Company and Mr. Guill on February 23, 2008, which would have
provided for the purchase of all of Mr. Guills membership interests in SMD by
the Company.
The Company had engaged a full service investment banking and
institutional securities firm to render an opinion to the Companys Board as to
whether the consideration to be paid by the Company for the membership interests
of SMD was fair, from a financial point of view. The Company also engaged
this firm to arrange for financing of the acquisition of SMDs membership
interests. All fees to be paid by the Company for these services were
contemplated to be paid out of proceeds raised during the financing.
Subsequent to the termination of the acquisition of SMD and the
failure of the investment banking firm to arrange financing, an invoice was
received by the Company from the investment banking firm for the provision of
the fairness opinion, as well as legal fees incurred by the firm during the
course of the financing. The total charged for the services provided was
$923,957. Company management disputes the amount of the fees charged for
the services provided, however the Company expects to recognize some portion of
these fees as a charge to operations in the first quarter of fiscal 2009.
The $923,857 of costs are categorized as deferred offering and
acquisition costs in current assets, as well as being included in accrued
offering and acquisition costs in current liabilities at September 30, 2008.
59
TIMBERLINE
RESOURCES CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2008
60
Timberline
Resources Corporation and Subsidiaries
Contents
Page
FINANCIAL
STATEMENTS:
Consolidated
balance sheets
62
Consolidated
statements of operations
63
Consolidated
statements of cash flows
64
Notes
to consolidated financial statements
65-74
61
TIMBERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
|
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
(audited)
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,653,120
|
$
|
737,503
|
|
|
Accounts receivable, net of allowance
for doubtful accounts of
|
|
|
|
|
|
|
|
|
$250,740 and $150,740,
respectively
|
|
|
1,029,656
|
|
3,499,371
|
|
|
Materials and supplies
inventory
|
|
|
1,483,565
|
|
2,045,223
|
|
|
Deferred offering and acquisition
costs
|
|
|
-
|
|
923,957
|
|
|
Deferred financing cost, net
|
|
|
-
|
|
202,550
|
|
|
Prepaid expenses and other current
assets
|
|
|
384,475
|
|
481,529
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
5,550,816
|
|
7,890,133
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, MINERAL RIGHTS AND
EQUIPMENT:
|
|
|
|
|
|
|
|
Property, mineral rights and
equipment, net
|
|
|
8,953,615
|
|
9,224,550
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
282,836
|
|
286,410
|
|
|
Deposits and other assets
|
|
|
183,947
|
|
160,170
|
|
|
Goodwill
|
|
|
2,808,524
|
|
2,808,524
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
3,275,307
|
|
3,255,104
|
|
TOTAL ASSETS
|
|
$
|
17,779,738
|
$
|
20,369,787
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,824,706
|
$
|
2,159,857
|
|
|
Accrued expenses
|
|
|
842,617
|
|
945,809
|
|
|
Accrued offering and acquisition
costs
|
|
|
923,957
|
|
923,957
|
|
|
Accrued payroll and benefits
|
|
|
163,473
|
|
482,714
|
|
|
Accrued taxes
|
|
|
2,327,834
|
|
2,173,362
|
|
|
Accrued severance
|
|
|
350,000
|
|
400,000
|
|
|
Deferred revenue
|
|
|
-
|
|
27,315
|
|
|
Current portion of capital
leases
|
|
|
431,904
|
|
448,127
|
|
|
Current portion of long term
debt
|
|
|
227,920
|
|
250,638
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
7,092,411
|
|
7,811,779
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
Bridge loan financing
|
|
|
-
|
|
8,000,000
|
|
|
Long term debt, net of current
portion
|
|
|
5,273,728
|
|
337,731
|
|
|
Accrued interest on long term debt
due at maturity
|
|
|
83,681
|
|
-
|
|
|
Put option on common stock
|
|
|
246,400
|
|
92,336
|
|
|
Obligation under capital leases, net
of current portion
|
|
|
464,187
|
|
577,534
|
|
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
6,067,996
|
|
9,007,601
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE
10)
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value;
10,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
none issued and outstanding
|
|
|
-
|
|
-
|
|
|
Common stock, $0.001 par value;
100,000,000 shares
|
|
|
|
|
|
|
|
|
authorized, 34,330,459 and 28,739,903
shares issued
|
|
|
|
|
|
|
|
|
and outstanding, respectively
|
|
|
34,330
|
|
28,739
|
|
|
Common stock subscribed
|
|
|
-
|
|
-
|
|
|
Additional paid-in capital
|
|
|
27,142,022
|
|
21,343,416
|
|
|
Accumulated deficit
|
|
|
(22,557,021)
|
|
(17,821,748)
|
|
|
|
TOTAL STOCKHOLDERS' EQUITY
|
|
|
4,619,331
|
|
3,550,407
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
$
|
17,779,738
|
$
|
20,369,787
|
See accompanying notes to consolidated
financial statements.
62
TIMBERLINE RESOURCES CORPORATION
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
4,690,696
|
$
|
6,435,125
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
4,908,046
|
|
4,949,665
|
|
|
|
|
|
|
|
|
GROSS PROFIT (LOSS)
|
|
|
(217,350)
|
|
1,485,460
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
Mineral exploration expenses
|
|
|
267,888
|
|
576,752
|
|
Non cash compensation expense
|
|
|
700,744
|
|
474,444
|
|
Salaries and benefits
|
|
|
351,819
|
|
1,690,482
|
|
Insurance expense
|
|
|
253,138
|
|
103,859
|
|
Professional fees
|
|
|
1,227,425
|
|
224,463
|
|
Other general and administrative
expenses
|
|
|
704,150
|
|
407,876
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
3,505,164
|
|
3,477,876
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(3,722,514)
|
|
(1,992,416)
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
Other income
|
|
|
18,442
|
|
11,241
|
|
Foreign exchange gain (loss)
|
|
|
(108,179)
|
|
57,959
|
|
Interest income
|
|
|
7,153
|
|
75,089
|
|
Interest expense
|
|
|
(895,373)
|
|
(145,568)
|
|
|
TOTAL OTHER EXPENSE
|
|
|
(977,957)
|
|
(1,279)
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(4,700,471)
|
|
(1,993,695)
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
(34,802)
|
|
-
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(4,735,273)
|
$
|
(1,993,695)
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE AVAILABLE TO
COMMON
|
|
|
|
|
|
|
STOCKHOLDERS, BASIC AND
DILUTED
|
|
$
|
(0.16)
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER
|
|
|
|
|
|
|
OF COMMON SHARES OUTSTANDING,
|
|
|
|
|
|
|
BASIC AND DILUTED
|
|
|
29,478,617
|
|
25,781,215
|
See accompanying notes to consolidated
financial statements.
63
TIMBERLINE RESOURCES CORPORATION AND
SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,735,273)
|
$
|
(1,993,695)
|
|
Adjustments to reconcile net loss to
net cash
|
|
|
|
|
|
|
used by
operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
353,606
|
|
204,288
|
|
|
Allowance for doubtful
accounts
|
|
|
100,000
|
|
-
|
|
|
Loss (gain) on sale of
equipment
|
|
|
9,938
|
|
(14,641)
|
|
|
Amortization of deferred financing
cost
|
|
|
202,550
|
|
-
|
|
|
Deferred offering and acquisition
costs
|
|
|
923,957
|
|
-
|
|
|
Change in fair value of put option on
common stock
|
|
|
154,064
|
|
-
|
|
|
Share based compensation
|
|
|
804,197
|
|
681,342
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,369,715
|
|
1,543,123
|
|
|
Materials and supplies
inventory
|
|
|
561,658
|
|
(573,544)
|
|
|
Prepaid expenses and other current
assets, deposits and other assets
|
|
|
73,277
|
|
(119,221)
|
|
|
Accounts payable
|
|
|
(335,151)
|
|
(734,754)
|
|
|
Accrued expenses
|
|
|
(103,192)
|
|
206,955
|
|
|
Accrued payroll and benefits
|
|
|
(319,241)
|
|
(80,568)
|
|
|
Accrued taxes
|
|
|
154,472
|
|
(85,794)
|
|
|
Accrued severance
|
|
|
(50,000)
|
|
-
|
|
|
Deferred revenue
|
|
|
(27,315)
|
|
(131,668)
|
|
|
Accrued interest on long term debt
due at maturity
|
|
|
83,681
|
|
-
|
|
|
Net cash provided (used)
by operating activities
|
|
|
220,943
|
|
(1,098,177)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(120,945)
|
|
(519,276)
|
|
Change in restricted cash
|
|
|
3,574
|
|
2,660
|
|
Purchase of investment in equity
security
|
|
|
-
|
|
(50,000)
|
|
Proceeds from sale of
equipment
|
|
|
28,336
|
|
14,641
|
|
|
Net cash used by investing
activities
|
|
|
(89,035)
|
|
(551,975)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of bridge loan
financing
|
|
|
(8,000,000)
|
|
-
|
|
Proceeds from long term debt
|
|
|
5,000,000
|
|
-
|
|
Proceeds from related party notes
payable
|
|
|
-
|
|
60,000
|
|
Payments on related party notes
payable
|
|
|
-
|
|
(787,000)
|
|
Payments on long term debt
|
|
|
(86,721)
|
|
(79,265)
|
|
Payments on capital leases
|
|
|
(129,570)
|
|
(116,934)
|
|
Proceeds from exercise of
warrants
|
|
|
-
|
|
817,273
|
|
Proceeds from issuances of stock and
warrants,
|
|
|
|
|
|
|
net of stock
offering costs
|
|
|
5,000,000
|
|
3,093,129
|
|
|
Net cash provided by financing
activities
|
|
|
1,783,709
|
|
2,987,203
|
|
Net increase in cash
|
|
|
1,915,617
|
|
1,337,051
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
|
|
|
737,503
|
|
3,949,988
|
CASH AND CASH EQUIVALENTS AT END
OF PERIOD
|
|
$
|
2,653,120
|
$
|
5,287,039
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivable exchanged for
equipment
|
|
$
|
104,220
|
$
|
600,895
|
|
Capital lease for equipment
purchase
|
|
|
-
|
|
228,672
|
|
Note payable issued for equipment
purchase
|
|
|
-
|
|
38,472
|
See accompanying notes to consolidated
financial statements.
64
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. In September
2008, Kettle Drilling, Inc. changed its name to Timberline Drilling Incorporated
(Timberline Drilling).
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-Q. 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 Companys
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, 2008 are not necessarily indicative of the results that may be expected for
the full year ending September 30, 2009.
For further information refer to the financial statements and
footnotes thereto in the Companys Annual Report on Form 10-KSB for the year
ended September 30, 2008.
b.
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.
c.
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 companys reported financial
position and results of operations.
d.
Intangible Assets
Intangible assets, including
employment contracts and customer drilling contracts, arose from the acquisition
of Kettle Drilling in 2006 and are stated at estimated fair value at the date of
acquisition. Amortization of employment contracts was initially calculated
on a straight-line basis over a useful life of three years. Amortization
of the drilling contracts was calculated on a straight-line basis over the life
of the contracts (typically one year or less). The value of intangible
assets is periodically tested for impairment. At December 31, 2008 all
intangible assets (excluding goodwill) were fully amortized.
e.
Accounts Receivable
Accounts receivable are carried at
original invoice amount less an estimate for doubtful accounts. Management
determines the allowance for doubtful accounts by regularly evaluating
individual customer receivables and considering a customers financial
condition, credit history, and current economic conditions. Trade
receivables are written off when deemed uncollectible. Recoveries of receivables
previously written off are recorded as income when received. The allowance
for doubtful accounts was $250,740 and $150,740 at December 31, 2008 and
September 30, 2008, respectively.
65
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
f.
Materials and supplies inventory -
The Company values its
materials and supplies inventory at the lower of average cost or market.
Allowances are recorded for inventory considered to be in excess or
obsolete. Inventories consist primarily of parts, operating supplies, drill rods
and drill bits.
g
.
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.
h
.
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 6).
i.
Stock-based compensation
The Company accounts for its
stock based compensation in accordance with statement of financial accounting
standards no. 123 (revised 2004),
share-based payment
(sfas 123(r)).
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 life), the estimated volatility of
the Companys 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.
j.
Net loss per share
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.
The dilutive effect of convertible and exercisable securities, in
periods of future income as of December 31, 2008 and 2007, is as follows:
|
|
December 31, 2008
|
|
December 31, 2007
|
Stock options
|
|
6,455,835
|
|
3,020,001
|
Warrants
|
|
1,337,934
|
|
3,223,649
|
Convertible debt
|
|
3,333,333
|
|
-
|
Convertible preferred stock
|
|
-
|
|
4,700,000
|
Total possible dilution
|
|
11,127,102
|
|
10,943,650
|
At December 31, 2008 and 2007, the effect of the Companys
outstanding options and common stock equivalents would have been
anti-dilutive.
66
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(continued):
k.
New Accounting Pronouncements
In September 2006, the
Financial Accounting Standards Board (FASB) issued SFAS no. 157,
Fair Value
Measurements
, (SFAS 157). 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 adoption of SFAS 157 on October 1,
2008 did not have a material effect on the Companys consolidated financial
statements.
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
adoption of this statement on October 1, 2008 did not have a material effect on
the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R
Business
Combinations
effective for fiscal years beginning after December 15, 2008.
SFAS 141R, which will replace FAS 141, is applicable to business combinations
consummated after the effective date of December 15, 2008.
In December 2007, the FASB also issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements, an amendment of
ARB 51. SFAS No. 160 will change the accounting and reporting for minority
interests, which will be re-characterized as non-controlling interests and
classified as a component of equity. SFAS No. 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
SFAS No. 160 is effective for fiscal years beginning on or after December 15,
2008 and interim periods within those fiscal years. The adoption of this
statement is not expected to have a material effect on the Companys future
reported financial position or results of operations.
In March 2008, the FASB issued SFAS 161 Disclosures about
Derivative Instruments and Hedging Activities an amendment of SFAS 133. This
Statement requires enhanced disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial reporting. This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The adoption of this
statement is not expected to have a material effect on the Companys future
reported financial position or results of operations.
NOTE 3 RELATED PARTY TRANSACTIONS:
On March 10, 2008, the Company entered into an agreement with
Douglas Kettle and David and Margaret Deeds providing for severance arrangements
relating to the resignation of Messrs. Kettle and Deeds, the President and CEO,
respectively, of Timberline Drilling.
Messrs. Kettle and Deeds resigned from Timberline Drilling on May
15, 2008. In connection with the resignations, the Company paid each of Mr.
Kettle and Mr. Deeds a cash severance amount of $600,000 at the time of their
resignation, as well as the balance of their 2007 bonuses ($135,822 each) and
paid additional cash severance of $300,000 in $25,000 installments from July
through November 2008 and a $175,000 payment in December 2008.
67
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 3 RELATED PARTY TRANSACTIONS,
(continued):
Additionally, the Company also transferred certain personal
property to Mr. Kettle and Mr. Deeds. The Company has not paid the severance
amounts due per the agreement as of December 31, 2008 pending ongoing
negotiations between the Company and its former management at the Kettle
Drilling subsidiary.
On
October 31, 2008, Timberline Resources Corporation (the Company) entered into
two convertible notes (see Notes 5 and 7); one with Ronald Guill, a director of
the Company, and his wife, Stacey Guill, and the other with Small Mine
Development, LLC (SMD), an Idaho limited liability company owned by Mr. Guill.
The Company used the proceeds of the notes to pay off the $8.0 million bridge
loan previously provided to the Company by Auramet Trading, LLC (Auramet) (See
Note 4) and for general working capital purposes.
NOTE 4 BRIDGE LOAN FINANCING:
On June
24, 2008, the Company entered into a bridge loan financing arrangement for
$8,000,000 with Auramet Trading, LLC (Auramet) under which the Company could
draw funds at any time before June 30, 2008. On June 27, 2008 the Company
withdrew $8,000,000, net of a fee equal to 4% of the principal amount of the
loan, to repurchase the Companys outstanding Series A Preferred Shares.
The
loan incurred interest at 12% per annum, with interest payable monthly in
arrears commencing August 1, 2008, and the principal amount outstanding was due
October 31, 2008. On October 31, 2008 the bridge loan principal amount was
repaid in full.
Pursuant to the loans terms, the Company also issued 160,000
shares of the Companys common stock to Auramet after the Companys drawdown of
the loan on June 27, 2008. The fair market value of the 160,000 common
shares ($484,800) was recorded on the balance sheet in common stock and
additional paid-in capital and discounted on the face value of the note.
The discount was ratably charged to interest expense over the term of the
loan. In addition, Auramet received a written put option for the 160,000
shares of common stock issued. Ninety days from the maturity date of the bridge
loan, on January 29, 2009, Auramet has a onetime option to put some or all of
the 160,000 common shares back to the Company at a redemption price of $2.00 per
share.
Subsequent to December 31, 2008, Auramet indicated its intention
to exercise the put option and return the shares to the Company. The Company and
Auramet agreed that the Company would issue an additional 535,652 shares of
common stock valued at $0.46 per share to Auramet rather than settle the option
with a cash payment. As a result of this transaction, a liability of
$246,400 for this put option has been recognized by the Company and the change
in fair value of the option was recorded as interest expense during the quarter.
NOTE 5 LONG TERM DEBT:
On
October 31, 2008, the Company entered into a series of agreements with SMD in
connection with a $5 million loan from SMD. The loan documents included: a
convertible note (the Convertible Term Note), a credit agreement (the Credit
Agreement), a collateral assignment and pledge of stock and security agreement
(the Pledge Agreement), a security agreement (the Security Agreement) and a
right of first refusal over the Companys Butte Highlands property (the Right
of First Refusal).
The
Convertible Term Note has a principal amount of $5.0 million and is secured
pursuant to the Security Agreement by a pledge of all of the stock of Timberline
Drilling, Inc. (TDI), a wholly-owned Company subsidiary incorporated in Idaho,
pursuant to the Pledge Agreement, and a deed of trust to be entered into
covering the Companys Butte Highlands property in Silver Bow county, Montana
(the Butte Highlands Property).
68
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 5 LONG TERM DEBT, (continued):
Pursuant to the terms of the Credit Agreement, the Convertible
Term Note bears interest at 10% annually, compounded monthly, with interest due
at maturity. The Convertible Term Note is convertible by SMD at any time prior
to payment of the note in full, at a conversion price of $1.50 per share. SMD
may also convert all or any portion of the outstanding amount under the
Convertible Term Note into any equity security other than the Company's common
stock issued by the Company at the issuance price. The Convertible Term Note
must be repaid on or before October 31, 2010, and may be prepaid in whole or in
part at any time without premium or penalty. If the Company defaults on the
Convertible Term Note or any of the related agreements, SMD may declare the
Convertible Term Note immediately due and payable, and the Company must pay SMD
an origination fee in the amount of $50,000.
Under
the Right of First Refusal, the Company granted SMD a right of first refusal to
purchase the Butte Highlands Property on the same terms as those of any bona
fide offer from a third-party upon 60 days notice from the Company of any such
offer. In addition, the Company granted SMD a right to develop the Butte
Highlands Property on the same terms as those of any bona fide offer to develop
the property from a third-party upon 60 days notice from the Company of any
such offer.
NOTE 6 INCOME TAXES:
Income
(loss) from continuing operations before income taxes for the three months ended
December 31, 2008 and 2007 are as follows:
|
|
2008
|
|
2007
|
Current:
|
|
|
|
|
Domestic
|
$
|
(4,697,729)
|
$
|
(2,004,292)
|
Foreign
|
|
114,127
|
|
10,597
|
|
$
|
(4,583,602)
|
$
|
(1,993,695)
|
Significant components of income tax expense as of December 31,
2008 and 2007 are as follows:
|
|
2008
|
|
2007
|
Current:
|
|
|
|
|
Federal
|
$
|
-
|
$
|
-
|
State
|
|
-
|
|
-
|
Foreign
|
|
34,802
|
|
|
Total
current income tax expense
|
|
34,802
|
|
-
|
|
|
|
|
|
Deferred:
|
|
|
|
|
Federal
|
|
-
|
|
-
|
State
|
|
-
|
|
-
|
Foreign
|
|
-
|
|
-
|
Total
deferred income tax expense
|
|
-
|
|
-
|
Total income tax expense
|
$
|
34,802
|
$
|
-
|
69
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 6 INCOME TAXES, (continued):
|
|
2008
|
|
2007
|
|
|
|
|
|
Statutory Federal income tax rate
|
|
34%
|
|
34%
|
|
|
|
|
|
Expected income tax expense (benefit) based on statutory
rate
|
$
|
(1,597,228)
|
$
|
(677,856)
|
Non-recognition of tax benefits related to losses
|
|
1,597,228
|
|
677,856
|
Foreign tax expense
|
|
34,802
|
|
-
|
Total income tax expense
|
$
|
34,802
|
$
|
-
|
NOTE 7 COMMON STOCK AND WARRANTS:
During
September, 2007, the Company initiated a private placement of the Companys
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 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, 2008, there are
1,337,934 warrants outstanding from this placement.
In
October, 2008, the Company entered into a short-term convertible note (the
Short-Term Convertible Note) for $5 million. The Short-Term Convertible
Note principal automatically converted into 5,555,556 shares of Company stock
(valued at $0.90 per share) upon approval of the issuance of the additional
shares for listing by NYSE Alternext US LLC in December 2008.
Under
the Subscription Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556
shares of the Companys common stock at a price of $0.90 per share. Should
the Company decide to issue and sell any equity securities or securities
convertible into equity securities, the Subscription Agreement also obligates
the Company to offer a pro rata share of such securities to Mr. and Mrs. Guill
on the same terms and conditions as the proposed sale and issuance.
During
the quarter ended December 31, 2008, 963,800 warrants expired. The
warrants were granted pursuant to a private placement during 2006 and were
exercisable at a price of $1.00 per warrant.
70
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 7 COMMON STOCK AND WARRANTS, (continued):
The
following is a summary of the Companys warrants outstanding:
|
Warrants
|
|
Weighted
Average Exercise
Price
|
Outstanding at September 30, 2008
|
2,301,734
|
$
|
2.45
|
Issued
|
-
|
|
-
|
Expired
|
(963,800)
|
|
(1.00)
|
Outstanding at December 31, 2008
|
1,337,934
|
|
3.50
|
|
|
|
|
These
warrants expire as follows:
Warrants
|
Price
|
Expiration Date
|
1,337,934
|
$3.50
|
September 30, 2009
|
1,337,934
|
|
|
NOTE 8 STOCK OPTIONS:
The
Company has established an Equity Incentive Plan (as amended August 31, 2006 and
August 22, 2008) to authorize the granting of up to 7,000,000 stock options to
employees, directors and consultants. Upon exercise of options, shares are
issued from the available authorized shares of the Company. Option awards
are generally granted with an exercise price equal to the market price of the
Companys stock at the date of grant. The fair value of option awards
granted on December 19, 2008 and October 24, 2007 (the only grants during the
quarters ended December 31, 2008 and 2007, respectively) is estimated on the
date of grant using the assumptions noted in the following table. Total
compensation cost charged against operations under the plan for employees was
$700,744 and $474,444 for the three months ended December 31, 2008 and 2007,
respectively, and is classified under non cash compensation expense. Total
compensation cost charged against operations under the plan for directors and
consultants was $103,453 and $70,898 for the three months ended December 31,
2008 and 2007, respectively, and is classified under other general and
administrative expenses.
|
December 19,
2008
|
|
October 24,
2007
|
Expected volatility
|
106.60%
|
|
82.30%
|
Weighted-average volatility
|
106.60%
|
|
82.30%
|
Expected dividends
|
-
|
|
-
|
Expected term (in years)
|
3
|
|
3
|
Risk-free rate
|
0.02%
|
|
3.75%
|
71
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 8 STOCK OPTIONS, (continued):
The
following is a summary of the Companys options issued under the Amended 2005
Equity Incentive Plan:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
3,917,502
|
|
$
|
2.65
|
|
|
Granted
|
|
|
2,855,000
|
|
|
0.33
|
|
|
Exercised
|
|
|
75,000
|
|
|
0.80
|
|
|
Expired
|
|
|
(241,667)
|
|
|
2.41
|
|
Outstanding at December 31, 2008
|
|
|
6,455,835
|
|
$
|
1.65
|
|
Exercisable at December 31, 2008
|
|
|
3,280,438
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the
period ended
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
$
|
0.20
|
The
average remaining contractual term of the options outstanding and exercisable at
December 31, 2008 is 4.24 and 3.88 years, respectively. As of December 31,
2008, total unrecognized compensation expense related to options was $2,032,886
and the related weighted-average period over which it is expected to be
recognized is approximately 1.03 years. The aggregate intrinsic value of
options exercised during the three months ended December 31, 2008 and 2007 was
$52,500 and none, respectively.
NOTE 9 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.
NOTE 10 COMMITMENTS AND CONTINGENCIES:
Real Estate Lease Commitments
The Company has real estate lease commitments related to its main
office in Coeur dAlene, Idaho, a facility in Butte, Montana, offices and a
storage shop of Timberline Drilling in Coeur dAlene, Idaho; and its operational
facility in Elko, Nevada. The Companys 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
$79,623 and $51,805 for the three months ended December 31, 2008 and 2007,
respectively.
72
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 10 COMMITMENTS AND CONTINGENCIES,
(continued):
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.
Severance Agreements
As
discussed in Note 3 - Related Party Transactions, in the year ended September
30, 2008 the Company announced a change in management at its Kettle Drilling
subsidiary. As a result of this change, the Company had a commitment to
pay severance of $350,000 due December 31, 2008. The Company has not paid the
outstanding severance amounts due on December 31, 2008 pending ongoing
negotiations between the Company and its former management at the Kettle
Drilling subsidiary.
Offering Costs Arising From the Proposed Acquisition of
SMD
On
October 24, 2008, the Company and Ronald Guill mutually agreed by written
consent to terminate the Stock Purchase Agreement previously entered into
between the Company and Mr. Guill on February 23, 2008, which would have
provided for the purchase by the Company of all of Mr. Guills membership
interests in SMD.
The Company had engaged a full service investment banking and
institutional securities firm to render an opinion to the Companys Board as to
whether the consideration to be paid by the Company for the membership interests
of SMD was fair, from a financial point of view. The Company also engaged
this firm to arrange for financing of the acquisition of SMDs membership
interests. All fees to be paid by the Company for these services were
contemplated to be paid out of proceeds raised during the financing.
Subsequent to the termination of the acquisition of SMD and the
failure of the investment banking firm to arrange financing, an invoice was
received by the Company from the investment banking firm for the provision of
the fairness opinion, as well as legal fees incurred by the firm during the
course of the financing. The total charged for the services provided was
$923,957. Company management continues to negotiate the amount of the fees
charged for the services provided. However, the Company recognized these
fees as a charge to operations during the quarter ended December 31, 2008.
The expense has been classified with professional fees in the statement of
operations.
NOTE 11
SEGMENT INFORMATION:
The
Company has three operating segments at December 31, 2008: drilling revenues
from Timberline Drilling; drilling revenues in Mexico through Timberline
Drillings subsidiary, World Wide Exploration; and Timberlines exploration
activities.
73
Timberline
Resources Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE 11 SEGMENT INFORMATION, (continued):
Segment
information (after intercompany eliminations) for the three months ended
December 31, 2008 and 2007 is as follows:
|
|
|
|
Three months ending
December 31
|
Revenues:
|
|
|
|
|
|
2008
|
|
2007
|
Timberline
|
|
|
|
|
$
|
-
|
$
|
-
|
Timberline Drilling
|
|
|
|
|
|
2,428,845
|
|
4,942,179
|
World
Wide Exploration
|
|
|
|
|
|
2,261,851
|
|
1,492,946
|
Total
revenues
|
|
|
|
|
$
|
4,690,696
|
$
|
6,435,125
|
|
|
|
|
|
|
|
|
|
Income / (Loss) before income
taxes:
|
|
|
|
|
|
|
|
|
Timberline
|
|
|
|
|
$
|
(3,076,763)
|
$
|
(1,678,877)
|
Timberline Drilling
|
|
|
|
|
|
(1,737,835)
|
|
(325,415)
|
World
Wide Exploration
|
|
|
|
|
|
114,127
|
|
10,597
|
Loss before income taxes
|
|
|
|
|
$
|
(4,700,471)
|
$
|
(1,993,695)
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
December 31, 2008
|
|
September 30, 2008
|
Timberline
|
|
|
|
|
$
|
2,522,934
|
$
|
2,803,202
|
Timberline Drilling
|
|
|
|
|
|
11,063,084
|
|
12,456,114
|
World
Wide Exploration
|
|
|
|
|
|
4,193,720
|
|
5,110,471
|
Total
assets
|
|
|
|
|
$
|
17,779,738
|
$
|
20,369,787
|
|
|
|
|
|
|
|
|
|
The accounting policies of the segments are the same as those
described in the notes to the consolidated financial statements included in the
Companys annual report filed on Form 10-KSB for the fiscal year ended September
30, 2008, 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 three months ended December 31, 2008, revenues from
transactions with three customers each amounted to 10% or more of our total
revenues. Customer A accounted for revenue of $2,197,004, customer B
accounted for revenue of $1,676,146 and customer C accounted for revenue of
$614,689. The revenue for
customers B and C is reported through Timberline Drilling, while
the revenue for customer A is reported through World Wide Exploration.
The assets of Timberline are located in the United States.
The assets of Timberline 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.
74
MANAGEMENTS DISCUSSION AND
ANALYSIS
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
prospectus. 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 and elsewhere in this prospectus.
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, the addition of Randal Hardy, our acquisition of a drilling services
company, and the acquisition of Butte Highlands, we continue to advance our
business plan. Prior to our new business model, the addition
of new management, the purchase of Timberline Drilling (formerly known as Kettle
Drilling), and a more active and focused exploration division, the Company had
accumulated losses and no reported revenues.
Our 2008 results demonstrate our
objectives: become listed on the NYSE Alternext US LLC, formerly the
American Stock Exchange, advance the acquisition of Small Mine Development,
moderate the growth of our drilling services business with a focus on
responsible management and sustained profitability, and focus our exploration
efforts on the advancement of the Butte Highlands project.
The year commenced with seemingly
unprecedented demand within our industry. That environment became
overshadowed as the credit crisis, global deleveraging, and hedge fund blow-ups
gained momentum and adversely impacted the plans of many companies including
Timberline. In addition to the economic challenges, our industry dealt
with rising input costs, high oil prices, increased labor costs, a dearth of
experienced labor/management, and a number of other challenges. Toward the
end of the year and subsequent to year end, decreased demand and deteriorating
economic conditions have resulted in a more balanced level of input costs and
availability of labor. It should be noted that the price of gold, our main
focus, has remained relatively steady over the past year while other commodities
have experienced extreme price corrections.
During the fiscal year ended September 30,
2008, after a lengthy application and review process, the Company became listed
on the NYSE Alternext US LLC, formerly the American Stock Exchange, and began
trading under the symbol TLR. Also during the year, and after another
lengthy process, we received approval from the SEC to move forward with the
Small Mine Development (SMD) acquisition. In August we received approval
from shareholders to proceed with funding and consummation of the acquisition.
In October 2008, based on deteriorating market conditions, the proposed
SMD acquisition was terminated.
In August, the Company began the first of
what would become a four-hole drill program on the Butte Highlands Gold project.
Subsequent to year end, the Company announced that the most encouraging
hole-to-date, BH-DDH 08-03, was drilled 100 feet northwest of previously-tested
mineralization boundaries. The hole returned several mineralized gold intervals,
including 2.0 feet of 0.62 ounces per ton (oz/t), 37.0 feet of 0.22 oz/t, 5.0
feet of 0.26 oz/t, 9.0 feet of 0.43 oz/t, and 35.0 feet of 0.14 oz/t. These
results demonstrate the northwest extension of the Upper, Middle, and Lower
zones, while the latter two intervals comprise a new discovery at depth, a
potential offset portion of previously-identified zones. Our exploration staff
believes both the extension and the discovery have the potential to greatly
increase mineralization estimates at Butte Highlands. Subsequent to year
end, the Company announced plans for a 50/50 JV with Small Mine Development on
the development and advancement of the project into production.
In October, we announced plans to form a
50/50 joint-venture with SMD at Butte Highlands. Under terms of the
agreement, Timberline will be carried to production by SMD which will fund all
project development costs and begin development in the summer of 2009.
Timberlines 50-percent share of project costs will be paid out of
proceeds from future mine production. The partnership is mutually regarded
by Timberline and SMD as a model for future opportunities in underground mine
development and mining.
Pending proper approvals and permitting, we anticipate by
late summer of this year, SMD will begin development of the Decline to access
the mineralized areas to allow for additional underground drilling and
exploration. The exploration and development phase of the program is
expected to take approximately one year and, assuming acceptable permitting and
results, is expected to be followed by production in mid to late 2010.
It is the opinion of management that
projects similar to Butte Highlands are a good fit for the current environment
and the unique qualifications of our people and strategic partners. As a
result, subsequent to year end, the Company announced it
75
will not focus on early stage properties or
continue to expend capital or time on the Conglomerate Mesa project, unless it
can be done at a minimal cost to the company. Company management believes
these projects have value, however, given the complexities and challenges of
some of the property agreements, the current economic environment and our
strategic partnership with Small Mine Development, a more refined focus is
warranted at this time.
Subsequent to fiscal year end, the Company
announced termination of the agreement to acquire SMD. For most of the
year, management expended considerable effort, focus and expense on the
acquisition process. However, in these unprecedented market conditions, it
proved extremely difficult to complete the acquisition of SMD under acceptable
terms. Therefore, we jointly agreed that the unpredictability in the current
economic climate presented too great of a risk to the Company and our
shareholders. Given the uncertainty of the marketplace and credit markets, we
believe that our strategic partnership with SMD at Butte Highlands provides an
excellent opportunity for our shareholders by placing our most-advanced project
on a development track with considerably less share dilution. We believe this
partnership is a model for future opportunities in underground mine development
and mining with SMD.
Also subsequent to year-end, in conjunction
with its announced plans to form a 50/50 Joint Venture with Small Mine
Development for the advancement of the Butte Highlands project, the Company
announced the completion of a $10 million debt/equity financing to retire the $8
million bridge loan facility and for working capital. See the discussion under
the section heading Managements Discussion and Analysis Financial Condition
and Liquidity below for a more detailed description of the financing.
Management Forecast for 2009: Key Issues, Challenges, and
Opportunities
Recap of 2008 Goals and Objectives:
·
Complete the
listing process and begin trading on the NYSE Alternext US LLC, formerly the
American Stock Exchange.
(Completed listing process and began
trading.)
·
Complete due
diligence and close the acquisition of SMD.
(Received shareholder
approval in August, however economic crisis and changes within our industry
prevented completion of acquisition. Acquisition terminated subsequent to
year-end.).
·
Achieve
substantially increased profitability to further our business model.
(Management transition and focus on proper corporate culture supportive of
profitable operations.)
·
Complete
exploration and drilling programs at several project sites.
(Drilled
and dropped the Downeyville project. Explored a number of early stage
properties. Drilled Butte Highlands early in year and more successfully later in
year.)
·
Increase our
exploration activity with reduced financial risk through increased use of
strategic partnerships with larger mining and exploration companies.
(Announced 50/50 Joint Venture with SMD subsequent to year
end.)
·
Continue
evaluating additional merger and acquisition opportunities in both mining
services and mineral exploration.
(This is an ongoing and active
process and, where appropriate, utilizing our exploration and drilling
personnel as well as SMD.)
Looking at the year ahead, Company
management believes, at this time, the industry slowdown and lack of available
funding will adversely impact the ability for many companies to advance early
stage properties and/or larger projects requiring significant capital
expenditures. Furthermore, it is our opinion, that companies with no
source of current or future revenue, overly leveraged balance sheets, diluted
share structures, or the need to go to the equity markets to raise capital could
have a difficult time going forward. While we anticipated certain
structural issues we felt would be bullish for precious metals, notably gold,
the magnitude and all-encompassing nature of the current crisis and deleveraging
have impacted our business along with many others. We have not escaped the
impact of the industry downturn or economic crisis; however we feel that our
business model remains a viable alternative for our shareholders especially
given the current economic conditions.
Timberline has a revenue backed
exploration model. Share structure is important to management and our
shareholders. We focused on having sources of revenue, other than the
continual sale of equity, to finance the Company and/or its projects.
Firms with larger cash positions are to be commended at this time, as it
can be assumed their money was raised at higher stock prices, however most do
not have a source of revenue other than those stock sales. They may be
able to advance their projects to production without additional and potentially
dilutive financings. A main strategic difference
76
between Timberline and many other
exploration only companies is that we chose to invest our resources and cash
flow into ongoing revenue generating entities.
At Timberline we have two sources of
revenue and have focused our efforts mainly on underground drilling for
developing or producing companies. While this strategy has allowed us to
continue providing services to our largest customers, we have been and are
focused on right sizing the operations to fit the current demand in the
industry. This is an ongoing process that is becoming more refined as we
move into 2009.
Many companies are greatly reducing their
operating and capital costs and Timberline is no exception. We anticipate
this mindset will remain in place for the foreseeable future until we recognize
legitimate and meaningful signs of recovery in the segment of the market we
serve. The challenges within our industry are many and varied, yet we
remain confident that our cost cutting measures and underground focus in our
drilling divisions will allow us to maintain our position within the
marketplace. Our refined exploration focus on nearer term production
situations fits with our strategic partner, SMD, and will allow us to evaluate
projects that many companies are not in the position to evaluate.
We believe the global economic environment
and monetary situation favor a solid and relatively steady gold price for the
foreseeable future. Volatility is to be expected, however our view is that
we dont necessarily need a higher gold price in order for our business model to
move forward. As a company we are focused on our drilling subsidiaries,
advancing Butte Highlands and evaluating new opportunities. We are not
waiting around and working (or reworking) old ideas or projects. We have
evaluated a number of projects and opportunities in both the services and
production sides of the business and will continue to do so in 2009. Our
industry and the world have changed in the past year and we anticipate a number
of changes in the year ahead. We will continue to look for opportunity at
every turn.
As we have previously stated and firmly
believe, 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 and provides us the flexibility to
evaluate a wide range of opportunities going forward. We feel we
have the knowledge base to continue to evaluate opportunities either
organically or through mergers and acquisitions and continue to do so.
Mine
Services
Timberline Drilling and its subsidiary,
World Wide Exploration S.A. de C.V. (WWE), provide both surface and
underground drilling services, with their two largest clients being Newmont
Mining and Exploraciones Mineras Penoles S.A. de C.V., respectively. Both
units specialize in underground, hardrock core drilling a niche business that
we believe is well-positioned as the industry matures and exploration projects
are advanced into producing mines. Our underground focus has also provided
a solid base of operations as a large percentage of the above-ground and more
speculative exploration drilling has been cut back and/or delayed during the
current industry slowdown.
Revenue growth at Timberline Drilling and
WWE were substantial over the past year, and it was WWE that once again
demonstrated strong performance under the management of Paul Elloway. It
became apparent over the past year that while growth was aggressive at the U.S.
operations, a more moderate rate of growth - or no growth - would be prudent,
and that a focus on proper management and sustainable profitability was
warranted. In May we undertook a management transition at the U.S.
operations, which included a severance package for, and the resignations of,
David Deeds and Doug Kettle. Martin Lanphere was hired as the new
President of Timberline Drilling effective May 15.
On June 27, 2008, the Company redeemed and
cancelled 3,525,000 of the 4,700,000 Series A Preferred Stock from David Deeds
and Doug Kettle for $7,500,000. The remaining 1,175,000 Series A Preferred Stock
were converted to Common Stock by the Kettle Shareholders and sold to a third
party investor.
At Timberline Drilling, there is a
significant liability on the Companys balance sheet related to unpaid
delinquent payroll taxes for payrolls dated during the period from January 1,
2008 through May 15, 2008. Subsequent to the end of the fiscal year, the
Company met with a representative of the Internal Revenue Service who indicated
that she will be initiating an investigation into the parties responsible for
the non-payment of the trust fund taxes. The Company turned over to the
IRS certain requested information pertaining to the aforementioned time period
and the IRS has assessed a trust fund tax recovery penalty against certain
former managers and officers of the Company.
We began the year with rapid growth and
potential for drilling services throughout the industry and concluded the year
with global economic crisis and deleveraging impacting virtually every business
category including the demand for drilling services. Proper management
is important at all times, but is especially important during the challenges we
faced during the previous year.
77
Mineral Exploration
We began the year with a drill program at
Butte Highlands. That program was concluded early due to the inability to
reach required hole depth, poor weather conditions, and the onset of winter.
Later in the year, we evaluated, drilled, tested and subsequently dropped
our early stage Downeyville property. For most of the year we spent
considerable time and expense on the advancement of the Conglomerate Mesa
project in California. While we feel there is still potential in the area,
the lack of flexibility by the property owners in restructuring our agreement to
recognize the economic crisis, changing industry dynamics, challenges in
California, and the prevailing political climate did now allow for us to
continue advancement of the project. Thus, we decided subsequent to year
end to drop the property and take a write-down of the project. Also during
the year, we continued to evaluate and advance the East Camp Douglas project
through not only our own staff, but through the use of consulting geologists.
In addition to the larger, more advanced properties, we also evaluated a
number of early stage properties.
During the year we continued to advance the
Butte Highlands project with additional geological evaluation and began a drill
program in August that was concluded subsequent to year end. Results from that
program are very promising, with the potential for the extension of known
mineralized areas as well as a potential new discovery. Our exploration staff
believes both the extension and the discovery have the potential to greatly
increase mineralization estimates at Butte Highlands. In addition to evaluation,
exploration and drilling, we announced subsequent to year end a joint venture
and strategic partnership with SMD on the Butte Highlands project.
Our management and geologists have a more
refined focus and remain committed to providing exploration blue sky and
potential for discovery to our investors. We were much more active on our
projects in 2008, however our industry (and the world) changed considerably over
the past year and our focus has changed accordingly.
Looking ahead, it is the opinion of
management that our primary commodity focus should be on gold, and to a lesser
extent on silver in the precious metals area. Furthermore, we believe that
projects similar to Butte Highlands are a good fit for the current environment
and the unique qualifications of our people, drilling subsidiaries and strategic
partners. We do not plan to focus on early stage properties or expend
capital or time on the larger Conglomerate Mesa type projects unless it can be
done at a minimal cost to the Company, and not at the cost of advancing or
acquiring more advanced stage properties. We have evaluated, and will
continue to evaluate, projects that may fit our new focus.
Results of Operations for Years Ended September 30, 2008 and
2007
Combined Results Timberline Corporate, Timberline
Exploration, Timberline Drilling and WWE
For the year ended September 30, 2008, we
reported $31,728,617 in revenue compared to $19,233,406 in fiscal 2007.
Our revenues are derived entirely from our drilling subsidiaries and are
comprised of $22,660,556 from Timberline Drilling and $9,068,061 from WWE.
Our revenue increase was primarily due to an increased number of drill
rigs in service during this year. Gross profit from Timberline Drilling
and WWE was $3,989,352 and $2,799,766, respectively for the year ended September
30, 2008.
Our overall after tax net loss for the year
ended September 30, 2008 was $10,103,696 compared to an overall net loss of
$2,688,378 for the year ended September 30, 2007. Our net loss after
income taxes for the year ended September 30, 2008 is comprised of a loss of
$7,966,645 for Timberline Corporate and Exploration, a loss of $3,401,329 for
Timberline Drilling, offset by a gain of $1,264,278 at WWE.
Timberline Corporate and Exploration Division
The after tax net loss of $7,966,645
combined for Timberline Corporate and the Exploration division is comprised of
exploration expenditures of $2,387,862, non-cash charges of $2,149,839, other
general and administrative costs of $2,569,727, and interest expense of $975,586
less interest income of $116,369. Exploration expenditures include a
$578,391 writedown of previously capitalized costs related to our Conglomerate
Mesa property. A significant portion of other general and administrative costs
during the year were related to legal and accounting costs associated with our
proposed acquisition of SMD and our definitive proxy. Included in the
non-cash charges are expenses related to common stock issuances to employees and
stock options that vested during the year. Also included in the non-cash
charges is $148,646 in Depreciation and Amortization.
Timberline Drilling and WWE
For the year ended September 30, 2008,
Timberline Drilling had revenues of $22,660,556 as compared to $15,440,806 for
the year ended September 30, 2007. WWE had revenues of $9,068,061 for the
year ended September 30, 2008 as compared to $3,792,600 for the year ended
September 30, 2007.
78
For the year ended September 30, 2008,
Gross profit from Timberline Drilling and WWE was $3,989,352 and $2,799,766,
respectively, as compared to $3,018,656 for Kettle and $1,473,162 for WWE for
the year ended September 30, 2007.
Timberline Drilling and WWE had general and
administrative expenses of $7,001,869 and $736,947 respectively for the year
ended September 30, 2008 as compared to $3,644,750 for Timberline Drilling and
$900,815 for WWE for the year ended September 30, 2007. Timberline
Drillings general and administrative expenses include $1,880,590 in one-time
severance costs related to the management transition that was undertaken during
the year.
Results of Operations for the Three Month Periods ended
December 31, 2008 and 2007
Combined Results Timberline Corporate, Timberline
Exploration, Kettle Drilling and WWE
For the three months ended December 31,
2008, we reported $4,690,696 in revenue compared to $6,435,125 in the same
period of 2007. Our revenues are derived entirely from our drilling
subsidiaries and are comprised of $2,428,845 from Timberline Drilling and
$2,261,851 from WWE for the three months ended December 31, 2008. Our
revenue decrease was primarily due to a reduction in the number of drill rigs
operating this year versus last year. Gross profit(loss) from Timberline
Drilling and WWE was $(663,668) and $446,318, respectively, for the three months
ended December 31, 2008.
Our overall after tax net loss for the
three months ended December 31, 2008 was $4,735,273 compared to an overall net
loss of $1,993,695 for the three months ended December 31, 2007. Our net
loss for the three months ended December 31, 2008 is comprised of $3,076,763 for
Timberline Corporate and Exploration and $1,737,835 for Timberline Drilling,
offset by income of $79,325 at WWE.
Timberline Corporate and Exploration Division
The after tax net loss of $3,076,763 for
the combined Timberline Corporate and the Exploration division during the three
months ended December 31, 2008 is comprised of non-cash charges of $813,621,
exploration expenditures of $267,888, other general and administrative costs of
$1,481,160, and interest expense of $520,507, less interest income of
$6,413. $923,957 of our other general and administrative costs during the
quarter were related to legal, accounting and financial advisory costs
associated with our proposed acquisition of SMD. Included in the non-cash
charges are $804,197 in expenses related to stock options that vested during the
quarter. Also included in the non-cash charges is $9,424 in Depreciation
and Amortization.
Timberline Drilling and WWE
For the three months ended December 31,
2008, Timberline Drilling had revenues of $2,428,845 as compared to $4,942,179
for the three months ended December 31, 2007. WWE had revenues of
$2,261,851 for the three months ended December 31, 2008 as compared to
$1,492,946 for the three months ended December 31, 2007. The decrease in
revenues at Timberline Drilling is attributable to a reduction in the number of
operating drill rigs, while the increase in revenues at WWE is attributable to
the growth in the number of operating drill rigs in Mexico compared to the
previous year.
For the three months ended December 31,
2008, net loss before taxes from Timberline Drilling was $1,737,835 while net
income before taxes at WWE was $114,127 as compared to a net loss of $325,415
for Timberline Drilling and net income of $10,597 for WWE for the three months
ended December 31, 2007. At Timberline Drilling, the current quarter loss
is primarily attributable to a much greater than normal decrease in drilling
revenue during the holiday quarter. At WWE, however, the net income grew
compared to the corresponding quarter in 2007 due to the increased activity and
number of drill rigs in Mexico.
Financial Condition and Liquidity
At September 30, 2008, we had assets of
$20,369,787 consisting of cash in the amount of $737,503; restricted cash of
$286,410; accounts receivable, net of allowance for doubtful accounts, in the
amount of $3,499,371; materials and supplies inventory valued at $2,045,223;
property, mineral rights, and equipment, net of depreciation of $9,224,550;
goodwill related to the acquisition of Timberline Drilling in the amount of
$2,808,524; and other assets of $1,768,206.
At December 31, 2008, we had assets of
$17,779,738 consisting of cash in the amount of $2,653,120; accounts receivable,
net of allowance for doubtful accounts, in the amount of $1,029,656; inventories
valued at $1,483,565; property, mineral rights and equipment, net of
depreciation of $8,953,615; and other assets of $3,659,782.
79
Recently, the deteriorating economic
conditions experienced in the second half of 2008 in the U.S. housing market and
the credit quality of mortgage backed securities have continued. This situation
has caused a loss of confidence in the broader U.S. and global credit and
financial markets and has resulted in the collapse of, and government
intervention in, several major banks, financial institutions and insurers.
The contraction and unavailability of credit has created a climate of
greater volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions. These
disruptions in the current credit and financial markets have had a significant
material adverse impact on a number of financial institutions and have limited
access to capital and credit for many companies. These disruptions could, among
other things, make it more difficult for us to obtain, or increase our cost of
obtaining, capital and financing for our operations if needed. Access to
additional capital may not be available on terms acceptable to us or at all if
the current economic situation persists.
We expect to rely upon the cash flow
generated by our mine services subsidiaries. However, the recent economic
instability makes it difficult for the Companys management to accurately
predict revenues from these services through the remainder of the 2009 fiscal
year. While the majority of Timberline Drillings underground drilling
rigs remained active during the fiscal year to date, surface drilling by our
customers has been negatively impacted by the current economic instability.
Although we do not expect fiscal 2009 revenues to match 2008 levels, we
also believe that revenues will increase above the levels of our first fiscal
quarter in future quarters and profitability will be attained. Subsequent
to the quarter ended December 31, 2008, Timberline Drilling has mobilized two
additional drilling rigs, one surface and one underground, and has received
indications of interest in our surface drilling services from several potential
customers.
If cash flow from our mine services
subsidiaries are insufficient, our exploration activities and other operations
will be reliant upon equity financings, or other outside funding, to continue
into the future. The current market conditions could make it difficult or
impossible for us to raise necessary funds to meet our capital requirements.
We will continue to evaluate all available avenues to generate cash
including, but not limited to, equity placements, asset sales, credit facilities
or debt issuances.
On February 13, 2009 the Company received a
notice from the NYSE Alternext indicating that the Company was not in compliance
with the continued listing requirements of the exchange. See the
disclosure under the section heading Market for Common Equity and Related
Shareholder Matters below. If we are unable to maintain our listing on
the NYSE Alternext and are unable to obtain a comparable listing, the liquidity
of our common stock could decrease significantly and our ability to raise
additional capital through equity or convertible debt could be impaired.
In June of 2008, the Company and Auramet
Trading, LLC (which we refer to as Auramet) signed an indicative term sheet
under which Auramet would provide an $8.0 million loan to the Company, at the
Companys request, at any time before June 30, 2008. Pursuant to the
fee terms of the term sheet, the Company paid a fee equal to 4% of the principal
amount of the loan and issued 160,000 common shares of the Company to Auramet
after the Companys drawdown of the loan on June 27, 2008. Pursuant to the
section of the Term Sheet entitled Closing Fee to Lender, Auramet was granted
a put right (the Put Right) of $2.00 on the Fee Shares, entitling Auramet to
payment of $320,000 (the Put Value) from Timberline upon notice of exercise of
the Put Right to Timberline. Auramet submitted a notice of exercise of its
Put Right to Timberline on January 9, 2009.
Subsequently, in June of 2008, pursuant to
the term sheet and subject to the terms laid out in a promissory note between
the Company and Auramet, Auramet provided $8.0 million to the Company, $7.5
million of which was used to repurchase 3,525,000 shares of Series A Preferred
Stock from Douglas Kettle, the sole holder of the Series A Preferred Shares,
pursuant to a repurchase agreement
between the Company, Douglas Kettle
and Auramet. Of the 4,700,000 Series A Preferred Shares held by Mr.
Kettle, the Company repurchased and cancelled 3,525,000 Series A Preferred
Shares for $7.5 million. Pursuant to the Series A Preferred Shares
Agreement, the remaining 1,175,000 Series A Preferred Shares were converted to
1,175,000
common shares of the Company and purchased from Mr. Kettle by a
private investor. Upon closing of the above transactions, no Series A
Preferred Shares remain outstanding.
In accordance with Auramet providing the
Company with $8.0 million ($7.5 million of which was paid to Mr. Kettle as
described above), the Company entered into a promissory note with Auramet.
Our recent financing with Ron Guill and SMD, as described below, permitted
us to pay-off the $8.0 million loan from Auramet.
On February 10, 2009, Timberline and
Auramet entered into a Stock Purchase and Put Right Release Agreement (the
Agreement), stating that the Put Right could be converted into shares on
common stock of the Company at a deemed conversion price of $0.46 per share.
Timberline and Auramet further agreed that the previously issued 160,000
common shares could be credited to the Put Value, leaving the Put Value at
$246,400, which will be converted by the Company by issuance of 535,652 shares
of common stock of Timberline immediately upon final approval of the NYSE
Alternext US LLC.
80
On October 31, 2008, the Company entered
into two convertible notes (as described below), one with Ron Guill, a director
of the Company, and his wife, Stacey Guill, and the other with SMD, a company
owned by Mr. Guill. Each of the notes was made for a principal amount of
$5 million dollars for an aggregate of $10 million, and both are convertible
into the Companys common stock, as described below. The Company used the
proceeds of the notes to pay off the $8.0 million loan (plus any applicable
interest) previously provided to the Company by Auramet Trading, LLC (Auramet)
and described in the Companys Form 8-K filed on July 3, 2008 (such loan is
hereafter referred to as the Auramet Loan) and for general working capital
purposes.
The Convertible Term Note
On October 31, 2008, the Company entered
into a series of agreements with SMD in connection with a $5 million loan from
SMD. The loan documents included: a convertible note (the Convertible Term
Note), a credit agreement (the Credit Agreement), a collateral assignment and
pledge of stock and security agreement (the Pledge Agreement), a security
agreement (the Security Agreement) and a right of first refusal over the
Companys Butte Highlands property (the Right of First Refusal).
The Convertible Term Note has a principal
amount of $5.0 million and is secured pursuant to the Security Agreement by a
pledge of all of the stock of Timberline Drilling, Inc. (TDI), a wholly-owned
Company subsidiary incorporated in Idaho, pursuant to the Pledge Agreement, the
shares of which were previously pledged to Auramet but were released upon
payment of the Auramet Loan on October 31, 2008, and a deed of trust to be
entered into covering the Companys Butte Highlands property in Silver Bow
county, Montana (the Butte Highlands Property).
Pursuant to the terms of the Credit
Agreement, the Convertible Term Note bears interest at 10% annually, compounded
monthly, with interest payments due at maturity. The Convertible Term Note is
convertible by SMD at any time prior to payment of the note in full, at a
conversion price of $1.50 per share. SMD may also convert all or any portion of
the outstanding amount under the Convertible Term Note into any equity security
other than the Company's common stock issued by the Company at the issuance
price. The Convertible Term Note must be repaid on or before October 31, 2010,
and may be prepaid in whole or in part at any time without premium or penalty.
If the Company defaults on the Convertible Term Note or any of the related
agreements, SMD may declare the Convertible Term Note immediately due and
payable, and the Company must pay SMD an origination fee in the amount of
$50,000.
Under the Right of First Refusal, the
Company granted SMD a right of first refusal to purchase the Butte Highlands
Property on the same terms as those of any bona fide offer from a third-party
upon 60 days notice from the Company of any such offer. In addition, the
Company granted SMD a right to develop the Butte Highlands Property on the same
terms as those of any bona fide offer to develop the property from a third-party
upon 60 days notice from the Company of any such offer.
The Short-Term Convertible Note
In addition, on October 31, 2008, the
Company entered into a short-term convertible note (the Short-Term Convertible
Note), a subscription agreement (the Subscription Agreement), a collateral
assignment and pledge of stock and security agreement (the STN Pledge
Agreement), and a security agreement (the STN Security Agreement) with Ron
and Stacey Guill in connection with a loan for $5 million dollars. Upon
approval for listing of the shares issuable under the Short-Term Convertible
Note from the NYSE Alternext, the Short-Term Convertible Note will be
automatically converted into common stock as described below.
The Short-Term Convertible Note
automatically converted into 5,555,556 shares of Company stock (valued at $0.90
per share) upon approval of the issuance of the additional shares for listing by
the NYSE Alternext US LLC on December 19, 2008. Under the Subscription
Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556 shares of the
Companys common stock at a price of $0.90 per share as accredited investors
as defined under Regulation D of the Securities Act of 1933, as amended. Should
the Company decide to issue and sell any equity securities or securities
convertible into equity securities, the Subscription Agreement also obligates
the Company to offer a pro rata share of such securities to Mr. and Mrs. Guill
on the same terms and conditions as the proposed sale and issuance.
Management believes that it has sufficient
working capital to meet the Companys ongoing operating expenses for the next 12
months. Additional financing may be required if the Company seeks to
undertake further property acquisitions or expand its exploration or mine
services operations.
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.
81
Critical Accounting Policies and Estimates
See Note 2 to the financial statements
contained elsewhere in this registration statement 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
Companys 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 fair value at the date of acquisition.
Amortization of employment contracts was initially calculated on a
straight-line basis over a useful life of three years. Amortization of the
drilling contracts was 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. At
September 30, 2008 all intangible assets (excluding goodwill) were fully
amortized.
Materials and Supplies Inventory
The Company values its inventories at the
lower of average cost or market. Allowances are recorded for materials and
supplies inventory considered to be in excess or obsolete. Materials and
supplies inventories consist primarily of parts, operating supplies, drill rods
and drill bits.
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,
2008.
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
82
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.
Recently Issued Accounting Standards
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 adoption of SFAS 157 on October 1, 2008 did not have a
material effect on the Companys consolidated financial statements.
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 adoption of this statement on October 1, 2008 did not have a
material effect on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No.
160,
Noncontrolling Interests in Consolidated Financial Statements
(SFAS No. 160). This statements objective is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards that require ownership interests in the
subsidiaries held by parties other than the parent be clearly identified. The
Statement is effective for fiscal years beginning on or after December 15, 2008
and is to be applied prospectively as of the beginning of the fiscal year in
which the Statement is initially applied, except for the presentation and
disclosure requirements which shall be applied retrospectively for all periods
presented. Earlier adoption is not permitted. The adoption of this
statement is not expected to have a material effect on the Companys future
reported financial position or results of operations.
In December 2007, the FASB issued SFAS No.
141R
Business Combinations
effective for fiscal years beginning after
December 15, 2008. SFAS 141R, which will replace FAS 141, is applicable to
business combinations consummated after the effective date of December 15, 2008.
In March 2008, the FASB issued SFAS No.
161,
Disclosures about Derivative Instruments and Hedging Activities
("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure
requirements of FASB Statement 133,
Accounting for Derivative Instruments
and Hedging Activities
("SFAS No. 133") to require qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit risk related contingent features in derivative
agreements. The Statement is effective for consolidated financial
statements issued for fiscal years and periods beginning after November 15,
2008. Early application is encouraged. The Company is currently
evaluating the impact of the adoption of SFAS No. 161.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. SFAS No.
162 is effective 60 days following the Securities and Exchange Commissions
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. The Company is currently evaluating the
potential impact of the adoption of SFAS No. 162.
Contractual Obligations
As of September 30, 2008, we had the
following non-cancelable contractual obligations:
83
The Company finances a substantial portion
of their core drill purchases through capital leases. The capital lease
obligations as of September 30, 2008 and 2007 were $1,130,207 and $1,257,875,
respectively. Future minimum lease payments at September 30, 2008 for the
related obligations under capital leases were:
Year Ending
September 30,
|
|
2009
|
$
516,519
|
2010
|
417,916
|
2011
|
190,180
|
2012
|
5,592
|
Total Minimum
Lease Payments
|
1,130,207
|
Less Amount
Representing Interest
|
(104,546)
|
Present Value of
Minimum Lease Payments
|
1,025,661
|
Less Obligations
Due within One Year
|
(448,127)
|
Obligations
Under Capital Leases, Due after One Year
|
$
577,534
|
Long-term debt at
September 30, 2008 and 2007, respectively, consisted of the following:
|
September 30, 2008
|
September 30, 2007
|
Notes payable to
various lenders for vehicles and equipment,
|
|
|
in monthly
payments totaling $31,066 per month, at rates ranging
|
|
|
from 0.9% to
9.5% with a weighted average interest rate of
|
|
|
approximately
7%. The notes are collateralized by the vehicles
|
|
|
and equipment
that they represent.
|
$588,369
|
$872,172
|
|
|
|
|
Less Current
Portion
|
(250,638)
|
(300,638)
|
|
|
|
|
|
|
$337,731
|
$571,534
|
|
|
|
|
As of September
30, 2008, debt outstanding will mature as follows:
|
|
|
|
|
|
|
|
2009
|
$
250,638
|
|
|
2010
|
204,191
|
|
|
2011
|
106,582
|
|
|
2012
|
21,013
|
|
|
2013
|
5,945
|
|
|
Total
|
$
588,369
|
|
A substantial portion of the Companys core
drill purchases are financed through capital leases. Payment for the
fiscal year ending September 30, 2008 under these capital leases was $485,084.
The following fiscal year payments are due under these leases: $516,519
(2009), $417,916 (2010), $190,180 (2011) and $5,592 (2012).
Timberline Drilling also owns a fleet of
vehicles, trucks and fork-lifts for its drilling operations. Other
equipment and vehicles were financed with notes collateralized by the equipment
or vehicles. Monthly payments under the notes at September 30, 2008 were
$413,226. The following fiscal year payments are due under these financing
arrangements: $250,638 (2009), $204,191 (2010), $106,582 (2011) and $21,013
(2012).
Timberline and its subsidiaries lease
office space and storage facilities. All of these facilities, which we
believe are adequate for our needs for the foreseeable future, are leased. Under
the current leases, we paid rental payments of $294,553 in the fiscal year
ending September 30, 2008. The current leases call for total payments of
$304,206 in fiscal year 2009.
_________________________________________________________________________________________
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.
84
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS
The following table sets forth
certain information with respect to our current Directors and executive
officers. The term for each Director expires at our next Annual Meeting or
until his or her successor is appointed and qualified. The ages of the
Directors and officers are shown as of December 31, 2008.
Name
|
Current Office
|
Principal Occupation
|
Director/Officer Since
|
Age
|
John Swallow
|
Executive Chairman
|
Executive
Chairman,
Director to Timberline Resources
|
September 22, 2006
|
42
|
Randal Hardy
|
Chief Executive Officer;
Chief Financial Officer;
Director
|
Chief Executive
Officer;
Chief Financial Officer;
Director to Timberline
Resources
|
August 27, 2007
|
47
|
Paul Dircksen
|
Vice President,
Exploration; Director
|
Vice President,
Exploration; Director to
Timberline Resources
|
September 22, 2006
|
63
|
Craig Crowell
|
Chief Accounting
Officer
|
Chief Accounting
Officer
|
September 5, 2008
|
37
|
Vance Thornsberry*
|
Director
|
Consulting geologist
|
September 22, 2006
|
63
|
Eric Klepfer*
|
Director
|
Principal of Klepfer Mining
Services
|
September 22, 2006
|
51
|
Ron Guill*
|
Director
|
Founder, General Manager of
Small Mine
Development, LLC
|
November 9, 2007
|
60
|
James Moore*
|
Director
|
Chief Financial Officer to
Mines
Management, Inc.
|
January 1, 2008
|
63
|
*
Indicates that the director is independent in accordance with Rules 121 and
803A of the NYSE Alternext US LLC Company Guide.
The following is a description of
the business background of the Directors and executive officers of Timberline
Resources Corporation.
Randal Hardy Chief Executive Officer, Chief Financial Officer
& Director
Mr. Hardy (47) was appointed as our Chief
Executive Officer, Chief Financial Officer and to our board of directors in
August 2007. Prior to his appointment by us, since September 2006, Mr.
Hardy was the President of HuntMountain Resources, a publicly held U.S.-based
junior exploration company. Prior to that, from August 2005, he was
HuntMountains Chief Financial Officer. Previously, from 1997 to 2005, he
held positions as President and CEO of Sunshine Minting, Inc. a privately held,
precious metal custom minting and manufacturing firm. Prior to his tenure
at Sunshine Minting, Inc., Mr. Hardy has served as Treasurer of the NYSE-listed
Sunshine Mining and Refining Company. Mr. Hardy has a Business
Administration degree from Boise State University and has attained
certifications as a Certified Management Accountant and a Certified Cash
Manager. Mr. Hardy is currently a director of HuntMountain Resources.
John
Swallow Executive Chairman
Mr. Swallow (42) served as Timberlines CEO
from January 2006 through August 2007 and is largely responsible for enacting
the Companys current business plan. From 1994 to December 2005, Mr.
Swallow founded and ran Coeur dAlene Appraisals, Inc., a real estate appraisal
firm. He was formerly the President of Sterling Mining Corporation in 1998
and served on its board of directors until November 2003. He brings
wide-ranging experience from within the local mineral exploration industry as
well as extensive knowledge of the junior equity markets. Mr. Swallow
holds a B.S. in Finance from Arizona State University.
85
Paul
Dircksen Vice President, Exploration & Director
Mr. Dircksen (63) has over 35 years of
experience in the mining and exploration industry, serving in executive,
managerial, and technical roles at several companies. He has been a
director since January 2005 and our Vice President of Exploration since May 1,
2006. Working in the United States and internationally, he has a strong
technical background, serving as a team member on approximately nine gold
discoveries, seven of which later became operating mines. From January
2005 to May 2006 he was self employed as a consulting geologist until joining
Timberline Resources. Mr. Dircksen was the president of Brett Resources
from January 2004 to December 2004, and prior to that, from January 2003 to
December 2003, he was President of Bravo Venture Group, a junior exploration
company. During 2002 he was self employed as an independent mineral
geologist. Between 1987 and 2001, Mr. Dircksen was Senior Vice-President
of Exploration for Orvana Minerals Corp. He holds an M.S. in Geology from
the University of Nevada. Mr. Dircksen currently serves as a director of
Bravo Venture Group and is employed on a full-time basis with Timberline
Resources.
Craig
Crowell Chief Accounting Officer
Mr. Crowell (37) was appointed as our Chief
Accounting Officer in September 2008. Prior to his appointment, since
February 2008, Mr. Crowell was corporate controller of the Company. Prior
to that, from January 2003, he was a supervising accountant at Potlatch
Corporation. Previously, from 1998 to 2003, he served in several
accounting roles with Nexen, Inc. a NYSE-listed international energy company.
Prior to his tenure at Nexen, Inc., Mr. Crowell was employed by Price
Waterhouse. Mr. Crowell has a Commerce degree from the University of
Alberta and is a Certified Public Accountant (Illinois) and a Canadian Chartered
Accountant (Alberta).
Eric
Klepfer Director
Mr. Klepfer (51) has over 23 years of
experience in the mining industry, serving in environmental, engineering and
management positions at Placer Dome, Newmont Mining, Coeur dAlene Mines, and
Mines Management. He has been a director since January 2004. Since
November 2003, he has been the President of Klepfer Mining Services. In
addition, from August 2004 to August 2007 he was the Vice President of
Operations at Mines Management, Inc. From 1995 to November 2003, Mr.
Klepfer was simultaneously the Director of Environmental Affairs for Coeur
dAlene Mines Corporation and the Vice President of Operations and Technical
Services of its subsidiary Earthworks Technology, Inc. He holds B.S.
degrees in Mining Engineering and Engineering Administration from Michigan
Technological University.
Ron
Guill Director
Mr. Guill (60) is the founder, owner, and
general manager of Small Mine Development (
SMD
), one of the largest
underground mine contractors in the United States. He was appointed to the
Board in November 2007. Mr. Guill founded and has been fully employed by
SMD since 1982. SMD now has more than 300 full-time employees working at
five mine sites, serving world-class clients such as Newmont Mining. He
has served as a trustee for the Northwest Mining Association which recognized
him, and SMD, with their 2006 Platinum Award for Corporate Excellence. He holds
a degree in Mining Engineering from the Mackay School of Mines at the University
of Nevada.
Vance
Thornsberry Director
Mr. Thornsberry (63) has been a director
since January 2004 and is a Registered Professional Geologist with over 35 years
of experience in the mining and exploration industry. Since December 2007,
Mr. Thornsberry has worked as a consulting geologist, but has not been a
consultant for Timberline at any time in the past three years. From
January 2005 until December 2007, Mr. Thornsberry served as a consulting
geologist and Vice-President of Exploration for TSX-listed Northland Resources.
He also served as Vice President of Exploration for Timberline from
January 2004 to May 2006. From 1997 through December 2004, Mr. Thornsberry
consulted for a variety of exploration companies, including Golden Queen Mining
Company, Beartooth Mining Company, Thunder Mountain LLC and Romarco Minerals.
He held senior positions with Inspiration Development Company in the 1970s
and 1980s, and has since worked as a consulting geologist for over fifteen
mining companies worldwide. He holds a B.S. in Geology from the University
of Missouri.
James
Moore Director
Mr. Moore (63) has been a director since
January 2008, and since March 2004 has been Chief Financial Officer of Mines
Management, Inc. Mr. Moore has over 30 years of senior level experience in
financial management with the mining sector. Prior to joining Mines Management,
from November 2002 to March 2004, Mr. Moore was an independent mining consultant
for Idaho General Mining Inc. From September 1997 through August 2003 he was the
Vice President of Business Development for RAHCO International, Inc., a heavy
mining equipment designer and manufacturer in Spokane, Washington. Prior to that
time Mr. Moore was employed by Barrick Gold Corporation in Santiago, Chile as
Vice
86
President and Chief Financial Officer for
its Latin American division. Other experience includes service as Division
Controller Mobil Oil, Energy Minerals Division, and Operations Controller for
United Nuclear Corporation. Mr. Moore attended Stanford University and graduated
from University of Utah with a B.S. in accounting.
Family Relationships
None of our Directors are related by blood,
marriage, or adoption to any other Director, executive officer, or other key
employees. To our knowledge, there is no arrangement or understanding
between any of our officers and any other person, including Directors, pursuant
to which the officer was selected to serve as an officer.
Involvement In Certain Legal Proceedings
To the knowledge of the Company, none of
its officers or directors has been personally involved in any bankruptcy or
insolvency proceedings within the last five years. Similarly, to the knowledge
of the Company, none of the directors or officers, within the last five years,
have been convicted in any criminal proceedings (excluding traffic violations
and other minor offenses) or are the subject of a criminal proceeding which is
presently pending, nor have such persons been the subject of any order,
judgment, or decree of any court of competent jurisdiction, permanently or
temporarily enjoining them from acting as an investment advisor, underwriter,
broker or dealer in securities, or as an affiliated person, director or
insurance company, or from engaging in or continuing in any conduct or practice
in connection with any such activity or in connection with the purchase or sale
of any security, nor were any of such persons the subject of a federal or state
authority barring or suspending, for more than 60 days, the right of such person
to be engaged in any such activity, which order has not been reversed or
suspended.
EXECUTIVE COMPENSATION
The following summary compensation tables
set forth information concerning the annual and long-term compensation for
services in all capacities to the Company for the year ended September 30, 2008
of those persons who were, at September 30, 2008 (i) the chief executive officer
(Randal Hardy) and (ii) the other most highly compensated executive officers of
the Company, whose annual base salary and bonus compensation was in excess of
$100,000 (John Swallow Executive Chairman, Paul DircksenVice President of
Timberline, Craig Crowell---Chief Accounting Officer):
SUMMARY COMPENSATION TABLE
|
Name and principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
Vested
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
Randal
Hardy,
Chief Executive
Officer and
Chief Financial
Officer
|
2008
|
162,000
|
50,000
(9)
|
0
|
347,379
(1)
|
0
|
0
|
3,835
(6)
|
563,214
|
|
2007
|
13,500
|
37,000
(7)
|
0
|
0
|
0
|
0
|
0
|
50,500
|
John Swallow,
Executive
Chairman,
Former
CEO
|
2008
|
162,000
|
50,000
(9)
|
0
|
483,073
(2)
|
0
|
0
|
3,835
(6)
|
698,908
|
|
2007
|
144,750
|
0
|
0
|
0
|
0
|
0
|
0
|
144,750
|
Paul
Dircksen,
Vice
President
|
2008
|
162,000
|
0
|
0
|
193,794
(3)
|
0
|
0
|
2,775
(6)
|
355,794
|
|
2007
|
162,000
|
0
|
0
|
130,000
(8)
|
0
|
0
|
0
|
292,000
|
Craig Crowell,
Chief
Accounting
Officer
|
2008
|
58,173
|
0
|
0
|
11,000
(4)
|
0
|
0
|
5,986
(5)
|
75,159
|
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
(1)
216,667
stock options vested, with exercise prices ranging from $2.48 to $3.70 per
share. The valuation of the option award is calculated using the
Black-Scholes method in accordance with FAS 123(R). Vesting dates
for the option awards range from October 2007 through August 2008. None of
the vested options, valued for accounting purposes at $347,379, were
exercised or sold and no benefit or gain was recognized by Mr. Hardy
thereon.
(2)
333,334
stock options vested, with exercise prices ranging from $2.48 to $3.40 per
share. The valuation of the option award is calculated using the
Black-Scholes method in accordance with FAS 123(R). Vesting dates
for the option awards range from October 2007 through August 2008.
None of the vested options, valued for accounting purposes at
$483,073, were exercised or sold and no benefit or gain was recognized by
Mr. Swallow thereon.
|
87
(3)
250,001
stock options vested, with exercise prices ranging from $0.75 to $3.40 per
share. The valuation of the option award is calculated using the
Black-Scholes method in accordance with FAS 123(R). Vesting dates
for the option awards range from October 2007 through September 2008. None
of the vested options, valued for accounting purposes at $193,794, were
exercised or sold and no benefit or gain was recognized by Mr. Dircksen
thereon.
(4)
10,000
stock options vested in August 2008, with an exercise price of $3.20 per
share. The valuation of the option award is calculated using the
Black-Scholes method in accordance with FAS 123(R). None of the
vested options, valued for accounting purposes at $11,000, were exercised
or sold and no benefit or gain was recognized by Mr. Crowell thereon.
(5)
Reimbursement
of moving expenses incurred.
(6)
Employee
portion of health insurance benefits paid by the Company on the employees
behalf.
(7)
A
signing bonus of 10,000 shares of common stock awarded on August 27, 2007
with a fair value of $3.70 per share. The fair value of stock
awarded was determined using the closing market value of the Companys
common shares on the award date.
(8)
250,001
stock options vested. The valuation of the option award is
calculated using the Black-Scholes method in accordance with FAS 123(R).
Vesting dates for the option awards range from March 2007 through
September 2007.
(9)
Bonus
received in November 2007 for prior performance.
|
Executive Compensation Agreements and Summary of Executive
Compensation
Report on Executive Compensation
During the year ended September 30, 2008,
the Companys Board and the Companys Compensation Committee, once appointed,
was responsible for establishing a compensation policy and administering the
compensation programs of our executive officers.
The amount of compensation paid by the
Company to each of our officers and the terms of those persons employment is
determined by the Compensation Committee. The Compensation Committee evaluates
past performance and considers future incentive and retention in considering the
appropriate compensation for the Companys officers. The Company believes
that the compensation paid to the Companys directors and officers is fair to
the Company.
Our Compensation Committee believes that
the use of direct stock awards is at times appropriate for employees, and in the
future intends to use direct stock awards to reward outstanding service or to
attract and retain individuals with exceptional talent and credentials. The use
of stock options and other awards is intended to strengthen the alignment of
interests of executive officers and other key employees with those of our
stockholders. In this regard, on October 24, 2007, our Compensation
Committee and the Board of Directors authorized the issuance of 1,230,000 stock
option awards. Pursuant to his employment agreement, Mr. John Swallow was
awarded 500,000 options. In addition, the following stock option issuances
were made in the normal course of business: 100,000 options to Mr. John Swallow;
300,000 options to Mr. Randal Hardy; 100,000 to Mr. Dircksen; and 50,000 options
each to our directors Eric Klepfer, Ron Guill and Vance Thornsberry. An
additional 80,000 options were granted to non-executive employees at this time.
All options issued are exercisable at $3.40 until October 24, 2012, and
are subject to different vesting schedules, with all options vesting by two
years from the date they were granted.
On August 22, 2008, our Compensation
Committee and the Board of Directors authorized the issuance of 700,000 stock
option awards. The following stock option issuances were made in the
normal course of business: 100,000 options each to Mr. John Swallow, Mr. Randal
Hardy and Mr. Paul Dircksen; and 100,000 options each to our directors Eric
Klepfer, Ron Guill, Jim Moore, and Vance Thornsberry. All options issued
are exercisable at $2.48 until August 22, 2013, with all options vesting by two
years from the date they were granted.
Executive Compensation Agreements-
Swallow Employment Agreement
As of May 1, 2006, John Swallow, entered
into a three year employment agreement. Pursuant to the terms of this agreement,
he agreed to function as and perform the customary duties of Chief Executive
Officer and Chairman of the Companys Board of Directors. His original
compensation under the employment agreement was $90,000, but was later increased
to $162,000 in 2007 to match the salaries of Paul Dircksen, Doug Kettle and
David Deeds. In addition to this annual salary, his compensation includes
fringe benefits including payment of medical and dental insurance coverage
premiums of up to $12,000 per year. The agreement permits the issuance of
a signing bonus of our common stock, automobile benefits (encompassing a Company
truck), performance benefits and incentives. The agreement permits the
issuance of stock options per the terms of the 2005 Stock Incentive Plan with an
exercise price of $0.75 per share, but such options were not issued in
conjunction with the signing of this agreement. In October 2007, Mr.
Swallow was granted 500,000 stock options with an exercise price of $3.40, a
term of five years, with one half vesting immediately and the remainder vesting
in one year.
In the event of a change of
control, if Mr. Swallows employment is terminated by the Company without
Manifest Cause or by Mr. Swallow for Good Reason, he will be entitled to
receive a lump sum payment equaling three (3) times his annual base salary
and the continuation of medical and dental insurance benefits as the Company is
then obligated to pay.
Good Reason is defined in the Swallow
employment agreement to mean a reduction in
88
his compensation, title or level of
responsibility, a forced relocation or other change to the terms of his
employment, or a change of control of the Company. Manifest cause is
defined as a felony conviction, a gross and willful failure to perform his
duties, or dishonest conduct which is intentional and materially injurious to
the Company. Under the agreement, Mr. Swallow is permitted to engage in
other business activities. Mr. Hardy succeeded Mr. Swallow as Chief
Executive Officer on August 27, 2007.
Hardy Employment Agreement
In connection with his appointment, Mr.
Hardy entered into an employment agreement with us, effective August 27, 2007.
A brief description of the material terms of this agreement are as
follows: the term is three years, with a provision for mutually agreed
upon annual renewals thereafter. It can be terminated by us for cause (without
notice), without cause (with three months notice) or upon a takeover,
acquisition or change in control. Mr. Hardy is to act as both Chief
Executive and Financial Officer until such time as a new Chief Financial Officer
is appointed. Thereafter, he will remain as Chief Executive Officer during the
term of his employment. His compensation includes: an annual salary of
$162,000, payment or reimbursement of up to $12,000 per year of premiums for
health insurance coverage for him and his family, and reimbursement of Mr.
Hardys personal automobile related expenses. In addition to salary and
fringe benefits, Mr. Hardy shall be entitled to receive performance bonuses and
other incentive compensation as authorized by the Board of Directors. Per
the agreement, Mr. Hardy was granted 10,000 shares of our restricted common
stock as a signing bonus, and incentive stock options to purchase 200,000
shares of our restricted common stock (at the closing stock price on the
effective date of the agreement, August 27, 2007) pursuant to our Amended 2005
Stock Incentive Plan.
In the event of a
change of control, if Mr. Hardys employment is terminated by the Company
without Manifest Cause or by Mr. Hardy for Good Reason, he will be entitled
to receive a lump sum payment equaling three (3) times his annual base
salary and the continuation of medical and dental insurance benefits as the
Company is then obligated to pay.
Good Reason is defined in the
Hardy employment agreement to mean a reduction in his compensation, title or
level of responsibility, a forced relocation or other change to the terms of his
employment, or a change of control of the Company. Manifest cause is
defined as a felony conviction, a gross and willful failure to perform his
duties, or dishonest conduct which is intentional and materially injurious to
the Company.
Dircksen Employment Agreement
Mr. Dircksen entered into a three year
employment with us, effective May 1, 2006, to become our Vice President of
Exploration. Pursuant to the terms of this agreement, he will function as
and perform the customary duties of Vice President of Exploration and a member
of the Companys Board. His compensation includes an annual salary of $162,000,
fringe benefits including payment of medical and dental insurance coverage
premiums of up to $12,000 per year, automobile benefits (encompassing a Company
truck) and performance benefits and incentives. Regarding the performance
benefits and incentives, the agreement called for the issuance of 50,000 shares
of our common stock as a signing bonus, and the issuance of 500,000 incentive
stock options with an exercise price of $.75 per share. These signing bonus
shares and the incentive stock options were issued pursuant to this agreement.
In the event of a change of control, if
Mr. Dircksens employment is terminated by the Company without Manifest
Cause or by Mr. Dircksen for Good Reason, he will be entitled to receive a
lump sum payment equaling three (3) times his annual base salary and the
continuation of medical and dental insurance benefits as the Company is then
obligated to pay.
Mr. Dircksen is permitted to engage in other
business activities. Good Reason is defined in the Dircksen employment
agreement to mean a reduction in his compensation, title or level of
responsibility, a forced relocation or other change to the terms of his
employment, or a change of control of the Company. Manifest cause is
defined as a felony conviction, a gross and willful failure to perform his
duties, or dishonest conduct which is intentional and materially injurious to
the Company.
The Company issued the 50,000 shares due as
a signing bonus on June 21, 2006 and the 500,000 incentive stock options on
March 15, 2006.
Prior to May 1, 2006, Mr. Dircksen had a
consulting arrangement with us to provide services related to geologic
evaluation and marketing of the Companys mineral properties. Under this
arrangement, he received payment of $400 per day or $50 per hour.
89
Outstanding Equity Awards At Fiscal Year-End
The following table sets forth the stock
options granted to our named executive officers as of September 30, 2008. No
stock appreciation rights were awarded.
Option Awards
|
Stock Awards
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock that
have not
Vested (#)
|
Market Value of
Shares or Units
of
Stock
that have not
Vested ($)
|
Equity Incentive Plan
Awards: Number of
Securities Unearned
Shares, Units or Other
Rights That have not
Vested (#)
|
Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units or
Other Rights that
Have not Vested ($)
|
John
Swallow
(1)
|
283,334
50,000
|
316,666
50,000
|
0
0
|
$3.40
$2.48
|
10/24/2012
8/22/2013
|
0
|
$0.00
|
0
|
$0.00
|
Randal
Hardy
(2)
|
66,667
100,000
50,000
|
133,333
200,000
50,000
|
0
0
0
|
$3.70
$3.40
$2.48
|
8/27/2012
10/24/2012
8/22/2013
|
0
|
$0.00
|
0
|
$0.00
|
Paul
Dircksen
(3)
|
250,001
33,333
50,000
|
83,332
66,667
50,000
|
0
0
0
|
$0.75
$3.40
$2.48
|
3/14/2011
10/24/2012
8/22/2013
|
0
|
$0.00
|
0
|
$0.00
|
Craig
Crowell
(4)
|
10,000
0
|
20,000
50,000
|
0
0
|
$3.20
$2.05
|
2/25/2013
9/3/2013
|
0
|
$0.00
|
0
|
$0.00
|
(1)
283,333
of John Swallows unexercisable $3.40 options vest on 10/24/2008, with the
remainder vesting on 10/24/2009. The remaining 50,000 unexercisable $2.48
options vest in equal increments annually, with vesting dates ranging from
August 2009 through August 2010.
(2)
Randal
Hardys unexercisable $3.70 and $3.40 options vest at a rate of 33%
annually, with vesting dates ranging from August 2009 through August 2010.
The remaining 50,000 unexercisable $2.48 options vest in equal increments
annually, with vesting dates ranging from August 2009 through August
2010.
(3)
Paul
Dircksens unexercisable $0.75 options vest in equal increments on a
quarterly basis, with vesting dates ranging from December 2008 through
March 2009. The remaining unexercisable $3.40 options vest at a rate of
33% annually, with vesting dates ranging from August 2009 through August
2010. The remaining 50,000 unexercisable $2.48 options vest in equal
increments annually, with vesting dates ranging from August 2009 through
August 2010.
(4)
Craig
Crowells unexercisable $3.20 options vest at a rate of 50% annually, with
vesting dates ranging from February 2009 through February 2010. The
remaining 50,000 unexercisable $2.48 options have vesting dates ranging
from September 2009 through September 2010.
|
Retirement, Resignation or Termination Plans
We sponsor no plan, whether written or
verbal, that would provide compensation or benefits of any type to an executive
upon retirement, or any plan that would provide payment for retirement,
resignation, or termination as a result of a change in control of our Company or
as a result of a change in the responsibilities of an executive following a
change in control of our Company. Specific executive employment agreements
described above do, however, provide that i
n
the event of a change of control, if the executives employment is terminated by
the Company without Manifest Cause or by the executive for Good Reason, as such
terms are defined in their respective employment agreements, the executive will
be entitled to receive a lump sum payment equaling three (3) times his
annual base salary and the continuation of medical and dental insurance benefits
as the Company is then obligated to pay.
Timberline Drilling, our wholly owned
subsidiary, does maintain a Supplemental Executive Retirement Plan (SERP), which
is funded by insurance and covers several of its executive officers, including
Paul Dircksen, Douglas Kettle and David Deeds.
As of May 15, 2008, Mr. Kettle and Mr. Deeds resigned and
their SERPs were discontinued.
The Supplemental Income Agreement
(Agreement for purposes of this paragraph) between Timberline Drilling, Inc.
and Paul Dircksen provides for the payment of deferred compensation to Mr.
Dircksen upon his death, Disability, Retirement or Early Retirement,
or upon a Change in Control as defined in Regulations issued by the
Internal Revenue Service under IRC Section 409A. If Mr. Dircksen remains
actively and continuously employed on a full time basis until his Retirement
(defined as his voluntary termination of employment on or after attaining age
65) or his death, Mr. Dircksen will be paid $100,000 pursuant to the
Agreement. If Mr. Dircksen remains actively and continuously
employed on a full time basis until his Early Retirement (defined as
his voluntary termination of employment after attaining age 60 and before
attaining age 65) or his Disability (as defined in the Agreement) he will
be paid each year for ten years an amount equal to 5% of the cash
surrender value of the life insurance policy funding the Agreement (the
Policy). Upon a Change in Control, the Policy will be
distributed to Mr. Dircksen and the Agreement will be terminated, with no
further obligations on the part of the Company.
90
Director Compensation
The following table sets forth the stock
options granted to our directors during the fiscal year ended September 30,
2008. Compensation to directors that are also executive officers is
detailed above and is not included on this table.
Name
|
Fees
Earned or
Paid in
Cash ($)($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
Non-Qualified
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
Vance Thornsberry
|
0
|
0
|
82,063
(1)
|
|
0
|
0
|
0
|
82,063
|
Ron Guill
|
0
|
0
|
82,063
(1)
|
|
0
|
0
|
0
|
82,063
|
Jim Moore
|
0
|
0
|
57,000
(2)
|
|
0
|
0
|
0
|
57,000
|
Eric Klepfer
|
0
|
0
|
82,063
(1)
|
|
0
|
0
|
0
|
82,063
|
(1)
A
vested option to purchase 16,667 shares was granted to this director on
October. 24, 2007 with an exercise price of $3.40 per share and an
expiration date of October 24, 2012. A vested option to purchase 50,000
shares was granted to this director on August 22, 2008 with an exercise
price of $2.48 per share and an expiration date of August 22, 2013. None
of the vested options, valued for accounting purposes at $82,063, were
exercised or sold and no benefit or gain was recognized by Mr.
Thornsberry, Mr. Guill or Mr. Klepfer thereon.
(2)
A
vested option to purchase 50,000 shares was granted to this director on
August 22, 2008 with an exercise price of $2.48 per share and an
expiration date of August 22, 2013. None of the vested options, valued for
accounting purposes at $57,000, were exercised or sold and no benefit or
gain was recognized by Mr. Moore thereon.
|
Compensation of Directors
Directors receive no monetary compensation
for their work for the Company. Directors are granted non-qualified stock
options as compensation.
Compensation Committee Interlocks and Insider Participation
During the year ended September 30,
2008:
·
none of the members of the Companys Compensation Committee
entered into (or agreed to enter into) any transaction or series of transactions
with us or any of our subsidiaries in which the amount involved exceeded
$120,000 in which he had or will have a direct or indirect material
interest;
·
none of our executive officers was a director or Compensation
Committee member of another entity an executive officer of which served on our
Compensation Committee; and
·
none of our executive officers served on the Compensation
Committee (or another board committee with similar functions) of another entity
an executive officer of which served as a director on our board of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following tables set forth information
as of February 27, 2009, regarding the ownership of our common stock by:
·
each named executive officer, each
director and all of our directors and executive officers as a group; and
·
each person who is known by us to own
more than 5% of our shares of common stock
The number of shares beneficially
owned and the percentage of shares beneficially owned are based on 34,369,459
shares of common stock outstanding as of February 27, 2009.
Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. Shares subject to options that are exercisable within 60 days
following February 27, 2009 are deemed to be outstanding and beneficially owned
by the optionee for the purpose of computing share and percentage ownership of
that optionee but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to this table, and as affected by applicable community property laws,
all persons listed have sole voting and investment power for all shares shown as
beneficially owned by them.
91
Directors and Executive Officers
Name and Address of
Beneficial Owner
|
Number of Shares of Common Stock/
Common Shares Underlying
Options or Warrants
Beneficially Owned
|
Percentage of
Common Shares**
|
Randal
Hardy(b)(1)
Chief Executive
Officer; Chief Financial
Officer;
Director
|
55,000 / 464,167
|
1.49%
|
John
Swallow(b)(2)
Executive
Chairman
|
3,141,349 / 761,667
|
11.11%
|
Paul
Dircksen(b)(3)
Vice President,
Exploration; Director
|
505,691 /761,667
|
3.61%
|
Craig Crowell
(4)
Chief Accounting
Officer
|
1,000/53,334
|
*
|
Vance
Thornsberry(a)(5)
Director
|
100,000 / 183,334
|
*
|
Eric
Klepfer(a)(6)
Director
|
59,009 / 150,002
|
*
|
Ron Guill
(a)(7)
Director
|
5,556,556 / 133,334
|
16.49%
|
James Moore
(a)(8)
Director
|
1,000/100,000
|
*
|
Total
Directors and
Executive Officers as a
group ( 8
persons)
|
9,419,605 / 2,607,505
|
32.53%
|
|
|
|
5%
Stockholders
|
|
|
Praetorian
Capital
Management LLC
(9)
119 Washington
Ave., Ste 600
Miami Beach, FL
33139
|
2,317,020 /79,607
|
6.96%
|
* less than 1%.
** The percentages listed for each shareholder are based on
34,369,459 shares outstanding as of February 27, 2009 and assume the exercise by
that shareholder only of his entire option or warrant, exercisable within 60
days of February 27, 2009.
(a)
Director only
(b)
Officer and Director
(1)
A vested option to purchase 200,000 shares was granted to this
shareholder on Oct. 24, 2007 with an exercise price of $3.40 per share and an
expiration date of October 24, 2012. This shareholder purchased 5,000
units in the Companys private placement on October 11, 2007 consisting of 5,000
shares of common stock and 2,500 warrants. Each warrant grants the holder the
right to purchase an additional share at $3.50 per share until October 11, 2009.
A vested option to purchase 66,667 shares was granted to this shareholder on
Aug. 27, 2007 with an exercise price of $3.70 per share and an expiration date
of August 27, 2012. A vested option to purchase 50,000 shares was granted to
this shareholder on Aug. 22, 2008 with an exercise price of $2.48 per share and
an expiration date of August 22, 2013. A vested option to purchase 145,000
shares was granted to this shareholder on Dec. 19, 2008 with an exercise price
of $0.33 per share and an expiration date of December 19, 2013.
(2)
2,733,849 of the shares are held in the name of Cougar Valley LLC,
an entity controlled by Mr. Swallow, our Executive Chairman of the Board of
Directors, 387,500 are held in the name of J. Swallow Roth IRA and 20,000 shares
are held in the Roth IRA of Mr.Swallows spouse. 62,500 warrants granting the
right, but not the obligation, to purchase 62,500 shares were issued to J.
Swallow Roth IRA on March 13, 2006 with an exercise price of $1.00 per share.
The warrants were exercised on January 30, 2008. A vested option to purchase
566,667 shares was granted to this shareholder on Oct. 24, 2007 with an exercise
price of $3.40 per share and an expiration date of October 24, 2012. A vested
option to purchase 50,000 shares was granted to this shareholder on Aug. 22,
2008 with an exercise price of $2.48 per share and an expiration date of August
22, 2013. A vested option to purchase 145,000 shares was granted to this
shareholder on Dec. 19, 2008 with an exercise price of $0.33 per share and an
expiration date of December 19, 2013.
(3)
A vested option to purchase 500,000 shares at $.75 per share was
granted to this shareholder on May 1, 2006 which expire on May 1, 2011. A vested
option to purchase 66,667 shares was granted to this shareholder on Oct. 24,
2007 with an exercise price of $3.40 per share and an expiration date of October
24, 2012. A vested option to purchase 50,000 shares was granted to this
shareholder on Aug. 22, 2008 with an exercise price of $2.48 per share and an
expiration date of August 22, 2013. A vested option to purchase 145,000
shares was granted to this shareholder on Dec. 19, 2008 with an exercise price
of $0.33 per share and an expiration date of December 19, 2013.
(4)
A vested option to purchase 20,000 shares was granted to this
shareholder on February 25, 2008 with an exercise price of $3.20 per share and
an expiration date of February 25, 2013. A vested option to purchase 33,334
shares was granted to this shareholder on Dec. 19, 2008 with an exercise price
of $0.33 per share and an expiration date of December 19, 2013.
92
(5)
An option to purchase 50,000 shares was granted to this
shareholder on February 7, 2005 with an exercise price of $0.56 per share and an
expiration date of February 7, 2010. A vested option to purchase 33,334
shares was granted to this shareholder on Oct. 24, 2007 with an exercise price
of $3.40 per share and an expiration date of October 24, 2012. A vested option
to purchase 50,000 shares was granted to this shareholder on Aug. 22, 2008 with
an exercise price of $2.48 per share and an expiration date of August 22, 2013.
A vested option to purchase 50,000 shares was granted to this shareholder on
Dec. 19, 2008 with an exercise price of $0.33 per share and an expiration date
of December 19, 2013.
(6)
A vested option to purchase 16,668 shares was granted to this
shareholder on August 15, 2006 with an exercise price of $0.75 per share and an
expiration date of August 14, 2011. A vested option to purchase 33,334
shares was granted to this shareholder on Oct. 24, 2007 with an exercise price
of $3.40 per share and an expiration date of October 24, 2012. A vested option
to purchase 50,000 shares was granted to this shareholder on Aug. 22, 2008 with
an exercise price of $2.48 per share and an expiration date of August 22, 2013.
A vested option to purchase 50,000 shares was granted to this shareholder on
Dec. 19, 2008 with an exercise price of $0.33 per share and an expiration date
of December 19, 2013.
(7)
A vested option to purchase 33,334 shares of common stock was
granted to this shareholder on October 24, 2007 with an exercise price of $3.40
per share and an expiration date of October 24, 2012. A vested option to
purchase 50,000 shares was granted to this shareholder on Aug. 22, 2008 with an
exercise price of $2.48 per share and an expiration date of August 22, 2013.
A vested option to purchase 50,000 shares was granted to this shareholder
on Dec. 19, 2008 with an exercise price of $0.33 per share and an expiration
date of December 19, 2013.
(8)
A vested option to purchase 50,000 shares was granted to this
shareholder on Aug. 22, 2008 with an exercise price of $2.48 per share and an
expiration date of August 22, 2013. A vested option to purchase 50,000
shares was granted to this shareholder on Dec. 19, 2008 with an exercise price
of $0.33 per share and an expiration date of December 19, 2013.
(9)
This shareholder purchased 3,350,000 units in the Companys
private placement on November 21, 2006 consisting of 3,350,000 shares of common
stock and 1,675,000 warrants. Each warrant grants the holder the right to
purchase an additional share of stock at $1.00 per share. 1,150,000
warrants have been exercised and the 525,000 remaining warrants expired on
December 31, 2008. This shareholder also purchased 300,000 units in the
Companys private placement on September 30, 2007 consisting of 300,000 shares
of common stock and 150,000 warrants. Each warrant grants the holder the right
to purchase an additional share of stock at $3.50 per share. All of these
warrants remain outstanding. This shareholder also purchased 497,833
shares on the open market. On December 31, 2008 the shareholder
distributed 3,144,313 shares of common stock and 70,393 of the warrants
described above via in-kind distributions to shareholders of the funds managed
by the shareholder.
It is believed by us that all persons named
have full voting and investment power with respect to the shares indicated,
unless otherwise noted in the table. Under the rules of the Securities and
Exchange Commission, a person (or group of persons) is deemed to be a
beneficial owner of a security if he or she, directly or indirectly, has or
shares the power to vote or to direct the voting of such security, or the power
to dispose of or to direct the disposition of such security. Accordingly, more
than one person may be deemed to be a beneficial owner of the same security. A
person is also deemed to be a beneficial owner of any security, which that
person has the right to acquire within 60 days, such as options or warrants to
purchase our common stock.
We have no knowledge of any arrangements,
including any pledge by any person of our securities, the operation of which may
at a subsequent date result in a change in our control.
We are not, to the best of our knowledge,
directly or indirectly owned or controlled by another corporation or foreign
government.
Change in Control
We are not aware of any arrangement that
might result in a change in control in the future.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reportable transactions with related
parties, including named security holders, during the two years ended September
30, 2008 and 2007 are as follows.
Except as indicated herein, no officer,
Director, promoter, or affiliate of Timberline has or proposes to have any
direct or indirect material interest in any asset acquired or proposed to be
acquired by Timberline through security holdings, contracts, options, or
otherwise. In cases where we have entered into such related party
transactions, we believe that we have negotiated consideration or compensation
that would have been reasonable if the party or parties were not affiliated or
related.
Loan
Agreement with John Swallow
On March 1, 2006, the Company entered into
a loan agreement with John Swallow wherein it borrowed from Mr. Swallow
$400,000, repayable at 9% interest on an interest only basis. Monthly
payments were $3,000, beginning on April 1, 2006. The term of the loan was
from March 1, 2006 to March 1, 2007. These funds were borrowed to
partially finance the May 6, 2006 acquisition of Kettle as our wholly-owned
subsidiary. This loan was subsequently repaid in full during fiscal year
2007.
93
This loan was approved by the disinterested
members of our Board. In each case, management believes that the terms and
conditions of the loans from Mr. Swallow or entities that he controls are under
similar terms and conditions that would be available to the Company from an
unrelated third party, if such loans were actually available from an unrelated
third party.
Kettle Acquisition
On March 6, 2006, Timberline Resources
Corporation completed the acquisition of all of the outstanding capital stock of
Kettle Drilling (Kettle), a privately held, Idaho corporation owned by Douglas
Kettle (75%) and David Deeds (25%) (the Sellers) for a purchase price of
$2,800,000 (comprised of a cash payment of $2,400,000 and two promissory notes
in the total principal amount of $400,000 issued to the Sellers, hereinafter
referred to as the as the Sellers Notes) and 5,000,000 shares of convertible
preferred stock (with certain registration and redemption rights) (the
Acquisition). In March 2007, Mr. Kettle and Mr. and Mrs. Deeds sold a total of
300,000 of the Series A Preferred Shares, which were converted to Common Shares
by the purchaser, leaving a total of 4,700,000 Series A Preferred Shares
outstanding. Pursuant to an agreement between Mr. Kettle and Mr. and Mrs.
Deeds, Mr. Kettle later became the sole owner of all of the outstanding Series A
Preferred Shares. These remaining outstanding Series A Preferred Shares
were then repurchased from Mr. Kettle by the Company and a private investor on
June 27, 2008. The Company repurchased and cancelled 3,525,000 Series A
Preferred Shares. The remaining 1,175,000 Series A Preferred Shares that
were outstanding were converted into Common Shares and transferred to a private
investor. The result of this transaction is that there is now only one
class of stock, the Common Shares, and no holder has any rights associated with
the Series A Preferred Shares, as all Series A Preferred Shares have been
cancelled.
Kettle Voting Trust Agreement
As of March 3, 2006, the Company, the
Sellers (individually and collectively) and certain of the Companys
shareholders (individually and collectively) entered into a voting trust
agreement upon the completion of the acquisition of Kettle. The Kettle
voting trust agreement was approved by the disinterested members of our Board.
The voting trust agreement is no longer in effect as the Series A
Preferred Shares have been cancelled after repurchase by the Company and a
private investor on June 27, 2008.
Kettle Agreement and Preferred Stock Repurchase
On March 10, 2008, we entered into the
Kettle Agreement with Douglas Kettle and David and Margaret Deeds providing for
(i) severance arrangements relating to the resignation of Messrs. Kettle and
Deeds, the President and CEO, respectively, of our subsidiary Kettle; and (ii)
the repurchase by the Company of all of the Preferred Stock of Mr. Kettle and
Mr. and Mrs. Deeds. The Kettle Agreement and the repurchase of
the Series A Preferred Stock were approved by the disinterested members of our
Board.
The primary business purpose for entering
into the Kettle Agreement was to eliminate, through the repurchase of the Series
A Preferred Shares, the potentially burdensome redemption provisions of the
Series A Preferred Shares. Upon certain occurrences, including a failure
to list on AMEX or another national securities exchange on a timely basis, a
subsequent delisting from such exchange, or a failure to maintain adequate
trading volume, the holder would have the right to require the Company to redeem
the Series A Preferred Shares. If the Company was unable to do so, the
terms of the Series A Preferred Shares provided that such failure to repurchase
would be deemed an offer to sell Kettle Drilling back to the holders of the
Series A Preferred Shares. The consent provisions relating to the Series A
Preferred Shares and the uncertainty relating to the redemption provisions
caused the Company to conclude that it was in the best interests of the Company
and its shareholders to repurchase the Series A Preferred Shares.
At the time we acquired Kettle, there was a
$2,000,000 portion of the purchase price that was paid by delivery of 5,000,000
shares of Series A Preferred Stock, of which 300,000 were subsequently converted
and resold. The fair value of the stock was determined to be $0.40 per share
because that was the approximate market price at the time the acquisition price
was negotiated and the buyer and the seller agreed it was the fair value of the
stock at the time of the acquisition. During the arms length negotiations
regarding the terms of the repurchase of the Series A Preferred Stock, Messrs.
Kettle and Deeds offered to sell all of their Series A Preferred Shares for a
total price of $10.0 million.
In connection with their resignations, we
paid each of Mr. Kettle and Mr. Deeds a cash severance amount of $600,000 at the
time of their resignation, and agreed to pay additional cash severance of
$300,000 paid out over installments during 2008, as well as the balance of their
2007 bonuses ($135,822 each). We also transferred certain personal
property to Mr. Kettle and Mr. Deeds. On March 10, 2008, Mr. Kettle entered into
an agreement with Mr. and Mrs. Deeds whereby Mr. Kettle purchased all of the
Series A Preferred Shares held by Mr. and Mrs. Deeds, contingent upon receiving
payment from Timberline. The effect of this agreement is that Timberline
and a private investor purchased all of the Series A Preferred Shares solely
from Mr. Kettle for the aggregate price of $10.0 million.
94
On June 27, 2008 the Company
repurchased and cancelled 3,525,000 Series A Preferred Shares for $7.5 million,
which funds came from a short-term $8.0 million loan entered into by the Company
on June 27, 2008. The remaining 1,175,000 Series A Preferred Shares that
were outstanding were converted into Common Shares and transferred to a private
investor, who waived any redemption rights that might attach to the converted
common stock, for $2.5 million. The result of this transaction is that
there is now only one class of stock, the Common Shares, as all Series A
Preferred Shares have been cancelled or converted into common stock.
Ron
Guill and SMD Financing
On October 31, 2008, the Company entered
into two convertible notes (as described below), one with Ron Guill, a director
of the Company, and his wife, Stacey Guill, and the other with SMD, a company
owned by Mr. Guill. Each of the notes was made for a principal amount of
$5 million dollars for an aggregate of $10 million, and both are convertible
into the Companys common stock, as described below. The Company used the
proceeds of the notes to pay off the $8.0 million loan (plus any applicable
interest) previously provided to the Company by Auramet Trading, LLC (Auramet)
and described in the Companys Form 8-K filed on July 3, 2008 (such loan is
hereafter referred to as the Auramet Loan) and for general working capital
purposes.
The Convertible Term Note
On October 31, 2008, the Company entered
into a series of agreements with SMD in connection with a $5 million loan from
SMD. The loan documents included: a convertible note (the Convertible Term
Note), a credit agreement (the Credit Agreement), a collateral assignment and
pledge of stock and security agreement (the Pledge Agreement), a security
agreement (the Security Agreement) and a right of first refusal over the
Companys Butte Highlands property (the Right of First Refusal).
The Convertible Term Note has a principal
amount of $5.0 million and is secured pursuant to the Security Agreement by a
pledge of all of the stock of Timberline Drilling, Inc. (TDI), a wholly-owned
Company subsidiary incorporated in Idaho, pursuant to the Pledge Agreement, the
shares of which were previously pledged to Auramet but were released upon
payment of the Auramet Loan on October 31, 2008, and a deed of trust to be
entered into covering the Companys Butte Highlands property in Silver Bow
county, Montana (the Butte Highlands Property).
Pursuant to the terms of the Credit
Agreement, the Convertible Term Note bears interest at 10% annually, compounded
monthly, with interest payments due at maturity. The Convertible Term Note is
convertible by SMD at any time prior to payment of the note in full, at a
conversion price of $1.50 per share. SMD may also convert all or any portion of
the outstanding amount under the Convertible Term Note into any equity security
other than the Company's common stock issued by the Company at the issuance
price. The Convertible Term Note must be repaid on or before October 31, 2010,
and may be prepaid in whole or in part at any time without premium or penalty.
If the Company defaults on the Convertible Term Note or any of the related
agreements, SMD may declare the Convertible Term Note immediately due and
payable, and the Company must pay SMD an origination fee in the amount of
$50,000.
Under the Right of First Refusal, the
Company granted SMD a right of first refusal to purchase the Butte Highlands
Property on the same terms as those of any bona fide offer from a third-party
upon 60 days notice from the Company of any such offer. In addition, the
Company granted SMD a right to develop the Butte Highlands Property on the same
terms as those of any bona fide offer to develop the property from a third-party
upon 60 days notice from the Company of any such offer.
The Short-Term Convertible Note
In addition, on October 31, 2008, the
Company entered into a short-term convertible note (the Short-Term Convertible
Note), a subscription agreement (the Subscription Agreement), a collateral
assignment and pledge of stock and security agreement (the STN Pledge
Agreement), and a security agreement (the STN Security Agreement) with Ron
and Stacey Guill in connection with a loan for $5 million dollars. Upon
approval for listing of the shares issuable under the Short-Term Convertible
Note from the NYSE Alternext, the Short-Term Convertible Note was automatically
converted into common stock as described below.
The Short-Term Convertible Note
automatically converted into 5,555,556 shares of Company stock (valued at $0.90
per share) upon approval of the issuance of the additional shares for listing by
the NYSE Alternext US LLC on December 19, 2008. Under the Subscription
Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556 shares of the
Companys common stock at a price of $0.90 per share as accredited investors
as defined under Regulation D of the Securities Act of 1933, as amended. Should
the Company decide to issue and sell any equity securities or securities
convertible into
95
equity securities, the Subscription
Agreement also obligates the Company to offer a pro rata share of such
securities to Mr. and Mrs. Guill on the same terms and conditions as the
proposed sale and issuance.
Change in Control
We are not aware of any arrangement that
might result in a change in control in the future.
CORPORATE GOVERNANCE
Board
of Directors Structure
The Companys current bylaws require the
Board to have three or more persons, and may be increased or decreased from time
to time, exclusively by resolution approved by the affirmative vote of a
majority of the Board. The current Board is composed of seven
Directors.
Director Independence
We have seven directors as of February 27,
2009, including four independent directors, as follows:
·
Eric
Klepfer
·
Vance
Thornsberry
·
James
Moore
·
Ron Guill
An independent director is a director
whom the Board of Directors has determined satisfies the requirements for
independence under Rule 803A of the NYSE Alternext U.S. Company Guide.
THE SECS POSITION ON
INDEMNIFICATION FOR
SECURITIES ACT
LIABILITIES
Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to our directors, officers or controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC this indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for our
shares of common stock will be Corporate Stock Transfer, located at 3200 Cherry
Creek Dr. South, Denver, Colorado 80209.
LEGAL MATTERS
The validity of the securities offered
hereby will be passed upon for Timberline by Dorsey & Whitney LLP.
WHERE YOU CAN FIND MORE
INFORMATION
We are subject to the informational
requirements of the Exchange Act and, accordingly, file current and periodic
reports, proxy statements and other information with the SEC. We have also
filed a registration statement on Form S-1 under the Securities Act, as amended,
in connection with this offering. This prospectus, which is part of the
registration statement, does not contain all of the information contained in the
registration statement. For further information with respect to us and the
shares of common stock offered hereby, reference is made to such registration
statement, including the exhibits thereto, which may be read, without charge,
and copied at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on
the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC maintains a site on the World Wide Web at http://www.sec.gov that
contains current and periodic reports, proxy statements and other information
regarding registrants that filed electronically with the SEC. Statements
contained in this prospectus as to the intent of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to this
registration statement, each such statement being qualified in all respects by
such reference.
96
GLOSSARY OF CERTAIN MINING TERMS
ADIT: An
opening driven horizontally into the side of a mountain or hill for providing
access to a mineral deposit.
ALTERATION: Any physical
or chemical change in a rock or mineral subsequent to its formation. Milder and
more localized than metamorphism.
ASSAY: A
chemical test performed on a sample of ores or minerals to determine the amount
of valuable metals contained.
BASE METAL:
Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.).
BRECCIA: A
rock in which angular fragments are surrounded by a mass of fine-grained
minerals.
BULK MINING:
Any large-scale, mechanized method of mining involving many
thousands of tons of ore being brought to surface per day.
BUREAU OF LAND
MANAGEMENT: Also known as BLM. It is an agency within the United States
Department of the Interior which administers Americas public lands.
COMMERICALLY MINEABLE
ORE BODY: A mineral deposit that contains ore reserves that may be mined
economically.
CORE: The
long cylindrical piece of rock, about an inch in diameter, brought to surface by
diamond drilling.
DECLINE: An underground
passageway connecting one or more levels in a mine, providing adequate traction
for heavy, self-propelled equipment. Such underground openings are often driven
in an upward or downward spiral, much the same as a spiral staircase.
DEVELOPMENT:
Work carried out for the purpose of opening up a mineral deposit and
making the actual ore extraction possible.
DIAMOND DRILL: A rotary
type of rock drill that cuts a core of rock that is recovered in long
cylindrical sections, two centimeters or more in diameter.
DILUTION:
Rock that is, by necessity, removed along with the ore in the mining
process, subsequently lowering the grade of the ore.
DIP: The
angle at which a vein, structure or rock bed is inclined from the horizontal as
measured at right angles to the strike. A vein is a mineralized zone
having a more or less regular development in length, width and depth, which
clearly separates it from neighboring rock. A strike is the direction or
bearing from true north of a vein or rock formation measured on a horizontal
surface.
DISSEMINATED ORE: Ore
carrying small particles of valuable minerals spread more or less uniformly
through the host rock.
DRIFT: A
horizontal underground opening that follows along the length of a vein or rock
formation as opposed to a cross-cut which crosses the rock formation.
EPITHERMAL DEPOSIT: A
mineral deposit consisting of veins and replacement bodies, usually in volcanic
or sedimentary rocks, containing precious metals, or, more rarely, base metals.
EXPLORATION:
Work involved in searching for ore, usually by drilling or driving a
drift.
FOOTWALL:
The rock on the underside of a vein or ore structure.
97
FRACTURE: A
break in the rock, the opening of which allows mineral bearing solutions to
enter. A cross-fracture is a minor break extending at more-or-less right
angles to the direction of the principal fractures.
FREE MILLING:
Ores of gold or silver from which the precious metals can be
recovered by concentrating methods without resort to pressure leaching or other
chemical treatment.
GEOPHYSICAL SURVEY:
Indirect methods of investigating the subsurface geology using the applications
of physics including electric, gravimetric, magnetic, electromagnetic, seismic,
and radiometric principles.
GRADE: The
average assay of a ton of ore, reflecting metal content.
HOST ROCK:
The rock surrounding an ore deposit.
INTRUSIVE: A
body of igneous rock formed by the consolidation of magma intruded into other
rocks, in contrast to lavas, which are extruded upon the surface.
LIMESTONE: A
bedded, sedimentary deposit consisting chiefly of calcium carbonate.
LODE: A
mineral deposit in solid rock.
METAMORPHIC ROCKS: Rocks
which have undergone a change in texture or composition as the result of heat
and/or pressure.
MILL: A
processing plant that produces a concentrate of the valuable minerals or metals
contained in an ore. The concentrate must then be treated in some other type of
plant, such as a smelter, to affect recovery of the pure metal, recovery being
the percentage of valuable metal in the ore that is recovered by metallurgical
treatment.
MINE DEVELOPMENT: The
work carried out for the purpose of opening up a mineral deposit and making the
actual ore extraction possible
MINERAL: A
naturally occurring homogeneous substance having definite physical properties
and chemical composition and, if formed under favorable conditions, a definite
crystal form.
MINERAL RESERVE: The
economically mineable part of a measured or indicated mineral resource.
Appropriate assessments, often called
feasibility studies
, have been
carried out and include consideration of and modification by realistically
assumed mining, metallurgical, economic, marketing, legal, environmental,
social, and governmental factors. These assessments demonstrate, at the time of
reporting, that extraction is reasonably justified. Mineral reserves are
sub-divided, in order of increasing confidence, into
probable
and
proven
categories. A
probable
reserve is the economically mineable
part of an
indicated
(and in certain circumstances,
measured
)
resource. A
proven
reserve is the economically mineable part of a
measured
resource.
MINERAL RESOURCE:
A deposit or concentration of natural, solid, inorganic or
fossilized organic substance in such quantity and at such grade or quality that
extraction of the material at a profit is currently or potentially possible.
Mineral resources are sub-divided, in order of increasing geological confidence,
into
inferred
,
indicated
and
measured
categories. An
inferred
resource designation comes from limited sampling data
insufficient for verification of deposit quantity and quality, but it is usually
supported by limited geological, geochemical and geophysical data. An
indicated
resource designation comes from sampling data spaced closely
enough to allow certain assumptions of deposit quantity and quality and to
clearly establish its mineral content. Finally, a
measured
resource
designation comes from sampling data spaced closely enough to allow confirmation
of deposit quantity and quality and to allow a preliminary evaluation of the
economic viability of the deposit.
MINERALIZED MATERIAL OR
DEPOSIT: A mineralized body, which has been delineated by appropriate drilling
and/or underground sampling to support a sufficient tonnage and average grade of
metal(s). Under SEC standards, such a deposit does not qualify as a reserve
until a comprehensive evaluation, based upon unit cost, grade, recoveries, and
other factors, conclude economic feasibility.
98
MINERALIZATION: The
presence of economic minerals in a specific area or geological formation.
NET SMELTER RETURN: A
share of the net revenues generated from the sale of metal produced by a mine.
OPEN PIT: A
mine that is entirely on surface. Also referred to as open-cut or open-cast
mine.
ORE:
Material that can be mined and processed at
a positive cash flow.
PATENT: The
ultimate stage of holding a mineral claim in the United States, after which no
more assessment work is necessary because all mineral rights have been earned.
PROSPECT: A
mining property, the value of which has not been determined by exploration.
QUALIFIED PERSON: A
qualified person
must make resource and reserve designations. A qualified
person is an engineer or geoscientist with at least five years of experience in
mineral exploration, mine development, production activities, or project
assessment, or any combination thereof, including experience relevant to the
subject matter of the report and is a member in good standing of a
self-regulatory organization.
RECLAMATION:
The restoration of a site after mining or exploration activity is
completed.
RECOVERY:
The percentage of valuable metal in the ore that is recovered by
metallurgical treatment.
RESERVES:
That part of a mineral deposit, which could be economically and
legally extracted or produced at the time of the reserve determination. Reserves
are customarily stated in terms of Ore when dealing with metalliferous
minerals.
RESOURCE:
The calculated amount of material in a mineral deposit, based on
limited drill information.
SHEAR OR SHEARING: The
deformation of rocks by lateral movement along numerous parallel planes,
generally resulting from pressure and producing such metamorphic structures as
cleavage and schistosity.
SKARN: Name
for the metamorphic rocks surrounding an igneous intrusive where it comes in
contact with a limestone or dolomite formation.
STRIKE: The
direction, or bearing from true north, of a vein or rock formation measured on a
horizontal surface.
SULFIDE: A
compound of sulfur and some other element.
TAILINGS:
Material rejected from a mill after more of the recoverable valuable
minerals have been extracted.
TREND: The
direction, in the horizontal plane, or a linear geological feature (for example,
an ore zone), measured from true north.
UNPATENTED MINING CLAIM:
A parcel of property located on federal lands pursuant to the General Mining Law
and the requirements of the state in which the unpatented claim is located, the
paramount title of which remains with the federal government. The holder of a
valid, unpatented lode-mining claim is granted certain rights including the
right to explore and mine such claim under the General Mining Law.
VEIN: A
mineralized zone having a more or less regular development in length, width and
depth, which clearly separates it from neighboring rock.
99
PROSPECTUS
TIMBERLINE RESOURCES CORPORATION
9,425,541 Shares of Common Stock
February 27, 2009
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
ITEM
13- OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION
|
Amount
|
Securities and Exchange Commission
Registration Fee
|
$267
|
Legal Fees and Expenses
|
$25,000
|
Accounting Fees and Expenses
|
$10,000
|
Printing and Engraving
Expenses
|
$5,000
|
Miscellaneous Expenses
|
$10,000
|
Total
|
$
50,267
|
ITEM 14- INDEMNIFICATION OF DIRECTORS
AND OFFICERS
The Companys Articles of Incorporation
dated August 15, 2008 under Article 10 provide that:
To the fullest extent permitted by
applicable law, this Corporation is authorized to provide indemnification of
(and advancement of expenses to) agents of this Corporation (and any other
persons to which General Corporation Law permits this Corporation to provide
indemnification) through bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
General Corporation Law, subject only to limits created by applicable General
Corporation Law (statutory or non-statutory), with respect to actions for breach
of duty to this Corporation, its stockholders, and others.
The Companys Bylaws dated August 15, 2008
under Article 10, Section 10.1 provide for indemnification for certain
individuals acting on behalf of the Company, including its Officers and
Directors to the fullest extent permissible under the Delaware General
Corporation Law for liabilities incurred by reason of the fact that such person
is or was acting in such capacity on behalf of the Company. Delaware
General Corporation Law generally provides for indemnification of officers and
directors except (i) for any breach of a directors duty of loyalty to our
company or our stakeholders (ii) acts and omission that are not in good faith or
that involve intentional misconduct or knowing violation of law, (iii) under
Section 174 of the general corporate law of the State of Delaware, or (iv) for
any transaction from which the director derived any improper benefit.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be conferred upon officers,
directors and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the United
States Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act at and is, therefore,
unenforceable.
Timberline does not have Officers and
Directors liability insurance nor does it have any plans to obtain any.
ITEM 15- RECENT SALES OF UNREGISTERED
SECURITIES
On October 31, 2008, the Company entered
into two convertible notes (as described below), one with Ron Guill, a director
of the Company, and his wife, Stacey Guill, and the other with Small Mine
Development (SMD), a company owned by Mr. Guill. Each of the notes was
made for a principal amount of $5 million dollars for an aggregate of $10
million, and both are convertible into the Companys common stock, as described
below. The Company used the proceeds of the notes to pay off the $8.0
million loan (plus any applicable interest) previously provided to the Company
by Auramet Trading, LLC (Auramet) and described in the Companys Form 8-K
filed on July 3, 2008 (such loan is hereafter referred to as the Auramet Loan)
and for general working capital purposes.
On October 31, 2008, the Company entered
into a series of agreements with SMD in connection with a $5 million loan from
SMD. The loan documents included: a convertible note (the Convertible Term
Note), a credit agreement (the Credit Agreement), a collateral assignment and
pledge of stock and security agreement (the Pledge Agreement), a security
agreement (the Security Agreement) and a right of first refusal over the
Companys Butte Highlands property (the Right of First Refusal).
The Convertible Term Note has a principal
amount of $5.0 million and is secured pursuant to the Security Agreement by a
pledge of all of the stock of Timberline Drilling, pursuant to the Pledge
Agreement, the shares of which were previously pledged to Auramet but were
released upon payment of the Auramet Loan on October 31, 2008, and a deed
of trust to be
II-1
entered into covering the Companys Butte
Highlands property in Silver Bow county, Montana (the Butte Highlands
Property).
Pursuant to the terms of the Credit
Agreement, the Convertible Term Note bears interest at 10% annually, compounded
monthly, with interest payments due at maturity. The Convertible Term Note is
convertible by SMD at any time prior to payment of the note in full, at a
conversion price of $1.50 per share. SMD may also convert all or any portion of
the outstanding amount under the Convertible Term Note into any equity security
other than the Company's common stock issued by the Company at the issuance
price. The Convertible Term Note must be repaid on or before October 31, 2010,
and may be prepaid in whole or in part at any time without premium or penalty.
If the Company defaults on the Convertible Term Note or any of the related
agreements, SMD may declare the Convertible Term Note immediately due and
payable, and the Company must pay SMD an origination fee in the amount of
$50,000.
Under the Right of First Refusal, the
Company granted SMD a right of first refusal to purchase the Butte Highlands
Property on the same terms as those of any bona fide offer from a third-party
upon 60 days notice from the Company of any such offer. In addition, the
Company granted SMD a right to develop the Butte Highlands Property on the same
terms as those of any bona fide offer to develop the property from a third-party
upon 60 days notice from the Company of any such offer.
In addition, on October 31, 2008, the
Company entered into a short-term convertible note (the Short-Term Convertible
Note), a subscription agreement (the Subscription Agreement), a collateral
assignment and pledge of stock and security agreement (the STN Pledge
Agreement), and a security agreement (the STN Security Agreement) with Ron
and Stacey Guill in connection with a loan for $5 million dollars. Upon
approval for listing of the shares issuable under the Short-Term Convertible
Note from the NYSE Alternext, the Short-Term Convertible Note was automatically
converted into common stock as described below.
The Short-Term Convertible Note
automatically converted into 5,555,556 shares of Company stock (valued at $0.90
per share) upon approval of the issuance of the additional shares for listing by
the NYSE Alternext US LLC on December 19, 2008. Under the Subscription
Agreement, Mr. and Mrs. Guill subscribed to purchase 5,555,556 shares of the
Companys common stock at a price of $0.90 per share as accredited investors
as defined under Regulation D of the Securities Act of 1933, as amended. Should
the Company decide to issue and sell any equity securities or securities
convertible into equity securities, the Subscription Agreement also obligates
the Company to offer a pro rata share of such securities to Mr. and Mrs. Guill
on the same terms and conditions as the proposed sale and issuance.
The common shares and convertible notes of
the above transaction were not registered under the Securities Act, or the laws
of any state, and are subject to resale restrictions and may not be offered or
sold in the United States absent registration or an applicable exemption from
the registration requirements. The common shares and convertible notes were
placed pursuant to exemptions from registration requirements of the Securities
Act provided by Section 506 of Regulation D of the Securities Act, such
exemption being available based on information obtained from the investors to
the private placement.
On June 27, 2008
Auramet Trading LLC (Auramet) provided
Timberline $8.0 million (the Loan) pursuant to the terms of a term sheet (the
Term Sheet), dated June 24 2008, by an between Timberline and Auramet, and the
terms of a promissory note (the Promissory Note), dated June 27, 2008, by and
between Timberline and Auramet. Pursuant to the Term Sheet, Timberline
paid Auramet a fee equal to 4% of the principal amount of the Loan and issued to
Auramet 160,000 shares of Timberline common stock (the Fee Shares).
Pursuant to the section of the Term Sheet entitled Closing Fee to
Lender, Auramet was granted a put right (the Put Right) of $2.00 on the Fee
Shares, entitling Auramet to payment of $320,000 (the Put Value) from
Timberline upon notice of exercise of the Put Right to Timberline. Auramet
submitted a notice of exercise of its Put Right to Timberline on January 9,
2009.
On February 10, 2009, Timberline and
Auramet entered into a Stock Purchase and Put Right Release Agreement (the
Agreement), stating that the Put Right could be converted into shares on
common stock of the Company at a deemed conversion price of $0.46 per share.
Timberline and Auramet further agreed that the previously issued 160,000
common shares could be credited to the Put Value, leaving the Put Value at
$246,400, which will be converted by the Company by issuance of 535,652 shares
of common stock of Timberline immediately upon final approval of the NYSE
Alternext US LLC.
The common shares of the above transaction
were not registered under the Securities Act, or the laws of any state, and are
subject to resale restrictions and may not be offered or sold in the United
States absent registration or an applicable exemption from the registration
requirements. The common shares were placed pursuant to exemptions from
registration requirements of the Securities Act provided by Section 506 of
Regulation D of the Securities Act, such exemption being available based on
information obtained from the investors to the private placement.
II-2
On June 24, 2008, Timberline Resources
Corporation (the Company) and Auramet Trading, LLC (Auramet) signed an
Indicative Term Sheet (the Term Sheet) under which Auramet would provide an
$8.0 million loan to the Company, at the Companys request, at any time before
June 30, 2008. Pursuant to the fee terms of the Term Sheet, the Company
paid a fee equal to 4% of the principal amount of the loan and issued 160,000
common shares of the Company to Auramet after the Companys drawdown of the loan
on June 27, 2008. The shares were issued to Auramet pursuant to Section
4(2) of the Securities Act of 1933, as amended (the Securities Act) and Rule
506 promulgated thereunder. Auramet has represented that they are an
accredited investor and the securities issued to Auramet are restricted
securities within the meaning of Rule 144 of the Securities Act.
On June 27, 2008, pursuant to the Term
Sheet and subject to the terms laid out in the Promissory Note (as described
below), Auramet provided $8.0 million to the Company, $7.5 million of which was
used to repurchase 3,525,000 shares of Series A Preferred Stock from Douglas
Kettle, the sole holder of the Series A Preferred Shares, pursuant to the
Preferred Shares Repurchase
Agreement (the Series A Preferred Shares
Agreement) between the Company, Douglas Kettle and Auramet. Of the
4,700,000 Series A Preferred Shares held by Mr. Kettle, the Company repurchased
and cancelled 3,525,000 Series A Preferred Shares for $7.5 million.
Pursuant to the Series A Preferred Shares Agreement, the remaining
1,175,000 Series A Preferred Shares were converted to 1,175,000
common
shares of the Company and purchased from Mr. Kettle by a private investor. The
purchaser of the common shares has no rights previously associated with the
Series A Preferred Shares. Upon closing of the above transactions, no
Series A Preferred Shares remain outstanding.
On June 27, 2008, in accordance with
Auramet providing the Company with $8.0 million ($7.5 million of which was paid
to Mr. Kettle as described above), the Company entered into a Promissory Note
(the Note) with Auramet, the material terms of which are described in Item
2.03 Creation of a Direct Financial Obligation or an Obligation Under an
Off-Balance Sheet Arrangement of a Registrant below.
On October 11, 2007, the Company closed the
third and final tranche of its private placement of units. In the
aggregate, the Company placed 2,626,696 units of the Company at a price of
$2.75/unit for gross aggregate proceeds of $7,223,414. Each unit consists of one
common share and one-half of one purchase warrant. The warrants will be
exercisable at a price of $3.50 for a period of 24 months after the date of
issuance. The Company closed the private placement in three tranches: the
first closing on September 30, 2007 and consisting of 1,780,974 units, the
second closing on October 1, 2007 and consisting of 288,182 units, and the third
closing on October 11, 2007 and consisting of 557,540 units. We
offered and sold units outside the United States to non-U.S. persons in
off-shore transactions pursuant to the exemption from registration available
under Regulation S of the Securities Act. We offered and sold units solely to
accredited investors in the United States in private transactions not involving
a public offering pursuant to exemptions available under Rule 506 of Regulation
D and Section 4(2) of the Securities Act.
In connection with the October private
placement, the Company has agreed to pay qualified agents a cash compensation
fee in U.S. dollars in an amount equal to six percent (6%) of the gross proceeds
of the Offering received by the Company for units placed by the agents, an
amount equal to $67,612, and the agents will also receive agents warrants,
exercisable to acquire units equal in number to six percent (6%) of the total
number of units sold that were placed by the agents, totaling 12,293 agents
warrants.
On July 18, 2007, the Company (TLR)
entered into a Mineral Agreement with Steve Van Ert and Noel Cousins (the
Sellers), residents of California and Arizona, respectively, whereby the
Sellers conditionally transferred to TLR the exclusive right and privilege to
explore for and develop mineral in the Conglomerate Mesa Mining Claims in Inyo
County, California of claim groups known as CM, FAT, Mesa CMP, CGL and MP (the
Conglomerate Mesa Claims). These claims total 325 unpatented lode claims,
covering more than 10 square-miles. They include several mineralized gold
zones identified by prior operators (Newmont and BHP-Billiton) and the historic
Santa Rosa Mine, a silver-lead-zinc occurrence which had limited production by
several operators including Anaconda Copper.
The Agreement, which is effective as of
September 15, 2006, provides TLR with the right to purchase a 100-percent
interest in the Conglomerate Mesa Claims, subject to a 4-percent NSR production
royalty of which 1-percent may be bought out by TLR for $1-million. In the
first year of the Agreement, Timberline is obligated to make an option payment
of $75,000 and 100,000 shares of its unregistered common stock to the property
owners (85,000 shares to Steve Van Ert and 15,000 shares to Noel Cousins), along
with a commitment to $100,000 in exploration expenditures. The option
payment will continue at $75,000 in 2008, and then increase by $25,000 per year
annually to a cap of $250,000. Annual share payments and work commitment
amounts will remain fixed at 100,000 (at the same ratio between the Sellers of
85% to Mr. Van Ert and 15% to Mr. Cousins) and $100,000, respectively.
The execution of the Mineral Lease
represents the finalization of a Lease/Option to Purchase arrangement that
originally commenced with the parties entering into a September 22, 2006, a
binding Memorandum of Understanding (MOU) regarding the aforementioned
Conglomerate Mesa Claims. The MOU was the subject of and an exhibit to a Current
Report on Form 8K filed by TLR on September 28, 2006, which are incorporated by
reference hereto.
II-3
On July 19, 2007, Timberline closed the
purchase of certain mining claims (and related assets) located in Silver Bow
County, Montana, known as the Butte Highlands Gold Project (the Assets) from
Butte Highlands Mining Company, a publicly held, Delaware corporation, (the
Seller). The purchase was evidenced by the parties executing, on that date, an
Assignment and Assumption Agreement (July 19, 2007 Agreement). Pursuant to the
July 19, 2007 Agreement, the Seller transferred to TLR the Assets and TLR agreed
to assume and discharge, and indemnify and hold the Seller harmless against all
debts, claims, liabilities and obligations under any lease or other agreement
relating directly to the Assets. The terms of the purchase were governed by an
Asset Purchase Agreement entered into between the parties as of May 17, 2007, as
reported by and included in TLRs Current Report on Form 8K filed on May 25,
2007 and incorporated by reference hereto. The Assets include eight patented
claims and eight unpatented claims located in Silver Bow County, Montana, known
as the Butte Highlands Gold Project and certain related water rights and all
papers, documents and instruments in the Sellers possession, custody or control
relating or pertaining to the mining claims and water rights.
The consideration paid by TLR was $621,000,
consisting of $405,000 in cash and $216,000 in restricted common stock of TLR
(108,000 shares issued to the Seller) (the Purchase Shares). There are certain
limited registration rights attached to the Purchase Shares. See Exhibit
10.1 (Assignment and Assumption Agreement between Timberline and Butte Highlands
Mining Company, dated July 19, 2007) in the Companys
8
-K current report filed on July 24, 2007 which is
incorporated herein by reference.
On December 21, 2006, the Company closed a
best efforts only private placement of its securities (4,200,000 units at $.65
per unit) for up to $2,730,000, to accredited investors only. The maximum
offering of 4,200,000 units ($2,730,000) was completed among 10 investors. Each
unit consisted of one share of the Companys common stock and one-half of one
share purchase warrant. Each whole purchase warrant will entitle its holder to
purchase one additional share of the Companys common stock for $1.00 until
December 2008. As a result of this private offering, the Company has 18,566,901
shares of common stock outstanding prior to the exercise of any outstanding
warrants or the conversion of its outstanding voting, convertible preferred
stock. The following units have been sold as indicated below:
Investor
|
Amount Invested
|
Number of Units
|
Praetorian Offshore Ltd.
|
|
|
(Harris B. Kupperman,
Director)
|
$2,177,500
|
3,350,000
|
|
|
|
Kenneth D. Wasserman
|
$
19,500
|
30,000
|
|
|
|
John A. Swallow**
|
|
|
(Roth IRA)
|
$
32,500
|
50,000
|
|
|
|
Paul E. Dircksen**
|
$
32,500
|
50,000
|
|
|
|
Michael P. Wilson***
|
$
32,500
|
50,000
|
|
|
|
Laurence A. Rudnicki
|
$
32,500
|
50,000
|
|
|
|
The RTM Fund
|
|
|
(Wm. A. Fleckenstein, GP)
|
$
195,000
|
300,000
|
|
|
|
Vladimir Spina
|
$
13,000
|
20,000
|
|
|
|
Alan R. Davidson
|
$
65,000
|
100,000
|
|
|
|
Erik Goldring
|
$
130,000
|
200,000
|
|
|
|
**
Officer or Director of the Company.
***Former Officer of the Company.
|
All of the unregistered sales of securities
referred to above were made in reliance upon the exemptions from registration
provided under Section 4(2) of the Securities Act of 1933, as amended, including
the regulations and rules promulgated thereunder.
On May 19, 2006, we closed the last portion
our best efforts offering of units of our securities to accredited investors
only at $.55 per unit. Each unit is composed of one share of common stock
and one-half of a warrant; two warrants permit the purchase of an additional
share of common stock at $1.00 per share. The first portion of this offering was
reported on our Current Report on Form 8K filed on March 10, 2006. In this last
portion of the offering, we raised an additional $1,416,650 from the sale of
2,575,727 units to 17 accredited investors.
II-4
The securities issuances referred to above
were exempt from registration pursuant to Section 3(b) and 4(2) of the
Securities Act
, including Rule 506 of Regulation D
promulgated under the Act. Furthermore, each recipient who purchased their
securities was an "accredited investor" as defined under Regulation D
and represented his or her intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and, appropriate legends were affixed to the share
certificates issued in such transactions. No advertisement or general
solicitation was used in connection with any offer or sale of such securities.
On December 19, 2006,
the Company
issued 100,000 shares of its
common stock to the Kettle Shareholders (
25,000
shares David Deeds;
75,000
shares Doug Kettle) in consideration for an option to
purchase all of their shares of Kettle Drilling which are all of the issued and
outstanding shares of Kettle Drilling. See
the Company
s Current Report on Form 8-K filed on
December 19, 2005 which is incorporated by reference herein.
On January 18, 2006,
the Company
commenced its best efforts
only Private Placement of its securities (8,000,000 units at $.55 per unit) for
up to $4,400,000, to accredited investors only. Each unit is comprised of one
share of common stock and one-half of a warrant; two warrants permit the
purchase of an additional share of common stock at $1.00 per share. To date, the
following units have been sold as indicated below:
Investor
|
Dollars
Invested
|
Units
|
1) Hugh
L. and Andrea L. Hendrick Trust
|
$5,500
|
10,000
|
2) Tom
L. Lawson, Jr.
|
$16,500
|
30,000
|
3)
James Marchione
|
$13,750
|
25,000
|
4)
Laurence A. Rudnicki
|
$13,750
|
25,000
|
5)
Roger J. Ciapara Trust
|
$27,500
|
50,000
|
6) Paul
and Susan Finney Revocable Trust
|
$22,000
|
40,000
|
7) John
L. Sheldon
|
$6,600
|
12,000
|
8)
Berta Holzinger Trust UTD
|
|
|
Berta
Holzinger and Linda Hagen, Trustees
|
$5,500
|
10,000
|
9) Todd
Kiesbuy
|
$15,000
|
27,272
|
10)
Gene Higdem
|
$33,000
|
60,000
|
11)
Aaron Robb
|
$85,000
|
154,545
|
12)
Robert E. Johnson
|
$22,000
|
40,000
|
13)
Jeffrey D. Hanna
|
$27,500
|
50,000
|
14)
Barbara E. Heldridge
|
$55,000
|
100,000
|
15)
Michael L. Mooney
|
$9,900
|
18,000
|
16)
Richard D. Hassenplug
|
$16,500
|
30,000
|
17)
Biff Dodson
|
$11,000
|
20,000
|
18)
Bret A. Dirks
|
$110,000
|
200,000
|
19)
Noren Family Trust
|
$192,500
|
350,000
|
20)
William Butcher, Jr.
|
$16,500
|
30,000
|
21)
James E. Kirkham, Jr.
|
$13,750
|
25,000
|
22)
Brian F. OShea
|
$13,750
|
25,000
|
23)
Wesley A. Pomeroy
|
$11,000
|
20,000
|
24)
Joseph N. Gerl
|
$11,000
|
20,000
|
25)
Roger A. VanVoorhees
|
$82,500
|
150,000
|
26)
Robert M. Blumen
|
$22,000
|
40,000
|
27)
Walter and Ofelia Holzinger Family Trust
|
$11,000
|
20,000
|
II-5
28)
Bruce E. Malcolm
|
$30,250
|
55,000
|
29)
Mountain Gold Exploration, Inc.
|
$13,750
|
25,000
|
30)
Thomas K. Mancuso
|
$5,500
|
10,000
|
31)
Eugene E. Arensberg, Jr
|
$29,700
|
54,000
|
32)
Ronald and Nancy Brown
|
$13,750
|
25,000
|
33)
Glen R. Forsch
|
$5,500
|
10,000
|
34)
Peter B. Smith
|
$16,500
|
30,000
|
35)
Sean Rahkimov
|
$11,000
|
20,000
|
36)
Merlin R. and Beverly G. Gilbertson
|
$11,000
|
20,000
|
37)
Robert E. Cell
|
$22,000
|
40,000
|
38) Tom
Robb
|
$55,000
|
100,000
|
39)
Russell L. Abrams
|
$22,000
|
40,000
|
40)
Thomas J. Loucks
|
$5,500
|
10,000
|
41)
Larry Kornze and Lisa Kornze
|
$5,500
|
10,000
|
42)
Dante J. Gallinetti, Trustee
|
$55,000
|
100,000
|
43)
James J. Swab
|
$68,750
|
125,000
|
44)
Robert Heckler and Jane E. Heckler
|
$22,000
|
40,000
|
45)
Sharon F. Detjens
|
$5,500
|
10,000
|
46)
Rosco Eversole IRA
|
$27,500
|
50,000
|
NFS
FBO Rosco Eversole
|
|
|
47) Jon
Slizza
|
$12,650
|
23,000
|
48)
Joseph L. Trentacosta
|
$41,250
|
75,000
|
49)
Argentaurus Capital Limited
|
$20,900
|
38,000
|
50)
Robert Dumont
|
$250,000
|
454,546
|
51)
Cheryl L. Dumont IRA
|
|
|
NFS/FMTC
FBO Cheryl L. Dumont
|
$8,800
|
16,000
|
52)
Robert L. Dumont IRA
|
|
|
NFS/FMTC
FBO Robert L. Dumont
|
$27,500
|
50,000
|
53)
Erin E. Mullen
|
$11,000
|
20,000
|
54)
John G. Mullen
|
$11,000
|
20,000
|
55)
Chris Mullen
|
$11,000
|
20,000
|
56)
Vladimir Spina
|
$22,000
|
40,000
|
57)
Gold Seek LLC
|
$27,500
|
50,000
|
58) KIT
Financial
|
$33,000
|
60,000
|
59)
John A. Swallow* (Roth IRA)
|
$123,750
|
225,000
|
Total Invested as of March
10, 2006:
|
$1,896,050
|
|
|
|
|
* Mr. Swallow is the Companys Former Chief Executive
Officer
|
On March 6, 2006,
the Company
issued 5,000,000 shares of the
Preferred Stock to the Kettle Shareholders in connection with the Acquisition.
1,250,000 shares were issued to David Deeds and Margaret Deeds, husband and
wife, and 3,750,000 shares were issued to Doug Kettle. See Items 1.01, 2.01 and
2.03, above.
II-6
On March 10, 2006,
the Company
issued 500,000 shares of its
common stock to Cougar Valley LLC (an affiliate of its former Chief Executive
Officer, John Swallow) for its February 24, 2006 exercise of 250,000 options at
$.40 per share and its February 28, 2006 exercise of 250,000 options also at
$.40 per share.
The Company used $2,000,000 of the proceeds
from the Private Placement and the Cougar Valley LLC option exercise in the
Acquisition.
All of the unregistered sales of securities
referred to above were made in reliance upon the exemptions from registration
provided under Section 4(2) of the Securities Act
,
including the regulations and rules promulgated thereunder.
The Company participated in a Regulation D
private placement on September 6, 2005.
The Company participated in a Regulation D
private placement on June 28, 2005.
II-7
ITEM 16- EXHIBITS
Other than contracts made in the ordinary
course of business, the following are the material contracts that we have
entered into within the two years preceding the date of this Registration
Statement:
Exhibit No.
|
Description of
Document
|
3.1
|
Certificate of
Incorporation of the Company (20)
|
3.2
|
By-Laws of the
Company (20)
|
4.1
|
Specimen of the
Common Stock Certificate (1)
|
4.2
|
Form of Warrant
for December 2006 Private Placement (22)
|
4.3
|
Form of Warrant
for October 2007 Private Placement (22)
|
4.4
|
Stock Purchase
and Put Right Release Agreement between the Company and Auramet Trading
LLC
|
5.1
|
Opinion of
Dorsey & Whitney LLP
|
10.1
|
Miller-Adams
Agreement/Mineral Lease for Sun Property, Nevada (1)
|
10.2
|
Miller-Adams
Agreement//Mineral Lease for HD, ACE, PAC claims, Nevada (1)
|
10.3
|
Miller-Adams
Agreement//Mineral Lease for DOW claims, Nevada (1)
|
10.4
|
Sedi-Met, Inc.
Agreement//Mineral Lease for Olympic Mine, NV (1)
|
10.5
|
Assignment of
State Lease//State Lease for Spencer property, ID (1)
|
10.6
|
Sterling Mining
Co. Lease//Mineral Lease with Sterling Mining, for
four claim groups in western Montana (1)
|
10.7
|
Hecla
Agreement//Joint Venture Agreement for Snowstorm, Idaho (1)
|
10.8
|
Snowshoe Mining
Co. Lease//Mineral Lease Property at Snowstorm, Idaho (1)
|
10.9
|
Western
Goldfields, Inc. Lease//Mineral Lease with Western
Goldfields, Inc./Claim at the Snowstorm Project, Idaho
(1)
|
10.10
|
Renegade
Exploration Letter of Intent/Proposal for agreement at Sanger, Nevada(1)
|
10.11
|
S. Goss
Agreement/Consulting Agreement (1)
|
10.12
|
P. Dircksen
Agreement/Current Consulting Agreement (1)
|
10.13
|
2005 Equity
Incentive Plan approved at the September 23, 2005 Annual Meeting of
Shareholders (1)
|
10.14
|
Promissory Note
with Swallow Family LLC, dated September 1, 2005(2)
|
10.15
|
Promissory Note
with Swallow Family LLC, dated December 1, 2005(2)
|
10.16
|
Letter of Intent
and Option to Purchase, Kettle Drilling, Inc. (2)
|
10.17
|
2/1/06
Memorandum of Royalty Deed and Agreement between Hecla
Mining Co. and the Company (3)
|
10.18
|
2/1/06 Quitclaim
Deed and Assignment between Hecla Mining Co. and the Company (4)
|
10.19
|
Amended 2005
Equity Incentive Plan approved at the September 22,
2006 Annual Meeting of Shareholders (5)
|
10.20
|
5/1/06,
Employment Agreement with CEO John Swallow (10)
|
10.21
|
5/1/06,
Employment Agreement with VP Paul Dircksen (10)
|
10.22
|
11/21/06,
Consulting Agreement with CFO Michael P. Wilson (7)
|
10.23
|
Form of
Employment Agreement signed on 3/6/2006 between Douglas
Kettle and Kettle Drilling, Inc. (8)
|
10.24
|
Form of
Employment Agreement signed on 3/6/2006 between David
Deeds and Kettle Drilling, Inc. (9)
|
10.25
|
Stock Purchase
and Sale Agreement dated February 23, 2006 by and among the Company and
the shareholders of Kettle Drilling and certain of the shareholders of the
Company (12)
|
10.26
|
Amendment, dated
March 3, 2006, to the Stock Purchase and Sale Agreement dated February 23,
2006 by and among the Company and the shareholders of Kettle Drilling and
certain of the shareholders of the Company (11)
|
10.27
|
Exploration
License and Option to Lease Agreement, dated effective June 30, 2006,
between the Company and Diversified In holding LLC regarding the East Camp
Douglas property (13)
|
10.28
|
Mining Lease and
Option to Purchase Agreement, dated effective August 16, 2006, between the
Company and Diversified Inholding LLC regarding the East Camp Douglas
property (14)
|
10.29
|
Binding
Memorandum of Understanding between the Company and Steve Van Ert and Noel
Cousins, dated September 22, 2006 (15)
|
10.30
|
Mineral
Agreement dated July 18, 2007 between the Company and Steve Van Ert and
Noel Cousins (16)
|
10.31
|
Assignment and
Assumption Agreement dated July 19, 2007 between the Company and Butte
Highlands Mining Company (17)
|
10.32
|
Promissory Note,
dated June 27, 2008, entered into between Timberline Resources Corporation
and Auramet Trading, LLC.(18)
|
10.33
|
Severance
Agreement, dated March 10, 2008 among Timberline Resources Corporation,
Douglas Kettle and David and Margaret Deeds.(18)
|
10.34
|
Amendment No. 1
to Timberline Resources Corporations Amended 2005 Equity Incentive Plan
(19)
|
10.35
|
Agreement and
Plan of Merger between Timberline Resources Corporation, an Idaho
corporation ,and Timberline Resources Corporation, a Delaware corporation,
date August 22, 2008(20)
|
10.36
|
Pledge Agreement between the Company and Ron and Stacey
Guill. (21)
|
10.37
|
Security Agreement between the Company and Ron and Stacey
Guill.(21)
|
10.38
|
Credit Agreement between the Company and Small Mine
Development, LLC. (21)
|
10.39
|
Pledge Agreement between the Company and Small Mine
Development, LLC. (21)
|
10.40
|
Right of First Refusal between the Company and Small Mine
Development, LLC. (21)
|
|
|
14
|
Code of Ethics
(2)
|
16.1
|
Letter from
Former Accountants (6)
|
23.1
|
Consent of
DeCoria, Maichel & Teague
|
23.2
|
Consent of
Dorsey & Whitney LLP (contained in Exhibit 5.1 above)
|
24
|
Power of
Attorney (filed with the signature page)
|
|
|
(1) Incorporated
by reference to the Companys Form 10SB as filed with the Securities
Exchange Commission on September 29, 2005.
(2) Incorporated
by reference to the Companys Form 10SB/A as filed with the Securities
Exchange Commission on January 10, 2006.
(3) Incorporated
by reference to Exhibit 10.3 to the Companys Form 8-K as filed with the
Securities Exchange Commission on February 6, 2006.
(4) Incorporated
by reference to Exhibit 10.2 to the Companys Form 8-K as filed with the
Securities Exchange Commission on February 6, 2006.
(5) Incorporated
by reference Exhibit A to the Companys Schedule DEF14A (Proxy Statement)
as filed with the Securities and Exchange Commission on September 8,
2006
(6) Incorporated
by reference to Exhibit 16.1 to the Companys Form 8-K as filed with the
Securities Exchange Commission on September 12, 2006.
(7) Incorporated
by reference to Exhibit 10.1 to the Companys Form 8-K as filed with the
Securities Exchange Commission on November 29, 2006.
(8) Incorporated
by reference to Exhibit 10.23 to the Companys Form 8-K as filed with the
Securities Exchange Commission on March 10, 2006.
(9) Incorporated
by reference to Exhibit 10.24 to the Companys Form 8-K as filed with the
Securities Exchange Commission on March 10, 2006.
(10) Incorporated
by reference to the Companys Form 10KSB as filed with the Securities
Exchange Commission on January 16, 2007.
|
II-8
(11) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on March 10, 2006.
(12) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on March 1, 2006.
(13) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on July 6, 2006.
(14) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on August 22, 2006.
(15) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on September 28, 2006.
(16) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on July 23, 2007.
(17) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on July 23, 2007.
(18) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on July 3, 2008..
(19) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on August 26, 2008.
(20) Incorporated
by reference to the Companys Form 8-K as filed with the Securities and
Exchange Commission on August 29, 2008.
(21) Incorporated
by reference to Ron and Stacey Guills Schedule 13-D as filed with the
Securities and Exchange Commission on December 24, 2008.
|
II-9
ITEM 17- UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file,
during any period in which offers or sales of securities are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus
required by Section 10(a)(3) of the Securities Act of 1933;
(ii) Reflect in the prospectus any facts
or events which, individually or together, represent a fundamental change in the
information in the registration statement; and notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectuses filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the Calculation of Registration Fee table in the effective registration
statement.
(iii) Include any additional or changed material
information on the plan of distribution;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of
the undersigned small business issuer relating to the offering required to be
filed pursuant to Rule 424 (§230.424 of this chapter);
(ii)
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned small
business issuer or used or referred to by the undersigned small business
issuer;
(iii)
The portion of any other free writing
prospectus relating to the offering containing material information about the
undersigned small business issuer or its securities provided by or on behalf of
the undersigned small business issuer; and
(iv)
Any other communication that is an
offer in the offering made by the undersigned small business issuer to the
purchaser.
(b) Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described herein, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) that, for the
purpose of determining liability under the Securities Act to any purchaser, each
prospectus filed pursuant to Rule 424(b) as part of this registration statement
relating to the offering, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in the registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
II-10
SIGNATURES
In accordance with
the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements of filing on Form S-1 and authorized registration statement to be
signed on its behalf by the undersigned, in the city of Coeur dAlene, Idaho on
February 27, 2009.
TIMBERLINE RESOURCES CORPORATION
/s/
Randal Hardy
|
Chief Executive Officer, Chief Financial
Officer and Director (Principal
Executive and Financial
Officer)
|
February 27, 2009
|
POWER
OF ATTORNEY
Each person whose signature appears below
constitutes and appoints each of Randal Hardy and John Swallow his or her
attorney-in-fact and agent, with the full power of substitution and
resubstitution and full power to act without the other, for them in any and all
capacities, to sign any and all amendments, including post-effective amendments,
and any registration statement relating to the same offering as this
registration that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, to this registration statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the
Securities Act of 1933, as amended, this registration statement has been signed
by the following persons in the capacities and on the dates indicated.
/s/
Randal Hardy
|
Chief Executive Officer, Chief Financial
Officer , Director and Attorney-in-Fact
(Principal Executive and Financial
Officer)
|
February 27, 2009
|
/s/
John Swallow
|
Director, Chief Executive Chairman of
the Board
|
February 27, 2009
|
/s/
Craig Crowell
|
Chief Accounting Officer
(Principal Accounting Officer)
|
February 27, 2009
|
/s/
Vance Thornsberry
|
Director
|
February 27, 2009
|
/s/
Paul Dircksen
|
Director
|
February 27, 2009
|
/s/
Eric Klepfer
|
Director
|
February 27, 2009
|
/s/
Ron Guill
|
Director
|
February 27,
2009
|
/s/
James Moore
|
Director
|
February 27,
2009
|
II-11
Timberline Resources (QB) (USOTC:TLRS)
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부터 6월(6) 2024 으로 7월(7) 2024
Timberline Resources (QB) (USOTC:TLRS)
과거 데이터 주식 차트
부터 7월(7) 2023 으로 7월(7) 2024