TLRS Timberline Resources Corporation (QB)

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

As used in herein, the terms “Timberline,” the “Company,” “we,” “us,” and “our” refer to Timberline Resources Corporation.

This discussion and analysis contains forward-looking statements that involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Except for historical information, the matters set forth herein, which are forward-looking statements, involve certain risks and uncertainties that could cause actual results to differ. Potential risks and uncertainties include, but are not limited to, unexpected changes in business and economic conditions; significant increases or decreases in gold prices; changes in interest and currency exchange rates; unanticipated grade changes; metallurgy, processing, access, availability of materials, equipment, supplies and water; results of current and future exploration and production activities; local and community impacts and issues; timing of receipt and maintenance of government approvals; accidents and labor disputes; environmental costs and risks; competitive factors, including competition for property acquisitions; and availability of external financing at reasonable rates or at all, and those set forth under the heading “Risk Factors” in our Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”) on January 13, 2021. Forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues” or the negative of these terms or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance, or achievements. Forward-looking statements are made based on management’s beliefs, estimates, and opinions on the date the statements are made, and the Company undertakes no obligation to update such forward-looking statements if these beliefs, estimates, and opinions should change, except as required by law.

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

Corporate Overview

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

We are also operator of the Paiute Joint Venture Project with Nevada Gold Mines in the Battle Mountain District. Both of these properties lie on the prolific Battle Mountain-Eureka gold trend. We also control the Seven Troughs Project in

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northern Nevada, which is one of the state's highest-grade former gold producers. In total, we control over 43 square miles (111 square kilometers) of mineral rights in Nevada. Detailed maps and mineral resource estimates for the Eureka Project and NI 43-101 technical reports for its projects may be viewed at http://timberlineresources.co/.

Corporate Update

In January 2021, we announced the appointment of Mr. Patrick Highsmith, our President and CEO, to the board of directors effective January 1, 2021. At the Company’s annual meeting of shareholders on April 14, 2021, our shareholders approved a downsized board of directors, including five members: Leigh Freeman (Chairman), Quinton Hennigh, Patrick Highsmith, William Matlack, and Don McDowell. In another event subsequent to the end of the quarter, on May 6, 2021 we announced the appointment of Ms. Pamela Saxton to the board of directors.  

Summary of the exploration activities for the three months ended March 31, 2021:

During the three months ending March 31, 2021, we announced final results of the 2020 exploration program at our 100%-controlled Eureka Project in Nevada. Announcements during the quarter included the last of the reverse circulation (RC) drilling around the Lookout Mountain resource area and three exploration core holes that were significant step-outs away from known mineralization (see Figure 1). We also shared the results of a significant induced polarization/resistivity (IP) survey at the Lookout Mountain and Windfall targets.    

On January 7, 2021, Timberline announced results for the final five holes of the 2020 RC drill program. The results include considerable near-surface oxide gold mineralization and multiple high-grade intercepts above 4.0 grams per tonne (g/t) of gold (see Table 1). The primary objectives of the 12-hole, 2,438m (8,000 ft) RC drill program were to infill and expand the current mineral resource and test for deeper sulfide mineralization to the east in the graben structure (see Figure 1).

On March 25, 2021, we announced assay results from the three core holes totaling 1,365m (4,478 ft), which completed our 2020 drilling campaign. These core holes were exploration holes, well outside the footprint of the resource, targeting the down-dip extension of the Lookout Mountain mineralization to the east (Figure 1). However, they were not drilled deep enough to test the target because of previously unknown faults that have down-dropped the most favorable rock units. While there were considerable thicknesses of anomalous gold, silver, and associated pathfinder elements in these holes, they did not encounter gold mineralization above the Company’s cutoff grade of 0.3 g/t.  

The new drill core revealed extensive alteration that is consistent with Carlin-type gold systems.  In addition, there was low level silver-lead-zinc mineralization that could be related to nearby carbonate-replacement-deposits, for which the historic Eureka District was well known.   

The 2020 drill program improved our geological understanding within and outside the existing Lookout Mountain gold resource area (508,000oz gold Measured & Indicated and 141,000oz gold Inferred; see below and refer to Updated NI 43-101 Technical Report on the Lookout Mountain Project, MDA, Effective March 1, 2013, filed on SEDAR April 12, 2013). Regarding the resource area and possible expansions, the new drill holes provided important in-fill data, offset and improved historic high-grade intercepts, and extended higher grade gold mineralization east of the resource. In aggregate, the near-surface oxide gold and deeper high-grade gold intercepts from the 2020 program highlight the continued growth opportunity at our Eureka Project.

Drilling Highlights (see Table 1)

·Hole BHSE-176 intercepted near surface high-grade oxide gold mineralization, 15.24m averaging 10.09 g/t, beginning at 21.34m downhole depth. Within this interval, there are sub-intervals of 9.14m of 16.31 g/t, including 3.05m of 31.40 g/t.   

·Holes BHSE-177 and 178 encountered shallow oxide gold within the existing resource, including 18.29m (beginning at the surface) of 0.87 g/t, 48.77m of 1.00 g/t, and 59.44m of 0.63 g/t.   

·Holes BHSE-180, 181, and 182 confirmed northward and down dip extensions of mineralization beyond the historic Lookout Mountain pit, including gold intercepts up to 18.29m of 1.58 g/t in BHSE-182.  

·Hole BHSE-184 intercepted 18.29m of 0.93 g/t oxide gold from 3.0m below surface.  

·Hole BHSE-186 intercepted 6.10m of near-surface, high-grade gold (5.21 g/t) and 25.91m @ 0.77 g/t gold from 47.24m downhole, both intervals being oxidized material.  

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·Hole BHSE-187, a step-out hole drilled approximately 75m northeast of the existing resource, encountered 7.62m of 4.49 g/t, within an interval of 25.91m @ 2.18 g/t gold.  

Figure 1 - Lookout Mountain 2020 Drilling

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Table 1.  Significant Drill Intercepts from 2020 Drilling Campaign at Lookout Mountain Deposit

Sampling Methodology, Chain of Custody, Quality Control and Quality Assurance

Collection of reverse circulation percussion drill samples and diamond drill core was completed under the supervision of a Company representative, Steven Osterberg. Personnel from Timberline or the drilling contractors transported the RC and core samples to Timberline’s secure Eureka facility where samples were logged and prepared for transport to the lab. Senior geologists directed the cutting and sampling of the core and selection of representative samples for assay. Quality control was monitored by the insertion of numerous blind certified standard reference materials, field duplicates, and blanks into each sample shipment. Company representatives completed sample dispatch paperwork and delivered the samples to ALS USA Inc. (ALS) in Elko, Nevada for sample preparation. Drill samples were assayed by ALS in Reno, Nevada for gold by fire assay of a 30-gram charge with an AA or ICP-ES finish (ALS code Au-AA23). The overlimits for gold samples assaying above 10 g/t were determined by a 30-gram fire assay with gravimetric finish. In addition, highly mineralized samples (>0.2 g/t Au) were submitted for multi-element analysis (33 elements) by four-acid digestion and ICP-ES determination (code ME-ICP61).

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Geophysical Surveys

On February 3, 2021, Timberline announced results of an IP geophysical survey (see Figures 2 and 3) completed concurrently with the 2020 drilling at Eureka. The IP survey included 28.4 line-kilometers over eight lines focused primarily along the Lookout Mountain trend. IP can be an effective tool for mapping subsurface electrical characteristics of the rocks related to the distribution of sulfide minerals and organic carbon, which are often associated with Carlin-type gold deposits. IP surveys may also help map fault structures that are related to or crosscut mineralization. Timberline previously reported a district-scale gravity survey at Eureka (see Company news release dated Nov 2, 2020 at http://timberlineresources.co/press-releases). These two large-scale geophysical surveys are complementary, and Timberline has developed a fully integrated interpretation of these data with the growing geological database, which includes drilling, mapping, surface sampling, and modeling.

Figure 2.  Plan Map Showing 2020 IP Survey Lines and Anomalies over Gravity Vertical Derivative Base Map

Lookout Pit

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Highlights of the IP survey at Lookout Mountain include:

·A strong chargeability anomaly spanning at least two kilometers in a north-south direction east of the Lookout Mountain gold resource (Figure 3); and 

·Identified two major fault zones: the Lookout Mountain Fault (LMF) which is associated with known gold mineralization, and the East Bounding Fault (EBF) which is undrilled. 

At Windfall, located approximately 6 km northeast of Lookout Mountain, the Company completed a single east-west IP test line between the Windfall and Rustler historic open pits (Figure 4). As at Lookout Mountain, a distinct chargeability anomaly occurs east of the known mineralization which includes numerous drill holes with high grade gold (≥ 3 g/t) intercepts. A more extensive IP survey in the Windfall area is planned for 2021.

Figure 3.  3D View of Lookout Mountain Gold Resource and New IP Anomalies with 2020 Drillholes

(Note:  looking northwest with grid lines on 1,000 m spacing)

Integrated Geological Analysis and 2021 Exploration Planning

The 2020 exploration program at Eureka included drilling, geophysics, logging of new and historical drill core and cuttings, and geologic modeling. Gold mineralization at Eureka is hosted by sedimentary rocks including shale and interbedded limestone and dolomite. Host rocks are variably but often intensely silicified, decalcified, sulfidized, argillized, and subsequently oxidized. Porosity and permeability are created in these systems by leaching of the calcite and volume losses created by dolomitization, fracturing, and brecciation. Iron also appears to be introduced along with hydrothermal dolomite Many shallow gold intercepts are hosted by oxidized jasperoid and chalcedonic silica, sometimes with high gold grades. Collectively these patterns of alteration are consistent with those observed in Carlin-type gold deposits.  Gold is concentrated along moderate to steeply dipping faults and along contacts within the Cambrian and Silurian-Devonian age stratigraphy (Figure 5). Clustered, higher grade intercepts occur at the Water Well - North Lookout, South Lookout, and Rocky Canyon Zones (Figure 6). These areas are all inadequately drilled and are targeted for new drilling in 2021.

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Figure 4.  Windfall Target 3D Perspective with 2D IP Inversion Section

(Note:  looking northwest with grid lines on 1,000 m spacing)

While the Lookout Mountain mineral system has been documented by previous drilling as extending two kilometers north and nearly four kilometers south from the historic Lookout Pit, the 2020 drilling and geophysics campaign helped link the known mineral system to deeper geophysical anomalies and new extensions to the east.  It is clear now that the Lookout Mountain mineral system has a much wider footprint than previously thought and it appears to be linked to a significant geophysical anomaly at depth. Timberline’s structural understanding of the Lookout Deposit and the Graben Zone to the east was also markedly improved by the 2020 exploration program and its follow-up into the first quarter of 2021 (Figure 5).  

Work along the Windfall Trend came late in the 2020 field season, but compilation and modeling of historic data continues at the time of this writing. We have reported significant historical drill intercepts between the pits and the single line of IP data indicates apparent targets downdip and to the east.  Overall, the setting at Windfall appears to be highly analogous to the Lookout Trend, but much less modern work has been conducted there. It is clear that the Windfall Trend is rich in targets and these will be assessed with geophysical surveys and mapping planned for 2021. Drill targets may emerge at Windfall by later summer of 2021.       

Timberline issued a news release on April 1, 2021 discussing the progress made during the 2020 field season and the exploration plans for 2021. At the time of this writing, it is premature to state with certainty the scale of the exploration program or specifics of drilling planned for 2021. However, Timberline expects to put forward a program that will include significant geophysics (CSAMT, IP, and gravity), extensive geological mapping and surface sampling, and drilling of approximately 6,000 meters or more. If successful in financing and delivering a drill program of this scale, that would constitute an increase of almost 60% from the 2020 drill program.  

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Figure 5.  Preliminary Lookout Mountain Geologic Cross Section and Schematic Gold Targets

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Figure 6. 2021 Target Zones (red hatch) along the Lookout Mountain Trend with Historic Drilling.  Red Discs Indicate Gold Intercepts Higher than 5 g/t.

Results of Operations for the six months ended March 31, 2021 and 2020

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Our consolidated net loss for the three months ended March 31, 2021 was $485,159, compared to a consolidated net loss of $315,026 for the three months ended March 31, 2020. As a result of the consolidation of Lookout Mountain LLC, total exploration expenses of $223,546 were recorded on our statement of operations for the three months ended March 31, 2021, compared with $12,749 for the three months ended March 31, 2020. The year-over-year increase in net loss is due to the significant increase in exploration expenses made possible by the infusion of cash that occurred near the close of fiscal year 2020, an increase in salaries and benefits resulting from adding an additional corporate officer, and increases in investor and legal fees resulting from costs associated with the preparation for the shareholder meeting held in April 2021, offset by reduced investor relations consulting fees during the three months ended March 31, 2021. These cost increases were offset by the reduction of interest expense and accretion of the discount on senior notes payable as a result of paying off significant debt late in fiscal year 2020. Insurance expense was somewhat higher in the comparative period due to the normal increases the industry is experiencing.

Our consolidated net loss for the six months ended March 31, 2021 was $2,069,272, compared to a consolidated net loss of $1,079,645 for the six months ended March 31, 2020. As a result of the consolidation of Lookout Mountain LLC, total exploration expenses of $1,400,072 were recorded on our statement of operations for the six months ended March 31, 2021, compared with $159,231 for the six months ended March 31, 2020. The year-over-year increase in net loss is due to the significant increase in exploration expenses made possible by the infusion of cash that occurred near the close of fiscal year 2020, an increase in salaries and benefits resulting from adding an additional corporate officer, all of which were offset by the non-recurrence of the loss on modification of debt, and the reduction of interest expense and accretion of the discount on senior notes payable as a result of paying off significant debt late in fiscal year 2020. Insurance expense was somewhat higher in the first six months of 2021 due to the normal increases the industry is experiencing. Additionally, non-cash stock option expenses decreased slightly with the reduced number of options granted and the application of variables to their fair values in the most recent period compared to the six months ended March 31, 2020.

Subject to adequate funding in 2021, we expect to continue to incur exploration expenses for the advancement of our Eureka Project.

Financial Condition and Liquidity

At March 31, 2021, we had assets of $15,186,062, consisting of cash of $763,937; property, mineral rights and equipment of $13,801,275, net of depreciation, reclamation bonds of $538,696, and prepaid expenses, deposits and other assets in the amount of $82,154.

On March 31, 2021, we had total liabilities of $716,726 and total assets of $15,186,062. This compares to total liabilities of $792,085 and total assets of $16,886,921 on September 30, 2020. As of March 31, 2021, our liabilities consist of $115,431 for asset retirement obligations, $300,000 of senior unsecured note payable – related party, and $109,520 of trade payables and accrued liabilities and $191,775 of interest and expenses payable to related parties. Of these liabilities, $301,295 are due within twelve months. The liabilities compared to September 30, 2020 have changed as a result of a decrease in accrued payables offset by increases in accrued liabilities and accrued interest - related party. The decrease in total assets was due to the usage of cash to reduce accounts payable and to pay Company operating expenses.

On March 31, 2021, we had working capital of $539,096 and stockholders’ equity of $14,469,336 compared to working capital of $2,155,400 and stockholders’ equity of $16,094,836 for the year ended September 30, 2020. Working capital experienced an unfavorable change because of the decrease in cash associated payments of accounts payable and operating expenses, offset by increases in accrued expenses – related party and accrued interest - related party.

During the six months ended March 31, 2021, we used cash from operating activities of $2,079,919, compared to cash used of $505,517 for the six months ended March 31, 2020. The use of cash from operating activities results primarily from the net loss of $2,069,272 for the six-month period ended March 31, 2021 compared to net loss of $1,079,645 for the six months ended March 31, 2020. Changes to the net loss for the comparative periods are described above.

During the six-month period ended March 31, 2021, cash of $6,380 was provided by investment activities, compared with cash of $70,709 provided for the six-month period ended March 31, 2020. During the six months ended March 31, 2021, we received $52,380 for lease payments to us for company-owned mineral properties offset by $46,000 paid for mineral rights, compared to cash received of $12,500 for refunds of reclamation bonds paid previously and $58,209 for lease payments to us for company-owned mineral properties for the six months ended March 31, 2020.

During the six-month period ended March 31, 2021, $316,750 was provided by financing activities, compared to cash of $571,716 provided during the six-month period ended March 31, 2020. For the six-month period ended March 31, 2020, cash of $600,000 was provided through the sale of stock and warrants, net of offering costs, and $28,294 cash was used for payment of the payment obligation.

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Going Concern:

The audit opinion and notes that accompany our consolidated financial statements for the year ended September 30, 2020 disclose a ‘going concern’ qualification to our ability to continue in business. These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of our assets and the settlement of our liabilities in the normal course of our operations. Disruptions in the credit and financial markets over the past several years have had a material adverse impact on a number of financial institutions and investors and have limited access to capital and credit for many companies. In addition, commodity prices and mining equities have seen significant volatility which increases the risk to precious metal investors. Market disruptions and alternative investment options, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all. If we are unable to obtain financing through equity investments, we will seek multiple solutions including, but not limited to, asset sales, corporate transactions, credit facilities or debenture issuances in order to continue as a going concern.

The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We believe that the going concern condition cannot be removed with confidence until the Company has entered into a business climate where funding of its activities is more assured. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.

At March 31, 2021, we had working capital of $539,096. We have a cash balance of approximately $763,937 and approximately $301,295 outstanding in current liabilities. As of the date of this report on Form 10-Q, we have sufficient cash to meet our normal operating commitments for the next 12 months. Therefore, we do not expect to be required to engage in financial transactions to increase our cash balance or decrease our cash obligations in the near term. However, we are an exploration company with exploration programs that require significant cash expenditures. A significant drilling program, such as those we have planned, will result in depletion of cash and return us to a position of insufficient cash to support normal operations for the following 12 months. Cash-raising efforts may include equity financings, corporate transactions, joint venture agreements, sales of assets, credit facilities or debenture issuances, or other strategic transactions.

We plan, as funding allows, to follow up on our positive drill results on our Eureka and Paiute Projects. Principally, we plan to execute drilling as part of the ongoing exploration program at Eureka. Also, subject to available capital, we may continue prudent exploration programs on our material exploration properties and/or fund some exploratory activities on early-stage properties. We will require additional funding and/or reductions in exploration and administrative expenditures in future periods. If we cannot obtain sufficient additional financing, we may be unable to make required property payments on a timely basis and be forced to return some or all of our leased or optioned properties to the underlying owners.

Financing Activities

None

Subsequent Events

Subsequent to March 31, 2021, holders of Class D and Class H Warrants exercised a total of 2,150,000 warrants for $0.14 per share and received 2,150,000 shares of the Company’s common stock for total cash proceeds of $301,000 to the Company.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

See Note 2 to the financial statements contained in this Quarterly Report for a summary of the significant accounting policies used in the presentation of our financial statements. We are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses. We believe that our most critical accounting estimates are related to asset impairments and asset retirement obligations.

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Our critical accounting policies and estimates are as follows:

Asset Impairments - Carrying Value of Property, Mineral Rights and Equipment

Significant property acquisition payments for active exploration properties are capitalized. The evaluation of our mineral properties for impairment is based on market conditions for minerals, underlying mineralized material associated with the properties, and future costs that may be required for ultimate realization through mining operations or by sale. If no mineable ore body is discovered, or market conditions for minerals deteriorate, there is the potential for a material adjustment to the value assigned to such mineral properties.

We review the carrying value of equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment or abandonment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the equipment is used, and the effects of obsolescence, demand, competition, and other economic factors.

Asset Retirement Obligations

We have an obligation to reclaim our properties after the surface has been disturbed by exploration methods at the site. As a result, we have recorded a liability for the fair value of the reclamation costs we expect to incur at our Lookout Mountain Target on our Eureka Project, and our Paiute Project. We estimate applicable inflation and credit-adjusted risk-free rates as well as expected reclamation time frames. To the extent that the estimated reclamation costs change, such changes will impact future reclamation expense recorded. A liability is recognized for the present value of estimated environmental remediation (asset retirement obligation) in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The offsetting balance is charged to the related long-lived asset. Adjustments are made to the liability for changes resulting from passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation.