Trilogy Metals Inc. - Quarter Report: 2021 February (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 28, 2021

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 1-35447

TRILOGY METALS INC.

(Exact Name of Registrant as Specified in Its Charter)

(604) 638-8088

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 7, 2021, the registrant had 144,292,774 Common Shares, no par value, outstanding.

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Trilogy Metals Inc.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Trilogy Metals Inc.

Interim Consolidated Balance Sheets

(unaudited)

Commitments (note 10)

(See accompanying notes to the interim consolidated financial statements)

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Trilogy Metals Inc.

Interim Consolidated Statements of Income (Loss)

and Comprehensive Income (Loss)

(unaudited)

(See accompanying notes to the interim consolidated financial statements)

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Trilogy Metals Inc.

Interim Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

in thousands of US dollars, except share amounts

(See accompanying notes to the interim consolidated financial statements)

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Trilogy Metals Inc.

Interim Consolidated Statements of Cash Flows

(unaudited)

(See accompanying notes to the interim consolidated financial statements)

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

1)    Nature of operations

Trilogy Metals Inc. (“Trilogy” or the “Company”) was incorporated in British Columbia under the Business Corporations Act (BC) on April 27, 2011. The Company is engaged in the exploration and development of mineral properties, through our equity investee (see note 4), with a focus on the Upper Kobuk Mineral Projects (“UKMP”), including the Arctic and Bornite Projects located in Northwest Alaska in the United States of America (“US”).

2)    Summary of significant accounting policies

Basis of presentation

These interim consolidated financial statements have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Trilogy and its wholly owned subsidiary, NovaCopper US Inc. (dba “Trilogy Metals US”). All intercompany transactions are eliminated on consolidation. For variable interest entities (“VIEs”) where Trilogy is not the primary beneficiary, we use the equity method of accounting.

All figures are in United States dollars unless otherwise noted. References to CAD$ refer to amounts in Canadian dollars.

The unaudited interim consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s financial position as of February 28, 2021 and our results of operations and cash flows for the three months ended February 28, 2021 and February 29, 2020. The results of operations for the three months ended February 28, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2021.

As these interim consolidated financial statements do not contain all of the disclosures required by U.S. GAAP for annual financial statements, these unaudited interim consolidated financial statements should be read in conjunction with the annual financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2020, filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities on February 12, 2021.

These interim consolidated financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on April 6, 2021.

3)    Accounts receivable

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The balance due from Ambler Metals LLC (see note 4 below) consists of services rendered by Trilogy and reimbursements for invoices paid by Trilogy on behalf of Ambler Metals LLC per a service agreement. The balance was paid in full by Ambler Metals LLC subsequent to the quarter end.

4)    Equity method investment

On February 11, 2020, the Company completed the formation of a 50/50 joint venture named Ambler Metals LLC with South32 Limited (“South32”). As part of the formation of the joint venture, Trilogy contributed all its assets associated with the UKMP, including the Arctic and Bornite Projects, while South32 contributed US$145 million, resulting in each

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

party’s subsidiaries directly owning a 50% interest in Ambler Metals LLC. To assist Ambler Metals during the initial set up phase, Trilogy was paying all of Ambler Metals LLC’s invoices and being reimbursed pursuant to a services agreement (the “Services Agreement”) between Trilogy and Ambler Metals LLC until the back office was fully transitioned to a new permanent team employed by the joint venture. The Services Agreement ended on December 31, 2020.

Ambler Metals LLC is an independently operated company jointly controlled by Trilogy and South32 through a four-member board, of which two members are appointed by Trilogy based on its 50% equity interest. All significant decisions related to the UKMP require the approval of both companies. We determined that Ambler Metals LLC is a VIE because it is expected to need additional funding from its owners for its significant activities. However, we concluded that we are not the primary beneficiary of Ambler Metals LLC as the power to direct its activities, through its board, is shared under the Ambler Metals LLC limited liability company agreement. As we have significant influence over Ambler Metals LLC through our representation on its board, we use the equity method of accounting for our investment in Ambler Metals LLC. Our investment in Ambler Metals LLC was initially measured at its fair value of $176 million upon recognition. Our maximum exposure to loss in this entity is limited to the carrying amount of our investment in Ambler Metals LLC, which, as at February 28, 2021, totaled $172 million. The following table summarizes the gain on recognition of the UKMP assets upon transfer to the Ambler Metals LLC joint venture on February 11, 2020.

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No additional mineral properties expenses were incurred subsequent to February 11, 2020 as upon the formation of the joint venture with South 32, all mineral properties previously held by the Company were contributed to Ambler Metals LLC. Prior to the formation of the joint venture, the Company had also incurred $0.7 million in Arctic Project feasibility costs that are included in the mineral properties expense balance of $1.5 million for the three-month period ended February 29, 2020.

During the three-month period ending February 28, 2021, Trilogy recognized, based on its 50% ownership interest in Ambler Metals LLC, an equity loss equivalent to its pro rata share of Ambler Metals LLC's comprehensive loss of $2.2 million for the three month period ending February 28, 2021. The carrying value of Trilogy’s 50% investment in Ambler Metals LLC as at February 28, 2021 is summarized on the following table.

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

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The Company charged $22,151 of expenses related to technical services, including geological, engineering, environmental and human resources, and accounting services in connection with the Services Agreement. In addition, the Company received payments of $4,053 related to operating expenses paid on behalf of Ambler Metals during the three-month period ending February 28, 2021.

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5)    Fixed assets

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

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6)    Accounts payable and accrued liabilities

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7)    Leases

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The Company’s lease arrangements primarily consist of an operating lease for our office space ending in June 2024. There are no extension options.

Total lease expense recorded within general and administrative expenses was comprised of the following components:

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

Variable lease costs consist primarily of the Company’s portion of operating costs associated with the office space lease as the Company elected to apply the practical expedient not to separate lease and non-lease components.

As of February, 28, 2021, the weighted-average remaining lease term was 3.3 years and the weighted-average discount rate is 8%. Significant judgment was used in the determination of the incremental borrowing rate which included estimating the Company’s credit rating.

Supplemental cash and non-cash information relating to our leases during the three months ended February 28, 2021 are as follows:

Future minimum payments relating to the lease recognized in our balance sheet as of February 28, 2021 are as follows:

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8)    Share capital

Authorized:

unlimited common shares, no par value

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During the three-month period ended February 28, 2021, the Company granted 3,374,150 options (2020 - 2,050,000 options) at a weighted-average exercise price of CAD$2.52 (2020 - CAD$3.02) to employees, consultants and directors exercisable for a period of five years with various vesting terms from immediate vesting to vesting over a two-year period. The weighted-average fair value attributable to options granted in the period was $0.84 (2020 - $0.99).

For the three-month period ended February 28, 2021, Trilogy recognized a stock-based compensation charge of $2.10 million (2019 – $1.16 million) for options granted to directors, employees and service providers, net of estimated forfeitures.

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

The fair value of the stock options recognized in the period has been estimated using the Black-Scholes option pricing model.

Assumptions used in the pricing model for the three-month period ended February 28, 2021 are as provided below.

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As of February 28, 2021, there were 3,374,150 non-vested options outstanding with a weighted average exercise price of $2.07; the non-vested stock option expense not yet recognized was $1.63 million. This expense is expected to be recognized over the next two years.

A summary of the Company’s stock option plan and changes during the three-month period ended February 28, 2021 is as follows:

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The following table summarizes information about the stock options outstanding at February 28, 2021.

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The aggregate intrinsic value of vested share options (the market value less the exercise price) at February 28, 2021 was $3.3 million (2020 - $5.9 million) and the aggregate intrinsic value of exercised options for the three months ended February 28, 2021 was $0.17 million (2020 - $0.04 million).

The Company has a Restricted Share Unit Plan (“RSU Plan”) and a Non-Executive Director Deferred Share Unit Plan (“DSU Plan”) to provide long-term incentives to employees, officers and directors.  Awards under the RSU Plan and DSU Plan

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

may be settled in cash and/or common shares of the Company at the Company’s election with each restricted share unit (“RSU”) and deferred share unit (“DSU”) entitling the holder to receive one common share of the Company or equivalent value.  All units are accounted for as equity-settled awards.

A summary of the Company’s unit plans and changes during the three-month period ended February 28, 2021 is as follows:

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For the three-month period ended February 28, 2021, Trilogy recognized a stock-based compensation charge of $0.04 million (2020- $0.04 million), net of estimated forfeitures.  The Company did not issue any RSU grants during the three-month period ended February 28, 2021. As of February 28, 2021, there were no outstanding RSU grants.

9)    Financial instruments

The Company is exposed to a variety of risks arising from financial instruments. These risks and management’s objectives, policies and procedures for managing these risks are disclosed as follows.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. The fair value of the Company’s financial instruments approximates their carrying value due to the short-term nature of their maturity. The Company’s financial instruments initially measured at fair value and then held at amortized cost include cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities.

Financial risk management

The Company’s activities expose it to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.

Currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates. The Company operates in the United States and Canada. The Company’s exposure to currency risk at February 28, 2021 is limited to the Canadian dollar balances consisting of cash of approximately CDN$78,000, accounts receivable of approximately CDN$29,000 and accounts payable of approximately CDN$413,000. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, the Company’s net loss would change by approximately $24,000.

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company holds cash and cash equivalents with Canadian Chartered financial institutions. The Company’s accounts receivable consists of Canadian Goods and Services Tax receivable from the Federal Government of Canada and other receivables for recoverable expenses. The Company’s exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial statements.

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Trilogy Metals Inc.

Notes to the Interim Consolidated Financial Statements

Liquidity risk is the risk that the Company will encounter difficulties raising funds to meet its financial obligations as they fall due. The Company is in the exploration stage and does not have cash inflows from operations; therefore, the Company manages liquidity risk through the management of its capital structure and financial leverage.

Contractually obligated cash flow requirements as at February 28, 2021 are as follows:

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