Trilogy Metals Inc. 10-Q

Item 1. Financial Statements Trilogy Metals Inc. Interim Consolidated Balance Sheets (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of US dollars ​ ​ ​ August 31, 2020 ​ ​ November 30, 2019 ​ ​ $ $ Assets ​ ​ ​ Current assets ​ ​ ​ Cash and cash equivalents ​ 12,780 ​ 19,174 ​ Accounts receivable (note 3) ​ 121 ​ 264 ​ Deposits and prepaid amounts ​ 379 ​ 719 ​ ​ ​ 13,280 ​ 20,157 ​ ​ ​ ​ ​ ​ ​ ​ Equity method investment (note 4) ​ 174,167 ​ ​ — ​ Plant and equipment (note 5) ​ 222 ​ 715 ​ Mineral properties and development costs (note 6) ​ — ​ 30,631 ​ Rent deposit (note 8 (a)) ​ — ​ ​ 114 ​ Right of use asset (note 8 (a)) ​ 503 ​ ​ — ​ ​ ​ 188,172 ​ 51,617 ​ Liabilities ​ ​ ​ Current liabilities ​ ​ ​ Accounts payable and accrued liabilities (note 7) ​ 1,287 ​ 2,354 ​ Current portion of lease liability ​ 152 ​ ​ — ​ ​ ​ 1,439 ​ 2,354 ​ ​ ​ ​ ​ ​ ​ ​ Long-term portion of lease liability (note 8 (b)) ​ 447 ​ ​ — ​ Mineral properties purchase option ​ — ​ 31,000 ​ ​ ​ 1,886 ​ 33,354 ​ Shareholders’ equity ​ ​ ​ Share capital (note 9) – unlimited common shares authorized, no par value Issued – 142,978,805 (2019 – 140,427,761 ) ​ 179,310 ​ 177,971 ​ Contributed surplus ​ 122 ​ 122 ​ Contributed surplus – options (note 9(a)) ​ 23,024 ​ 21,123 ​ Contributed surplus – units (note 9(b)) ​ 1,549 ​ 1,759 ​ Deficit ​ ( 17,719 ) ​ ( 182,712 ) ​ ​ ​ 186,286 ​ 18,263 ​ ​ ​ 188,172 ​ 51,617 ​ Commitments (note 11) (See accompanying notes to the interim consolidated financial statements) /s/ Tony Giardini, President, CEO and Director /s/ Kalidas Madhavpeddi, Director Approved on behalf of the Board of Directors ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 3 ​ Table of contents Trilogy Metals Inc. Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss ) (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of US dollars, except share and per share amounts ​ ​ ​ ​ For the three months ended ​ For the nine months ended ​ ​ ​ ​ August 31, 2020 ​ ​ August 31, 2019 ​ ​ August 31, 2020 ​ ​ August 31, 2019 ​ ​ ​ $ $ $ $ ​ ​ Expenses ​ ​ ​ ​ ​ ​ ​ ​ Amortization ​ ​ 17 ​ 31 ​ ​ 75 ​ 106 ​ ​ Feasibility study (note 6(a)) ​ ​ 232 ​ ​ — ​ ​ 974 ​ ​ — ​ ​ Foreign exchange (gain) loss ​ ​ 37 ​ 3 ​ ​ 44 ​ ( 26 ) ​ ​ General and administrative ​ ​ 265 ​ 435 ​ ​ 1,349 ​ 1,363 ​ ​ Investor relations ​ ​ 156 ​ 164 ​ ​ 383 ​ 456 ​ ​ Mineral properties expense (note 6(a)) ​ ​ — ​ 10,951 ​ ​ 1,545 ​ 15,392 ​ ​ Professional fees ​ ​ 165 ​ 414 ​ ​ 1,031 ​ 658 ​ ​ Salaries ​ ​ 170 ​ 272 ​ ​ 620 ​ 835 ​ ​ Salaries – stock-based compensation ​ ​ 1,064 ​ 402 ​ ​ 3,030 ​ 3,005 ​ ​ Total expenses ​ ​ 2,106 ​ 12,672 ​ ​ 9,051 ​ 21,789 ​ ​ Other items ​ ​ ​ ​ ​ ​ ​ ​ Gain on derecognition of assets contributed to joint venture (note 4(a)) ​ ​ — ​ ​ — ​ ​ ( 175,770 ) ​ ​ — ​ ​ Share of loss on equity investment (note 4(b)) ​ ​ 1,094 ​ ​ — ​ ​ 1,833 ​ ​ — ​ ​ Interest and other income ​ ​ ( 16 ) ​ ( 137 ) ​ ​ ( 107 ) ​ ( 409 ) ​ ​ Comprehensive (loss) earnings for the period ​ ​ ( 3,184 ) ​ ( 12,535 ) ​ ​ 164,993 ​ ( 21,380 ) ​ ​ Basic (loss) earnings per common share ​ ​ ( 0.02 ) ​ ​ ( 0.09 ) ​ ​ 1.17 ​ ​ ( 0.16 ) ​ ​ Diluted (loss) earnings per common share ​ ​ ( 0.02 ) ​ ​ ( 0.09 ) ​ ​ 1.12 ​ ​ ( 0.16 ) ​ ​ Basic weighted average number of common shares outstanding ​ ​ 141,018,130 ​ ​ 136,981,179 ​ ​ 140,807,319 ​ ​ 133,677,437 ​ ​ Diluted weighted average number of common shares outstanding ​ ​ 141,018,130 ​ ​ 136,981,179 ​ ​ 146,660,689 ​ ​ 133,677,437 ​ ​ (See accompanying notes to the interim consolidated financial statements) ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 4 ​ Table of contents Trilogy Metals Inc. Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited) in thousands of US dollars, except share amounts ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contributed ​ ​ Contributed ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contributed ​ ​ surplus – ​ ​ surplus – ​ ​ ​ ​ ​ shareholders’ ​ ​ Number of shares ​ ​ Share capital ​ ​ Warrants ​ ​ surplus ​ ​ options ​ ​ units ​ ​ Deficit ​ ​ equity ​ ​ outstanding $ $ $ $ $ $ $ Balance – November 30, 2018 131,585,612 ​ ​ 164,069 ​ 2,253 ​ 122 ​ 19,076 ​ 1,489 ​ ( 154,807 ) ​ ​ 32,202 ​ Exercise of options 44,230 ​ ​ 28 ​ — ​ — ​ ( 28 ) ​ — ​ — ​ ​ — ​ Restricted Share Units 412,501 ​ ​ 424 ​ — ​ — ​ — ​ ( 424 ) ​ — ​ ​ — ​ Stock-based compensation — ​ ​ — ​ — ​ — ​ 1,586 ​ 353 ​ — ​ ​ 1,939 ​ Loss for the period — ​ ​ — ​ — ​ — ​ — ​ — ​ ( 4,336 ) ​ ​ ( 4,336 ) ​ Balance – February 28, 2019 132,042,343 ​ ​ 164,521 ​ 2,253 ​ 122 ​ 20,634 ​ 1,418 ​ ( 159,143 ) ​ ​ 29,805 ​ Exercise of options ​ 101,064 ​ ​ 53 ​ ​ — ​ ​ — ​ ​ ( 53 ) ​ ​ — ​ ​ — ​ ​ — ​ Stock-based compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 355 ​ ​ 309 ​ ​ — ​ ​ 664 ​ Loss for the period ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 4,509 ) ​ ​ ( 4,509 ) ​ Balance – May 31, 2019 ​ 132,143,407 ​ ​ 164,574 ​ ​ 2,253 ​ ​ 122 ​ ​ 20,936 ​ ​ 1,727 ​ ​ ( 163,652 ) ​ ​ 25,960 ​ Exercise of options 57,818 ​ ​ 41 ​ — ​ — ​ ( 41 ) ​ — ​ — ​ ​ — ​ Stock-based compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 288 ​ ​ 114 ​ ​ — ​ ​ 402 ​ Deferred share units ​ 182,132 ​ ​ 189 ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 189 ) ​ ​ — ​ ​ — ​ Exercise of warrants ​ 6,521,740 ​ ​ 12,166 ​ ​ ( 2,253 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 9,913 ​ Loss for the period ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 12,535 ) ​ ​ ( 12,535 ) ​ Balance – August 31, 2019 ​ 138,905,097 ​ ​ 176,970 ​ ​ — ​ ​ 122 ​ ​ 21,183 ​ ​ 1,652 ​ ​ ( 176,187 ) ​ ​ 23,740 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance – November 30, 2019 ​ 140,427,761 ​ ​ 177,971 ​ ​ — ​ ​ 122 ​ ​ 21,123 ​ ​ 1,759 ​ ​ ( 182,712 ) ​ ​ 18,263 ​ Exercise of options 19,514 ​ ​ 6 ​ — ​ — ​ ( 6 ) ​ — ​ — ​ ​ — ​ Restricted Share Units 212,501 ​ ​ 330 ​ — ​ — ​ — ​ ( 330 ) ​ — ​ ​ — ​ Stock-based compensation — ​ ​ — ​ — ​ — ​ 1,155 ​ 41 ​ — ​ ​ 1,196 ​ Earnings for the period ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 171,179 ​ ​ 171,179 ​ Balance – February 29, 2020 ​ 140,659,776 ​ ​ 178,307 ​ ​ — ​ ​ 122 ​ ​ 22,272 ​ ​ 1,470 ​ ​ ( 11,533 ) ​ ​ 190,638 ​ Exercise of options ​ 63,110 ​ ​ 31 ​ ​ — ​ ​ — ​ ​ ( 31 ) ​ ​ — ​ ​ — ​ ​ — ​ Restricted Share Units ​ 200,000 ​ ​ 312 ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 312 ) ​ ​ — ​ ​ — ​ Stock-based compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 420 ​ ​ 350 ​ ​ — ​ ​ 770 ​ Loss for the period — ​ ​ — ​ — ​ — ​ — ​ — ​ ( 3,002 ) ​ ​ ( 3,002 ) ​ Balance – May 31, 2020 140,922,886 ​ ​ 178,650 ​ — ​ 122 ​ 22,661 ​ 1,508 ​ ( 14,535 ) ​ ​ 188,406 ​ Exercise of options ​ 2,055,919 ​ ​ 660 ​ ​ — ​ ​ — ​ ​ ( 660 ) ​ ​ — ​ ​ — ​ ​ — ​ Restricted Share Units ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ Stock-based compensation ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,023 ​ ​ 41 ​ ​ — ​ ​ 1,064 ​ Loss for the period — ​ ​ — ​ — ​ — ​ — ​ — ​ ( 3,184 ) ​ ​ ( 3,184 ) ​ Balance – August 31, 2020 142,978,805 ​ ​ 179,310 ​ — ​ 122 ​ 23,024 ​ 1,549 ​ ( 17,719 ) ​ ​ 186,286 ​ (See accompanying notes to the interim consolidated financial statements) ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 5 ​ Table of contents Trilogy Metals Inc. Interim Consolidated Statements of Cash Flows (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of US dollars ​ ​ For the nine months ended ​ ​ August 31, 2020 ​ ​ August 31, 2019 ​ ​ $ ​ $ ​ Cash flows used in operating activities ​ ​ ​ ​ Earnings (loss) for the period ​ 164,993 ​ ​ ( 21,380 ) ​ Items not affecting cash ​ ​ ​ ​ ​ Amortization ​ 75 ​ ​ 106 ​ Right of use asset amortization ​ 124 ​ ​ ​ — ​ Loss on working capital written-off upon joint venture formation ​ 18 ​ ​ ​ — ​ Gain on derecognition of assets (note 4(a)) ​ ( 175,770 ) ​ ​ ​ — ​ Loss on equity investment in Ambler Metals LLC (note 4(b)) ​ 1,833 ​ ​ ​ — ​ Unrealized foreign exchange loss ​ 12 ​ ​ 3 ​ Stock-based compensation ​ 3,030 ​ ​ 3,005 ​ Operating lease payments ​ ( 142 ) ​ ​ ​ — ​ Net change in non-cash working capital ​ ​ ​ ​ ​ Decrease (increase) in accounts receivable ​ 143 ​ ​ ( 336 ) ​ Decrease in deposits and prepaid amounts ​ 340 ​ ​ 99 ​ (Decrease) increase in accounts payable and accrued liabilities ​ ( 1,067 ) ​ ​ 2,748 ​ ​ ​ ( 6,411 ) ​ ​ ( 15,755 ) ​ Cash flows from financing activities ​ ​ ​ ​ Proceeds from exercise of warrants ​ — ​ ​ ​ 9,913 ​ ​ ​ — ​ ​ 9,913 ​ Cash flows from investing activities ​ ​ ​ ​ Acquisition of plant & equipment ​ — ​ ​ ( 494 ) ​ Mineral properties funding ​ — ​ ​ 10,200 ​ ​ ​ — ​ ​ 9,706 ​ (Decrease) increase in cash and cash equivalents ​ ( 6,411 ) ​ ​ 3,864 ​ Effect of exchange rate on cash and cash equivalents ​ 17 ​ ​ ( 3 ) ​ Cash and cash equivalents – beginning of period ​ 19,174 ​ ​ 22,991 ​ Cash and cash equivalents – end of period ​ 12,780 ​ ​ 26,852 ​ (See accompanying notes to the interim consolidated financial statements) ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 6 ​ Table of contents 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 significant 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 August 31, 2020 and our results of operations and cash flows for the nine months ended August 31, 2020 and August 31, 2019. The results of operations for the nine months ended August 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2020. 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, 2019, filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities on February 13, 2020. These interim consolidated financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on October 6, 2020. Accounting standards adopted Leases In February 2016, the FASB issued new accounting requirements for accounting for, presentation of, and classification of leases (“ASU 2016-02”) which, together with subsequent amendments, is included in ASC 842, Leases. ASC 842 became effective for the Company as of December 1, 2019. The Company adopted ASC 842 using the modified retrospective transition method by applying the transition provision and recording our cumulative adjustment to opening deficit at the beginning of the period of adoption on December 1, 2019, rather than at the beginning of the comparative period presented. Therefore, in the comparative periods, we continue to apply the legacy guidance in ASC 840, including its disclosure requirements. We elected to apply all of the transition practical expedients available, including: ● the package of three practical expedients to (1) not reassess whether any expired or existing contracts are or contain leases, (2) not reassess the lease classification for any expired or existing leases, and (3) not reassess initial direct costs for any existing lease; ● the hindsight practical expedient to use hindsight when determining lease term and assessing impairment of right-of-use assets, if any; and ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 7 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements ● the easements practical expedient to continue applying our current policy for accounting for any land easements expired before or existing as of December 1, 2019. In addition, we elected to apply the short-term lease recognition exemption and elected to apply the practical expedient to not separate lease and non-lease components for all applicable leases on transition. The adoption of this new standard resulted in the recognition of right of use assets and lease liabilities of $ 786,000 as at December 1, 2019. New accounting policy Investment in affiliates Investments in unconsolidated ventures over which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method and include the Company’s investment in the Ambler Metals project. We identified Ambler Metals LLC as a VIE as the entity is dependent on funding from its owners. All funding, ownership, voting rights and power to exercise control is shared equally on a 50 /50 basis between the owners of the VIE. Therefore, the Company has determined that it is not the primary beneficiary of the VIE. The Company’s maximum exposure to loss is its investment in Ambler Metals LLC. Ambler Metals LLC is a non-publicly traded equity investee holding exploration and development projects. The Company reviews and evaluates its investment in affiliates for other than temporary impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that could indicate impairment of an investment in affiliates include a significant decrease in long-term expected commodity prices, a significant increase in expected operating or capital costs, unfavorable exploration results or technical studies, a significant decrease in reserves, a loss of significant mineral claims or a change in the development plan or strategy for the project. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. If the underlying assets are not recoverable, an impairment loss is measured and recorded based on the difference between the carrying amount of the investee and its estimated fair value which may be determined using a discounted cash flow model. 3) Accounts receivable ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ August 31, 2020 ​ ​ November 30, 2019 ​ ​ $ $ ​ GST input tax credits ​ 15 ​ 42 ​ Recoverable payments ​ — ​ 222 ​ Ambler Metals LLC ​ 106 ​ — ​ Accounts receivable ​ 121 ​ 264 ​ ​ 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 (a) Formation of Ambler Metals LLC 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 party’s subsidiaries directly owning a 50 % interest in Ambler Metals LLC. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 8 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements Ambler Metals LLC is an independently operated company jointly controlled by Trilogy and South32 through a four-member board, of which two members are currently 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 August 31, 2020, totaled $ 174 million, as well as $ 106,000 of amounts receivable per a service agreement. 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. ​ ​ ​ ​ ​ ​ in thousands of dollars ​ $ ​ Fair value ascribed to Ambler Metals LLC interest ​ 176,000 ​ Less: carrying value of contributed /eliminated assets ​ ​ Mineral properties ​ ( 30,631 ) ​ Property, plant and equipment ​ ( 618 ) ​ Elimination of Fairbanks warehouse right of use asset ​ ( 93 ) ​ Elimination of prepaid State of Alaska mining claim fees ​ ( 303 ) ​ Add: ​ ​ Reimbursement of claims staking ​ 44 ​ Demobilization costs of drills ​ 278 ​ Cancellation of Fairbanks warehouse lease liability ​ 93 ​ Fair value of mineral properties purchase option ​ 31,000 ​ Gain on derecognition ​ 175,770 ​ ​ (b) Carrying value of equity method investment During the nine-month period ended August 31, 2020, 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 $ 3.67 million for the period between February 11, 2020 (date of joint venture formation) to August 31, 2020 and $ 2.19 million for the three-month period ended August 31, 2020. The carrying value of Trilogy’s 50 % investment in Ambler Metals LLC as at August 31, 2020 is summarized on the following table. ​ ​ ​ ​ ​ in thousands of dollars ​ $ ​ February 11, 2020, fair value ascribed to Ambler Metals LLC interest ​ 176,000 ​ Share of loss on equity investment for the nine-month period ended August 31, 2020 ​ ( 1,833 ) ​ August 31, 2020, equity method investment ​ 174,167 ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 9 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements (c) The following table summarizes Ambler Metals LLC's Balance Sheet as at August 31, 2020. ​ ​ ​ ​ ​ in thousands of dollars ​ ​ August 31, 2020 ​ ​ $ ​ Current assets: Cash, deposits and prepaid expenses ​ 84,245 ​ Non - current assets: Property, equipment and mineral properties ​ 31,308 ​ Loan receivable from South32 ​ 58,205 ​ Current liabilities: Accounts payable and accrued liabilities ​ ( 1,155 ) ​ Non - current liabilities: Lease obligation ​ ( 64 ) ​ Net assets ​ 172,539 ​ (d) The following table summarizes Ambler Metals LLC's comprehensive loss from the formation of the joint venture on February 11, 2020 to the end of the reporting period on August 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ ​ Three months ended ​ ​ Nine months ended ​ ​ ​ August 31, 2020 ​ ​ August 31, 2020 ​ ​ $ ​ $ Amortization ​ 37 ​ ​ 87 ​ Mineral properties expense ​ 1,329 ​ ​ 2,409 ​ General and administrative expense ​ 1,168 ​ ​ 2,072 ​ Interest income ​ ( 345 ) ​ ​ ( 902 ) ​ Comprehensive loss ​ 2,189 ​ ​ 3,666 ​ ​ ​ ​ 5) Plant and equipment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ ​ August 31, 2020 ​ ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ ​ ​ Accumulated ​ ​ derecognized ​ ​ ​ ​ ​ Cost ​ amortization ​ note 4(a) Net ​ ​ $ $ $ $ British Columbia, Canada ​ ​ ​ ​ ​ ​ ​ ​ ​ Furniture and equipment 63 ​ ​ ( 39 ) ​ ​ — ​ ​ 24 ​ Leasehold improvements 253 ​ ​ ( 56 ) ​ ​ — ​ ​ 197 ​ Computer hardware and software 115 ​ ​ ( 114 ) ​ ​ — ​ ​ 1 ​ Alaska, USA ​ ​ ​ ​ ​ ​ ​ ​ ​ Machinery, and equipment 3,667 ​ ​ ( 3,049 ) ​ ​ ( 618 ) ​ ​ — ​ Vehicles 348 ​ ​ ( 348 ) ​ ​ — ​ ​ — ​ Computer hardware and software 4 ​ ​ ( 4 ) ​ ​ — ​ ​ — ​ ​ 4,450 ​ ​ ( 3,610 ) ​ ​ ( 618 ) ​ ​ 222 ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 10 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ November 30, 2019 ​ ​ ​ ​ Accumulated ​ ​ ​ ​ Cost ​ amortization ​ Net ​ ​ $ $ $ British Columbia, Canada ​ ​ ​ ​ ​ ​ ​ Furniture and equipment 63 ​ ​ ( 29 ) ​ ​ 34 ​ Leasehold improvements 53 ​ ​ ( 17 ) ​ ​ 36 ​ Computer hardware and software 115 ​ ​ ( 112 ) ​ ​ 3 ​ Alaska, USA ​ ​ ​ ​ ​ Machinery, and equipment 3,667 ​ ​ ( 3,026 ) ​ ​ 641 ​ Vehicles 348 ​ ​ ( 348 ) ​ ​ — ​ Computer hardware and software 4 ​ ​ ( 3 ) ​ ​ 1 ​ ​ 4,250 ​ ​ ( 3,535 ) ​ ​ 715 ​ ​ ​ 6) Mineral properties and development costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ ​ November 30, 2019 ​ ​ Assets ​ ​ August 31, 2020 ​ ​ ​ ​ ​ ​ derecognized ​ ​ ​ ​ ​ ​ ​ ​ ​ note 4(a) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ $ $ Alaska, USA ​ ​ ​ ​ Ambler (a) ​ 26,631 ​ ( 26,631 ) ​ — ​ Bornite (b) ​ 4,000 ​ ( 4,000 ) ​ — ​ ​ ​ 30,631 ​ ( 30,631 ) ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ ​ November 30, 2018 ​ ​ Acquisition costs ​ ​ November 30, 2019 ​ ​ $ $ $ Alaska, USA ​ ​ ​ ​ Ambler (a) ​ 26,587 ​ 44 ​ 26,631 ​ Bornite (b) ​ 4,000 ​ — ​ 4,000 ​ ​ ​ 30,587 ​ 44 ​ 30,631 ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 11 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements (a) Mineral properties expense The following table summarizes mineral properties expense for the noted periods. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ In thousands of dollars ​ ​ ​ Three months ended ​ ​ Three months ended ​ ​ Nine months ended ​ ​ Nine months ended ​ ​ ​ August 31, 2020 ​ ​ August 31, 2019 ​ ​ August 31, 2020 ​ ​ August 31, 2019 ​ ​ $ $ $ $ Alaska, USA ​ ​ ​ ​ ​ ​ Community ​ — ​ 164 ​ ​ 137 ​ 428 ​ Drilling ​ — ​ 4,760 ​ ​ — ​ 4,933 ​ Engineering ​ — ​ 663 ​ ​ 723 ​ 1,287 ​ Environmental ​ — ​ 153 ​ ​ 99 ​ 424 ​ Geochemistry and geophysics ​ — ​ 252 ​ ​ 12 ​ 1,010 ​ Land and permitting ​ — ​ 163 ​ ​ 134 ​ 523 ​ Project support ​ — ​ 3,062 ​ ​ 249 ​ 4,066 ​ Other income ​ — ​ ​ — ​ ​ — ​ ​ ( 1 ) ​ Wages and benefits ​ — ​ 1,734 ​ ​ 191 ​ 2,722 ​ ​ ​ — ​ 10,951 ​ ​ 1,545 ​ 15,392 ​ ​ No additional mineral properties expenses were incurred during the three-month period ended August 31, 2020, as on February 11, 2020, upon the formation of the joint venture with South 32, all mineral properties previously held by the Company were contributed to Ambler Metals LLC. The Company continues to fund the Arctic Project feasibility study, costs for which were $ 1.0 million since the formation of the joint venture on February 11, 2020. 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 nine-month period ended August 31, 2020.The table above is for comparison purposes for the respective periods. (b) Derecognition As part of the formation of the joint venture with South32 on February 11, 2020, Trilogy contributed all its assets associated with the UKMP, including the Arctic and Bornite projects. As a result, $ 0.62 million of machinery and equipment as well as $ 30.6 million of mineral properties related to the UKMP were derecognized in Trilogy on February 11, 2020. 7) Accounts payable and accrued liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ August 31, 2020 ​ ​ November 30, 2019 ​ ​ $ $ Trade accounts payable ​ 142 ​ ​ 902 ​ Accrued liabilities 101 ​ 721 ​ Accrued salaries and vacation 1,044 ​ 731 ​ Accounts payable and accrued liabilities 1,287 ​ 2,354 ​ ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 12 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements 8) Leases (a) Right-of-use asset ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ $ ​ ASC 842 transition as at December 1, 2019 ​ 681 ​ Amortization ​ ( 124 ) ​ Lease accretion ​ 39 ​ Derecognition of Fairbanks warehouse lease ​ ( 93 ) ​ ​ ​ 503 ​ ​ The pre-transition rent deposit of $ 0.11 million was transferred to the Right-of-use asset upon adoption of ASC 842 on December 1, 2019 and is included in the opening balance of $ 0.68 million. (b) Lease liabilities 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: ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ Nine months ended ​ ​ ​ August 31, 2020 ​ ​ $ ​ Operating lease costs ​ 124 ​ Variable lease costs ​ 97 ​ Total lease expense ​ 221 ​ ​ 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 August 31, 2020, the weighted-average remaining lease term was 3.9 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 nine months ended August 31, 2020 are as follows: ● Cash paid for amounts included in the measurement of lease liabilities was $ 141,784 . ● No cash was paid upon termination of a lease for office and warehouse space and reassignment to Ambler Metals LLC that resulted in the derecognition of the right-of-use asset of $ 92,974 and the operating lease liability of $ 93,006 . ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 13 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements Future minimum payments relating to the lease recognized in our balance sheet as of August 31, 2020 are as follows: ​ ​ ​ ​ ​ ​ in thousands of dollars ​ ​ August 31, 2020 Fiscal year $ 2020 48 ​ 2021 195 ​ 2022 184 ​ 2023 223 ​ 2024 122 ​ Total undiscounted lease payments 772 ​ Effect of discounting ( 173 ) ​ Present value of lease payments recognized as lease liability 599 ​ ​ ​ 9) Share capital Authorized: unlimited common shares, no par value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars, except share amounts ​ ​ ​ Number of shares ​ ​ Ascribed value ​ ​ ​ $ November 30, 2018 131,585,612 ​ ​ 164,069 ​ Exercise of options 1,725,776 ​ ​ 1,123 ​ Restricted Share Units 412,501 ​ ​ 424 ​ Deferred Share Units ​ 182,132 ​ ​ 189 ​ Exercise of warrants ​ 6,521,740 ​ ​ 12,166 ​ November 30, 2019 140,427,761 ​ ​ 177,971 ​ Exercise of options ​ 2,138,543 ​ ​ 697 ​ Restricted Share Units ​ 412,501 ​ ​ 642 ​ August 31, 2020, issued and outstanding ​ 142,978,805 ​ ​ 179,310 ​ ​ On April 30, 2012, in connection with the transaction with NovaGold Resources Inc. whereby Trilogy was spun-out to NovaGold shareholders and publicly listed, Trilogy committed to issue common shares to satisfy holders of NovaGold deferred share units (“NovaGold DSUs”) on record as of the close of business April 27, 2012. When vested, Trilogy committed to deliver one common share to the holder for every six shares of NovaGold the holder is entitled to receive, rounded down to the nearest whole number. As of August 31, 2020, 11,927 NovaGold DSUs remained outstanding representing a right to receive 1,988 common shares in Trilogy, which will settle upon certain directors retiring from NovaGold’s board. (a) Stock options During the nine-month period ended August 31, 2020, the Company granted 4,095,000 options (2019 - 2,527,500 options) at a weighted-average exercise price of CAD$ 2.80 (2019 - CAD$ 2.96 ) 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 $ 0.90 (2019 - $ 1.08 ). For the nine-month period ended August 31, 2020, Trilogy recognized a stock-based compensation charge of $ 2.60 million (2019 – $ 2.23 million) for options granted to directors, employees and service providers, net of estimated forfeitures. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 14 ​ Table of contents 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 nine-month period ended August 31, 2020 are as provided below. ​ ​ ​ ​ ​ August 31, 2020 Risk-free interest rates 0.97 % Exercise price CAD$ 2.74 Expected life 3 years Expected volatility 64.3 % Expected dividends Nil ​ As of August 31, 2020, there were 2,373,337 non-vested options outstanding with a weighted average exercise price of $ 2.15 ; the non-vested stock option expense not yet recognized was $ 1.13 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 nine-month period ended August 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ August 31, 2020 ​ ​ ​ ​ ​ ​ Weighted average ​ ​ ​ ​ ​ ​ exercise price ​ ​ Number of options $ Balance – beginning of the period 9,205,600 ​ ​ 1.11 ​ Granted 4,095,000 ​ ​ 2.14 ​ Exercised ( 2,924,221 ) ​ ​ 0.56 ​ Forfeited ( 710,000 ) ​ ​ 2.26 ​ Balance – end of period 9,666,379 ​ ​ 1.63 ​ ​ The following table summarizes information about the stock options outstanding at August 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ ​ Exercisable ​ ​ Unvested ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Number of ​ ​ Weighted ​ ​ average ​ ​ Number of ​ ​ average ​ ​ Number of ​ ​ outstanding ​ ​ average years ​ ​ exercise price ​ ​ exercisable ​ ​ exercise price ​ ​ unvested ​ Range of price options to expiry $ options $ options $ 0.34 to $ 0.50 1,304,879 ​ 0.24 ​ ​ 0.36 ​ ​ 1,304,879 ​ ​ 0.36 ​ ​ — ​ $ 0.51 to $ 1.00 1,765,000 ​ 1.85 ​ ​ 0.68 ​ ​ 1,765,000 ​ ​ 0.68 ​ ​ — ​ $ 1.01 to $ 1.50 129,000 ​ 2.50 ​ ​ 1.27 ​ ​ 129,000 ​ ​ 1.27 ​ ​ — ​ $ 1.51 to $ 2.00 2,685,000 ​ 4.55 ​ ​ 1.94 ​ ​ 1,448,333 ​ ​ 1.89 ​ ​ 1,236,667 ​ $ 2.01 to $ 2.50 3,695,000 ​ 3.84 ​ ​ 2.29 ​ ​ 2,558,330 ​ ​ 2.28 ​ ​ 1,136,670 ​ $ 2.51 to $ 2.61 ​ 87,500 ​ ​ 3.61 ​ ​ 2.58 ​ ​ 87,500 ​ ​ 2.58 ​ ​ — ​ ​ ​ 9,666,379 ​ ​ 3.17 ​ ​ 1.63 ​ ​ 7,293,042 ​ ​ 2.77 ​ ​ 2,373,337 ​ ​ The aggregate intrinsic value of vested share options (the market value less the exercise price) at August 31, 2020 was $ 5.2 million (2019 - $ 10.6 million) and the aggregate intrinsic value of exercised options for the nine months ended August 31, 2020 was $ 4.5 million (2019 - $ 0.50 million). ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 15 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements (b) Restricted Share Units and Deferred Share Units 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 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 nine-month period ended August 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of RSUs Number of DSUs Balance – beginning of the period ​ 212,501 ​ 1,137,488 ​ Granted 200,000 ​ 66,682 ​ Vested/paid ( 412,501 ) ​ — ​ Balance – end of period — ​ 1,204,170 ​ ​ For the nine-month period ended August 31, 2020, Trilogy recognized a stock-based compensation charge of $ 0.43 million (2019- $ 0.78 million), net of estimated forfeitures. The 200,000 RSUs granted and fully vested during the period were settled on April 16, 2020 through the issuance of 200,000 common shares. The 225,000 RSUs granted for the annual incentive payout for the 2018 fiscal year vested half on the grant date and half on the first anniversary of the grant date. RSUs vesting in December 2019 were settled on December 17, 2019 through the issuance of 212,501 common shares. 10) 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. (a) Currency 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 August 31, 2020 is limited to the Canadian dollar balances consisting of cash of CDN$ 1,462,000 , accounts receivable of CDN$ 20,000 and accounts payable of CDN$ 1,500,000 . 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 $ 5,000 . (b) Credit risk 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. ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 16 ​ Table of contents Trilogy Metals Inc. Notes to the Interim Consolidated Financial Statements 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. (c) Liquidity risk 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 August 31, 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in thousands of dollars ​ Total < 1 Year 1–2 Years 2–5 Years Thereafter ​ ​ ​ $ ​ ​ $ ​ ​ $ ​ ​ $ ​ ​ $ ​ Accounts payable and accrued liabilities 1,287 ​ 1,287 ​ — ​ ​ — ​ ​ — ​ ​ 1,287 ​ 1,287 ​ — ​ ​ — ​ ​ — ​ ​ (d) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk with respect to interest earned on cash and cash equivalents. Based on balances as at August 31, 2020, a 1 % change in interest rates would result in a change in net loss of $ 0.1 million, assuming all other variables remain constant. 11) Commitment The Company has commitments with respect to an office lease requiring future minimum lease payments as summarized in note 8(b) above. ​ ​ ​ ​ ​ ​ ​ ​ ​ Trilogy Metals Inc. For the Quarter Ended August 31, 2020 17 ​ Table of contents