IBCADVANCEDALLOYSCORP.
MANAGEMENT’SDISCUSSIONANDANALYSIS
THREEMONTHSENDEDSEPTEMBER30,2019
FISCALFIRSTQUARTEROF2020
401ARVINROADFRANKLIN,IN46131
TELEPHONE:317-738-2558
EMAIL:[email protected]
IBCAdvancedAlloysCorp.Management’sDiscussionandAnalysisYearEndedJune30,2019
TableofContents
ExecutiveSummary..................................................................................................................................................2
OurBusiness................................................................................................................................................................4
RecentCorporateDevelopments,BusinessInitiatives,andSubsequentEvents...........................4
ManufacturingOperations.....................................................................................................................................5
CopperAlloys..........................................................................................................................................................6EngineeredMaterials...........................................................................................................................................7
FinancialResultsandOutlook..............................................................................................................................8
CommodityPricingforCopper........................................................................................................................8ResultsofOperations...........................................................................................................................................9ChangesinFinancialCondition....................................................................................................................11SelectedQuarterlyInformation...................................................................................................................12LiquidityandCapitalResources..................................................................................................................12Commitments.......................................................................................................................................................14RelatedPartyTransactions............................................................................................................................14FinancialInstrumentsandOtherInstruments......................................................................................14Non-IFRSMeasures...........................................................................................................................................16
ResearchInitiatives...............................................................................................................................................18
BusinessRisks..........................................................................................................................................................18
LegalMatters............................................................................................................................................................19
EnvironmentalandOccupationalSafetyIssues........................................................................................21
Shareholders’Equity.............................................................................................................................................22
PrivatePlacement..............................................................................................................................................22ShareIssuance.....................................................................................................................................................23OutstandingShareData...................................................................................................................................23
IBCAdvancedAlloysCorp.Management’sDiscussionandAnalysisPeriodEndedSeptember30,2019
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Thefollowingismanagement’sdiscussionandanalysis(“MD&A”)ofIBCAdvancedAlloysCorp.,anditssubsidiaries,preparedasofNovember27,2019.ThisMD&AshouldbereadtogetherwiththeauditedconsolidatedfinancialstatementsandrelatednotesfortheyearendedJune30,2019.Financialamounts,otherthanamountspershareorperpound,arepresentedinthousandsofUnitedStatesdollars(“$”)unlessindicatedotherwise.Canadiandollaramountsaredenotedby“C$”.Theterms“IBC”,“we”,“us”and“our”refertoIBCAdvancedAlloysCorp.anditssubsidiaries,unlessthecontextotherwiserequires.
ThisMD&Acontains“forward-lookinginformation”or“forward-lookingstatements”withinthemeaningofapplicablesecuritieslegislation,concerningfuturefinancialoroperatingperformanceofIBCanditsbusinessandoperations.Forward-lookingstatementsconsistofstatementsthatarenotpurelyhistorical,includinganystatementsregardingbeliefs,plans,expectationsorintentionsregardingthefuture.Often,butnotalways,forward-lookingstatementscanbeidentifiedbytheuseofwordssuchas“plans”,“expects”,“budget”,“scheduled”,“estimates”,“forecasts”,“intends”,“anticipates”,or“believes”orvariations(includingnegativeandgrammaticalvariations)ofsuchwordsandphrasesorstatementsthatcertainactions,eventsorresults“may”,“could”,“would”,“should”,“might”or“will”betaken,occurorbeachieved.Noassurancecanbegiventhatanyoftheeventsanticipatedbytheforward-lookingstatementswilloccuror,iftheydooccur,whatbenefitswewillobtainfromthem.Theseforward-lookingstatementsreflectmanagement’scurrentviewsandarebasedoncertainassumptionsandareeffectiveonlyasofthedateofthisMD&A.Theseassumptions,whichincludemanagement’scurrentexpectations,estimatesandassumptionsaboutcertainprojectsandthemarketsweoperatein,theglobaleconomicenvironment,interestrates,exchangeratesand,ourbusinessstrategy,plans,outlookandshareholdervalue,projections,targetsandexpectationsandourabilitytomanageourassetsandoperatingcosts,mayprovetobeincorrect.
Forward-lookingstatementsaresubjecttoknownandunknownrisks,uncertaintiesandotherfactorsthatmaycauseouractualresults,levelofactivity,performanceorachievementstobemateriallydifferentfromthoseexpressedorimpliedbysuchforward-lookingstatements,including:ourestimatesregardingcapitalrequirements;futureproduction,futurecashandtotalcostsofproductionforourmanufacturingoperations;ourexpectationswithrespecttotransactionswiththirdparties;changesingeneraleconomicconditions,thefinancialmarketsandthedemandofourproducts;changesin,andtheeffectsof,thelaws,regulationsandgovernmentpoliciesaffectingoperations,particularlylaws,regulationsandpolicies;anduncertaintiesinthemarketpriceformineralsandmetals,suchascopperandberyllium,andexchangerates.Althoughwehaveattemptedtoidentifyfactorsthatwouldcauseactualactions,eventsorresultstodiffermateriallyfromthosedisclosedintheforward-looking
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statementsorinformation,theremaybeotherfactorsthatcauseactualresults,performances,achievementsoreventsnottobeanticipated,estimatedorintended.Otherfactorsthatcouldcauseactualresultstodiffermateriallyinclude,butarenotlimitedto,thosesetforthinourmostrecentAnnualInformationFormunder“RiskFactors”.Also,manyofthefactorsarebeyondourcontrol.Accordingly,readersshouldnotplaceunduerelianceonforward-lookingstatementsorinformation.Weundertakenoobligationtoreissueorupdateforward-lookingstatementsorinformationasaresultofnewinformationoreventsafterthedatehereofexceptasmayberequiredbyapplicablesecuritieslaws.Allforward-lookinginformationandstatementsmadeinthisMD&Aarequalifiedbythiscautionarystatement.
CertaininformationinthisMD&Amaybeconsidereda“financialoutlook”withinthemeaningofapplicablesecuritieslegislation.AnyfinancialoutlooksetoutinthisMD&Aisbasedonanumberofsignificantassumptions.ThepurposeofthisfinancialoutlookistoprovidereaderswithdisclosureregardingtheCompany’sreasonableexpectationsastotheanticipatedresultsofitsproposedbusinessactivitiesfortheperiodsindicated.Readersarecautionedthatthefinancialoutlookmaynotbeappropriateforotherpurposes.
TheCompany’sfinancialstatementsfortheperiodendedSeptember30,2019havebeenpreparedinaccordancewithIAS32–InterimFinancialReportingusingaccountingpoliciesconsistentwithInternationalFinancialReportingStandards(“IFRS”),asissuedbytheInternationalAccountingStandardsBoard(“IASB”)usingaccountingpoliciesconsistentwithIFRSasissuedbytheIASBandinterpretationsoftheInternationalFinancialReportingInterpretationsCommittee.AdditionalinformationrelatingtousisavailableforviewonSEDARatwww.sedar.com.
EXECUTIVESUMMARY
Exceptasnoted,allfinancialamountsaredeterminedinaccordancewithIFRS.
• HigherYoYSales:Wegenerated$5.0millioninconsolidatedsalesinthequarterendedSeptember30,2019,whichwasa5.6%increaseoversalesof$4.7millionintheprior-yearperiodanda1.8%sequentialincreaseoversalesof$4.9millioninthequarterendedJune30,2019.
• LossNarrows:Werecordedacomprehensiveloss,netoftax,of$550,000inthequarter,or($0.01)pershare.Thatcomparedfavorablytoalossof$767,000,or($0.02)inprior-yearperiod,andtoalossof$1.6millioninthequarterendedJune30,2019.
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• AdjustedEBITDA1:Adjustedearningsbeforeinterest,taxes,depreciation,and
amortization(“AdjustedEBITDA”)forthequarterwas$127,000,whichcomparedfavorablytoAdjustedEBITDAof($114,000)fortheprior-yearperiodandAdjustedEBITDAof($1.0million)inthequarterendedJune30,3019.
• HigherCopperAlloysSalesLiftsDivisiontoProfitability:OurCopperAlloysdivisionswungtonetprofitabilityintheCompany’sfiscalfirstquarterof2020,postingdivisionalincomeof$62,000.Thatcomparedtoalossof$260,000intheprior-yearperiodandtoalossof$582,000inthequarterendedJune30,3019.
o Copperdivisionsalesinthequarterof$3.9millionwere11.8%higherthansalesof$3.5millioninfiscalQ1of2019.FiscalQ12020salesrepresentedthedivision’shighestsalesperformanceofthepastfivequarters.
o CopperAlloys’operatingincome1inthequarterof$149,000representeda154%increaseoveroperatingincomeof$59,000intheprior-yearperiod,andcontrastedfavorablywithanoperatinglossof$510,000inthequarterendedJune30,2019.
o AdjustedEDITDA1forthedivisionwas$302,000inthequarter,a58%increaseoverAdjustedEBITDA1of$191,000intheprior-yearperiod.ThedivisionpostedanegativeAdjustedEBITDAof$366,000inthequarterendedJune30,2019.
o Demandforcopperalloyproductshascontinuedtoreboundsincetheindustry-widereductionindemandincopperalloyproductsexperiencedincalendarQ4of2018.Growthforthedivisionhasbeenacceleratinginpartduetoitsabilitytoproducemorevalue-addedproducts,whichwasmadepossiblebyseveralstrategiccapitalequipmentupgradesmadein2019.
• EngineeredMaterialsDivisionResults:InourEngineeredMaterialsdivision,salesinthequarterof$1.1million,comparedtosalesintheprior-yearperiodof$1.2million.Thechangewasduelargelytolower-than-normaldemandfor
1 Wereportnon-IFRSmeasuressuchas"AdjustedEBITDA"and“OperatingIncome”.Pleaseseeinformationonthisandothernon-IFRSmeasuresinthe"Non-IFRSMeasures"sectionofthisMD&A
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beryllium-aluminum(“BeAl”)productsbysemiconductorequipmentmanufacturers,whichfollowedseveralconsecutiverecord-breakingyearsofsalestothatsector.DemandforBeAlproductsusedincommercialapplicationsisstrengthening,asunderscoredbytheCompany’ssigninginOctober2019ofatwo-yearsupplyagreementwithaleadingglobalmanufacturerofsemiconductorandelectronicsassemblyequipment.Thedivisionpostedanoperatinglossof$222,000whichcomparedfavorablywithanoperatinglossontheprioryearperiodof$294,000andanoperatinglossof$574,000inthequarterendedJune30,2019.
• HigherDemandExpectedforBeAlAlloyProductsinDefenseMarkets:DemandforBeAlproductsusedindefenseapplicationsremainedsteadyincalendaryear2019butisexpectedtostrengthenasratesofproductionfordefenseprogramssuchastheF-35LightningIIaircraftbegintoacceleratebeyondlowratesofinitialproduction.Forexample,accordingtoourcustomerLockheed-Martin,theannualrateofproductionoftheF-35aircraftisexpectedtonearlydoubleby2022from2018productionlevels.Wearecontinuingtopursueadditionalcontractsforhigh-performanceBeAlproductsinotherdefense-sectorplatforms.
• RecyclingofScrapBerylliumMetal:OurEngineeredMaterialsdivisioncontinuestorecycleBeAlscrapmaterialintousefulfeedstockforbothaerospaceandcommercialBeAlcastingproducts,whichhelpstoreduceourcostofcostofgoodssoldandcapturehighermargins.
OURBUSINESS
Weareprimarilyengagedindevelopingandmanufacturingadvancedalloys,suchasberyllium-aluminumalloysandspecialtycopperalloys,foravarietyofcustomersinthedefenseandnon-defensesectors,includingthoseinaerospace,automotive,marinedefense,electronics,industrialequipment,oilandgas,amongothers.WithourheadquartersinFranklin,Indiana,weoperatefourplantsintheUnitedStates(“U.S.”)thatmanufacture,heat-treat,machine,ormarketcopper-beryllium,beryllium-aluminum,copper-basedmasteralloys,andsimilarspecialtyalloyproductsincludingberyllium-aluminumcastings.
Ourmanufacturingoperationscurrentlyemploy67peopleandcomprisetwodivisions:CopperAlloysandEngineeredMaterials.
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• CopperAlloysmanufacturesanddistributesawidevarietyofcopperalloysascastingsandforgings:berylliumcopper;chromecopper;oxygen-freehighconductivitycopperandaluminumbronzeasplate,block,bar,rings;andspecialtycopperalloyforgings.Theindustriesweservewiththeseproductsincludetheindustrialwelding,oilandgas,plasticmold,metalmelting,marinedefense,electronicandindustrialequipmentmarkets.
• EngineeredMaterialsmanufacturesandsupplieshigh-performance,precision-castberyllium-aluminumcomponentstotheaerospaceandhigh-techmanufacturingsectors.
Atpresent,weareengagedinresearchanddevelopmentofscandium-containingalloysandtheirpotentialapplications,andwearemonitoringdevelopmentsrelatedtothepotentialuseofberylliumoxide(“BeO”)inenhancednuclearfuels,whichhasbeenthesubjectofpreviousresearchbyus.WewereformedbyanamalgamationunderthelawsofBritishColumbiaonNovember23,2007andourcommonsharesarelistedontheTSXVentureExchange(the“TSX-V”)underthesymbol“IB”andontheOTCQBmarketunder“IAALF”.
RECENTCORPORATEDEVELOPMENTS,BUSINESSINITIATIVES,ANDSUBSEQUENTEVENTS
OnNovember25,2019,weannouncedanon-brokeredprivateplacementtoissueupto17.1millioncommonsharesatapriceofC$0.117percommonshareforgrossproceedsofuptoC$2.0million.Thereisnominimumofferingamount.WeexpectthattheprivateplacementwillcloseonorsoonafterNovember29,2019.Theprivateplacementissubjecttothecompletionofformaldocumentation,receiptofallnecessaryregulatoryapprovals,includingtheapprovaloftheTSX-V,andothercustomaryconditions.
MANUFACTURINGOPERATIONS
WecurrentlyhavefourmanufacturingoperationsintheU.S.that,intotal,employatotalof67people.ThesefacilitiesarelocatedinFranklin,IN;Royersford,PA;Wilmington,MA;andNewMadrid,MO.MostofourmanagementandadministrationarebasedattheFranklin,INfacility.
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COPPERALLOYS
Wemanufactureanddistributeawidevarietyofcopperalloysascastingsandforgings,includingberylliumcopper,chromecopper,oxygen-freehighconductivitycopper,andaluminumbronzeasplate,block,bar,ringsandspecialtycopperalloyforgingsforvariousmarketsandapplications.Weselldirectlytoendusersandservevariousmarketsthroughanetworkofestablisheddealersanddistributors.TheCopperAlloys’Division’soperationsarebasedinFranklin,IN,wherewemaintainforging(hammer,pressandringrolling),heat-treating,andmachiningoperations.WecastbilletsatplantsinRoyersford,PAandNewMadrid,MO.TheFranklinplantsitson4.8hectares(12.0acres)oflandthathasconsiderableroomforexpansionshouldeconomicconditionsandbusinessplanscallforsuchexpansion.
Wesourcecopperalloysascastbillet,slab,oringotfrommillsinNorthAmerica,Europe,andAsia,andweconverttheseintousableindustrialproductsservingtheindustrialwelding,oilandgas,plasticmold,metalmelting,marinedefense,electronic,andindustrialequipmentmarkets.WealsoprovidetoolingcomponentsfortheNorthAmericanautomotiveindustry,theEuropeanandNorthAmericanconsumerplastictoolingproducers,theglobaloilandgasserviceindustry,theprimeNorthAmericansubmarineandaircraftcarrierproducersandrepairfacilitiesincludingtheU.S.Navy,electronicsindustries,andgeneralequipmentmanufacturers.
WeproducematerialattwoIBC-ownedfoundriesandbuyotherbilletandslabfromindependentthird-partyfoundriesandmills.Wehaveexpertiseinmeltingandcastingberyllium-copperandotherberyllium-containingalloys.Ourcastingoperationsareaprimaryproducer/supplierofberylliumcoppercastingandmasteralloyingotproductsinNorthAmericaandmarketsaroundtheworld.Weoffercustomersafullrangeofmanufacturingandsupportservices,includingcastingandmasteralloyproducts,castandforgedbilletproducts,semi-continuouscastinputbillets,andwroughtproducts.Wealsomanufactureberylliumalloysutilizingcertifiedberyllium-coppermasteralloy.
OurRoyersford,PAfacilityhasthreefurnacesthathavebeenadaptedtomeetthespecializedrequirementsofcopperalloymanufacturing.Wehavestrongtechnicalandmanufacturingengineeringresourcesinthehighlyspecializedcopperalloyindustry,includingintheproductionofberylliumcopperalloys.Thisgivesusthecapabilityofmanufacturinglarge21-inchdiametercopperalloybilletsweighinguptotwotons.
OurNewMadrid,MOplantislocatedona2.4-hectare(6.0acres)sitethatis265kilometers(165miles)southofSt.Louis,MO.Ithastwofurnacesandiscapableofproducingbilletsin
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arangeofsizesandcompositions.Becausethisfacilityiscurrentlyunderutilized,thereisroomforsignificantexpansionofplantoperationsatthislocationshouldeconomicconditionsandbusinessplanscallforsuchexpansion.
ENGINEEREDMATERIALS
OurEngineeredMaterialsDivisionsupplieshigh-performanceberyllium-aluminumcomponentstodefense,aerospace,high-techmanufacturing,andothersectors.ItcurrentlymanufacturestheBeralcast®familyofmetalmatricesthatareusedincommercialanddefenseapplicationsthatrequirecomplex,lightweight,andhigh-stiffnessparts.Thedivisionhasadditional,higher-performanceproductsindevelopment.Usingourproprietarymanufacturingtechniques,ourEMCDivision’sobjectiveistomakeprecision-castberyllium-aluminumcomponentsmoreaccessibleandcost-effectiveforawiderangeofindustriesandapplications.
Ingeneral,Beralcast®alloysserveasahigher-performanceorlower-costreplacementmaterialsforcastaluminum,magnesium,titanium,metalmatrixcomposites,non-metalliccomposites,andpureberylliumorpowdermetallurgyberyllium-aluminum.Someoftheirvariedapplicationsincludeautomotivebrakingandstructuralcomponentsandaerospaceandsatellitesystemcomponents.
TheprincipalBeralcast®metalmatrixismorethanthreetimesstifferthanaluminum,with22%lessweight,anditcanbeprecisioncasttobothsimpleandcomplexconfigurations.Thismaterialisverylightweight,canbeprecisioncastforthree-dimensionalstability,anddeliversahighmodulusofelasticity.Assuch,Beralcast®isideallysuitedforcertaindemandingsemiconductormanufacturingequipment,computercomponents,andothercommercialandaerospaceapplications.OurabilitytocastBeralcast®productsinanear-netshapeallowsformanufacturingcostefficiencies.
Binaryberyllium-aluminumcompositesweredevelopedbyaU.S.corporation,whichwasoriginallyametallurgicallaboratoryaffiliatedwiththeMassachusettsInstituteofTechnology(MIT),incooperationwithLockheedMartin.Weowntheintellectualpropertyrelatingtothemoreadvanceddevelopmentofthistechnology,whichisaproprietarycastablemetalmatrixcompositeberyllium-aluminumalloynowmanufacturedasBeralcast®.Webelievethatacompetitorhassoughttodevelopanalternativecastberyllium-aluminumproduct,which,ifcommerciallyviable,wouldbeadirectcompetitortoBeralcast®.
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FINANCIALRESULTSANDOUTLOOK
COMMODITYPRICINGFORCOPPER
Weaimtopassthecostofcopperthroughtoourcustomers,andwedonotholdlargeinventoriesofcopper.Accordingly,profitabilityshouldnotbeaffectedbythepriceofcopperinthelongterm,excepttotheextentthathighcopperpricesdiscourageconsumptionorthatcompetitorslowertheirmarginstoobtainbusiness.Intheshortterm,pricefluctuationscanhaveabearingonourprofitabilityaswerealizegainsorlossesoninventories.Sincecopperisasignificantcomponentofproductsthatwesell,thepriceofcopperdoesmateriallyaffectrevenues.
Recentindicativecopperpricesperpoundareshownbelow:
Source:COMEX
2018 2017
September30 $2.81 $2.95December31 $2.65 $3.35
2019 2018
June30 $2.73 $2.99September30 $2.57 $2.80
2018 2017
September30 $2.80 $2.95December31 $2.65 $3.35
2019 2018
June30 $2.73 $2.99September30 $2.57 $2.80
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RESULTSOFOPERATIONS
Weincurredaloss(netoftax)of$550,000forthethreemonthsendedSeptember30,2019,comparedtoaloss(netoftax)of$767,000inthecomparative2018period.Asummaryofresultsofoperationstooperatingincome(loss)follows:
Three Months Ended Three Months EndedSeptember 30, 2019 September 30, 2018
Copper Eng. Corp. Consol- Copper Eng. Corp. Consol-Alloys Mat. idated Alloys Mat. idated
$000s $000s $000s $000s $000s $000s $000s $000s
Revenue 3,867 1,089 - 4,955 3,460 1,233 - 4,693
Cost of revenueMaterials 1,945 194 - 2,138 1,988 73 - 2,061 Labor 597 301 - 899 534 367 - 901 Subcontract 111 78 - 189 74 78 - 152 Overhead 556 248 - 804 418 416 - 834 Depreciation 148 204 - 352 96 100 - 196 Change infinished goods (3) 81 - 78 (150) 232 - 82
3,354 1,107 - 4,460 2,960 1,266 - 4,226
Gross (loss) profit 513 (18) - 495 500 (33) - 467
Gross margin 13% (2%) 10% 14% (3%) - 10%
SG&A expenses 364 204 252 820 440 262 255 957
149 (222) (252) (325) 60 (295) (255) (490)
62 (258) (355) (550) (26) (301) (440) (767) Adjusted EBITDA:Add back (deduct):
Interest expense 86 39 158 283 79 8 195 283 Depreciation, amortization, & impairment 150 206 - 356 97 100 - 197 Stock-based compensation expense (non-cash) 5 3 30 38 41 27 105 173
Adjusted EBITDA 302 (10) (166) 127 191 (165) (140) (114)
Total comprehensive income (loss)
Operating income (loss) before other items
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SEGMENTANALYSIS:FISCALQ1YEAR2020
FactorsaffectingourfinancialperformanceinthequarterendedSeptember30,2020:
• HigherCopperAlloysSalesLiftsDivisiontoProfitability:OurCopperAlloysdivisionswungtonetprofitabilityintheCompany’sfiscalfirstquarterof2020,postingdivisionalincomeof$62,000.Thatcomparedtoalossof$26,000intheprior-yearperiodandtoalossof$582,000inthequarterendedJune30,3019.
• o Copperdivisionsalesinthequarterof$3.9millionwere11.8%higherthan
salesof$3.5millioninfiscalQ1of2019.FiscalQ12020salesrepresentedthedivision’shighestsalesperformanceofthepastfivequarters.
o CopperAlloys’operatingincome1inthequarterof$149,000representeda154%increaseoveroperatingincomeof$59,000intheprior-yearperiod,andcontrastedfavorablywithanoperatinglossof$510,000inthequarterendedJune30,2019.
o AdjustedEDITDA1forthedivisionwas$302,000inthequarter,a58%increaseoverAdjustedEBITDA1of$191,000intheprior-yearperiod.ThedivisionpostedanegativeAdjustedEBITDAof$366,000inthequarterendedJune30,2019.
o Demandforcopperalloyproductshascontinuedtoreboundsincetheindustry-widereductionindemandincopperalloyproductsthatwasexperiencedincalendarQ4of2018.Growthforthedivisionhasbeenacceleratedinpartduetoitsabilitytoproducemorevalue-addedproductsasaresultofseveralstrategiccapitalequipmentupgradesmadein2019.
• EngineeredMaterialsDivisionResults:InourEngineeredMaterialsdivision,salesinthequarterof$1.1millioncomparedtosalesintheprior-yearperiodof$1.2million.Thechangewasduelargelytolower-than-normaldemandforBeAlproductsbysemiconductorequipmentmanufacturers,whichfollowedseveralconsecutiverecord-breakingyearsofsalestothatsector.DemandforBeAlproductsusedincommercialapplicationsisstrengthening,asunderscoredbytheCompany’ssigninginOctober2019ofatwo-yearsupplyagreementwithaleadingglobalmanufacturerofsemiconductorandelectronicsassemblyequipment.Thedivisionpostedanoperatinglossof$222,000whichcomparedfavorablywithanoperating
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lossontheprioryearperiodof$294,000andanoperatinglossof$574,000inthequarterendedJune30,2019.
• HigherDemandExpectedforBeAlAlloyProductsinDefenseMarkets:DemandforBeAlproductsusedindefenseapplicationsremainedsteadyincalendaryear2019butisexpectedtostrengthenasratesofproductionfordefenseprogramssuchastheF-35LightningIIaircraftbegintoacceleratebeyondlowratesofinitialproduction.Forexample,accordingtoourcustomerLockheed-Martin,theannualrateofproductionoftheF-35aircraftisexpectedtonearlydoubleby2022from2018productionlevels.Wearecontinuingtopursueadditionalcontractsforhigh-performanceBeAlproductsinotherdefense-sectorplatforms.
• RecyclingofScrapBerylliumMetal:OurEngineeredMaterialsdivisioncontinuestorecycleBeAlscrapmaterialintousefulfeedstockforbothaerospaceandcommercialBeAlcastingproducts,whichhelpstoreduceourcostofcostofgoodssoldandcapturehighermargins.
SellingGeneralandAdministrativeExpenses
SG&Aexpenses14%lowerin2020whencomparedtothesameperiodin2019duetoreductioninheadcount,consultingfees,andeducationalfees.
OtherIncome(Expense)
Themaincomponentofotherincome(expense)isinterestexpense.
CHANGESINFINANCIALCONDITION
ChangesinourfinancialconditionsinceJune30,2019arerelatedtooperationsinthenormalcourseofbusiness.
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SELECTEDQUARTERLYINFORMATION
Duringthemostrecenteightquarters,wehavenotincurredanylossfromdiscontinuedoperations.
LIQUIDITYANDCAPITALRESOURCES
AtSeptember30,2019,wehadworkingcapitaldeficiencyof$1.3millionincludingcashandshort-terminvestmentsof$597,000ascomparedtoworkingcapitaldeficiencyof$1.3millionincludingcashandshort-terminvestmentsof$720,000atJune30,2019.Factorsaffectingliquidityinclude:Wehavenotyetachievedsustainedprofitableoperations.
• OnNovember25,2019weannouncedanon-brokeredprivateplacementbasistoraisegrossproceedsofuptoC$2.0million(approximately$1.5million)forworkingcapitalandgeneralcorporatepurposes.Therecanbenoassurancehoweverthatthisprivateplacementwillcloseasplannedoratall.
• UnderthetermsofourloanagreementwithLindPartners,wemustmakemonthlypaymentsofC$45,000.Lindhastooptiontorequiretheissuanceofcommonsharesinlieuofcash.
• WesuccessfullyrenewedourcreditfacilitywithBMOHarrisinOctober,2019,butmayhavetoseekfurtherfinancing.
QuarterEnded Revenue Income(loss) Basicandfortheperiod dilutedlossper
(netoftax) share 1
$000 $000 $
December31,2017 4,728 (402) (0.01)March31,2018 5,149 62 0.00June30,2018 5,224 240 0.01September30,2018 4,693 (766) (0.02)December31,2018 3,904 (1,088) (0.03)March31,2019 5,202 (639) (0.02)June30,2019 4,869 (1,552) (0.04)September30,2019 4,955 (550) (0.01)
1 Thesumofquarterlylosspersharemaynotaddtoyear-to-datetotalsduetorounding
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• Currentliabilitiesincludeanaccrualof$1.4millionrelatedtothearbitrationawarddiscussedinLegalMattersabove.Weareappealingtheaward.
• TheCompanymustrepaynotespayable:principalandinterestof$50,000aredueFebruary4,2020,principalandinterestof$101,000aredueMarch27,2020,andprincipalandinterestof$51,000aredueFebruary28,2020.ThesenotesaresecuredbyaccountsreceivableandinventoryofourEngineeredMaterialsDivision.
• Wehavetheoptionofsettlinginterestonconvertibledebenturesthroughtheissuanceofcommonshares.Infiscal2019,doingsobenefitedourcashflowbyC$341,000.
• Resourceprices,particularlyforcopper,haveabearingonourmanufacturingcostsandsellingprices,ascopperisalargecomponentofmostofitsproducts.
• Wemaybeobligedtoincurmaterialexpendituresonpurchasesofandrepairstoproperty,plantandequipmenttomaintainproductivecapacityortoservicecustomers.
• Wemanageliquidityriskassociatedwithtradereceivablesbytradingwithrecognizedcreditworthythirdpartiesandinsuringtradereceivables.AllrevenueisconductedinU.S.dollars.Inaddition,receivablebalancesaremonitoredonanon-goingbasiswiththeresultthattheCompany’sexposuretoimpairedreceivablesisnotsignificant.
• WealsomanageliquidityriskbyinvestingitscashonlyinobligationsofCanadaortheU.S.ortheirrespectiveagencies,obligationsofenterprisessponsoredbyanyoftheabovegovernments;bankers’acceptancespurchasedinthesecondarymarketandhavingreceivedthehighestcreditratingfromarecognizedratingagencyinCanadaortheU.S.,withatermoflessthan180days;andbanktermdepositsandbearerdepositnotes,withatermoflessthan180days.
• Wearecontractuallycommittedtopurchase,atJune30,2019prices,anaggregateof$1.8millioninrawmaterialspriortoJune30,2020.
• Wehaveenteredintocommercialpropertyleases.Theseleaseshaveanaverageremaininglifeof1.7years,withnorenewaloptions.Thefutureminimumrentalpaymentsundernon-cancellableoperatingleasesare$573,000forfiscal2020and$408,000forsubsequentfiscalyears.
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Wemayneedtoraiseadditionalfundsintheshort-termtofinanceworkingcapitalandadditionalgrowthinitiatives.Wemaybeabletogenerateadditionalcashthroughshort-termdebtorbyissuingshares,buttherecanbenoassurancethatwewillbesuccessfulinobtainingsuchfunds.
COMMITMENTS
AtSeptember30,2019,wehadcommitmentstoleasepremisesoverthenextthreeyearswithanaggregatepaymentobligationof$870,000.Wearealsocommittedtorawmaterialspurchasesovernextyearaggregating$3.6million.
RELATEDPARTYTRANSACTIONS
Exceptasdescribedbelow,wedonothaveanycontractualrelationshipswithdirectorsorofficersotherthanemploymentcontractsintheordinarycourseofbusiness.Theemploymentcontractsarenotfinanciallymaterialtoitsbusiness.
Non-executivedirectorsarepaid$36,000peryearbutthedirectorshaveagreedtoreceivethebulkofthisamountincommonshares.Infiscal2020,weissued406,228commonsharesforservicestothenon-executivedirectorsandpaid$13,000incash.Asoftheendofthefirstquarteroffiscal2020,non-executivedirectors’compensationof$39,000wasnotpaidbuthasbeenaccruedorrecordedinpayables.
FINANCIALINSTRUMENTSANDOTHERINSTRUMENTS
Ouractivitiesexposeustoavarietyoffinancialrisks,includingforeignexchangerisk,interestraterisk,commoditypricerisk,andcreditrisk.Wedonothaveapracticeoftradingderivatives,andweattempttoemployanaturalhedgeforforeigncurrencybyholdingfundsinthecurrencyinwhichitexpectstospendthemonies.
ForeignExchangeRisk
WhilethemajorityofouradministrativeandmanufacturingactivitiesoccurintheU.S.,weincursomecorporateadministrationcostsinCanadaandraiseequityproceedsinCanadiandollars.WemanageexchangeriskonequitycapitalbyconvertingexpectedU.S.expenditurestoU.S.dollarsatthetimethemoneyisraised.
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InterestRateRisk
OurinterestrateriskmainlyarisesfrominterestexpenseontheBMOHarrisBanklineofcredit.Thetermloanhasafixedinterestrateandisnotexposedtoshort-terminterestraterisk.
CommodityPriceRisk
Ourprofitabilityandlong-termviabilitydepend,insomemeasure,onthemarketpricesofcopper,aluminum,andberyllium.Thepricesformetalscanbevolatileandareaffectedbyfactorsbeyondourcontrol,includingthefollowing:globalorregionalconsumptionpatterns;thesupplyof,anddemandfor,thesemetals;speculativeactivities;theavailabilityandcostsofmetalsubstitutes;expectationsforinflation;andpoliticalandeconomicconditions,includinginterestratesandcurrencyvalues.Wecannotpredicttheeffectofthesefactorsonmetalprices.Wedonotengageinhedgingbut,wherepossible,structuresellingarrangementsinawaythatpassescommoditypriceriskthroughtoourcustomer.
CreditRisk
Wemanagecreditriskbytradingwithrecognizedcreditworthythirdpartiesandbyinsuringalltradereceivables.Inaddition,wemonitorreceivablebalanceswiththeresultthatourexposuretoimpairedreceivablesisgenerallynotsignificant.
AdoptionofNewAccountingPronouncementsandRecentDevelopments
Certainpronouncements,issuedbytheIASBortheIFRSInterpretationsCommittee,wereadoptedduringtheyear,orweremandatoryfortheCompany’sfiscalyearsbeginningonorafterJuly1,2019orarerequiredtobeadoptedinfutureperiods.Thefollowingpronouncementisrelevanttothecondensedconsolidatedinterimfinancialstatements:
IFRS16-Leases
• IFRS16-Leasesspecifieshowtorecognize,measure,presentanddiscloseleases.Thestandardprovidesasinglelesseeaccountingmodel,requiringthatlesseesrecognizeassetsandliabilitiesforallleasesunlesstheleasetermis12monthsorlessortheunderlyingassethasaninsignificantvalue.Lessorscontinuetoclassifyleasesasoperatingorfinance,withIFRS16’sapproachtolessoraccountingsubstantiallyunchangedfromitspredecessor,IAS17.IFRS16wasissuedinJanuary2016andisapplicabletoourfiscalyearthatbeganonJuly1,2019.AdoptionofIFRS16resultedinourrecordingaright-of-useassetandacorrespondingleaseliability
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of$2.6millioninourstatementoffinancialposition.Althoughtherelatedinterestanddepreciationexpenseswillnotbethesameasthemonthlyleasepayments,thedifferencesarenotmaterial.
TherearenootherpendingIFRSsorIFRICinterpretationsthatareexpectedtoberelevanttoourfinancialstatements.
NON-IFRSMEASURES
Tosupplementourconsolidatedfinancialstatements,whicharepreparedandpresentedinaccordancewithIFRS,weuse“operatingincome(loss)”and“AdjustedEBITDA”,whichareanon-IFRSfinancialmeasure.
Webelievethatoperatingincome(loss)helpidentifyunderlyingtrendsinourbusinessthatcouldotherwisebedistortedbytheeffectofcertainincomeorexpensesthatweincludeinlossfortheperiod.Wefurtherbelievethatoperatingincome(loss)providesusefulinformationaboutcoreoperatingresults,enhancestheoverallunderstandingofourpastperformanceandfutureprospects,andallowsforgreatervisibilitywithrespecttokeymetricsusedbymanagementinourfinancialandoperationaldecision-making.
WebelievethatAdjustedEBITDAisausefulindicatorforcashflowgeneratedbyourbusinessthatisindependentofourcapitalstructure.
Operatingincome(loss)andAdjustedEBITDAshouldnotbeconsideredinisolationorconstruedasanalternativetolossfortheperiodoranyothermeasureofperformanceorasanindicatorofouroperatingperformance.Operatingincome(loss)andAdjustedEBITDApresentedheremaynotbecomparabletosimilarlytitledmeasurespresentedbyothercompanies.Othercompaniesmaycalculatesimilarlytitledmeasuresdifferently,limitingtheirusefulnessascomparativemeasurestoourdata.
Operatingincome(loss)
Operatingincome(loss)representslossfortheperiod,excludingforeignexchangeloss,interestexpense,interestincome,otherincome(expense)andincometaxesthatwedonotbelievearereflectiveofourcoreoperatingperformanceduringtheperiodspresented.Areconciliationofourfirstquarterlosstooperatingincomefollows:
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AdjustedEBITDA
AdjustedEBITDArepresentsourincome(loss)fortheperiodbeforeinterest,incometaxes,depreciation,amortizationandshare-basedcompensation.AreconciliationofourfirstquarterlosstoAdjustedEBITDAfollows:
QuarterendedendedSeptember30 2019 2018$000s $000s
Lossfortheperiod (550) (766)Foreignexchange(gain)loss (57) (4)Interestexpense 283 283Lossondisposalofassets - -Interestincome (0) (4)Otherincome (6) (2)Incometaxes 6 3Operatingincome(loss)beforeotheritems (325) (490)
QuarterendedendedSeptember30 2019 2018$000s $000s
Lossfortheperiod (550) (766)
Taxexpense - - Interestexpense 283 283Depreciation,amortization,&impairment 356 197Stock-basedcompensationexpense(non-cash) 38 173
AdjustedEBITDA 127 (113)
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RESEARCHINITIATIVES
Fromtimetotime,wesponsorandassistinresearchanddevelopment(“R&D”)initiativestocreatenewmarketopportunities.OurcurrentR&Dfocusisondevelopingscandium-dopedaluminumalloys.
BUSINESSRISKS
SomeoftherisksthattheCompanyfaces,whicharespecifictoouroperations,includethefollowing:
DependenceonUlbaMetallurgicalPlantandsole-sourcesuppliers
OurproprietaryBeralcast®castingsandmanyofourcopperalloysuseberyllium,whichisaspecialtymetalthatproducedbyalimitednumberofcompaniesglobally.WeareabletopurchaseberylliumfromaU.S.producer,fromtheU.S.NationalDefenseStockpile,andfromUlbaMetallurgicalPlant(“Ulba”),ownedbyKazatompromofKazakhstan.Wecurrentlysourceourvacuum-castberylliumandberylliumcoppermasteralloyfromUlba,andwehaveenteredintolong-termberylliumandberylliumcoppermasteralloysupplyagreementswithUlbalastingthrough2021.Ulba’sabilitytohonoritssupplyobligationswilldependonitsabilitytosourcerawmaterials.Weunderstandthatproductionuseslong-termstockpiles;however,anydisruptionsinUlba’sabilitytomanufactureberylliumorCTMA(CarbothermicMasterAlloy)toourspecificationswouldhaveamateriallyadverseeffectonourbusiness.OurabilitytopurchasethosesuppliesalsoiscontingentuponacontinuationofcurrentU.S.lawsandregulationgoverningsuchpurchases.
Wearedependentuponseveralsuppliersofbasematerialsandalloyingagentsassole-sourcesuppliers.Approximately80%ofmaterialspurchased,includingUlbaMetallurgicalPlantasdescribedabove,areprimarilyfromthesesole-sourcesuppliers.Anydisruptionsinthesesuppliers’abilitytomanufacturebasematerialsandalloyingagentsneededbyuscouldhaveamateriallyadverseeffectonshort-termrevenue,whileweseektoengagealternativesources.
DisruptionsofManufacturingOperations
Fromtimetotime,ouroperationsareadverselyaffectedbydisruptionscausedbysuchthingsaswaterlinefailures,poweroutages,laborturnover,equipmentfailures,andadverseweather.Theseissuesnormallyonlycauseshort-terminterruptionsbutcanaffectourabilitytomeetquarterlyrevenueandprofitabilityobjectives.
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NeedtoMeetProductSpecifications
Mostoftheproductsthatwemanufacturearerequiredtoconformtoaspecification.Someofthesespecificationsareveryexacting.Smallvariationsinprocesscancauseourproductstofallshortoftherequiredstandards.Inaddition,customerrequirementscanchangefromtimetotime.Ifweareunabletoaddressthesespecificationissuesinatimelymanner,weareatriskoflosingshort-termrevenueandevenlong-termproductioncontracts.
LEGALMATTERS
Inthenormalcourseofbusinessoperations,weandoursubsidiariesareparties,fromtimetotime,tovariouscivilandadministrativeproceedings.Thesemayincludeproductliabilityclaims,healthandsafetyclaims,environmentalclaimsandemployee-relatedmatters.
Asmorefullydiscussedbelow,weareinvolvedinavarietyofclaims,lawsuits,investigationsandproceedingsconcerningsecuritieslaw,intellectualpropertylaw,environmentallaw,employmentlawandtheEmployeeRetirementIncomeSecurityAct(“ERISA”).Wedeterminewhetheranestimatedlossfromacontingencyshouldbeaccruedbyassessingwhetheralossisdeemedprobableandcanbereasonablyestimated.Weassessourpotentialliabilitybyanalyzingourlitigationandregulatorymattersusingavailableinformation.Wedevelopourviewsonestimatedlossesinconsultationwithoutsidecounselhandlingourdefenseinthesematters,whichinvolvesananalysisofpotentialresults,assumingacombinationoflitigationandsettlementstrategies.Shoulddevelopmentsinanyofthesematterscauseachangeinourdeterminationastoanunfavorableoutcomeandresultintheneedtorecognizeamaterialaccrual,orshouldanyofthesemattersresultinafinaladversejudgmentorbesettledforsignificantamounts,theycouldhaveamaterialadverseeffectonourresultsofoperations,cashflowsandfinancialpositionintheperiodorperiodsinwhichsuchchangeindetermination,judgmentorsettlementoccurs.
OnSeptember8,2017,anAwardwasissuedinfavorofClaimantGeraldHoolahanagainstIBCAdvancedAlloysCorp.TheAward,intheamountof$1.2millionplusattorney’sfees,costs,andexpensesintheamountof$155,000wasgrantedbytheAmericanArbitrationAssociation’sInternationalCentreforDisputeResolution.Theamounthasbeenaccruedandthematterwasunderappeal.OnMarch27,2019,theCompanyreceivednoticeoftheCourtaffirmingtheSeptember8,2017arbitrationawardmadeinfavorofGeraldR.Hoolahan.WehavefiledanappealoftheDistrictCourt’sdecision.
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OnJanuary21,2014,asubsidiaryintheCopperAlloysDivision,NonferrousProducts,Inc.(“NonferrousProducts”)receiveda“SpecialNoticeLetterofPotentialLiability”fromtheU.S.EnvironmentalProtectionAgency(“EPA”).TheletterreferencestheEPA’sdeterminationthatareleaseofhazardousmaterialshadoccurredattheChemetcoSuperfundSitelocatedinHartford,Illinois.Chemetco,Inc.operatedasecondarysmeltingoperationforrecyclingandafter-marketprocessingofcopper-bearingscrapandmanufacturingby-products.TheEPAhasidentifiedNonferrousProductsasapotentiallyresponsibleparty(“PRP”)undertheComprehensiveEnvironmentalResponse,Compensation,andLiabilityAct(“CERCLA”).NonferrousProductshasjoinedadefensegroupofotherPRPs.Todate,NonferrousProductshaspaidimmaterialamountsrelatedtotheseassessmentsandmemberfees.TheseassessmentswillbeusedtofundfurthersiteinvestigationtodeterminetheamountofmaterialssenttoChemetcobyeachpartyandthebestclean-upmethod.TheCompanyisevaluatingitsoptionsregardingnotifyingitsinsurersofpotentiallyincreasedliabilityshouldtheEPAand/orChemetcoPRPGroupcontributionlawsuitattempttonameCompany’ssubsidiaryasaDefendant.SpecialloyMetalsCompanywasallocatedwithover4millionpoundsofmaterialshippedtotheChemetcosite,ormorethantentimestheamountallocatedtoNonferrous.ShouldtheEPAand/orPRPGroupcontributionlawsuitpursuealteregotheoriesandallegetheCompany’ssubsidiaryCompany,thenwepotentiallyfacesignificantlymoreliabilityrequiringfurtherdefensiveaction.
OnApril7,2015,asubsidiaryintheCopperAlloysDivision,FreedomAlloys,Inc.(“FreedomAlloys”) was named as a defendant in a suit filed in the Superior Court of the State ofCalifornia,LosAngelesCountyentitledGodoyetal.vTheArgenCorporationetal.BC578085.ThisComplaintforSurvivalandWrongfulDeathfromToxicInjuriesallegesFreedomAlloys,along with five other defendants, supplied beryllium-containing materials causing fatalchronic beryllium disease to the plaintiffs’ deceased father. The claimwas dismissed inSeptember2015butwasreinstatedontheplaintiffs’appealinJune2016.AtrialdatewassetinthematterforApril2019;however,priortothetrialdateallpartiesfiledMotionsforSummaryJudgment,whichwereheardbytheCourtonFebruary6,2019.TheCourtentereditsrulingonSummaryJudgmentonFebruary7,2019,andFreedomAlloyslnc.'smotionforsummary judgmentwasgranted.Plaintiffshaduntil June17,2019toappeal thegrantofSummaryJudgmentinfavorofFreedom.OnSeptember12,2019,theCourtenteredafinaljudgmentinfavorofFreedomAlloysandorderedplaintiffstopaylegalcosts incurredbyFreedomAlloysinthematter.
OnMarch7,2016,MaxumIndemnityCompanyfiledaComplaintforDeclaratoryJudgmentagainstFreedomAlloys in theU.S.DistrictCourt for theEasternDistrictofPennsylvania,
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seekingajudgmentthatitowesFreedomAlloysnodutytodefendorindemnifyFreedomAlloysfortheunderlyingGodoyetal.vTheArgenCorporationetal.lawsuitdescribedabove.The matter was stayed by agreement based on the status of Godoy et al. v The ArgenCorporationetal.However,becauseGodoyetal.vTheArgenCorporationetal.hasresumedproceedingsinthetrialcourtinCalifornia,Maxum’scounselhasthreatenedtolifttheStayofProceedingsifFreedomAlloysdoesnotcommittogivingupitsclaimforindemnityifitdoesnotprevailinitsdefenseofthematter.TheCourtissuedarulinggrantingDefendants’SummaryJudgmentMotiononthesurvivalclaims.Atthispoint,theremainingclaimsarethewrongful death claims of decedent’s heirs for which defense counsel has asked Plaintiffcounsel to voluntarily dismiss FreedomAlloys from the case, emphasizing that PlaintiffshavenotproducedanyevidencethatFreedomsuppliedanyberylliumthatcameintocontactwiththedecedent.
ENVIRONMENTALANDOCCUPATIONALSAFETYISSUES
Wemeltandmachinematerialsthathavethepotential,ifnotcontrolledandhandledappropriately,tohaveanegativeeffectonanindividual’shealthandtheenvironment.Inaddition,ouroperationsusematerialssuchascuttingandhydraulicfluids,whichhavethecapacitytocauseenvironmentalcontaminationifleftuncontained.
Tomitigatethesepotentialrisks,we:
• employafull-timehealthandsafetymanagertoadministerandmonitoroursafetyprograms;
• employmanufacturingpracticestominimizeandeliminatedispersaloffumesanddust;
• usetrapbasinsandfluidreservoirstocaptureandretrievepossibleoverages;
• useactiveexhaustventsandhoodslocatedinequipmentareastocaptureandfilterair;
• regularlyscheduleassessmentsandmaintenanceofin-houseventilationsystems;
• requireouremployeestouseappropriatepersonalprotectiveequipment(suchasrespirators,outergarments,gloves,etc.)selectedtolimitandprotectthemfromanypotentialexposures;
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• conductberylliumlymphocyteproliferationtests(BeLPT)todetermineemployees’potentialforsensitivitytoberylliumpriortopossibleexposure;
• undertakeongoingairqualitymonitoringandperformperiodicemployeehealthexamsasperoccupationalhealthguidelines;and
• limitaccesstoareasthatmayhaveapotentialexposuretoberylliumdustparticles.
Despitetheseprocedures,weremainsubjecttoriskinthisregard.
Aswithallindustry,wearesubjecttoperiodicinspectionbystateandlocalsafety,healthandenvironmentalauthorities.Ifduringaninspectionafailingwasnotedinoursystems,thepotentialforthetemporaryorpermanentclosureofthefacilitiescouldexist.Ifduringtheperiodicemployeehealthscreening,anemployeedisplayselevatedexposuretometals,itcouldrequireustoplacetheemployeeonsickleave,whichwouldhavethepotentialtoimpactbothdirectandindirectcostsandcauseadisruptionofproduction.Thereisalsothepotentialthataninherentsafetyorenvironmentalexposure,ifuncontrolled,couldinitializelegalactionbyemployees,neighborsorthosewhovisitourfacilities.
Tominimizetherisksarisingfrompre-acquisitionactivities,wecommissionedphaseoneenvironmentalreviewspriortoacquiringourcopperalloysbusinesses.Itispossiblethatenvironmentalproblemsremainatourfacilitiesthatthesephase-oneassessmentsdidnotuncover.
SHAREHOLDERS’EQUITY
PRIVATEPLACEMENTS
OnNovember25,2019,weannouncedanon-brokeredprivateplacementtoissueupto17.1millioncommonsharesatapriceofC$0.117percommonshareforgrossproceedsofuptoC$2.0million.Thereisnominimumofferingamount.WeexpectthattheprivateplacementwillcloseonorsoonafterNovember29,2019.Theprivateplacementissubjecttothecompletionofformaldocumentation,receiptofallnecessaryregulatoryapprovals,includingtheapprovaloftheTSX-V,andothercustomaryconditions.
InApril2019,wecompletedanon-brokeredprivateplacementforgrossproceedsofC$545,000.Inconnectionwiththeclosingoftheoffering,weissued2,477,080unitsatapriceofC$0.22perunitforgrossproceedsofC$545,000.EachUnitconsistsofonecommonshareandaonecommonsharepurchasewarrant.Eachwarrantentitlestheholderto
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acquireonecommonshareatapriceofC$0.28untilApril29,2022.Allofthesecuritiesissuedpursuanttotheofferingaresubjecttoafour-monthholdperiodinaccordancewithapplicableCanadiansecuritieslaws.Certainofourdirectorssubscribedforanaggregateof682,047UnitsintheofferingforgrossproceedsofC$151,000.TheOfferingconstitutesarelatedpartytransactionunderMultilateralInstrument61-101-ProtectionofMinoritySecurityHoldersinSpecialTransactions(“MI61-101”).ThetransactionisexemptfromtheformalvaluationandminorityshareholderapprovalrequirementsofMI61-101pursuanttosections5.5(a)and5.7(1)(a)ofMI61-101asneitherthefairmarketvalueofanysecuritiesissuedtonortheconsiderationpaidbysuchpersonswouldexceed25%oftheCompany’smarketcapitalization.
SHAREISSUANCE
InJuly2019,weissued304,671commonsharesforservicestoourdirectors,101,557commonsharesforservicestoaconsultant,and185,000commonsharesforoptionsexercisedbyadirector.
InJune2019,weissued737,059commonsharestodebenturesholderswithanissue-datevalueofC$161,000insatisfactionoftheJune30,2019interestpaymentinlieuofcash.
InJune2019,16,129shareswereissueduponC$5.0millionofthe8.25%convertibledebenturesconversiontocommonstock.
OUTSTANDINGSHAREDATA
AsatthedateofthisMD&A,wehaveissued:
• Atotalof40,142,033commonshares.
• Warrantstopurchase35,639,296commonshares.
• Shareoptionstopurchase2,560,750commonshares.
Themaximumnumberofsharespotentiallyissuabletogetherwiththeissuedsharesistherefore78,342,079.