Ceylon Graphite Corp. — Interim / Quarterly Report 2020

Oct 13, 2020

CEYLON GRAPHITE CORP. Period Report June 30, 2020

MANAGEMENT’S DISCUSSION AND ANALYSIS

1.1 Date of Report: October 13, 2020

The following management’s discussion and analysis (“MD&A”) should be read together with the unaudited condensed consolidated interim financial statements and accompanying notes for the period ended June 30, 2020 which are prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts are stated in Canadian dollars unless otherwise indicated.

This MD&A includes certain statements that may be deemed “forward-looking statements”. Forwardlooking statements are often, but not always, identified by the use of words such as "anticipate", "plan", "estimate", "expect", "may", "project", "predict", "potential", "could", "might", "should" and other similar expressions. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guaranteeing of future performance and actual results or developments may differ materially from those in the forwardlooking statements. Factors that could cause actual results to differ materially from those in forwardlooking statements include market prices, continued availability of capital and financing and general economic, market or business conditions. Investors are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements.

1.2 Nature of Business and Overall Performance

Ceylon Graphite Corp. (the “Company” or “Ceylon”) was incorporated on April 3, 1986 under the Canada Business Corporations Act as NWest Energy Corp. On December 30, 2016, the Company acquired Plumbago Refining Corp. B.V. (“Plumbago”) through a reverse acquisition transaction. Plumbago was a private limited liability company organized under the laws of Curacao.

Concurrent with the closing of the reverse acquisition transaction, the Company changed its name from NWest Energy Corp. to Ceylon Graphite Corp. and effected a change in directors, management and business.

The address of the Company’s corporate office is 1100-1111 Melville Street, Vancouver, BC, Canada and its principal place of business is in Canada with its mining assets being in Sri Lanka. This is done through a wholly owned subsidiary Sarcon Development (Private) Limited (“Sarcon”) and JADS Enterprise (Pvt) Limited (“JADS”)

1.3 Overall Performance

Announcements and highlights during the period:

• On June 2, 2020, the Company announced its first sale of graphite from its wholly owned subsidiary, Sarcon Development (Pvt) Ltd (“Sarcon Development”), since the commencement of commercial production in December 2019.

• On June 4, 2020, the Company announced its first sale of graphite from its wholly owned subsidiary, Sarcon Development (Pvt) Ltd (“Sarcon Development”), to the Korean market.

• Management On June 30, 2020, 25,393,500 special warrants expired unexercised continued to actively focus on capital raising to support the company’s business, marketing initiatives and general working capital.

Ceylon Graphite Corp. Period Report June 30, 2020– Page 2

1.4 Results of Operations

Selected Annual Information and Result of Operations

The condensed consolidated interim financial statements are presented as a continuance of Plumbago Refining Corp. B.V. (“Plumbago”). The condensed consolidated interim financial statements include the assets and operations of the Company and its wholly owned subsidiaries Plumbago and Sarcon Development (PVT) Limited, C Y L Lanka (Private) limited and JADS Enterprise (Private) Limited. Sarcon, CYL Lanka and JADS are incorporated in Sri Lanka.

The Company reported a net loss of $202,657 for the period ended June 30, 2020, as compared to a net loss of $403,314 for the period ended June 30, 2019.

During the period, the Company incurred professional fees in the amount of $80,500 compared to $66,795 during the prior period due to increased third party consulting services and operational activities of the Company. The professional fees include all consulting services and related expenses.

Advertising and promotion increased to $9,524 from $nill in the prior period mainly due to more marketing and promotional efforts as the Company focused more on the mining operation during the period.

Office and administrative expenses incurred were $ 13,738 compared to the prior year of $109,356 mainly due to less activities during the period compared to the prior year. The decrease of $95,618in office and administration expenses can be generally attributed to a decrease in office-related costs and costs incurred at new and/or expanded facilities including incremental employment levels to support the growth in the business with operations.

Interest expense increased to $90,301 in 2020 from $76,968 in 2019 mainly due to the interest expense and interest accretion of the convertible debentures. The transfer fees decreased to $1,429 from $9,767 during the prior period due to an decreased in transfer related transactions.

During the period ended June 30, 2020, the Company incurred travel expense in the amount of $nill (period ended June 30, 2019 –$32,944) related to travel to Sri Lanka and other locations. The Company had $Nill wages and benefits (period ended June 30, 2019 –$44,713) due to a decrease in employees and engages consultants on an as needed basis.

During the period ended June 30, 2020, the Company recorded $7,243 in foreign exchange translation loss to its cumulative translation account due to the changes resulting from the fluctuation of foreign exchange rates.

Summary of Quarterly Results

	June 30,	March 31,	December 31,	September 30,
	2020	2020	2019	2019
	$	$	$	$
Expenses	202,657	282,812	767,208	286,409
Net Loss	(202,657)	(810,433)	(783,608)	(286,409)
Lossper Share	(0.00)	(0.01)	(0.01)	(0.01)

Ceylon Graphite Corp. Period Report June 30, 2020– Page 3

	June 30,	March 31,	December 31,	September 30,
	2019	2019	2018	2018
	$	$	$	$
Expenses	403,396	503,262	332,678	339,017
Net Loss	(403,314)	(323,528)	(332,678)	(339,017)
LossperShare	(0.01)	(0.01)	(0.01)	(0.01)

1.5 Liquidity

The Company has total assets of $3,928,550 as at June 30, 2020 consisting of cash, amounts receivable, prepaid expenses, equipment and exploration and evaluation assets. The Company has working capital deficiency of $1,457,575 .

At June 30, 2020, the Company had cash of $3,684. The amounts payable in the amount of $1,362,800 (USD $1,000,000) was payable to the former shareholders of Sarcon, which is contingently payable when the Company begins mining activities and receives revenues from the sale of graphite.

During the period ended June 30, 2020, the Company used $37,013 in operating activities.

At June 30, 2020, share capital was $6,200,542 comprising of 67,266,181 issued and outstanding Common Shares.

At June 30, 2020, the value of exploration and evaluation assets was $3,165,537. The decrease is due to fluctuation of foreign exchange during the quarter.

At present, the Company’s operations do not generate cash inflows and its financial success after June 30, 2020 is dependent on management’s ability to quickly explore its grids and commence mining. To do this management will need to continue to obtain funding to sustain operations through the development stages of the mining process to the point that these operations lead to the Company being cash flow positive. The mining development process may take substantial time and is subject to factors that may be beyond the Company’s control.

In order to finance the Company’s future mining and development and to cover administrative and overhead expenses in the coming years the Company may raise money through equity sales. Many factors influence the Company’s ability to raise funds, including the Company’s track record, and the experience and caliber of its management. Actual funding requirements may vary from those planned due to a number of factors, including the progress of operational activities. Management believes it will be able to meet its operational targets and raise capital if and when required through future equity issuance and or borrowings, but recognizes there may be risks involved that may be beyond their control.

1.6 Share Capital

The Company had 67,266,181 common shares issued and outstanding on June 30, 2020 and as of the date of this report.

Ceylon Graphite Corp. Period Report June 30, 2020– Page 4

1.7 Stock Options

As of June 30, 2020, the Company has 3,007,870 stock options outstanding.

1.8 Capital Resources

The Company is not a party to any off -balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

1.9 Off Balance Sheet Arrangements

There is no off-balance sheet arrangements to which the Company is committed.

1.10 Transactions with Related Parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

Key management personnel receive compensation in the form of short-term employee benefits, share-based payments, and post-employment benefits. Key management personnel include the Chief Executive Officer, Chief Financial Officer, and directors of the Company. The remuneration of key management is as follows:

	June 30,	June 30,
	2020	2019
	$	$
Consulting fees - CEO	21,000	21,000
Consulting fees - CFO	16,500	15,000
Share-basedpayments	-	38,059

The Company has an amounts payable of $1,362,800 (US$1,000,000) (March 31, 2020 - $1,418,641 or US$1,000,000) due to the former shareholder of Sarcon. The amounts are unsecured and noninterest bearing.

As at June 30, 2020, the Company had amounts payable to officers of the Company for total of $72,200 (March 31, 2020 – $88,730) included in accounts payable and accrued liabilities.

As at June 30, 2020, the Company had loans payable to an individual shareholder and an officer for a total of $161,478 (March 31, 2020 - $161,478).

During the period ended June 30, 2020, the Company received $40,000 from Canada Emergency Business Account (CEBA). The loan is repayable the balance of the loan on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000).

1.11 Commitment

The Company does not have any commitments outside of the normal course of business other than those already disclosed in the audited financial statements.

Ceylon Graphite Corp. Period Report June 30, 2020– Page 5

1.12 Subsequent event

• On July 13 2020, the Company announced that due to circumstances created by the COVID-19 pandemic, the Company has delayed the release of its annual financial statements for the year March 31, 2020.

• On August 6, 2020, the Company announced its intention to complete a non-brokered private placement of units (“Units”) for gross proceeds of up to C$ 8,100,000 or US$ 6,000,000 (US$1= C$1.35) to a consortium of four international investors (the “Offering”). Upon the closing of the Offering, the consortium will, collectively, own approximately 55% of the issued and outstanding shares of the Company, though individually no one subscriber will hold more than 15% of the issued and outstanding shares. Mr. Paul Selvam Devadoss and Mr. Anuka B.A Soza will join the Board of Directors of the Company upon completion of the transaction.

• On August 13, 2020, the Company announced that due to circumstances created by the COVID-19 pandemic, the Company has delayed the release of its interim financial statements for the quarter June 30, 2020.

• On August 26, 2020, the Company announced that pursuant to its press release of August 6, 2020, it has been granted an extension to close its proposed private placement by the TSX Venture Exchange. The extension was granted to permit Ceylon Graphite to obtain the requisite disinterested shareholder approval.

• On October 2, 2020, the Company announced that pursuant to its press release of August 6, 2020, it has been granted a further extension to close its proposed private placement by the TSX Venture Exchange. The small delay is necessitated by certain measures instituted in the domicile of our investors in response to COVID -19 and other health related issues. Mr. Paul Selvam Devadoss a lead investor said “ Our Consortium is very committed to completing this investment as soon as possible under the agreements that we have signed with the company. The delay is unfortunate but has been beyond our control.”

1.13 Critical Accounting Estimates

Critical Estimates and Assumptions

The preparation of the condensed consolidated interim financial statements in accordance with IFRS requires the Company to make estimates and assumptions concerning the future. The Company’s management reviews the estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that a rebelieved to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which the estimates are revised.

Estimates and assumptions where there is significant risk of material adjustments to assets and liabilities in future accounting periods include assessment of decommissioning provision, valuation of share-based provisions, valuation of the convertible debentures, assessment of impairment of exploration and evaluation assets and the recoverability and measurement of deferred tax assets.

The most significant judgments in applying the Company’s financial statements is the classification of financial instruments and the going concern assumption.

1.14 Changes in Accounting Policies

There was no change in accounting policies for the period ended June 30, 2020.

1.15 Financial Instruments and Other Instruments

Ceylon Graphite Corp. Period Report June 30, 2020– Page 6

The Company’s financial instruments consist of cash, accounts payable, amounts payable, loan payable and convertible debentures.

The Company’s financial instruments are exposed to the following risks:

(i) Currency risk

The Company is exposed to foreign currency risk on fluctuations related to cash, accounts payable, amounts payable, loan payable and due to related party that are denominated in the United States dollar and Rupees. Management does not hedge its exposure to foreign exchange risk and the Company’s net exposure to foreign currency as at each of the reporting periods is at below:

Cash Advances to affiliates Accounts payable Amountspayable	June 30, 2020 June 30, 2020 March 31, 2020 March 31, 2020
	Rupee US$ Rupee US$ (58,882) (712) 1,349,799 104 - - 32,061,200 - (8,675,470) (6,174) (13,427,738) (6,881) - (1,000,000) - (1,000,000)
Total in foreign currency Net exposure Canadian dollar equivalents	(8,734,352) (1,006,885) 19,983,261 (1,006,777) (8,670,993) 365,298 (19,833,387) (421,537) (63,359) (1,372,184) 149,874 (1,428,314)

Based on the net Canadian dollar denominated asset and liability exposures as at June 30 ,2020, a 10% fluctuation in the Canadian/US exchange rates would impact the Company’s earnings for the period ended June 30, 2020 by $137,000 (March 31, 2020 - $143,000). A 10% fluctuation in the Canadian/Rupee exchange rates would impact the Company’s earnings for the period ended June 30, 2020 by $6,000 (March 31, 2020 - $15,000).. The Company has not entered into any foreign currency contracts to mitigate this risk.

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 credit risk on cash is limited because the cash are composed of financial instruments issued by ‐ Canadian banks with high credit ratings as assigned by international credit rating agencies. Therefore, the Company is not exposed to significant credit risk.

Interest rate risk

Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates.

Liquidity risk

In managing of liquidity risk, the Company maintains a balance between continuity of funding and the flexibility through the use of borrowings. Management closely monitors the liquidity position and expects to have adequate sources of funding to finance the Company’s projects and operations. As at March 31, 2020, the Company had working capital deficiency of $1,457,575. As at June 30, 2020, the Company had cash of $3,684 to settle accounts payable, amounts payable, current portion of capital

Ceylon Graphite Corp. Period Report June 30, 2020– Page 7

lease obligation and loan payable of $1,867,623 which fall due for payment within twelve months of the financial position date.

		Carrying	Less than	Between 2 – 5	More than
		value	1 year	years	5 years	Total
		$	$	$	$
Capital	lease	11,717	3,747	7,970	-	11,717
obligations
Convertible loans		2,025,405	-	2,360,000	-	2,360,000

Fair value

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

• Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

• Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and

• Level 3 – Inputs that are not based on observable market data.

1.16 Other MD&A Requirements

• A. For more information about the Company, see Ceylon Graphite website at http://www.ceylongraphite.com. The Company has not filed an AIF Annual Information Form.

• B. Information required in the following section of National Instrument 51-102, if applicable:

• i) Section 5.3– Additional Disclosure for Venture Issuers without Significant Revenue

Analysis of material components of the Company’s general and administrative expenses is disclosed in the Statement of Comprehensive Loss forming part of the Financial Statements for the year ended March 31, 2020 to which this MD&A relates.

• ii) Section5.4- Disclosureof Outstanding Share Data

• a. Authorized:

Unlimited common shares without par value

• b. Common Shares Issued and Outstanding as at June 30, 2020 was 67,266,181 shares.

As at June 30, 2020, there were no common shares held in escrow.

(iii)Section5.7– Additional Disclosure for Reporting Issuers with Significant Equity Investees .

Ceylon Graphite Corp. Period Report June 30, 2020– Page 8

Not applicable.

C. Disclosure required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Filings.

Not applicable.

Risk Factors

The Company is focused solely on its mining and exploration efforts in a cost-effective manner. The failure to generate future cash flow could have a significant and adverse effect on the Company.

The Company's success will depend in large measure on certain key personnel. The loss of the services of such key personnel could have a material adverse effect on the Company. In addition, there can be no assurance that Company will be able to continue to attract and retinal personnel necessary for the development and operation of its business.

The Company has incurred a net loss for the period ended June 30, 2020 of $202,657 and has a deficit of $9,860,507 as at June 30, 2020. Management is continuing its efforts to attract additional equity and capital investors and implement cost control measures to maintain adequate levels of working capital. Nevertheless, there can be no assurance provided with respect to the successful outcome of the seagoing actions. If the Company is unable to obtain additional financing on reasonable terms, the Company may be required to reduce its operations to continue as a going concern.

In addition, the Company’s negative working capital could affect the Company’s ability to seize upon opportunities requiring investment, or to reinvest in its products in a timely manner.