Ceylon Graphite Corp. — Interim / Quarterly Report 2021

Mar 1, 2021

CEYLON GRAPHITE CORP.

Condensed Consolidated Interim Financial Statements

For the Period Ended

December 31, 2020 and 2019

(Unaudited)

(Expressed in Canadian dollars)

Notice of no Auditor Review of Interim Financial Statements

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the condensed consolidated interim financial statements, they must be accompanied by a notice indicating that the condensed consolidated interim financial statements have not been reviewed by an auditor.

The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company’s management.

The Company’s independent auditor has not performed a review of these condensed consolidated interim consolidated financial statements in accordance with standards established by the Chartered Professional Accountants of Canada for a review of interim financial statements by an entity’s auditor.

CEYLON GRAPHITE CORP. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(Expressed in Canadian Dollars)

		December 31,	March 31,
	Note	2020	2020
		(Unaudited)	(Audited)
ASSETS
Current
Cash		3,013,759	1,047
Amount receivable		22,475	56,744
Prepaid expenses and advances		4,199	330,377
Prepayment of license		401,956	-
		3,442,389	388,168
Property and equipment	5	344,726	369,208
Explorationand evaluationassets	6	3,066,225	3,290,417
		6,853,340	4,047,793
LIABILITIES
Current
Accounts payable and accrued liabilities	9	226,529	282,482
Amounts payable	6, 9	1,273,200	1,418,641
Loans payable	10	41,541	161,478
Current portion of capital lease obligations		3,110	3,868
Convertible debentures	7	2,219,767	1,935,644
		3,764,147	3,802,113
Capital lease obligations		6,432	8,228
		3,770,579	3,810,341
EQUITY
Share capital	8	10,381,409	6,200,542
Share subscriptions	8	50,000	50,000
Equity component of convertible debenture	7	394,711	394,711
Contributed surplus	8	3,330,083	3,025,999
Deficit		(11,111,368)	(9,657,850)
Accumulated othercomprehensiveincome		37,926	224,050
		3,082,761	237,452
		6,853,340	4,047,793

CORPORATE INFORMATION AND CONTINUANCE OF OPERATIONS (Note 1) COMMMITMENT (Note 4) SUBSEQUENT EVENT (Note 13)

Approved by the Board of Directors on February 28, 2021

“Bharat Parashar” “Kevin Aylward” Bharat Parashar, Director Kevin Aylward, Director

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

CEYLON GRAPHITE CORP. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE LOSS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited)

(Expressed in Canadian Dollars)

				Three Months ended	Three Months ended	Nine Months ended	Nine Months ended
				December	December	December	December
				31,	31,	31,	31,
			Note	2020	2019	2020	2019
				$	$	$	$
Expenses
Advertising and promotion				90,059	23,810	109,107	23,810
Amortization				15,501	15,900	47,573	48,030
Consulting				300,000	224,000	300,000	224,000
Interest, finance and bank charge			7	112,465	79,182	300,181	254,782
Office and administrative				(111,635)	155,816	45,842	356,292
Professional fees			10	463,060	144,466	662,006	236,431
Rent				(3,246)	2,979	-	7,557
Repair and maintenance				(538)	4,588	-	13,694
Share-based payments			9,10	403,265	-	403,265	38,059
Transfer agents				37,084	8,988	40,313	18,755
Travel				6,017	49,079	6,083	90,398
Vehicle expenses				4,958	-	4,958
Wages and benefits				32,756	58,401	69,611	145,124
Loss before other items				(1,349,746)	(767,208)	(1,988,939)	(1,456,931)
Other items
Other income				88	-	2,088	-
Net loss				(1,349,658)	(767,208)	(1,986,851)	(1,456,931)
Other comprehensive loss
Item that may be reclassified
subsequently to loss:
Unrealized foreign exchange
translation				(133,475)	(16,400)	(186,124)	(142,842)
Comprehensive loss				(1,483,133)	(783,608)	(2,172,975)	(1,599,773)
Lossper share – basic	and diluted			(0.01)	(0.01)	(0.02)	(0.03)
Weighted average	number	of
common shares outstanding				108,424,952	63,896,616	80,791,056	57,820,726

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

CEYLON GRAPHITE CORP. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019

(Unaudited)

(Expressed in Canadian Dollars)

	December 31,	December 31,
	2020	2019
	$	$
Net loss	(1,986,851)	(1,456,932)
Items not involvingcash:
Accretion and interest for convertible debentures	284,123	235,876
Amortization	47,573	48,030
Share-based payments	403,265	38,059
	(1,251,890)	(1,134,967)
Changes in non-cash workingcapital balances:
Accountspayable and accrued liabilities	(39,576)	24,397
Amounts receivable	34,264	(20,523)
Prepaid and deposit	(36,732)	(225,935)
Cashusedinoperating activities	(1,293,934)	(1,357,028)
INVESTING ACTIVITIES
Purchase ofpropertyand equipment	(56,423)	(87,560)
Expenditures onexplorationand evaluationassets	(108,997)	(18,506)
Cashusedin investing activities	(165,420)	(106,066)
FINANCING ACTIVITIES
Privateplacement,net	4,500,000	984,000
Relatedpartytransactions	(5,424)	-
Payments on capital lease obligation	(1,543)	(5,045)
Loan advances	195,000	105,978
Loan repayments	(314,938)	-
Warrants exercised	105,000	-
Cash provided by financing activities	4,478,095	1,084,933
CHANGE IN CASH DURING THE PERIOD	3,018,741	(378,161)
CASH,BEGINNING OF PERIOD	1,047	432,811
EFFECTOF TRANSLATINGFOREIGNCURRENCY	(6,029)	(6,211)
CASH,END OF PERIOD	3,013,759	48,439
SUPPLEMENTAL CASH DISCLOSURES
Interest and income taxespaid	945	-

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

CEYLON GRAPHITE CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE PERIOD ENDED DECEMBER 31, 2020 AND 2019

(Unaudited)

(Expressed in Canadian Dollars)

	CommonShares Number Amount Share subscriptions Equity portion of convertible debentures Contributed surplus Deficit Accumulated other comprehensive income Total
Balances as at March 31, 2019 Issuance of common shares for cash Share issuance for costs Share-based payments Netloss and comprehensiveloss	$ $ $ $ $ $ $ 54,766,181 5,216,542 50,000 394,711 2,454,607 (7,390,486) 83,678 809,052 12,500,000 1,000,000 - - - - - 1,000,000 - (16,000) - - - - - (16,000) - - - - 38,059 - - 38,059 - - - - - (1,456,932) (142,842) (1,599,774)
Balances as atDecember31,2019	67,266,181 6,200,542 50,000 394,711 2,492,666 (8,847,418) (59,164) 231,337
Balances as at March 31, 2020 67,266,181 6,200,542 50,000 394,711 3,025,999 (9,657,850) 224,050 237,452 Share-based payments 51,428,566 4,500,000 - - - - - 4,500,000 Share issued to finders 3,600,000 315,000 - - - - - 315,000 Share issuance costs - (739,133) - - 424,133 - - (315,000) Reversal of conversion inducement (Note 7) - - - - (533,333) 533,333 - - Warrant Exercised 700,000 105,000 - - - - - 105,000 Issuance of warrants for loan interest (Note 10(a)) - - - - 10,019 - - 10,019 Share-based payments - - - - 403,265 - - 403,265 Netloss and comprehensiveloss - - - - - (1,986,851) (186,124) (2,172,975)
Balances as at December 31,2020 122,994,747 10,381,409 50,000 394,711 3,330,083 (11,111,368) 37,926 3,082,761

(The accompanying notes are an integral part of these condensed consolidated interim financial statements)

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. CORPORATE INFORMATION AND CONTINUANCE OF OPERATIONS

Ceylon Graphite Corp. (the “Company or Ceylon”) was incorporated on April 3, 1986 under the Canada Business Corporations Act. 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.

The address of the Company’s corporate office is 1100-1111 Melville Street Vancouver, BC V6E 3V6, Canada and its principal place of business is Landhuis Joonchi, Kaya Richard J. Beaujon z/n Willemstad, Curacao.

On July 13, 2019, the Company incorporated a subsidiary B P A Lanka (Private) Limited (“BPA”) in Sri Lanka and retained 49% interest. As Plumbago is the sole decision maker in the operations of BPA, for accounting purposes, Plumbago has control over BPA and thus the operating results of BPA have been consolidated.

During the period ended December 31, 2020, the Company incurred a net loss of $1,986,851 and had a deficit of $11,111,368, which has been funded by the issuance of equity. The Company’s ability to continue its operations and to realize its assets at their carrying values is dependent upon obtaining additional financing and generating sufficient revenues to cover its operating costs. The Company had not yet determined whether its property contains graphite reserves that are economically recoverable. The recoverability of amounts shown for exploration and evaluation assets is dependent upon the discovery of economically recoverable reserves, confirmation of the Company’s interest in the underlying mineral claims, the ability of the Company to obtain necessary financing to complete the development, and upon future profitable production or proceeds from the disposition of the resource property. The outcome of these matters cannot be predicted at this time and the uncertainties cast significant doubt upon the Company’s ability to continue as a going concern.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. To date, there have been a large number of temporary business closures, quarantines and a general reduction in consumer activity in Canada. The outbreak has caused companies and various governmental bodies to impose travel, gathering and other public health restrictions. While these effects are expected to be temporary, the duration of the various disruptions to businesses locally and internationally and the related financial impact cannot be reasonably estimated at this time. Similarly, the Company cannot estimate whether or to what extent this outbreak and the potential financial impact may extend. At this point, the extent to which COVID-19 will or may impact the Company is uncertain and these factors are beyond the Company’s control; however, it is possible that COVID-19 may have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company has been able to fund operations and mineral property exploration through equity financings. The continued uncertainty in the financial equity markets may make it difficult to raise capital through the private placement of shares. The junior mining industry is considered speculative in nature which could make it more difficult to fund. While the Company is using its best efforts to achieve its business plans by examining various financing alternatives, there is no assurance that the Company will be successful with its financing ventures.

These condensed consolidated interim financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in these condensed consolidated interim financial statements.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SIGNIFICANT ACCOUNTING POLICIES

a) Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”) using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the IFRS Interpretations Committee (“IFRIC”). These condensed consolidated interim financial statements were approved and authorized for issue by the Board of Directors on February 28, 2021

b) Basis of presentation

These condensed consolidated interim financial statements include the assets and operations of the Company and entities it controls, Plumbago and Sarcon Development (PVT) Limited (“Sarcon”), C Y L Lanka (Private) Limited (“Lanka”) and JADS Enterprise (Private) Limited (“JADS”) and BPA. Sarcon was incorporated in Sri Lanka under the Companies Act, No. 07 of 2007. Lanka was incorporated in Sri Lanka having a registration number PV 129449 with the local registration office No.47. JADS was incorporated in Sri Lanka having a registration number PV99839 with the local registration office No.165/2. BPA was incorporated in Sri Lanka having a registration number PV00214055 with the local registration office No.47. All significant intercompany balances and transactions have been eliminated upon consolidation.

The condensed consolidated interim financial statements have been prepared on the historical cost basis, with the exception of financial instruments which are measured at fair value, as explained in the accounting policies set out below. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.

c) Cash and cash equivalents

Cash in the statements of financial position is comprised of cash in banks and on hand, and short-term deposits with an original maturity of three months or less, which are readily convertible into a known amount of cash. As of December 31, 2020, and 2019, the Company held cash only.

• d) Exploration and evaluation assets

Exploration expenditures and direct costs of exploration and evaluation assets, such as property acquisition costs and leases, are capitalized. Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount.

Development costs incurred on a mineral property are deferred once management has determined, based on a feasibility study, that, a property is capable of economical commercial production as a result of having established proven and probable reserves. Development costs are carried at cost less accumulated depletion and accumulated impairment charges. Exploration expenditures incurred prior to determining that a property has economically recoverable resources are expensed as incurred.

The Company reviews the carrying values of mineral properties and development costs regularly with a view to assessing whether there has been any impairment in value, or whenever events or changes in circumstances that indicate the carrying value may not be recoverable. In the event the estimated discounted cash flows expected from its use or eventual disposition is determined to be insufficient to recover the carrying value of the property, the carrying value is written down to the estimated recoverable amount. Once a mine has achieved commercial production, mineral properties and development costs are depleted on a units-of-production basis over the life of the mine.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

e) Foreign currency

The Company’s consolidated financial statements are presented in Canadian dollars. The Company’s functional currency is the Canadian dollar, Plumbago’s functional currency is the US dollar and the functional currency for Sarcon, Lanka, JADS and BPA is the Sri Lankan Rupee.

Transactions and balances in currencies other than the Canadian dollar, the currency of the primary economic environment in which the Company operates (“the functional currency”), are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at exchange prevailing on the statement of financial position date are recognized in the consolidated statement of comprehensive loss.

Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each financial position reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the date of the statement of financial position. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated.

f) Provisions

Provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the consolidated statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable can be measured reliably.

At each financial position reporting date presented, the Company has not incurred any decommissioning costs related to the exploration and evaluation of its mineral properties and accordingly no provision has been recorded for such site reclamation or abandonment.

g) Loss per share

The Company presents basic and diluted loss per share data for its common shares, calculated by dividing the loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted loss per share does not adjust the loss attributable to common shareholders or the weighted average number of common shares outstanding when the effect is anti-dilutive.

h) Income taxes

Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the statement of financial position date, and includes any adjustments to tax payable or receivable in respect of previous years.

Deferred income taxes are recorded using the liability method whereby deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

• h) Income taxes (continued)

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the statement of financial position date. Deferred tax is not recognized for temporary differences which arise on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting, nor taxable profit or loss.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

i) Equipment

Equipment is recorded at cost less accumulated amortization, less any accumulated impairment losses. Amortization is taken on a straight line basis at the following rates:

Machinery	8 years
Furniture and fixtures	5 years
Tools and equipment	4 years
Motor vehicles	5 years

• j) Financial Instruments

Financial instruments are accounted for in accordance with IFRS 9 “Financial Instruments: Classification and Measurement”. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another equity.

Classification

The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”) or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Company has opted to measure them at FVTPL.

Measurement

Financial assets at FVTOCI - Elected investments in equity investments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses recognized in other comprehensive loss. The Company has no financial assets designated as FVTOCI.

Financial assets and liabilities at amortized cost - Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment. The Company financial assets and liabilities at amortized cost include accounts receivable, accounts payable, amounts payable, loans payable and convertible debentures.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

2. j) Financial Instruments (continued)

Financial assets and liabilities at FVTPL - Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs expensed in the consolidated statements of net loss. Realized and unrealized gains or losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the consolidated statements of net loss. The Company has classified cash as FVTPL.

Impairment of financial assets at amortized cost

The Company recognized a loss allowance for expected credit losses on financial assets that are measured at amortized cost.

At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset at an amount equal to the twelve months expected credit losses. The Company shall recognize in the consolidated statements of net loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

3. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of these condensed consolidated interim financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in future periods affected.

Significant accounts that require estimates as the basis for determining the stated amounts include recognition of deferred income tax assets, assessment of decommissioning provision, valuation of share-based payments and assessment of impairment of exploration and evaluation assets.

Critical accounting estimates

• i) the inputs used in accounting for share based payment expense and for the convertible debentures;

• ii) expected future tax rates used in the deferred income tax disclosures

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS (continued)

Critical accounting judgments

• i. the determination of categories of financial assets and financial liabilities has been identified as an accounting policy which involves judgments or assessments made by management;

• ii. the assessment of indications of impairment of exploration and evaluation properties and related determination of net realizable values and write-down of the properties where applicable;

• iii. the determination of whether it is likely that future taxable profits will be available to utilize against any deferred tax assets; and

• iv. the determination of the Company’s ability to continue as a going concern.

4. COMMITMENT

In March 2018, Plumbago acquired 40% interest in Lanka by paying 2,849,925 Rupees. Subsequent to the acquisition of Lanka, Lanka entered into an acquisition agreement with the sole shareholder (“transferor”) of JADS whereby Lanka acquired all issued and outstanding shares of JADS by paying 2,296,536 Rupees. Pursuant to the terms and conditions of the acquisition agreement, the transferor is entitled to 5% of net profits, which will be paid out in the form of the shares of Lanka or its nominee, for the first 5 years and 3% for the next 5 years. To date, no shares have been issued.

5. PROPERTY AND EQUIPMENT

During the period ending December 31, 2020, the Company purchased equipment in the amount of $56,423. Amortization of assets for the period ended December 31, 2020 was $47,573 (December 31, 2019 - $48,030). Net book value of property and equipment as of December 31, 2020 was $344,726 (December 31, 2019 - $279,849). Any change on property and equipment balance other than amortization was due to foreign exchange adjustments.

6. EXPLORATION AND EVALUATION ASSETS

During the period ended December 31, 2020, the Company incurred $108,997 and capitalized in exploration and evaluation costs. Balance as of December 31, 2020 was $3,066,225 (March 31, 2020 - $3,290,417). The remaining difference was due to the foreign exchange adjustment.

Sri Lanka

On September 12, 2012, the Company entered into an agreement (“Agreement”) to purchase 100% of the shares outstanding of Sarcon Development (PVT) Ltd. (“Sarcon”). At the time of the transaction, Sarcon had 1,000,000 shares outstanding. Sarcon has interests in approximately 100 zones on 1km by 1km grids to develop, construct and operate graphite mines located in Sri Lanka. In exchange for the shares of Sarcon, the Company agreed to pay US $2 million. The terms and conditions of the Agreement were amended in 2013 and 2014. The payment table below reflects all the amendments to the Agreement.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

6. EXPLORATION AND EVALUATION ASSETS (continued)

The Company will be required to make the following cash payments:

	US$
14 days after Sarcon’s Board of Investment approval – paid; Within 7 days of confirming that Sarcon’s shares have been transferred to the Company and the applicable stamp duty has been paid by the Company (“Confirmation Letter”) – paid; Within 45 days of issuance of the Confirmation Letter – paid; On or before December 31, 2016 - paid; Within 14 days of receipt of proceeds from the sale of a minimum 350 tonnes of graphite from the Sarcon grids; On or before July 1, 2017, or in the event that the third payment (US$650,000 noted above) was not made for reason other than breach of this Agreement, then the date of the fourth instalment (US$350,000) shall be adjusted to a date acceptable to both parties.	250,000 300,000 75,000 375,000 650,000 350,000
	2,000,000

In 2013 and amended in 2014, the Company entered into an escrow agreement with the vendor of Sarcon and an escrow agent. Under the terms of the escrow agreement, the Company deposited its share certificates for 875,000 shares of Sarcon with the escrow agent. The escrow agent will release the remaining share certificates once the Company has fulfilled its payment commitments outlined above.

As of December 31, 2020 the Company has made total payments of US$1,000,000.

The outstanding amounts due to the vendor have been shown as amounts payable on the condensed consolidated interim statements of financial position. They are non-interest bearing and unsecured.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

7. CONVERTIBLE DEBENTURES

On May 23, 2018, the Company closed a non-brokered private placement offering of units, at a purchase price $1.00 per Unit for aggregate gross proceeds of $2,000,000. Each Unit is comprised of $1.00 in principal amount of convertible debentures and two common share purchase warrants. The principal amount of the convertible debentures will be convertible at the holder’s option into fullypaid common shares in the capital of the Company at any time prior to Maturity in three years, at a conversion price of $0.25 per share. Each whole warrant will be exercisable into one Common Share on or before Maturity at an exercise price of $0.25 per share. Interest on the Debentures shall be paid upon maturity, at an annual rate of interest of 6% per annum. The Company paid $67,500 finders’ fees related to the convertible debentures.

The following table summarizes accounting for the convertible debentures and the amounts recognized in the liability and equity during the period:

	$
Principal
Issued duringtheyear ended March 31,2019	2,000,000
Liability
Gross proceeds received	2,000,000
Issue costs	(67,500)
Equitycomponent less issue costs allocated	(540,700)
Liability component initially recognized	1,391,800
Accretion and interest expense	221,285
Balance at March 31, 2019	1,613,085
Accretionandinterest expense	322,559
Balance at March 31, 2020	1,935,644
Accretionandinterest expense	284,123
Balance at December 31, 2020	2,219,767
Equity Component of Debentures
Equity component initially recognized	540,700
Deferred income tax liabilities recognized	(145,989)
Balance at December 31, 2020	394,711

For accounting purposes, the convertible debentures are separated into their liability and equity components using the residual method. The fair value of the liability component at the time of issue was determined based on an estimated interest rate of 17% for convertible debentures without the conversion feature. The fair value of the equity component was determined as the difference between the face value of the convertible debentures and the fair value of the liability component. After initial recognition the fair value of the liability component of $1,391,800 is carried on an amortized cost basis and will be accreted to its face value over the term to maturity of the convertible debenture at an effective interest rate of approximately 18.6% per annum.

During the year ended March 31, 2020, the Company modified the conversion price of $0.25 to $0.15 and as a result the Company recognized a conversion inducement expense with a corresponding increase in equity of $533,333 using the share price at the date of modification. During the period ended December 31, 2020, this modification was disallowed by the Security Commission. As such, the conversion inducement expense was reversed.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SHARE CAPITAL

2. a) Authorized:

The Company is authorized to issue an unlimited number of common shares without par value.

• b) As at December 31, 2020, there were 122,994,747 (March 31, 2020 – 67,266,181) common shares issued and outstanding.

During the period ended December 31, 2020, the Company issued the following common shares:

During the period ended December 31, 2020, the Company completed a brokered private placement and issued 51,428,566 units at a price of $0.0875 per unit for aggregate gross proceeds of $4,500,000. Each unit is comprised of one common share and one common share purchase warrant. Each whole warrant will entitle the holder to acquire one common share of the Company at an exercise price of $0.15 and an expiry date of three years. In connection with the financing, the Company issued 3,600,000 private placement units and 3,600,000 agents’ warrants to the broker for commission. The agents’ warrants have the same terms as private placement warrants. Fair value of the units is $315,000 and agents’ warrants is $424,133.

The Company issued 700,000 common shares pursuant to the exercise of share purchase warrants for total proceeds of $105,000.

During the year ended March 31, 2020, the Company issued the following common shares:

On October 16, 2019, the Company completed the first tranche of the brokered private placement and issued 10,000,000 units at $0.08 per unit for gross proceeds of $800,000. Each unit consists of one common share and one common share purchase warrant with an exercise price of $0.15 and an expiry date of three years. In connection with the financing, the Company paid cash commission in the amount of $12,800.

On December 4, 2019, the Company completed the second tranche of the brokered private placement and issued 2,500,000 units at $0.08 per unit for gross proceeds of $200,000. Each unit consists of one common share and one common share purchase warrant with an exercise price of $0.15 and an expiry date of three years. In connection with the financing, the Company paid cash commission in the amount of $3,200.

c) Share options

The Company has a stock option plan under which directors, officers, employees and consultants of the Company and its subsidiary are eligible to receive stock options. The total number of shares which are at any one time reserved and set aside for issuance under the stock option plan, and under all other management options outstanding, shall not exceed 10% of the shares issued and outstanding. The maximum number of common shares reserved for issuance to any one person pursuant to stock options shall not exceed 5% of the common shares outstanding at the time of the grant, or such greater amount as may be permitted pursuant to the rules of any regulatory authority having jurisdiction. The option price of a stock option granted shall be fixed by the Board of Directors but shall not be less than the market price of the shares at the time the option is granted, or such lesser price as may be permitted by the rules of the regulatory authority having jurisdiction. Stock options may be granted for a period not exceeding five years. Unless the Board determines otherwise, a stock option shall vest immediately upon being granted.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SHARE CAPITAL (continued)

2. c) Share options

On November 19, 2020, the Company granted an aggregate of 5,000,000 stock options to its directors, officers and consultants. Each option is exercisable at $0.215 per common share, and vested in various periods from November 19, 2020 to May 19, 2022, expire in 5 years. Sharebased compensation of $403,265 was recorded using the Black-Scholes option pricing model with the following assumptions:

Share price	$0.30
Risk free interest rate	0.42%
Weighted expected life	5 years
Weighted average expected volatility	156%
Weighted expected dividends	Nil
Forfeiture rate	Nil

As at December 31, 2020, the Company had options outstanding enabling holders to acquire the following:

		Weighted-
	Options	Average
	Outstanding	ExercisePrice
Outstanding, March 31, 2019	2,707,870	$0.30
Optionsgranted	300,000	$0.20
Outstanding, March 31, 2020	3,007,870	$0.25
Options granted	5,000,000	$0.215
Outstanding, December 31, 2020	8,007,870	$0.23

Details of stock options outstanding and exercisable at December 31, 2020 are as follows:

Number of	Number of		Remaining
Stock Options	Stock Options		Contractual
Outstanding	Exercisable	ExercisePrice	Life (years)	ExpiryDate
350,000	350,000	$0.20	1.20	March 15, 2022
200,000	200,000	$0.20	1.24	March 27, 2022
1,650,000	1,650,000	$0.30	2.13	February 15, 2023
507,870	507,870	$0.20	2.67	August 31, 2023
300,000	300,000	$0.20	3.37	May 15, 2024
5,000,000	775,000	$0.22	4.89	November 19,2025
8,007,870	8,007,870	$0.23	3.87

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. SHARE CAPITAL (continued)

d) Warrants

A summary of the status of the Company’s outstanding and exercisable warrants as at December 31, 2020 and the changes during the period then ended are as follows:

	Warrants	Weighted Average
	Outstanding	Exercise Price
Balance, March 31, 2019	4,000,000	$0.25
Granted	12,500,000	$0.15
Balance, March 31, 2020	16,500,000	$0.17
Granted – private placement	51,428,566	$0.15
Agents’ warrants	7,200,000	$0.15
Granted for loan interest payment (see Note 10(a))	250,000	$0.155
Exercised	(700,000)	$0.15
Balance, December 31, 2020	74,678,566	$0.16

Details of warrants outstanding at December 31, 2020 are as follows:

		Remaining
Number of		Contractual Life (in
Warrants	ExercisePrice	years)	ExpiryDate
4,000,000	$0.25	0.39	May 23, 2021
10,000,000	$0.15	0.79	October 16, 2021
1,800,000	$0.15	0.93	December 4, 2021
250,000	$0.155	0.71	September 15, 2021
58,628,566	$0.15	2.88	November 19,2024
74,428,566	$0.16	2.42

As part of the reverse take-over transaction previously entered into, the Company issued 25,393,500 special warrants. The special warrants can be converted to common shares for no further consideration once certain performance milestones are reached. On June 30, 2020, the warrants expired unexercised.

9. RELATED PARTY BALANCES AND TRANSACTIONS

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:

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. RELATED PARTY BALANCES AND TRANSACTIONS (continued)

	2020	2019
	$	$
Consulting fees - CEO	63,000	63,000
Consulting fees - CFO	45,000	45,000
Share-basedpayments	140,631	38,059

The Company has an amount payable of $1,273,200 (US$1,000,000) (December 31, 2019 - $1,298,800 or US$1,000,000) due to the former shareholder of Sarcon in connection with the Agreement described in Note 6. The amounts are unsecured and non-interest bearing.

In addition, the Company also obtained advances from shareholders, officers and directors. See Notes 10(c) to 10(h).

10. LOANS PAYABLE

During the period ended December 31, 2020, the Company had the following transactions:

• a) The Company received $150,000 from an arm’s length third party. The loan is non-interest bearing, unsecured and due on demand. As part of the loan agreement the Company issued 250,000 warrants with a fair value of $10,119 which is included in the condensed consolidated interim statements of comprehensive loss (see Note 8(d)). The loan was fully repaid as of December 31, 2020.

• b) The Company received $40,000 from Canada Emergency Business Account (CEBA). The loan has 0% interest until December 31, 2022, thereafter interest is 5% per annum starting on January 1, 2023. No principal repayments are required before December 31, 2022 and if the loan remains outstanding after December 31, 2022, only interest payments are required until full principal is due December 31, 2025. Payment of the loan balance on or before December 31, 2022 will result in loan forgiveness of 25 percent (up to $10,000).

• c) The Company received $5,000 from an officer of the Company. The loan is non-interest bearing, unsecured and due on demand. The loan was fully repaid as of December 31, 2020.

• d) The Company received $3,471 from a director of the Company. The loan is non-interest bearing, unsecured and due on demand. The loan was fully repaid as of December 31, 2020.

During the year ended March 31, 2020, the Company had the following transactions:

• e) The Company received $13,500 from an officer of the Company. During the period ended September 30, 2020, the officer loaned an additional $3,471. The loans are non-interest bearing, unsecured and due on demand. The loan was fully repaid during the period ended December 31, 2020.

• f) The Company received $223,250 from an individual shareholder of the Company and repaid $102,272 during the fiscal year. The loan is non-interest bearing, unsecured and due on demand. The loan was fully repaid during the period ended December 31, 2020.

• g) The Company received $27,000 (USD$20,000) from an individual shareholder. During the period ended September 30, 2020, the shareholder loaned an additional $13,500 (USD$10,000). The loans are non-interest bearing, unsecured and due on demand. The loan was fully repaid during the period ended December 31, 2020.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. LOANS PAYABLE (continued)

2. h) The Company received $137,000 (USD$100,000) from an individual shareholder. The loan bears interest of 15% per annum accrued daily and calculated on the basis of the actual number of days elapsed in a year of 360 days. The loan is unsecured and due on demand. The loan was fully repaid during the period ended December 31, 2020.

11. MANAGEMENT OF CAPITAL

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the sourcing and exploration of its resource properties. The Company does not have any externally imposed capital requirements to which it is subject.

The Company considers the aggregate of its share capital, contributed surplus and deficit as capital. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares or dispose of assets or adjust the amount of cash.

The Company’s investment policy is to invest its cash in large financial institutions with terms to maturity selected with regards to the expected time of expenditures from continuing operations.

The Company expects its current capital resources will be sufficient to carry its acquisition plans and operations through its current operating period.

12. FINANCIAL INSTRUMENTS AND FINANCIAL RISK

International Financial Reporting Standards 7, Financial Instruments: Disclosures , establishes a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Fair Value of Financial Instruments

The Company’s financial instruments include cash, amounts receivable, accounts payable, amounts payable, loans payable and convertible debentures.

Assets measured at fair value on a recurring basis were presented on the Company’s statements of financial position are as follows:

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. FINANCIAL INSTRUMENTS AND FINANCIAL RISK (continued)

			Fair ValueMeasurements Using	Fair ValueMeasurements Using	Fair ValueMeasurements Using	Fair ValueMeasurements Using
		Quoted Prices in		Significant
		Active Markets		Other		Significant
		For Identical		Observable		Unobservable
		Instruments		Inputs		Inputs
		(Level 1)		(Level 2)		(Level 3)		Total
December 31, 2020:
Cash	$	3,013,759	$	-	$	-	$	3,013,759
March 31, 2020:
Cash	$	1,047	$	-	$	-	$	1,047

Fair value

The fair value of the Company’s financial instruments approximates their carrying value as at ‐ December 31, 2020 because of the demand nature or short term maturity of these instruments.

Financial risk management objectives and policies

The risks associated with the financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

(i) Currency risk

The Company is exposed to foreign currency risk on fluctuations related to cash, accounts payable, amounts payable and loans payable 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	December 31, December 31, March 31, 2020 March 31, 2020
	Rupee US$ Rupee US$ 19,205,867 539 1,349,799 104 - - 32,061,200 - (3,835,874) (6,173) (13,427,738) (6,881) - (1,000,000) - (1,000,000)
Total in foreign currency Net exposure Canadian dollar equivalents	15,369,993 (1,005,634) 19,983,261 (1,006,777) 15,265,154 (274,739) (19,833,387) (421,537) 104,839 (1,280,373) 149,874 (1,428,314)

Based on the net Canadian dollar denominated asset and liability exposures as at December 31 ,2020, a 10% fluctuation in the Canadian/US exchange rates would impact the Company’s earnings for the period ended December 31, 2020 by $128,000 (March 31, 2020 - $143,000). A 10% fluctuation in the Canadian/Rupee exchange rates would impact the Company’s earnings for the period ended December 31, 2020 by $10,500 (March 31, 2020 - $15,000). The Company has not entered into any foreign currency contracts to mitigate this risk.

CEYLON GRAPHITE CORP. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (Unaudited) (Expressed in Canadian Dollars)

1. FINANCIAL INSTRUMENTS AND FINANCIAL RISK (continued)

(ii) Interest rate risk

The Company is exposed to interest rate risk on the variable rate of interest earned on bank deposits. The fair value interest rate risk on bank deposits is insignificant as the deposits are short ‐ term.

The Company has not entered into any derivative instruments to manage interest rate fluctuations.

(iii) 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 and companies with high credit ratings as assigned by international credit rating agencies. Therefore, the Company is not exposed to significant credit risk.

(iv) 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 December 31, 2020, the Company had a negative working capital of $321,758. As at December 31, 2020, the Company had cash of $3,013,759 to settle accounts payable, current portion of capital lease obligation, convertible debentures, amounts payable and loans payable of $3,764,145 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 obligations	9,542	3,110	6,432	-	9,542
Convertible loans	2,219,767	2,360,000		-	2,360,000

13. SUBSEQUENT EVENT

On January 4th, 2021, the Company announced that further to a previous release the Company intends to amend certain terms of the convertible debenture that were issued by the Company on May 23, 2018 (the “Convertible Debentures”). Ceylon Graphite proposes to amend the Convertible Debentures as follows: (i) extending the maturity date of the Convertible Debentures by six (6) months from May 23, 2021 to November 23, 2021. (ii) adding a provision whereby the Company will have the option to redeem the Convertible Debentures at any time, on ten (10) days’ notice, without penalty; and (iii) increasing the interest rate from 6% to 8%.