Zentek Ltd 40-F, filed Jun 30, 2022
Zentek Ltd. (ZTEKF)
About this 40-F
Zentek Ltd filed this 40-F on June 30, 2022, covering the fiscal year ended March 31, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
[ ] Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934
or
[x] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
|
For the fiscal year ended March 31, 2022 |
Commission File Number 001-41310 |
Zentek Ltd.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English (if applicable))
| Ontario, Canada | 2890 | N/A |
| (Province or other jurisdiction of | (Primary Standard Industrial Classification | (I.R.S. Employer |
| incorporation or organization) | Code Number) | Identification Number) |
24 Corporate Ct
Guelph, Ontario N1G 5G5
1- 844-730-9822
(Address and telephone number of Registrant's principal executive offices)
Cogency Global Inc.
122 East 42nd Street, 18th Floor
New York, NY 10168
1-800-221-0102
(Name, address (including zip code) and telephone number (including
area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Shares, no par value | ZTEK | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this Form:
|
[ x ] Annual information form |
[ x ] Audited annual financial statements |
Indicate the number of outstanding shares of each of the registrant's classes of capital or common stock as of the close of the period covered by the annual report: 99,248,058 outstanding as of March 31, 2022.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. [ x ] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ x ] Yes [ ] No
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
[X] Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. [ ]
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
EXPLANATORY NOTE
Zentek Ltd. (the "Company" or "Zentek") is a "foreign private issuer" as defined in Rule 3b-4 under Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is a Canadian issuer eligible to file its annual report ("Annual Report") pursuant to Section 13 of the Exchange Act on Form 40-F pursuant to the multi-jurisdictional disclosure system (the "MJDS") adopted by the United States Securities and Exchange Commission (the "SEC"). The Company's common shares are listed on the TSX Venture Exchange under the trading symbol "ZEN" and the Nasdaq Capital Market ("NASDAQ") under the trading symbol "ZTEK".
In this annual report, references to "we", "our", "us", the "Company", the "Registrant", or "Zentek", mean Zentek Ltd., unless the context suggests otherwise.
FORWARD LOOKING STATEMENTS
The documents incorporated into this Annual Report contain “forward-looking statements” and “forward-looking information” within the meaning of applicable securities laws (forward-looking information and forward-looking statements being collectively hereinafter referred to as “forward-looking statements”). Such forward-looking statements are based on expectations, estimates and projections as at the date of the documents incorporated by reference in this Annual Report or the dates of the documents incorporated herein, as applicable. Any statements that involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often but not always using phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “budget”, “scheduled”, “forecasts”, “estimates”, “believes” or “intends”, or variations of such words and phrases, or stating that certain actions, events or results “may” or “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements and are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements and information concerning: the intentions, plans and future actions of the Company; statements relating to the business and future activities of the Company after the date of this Annual Report; market position, ability to compete and future financial or operating performance of the Company after the date of this Annual Report; statements based on the audited and unaudited financial statements of the Company; anticipated developments in operations; the timing and amount of funding required to execute the Company’s development and business plans; intellectual property expenditures; capital and exploration and development expenditures; the effect on the Company of any changes to existing legislation or policy; government regulation of patent law or mining operations; the length of time required to obtain permits, certifications and approvals; markets for the Company’s graphene related products and the ability to supply those markets; the success of exploration, development and mining activities; the geology of the Company’s properties; environmental risks; the availability of labour; demand and market outlook for precious metals and the prices thereof; progress in development of mineral properties; estimated budgets; currency fluctuations; requirements for additional capital; government regulation; limitations on insurance coverage; the timing and possible outcome of litigation in future periods; the timing and possible outcome of regulatory and permitting matters; goals; strategies; future growth; planned business activities and planned future acquisitions; the adequacy of financial resources; and other events or conditions that may occur in the future.
Forward-looking statements are based on the beliefs of the Company's management, as well as on assumptions, which such management believes to be reasonable based on information currently available at the time such statements were made. However, by their nature, forward-looking statements are based on assumptions and involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements are subject to a variety of risks, uncertainties, and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation those risks outlined under the heading "Risk Factors" on page 15 of the Annual Information Form for the year ended March 31, 2022, attached as Exhibit 99.1 to this Annual Report, and incorporated herein by reference, and under the heading "Risks and Uncertainties" on pages 23-33 of the Registrant's Management's Discussion & Analysis for the year ended March 31, 2022, attached as Exhibit 99.3 to this Annual Report, and incorporated herein by reference, and in other filings that the Registrant has made and may make with applicable securities authorities in the future.
The list of risk factors set out in the Annual Information Form for the year ended March 31, 2022, attached as Exhibit 99.1 to this Annual Report, and as set out in Management’s Discussion & Analysis for the year ended March 31, 2022, attached as Exhibit 99.3 to this Annual Report, and both incorporated herein by reference, is not exhaustive of the factors that may affect any forward-looking statements of the Company. Forward-looking statements are statements about the future and are inherently uncertain. Actual results could differ materially from those projected in the forward-looking statements as a result of the matters set out or incorporated by reference in this Annual Report generally and certain economic and business factors, some of which may be beyond the control of the Company, including, among other things, potential director or indirect operational impacts resulting from infectious diseases or pandemics, such as the COVID-19 outbreak, and other factors not currently viewed as material that could cause actual results to differ materially from those described in the forward-looking statements. In addition, recent unprecedented events in the world economy and global financial and credit markets as a consequence of the COVID-19 outbreak have resulted in high market and commodity volatility and a contraction in debt and equity markets, which could have a particularly significant, detrimental, and unpredictable effect on forward-looking statements. The Company does not intend and does not assume any obligation, to update any forward-looking statements, other than as required by applicable law. For all of these reasons, the Company's securityholders should not place undue reliance on forward-looking statements.
DIFFERENCES IN UNITED STATES AND CANADIAN REPORTING PRACTICES
The Registrant is permitted, under the MJDS, to prepare this Annual Report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant has historically prepared its consolidated financial statements, which are filed as Exhibit 99.2, and incorporated herein by reference, to this Annual Report on Form 40-F, in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board, which are subject to Canadian auditing and auditor independence standards. Financial statements prepared in IFRS may differ from financial statements prepared in United States GAAP ("U.S. GAAP") and from practices prescribed by the SEC. Therefore, the Registrant's financial statements filed with this Annual Report may not be comparable to financial statements of United States companies prepared in accordance with U.S. GAAP.
Unless otherwise indicated, all dollar amounts in this annual report on Form 40-F are in Canadian dollars. The exchange rate of Canadian dollars into U.S. dollars, on June 29, 2022 based upon the closing rate published by the Bank of Canada, was U.S.$1.00=CDN$0.7765. Bank of Canada exchange rates are nominal quotations and are not buying or selling rates. These rates are intended for statistical or analytical purposes. Rates available from financial institutions will differ. Rates are expressed in Canadian dollars, converted from U.S. dollars.
PRINCIPAL DOCUMENTS
The following documents have been filed as part of this annual report on Form 40-F:
A. Annual Information Form
The Registrant's Annual Information Form for the fiscal year ended March 31, 2022 is attached as Exhibit 99.1 to this Annual Report on Form 40-F, and is incorporated by reference herein.
B. Audited Annual Financial Statements
The Registrant's consolidated audited annual financial statements, including the reports of the independent registered public accounting firm with respect thereto, are attached as Exhibit 99.2 to this Annual Report on Form 40-F, and is incorporated by reference herein.
C. Management's Discussion and Analysis
The Registrant's management's discussion and analysis of financial condition and results of operations for the twelve-month period ended March 31, 2022 is attached as Exhibit 99.3 to this Annual Report on Form 40-F, and is incorporated by reference herein.
TAX MATTERS
Purchasing, holding or disposing of securities of the Registrant may have tax consequences under the laws of the United States and Canada that are not described in this Annual Report on Form 40-F.
DISCLOSURE CONTROLS AND PROCEDURES
The required disclosure is included under the heading "Disclosure Controls" in the Company's Management's Discussion and Analysis for the year ended March 31, 2022, filed as Exhibit 99.3 to this Annual Report on Form 40-F, and incorporated herein by reference.
MANAGEMENT'S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The required disclosure is included under the heading "Material Weakness" in the Company's Management's Discussion and Analysis for the year ended March 31, 2022, filed as Exhibit 99.3 to this Annual Report on Form 40-F, and incorporated herein by reference.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This Annual Report does not include an attestation report of the Registrant's registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Under Section 3 of the Exchange Act, as a result of enactment of the Jumpstart Our Business Startups Act (the "JOBS Act"), "emerging growth companies" are exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002, which generally requires that a public company's registered public accounting firm provide an attestation report relating to management's assessment of internal control over financial reporting. The Registrant qualifies as an "emerging growth company" and therefore has not included in, or incorporated by reference into, this Annual Report such an attestation report as of the end of the period covered by this Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes to the Company's internal controls over financial reporting that occurred during the year ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR
None.
CODE OF CONDUCT
The Registrant has adopted a written "code of ethics" (as defined by the rules and regulations of the SEC), entitled "Code of Conduct" (the "Code") that applies to all members of the board of directors, officers, employees, consultants, contractors and agents of the Company and its affiliates and subsidiaries worldwide. Adherence to this code is a condition of employment with or providing services to the Company.
The Code may be obtained upon request from Zentek Ltd.'s head office at 24 Corporate Ct, Guelph, Ontario N1G 5G5, or by viewing the Registrant's web site at https://www.zentek.com/.
All amendments to the Code, and all waivers of the Code with respect to any director, executive officer or principal financial and accounting officers, will be posted on the Registrant's web site within five business days following the date of the amendment or waiver and any amendment will be provided in print to any shareholder upon request.
AUDIT COMMITTEE
Our Board of Directors has established the Audit Committee in accordance with section 3(a)(58)(A) of the Exchange Act and Rule 5605(c) of the NASDAQ Marketplace Rules for the purpose of overseeing our accounting and financial reporting processes and the audits of our annual financial statements.
The Audit Committee is comprised of Eric Wallman (Chair), Brian Bosse, and Frank Klees. The Company is utilizing the phase-in provision of Rule 5615(b) for the Audit Committee Composition requirement. Of the three members in the Audit Committee, Brian Bosse is not independent. The Company confirms that it will fully comply with the Audit Committee Composition requirement at the end of its phase-in period before March 2023.
All members of the Audit Committee are financially literate, meaning they are able to read and understand the Registrant's financial statements and to understand the breadth and level of complexity of the issues that can reasonably be expected to be raised by the Registrant's financial statements.
Our Board of Directors has determined that Eric Wallman qualifies as an "audit committee financial expert" (as defined in paragraph (8)(b) of General Instruction B to Form 40-F).
The SEC has indicated that the designation or identification of a person as an audit committee financial expert does not make such person an "expert" for any purpose, impose any duties, obligations or liability on such person that are greater than those imposed on members of the audit committee and the board of directors who do not carry this designation or identification, or affect the duties, obligations or liability of any other member of the audit committee or board of directors.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The required disclosure is included under the heading "Audit Committee Information" under the sub-heading "External Auditor Services Fees (By Category)" in the Company's Annual Information Form for the fiscal year ended March 31, 2022, filed as Exhibit 99.1 to this Annual Report on Form 40-F, and incorporated herein by reference.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee Charter sets out responsibilities regarding the provision of non-audit services by the Registrant's external auditors and requires the Audit Committee to pre-approve all permitted non-audit services to be provided by the Registrant's external auditors, in accordance with applicable law.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant currently has no off-balance sheet arrangements.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table lists, as of March 31, 2022, information with respect to the Registrant's known contractual obligations (in thousands):
| Payments due by period | |||||||||||||||
| Less than | More than | ||||||||||||||
| Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||
| Long-Term Debt Obligations | $ | 1,949,000 | $ | 950,930 | $ | 998,070 | $ | - | $ | - | |||||
| Capital (Finance) Lease Obligations | $ | 281,872 | $ | 149,317 | $ | 132,555 | $ | - | $ | - | |||||
| Operating Lease Obligations | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
| Purchase Obligations | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
| Other Long-Term Liabilities Reflected on Balance Sheet | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
| Total | $ | 2,230,872 | $ | 1,100,247 | $ | 1,130,625 | $ | - | $ | - | |||||
NASDAQ CORPORATE GOVERNANCE
The Registrant is a foreign private issuer and its common shares are listed on the NASDAQ.
NASDAQ Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of the requirements of the Rule 5600 Series, the requirement to distribute annual and interim reports set forth in Rule 5250(d), and the Direct Registration Program requirement set forth in Rules 5210(c) and 5255; provided, however, that such a company shall comply with the Notification of Material Noncompliance requirement (Rule 5625), the Voting Rights requirement (Rule 5640), have an audit committee that satisfies Rule 5605(c)(3), and ensure that such audit committee's members meet the independence requirement in Rule 5605(c)(2)(A)(ii).
The Registrant has reviewed the NASDAQ corporate governance requirements and confirms that except as described below, the Registrant is in compliance with the NASDAQ corporate governance standards in all significant respects:
The Registrant is not currently following Rule 5605(c)(2)(A), under which the Registrant must have an Audit committee of at least three members comprised solely of directors each of whom: (1) meets Nasdaq's definition of independence contained in Rule 5605(a)(2) (subject to the exception provided in Rule 5605(c)(2)(B) and the cure period provided in Rule 5605(c)(4)); (2) meets the requirements of SEC Rule 10A-3(b)(1) (subject to exceptions provided in Rule 10A-3(c) and the cure period provided in Rule 5605(c)(4)); (3) has not participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years; and (4) is able to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement, as required by Rule 5605(c)(2). Additionally, the Registrant needs to have, at least one member of the Audit Committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. In lieu of following Rule 5605(c)(2)(A), the Registrant is currently utilizing the phase-in provisions of Rule 5615(b) for the Audit Committee Composition requirement. The Registrant intends to fully comply with this requirement as of the end of the phase-in period before March 2023.
The Registrant does not follow Rule 5605(c)(1), which requires the Registrant to adopt a formal written Audit Committee charter specifying the items enumerated in Rule 5605(c)(1), with the Audit Committee reviewing and assessing the adequacy of the charter on an annual basis. In lieu of following Rule 5605(c)(1), the Registrant follows the rules of the TSX Venture Exchange.
The Registrant does not follow Rule 5605(e)(1), which requires the Registrant to have independent director involvement in the selection of director nominees, by having a nominations committee comprised solely of independent directors. In lieu of following Rule 5605(e)(1), the Registrant follows the rules of the TSX Venture Exchange.
The Registrant does not follow Rule 5605(e)(2), which requires the Registrant to adopt a formal written charter or board resolution, as applicable, addressing the director nomination process and such related matters as may be required under the federal securities laws. In lieu of following Rule 5605(e)(2), the Registrant follows the rules of the TSX Venture Exchange.
The Registrant does not follow Rule 5605(d)(1), which requires the Registrant to adopt a formal written compensation committee charter specifying the items enumerated in Rule 5605(d)(1), with the compensation committee reviewing and reassessing the adequacy of the charter on an annual basis. In lieu of following Rule 5605(d)(1), the Registrant follows the rules of the TSX Venture Exchange.
The Registrant does not follow Rule 5605(d)(2), which requires the Registrant to have, a compensation committee of at least two members, with each member being an "Independent Director", as defined under Rule 5605(a)(2). In lieu of following Rule 5605(d)(2), the Registrant follows the rules of the TSX Venture Exchange.
The Registrant is not currently following Rule 5605(b)(1), which requires the Registrant to have a board of directors comprised of a majority of independent directors as required by Rule 5605(b)(1). In lieu of following Rule 5605(b)(1), the Registrant is currently utilizing the phase-in provisions of Rule 5615(b) for the Majority Independent Director requirement. The Registrant intends to fully comply with this requirement as of the end of the phase-in period before March 2023.
The foregoing is consistent with the laws, customs, and practices in the Province of Ontario and Canada.
Further information about the Registrant's governance practices is included on the Registrant's website.
INTERACTIVE DATA FILE
The Registrant will submit by amendment Exhibits 101 and 104 to this Annual Report on Form 40-F its Interactive Data Files. The amendment will be filed within the 30-day grace period provided by Rule 405(a)(2)(ii) of Regulation S-T.
MINE SAFETY DISCLOSURE
Not applicable.
UNDERTAKING
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
CONSENT TO SERVICE OF PROCESS
The Registrant has previously filed with the SEC a written consent to service of process on Form F-X. Any change to the name or address of the Registrant's agent for service shall be communicated promptly to the SEC by amendment to the Form F-X referencing the file number of the Registrant.
ADDITIONAL INFORMATION
Additional information relating to the Registrant may be found on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com and on the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system at www.sec.gov.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized.
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ZENTEK LTD. |
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/s/ Wendy Ford |
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Name: Wendy Ford |
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Title: Chief Financial Officer |
Date: June 29, 2022
EXHIBIT INDEX
* To be filed by amendment within the 30-day grace period provided by Rule 405(a)(2)(ii) of Regulation S-T.
Annual Information Form
ZENTEK LTD.
For the year ended March 31, 2022
Dated as of June 29, 2022
TABLE OF CONTENTS
PRELIMINARY NOTES
This Annual Information Form ("AIF") is prepared in the form prescribed by National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. All dollar amounts in this AIF are expressed in Canadian dollars unless otherwise indicated. All information in this AIF is as of March 31, 2022, unless otherwise indicated.
FORWARD-LOOKING INFORMATION
This AIF and the documents incorporated into this AIF contain "forward-looking statements" and "forward-looking information" within the meaning of applicable securities laws (forward-looking information and forward-looking statements being collectively hereinafter referred to as "forward-looking statements"). Such forward-looking statements are based on expectations, estimates and projections as at the date of this AIF or the dates of the documents incorporated herein, as applicable. Any statements that involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often but not always using phrases such as "expects" or "does not expect", "is expected", "anticipates" or "does not anticipate", "plans", "budget", "scheduled", "forecasts", "estimates", "believes" or "intends", or variations of such words and phrases, or stating that certain actions, events or results "may" or "could", "would", "should", "might" or "will" be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements and are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements and information concerning: the intentions, plans and future actions of Zentek Ltd. (the "Company"); statements relating to the business and future activities of the Company after the date of this AIF; market position, ability to compete and future financial or operating performance of the Company after the date of this AIF; statements based on the audited and unaudited financial statements of the Company; anticipated developments in operations; the timing and amount of funding required to execute the Company's development and business plans; intellectual property expenditures; capital and exploration and development expenditures; the effect on the Company of any changes to existing legislation or policy; government regulation of patent law or mining operations; the length of time required to obtain permits, certifications and approvals; markets for the Company's graphene related products and the ability to supply those markets; the success of exploration, development and mining activities; the geology of the Company's properties; environmental risks; the availability of labour; demand and market outlook for precious metals and the prices thereof; progress in development of mineral properties; estimated budgets; currency fluctuations; requirements for additional capital; government regulation; limitations on insurance coverage; the timing and possible outcome of litigation in future periods; the timing and possible outcome of regulatory and permitting matters; goals; strategies; future growth; planned business activities and planned future acquisitions; the adequacy of financial resources; and other events or conditions that may occur in the future.
Forward-looking statements are based on the beliefs of the Company's management, as well as on assumptions, which such management believes to be reasonable based on information currently available at the time such statements were made. However, by their nature, forward-looking statements are based on assumptions and involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements are subject to a variety of risks, uncertainties, and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation those risks outlined under the heading Risk Factors in this AIF.
The list of risk factors set out in this AIF is not exhaustive of the factors that may affect any forward-looking statements of the Company. Forward-looking statements are statements about the future and are inherently uncertain. Actual results could differ materially from those projected in the forward-looking statements as a result of the matters set out or incorporated by reference in this AIF generally and certain economic and business factors, some of which may be beyond the control of the Company, including, among other things, potential direct or indirect operational impacts resulting from infectious diseases or pandemics, such as the COVID-19 outbreak, and other factors not currently viewed as material that could cause actual results to differ materially from those described in the forward-looking statements. In addition, recent unprecedented events in the world economy and global financial and credit markets as a consequence of the COVID-19 outbreak have resulted in high market and commodity volatility and a contraction in debt and equity markets, which could have a particularly significant, detrimental, and unpredictable effect on forward-looking statements. The Company does not intend and does not assume any obligation, to update any forward-looking statements, other than as required by applicable law. For all of these reasons, the Company's securityholders should not place undue reliance on forward-looking statements.
CORPORATE STRUCTURE
Name, Address and Incorporation
Zentek Ltd. (the "Company") was incorporated under the Business Corporations Act (Ontario) as a numbered company on July 29, 2008. Pursuant to Articles of Amendment dated November 24, 2009, the Company changed its name to Zenyatta Ventures Ltd. Pursuant to Articles of Amendment dated January 1, 2019, the Company changed its name to ZEN Graphene Solutions Ltd. On October 27, 2021 (effective October 28, 2021), the Company filed Articles of Amendment changing the name from "Zen Graphene Solutions Ltd" to "Zentek Ltd.".
The Company's registered office is located at 210-1205 Amber Drive, Thunder Bay, Ontario P7B 6M4 and its head office is located at 210-1205 Amber Drive, Thunder Bay, Ontario P7B 6M4. The Company does not have any material subsidiaries.
GENERAL DEVELOPMENT OF THE BUSINESS
Originally, the Company commenced operations as a junior mineral exploration company focused primarily on mineral deposits in Northern Ontario, Canada. The Company was actively engaged in exploring mining projects and held an interest in exploration licenses on properties in the "Arc of Fire" area in Northern Ontario, Canada. The properties, located north of Lake Superior and west of James Bay in north-western Ontario, Canada, were unpatented, non-contiguous, and consisted of nine claim blocks, including 234 claims comprised of 3,549 claim units over a total of 56,784 ha. Within such claim blocks, the Company still holds a 100% undivided interest in Claim Block 4F, which hosts the igneous-hosted, fluid-derived graphite deposit (the "Albany Graphite Project"). The Company did extensive work to determine potential uses for the graphite materials extracted from the Albany Graphite Project, including engaging in testing and studies on graphene materials.
In May 2018, the Company began to focus resources on the research and development of graphene and related applications, which was supported by shareholders of the Company who voted in favour of a new Board of Directors with an interdisciplinary team to augment key management personnel with expertise in business, science, marketing, and government relations.
In February of 2020, the Company opened a research facility in Guelph, Ontario, to support its university and industrial partners' ongoing research and to scale-up production of graphene product. Subsequently, the COVID-19 pandemic halted research at the Company's collaborators' laboratories. The Company pivoted to focus its resources to develop graphene-based solutions for the fight against COVID-19.
Pursuant to a License Agreement dated September 22, 2020, between the Company and the University of Guelph, the Company holds the exclusive global rights to intellectual property regarding an electrochemical exfoliation ("ECE") process to produce graphene oxide ("GO").
On September 22, 2020, the Company announced, based on the results from a report to the Company dated September 18, 2020, from the ImPaKT Centre at the University of Western Ontario entitled "Zen Graphene - Lab Test Report No. Z03-092020", the development and successful testing of a patent-pending GO/silver compound that showed to be 99% effective against COVID-19 virus a minimum of 35 days after application of the coating to N95 mask material. On December 22, 2020, the Company announced the successful testing at the Department of Microbiology at Mount Sinai Hospital/University Health Network of the GO/silver compound that showed to be 99.9% effective against both gram-positive and gram-negative aerobic bacteria as well as against fungus/yeast, based on a report to the Company dated December 18, 2020 entitled "Evaluation of Graphene Oxide with Silver Cations (GO-Ag+) as an Antibacterial Agent against Respiratory Pathogens", which stated that if the compound could be shown to be safe and effective, it could provide a breakthrough alternative therapy for the practices of family medicine, Otolaryngology, Ophthalmology and intensive care units. The Company has filed three patent applications relating to its antimicrobial coating, and on April 13, 2021, announced the brand name ZenGUARD ("ZenGUARD™") for such coating.
On November 29, 2021, the Company announced that it had been issued a Medical Device Establishment License ("MDEL") from Health Canada (license number 18823) for the manufacture and distribution of any Class I medical devices, including any such devices with or without the ZENGuard™ coating.
The Company is now an intellectual property development and commercialization company focused primarily on commercializing ZenGUARD™, as well as on the development of certain rapid detection technologies and other nanomaterials-based technologies. The Company is not currently conducting any significant work on the Albany Graphite Project and does not require materials extracted from the Albany Graphite Project for its current business plans, although such materials could hold significant value to the Company in the future. On October 18, 2021, the TSXV changed the Company's classification from a "mining issuer" to an "industrial, technology, or life sciences issuer", which was approved by the shareholders of the Company on September 27, 2021, in accordance with the rules and policies of the TSXV.
Three Year History
Current Business
ZenGUARD™ Antimicrobial Compound
At the Company's financial year-end, it was producing the ZenGUARD™ antimicrobial coating at pilot-scale, but is now ramping up towards industrial production for application to non-woven, spunbond polypropylene material to be used in surgical mask manufacturing and potentially on other materials and products. Based on reports from GAP EnviroMicrobial Services Ltd. ("GAP Labs") dated May 3, 2021, the addition of ZenGUARD™ coating to surgical masks has shown to increase the bacterial and viral filtration efficiency of masks and acts as an antimicrobial agent providing increased protection when compared to similar uncoated masks.
The Company entered into a License and Supply Agreement dated September 24, 2021, with Trebor Rx Corp. ("Trebor"), pursuant to which the Company granted a non-exclusive non-transferable license to Trebor to use the ZenGUARD™ coating in certain specified Trebor personal protective equipment ("PPE") products displaying the Company's branding, including surgical masks, nitrile gloves, surgical gowns and scrubs and other healthcare and similar such products, and an additional exclusive license to sell and distribute ZenGUARD™ coated Elastomeric Respirator Mask filters i.e. Pro+ filters, whether fixed or replaceable, such exclusive license remaining in force only so long as Trebor sells a minimum of 60,000,000 filters per year with annual growth of at least 10%. Trebor agreed to use the ZenGUARD™ coating on all of its products sold unless the purchaser specifically refuses to purchase the ZenGUARD™ coated products and agreed to purchase the ZenGUARD™ coating from the Company by way of cash payments for a supply of ZenGUARD™ coating based on demand for Trebor products. The sale of ZenGUARD™ coated PPE masks received Health Canada authorization on September 22, 2021, under Interim Order No.2 - #329587 - Respecting the Importation and Sale of Medical Devices for Use in Relation to COVID-19. On September 23, 2021, The Company announced that it had delivered and generated revenue from its first shipment of ZenGUARD™ antimicrobial coating to Trebor.
Additionally, the Company has been issued a MDEL from Health Canada (license number 18823) for the manufacture and distribution of any Class I medical devices, including any such devices with or without the ZenGUARD™ coating. The MDEL allows the Company to potentially work with other manufacturers and distributors inside and outside of Canada in addition to Trebor to bring surgical masks and, potentially, other PPE (whether or not coated with ZenGUARD™ antimicrobial compound) to the Canadian market. The MDEL also allows the Company to produce and sell its own Class I medical device PPE products.
On April 12, 2022, the Company announced that it has also entered into a Reciprocal Supply Agreement dated March 31, 2022, with EkoMed Global Inc. ("EkoMed"), a globally integrated manufacturer and distributor of PPE, pursuant to which (i) the Company will sell quantities of ZenGUARD™ coating to EkoMed for use initially on EkoMed's surgical masks and potentially other PPE in the future, including N95 and KN95 type masks, and (ii) the Company will purchase surgical masks manufactured by EkoMed, to be treated with ZenGUARD™ coating and resold by the Company.
On May 13, 2022, the Company announced that Mark's Work Wearhouse had placed an initial order for ZenGUARD™ coated-masks to be sold at select stores across Canada, and online.
Based on discussions with Trebor and management's reasonable business judgment in estimating demand for ZenGUARD™ coated masks during a global pandemic, to meet anticipated demand for its ZenGUARD™ proprietary antimicrobial compound, the Company began sourcing GO from third parties for the production of the ZenGUARD™ coating. On November 11, 2021, the Company announced that it had reached an agreement to secure the necessary supply of GO to produce enough ZenGUARD™ to meet anticipated demand, which has been estimated by the Company based on discussions with Trebor and the Company's research, with shipments that began in December 2021 and will continue during 2022.
The Company continues to market its ZenGUARD™ product to be applied to various materials, and has targeted manufacturers including PPE manufacturers and heating, ventilation, and air conditioning ("HVAC") filter material companies.
To produce the ZenGUARD™ antimicrobial coating, quantities of GO are required. The Company currently purchases GO from third parties, and then uses the GO to produce the ZenGUARD™ coating formulation at its production facility in Guelph, Ontario. The Company then ships the ZenGUARD™ coating formulation to a third party for application onto spunbond material to be used for surgical masks (and potentially other products). The Company has installed industrial scale manufacturing equipment in its Guelph, Ontario facility to produce ZenGUARD™ coating formulation at a higher scale and capacity (see below under the heading Construction of ZenGUARD™ Industrial Scale Production and Coating Facility). A completion of construction ceremony was held June 17, 2022, at the facility.
The Company also intends to construct a facility to produce its own GO. The Company believes that the ability to produce GO itself rather than relying on third party suppliers will be economically favourable to the Company over the long term, as well as reducing supply and shipping risk (see below under the heading Proposed Construction of Graphene Oxide Production Facility).
Construction of ZenGUARD™ Industrial Scale Production and Coating Facility
The Company has installed industrial scale production equipment to produce the ZenGUARD™ coating formulation at its York Rd., Guelph, Ontario location, as such location is permitted for industrial use. The Company has also purchased coating equipment so the process of applying the ZenGUARD™ coating formulation to spunbond polypropylene for use in surgical masks, other PPE equipment, and potentially other uses, can be completed by the Company on-site.
Preliminary engineering study by Bantrel Co. commenced in January 2021 for graphite purification, GO production, and ZenGUARD™ production equipment. Engineering efforts then shifted to the exclusive development of a ZenGUARD™ production facility due to the long lead time for construction of the proposed purification plant, and the availability of sufficient low-cost GO from an external supplier negating the immediate need to use and process internally sourced graphite from the Albany Graphite Project. The preliminary engineering study was further delayed by a fundamental change in the synthesis method in March 2021, resulting in a significantly more simplified design of the proposed ZenGUARD™ production equipment.
Detailed engineering of the proposed ZenGUARD™ compound manufacturing equipment began in July 2021. The Company announced on February 28, 2022 that the production facility was fully licensed and permitted for ZenGUARD™ production, and that substantially all equipment had been received to ramp-up industrial scale capacity. At this point the Company intends to continue to use third parties to coat the ZenGUARD™ Graphene compound onto materials until the coating capabilities are operational at the Company's facility and in circumstances when external coating capacity is required. Once this industrial process is in operation, the Company's production capacity of ZenGUARD™ coated material is expected to increase significantly. The Company hired a new director of Global Healthcare Sales, Moe Dieb on the 24th of May, 2022 to increase market opportunities for its increased manufacturing capacity.
Industrial scale spray coating line equipment was researched, selected, and ordered in October 2021. Upon delivery of the industrial scale coating equipment, installation and commissioning of such equipment can commence, after which the Company expects to be able to coat materials with ZenGUARD™ on-site. The Company notes that there are potentially many variables involved with commissioning the industrial scale coating plant, including the timing of the delivery of equipment, potential restrictions on travel due to the COVID-19 pandemic, among others, and the Company is therefore unable to provide timing estimates about commissioning completion with a high level of certainty.
James Jordan, P.Eng., the Company's Project Engineer is primarily overseeing the construction of the proposed ZenGUARD™ production equipment. As of March 31, 2022, approximately $2,440,000 has been spent by the Company on this objective, and the Company currently estimates that approximately $400,000 in additional expenditures will be required to complete construction. The Company held a grand opening on June 17, 2022.
Pilot scale coating line equipment has been sourced by the Company, and the Company has spent approximately $811,000 as of March 31, 2022. Upon delivery of such equipment, installation and commission will be required. The Company expects additional expenditures of approximately $500,000 for such equipment purchase, installation and commissioning.
Proposed Construction of Graphene Oxide Production Facility
In addition to the construction of the ZenGUARD™ industrial scale production and coating equipment, as discussed above, the Company intends to construct a plant to produce GO. The Company believes that the ability to produce GO itself, which is the precursor for the ZenGUARD™ compound, rather than relying on third party suppliers of GO, will be economically favourable to the Company over the long term, as well as reducing supply and shipping risk. The Company believes that there are three primary reasons it would benefit from an ability to produce GO internally: (i) it should eliminate or significantly reduce supply chain risk; (ii) GO is not a homogeneous substance and by producing its own GO the Company could ensure product consistency; and (iii) the Company believes that the demand for GO is increasing and that a domestic production facility could have the potential to generate product for third-party users of the material.
In connection with the Company's proposed production of GO, the Company has conducted research and development to produce high-quality, few-layer GO via an ECE process designed to be scalable, low cost, low energy, and environmentally friendly. In collaboration with Prof. Aicheng Chen at the University of Guelph, the prototype ECE process was designed, developed, and optimized. A PCT patent has been filed by Guelph University for the processes to produce expanded graphite and electrochemically exfoliated GO, the exclusive global rights to which has been licensed by the Company pursuant to a License Agreement dated September 22, 2020.
The Company engaged Bantrel Co. in January 2021, and engineering work was initiated. Potential sites for a proposed GO production plant have been investigated, however a site has not been secured and no permits have been obtained to date. James Jordan, P.Eng., the Company's Project Engineer is primarily overseeing the proposed engineering and construction of such a facility, and possible alternatives. As of March 31, 2022, the Company has spent $35,000 in preliminary investigations relating to this project and expects that approximately $7,500,000 will be required to complete construction of a GO production facility.
The Company estimates that fifteen to eighteen months will be required to complete the construction of a GO production plant, which is a management estimate only based on the expectation of securing an agreement for the purchase of technology from an existing GO producer. Inherent risks include, but are not limited to, the inability to reach an acceptable agreement for the purchase of such technology, the inability to adapt existing technology to the Canadian regulatory requirements, scaling-up from known existing production capacities could become a requirement, and delays as a result of ongoing material and equipment supply shortages.
ZenGUARD™ Research and Development
The Company continues to seek the most effective, cost-efficient, and scalable process to produce high-quality graphene. The production of graphene requires a consistent source (or precursor) material for conversion to graphene, which is then applied to various products for enhancement. The Company believes that it has a potential competitive advantage with its interest in the large and high-quality supply of source material, from the Albany Graphite Project, if and when the Company determines it cost effective to use such material.
Advanced testing on potential new processes for commercial GO production is underway. The Company continues to work with universities on different processes that could potentially lead to a more efficient and/or lower cost process for GO production.
The Company's research and development, and project development activities during the year ended March 31, 2022 are summarized below:
On December 22, 2020, the Company announced that testing results from the University Health Network/Mount Sinai Hospital Department of Microbiology in Toronto indicated that the ZenGUARD™ compound may also be beneficial in the treatment of numerous human contracted pathogens, including upper and lower respiratory tract infections, where COVID-19 is a major contributor, as well as drug resistant organisms. The report delivered to the Company dated December 18, 2020, entitled "Evaluation of Graphene Oxide with Silver Cations (GO-Ag+) as an Antibacterial Agent against Respiratory Pathogens", stated that if the Graphene Compound could be shown to be safe and effective, it could provide a breakthrough alternative therapy for the practices of family medicine, otolaryngology, ophthalmology, and intensive care units.
On December 29, 2020, the Company announced an update on cytotoxicity testing of the ZenGUARD™ compound and the effectiveness as a coating following testing completed at McMaster University's Centre for Microbial Chemical Biology and Mount Sinai Hospital. The preliminary testing confirmed the ZenGUARD™ compound's efficacy with fungi and bacteria in vitro at low concentrations.
On March 17, 2021, the Company announced that testing of the Company's ZenGUARD™ compound against four gram-positive and nine-gram negative bacteria with antimicrobial-resistance, including multidrug-resistant variants like methicillin-resistant staphylococcus aureus, had been completed. Testing demonstrated that the compound was 99.9% effective against bacteria, and fungi at very low concentrations. Testing was conducted by Dr. Tony Mazzulli, the Microbiologist-in-chief at Mount Sinai Hospital.
In a news release on April 13, 2021, the Company confirmed that safety testing results received from Nucro Technics indicated that the ZenGUARD™ compound did not lead to skin irritation or sensitivity as required in ISO 10993-10 for its Class I medical device i.e., surgical masks.
On October 6, 2021, the Company announced the filing of an international patent application under the Patent Cooperation Treaty ("PCT") for ZenGUARD™, which patent application was published on March 24, 2022, and the transfer from the University of Guelph of the rights, under its PCT application, for the ECE process to produce GO. Pursuant to a License Agreement dated September 22, 2020, between the Company and the University of Guelph, the Company holds the exclusive global rights to this technology.
On February 28, 2022, the Company announced that it had purchased its research and development facility in Guelph, Ontario for $2.3 million. The facility continues to be a dedicated location to conduct ongoing research and development activities in pursuit of developing new intellectual property for graphene and other nanomaterials and refining the Company's existing technologies.
The Company continues to conduct testing on its ZenGUARD™ compound, which includes the increased challenge viral filtration efficiency and bacterial filtration efficiency test results announced by the Company on September 27, 2021. The results of third-party testing at GAP Labs demonstrated that ZenGUARD™ coated masks removed 98.9% more bacteria and 97.8% more virus particles than a typical ASTM level 3, 3-ply uncoated mask and resulted in a bacterial and viral filtration efficiency of over 99.99% .
Business in Development
Aptamer-Based Rapid Detection Technology
On June 17, 2021, the Company announced that it had signed an exclusive agreement with McMaster University to be the global commercializing partner for a newly developed aptamer-based rapid detection technology to detect SARS-CoV-2 in patients through saliva samples. The technology was developed by a team of researchers under the guidance of Drs. Yingfu Li, John Brennan and Leyla Soleymani, who have expertise in biosensing technologies, and applications as point of care diagnostics. This patent-pending technology was validated with clinical samples from patients recruited under the supervision of two clinicians, Drs. Deborah Yamamura and Bruno Salena, who also work at McMaster University. The project was funded by the Canadian Institutes of Health Research (CIHR). This technology has shown to be accurate (similar to current PCR tests), is saliva-based, affordable and scalable, and provides results in under 10 minutes. A license fee of $100,000, comprised of $50,000 cash and $50,000 in common shares of the Company (19,157 common shares at $2.61 per share) was paid to McMaster University as consideration. Although this technology is currently being developed specifically for COVID-19, this technology platform is designed to be able to detect other diseases by changing the aptamer to match new diseases.
The Company also received $148,000 from Innovations Solutions Canada ("ISC") to design and build a prototype for the use of this technology to help detect COVID-19 in wastewater. On November 4, 2021, the Company announced that it was selected as one of three technologies for Phase 1 of the ISC challenge to develop a portable detection device for SARS-CoV-2 in wastewater. On June 1, 2022, the Company announced that it would not proceed to Phase 2 of the ISC challenge, however the process and results produced would be useful for prioritizing future opportunities. The Company intends to reassess wastewater as a market opportunity.
The Company has contracted with NeoVentures Biotechnology Inc. ("NeoVentures"), a prominent entity in the aptamer development and applications field. NeoVentures has been engaged to validate the McMaster University results against spike proteins and develop a mathematical model to better understand the technology and results. NeoVentures has also been tasked to develop a standard operating procedure for the system, perform a pre-trial evaluation using saliva samples, and optimize buffers for sample preparation. The Company has incurred approximately $265,000 in expenditures related to the forgoing. Additionally, Dr. van der Kuur, the Company's Vice-President - Science and Research has undertaken supply chain activities including receiving samples and pricing from suppliers of hardware for the rapid COVID test including: potentiostat suppliers, screen printed electrode manufacturers and vetting the quality of chips, aptamer producers, and sample collection vials, pipettes etc. The Company continues to work with axiVEND, McMaster University and StarFish Product Engineering Inc., on product strategy alignment, usability analysis, device and architecture development, proof of concept and prototyping, and program development.
The Company currently intends to continue developing this technology, including the development of software and hardware, using outsourced third party developers. The Company intends to spend funds to bring the product to market as soon as practicable, which will require having a working prototype prepared, having conducted baseline studies, and having made application to Health Canada. On May 19, 2022, the Company announced that McMaster has received two Natural Sciences and Engineering Research Council ("NSERC") grants related to the aptamer-based rapid detection technology; the Alliance Missions Grant for the amount of $1,000,000, and an Idea to Innovation (I2I) Grant for the amount of $350,000, of which the Company will make a $140,000 contribution. The Company intends to continue working with Dr. Yingfu Li and the research team at McMaster through in-kind contributions, using these grants towards commercializing the rapid diagnostic platform. The grants will be used to further commercialization efforts by improving the performance of aptamers, optimizing chip synthesis, and initiating additional tests that can be incorporated into its pathogen detection platform. The Company currently expects the cost to reach commercialization to be approximately $2,500,000, and includes enhancements and further development of the technology.
On June 1, 2022, the Company announced that it had retained Halteres Associates ("Halteres"), a consultancy focused on global health, diagnostics, and point-of-care testing, to assist with the commercialization of the aptamer-based rapid detection technology. Market research from the Halteres group will be used to identify the most commercially important pathogens for detection which will guide the aptamer development program. Halteres will evaluate several commercialization opportunities for the aptamer technology including human diagnostics, agriculture, wastewater, veterinary, and other potential uses in healthcare.
To bring the product to market, the Company will be required to obtain authorization from Health Canada under an interim order, or to obtain a Class IV Medical Device Active License ("MDAL"). The process for obtaining an MDAL involves completing certain testing requirements and demonstrating that the product is (i) safe, (ii) effective, and (iii) fit for purpose. Assuming that process is completed, the Company would then start preparing a product technical file, seek to obtain an ISO 13485 Certificate, and then seek to complete a Health Canada Class IV application.
Diesel Fuel Additive
The Company is also working to develop a stable graphene-based diesel fuel additive to improve combustion, increase burn rate, reduce greenhouse gas emissions and to improve fuel economy of diesel fuels, which initial testing has shown to increase the performance of diesel fuel. The Company is working to improve on these early results through additional optimization work. The Company has filed a provisional patent for its graphene-based fuel additive technology.
Primarily overseen by Dr. van der Kuur, the Company's Vice-President - Science and Research, the Company is developing a process to functionalize GO to produce a stable dispersion in diesel fuel. The fuel additive was tested by Conestoga College in a Gunt 159 single cylinder test engine, which reported an improvement in fuel economy of over 10% under certain rpm. The Company's research and development team improved the synthesis of the functionalized GO additive to reduce the size of the particles and increase the functional groups, which could lead to improved combustion. An NSERC alliance proposal has been submitted for $110,500 cash contribution and a total budget of $311,500 over two years to continue doped fuel research. The project will focus on measuring the combustion of doped fuel in both droplet and spray combustion. The Company has spent approximately $75,000 on this research and development project.
The Company intends to conduct further testing in 2022 and 2023, including: testing fuel economy, brake efficiency and emissions in a diesel engine for two different GO fuel additive concentrations; conducting spray combustion tests, which will provide an initial assessment of the GO additive; and testing and optimizing the GO fuel additive for diesel generator engines and marine engines and aviation usage. The Company currently estimates that the cost for such future testing is approximately $300,000.
Icephobic Coating
The Company is also working to develop a new, patent-pending, carbon-based, nanotechnology-enhanced coating designed to prevent or reduce ice accretion for aviation (including drone) and wind energy applications.
James Jordan, P.Eng., the Company's Project Engineer and Dr. van der Kuur, the Company's Vice-President - Science and Research are the primary overseers of the project, which has involved the use of dispersion technology to homogeneously mix graphene-based materials in an elastomer. The Company has filed a provisional patent on the technology. The Company has also conducted testing at National Research Council's Altitude Icing Wind Tunnel (AIWT) in Ottawa and prepared graphene-enhanced elastomer material and coated test coupons for testing.
The Company disclosed on February 28, 2022 that the icephobic coatings were undergoing full flight trials on a specially equipped research aircraft under real world ice-forming weather conditions. On March 14, 2022, the Company announced the results of three rounds of testing of its icephobic coating, including laboratory tests, real-world flights and applications related to drone operations in adverse weather. In real world testing the Company reported that video footage of icephobic coating on test pieces attached to a research aircraft undergoing flight trials targeting adverse weather environments has shown positive results and demonstrated that, under significant icing conditions, the coatings provide an effective deicing and anti-icing solution. Drone testing has shown that drone propellers coated with the icephobic material have demonstrated that higher thrust can be maintained when compared to a non-coated propeller due to the ability to shed ice that forms on the blades that would otherwise degrade the aerodynamic properties. Accelerated ageing testing involved the Company providing coated samples to be exposed to UV weathering for 1,000 hours, which approximates two years' worth of sun damage in typical Canadian weather. These samples were then tested in an icing wind tunnel under dynamic conditions and demonstrated significant retention of their icephobicity. The Company now intends to test its coating for sand and rain erosion, another important measurement that will demonstrate its use as a practical application. In addition, other tests are being planned to evaluate the coating as part of a hybrid ice protection system, where the icephobic properties are combined with a heated de-icing system with the aim to improve efficiency of current ice protection methods used in general and commercial aviation.
The Company continues to consider and seek collaborators to commercialize this technology, including drone companies and companies specializing in elastomer production. The Company has completed its ASTM G-154 accelerated weathering. The Company has not spent significant funds on this project and anticipates additional testing and development to cost approximately $150,000.
Fire-Retardant Additive
The Company announced on March 28, 2022, that it had filed a provisional patent with the United States Patent and Trademark Office for an innovative Graphene Oxide-Metal-Organic Framework ("GO-MOF") compound for use in fire retardant products. Management of the Company considers the manufacturing of the GO-MOF compound as relatively easily scalable and efficient, due to the patent-pending facile synthesis process. The Company believes the fire-retardant GO-MOF additive could potentially be placed in a variety of coating products, such as latex, epoxies or included in polymers. When integrated into a polymer, it could potentially create a fire-resistant plastic that could be used in electrical vehicles, providing a fire-resistant non-metal casing for the batteries. Management currently expects that GO-MOF production could be achieved on the existing ZenGUARD industrial scale production facility with minimal additional capital expense.
Dr. van der Kuur, the Company's Vice-President of Science and Research is the primary overseer of the project. The Company has spent approximately $20,000 on this research and development project, and intends to conduct further testing, and currently estimates that the cost for such future testing is approximately $100,000.
Other Use-Cases for ZenGUARD™
The Company intends to continue exploring other applications and uses for its ZenGUARD™ compound, including, but not limited to, use in HVAC filters. On September 30, 2020, the Company first announced testing on graphene use for HVAC systems. On January 13, 2021, the Company announced that testing by a major Canadian certification company had confirmed that there was very little effect on air flow and pressure drop with a ZenGUARD™ treated filter compared to an untreated filter. The Company spent approximately $60,000 on testing, including preliminary testing of ZenGUARD™-coated HVAC filter media for pressure drop, and increased challenge bacterial filtration efficiency on uncoated and coated MERV 8 and MERV 13 HVAC filters, overseen primarily by James Jordan, P.Eng., the Company's Project Engineer and Dr. van der Kuur, the Company's Vice-President - Science and Research and Peter Wood, P.Eng., the Company's Vice-President, Special Projects. The Company then determined to wait for government support in order to proceed with testing, which was subsequently awarded on November 30, 2021. Further to the press release dated November 30, 2021, the Company announced that it has been awarded a research and development test contract through the ISC Testing Stream Call for Proposals to test ZenGUARD™-coated HVAC filters with interest from three different units within the National Research Council of Canada ("NRC"). The goal of the testing, conducted by CremCo Laboratories ("CCL") with assistance by the Aerospace Research Centre ("ARC"), a department of the National Research Council of Canada ("NRC") was to demonstrate: (i) a net reduction in the airborne viral and bacterial load with ZenGUARD™ coating applied to standard filters; (ii) no modifications required to existing HVAC systems to achieve (i) above; (iii) no reduction in air flow rates, which means air exchange rates in the space will be unchanged; and (iv) no reduction in the air quality as the ZenGUARD™ coating was tested to ensure it does not contribute particles into the air stream. Phase 1 testing commenced in December 2021 after an extensive design process, calibration and assessment of the testing rig, and involved the test rig being installed inside an aerobiology chamber to push air through HVAC filter material with test organisms to study how these live airborne organisms were reduced by the ZenGUARD™ coating. Testing used multiple samples with repeated tests so that each filter's performance could be compared. It was determined that all Phase 1 targets were met including sufficient reduction in live airborne test organisms, no significant shedding of the ZenGUARD™ coating, and air flow rates that were not impacted by the coating. On April 11, 2022, the Company announced that, after successful completion of Phase 1 testing, it will proceed to Phase 2 testing. Phase 2 testing will commence in July 2022 and will be conducted at ARC with assistance from CCL. Airborne test organisms will again be used, and testing will be conducted in a controlled environment. The objective of Phase 2 testing is to demonstrate a reduction in live airborne surrogate contamination within a modular classroom environment, simulating a real-world environment. By testing ZenGUARD™-coated HVAC filters, NRC is also expected to gain the knowledge and equipment to evaluate how airborne infectious diseases spread within aircraft cabins and other indoor spaces. The Company has approximately $400,000 budgeted for future testing (including a $200,000 grant).
In addition, the active ingredient in ZenGUARD™ has low minimum inhibitory concentrations against several bacteria as tested by Dr. Tony Mazzulli from Mount Sinai Hospital in Toronto. The Company is exploring the potential to use this compound in therapeutic or pharmaceutical applications based on these results. On February 4, 2021, and March 2, 2021, the Company announced results of the Phase 2 cytotoxicity testing, by Nucro Technics testing laboratory, and included cytotoxicity testing that noted no adverse effects after seven days of repeated dosing. The Company has received quotes for animal studies of MRSA-related skin infections and expects to award a contract as soon as practicable. On March 10, 2022, the Company announced that it had retained Vimta Labs Limited ("Vimta"), a leading clinical research organization in India, to begin studies of ZenGUARD™ active ingredient as a potential treatment of skin disease. Vimta will be performing pre-clinical research including collecting the in vitro and in vivo data that is required for the submission of an Investigational New Drug to the United States Food and Drug Administration which is a requirement for the administration of a new drug in humans. The pre-clinical work with Vimta is scheduled to be completed by Q3 2023. The Company decided to move forward with this work following cytotoxicity studies with Nucro-Technics and positive anecdotal results of various human skin infections including acne, warts and toenail fungal infections. There were no adverse effects recorded during these anecdotal trials. These human anecdotal cases form part of the Company's patent application filed December 21, 2021, under the Patent Cooperation Treaty entitled "Graphene-Silver Nanocomposites and Uses For Same As a Broad-Spectrum Antimicrobial" which is scheduled to be published on June 23, 2022.
Other
The Company is also working with a number of research institutions developing processes to synthesize graphene, GO and graphene quantum dots, along with other possible applications for graphene. Potential markets for graphene include composites (e.g., concrete, rubber, plastic polymers and ceramics), sensors, water purification and filtration, coatings and solid-state lubricants, silicon-graphene and graphene aerogel anode material for next generation batteries along with aerospace applications. On February 18, 2022, the Company announced the filing of a provisional patent with the United States Patent and Trademark Office relating to a graphene-wrapped silicon anode material. The Company has other research projects commenced or contemplated including for applications in aluminum alloys, corrosion protection, battery technology, conductive polymers and others. The Company will report on these when it is appropriate to do so.
Albany Graphite Project
The Company owns 100% of the Albany Graphite Project in Northern Ontario, Canada. The unusual nature of the graphite in the Albany deposit and its potential economic significance motivated additional exploration drilling from 2012 to 2014. The graphene nanomaterials market was not considered as part of the June 2015 Preliminary Economic Assessment model. The current claims require a total of $195,600 worth of assessment work per year to keep them in good standing and the Company has a total credit of approximately $5.8M in available exploration reserves. The Company has no near-term plans to continue any significant work on the Albany Graphite Project in Northern Ontario and is not dependent on materials extracted from the Albany Graphite Project for its current business plans. On October 18, 2021, the TSXV changed the Company's classification from a "mining issuer" to an "industrial, technology, or life sciences issuer." The change of classification was approved by the shareholders of the Company on September 27, 2021, in accordance with the rules and policies of the TSXV.
On April 18, 2022, the Company announced that it has engaged The Benchmark Company, LLC ("Benchmark") to act as strategic financial advisor with respect to potential transactions relating to the Albany Graphite Project.
Financings
On September 12, 2019, the Company announced that it closed a non-brokered private placement financing through the issuance of 3,000,000 units at a price of $0.35 units, for gross proceeds for $1,050,000. Each unit was comprised of one common share and one-half of one whole common share purchase warrant. Each whole warrant entitled the holder thereof to acquire one common share at an exercise price of $0.50 per whole warrant for a period of 24 months from the date of issuance.
On December 20, 2019, the Company closed a non-brokered private placement of flow-through common shares, through the issuance of 3,025,000 flow-through common shares at a price of $0.40 per flow-through common share for gross proceeds of $1,210,000.
On February 4, 2020, the Company issued an aggregate of 137,100 broker warrants to certain eligible finders in connection with a previously closed non-brokered private placement of flow-through common shares. Each broker warrant entitled the holder thereof to acquire one common share at a price of $0.50 until December 19, 2021.
On June 29, 2020, the Company announced that it closed the first tranche of a non-brokered private placement through the issuance of 1,795,491 units at a price of $0.60 per unit, for gross proceeds of $1,077,294.80. Each unit consisted of one common share of the Company and one half of one non-transferable share purchase warrant. Each whole warrant entitles the holder thereof to acquire one additional common share at an exercise price of $0.80 per warrant, exercisable for a period of twenty-four months from the date of issuance.
On July 6, 2020, the Company announced that it closed the second tranche of a non-brokered private placement through the issuance of 1,621,175 units at a price of $0.60 per unit, for gross proceeds of $972,705. Each unit consisted of one common share of the Company and one half of one non-transferable share purchase warrant. Each whole warrant entitled the holder thereof to acquire one additional common share at an exercise price of $0.80 per warrant, exercisable for a period of twenty-four months from the date of issuance. The aggregate gross proceeds raised pursuant to the first and second tranche of the non-brokered private placement was $2,049,999.80 through the issuance of 3,416,666 units.
On April 9, 2021, the Company announced that it closed a non-brokered private placement of 1,735,199 units at a price of $2.50 per unit for gross proceeds of $4,337,998. Each unit was comprised of one common share and one-half of one whole common share purchase warrant. Each whole warrant entitled the holder thereof to acquire one common share at a price of $3.00 per common share until April 8, 2023, provided however that if, at any time after August 9, 2021, the closing price of the Company's common shares on the TSX Venture Exchange (or such other stock exchange on which the common share ay be traded from time to time) is at or above CDN$4.00 per share for a period of ten consecutive trading days (the "Triggering Event"), then the Company may, within one hundred days of the Triggering Event, accelerate the expiry date of the warrants by giving notice thereof to the holders of the warrants, by way of news release, and in such case the warrants will expire on the first day that is thirty calendar days after the date on which such notice is given by the Company announcing the Triggering Event. The warrants are subject to the terms and conditions of a warrant indenture dated April 8, 2021 between the Company and Capital Transfer Agency, ULC as agent for the warrants.
On January 4, 2022, the Company announced that it had closed a bought-deal prospectus offering (the "Prospectus Offering") for gross proceeds of $23,005,060, and a concurrent non-brokered private placement (the "Concurrent Private Placement") for aggregate gross proceeds of $10,009,022. Pursuant to the Prospectus Offering, the Company issued a total of 4,424,050 common shares at a price of $5.20 per common share (the "Issue Price"), and pursuant to the Concurrent Private Placement, the Company issued a total of 1,924,812 common shares at the Issue Price.
DESCRIPTION OF THE BUSINESS
General
Summary
In 2018, the Company began to focus resources on the research and development of graphene and related applications, which was supported by shareholders of the Company who voted in favour of significant Board changes and accordingly the assembly of an interdisciplinary team to augment key management personnel with expertise in business, marketing, and government relations.
Since May 2018, the Company has successfully raised over $40 million and the Company has received more than $3 million in government grants to accelerate its research and collaborations to build momentum towards commercial graphene production and mine development. In January 2020, the Company changed its name and began focusing its research on three priorities: (i) advanced materials, (ii) clean technology, and (iii) green energy. The name change reflects the Company's decision to focus its development plans for the Albany Graphite Project on graphene nanomaterial intellectual property and product opportunities that may benefit from vertical integration. In February of 2020, the Company opened a research facility in Guelph, Ontario, to support its university and industrial partners' ongoing research and to scale-up production of graphene product. Subsequently, the COVID-19 pandemic halted research at the Company's collaborators' laboratories. The Company rapidly pivoted to focus its resources to develop graphene-based solutions for the fight against COVID-19 and developed a patent-pending graphene oxide/silver coating that has shown to effectively inactivate over 99% of the SARS-CoV-2 virus. Additional testing and research have indicated that the Company's compound is also effective against bacteria and fungi. This research and development have resulted in the filing of three patent applications (see "Intangible Properties" below), the Trebor supply agreement and an agreement with Ekomed.
To meet rapidly growing immediate demand for its proprietary antimicrobial compound, the Company began sourcing graphene oxide from third parties and is also testing third party graphite as a potential precursor material to produce graphene-based nanomaterials. Consequently, the Company's continued existence is no longer dependent upon the discovery of economically recoverable ore reserves, the ability of the Company to obtain the necessary financing to explore and develop potential ore reserves, or by way of entering into joint venture arrangements, future profitable production, or alternatively, upon the Company's ability to dispose of its interests on an advantageous basis.
Currently the principal markets targeted by the Company are PPE equipment manufacturers (for the use of antimicrobial coatings on surgical masks, filters, cartridges for reusable masks, nitrile gloves, gowns, shoe covers, etc.) and HVAC system manufacturers and suppliers (for the use of antimicrobial coated filters, pre and post-filters, high-efficiency particulate air (HEPA), etc.). The Company is continuing to identify new markets and uses for its graphene-based antimicrobial coating.
The Company is working directly with PPE equipment and HVAC filter manufacturers and intends to ultimately supply the antimicrobial coating product directly to the manufacturers for use in their respective production lines, or as pre-coated materials/products that will be supplied to manufacturers (e.g., coated polypropylene (PP) or polyethylene terathalate (PET) spunbound nonwoven media to be used in the construction of a surgical mask, coated nitrile gloves or pre-coated HVAC filtration media). The Company is also currently discussing with other parties interested in representing the Company and/or distributing its products in other global markets (Europe, India, Australasia, etc.). To date, most of the business opportunities that have been developed have been pursuant to inbound inquiries; however, once the production line to produce the antimicrobial coatings is operational, the Company intends to initiate an outbound marketing program.
Specialized Skill and Knowledge
The Company's research and development, and application/product development work involves Highly Qualified Personnel (PhD researchers, scientists and engineers) and the Company has a highly skilled management team in place. The Company intends to add to its team and to hire and train additional staff as the Company's business transitions from research and product development to production, to work in the GO and antimicrobial coating production facilities, as may be required.
Competitive Conditions
The Company seeks to compete with other graphene and manufacturing companies, in highly competitive markets. The Company plans to provide functionalized graphene products to businesses, institutions and governments within North America and internationally. This is a rapidly growing industry which has been accelerated during the COVID-19 pandemic. The Company's competitive position is based on its increasing scientific knowledge and know-how, its intellectual property, possession of in-house laboratories, extension of in-house science via university partners, the growing productive capacity to serve large customers, and the optionality of future vertical integration represented by the Albany Graphite Project. The Company's management is not aware of any companies similarly positioned to serve like markets as the Company, although given the rapid progression of the graphene industry, the Company may face significant competition in the future (See "Risk Factors - Industry Competition").
New Products
The Company has publicly announced the introduction of its new graphene oxide-silver nanocomposite which has shown to be effective against bacterial, viral, and fungal pathogens and which can be sprayed or coated onto a variety of materials. Test results of this graphene oxide-silver nanocomposite show that it deactivates or kills at low concentrations, is shelf stable for months when applied to personal protective equipment without losing effectiveness, and acts upon a virus through multiple mechanical mechanisms at the atomic scale.
Components
The main components to produce the Company's antimicrobial compound are readily available and the Company has taken steps to secure GO from a third party in order to meet demand while the Company sets up its GO production facility, with the intention of using materials from the Albany Graphite Deposit.
Intangible Properties
The Company holds intangible property in various forms such as trademarks, pending patent applications, trade secrets and know-how, mining claims, laboratory reports, licensing agreements, scientific agreements, and customer lists. Specifically, the Company holds two active patent applications under the Patent Cooperation Treaty in the Company's name, for (i) graphene-silver nanocomposite uses as an antimicrobial coating agent, and (ii) graphene-silver nanocomposite compositions and uses for treatment of infectious diseases. Additionally, the Company has an exclusive license to make, have made, use, lease, sell, have sold, export, import, or otherwise distribute the subject matter of another provisional patent application relating to the processes for the preparation of expanded graphite and exfoliated GO. Management anticipates that amongst the existing intangible properties the pending patent applications have the most potential value for the Company. (See "Risk Factors - Unpredictable Sales Cycles").
Cycles
The sales cycle for graphene products may range considerably from one to multiple years from the time a customer begins testing the Company's product until the time that they could be used in a commercial product. Timing of product introduction could vary significantly based on the target market. Additionally, any demand for the Company's products based in whole or in part on the current coronavirus (COVID-19) pandemic could materially change in the event the pandemic ends or decreases in severity. (See "Risk Factors - Intellectual Property").
Economic Dependence
The Company has entered into a limited number of supply or sales agreements for the sale of its products. Until additional supply agreements are executed by the Company, the Company's revenues will be completely dependent on such agreements. If such agreements are terminated, or if less of the Company's product than anticipated is purchased pursuant to such agreements, this could have a material adverse impact on the Company's business, operations and results.
Environmental Protection
The Company is seeking to develop environmentally friendly processes and products and is currently working with its partners to create biodegradable/recyclable/reusable products that have a low carbon footprint. In addition, the Company is currently working with Prof. Aicheng Chen and his team at the University of Guelph to develop a scalable, low cost, low energy, and environmentally friendly process (chemically and electrochemically) to produce high quality, few-layer GO at the Company's Guelph facility. On September 28, 2020, the University of Guelph filed a provisional patent application directed to an electrochemical exfoliation process to produce GO from Albany Pure™ graphite, to which the Company holds an exclusive license.
The Company's current and future operations with respect to the Albany Graphite Project, including development activities on its properties or areas in which it has an interest, are subject to laws and regulations governing exploration, development, tenure, productions, taxes, labour standards, occupational health, waste disposal, protection and remediation of the environment, mine safety, toxic substances and other matters. Environmental protection requirements did not have a material effect on the capital expenditures, earnings or competitive position of the Company during its financial year ended March 31, 2022 and are not expected to have a material effect during the Company's financial year ending March 31, 2022.
Employees
As of the date of this AIF, the Company has 27 staff consisting of 25 employees and 2 consultants. Management expects headcount to grow as production volumes, scientific capacity and sales staff grow during the current and upcoming fiscal years.
Foreign Operations
The Company has no meaningful foreign operations.
Bankruptcy
There have been no bankruptcy, receivership or similar proceedings against the Company within the three most recently completed financial years or during or proposed for the current financial year.
RISK FACTORS
The operations of the Company are speculative due to the high-risk nature of its business, which includes the development of certain intellectual property and the manufacturing of graphene related products, and which may include the future acquisition, financing and development of the Albany Graphite Project. These risk factors could materially affect the Company's future operating results and could cause actual events to differ materially from those described in forward-looking information relating to the Company. Accordingly, any investment in securities of the Company is speculative and investors should not invest in securities of the Company unless they can afford to lose their entire investment.
The Company assesses and attempts to minimize the effects of these risks through careful management and planning of its operations and hiring qualified personnel but is subject to a number of limitations in managing risk resulting from its early stage of development. Below is a non-exhaustive summary of the principal risks and related uncertainties that may impact the Company. Such risk factors, as well as additional risks and uncertainties not presently known to Company or that the Company currently deems immaterial, could have a material adverse effect on the Company's business, financial condition and results of operations or the trading price of the common shares.
As at March 31, 2022, there was an increase in trade credit risk as a result of trade receivables now being generated through sales.
Negative Operating Cash Flow
During the financial year ended March 31, 2022, the Company had negative operating cash flow because its revenues did not exceed its operating expenses. In addition, as a result of the Company's business plans for the development of its products, the Company expects cash flow from operations to be negative until revenues improve to offset its operating expenditures. The Company's cash flow from operations may be affected in the future by expenditures incurred by the Company to continue to develop its products. To the extent the Company has negative cash flow in any future period, the Company may be required to allocate funds to fund such negative cash flow from operating activities. In order to stay in business, in the absence of cash flow from operations, the Company will have to raise funding through financing activities. However, there is no certainty the Company will be able to raise funds at all or on terms acceptable to the Company in the event it needs to do so. Furthermore, additional funds raised by the Company through the issuance of equity or convertible debt securities would cause the Company's current shareholders to experience dilution. Such securities also may grant rights, preferences or privileges senior to those of the Company's shareholders. The Company does not have any contractual restrictions on its ability to incur debt and, accordingly, the Company could incur significant amounts of indebtedness to finance its operations. Any such indebtedness could contain restrictive covenants, which likely would restrict the Company's operations.
Uncertainties Relating to the Company's Business Plans
There is no assurance that broad successful commercial applications may be feasible for the Company. The Company is continuing to explore, develop, and test its current products and new products, and there can be no assurance that new uses of existing products or new products will be fully developed for commercial application, that test results will be successful, if completed at all, that any necessary permits or approvals required in order to market such products will be obtained by the Company, or that existing technology or products will become profitable. Furthermore, there is no assurance that the Company will complete any acquisitions or acquire any know-how or trade secrets to carry out certain of its future objectives. Should the Company fail to achieve any of the foregoing, this could have a material adverse impact on the business and planned business of the Company.
The Company's business is in part dependent on patents, trade secret and other intellectual property laws of Canada, and potentially foreign jurisdictions. The Company may be unable to prevent third parties from using its intellectual property without its authorization. Some of the Company's current or future technologies and trade secrets may not be covered by any patent or patent application, and the Company's issued and pending patents may not provide the Company with any competitive advantage and could be challenged by third parties. The Company's inability to secure issuance of pending patent applications may limit its ability to protect the intellectual property rights these pending patent applications were intended to cover. The Company's competitors may attempt to design around its patents to avoid liability for infringement and, if successful, could adversely affect the Company's market share. Furthermore, the expiration of the Company's patents may lead to increased competition.
Additionally, the Company plans to construct facilities for some of its operations and business activities. There can be no assurance that locations will be secured on terms favourable to the Company or at all, that engineering plans will be completed or will be satisfactory for the intended business activities of the Company, that any required permitting will be obtained, that construction of such facilities will be completed, or that such facilities will ever become operational. If such facilities are not constructed, or do not become operational, or do not operate at the capacity required or anticipated, there could be a material adverse effect of the Company's planned business and operations.
Economic and Political Conditions
Worldwide financial and economic cycles or conditions are uncertain, and recovery from a business downturn or recession could be very slow and have significant impact on the Company's business. The Company's business is sensitive to changes in economic and political conditions, including interest rates, currency issues, energy prices, trade issues, international or domestic conflicts or political crises, and epidemics or pandemics, such as the strain of COVID-19.
As at the date hereof, the global reactions to the spread of COVID‐19 have led to, among other things, significant restrictions on travel and gatherings of individuals, quarantines, temporary business closures and a general reduction in consumer activity. While these effects are expected to be temporary, the duration of the disruptions to business internationally and the related financial impact cannot be estimated with any degree of certainty at this time. In addition, the increasing number of individuals infected with COVID‐19 could result in an even greater global health crisis that could adversely affect global economies and financial markets, resulting in a protracted economic downturn that could have an adverse effect on the Company's prospects.
The responses of governmental authorities and corporate entities, including through mandated or voluntary shutdowns, may also lead to a general long-term slow-down in the economy and may lead to disruptions to the Company's workforce and facilities, customers, sales and operations and supply chain.
Measures taken by the governments worldwide and voluntary measures undertaken by the Company with a view to the safety of the Company's employees, may adversely impact the Company's business.
In particular, as a result of the foregoing, COVID‐19 could materially and adversely impact the Company's business, including without limitation, employee health, workforce availability and productivity, limitations on travel, supply chain disruptions, increased insurance premiums, and restrictions to the Company's ability to conduct its business. Also, the Company's revenues and cash resources may be negatively affected, it may need to assist potential customers with obtaining financing or government incentives to help customers fund their purchases of the Company's products and demand for the Company's products may decrease as partners and potential customers defer their projects. Any such disruptions or closures could have a material adverse effect on the Company's business. In addition, parties with whom the Company does business or on whom the Company is reliant may also be adversely impacted by the COVID‐19 pandemic which may in turn cause further disruption to the Company's business. Any long-term closures or suspensions may also result in the loss of personnel or the workforce in general as employees seek employment elsewhere.
The impact of COVID‐19 and government responses thereto may also continue to have a material impact on financial results and could constrain the Company's ability to obtain equity or debt financing in the future, which may have a material adverse effect on its business, financial condition and results of operations.
The Company is actively monitoring the situation and will respond as the impact of the COVID-19 pandemic evolves, which will depend on several factors set out above. The extent to which the pandemic will impact the Company's operations in the future is highly uncertain and cannot be predicted with confidence as at the date hereof, but could have a material adverse effect on the Company's business, financial condition and results of operations. These uncertainties include, but are not limited to, the duration of the outbreak, the ability of governments in countries in which the Company conducts business to curtail the spreading of the virus, the economic recovery as well as community and social stabilities. Any of these uncertainties, and others, could have further material adverse effects on the Company's business and operations.
Revenue from Graphene Sales; Long and Complex Sales Cycle
To date, the Company has recorded minimal revenue from its graphene enhanced products sales. There can be no assurance that significant losses will not occur in the near future or that the Company will be profitable in the future. The Company's operating expenses, and capital expenditures may increase in subsequent years. The Company expects to continue to incur losses unless and until such time as it enters into long term and large volume supply agreements and generates sufficient revenues to fund its continuing operations.
Intellectual Property
The Company relies on the patent, trade secret and other intellectual property laws of Canada, and foreign jurisdictions. The Company may be unable to prevent third parties from using its intellectual property without its authorization. The unauthorized use of the Company's intellectual property could reduce any competitive advantage that it has developed, reduce its market share or otherwise harm its business. In the event of unauthorized use of the Company's intellectual property, litigation to protect and enforce the Company's rights could be costly, and the Company may not prevail.
Some of the Company's current or future technologies and trade secrets may not be covered by any patent or patent application, and the Company's issued and pending patents may not provide the Company with any competitive advantage and could be challenged by third parties. The Company's inability to secure issuance of pending patent applications may limit its ability to protect the intellectual property rights these pending patent applications were intended to cover. The Company's competitors may attempt to design around its patents to avoid liability for infringement and, if successful, could adversely affect the Company's market share. Furthermore, the expiration of the Company's patents may lead to increased competition.
In addition, effective patent, trade secret and other intellectual property protection may be unavailable or limited in some foreign countries. In some countries, the Company may not apply for patent or other intellectual property protection. The Company also relies on unpatented technological innovation and other trade secrets to develop and maintain its competitive position. Although the Company generally enters into confidentiality agreements with its employees and third parties to protect its intellectual property, these confidentiality agreements are limited in duration, could be breached and may not provide meaningful protection of its trade secrets. Adequate remedies may not be available if there is an unauthorized use or disclosure of the Company's trade secrets and manufacturing expertise. In addition, others may obtain knowledge about the Company's trade secrets through independent development or by legal means. The failure to protect the Company's processes, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on its business by jeopardizing critical intellectual property.
Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to such trade secret products or processes. This could have a material adverse effect on the Company's ability to make and sell products or use such processes and could potentially result in costly litigation in which the Company might not prevail. The Company could face intellectual property infringement claims that could result in significant legal costs and damages and impede its ability to produce key products, which could have a material adverse effect on its business, financial condition, and results of operations.
Product Development and Technological Change
There is no assurance that broad successful commercial applications for the Company's products may be feasible. Most, if not all, of the scientific and engineering data related to the Company's products has been generated by the Company's own laboratories or laboratory environments of the Company's partners, such as universities. There can be no assurance that laboratory data translates to or is representative in commercial applications.
Additionally, the industries in which the Company seeks to operate are characterized by rapid technological change and frequent new product introductions. Part of the Company's business strategy is to monitor such change and take steps to remain technologically current, but there is no assurance that such strategy will be successful. If the Company is not able to adapt to new advances in materials sciences, or if unforeseen technologies or materials emerge that are not compatible with the Company's or that could replace its products, the Company's revenues and business would likely be adversely affected.
Market Development and Growth
Failure to further develop the Company's key markets and existing geographic markets or to successfully expand its business in the future into new markets could have an adverse impact on sales growth and operating results. The Company's ability to further penetrate its key markets and the existing geographic markets in which it competes and/or aims to compete, and to successfully expand its business into other countries, is subject to numerous factors, many of which are beyond its control. There can be no assurance that efforts to increase market penetration in the Company's key markets and existing geographic markets will be successful. Failure to achieve these goals may have a material adverse effect on the Company's operating results.
Unpredictable Sales Cycles
The sales cycle for graphene products may range considerably from one to multiple years from the time a customer begins testing the Company's product until the time that they could be used in a commercial product. Timing of product introduction could vary significantly based on the target market. Additionally, any demand for the Company's products based in whole or in part on the current coronavirus (COVID-19) pandemic could materially change in the event the pandemic ends or decreases in severity. The Company has demonstrated little track record of success in completing customer development projects, which makes it difficult to evaluate the likelihood of future success. The sales and development cycles for the Company's products are subject to customer budgetary constraints, internal acceptance procedures, competitive product assessments, scientific and development resource allocations, and other factors beyond the Company's control. If the Company is not able to successfully accommodate these factors to achieve commercial success, the Company may be unable to achieve sufficient sales to reach profitability.
Government Regulation and Import/Export Controls
The Company's future operations, including development, and commencement and continuation of commercial production, require licenses, permits or other approvals from various federal, provincial, local and potentially foreign governmental authorities, and such operations are or will be governed by laws and regulations relating to production, exports, taxes, labor standards, occupational health and safety, waste disposal, toxic substances, prospecting, development, mining, land use, water use, environmental protection, land claims of indigenous people and other matters. Furthermore, in certain foreign jurisdictions, these regulatory requirements may be more stringent than those in Canada. Certain export control laws or economic sanctions laws may include restrictions or prohibitions on the sale or supply of certain products and services to embargoed or sanctioned countries, governments, persons, and entities. In addition, various countries regulate the import of certain technology, including import and export permitting and licensing requirements, and have enacted or could enact laws that could limit the Company's ability to distribute its products. Changes in the Company's products, or future changes in export and import regulations may prevent any potential international customers from utilizing the Company's products globally or, in some cases, prevent the export or import of the Company's products to certain countries, governments, or persons altogether.
Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of the Company's products in the future by, or in the Company's decreased ability to export or sell its products to, potential international customers. Any limitation on the Company's ability to export or sell its products would likely adversely affect the Company's future business, results of operations, and financial results.
Large volume production of graphene requires permits and approvals from various government authorities, and is subject to extensive federal, provincial, state, and local laws and regulations governing development, production, exports, taxes, labour standards, occupational health and safety, environment, and other matters. As graphene is a new chemical substance, production and sale of graphene may be subject to specific occupational health and safety and environment regulatory approvals in different jurisdictions including, without limitations, under the Canadian Environmental Protection Act (Canada), the Food and Drug Act (Canada), the Toxic Substances Control Act (USA), the Food Drug and Cosmetic Act (USA) and the Registration, Evaluation, Authorization and Restriction of Chemicals (Europe).
Health Canada also regulates certain markets into which the Company intends to supply products or license its intellectual property. There is no assurance that Health Canada or any other body will grant license for sales into markets it regulates. Each foreign jurisdiction for the Company's products is regulated and no assurance exists that sales of graphene related products will be permitted. Any inability by the Company to obtain approval from Health Canada and/or international bodies could have a material adverse impact of the business of the Company.
The Company is also subject to consumer protection laws that may impact its sales and marketing efforts. These laws, as well as any changes in these laws, could make it more difficult for the Company to sell and market its products. These laws and regulations are subject to change over time and thus the Company must continue to monitor and dedicate resources to ensure continued compliance. Non-compliance with applicable regulations or requirements could subject the Company to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if the Company does not prevail in any possible civil or criminal litigation, its business, operating results, and financial condition could be materially adversely affected.
Additionally, in order for the Company to carry out its activities, any required licences and permits must be obtained and kept current. There can be no assurance, however, that the Company will obtain on reasonable terms or at all the permits and approvals, and the renewals thereof, which it may require for the conduct of its future operations or that compliance with applicable laws, regulations, permits and approvals will not have an adverse effect on the Company's business plans. Possible future environmental and mineral tax legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delay on the Company's planned exploration and operations, the extent of which cannot be predicted.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Industry Competition
The Company seeks to compete with other graphene and manufacturing companies, in highly competitive markets. Some of the Company's competitors have substantially greater financial, marketing, and other resources and higher market share that the Company has in certain products or geographic areas. As the markets for the Company's products expand, additional competition may emerge, and competitors may commit more resources to products which directly compete with the Company's products. There can be no assurance that the Company will be able to compete successfully with existing competitors or be able to develop any market for its products, or that its business will not be adversely affected by increased competition or by new competitors.
There is no assurance that the Company will continue to be able to compete successfully with its competitors in acquiring such properties or prospects and any such inability could have a material adverse effect on the Company's business and financial condition.
Lack of Trading Market for Graphene
Unlike commodity minerals such as copper, gold or silver, industrial minerals such as graphene precursor graphene materials and graphite do not have a metals exchange or an open market upon which to trade and therefore prices are not set in an open market or publicly traded market, and there can be no assurance that certain items can be sold or purchased at any time. As prices are set with private suppliers and private customers, it is difficult to predict what market prices may be at the time of any transaction. There can be no guarantees that the Company will be able to sell its graphene products in a profitable manner, or at all.
Shortages
The Company will be dependent on various supplies, equipment, parts and labour, and the services of contractors to carry out its business objectives. The availability and cost of such supplies, equipment, parts or labour or the services of contractors could have a material adverse effect on the Company's ability to successfully carry out its exploration and development activities.
Liquidity Concerns and Future Financing
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As of March 31, 2022, the Company had a cash balance of $26,840,829 (2021 - $3,091,549) to settle current liabilities of $2,825,869 (2021 - $2,506,167). The Company is ultimately dependent on the commercial sales of its products. Any delay in the sales of such products could require additional financing. There can be no assurance that the Company will be successful in obtaining the required financing as and when needed. Volatile markets may make it difficult or impossible for the Company to obtain debt financing or equity financing on favorable terms, if at all. Failure to obtain additional financing on a timely basis may cause the Company to postpone or slow down its development plans or reduce or terminate some or all of its activities.
Reliance on Key Personnel
The Company's development to date has depended, and in the future, will depend largely on the efforts of key management and other key personnel. Loss of any of these people, particularly to competitors, could have a material adverse effect on the Company's business. Further, with respect to the future development of the Company's projects, it may become necessary to attract both international and local personnel for such development. The marketplace for key skilled personnel is becoming more competitive, which means the cost of hiring, training, and retaining such personnel may increase. Factors outside the Company's control, including competition for human capital and the high-level of technical expertise and experience required to execute this development will affect the Company's ability to employ the specific personnel required. The failure to retain or attract a sufficient number of key skilled personnel could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company has not taken out and does not intend to take out "key man insurance" in respect of any directors, officer or other employees.
Qualified Employees
Recruiting and retaining qualified personnel is critical to the Company's success. Especially if it relates to its graphene operations, finding skilled scientists and a sales team familiar with the subject matter is difficult. As the Company grows further, the need for skilled labour will increase. The number of persons skilled in the high-tech manufacturing business is limited and competition for this workforce is intense. This may adversely affect the business of the Company if it is unable to recruit and retain qualified personnel as and when required.
Cybersecurity Threats
The reliability and security of the Company's information technology ("IT") systems is important to the Company's business and operations. Although the Company has established and continues to enhance security controls intended to protect the Company's IT systems and infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical access or cyberattacks. A significant breach of the Company's IT systems could, among other things, cause disruptions in the Company's manufacturing operations (such as operational delays from production downtime, inability to manage the supply chain or produce product for customers, disruptions in inventory management), lead to the loss, destruction, corruption or inappropriate use of sensitive data, including employee information or intellectual property, result in lost revenues due to theft of funds or due to a disruption of activities, including remediation costs, or from litigation, fines and liability or higher insurance premiums, the costs of maintaining security and effective IT systems, which could negatively affect results of operations and the potential adverse impact of changing laws and regulations related to cybersecurity or result in theft of the Company's, its customers' or suppliers' intellectual property or confidential information. If any of the foregoing events (or other events related to cybersecurity) occurs, the Company may be subject to a number of consequences, including reputational damage, a diminished competitive advantage and negative impacts on future opportunities which could have a material adverse effect on the Company.
Share Price Fluctuations
The market price of securities of many companies, particularly development stage companies, experience wide fluctuations in price that are not necessarily related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that fluctuations in the Company's share price will not occur. In particular, the fluctuations may be exaggerated if the trading volume of the Company's common shares is low.
Cost Absorption and Purchase Orders
Especially as it relates to its activities in the transportation industry, and given the current trends in that industry, the Company is under continuing pressure to absorb costs related to product design and development, engineering, program management, prototypes and validation. In particular, OEMs are requesting that suppliers pay for the above costs and recover these costs through the piece price of the applicable component. Contract volumes for customer programs not yet in production are based on the Company's customers' estimates of their own future production levels. However, actual production volumes may vary significantly from these estimates due to a reduction in consumer demand or new product launch delays, often without any compensation to the supplier by its OEM customer. Typical purchase orders issued by customers do not require that they purchase a minimum number of the Company's products. For programs currently under production, the Company is generally unable to request price changes when volumes differ significantly from production estimates used during the quotation stage. If estimated production volumes are not achieved, the product development, design, engineering, prototype and validation costs incurred by the Company may not be fully recovered. Similarly, future pricing pressure or volume reductions by the Company's customers may also reduce the amount of amortized costs otherwise recoverable in the piece price of the Company's products. Either of these factors could have an adverse effect on the Company's profitability. While it is generally the case that once the Company receives a purchase order for products of a particular vehicle program it would continue to supply those products until the end of such program, customers could cease to source their production requirements from the Company for a variety of reasons, including the Company's refusal to accept demands for price reductions or other concessions.
Acquisitions
The Company could seek to acquire complementary businesses, assets, technologies, services or products, at competitive prices. The Company could pursue acquisitions in those product areas which were identified as key to the Company's long-term business strategy. However, as a result of intense competition in these strategic areas, the Company may not be able to acquire the targets needed to achieve its strategic objectives. The completion of such transactions poses additional risks to the Company's business. Acquisitions are subject to a range of inherent risks, including the assumption of incremental regulatory/compliance, pricing, supply chain, commodities, labor relations, litigation, environmental, pensions, warranty, recall, IT, tax or other risks. Although the Company seeks to conduct appropriate levels of due diligence on acquisition targets, these efforts may not always prove to be sufficient in identifying all risks and liabilities related to the acquisition, including as a result of: limited access to information; time constraints for conducting due diligence; inability to access target company facilities and/or personnel; or other limitations in the due diligence process. Additionally, the Company may identify risks and liabilities that cannot be sufficiently mitigated through appropriate contractual or other protections. The realization of any such risks could have a material adverse effect on the Company's operations or profitability. The benefit to the Company of previous and future acquisitions is highly dependent on the Company's ability to integrate the acquired businesses and their technologies, employees and products into the Company, and the Company may incur costs associated with integrating and rationalizing the facilities (some of which may need to be closed in the future). The Company cannot be certain that it will successfully integrate acquired businesses or that acquisitions will ultimately benefit the Company. Any failure to successfully integrate businesses or failure of the businesses to benefit the Company could have a material adverse effect on its business and results of operations. Such transactions may also result in additional dilution to the Company's shareholders or increased debt. Such transactions may involve partners, and the formula for determining contractual sale provisions may be subject to a variety of factors that may not be easily quantified or estimated until the time of sale (such as market conditions and determining fair market value).
Launch and Operational Costs
The launch of new business, in an existing or new facility, is a complex process, the success of which depends on a wide range of factors, including the production readiness of the Company and its suppliers, as well as factors related to tooling, equipment, employees, initial product quality and other factors. A failure to successfully launch material new or takeover business could have an adverse effect on profitability. The Company's manufacturing processes are vulnerable to operational problems that can impair its ability to manufacture its products in a timely manner, or which may not be performing at expected levels of profitability. The Company's facilities and proposed facilities contain complex and sophisticated equipment that is used in its manufacturing processes. The Company could experience equipment failure in the future due to wear and tear, design error or operator error, among other things, which could have an adverse effect on profitability. From time to time, the Company may have some operating divisions which are not performing at expected levels of profitability. Significant underperformance of one or more operating divisions could have a material adverse effect on the Company's profitability and operations.
Material and Commodity Prices
Prices for key raw materials and commodities used in the production of graphene-based products, as well as energy prices, have proven to be volatile at certain times. To the extent that the Company is unable to fully mitigate its exposure to price change of key raw materials and commodities, particularly through engineering products with reduced content, by passing price increases to customers, or otherwise, such additional costs could have a material adverse effect on profitability. Increased energy prices could also have an impact on production or transportation costs which in turn could affect competitiveness.
Uninsured Risks
The Company maintains insurance to cover normal business risks. In the course of its manufacturing businesses, certain risks and, in particular, unexpected or unusual catastrophic events including explosions and fire may occur. It is not always possible to fully insure against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the common shares of the Company.
Litigation
The Company has entered into legally binding agreements with various third parties, including supply, license, distribution, non-disclosure, consulting and partnership agreements. The interpretation of the rights and obligations that arise from such agreements is open to interpretation and the Company may disagree with the position taken by the various other parties resulting in a dispute that could potentially initiate litigation and cause the Company to incur legal costs in the future. Given the speculative and unpredictable nature of litigation, the outcome of any such disputes could have a material adverse effect on the Company's business.
Credit risk
As at March 31, 2022, the Company's credit risk was primarily attributable to cash and accounts, loan receivables and other receivables. The Company issued a loan receivable during the year further increasing its exposure to credit risk. Financial instruments included in accounts and other receivables consisted of trade receivables generated through sales as well as recoverable harmonized sales tax. The Company's cash is held with reputable financial institutions. Management believes that the credit risk with respect to financial instruments included in accounts and other receivables is remote.
Interest rate risk
The Company has cash balances at federally regulated Canadian banks. The Company periodically monitors the investments it makes, the security of such investments and is satisfied with the credit ratings of its banks. The Company closely monitors interest rates to determine the appropriate course of action to be taken by the Company.
Price risk
The Company is exposed to price risk with respect to commodity prices. The Company closely monitors commodity prices to determine the appropriate course of action to be taken by the Company.
Financial Capability and Additional Financing
The Company has limited financial resources and there is no assurance that sufficient additional funding will be available to enable it to fulfill its business objectives or obligations, on acceptable terms or at all. Unanticipated expenses and other developments could cause existing funds to be depleted sooner than expected. In the event that its existing cash resources are inadequate to fund general and administrative expenses, and in order to fund the planned business objectives of the Company, the Company will be required to raise additional financing from external sources, such as debt financing, equity financing or joint ventures. The Company's ability to raise additional equity financing may be affected by numerous factors beyond the Company's control, including, but not limited to, adverse market conditions, commodity price changes and an economic downturn. Failure to obtain additional funding on a timely basis could result in delay or indefinite postponement of the development of the Company's business and could cause the Company to reduce or terminate its operations. Additional funds raised by the Company from treasury share issuances may result in significant dilution to existing shareholders, a depressive effect on the price of the common shares and/or a change of control.
Permits and Government Regulation
Although the Company believes it has all of the necessary permits to carry out the proposed business programs, the operations of the Company may require licenses and permits from time to time from various governmental authorities to carry out exploration and development at its projects or locations. Obtaining permits can be a complex, time-consuming process. There can be no assurance that the Company will be able to obtain the necessary licenses and permits on acceptable terms, in a timely manner or at all. The costs and delays associated with obtaining permits and complying with these permits and applicable laws and regulations could stop or materially delay or restrict the Company from continuing or proceeding with existing or future operations or projects. Any failure to comply with permits and applicable laws and regulations, even if inadvertent, could result in the interruption or closure of operations or material fines, penalties or other liabilities. In addition, the requirements applicable to sustain existing permits and licenses may change or become more stringent over time and there is no assurance that the Company will have the resources or expertise to meet its obligations under such licenses and permits.
Fluctuating Prices
The profitability of the Company's operations will be dependent upon the market price of the ZenGUARD™ masks and other products, their global acceptance and demand along with their regulatory approvals in other jurisdictions. The level of interest rates, rate of inflation, production costs, healthcare and consumer demand, and stability of exchange rates can all cause significant fluctuations in revenue. Such external economic factors are in turn influenced by changes in international purchasing patterns, COVID-19 pandemic situation, monetary systems and political developments.
Environmental Regulation
The Company's Albany Graphite Project is subject to environmental laws and regulations which may materially and adversely affect its future operations. These laws and regulations control the exploration and development of the Albany Graphite Project and their effects on the environment, including air and water quality, waste handling and disposal, the protection of different species of plant and animal life, and the preservation of lands. These laws and regulations will require the Company to acquire permits and other authorizations for certain activities. There can be no assurance that the Company will be able to acquire such necessary permits or authorizations on a timely basis, if at all.
Further, environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company's operations.
The Company is not currently insured against most environmental risks. Without such insurance, and if the Company becomes subject to environmental liabilities, the payment of such liabilities would reduce or eliminate its available funds or could exceed the funds the Company has to pay such liabilities and result in bankruptcy.
Economic Dependence on Supply Agreements
Currently, the Company has entered into a limited number of supply or sales agreements for the sale of its products. Until additional supply agreements are executed by the Company, the Company's revenues will be completely dependent on such agreements. If such agreements are terminated, or if less of the Company's product than anticipated is purchased pursuant to such agreements, this could have a material adverse impact on the Company's business, operations and results.
Nasdaq Listing in the United States
The Company recently listed its common shares on the Nasdaq in the United States. The Company cannot provide assurances that an active trading market will develop in the United States.
DIVIDENDS AND DISTRIBUTIONS
The Company relies primarily on equity financing to fund its working capital needs. The Company has neither declared nor paid any dividends on its common shares. The Company intends to retain its earnings, if any, to finance growth and expand its operation and does not anticipate paying any dividends on its common shares in the foreseeable future. Any decisions to pay dividends on the common shares will be made by the Board on the basis of its earnings, financial requirements, and other conditions.
DESCRIPTION OF CAPITAL STRUCTURE
Common Shares
The authorized share capital of the Company consists of an unlimited number of common shares. As at March 31, 2022, 99,248,058 common shares were issued and outstanding, and as of the date hereof there are 99,363,058 common shares issued and outstanding.
Each common share entitles the holder thereof to receive notice of any meetings of the shareholders of the Company, to attend, and to cast one vote per common share at all such meetings. Holders of common shares do not have cumulative voting rights with respect to the election of directors. Accordingly, holders of a majority of the common shares entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common shares are entitled to receive on a pro rata basis such dividends if any, as and when declared by the board of directors at its discretion from funds legally available therefore and, upon the liquidation, dissolution, or winding up of the Company, are entitled to receive on a pro rata basis the net assets of the Company for payment of debts and liabilities. The common shares do not carry any pre-emptive, subscription, redemption, retraction, or conversion rights, nor do they contain any sinking or purchase fund provisions.
Stock Options
The Company has an incentive stock option plan for the purchase of common shares for its directors, senior officers, employees, and certain consultants. The aggregate number of common shares reserved for issuance under the stock option plan is 10% of the issued and outstanding common shares at the time of grant. As at March 31, 2022, a total of 8,692,334 stock options were outstanding with a weighted average exercise price of $2.70.
During the financial year ended March 31, 2022, the Company granted an aggregate of 2,344,000 options to certain officers, directors, employees, and consultants of the Company.
On April 13, 2021, the Company granted 100,000 options exercisable at a price of $1.76 per common share for a period of five (5) years from the date of issuance to a consultant of the Company and 50,000 options exercisable at a price of $1.76 per common share for a period of two (2) years from the date of issuance to a consultant of the Company.
On June 30, 2021, the Company granted 150,000 options exercisable at a price of $3.50 per common share for a period of three (3) years from the date of issuance to an advisory board member of the Company.
On July 23, 2021, the Company granted 25,000 options exercisable at a price of $3.10 per Common Share for a period of three (3) years from the date of issuance to an employee of the Company.
On September 3, 2021, the Company granted 100,000 options exercisable at a price of $3.69 per common share for a period of three (3) years from the date of issuance to a consultant and an employee of the Company.
On September 21, 2021, the Company granted 120,000 options exercisable at a price of $4.08 per common share for a period of three (3) years from the date of issuance to an employee of the Company.
On October 13, 2021, the Company granted 100,000 options exercisable at a price of $4.92 per common share for a period of three (3) years from the date of issuance to an employee of the Company.
On October 26, 2021, the Company granted 50,000 options exercisable at a price of $4.77 per common share for a period of three (3) years from the date of issuance to an employee of the Company.
On November 1, 2021, the Company granted 50,000 options exercisable at a price of $5.67 per common share for a period of five (5) years from the date of issuance to an employee of the Company and 50,000 options exercisable at a price of $5.67 per common share for a period of three (3) years from the date of issuance to a consultant of the Company.
On December 15, 2021, the Company granted 25,000 options exercisable at a price of $5.20 per Common Share for a period of five (5) years from the date of issuance to a consultant of the Company.
On December 29, 2021, the Company granted 100,000 options exercisable at a price of $5.22 per common share for a period of three (3) years from the date of issuance to an advisory board member of the Company.
On January 14, 2022, the Company granted 50,000 options exercisable at a price of $4.25 per common share for a period of three (3) years from the date of issuance to directors, officers and employees of the Company and 1,110,000 options exercisable at a price of $1.76 per common share for a period of five (5) years from the date of issuance to directors, officers and employees the Company.
On January 17, 2022, the Company granted 20,000 options exercisable at a price of $4.25 per common share for a period of three (3) years from the date of issuance to an employee of the Company.
On March 29, 2022, the Company granted 54,000 options exercisable at a price of $3.88 per common share for a period of three (3) years from the date of issuance to an employee of the Company.
MARKET FOR SECURITIES
Trading Price and Volume
Common Shares
The common shares are listed for trading on the TSX Venture Exchange ("TSXV") under the trading symbol "ZEN". The following table sets out the high and low closing market prices and the volume traded of the common shares on the TSXV for each month since the beginning of the Company's financial year ended March 31, 2021:
|
2021 |
HIGH ($) |
LOW ($) |
VOLUME |
|
April |
3.00 |
1.71 |
7,084,792 |
|
May |
2.70 |
1.93 |
2,238,021 |
|
June |
3.59 |
2.45 |
4,290,710 |
|
July |
3.51 |
2.82 |
2,106,651 |
|
August |
3.34 |
2.71 |
1,468,501 |
|
September |
5.99 |
3.15 |
7,992,770 |
|
October |
5.48 |
4.30 |
4,468,373 |
|
November |
7.50 |
5.34 |
6,873,855 |
|
December |
6.68 |
4.85 |
5,360,664 |
|
2022 |
HIGH ($) |
LOW ($) |
VOLUME |
|
January |
5.19 |
3.04 |
5,821,967 |
|
February |
4.40 |
2.90 |
2,438,953 |
|
March |
4.16 |
2.15 |
5,983,848 |
|
April |
3.91 |
2.93 |
1,819,037 |
|
May |
3.35 |
2.20 |
1,465,376 |
|
June 1 to 28 |
2.87 |
2.24 |
1,065,645 |
ESCROWED SECURITIES
As of the date hereof, there are no securities of the Company subject to escrow provisions.
DIRECTORS AND OFFICERS
Name, Occupation, and Security Holdings
The following table sets forth all current directors and executive officers of the Company as at the date hereof, their principal occupations or employment, the period or periods of service, and the approximate number of voting securities of the Company beneficially owned, directly or indirectly, or over which control or direction is exercised as of the date hereof. The Board currently consists of five (5) directors to be elected annually. The term of office of each director will be from the date of the meeting at which he or she is elected until the next annual meeting, or until his or her successor is elected or appointed.
|
Name, Province and |
Director |
Number of Common |
Principal Occupation |
|
Greg Fenton St. James, Barbados Chief Executive Officer and Director |
July 11, 2018 |
2,566,825 common shares 1,650,000 options |
Chief Strategy Officer (September 27, 2019 to December 7, 2020); Chief Executive Officer of the Company (December 8, 2020 to present), President at Fortem Partners International Limited (2016 to present), Corporate Director.
|
|
Wendy Ford Ontario, Canada Chief Financial Officer
|
N/A |
200,000 options |
Chief Financial Officer of AirBoss of America Corp (March 2014 to August 2016); VP Finance and Chief Financial Officer of Mancor Canada Inc. (October 2017 to May 2022). |
|
Dr. Francis Dubé Ontario, Canada Executive Chairman and Director |
May 11, 2018 |
736,309 common shares 1,600,000 options |
Co-Chief Executive Officer (August 14, 2018 to April 1, 2019), Chief Executive Officer (April 2, 2019 to December 7, 2020, Executive Chairman of the Company (December 8, 2020 to present), Corporate Director, Optometrist
|
|
Brian Bosse(2) Ontario, Canada Chief Operations Officer and Director
|
May 11, 2018 |
290,704 common shares 1,110,000 options |
Chief Financial Officer of the Company (September 14, 2018 to May 2018), Chief Executive Officer and Director at IC Capitalight Corp., Corporate Director |
|
Eric Wallman(2) Manitoba, Canada Director |
May 11, 2018 |
171,755 common shares 600,000 options |
Senior Vice-President, Finance and Administration at Bothwell Cheese, Board Member of the Western Dairy Council, Corporate Director |
|
Frank Klees(2) Ontario, Canada Director |
July 11, 2018 |
264,000 common shares 500,000 Options |
Corporate Director |
|
Peter C. Wood Ontario, Canada President |
N/A |
56,900 common shares 450,000 options |
VP Exploration of the Company (2013 to June 21, 2018); Vice President of the Company (June 22 to September 13, 2018); President of the Company (September 14, 2018 to present); President and Geologist, Geodigital Mapping Systems Inc. (1991 to present)
|
|
James Jordan Ontario, Canada VP, Operations |
N/A |
150,900 common shares 75,000 options |
Project Manager (July 2016 to February 3, 2020); Chief Operating Officer (February 4, 2020 to December 7, 2020); VP Operations (December 8, 2020 to present) |
|
Name, Province and |
Director |
Number of Common |
Principal Occupation |
|
Dr. Colin van der Kuur, British Columbia, Canada VP, Science and Research |
N/A |
404,374 common shares 400,000 options |
Head of Research (February 4 to December 7, 2020); VP, Science and Research (December 8, 2020 to present) |
Notes:
(1) The information as to voting securities beneficially owned, controlled or directed, not being within the knowledge of the Company, has been obtained from the System for Electronic Disclosure by Insiders or furnished by the respective nominees individually.
(2) Member of the Audit Committee.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
For the purposes of this section "Order" means:
(a) a cease trade order;
(b) an order similar to a cease trade order; or
(c) an order that denied the relevant company access to any exemption under securities legislation;
that was in effect for more than 30 days.
None of the directors or executive officers of the Company or any shareholder holding a sufficient number of securities of the Company to materially affect control of the Company:
(a) is, as of the date of this AIF, or has been, within 10 years before the date of this AIF, a director or executive officer of any company that:
(i) was the subject of an Order that was issued while the director or executive officer was acting in the capacity as a director, chief executive officer, or chief financial officer;
(ii) was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer, or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as a director, chief executive officer or chief financial officer; or
(iii) while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or was subject to or instituted any proceeding, arrangement, or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
(b) has, within the 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
None of the directors or executive officers of the Company, or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company has, within the last 10 years, been subject to: (i) any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered a settlement agreement with a Canadian securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to a reasonable investor making an investment decision.
PROMOTERS
No person or company has been, within the two most recently completed financial years or during the current financial year, a promoter of the Company.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as set out below, the Company was not subject to any material legal proceedings during its most recently completed financial year, nor is the Company or any of its properties a party to or the subject of any such proceedings, and no such proceedings are known to be contemplated. The Company may be involved in routine, non-material litigation arising in the ordinary course of business, from time to time.
The Company is involved in legal proceedings relating to claims involving a former director and officer of the Company. The claim was commenced in the Ontario Superior Court of Justice on September 26, 2018, by Aubrey Eveleigh and Eveleigh Geological Consulting. Mr. Eveleigh seeks damages in excess of $5,000,000 in connection with an employment dispute. The Company is defending the claim and the proceedings remain ongoing, though the Company believes that the risk of significant loss in respect of the litigation is remote. The Company subsequently commenced a claim against Mr. Eveleigh and Eveleigh Geological Consulting on March 24, 2020, in the Ontario Superior Court of Justice (Commercial List), in connection with past breaches of Mr. Eveleigh's fiduciary duties. The Company is seeking, among other things, an order that Mr. Eveleigh disgorge any benefits obtained as a result of his misconduct, an order cancelling certain Company shares held by Mr. Eveleigh, and an order declaring that Mr. Eveleigh has no entitlement to any royalty payments or success fees in connection with the Albany Graphite Project. Mr. Eveleigh has defended the claim and the proceedings remain ongoing.
There were no penalties or sanctions imposed against the Company by a court relating to provincial and territorial securities legislation or by a securities regulatory authority during its most recently completed financial year, nor have there been any other penalties or sanctions imposed by a court or regulatory body against the Company, and the Company has not entered into any settlement agreements before a court relating to provincial and territorial securities legislation or with a securities regulatory authority.
On January 29, 2021, the Company was served with a statement claim issued by Graphene Composites Ltd. and is in the process of defending the action, which it considers frivolous and without merit. The Company has considered the allegations as set out in the claim and, in light of the facts, the lack of clarity in the claim, and, based on discussions with the Company's litigation counsel, the assessment of the merits of the claim and the defenses available to the Company, and the Company's conclusion is that the risk of the Company suffering loss in respect of the claim is remote, and therefore the Company determined the claim not to be material or constituting "significant litigation" pursuant to the policies of the TSX Venture Exchange. The Company continues to view this claim as frivolous and will continue to vigorously defend itself against these allegations
INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS
To the knowledge of management of the Company, no director or executive officer of the Company, person or company that beneficially owns, controls or directs, directly or indirectly, more than 10% of the common shares, or any associate or affiliate of any such persons, has or had any material interest, direct or indirect, in any transaction within the Company's three most recently completed financial years which has materially affected or will materially affect the Company or any of its subsidiaries other than as set out herein.
TRANSFER AGENT AND REGISTRAR
Effective as of November 22, 2021, the registrar and transfer agent of the Company is TSX Trust Company, having an address of 100 Adelaide Street West, Suite 301, Toronto, Ontario M5H 1S3.
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the Company has not entered into any material contracts during the most recently completed financial year or which are still in force and effect and which may reasonably be regarding as presently material.
EXPERTS AND INTERESTS OF EXPERTS
Jason J. Cox (P.Eng.), David Ross (P.Geo.), Katharine M. Masun (P.Geo.), Marc Lavigne (ing.), and Brenna J.Y. Scholey (P.Eng.), each of RPA as of the date of the PEA, and Derek Chubb (P.Eng.), of ERM Consultants Canada Inc. ("ERM"), prepared the PEA in respect of the Albany Graphite Project that is referenced and/or incorporated by reference herein, and have advised the Company that they do not hold, directly or indirectly, any beneficial interests in any securities or other property of the Company or any of its associates or affiliates.
The auditor of the Company, BDO Canada LLP, has informed the Company that it is independent with respect to the Company within the meaning of the Rules of Professional Conduct of Chartered Professional Accountants of Ontario.
AUDIT COMMITTEE INFORMATION
The Audit Committee's Charter
The directors of the Company have adopted a charter (the "Charter") for the audit committee (the "Audit Committee"), which sets out the Audit Committee's mandate, organization, powers and responsibilities. The full text of the Charter is attached hereto as Appendix "A" to this AIF.
Composition of the Audit Committee
The members of the Audit Committee are Eric Wallman CPA, CA (Chair), Brian Bosse and Frank Klees. Messrs. Wallman and Klees are independent (as defined in National Instrument 52-110 - Audit Committees ("NI 52-110") adopted by the Canadian Securities Administrators), and all members are financially literate (as defined in NI 52-110).
|
Name of Member |
Independent(1) |
Financially Literate(2) |
|
Eric Wallman CPA, CA (Chair) |
Yes |
Yes |
|
Brian Bosse |
No |
Yes |
|
Frank Klees |
Yes |
Yes |
Notes:
(1) To be considered independent, a member of the Audit Committee must not have any direct or indirect "material relationship" with the Company. A "material relationship" is a relationship which could. in the view of the board of directors of the Company. be reasonably expected to interfere with the exercise of a member's independent judgment.
(2) To be considered financially literate. a member of the Committee must have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company's financial statements.
Relevant Education and Experience
Mr. Wallman is a graduate of the University of Manitoba in 1983 and obtained a full CA designation in 1986. He has held senior accounting and finance positions in industry since 1991, and has been an active investor in the junior mining market since 1992. Currently, Mr. Wallman is the Senior Vice-President, Finance and Administration with Bothwell Cheese, which is the largest independently owned cheese manufacturer in Canada. His role includes strategic planning for Bothwell Cheese and two related companies.
Mr. Bosse graduated from Wilfrid Laurier University's School of Business and Economics and became a Chartered Financial Analyst in 2001. He entered the securities industry in 1995 as a floor trader at the Toronto Stock Exchange.
Mr. Bosse has long experience with public equity valuations, investment banking, and trading for investment houses including Dundee Corporation and Société Générale. He was Vice President and Portfolio Manager of the Goodman Bluespring Fund at Goodman & Corporation Investment Counsel from 2012-2016.
Currently, Mr. Bosse is Chief Executive Officer and a director at IC Capitalight Corp. He has 24 years of work experience as a highly skilled corporate- turnaround executive, and has extensive knowledge of the mining industry through Murenbeeld & Co. subscription research.
Mr. Klees is a highly respected professional who has held senior leadership positions in both the private sector and in government. Mr. Klees served five terms as a Progressive Conservative Member of the Legislative Assembly of Ontario from 1995 to 2014. He held senior cabinet positions in the governments of Mike Harris and Ernie Eves including Minister of Transportation, Minister of Tourism, Chief Government Whip and Deputy House Leader with additional responsibilities as a Member of the Management Board of Cabinet and the Board of Internal Economy. Over the course of 19 years as an elected politician, Mr. Klees established strong and trusted working relationships at all levels of government.
Mr. Klees has extensive business experience in the energy sector, financial services and real estate development. He was a co‐founder and Executive Vice President of Municipal Gas Corporation, served as Corporate Director and Member of the Audit and Governance Committees of Universal Energy Ltd. and has been a member of the Supervisory Board of Rockwool North America from 2003 to November 2020.
Mr. Klees is a Senior Advisor to a number of public and private enterprises and provides business development, government relations and strategic planning advisory services.
Audit Committee Oversight
At no time during the last financial year have any recommendations by the Audit Committee respecting the appointment and/or compensation of the external auditors of the Company not been adopted by the Board pre-approval policies and procedures
The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services as described in its Charter.
External Auditor Services Fees (By Category)
The following table discloses the fees billed to the Company by its external auditor during the last two completed financial years:
|
Financial Year Ending |
Audit Fees(1) |
Audit Related |
Tax Fees(3) |
All Other |
|
March 31, 2022 |
$115,000 |
Nil |
Nil |
Nil |
|
March 31, 2021 |
$33,500 |
Nil |
Nil |
Nil |
Notes:
(1) The aggregate fees billed for professional services rendered by the auditor for the audit of the Company's annual financial statements.
(2) The aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and are not disclosed in the "Audit Fees" column.
(3) The aggregate fees billed for tax compliance, tax advice. and tax planning services.
(4) Represents fees billed by the auditor in connection with the proofread of the Company's quarterly statements and the provision of non-audit related services during the last financial year.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found through a database search at SEDAR at www.sedar.com. Additional information on the Company, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities, and securities authorized for issuance under equity compensation plans, is contained in the Company's management information circular dated August 25, 2021, which may be found on SEDAR.
Additional financial information regarding the Company is provided in the Company's audited annual financial statements and management's discussion and analysis for the year ended March 31, 2022, which may be found on SEDAR.
APPENDIX A
AUDIT COMMITTEE CHARTER
Mandate
The Audit Committee ("Committee") is a committee of the Board of Directors (the "Board"). Its primary function shall be to assist the Board in fulfilling its oversight responsibilities with respect to financial reporting, and disclosure requirements, the overall maintenance of the systems of internal controls that management have established and the overall responsibility for Zentek Ltd.'s (the "Corporation") external and internal audit processes.
The Committee shall have the power to conduct or authorize investigations into any matter within the scope of this Charter. It may request any officer or employee of the Corporation, its external legal counsel or external auditor to attend a meeting of the Committee or to meet with any member(s) of the Committee.
The Committee shall be accountable to the Board. In the course of fulfilling its specific responsibilities hereunder, the Committee shall maintain an open communication between the Corporation's outside auditor and the Board.
The responsibilities of a member of the Committee shall be in addition to such member's duties as a member of the Board.
The Committee has the duty to determine whether the Corporation's financial disclosures are complete, accurate, are in accordance with international financial reporting standards and fairly present the financial position and risks of the organization. The Committee should, where it deems appropriate, resolve disagreements, if any, between management and the external auditor, and review compliance with laws and regulations and the Corporation's own policies.
The Committee will provide the Board with such recommendations and reports with respect to the financial disclosures of the Corporation as it deems advisable.
Membership and Composition
The Committee shall consist of at least three Directors who shall serve on behalf of the Board of which at least two directors are independent. The members shall be appointed annually by the Board and shall meet the independence, financial literacy and experience requirements of the TSX Venture Exchange, including National Instrument 52-110, and other regulatory agencies as required.
A majority of Members will constitute a quorum for a meeting of the Committee.
The Board will appoint one Member to act as the Chairman of the Committee. In his absence, the Committee may appoint another person provided a quorum is present.
The Chairman will appoint a Secretary of the meeting, who need not be a member of the committee and who will maintain the minutes of the meeting.
Meetings
At the request of the external auditor, the Chief Executive Officer or the Chief Financial Officer of the Corporation or any member of the Committee, the Chairman will convene a meeting of the Committee. In advance of every meeting of the Committee, the Chairman, with the assistance of the Chief Financial Officer, will ensure that the agenda and meeting materials are distributed in a timely manner and no less than five (5) business days before the meeting.
The Committee shall meet no less than four times per year or more frequently if circumstances or the obligations require.
Duties and Responsibilities
The duties and responsibilities of the Committee shall be as follows:
A. Financial Reporting, and Disclosure
i. Review and discuss with management and the external auditor at the completion of the annual examination:
(a) the Corporation's audited financial statements and related notes;
(b) the external auditor's audit of the financial statements and their report thereon;
(c) any significant changes required in the external auditor's audit plan;
(d) any serious difficulties or disputes with management encountered during the course of the audit; and
(e) other matters related to the conduct of the audit, which are to be communicated to the Committee under generally accepted auditing standards.
ii. Review and discuss with management and the external auditor at the completion of any review engagement or other examination, the Corporation's quarterly financial statements.
iii. Review, discuss with management the annual reports, the quarterly reports, the Management Discussion and Analysis, Annual Information Form, prospectus and other disclosures and, if thought advisable, recommend the acceptance of such documents to the Board for approval.
iv. Review and discuss with management any guidance being, provided to shareholders on the expected future results and financial performance of the Corporation and provide their recommendations on such documents to the Board.
v. Inquire of the auditors the quality and acceptability of the Corporation's accounting principles, including the clarity of financial disclosure and the degree of conservatism or aggressiveness of the accounting policies and estimates.
vi. Meet independently with the external auditor and management in separate executive sessions, as necessary or appropriate.
vii. Ensure that management has the proper systems in place so that the Corporation's financial statements, financial reports and other financial information satisfy legal and regulatory requirements. Based upon discussions with the external auditor and the financial statement review, if it deems appropriate, recommend to the Board the filing of the audited annual and unaudited quarterly financial statements.
viii. Oversee and enforce Corporation's public disclosure practices.
External Auditor
i. Consider, in consultation with the external auditor, the audit scope and plan of the external auditor.
ii. Recommend to the Board the external auditor to be nominated and review the performance of the auditor, including the lead partner of the external auditor.
iii. Confirm with the external auditor and receive written confirmation at least once per year as to disclosure of any investigations or government enquiries, reviews or investigations of the outside auditor.
iv. Take reasonable steps to confirm the independence of the external auditor, which shall include:
(a) ensuring receipt from the external auditor of a formal written statement delineating all relationships between the external auditor and the Corporation, consistent with generally accepting auditing practices,
(b) considering and discussing with the external auditor any disclosed relationships or services, including non audit services, that may impact the objectivity and independence of the external auditor, and
(c) approve in advance any non audit related services provided by the auditor to the Corporation with a view to ensuring., independence of the auditor, and in accordance with any applicable regulatory requirements, including the requirements of the TSX Venture Exchange with respect to approval of non audit related serviced performed by the auditor.
Internal Controls and Audit
i. Review and assess the adequacy and effectiveness of the Corporation's systems of internal and management information systems through discussion with management and the external auditor to ensure that the Corporation maintains appropriate systems, is able to assess the pertinent risks of the Corporation and that the risk of a material misstatement in the financial disclosures can be detected.
ii. Assess the requirement for the appointment of an internal auditor for the Corporation.
iii. Inquire of management and the external auditor about the systems of internal controls that management and the Board have established and the effectiveness of those systems. In addition, inquire of management and the external auditor about significant financial risks or exposures and the steps management has taken to minimize such risks to the Corporation.
Oversight Function
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to determine that the Corporation's financial statements are complete and accurate or are in accordance with IFRS and applicable rules and regulations. These are the responsibilities of management and the external auditors. The Committee, the Chairman and any Members identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of the Corporation, and are specifically not accountable or responsible for the day to day operation or performance of such activities. Although the designation of a Member as having accounting, or related financial expertise for disclosure purposes is based on that individual's education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of the Corporation's financial information or public disclosure.
Charter Review
The Committee will annually review and reassess the adequacy of this policy and submit any recommended changes to the Board for approval.
Adoption
This Policy was adopted by the Board on August 1, 2010.
ZENTEK LTD.
(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.)
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 2022 and 2021
(Expressed in Canadian Dollars)
 |
Tel: (604) 688-5421 Fax: (604) 688-5132 www.bdo.ca |
BDO Canada LLP 1100 Royal Centre 1055 West Georgia Street Vancouver, BC V6E 3P3 |
|
Report of Independent Registered Public Accounting Firm |
To the Shareholders and Board of Directors of Zentek Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of financial position of Zentek Ltd. (formerly Zen Graphene Solutions Ltd.) (the "Company") as of March 31, 2022 and the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2022, and the results of its operations and its cash flows for the year ended March 31, 2022, in conformity with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Chartered Professional Accountants
Vancouver, British Columbia
June 29, 2022
We have served as the Company's auditor since 2022
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ZENTEK LTD. |
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(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.) |
| MARCH 31, 2022 AND 2021 | PAGE |
| Independent Auditor's Report Report of Independent Registered Public Accounting Firm (BDO Canada LLP; Vancouver, British Columbia; (PCAOB ID#1227) |
|
| Consolidated Statements of Financial Position | 1 |
| Consolidated Statements of Loss and Comprehensive Loss | 2 |
| Consolidated Statements of Cash Flows | 3 |
| Consolidated Statements of Changes in Equity | 4 |
| Notes to the Consolidated Financial Statements | 5-39 |
1
ZENTEK LTD.
(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| (Stated in Canadian Dollars) | $ | $ | ||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents [note 13] | 26,675,000 | 3,091,549 | ||||
| Accounts and other receivables [note 4] | 656,164 | 119,349 | ||||
| Loan receivable [note 5] | 2,950,000 | - | ||||
| Inventories [note 6] | 665,572 | - | ||||
| Prepaids and deposits [note 6] | 1,012,363 | 174,480 | ||||
| Total current assets | 31,959,099 | 3,385,378 | ||||
| Non-current assets | ||||||
| Property and equipment [note 7] | 6,025,421 | 705,221 | ||||
| Exploration and evaluation assets [note 8] | - | 26,159,729 | ||||
| Total non-current assets | 6,025,421 | 26,864,950 | ||||
| Total assets | 37,984,520 | 30,250,328 | ||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities [note 9] | 1,204,587 | 373,103 | ||||
| Current portion of lease liability [note 10] | 149,317 | 122,452 | ||||
| Current portion of long-term debt [note 11] | 950,930 | - | ||||
| Unit subscriber deposits | - | 2,008,728 | ||||
| Deferred premium on flow-through shares | - | 1,884 | ||||
| Total current liabilities | 2,304,834 | 2,506,167 | ||||
| Non-current liabilities | ||||||
| Lease liability [note 10] | 132,555 | 281,873 | ||||
| Long-term debt [note 11] | 998,070 | - | ||||
| Total non-current liabilities | 1,130,625 | 281,873 | ||||
| Total liabilities | 3,435,459 | 2,788,040 | ||||
| SHAREHOLDERS' EQUITY | ||||||
| Share capital [note 12(a)] | 85,494,266 | 43,801,952 | ||||
| Warrants [note 12(b)] | - | 407,264 | ||||
| Share-based payment reserve [note 12(c)] | 7,761,541 | 3,270,399 | ||||
| Shares to be issued | 472,500 | 472,500 | ||||
| Deficit | (59,179,246 | ) | (20,489,827 | ) | ||
| Total shareholders' equity | 34,549,061 | 27,462,288 | ||||
| Total shareholders' equity and liabilities | 37,984,520 | 30,250,328 |
Nature of Business [note 1]
Commitments and Contingencies [note 18]
Subsequent Events [note 22]
The accompanying notes are an integral part of these consolidated financial statements
These consolidated financial statements were authorised for issue by the Board of Directors on June 29, 2022.
Approved on behalf of the Board of Directors:
|
"Eric Wallman" |
, Director |
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"Brian Bosse" |
, Director |
2
ZENTEK LTD.
(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.)
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
| (Stated in Canadian Dollars) | 2022 | 2021 | ||||
| FOR THE YEARS ENDED MARCH 31 | $ | $ | ||||
| REVENUE | ||||||
| Sales | 339,666 | - | ||||
| Other income | 7,517 | 2,355 | ||||
| 347,183 | 2,355 | |||||
| EXPENSES | ||||||
| Amortization [note 7] | 614,710 | 126,799 | ||||
| Consulting fees | 898,208 | 392,752 | ||||
| Investor relations and promotion | 280,740 | 175,932 | ||||
| Listing and filing fees | 325,167 | 52,466 | ||||
| Professional fees | 1,849,888 | 548,922 | ||||
| Rent | 196,994 | 51,570 | ||||
| Research and development | 1,541,902 | - | ||||
| Salaries and benefits [note 15] | 1,436,708 | 516,784 | ||||
| Stock-based compensation [notes 12(c) and 15] | 4,726,840 | 2,018,416 | ||||
| Supplies and materials | 376,787 | 196,028 | ||||
| Other expenses [note 21] | 661,904 | 236,406 | ||||
| 12,909,848 | 4,316,075 | |||||
| Loss from continuing operations | (12,562,665 | ) | (4,313,720 | ) | ||
| Discontinued operations | ||||||
| Impairment of exploration and evaluation assets [note 8] | 26,671,935 | - | ||||
| Loss from discontinued operations [note 8] | 26,671,935 | - | ||||
| Loss before the undernoted | (39,234,600 | ) | (4,313,720 | ) | ||
| Interest and other income | 20,597 | 4,107 | ||||
| Interest expense | (63,777 | ) | (6,460 | ) | ||
| Premium on flow-through shares | 1,884 | 109,795 | ||||
| Government grants [note 20] | 581,848 | 337,628 | ||||
| Total other items | 540,552 | 445,070 | ||||
| Net and comprehensive loss for the year | (38,694,048 | ) | (3,868,650 | ) | ||
| Basic and diluted net loss per share [note 19] | ||||||
| Continuing operations | 0.13 | 0.05 | ||||
| Discontinued operations | 0.29 | - | ||||
| 0.42 | 0.05 |
The accompanying notes are an integral part of these consolidated financial statements
3
ZENTEK LTD.
(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| (Stated in Canadian Dollars) | 2022 | 2021 | ||||
| FOR THE YEARS ENDED MARCH 31 | $ | $ | ||||
| OPERATING ACTIVITIES | ||||||
| Loss for the year | (38,694,048 | ) | (3,868,650 | ) | ||
| Loss from discontinued operations | 26,671,935 | - | ||||
| Loss from continuing operations | (12,022,113 | ) | (3,868,650 | ) | ||
| Items not affecting cash | ||||||
| Amortization [note 7] | 614,710 | 126,799 | ||||
| Premium on flow-through shares | (1,884 | ) | (109,795 | ) | ||
| Shares issued for license agreement [note 12(a)] | 50,000 | - | ||||
| Stock-based compensation [note 12(c)] | 4,726,840 | 2,018,416 | ||||
| (6,632,447 | ) | (1,833,230 | ) | |||
| Net change in non-cash working capital balances [note 13] | (1,356,425 | ) | 38,547 | |||
| Cash flows used in continuing operating activities | (7,988,872 | ) | (1,794,683 | ) | ||
| INVESTING ACTIVITIES | ||||||
| Government assistance received [note 8] | - | 132,732 | ||||
| Loan receivable advanced | (2,950,000 | ) | - | |||
| Purchase of property and equipment | (3,985,910 | ) | (254,282 | ) | ||
| Cash flows used in continuing investing activities | (6,935,910 | ) | (121,550 | ) | ||
| Cash flows used in discontinued investing activities | (316,698 | ) | (1,111,693 | ) | ||
| FINANCING ACTIVITIES | ||||||
| Shares issued [note 12(a)] | 33,014,082 | - | ||||
| Share issue costs [note 12(a)] | (1,592,488 | ) | - | |||
| Units issued [note 12(a)] | 2,329,270 | 2,050,000 | ||||
| Unit issue costs [note 12(a)] | (63,364 | ) | (37,661 | ) | ||
| Unit subscriber deposits | - | 2,008,728 | ||||
| Proceeds from stock options exercised [note 12(a)] | 406,967 | 370,866 | ||||
| Proceeds from warrants exercised [note 12(a)] | 4,866,415 | 995,493 | ||||
| Warrants issue costs | (13,498 | ) | - | |||
| Payments on lease liability | (122,453 | ) | (73,898 | ) | ||
| Cash flows from continuing financing activities | 38,824,931 | 5,313,528 | ||||
| Change in cash and cash equivalents during the year | 23,583,451 | 2,285,602 | ||||
| Cash and cash equivalents, beginning of year | 3,091,549 | 805,947 | ||||
| Cash and cash equivalents, end of year | 26,675,000 | 3,091,549 |
Supplementary disclosures - see note 13
The accompanying notes are an integral part of these consolidated financial statements
4
ZENTEK LTD.
(FORMERLY ZEN GRAPHENE SOLUTIONS LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Share-Based | |||||||||||||||||||||
| Share | Payment | Share to be | Total | ||||||||||||||||||
| Number of | Capital | Warrants | Reserve | Issued | Deficit | Equity | |||||||||||||||
| (Stated in Canadian Dollars) | Shares | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Balance as at March 31, 2020 | 80,405,791 | 40,211,736 | 331,415 | 1,599,609 | 472,500 | (16,904,177 | ) | 25,711,083 | |||||||||||||
| Issuance of units [note 12(a)] | 3,416,666 | 1,779,015 | 270,985 | - | - | - | 2,050,000 | ||||||||||||||
| Unit issue costs | - | (37,661 | ) | - | - | - | - | (37,661 | ) | ||||||||||||
| Issuance of shares for debt [note 12(a)] | 115,711 | 45,200 | - | - | - | - | 45,200 | ||||||||||||||
| Stock options exercised [note 12(a)] | 653,333 | 613,033 | - | (242,167 | ) | - | - | 370,866 | |||||||||||||
| Warrants exercised [note 12(a)] | 1,608,348 | 1,190,629 | (195,136 | ) | - | - | - | 995,493 | |||||||||||||
| Recognition of stock-based compensation [note 12(c)] | - | - | - | 2,195,957 | - | - | 2,195,957 | ||||||||||||||
| Stock options expired [note 12(c)] | - | - | - | (283,000 | ) | - | 283,000 | - | |||||||||||||
| Net loss and comprehensive loss for the year | - | - | - | - | - | (3,868,650 | ) | (3,868,650 | ) | ||||||||||||
| Balance as at March 31, 2021 | 86,199,849 | 43,801,952 | 407,264 | 3,270,399 | 472,500 | (20,489,827 | ) | 27,462,288 | |||||||||||||
| Issuance of units [note 12(a)] | 1,735,199 | 3,589,111 | 748,887 | - | - | - | 4,337,998 | ||||||||||||||
| Unit issue costs [note 12(a)] | 15,592 | (44,850 | ) | (18,514 | ) | - | - | - | (63,364 | ) | |||||||||||
| Issuance of shares [note 12(a)] | 6,348,864 | 33,014,082 | - | - | - | - | 33,014,082 | ||||||||||||||
| Share issue costs [note 12(a)] | - | (1,592,488 | ) | - | - | - | - | (1,592,488 | ) | ||||||||||||
| Issuance of shares for debt [note 12(a)] | 19,157 | 50,000 | - | - | - | - | 50,000 | ||||||||||||||
| Stock options exercised [note 12(a)] | 673,333 | 690,534 | - | (283,567 | ) | - | - | 406,967 | |||||||||||||
| Warrants exercised [note 12(a)] | 4,256,064 | 5,999,423 | (1,133,008 | ) | - | - | - | 4,866,415 | |||||||||||||
| Warrants issue costs | - | (13,498 | ) | - | - | - | - | (13,498 | ) | ||||||||||||
| Share purchase warrants expired [note 12(b)] | - | - | (4,629 | ) | - | - | 4,629 | - | |||||||||||||
| Recognition of stock-based compensation [note 12(c)] | - | - | - | 4,774,709 | - | - | 4,774,709 | ||||||||||||||
| Net loss and comprehensive loss for the year | - | - | - | - | - | (38,694,048 | ) | (38,694,048 | ) | ||||||||||||
| Balance as at March 31, 2022 | 99,248,058 | 85,494,266 | - | 7,761,541 | 472,500 | (59,179,246 | ) | 34,549,061 |
The accompanying notes are an integral part of these consolidated financial statements
5
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ZENTEK LTD. (Stated in Canadian Dollars) |
1. NATURE OF BUSINESS
Effective October 27, 2021, ZEN Graphene Solutions Ltd. obtained TSX Venture Exchange approval to change its name to Zentek Ltd. (the "Company"). The Company was incorporated on July 29, 2008 under the laws of the province of Ontario, Canada. The principal business of the Company is to develop opportunities in the graphene and related nano-materials industry based on its intellectual property, patents and unique Albany graphite. The address of the Company's executive office is 210 - 1205 Amber Drive, Thunder Bay, Ontario, P7B 6M4, Canada.
The Company is an emerging high-tech nano-graphite and graphene materials company based in Thunder Bay, Ontario, Canada. The current focus is to bring to market innovative products including surgical masks and HVAC filters with the Company's ZENGuard coating, Rapid Detection Point of Care diagnostics tests and continue to develop potential pharmaceutical products based on its patent-pending graphene-based compound.
There has been a global outbreak of COVID-19 (coronavirus), which has had a significant impact on businesses through the restrictions put in place by the Canadian, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders. The impact on the Company has not been significant, but management continues to monitor the situation.
Management believes the Company will be successful at completing its development plan and that current cash reserves are sufficient to carry forward the Company's plan through the coming twelve months.
These consolidated financial statements of the Company for the year ended March 31, 2022 were approved and authorised for issue by the Board of Directors on June 29, 2022.
6
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES
Statement of Compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
Basis of Presentation
The consolidated financial statements have been prepared using the measurement bases specified by IFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies below. The consolidated financial statements are prepared on the historical cost basis. In addition, these consolidated financial statements are prepared using the accrual basis of accounting, except for cash flow information.
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the application of policies and reported amounts of assets and liabilities and disclosures of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year.
The consolidated financial statements consolidate the accounts of the Company and all of its subsidiaries. The Company has the following inactive, wholly owned subsidiaries: 1000114904 Ontario Inc. and Zentek USA Inc.
Foreign Currency Translation
The consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company. In preparing the consolidated financial statements, transactions in currencies other than the entity's functional currency are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Gains/losses on translation are recorded in profit or loss.
Financial Instruments
Financial assets
Initial recognition and measurement
Non-derivative financial assets within the scope of IFRS 9 are classified and measured as "financial assets at fair value", as either Fair Value Through Profit or Loss ("FVPL") or Fair Value Through Other Comprehensive Income ("FVOCI"), and "financial assets at amortised costs", as appropriate. The Company determines the classification of financial assets at the time of initial recognition based on the Company's business model and the contractual terms of the cash flows.
All financial assets are recognised initially at fair value plus, in the case of financial assets not at FVPL, directly attributable transaction costs on the trade date at which the Company becomes a party to the contractual provisions of the instrument.
Financial assets with embedded derivatives are considered in their entirety when determining their classification at FVPL or at amortised cost. Cash and amounts receivable held for collection of contractual cash flows are measured at amortised cost.
7
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Subsequent measurement - financial assets at amortised cost
After initial recognition, financial assets measured at amortised cost are subsequently measured at the end of each reporting period at amortised cost using the Effective Interest Rate ("EIR") method. Amortised cost is calculated by taking into account any discount or premium on acquisition and any fees or costs that are an integral part of the EIR. The Company's financial assets measured at amortised cost correspond to cash, accounts and other receivables and loan receivable and their nominal value is similar to their amortised cost.
Subsequent measurement - financial assets at FVPL
Financial assets measured at FVPL include financial assets management intends to sell in the short term and any derivative financial instrument that is not designated as a hedging instrument in a hedge relationship. Financial assets measured at FVPL are carried at fair value in the statements of financial position with changes in fair value recognised in other income or expense in the statements of loss. The Company does not measure any financial assets at FVPL.
Subsequent measurement - financial assets at FVOCI
Financial assets measured at FVOCI are non-derivative financial assets that are not held for trading and the Company has made an irrevocable election at the time of initial recognition to measure the assets at FVOCI. The Company does not measure any financial assets at FVOCI.
After initial measurement, investments measured at FVOCI are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income or loss in the statements of comprehensive loss. When the investment is sold, the cumulative gain or loss remains in accumulated other comprehensive income or loss and is not reclassified to profit or loss.
Dividends from such investments are recognised in other income in the statements of loss when the right to receive payments is established.
Derecognition
A financial asset is derecognised when the contractual rights to the cash flows from the asset expire, or the Company no longer retains substantially all the risks and rewards of ownership.
Impairment of financial assets
The Company's only financial assets subject to impairment are accounts and other receivables, which are measured at amortised cost. The Company has elected to apply the simplified approach to impairment as permitted by IFRS 9, which requires the expected lifetime loss to be recognised at the time of initial recognition of the receivable. To measure estimated credit losses, accounts receivable have been grouped based on shared credit risk characteristics, including the number of days past due. An impairment loss is reversed in subsequent periods if the amount of the expected loss decreases and the decrease can be objectively related to an event occurring after the initial impairment was recognised.
Financial liabilities
Initial recognition and measurement
Financial liabilities are measured at amortised cost, unless they are required to be measured at FVPL as is the case for held for trading or derivative instruments, or the Company has opted to measure the financial liability at FVPL. The Company's financial liabilities include accounts payable and accrued liabilities, long-term debt and unit subscriber deposits which are measured at amortised cost. All financial liabilities are recognised initially at fair value and in the case of long-term debt, net of directly attributable transaction costs.
8
|
ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Subsequent measurement - financial liabilities at amortised cost
After initial recognition, financial liabilities measured at amortised cost are subsequently measured at the end of each reporting period at amortised cost using the EIR. Amortised cost is calculated by taking into account any discount or premium on acquisition and any fees or costs that are an integral part of the EIR. The Company's financial liabilities measured at amortised cost correspond to accounts payable, lease liability and long-term debt and their nominal value is similar to their amortised cost.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires with any associated gain or loss recognised in other income or expense in the statements of loss.
Exploration and Evaluation Assets
Exploration and evaluation assets include the costs of acquiring licenses, costs associated with exploration and evaluation activity (e.g. geological, geophysical studies, exploratory drilling and sampling), and the fair value (at acquisition date) of exploration and evaluation assets acquired in a business combination or asset purchase. The Company follows the practice of capitalizing all costs related to the acquisition of, exploration for and evaluation of mineral claims and crediting all revenue, including government assistance, received against the cost of related claims. Costs incurred before the Company has obtained the legal rights to explore an area are recognised as expenses of the Company.
Capitalised costs are only allocated to the extent that these costs can be related directly to operational activities in the relevant area of interest where it is considered likely to be recoverable by future exploitation or sale or where the activities have not reached a stage which permits a reasonable assessment of the existence of reserves.
Exploration and evaluation assets are assessed for impairment at each financial reporting date or when facts and circumstances suggest that the carrying amount exceeds the recoverable amount. The aggregate costs related to abandoned mineral claims are charged to operations at the time of any abandonment or when it has been determined that there is evidence of a permanent impairment.
Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified to mining property and development assets within property, plant and equipment.
Recoverability of the carrying amount of the exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest.
9
|
ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Equipment is carried at acquisition cost less subsequent amortization and impairment losses. Amortization is recognised on a declining balance basis over the estimated useful lives of the equipment less estimated residual value. The rates generally applicable are:
| Buildings | 4% |
| Equipment - Automotive | 20% |
| Equipment - Office | 20% |
| Equipment - Lab and Field | 20% |
| Signage | 20% |
| Computers | 20% |
| Computer software | 100% |
| Leasehold improvements | Straight-line over term of lease |
| Right of Use Assets | Straight-line over term of lease |
Material residual value estimates and estimates of useful life are updated as required, but at least annually.
Gains or losses arising on the disposal of equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognised in profit or loss within 'gain/loss on sale of property and equipment'.
Cash and Cash Equivalents
The Company's policy is to disclose cash, bank account balances, cashable investment-grade deposit certificates and non- cashable investment-grade deposit certificates with original maturities of three months or less as cash and cash equivalents. Cash and cash equivalents are held in Canadian chartered banks or financial institutions controlled by a Canadian chartered bank.
Impairment of Non-Financial Assets
At each financial reporting date, the carrying amounts of the Company's non-financial assets are reviewed to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair values less costs to sell, and value in use.
Fair value is determined as the amount that would be obtained from the sale of the asset in an arm's length transaction between knowledgeable and willing parties. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less that its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognised in the profit or loss for the period.
For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. When an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Share Capital
Share capital represents the fair value of consideration received, less related costs.
Flow Through Shares
Under Canadian income tax legislation, a company is permitted to issue flow through shares whereby it agrees to incur qualifying expenditures and renounce the related income tax deductions to the investors. The Company allocates the proceeds from the issuance of these shares between the offering of shares and the sale of tax benefits. The allocation is made based on the difference between the quoted price of non-flow through shares and the amount the investor pays for flow- through shares. A flow through premium liability is recognised for the difference. The liability is reversed when the expenditures are made and is recorded in the statement of loss. The spending also gives rise to a deferred tax timing difference between the carrying value and tax value of the qualifying expenditure.
Warrants
Warrants are recorded at their fair value on the date of issue, net of issue costs. The Company uses the Black-Scholes option pricing model to estimate the fair value of warrants issued. On the exercise of warrants, consideration received and the accumulated warrant value attributed to the portion exercised is credited to share capital. For those warrants that expire after vesting, the recorded value is transferred to deficit.
Share-Based Payments
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in the share-based payment note. See note 12(c).
The fair value determined at the grant date of the equity-settled share-based payments is expensed over the period during which the employee becomes unconditionally entitled to equity instruments, based on the Company's estimate of equity instruments that will eventually vest. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.
Charges for options that are forfeited before vesting are reversed from share-based payment reserve. For those options that expire after vesting, the recorded value is transferred to deficit.
On the exercise of options, consideration received and the accumulated option value attributed to the portion exercised is credited to share capital.
11
|
ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss per Share
Basic loss per share is calculated using the weighted average number of shares outstanding. In order to determine diluted loss per share, any proceeds from the exercise of dilutive stock options and warrants would be used to repurchase common shares at the average market price during the period, with the incremental number of shares being included in the denominator of the diluted loss per share calculation. The diluted loss per share calculation excludes any potential conversion of warrants and options that would increase earnings per share or decrease loss per share. The outstanding stock options and warrants to purchase common shares disclosed in note 12 were not included in the computation of the diluted loss per share for the periods presented because the effect would be anti-dilutive.
Income Taxes
Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the consolidated financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period, adjusted for amendments to tax payable with regards to previous years.
Deferred income taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with joint ventures is not provided if reversal of these temporary differences can be controlled by the Company and it is probable that reversal will not occur in the foreseeable future.
Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be able to be utilised against future taxable income. The Company has not recognised deferred tax assets to the extent that the company does not consider it probable that a deferred tax asset will be recovered.
Deferred tax assets and liabilities are offset only when the Company has a right and intention to offset current tax assets and liabilities from the same taxation authority.
Changes in deferred tax assets or liabilities are recognised as a component of taxable income or expense in profit or loss, except where they relate to items that are recognised in other comprehensive income or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively.
12
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Restoration, Rehabilitation, and Environmental Obligations
An obligation to incur restoration, rehabilitation and environmental costs arises when the Company has a present legal or constructive obligation caused by the exploration, development or ongoing production of a mineral property interest. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value, are provided for and capitalised at the start of each project to the carrying amount of the asset, as soon as the obligation to incur such costs arises. Discount rates using a pre-tax rate that reflect the time value of money are used to calculate the net present value. These costs are charged against profit or loss over the economic life of the related asset, through amortization using either the units-of-production or the straight-line method. The related liability is adjusted for each period for the unwinding of the discount rate and for changes to the current market-based discount rate, amount or timing of the underlying cash flows needed to settle the obligation. Costs for restoration of subsequent site damage which is created on an ongoing basis during production are provided for at their net present values and charged against profits as extraction progresses. The Company had no material restoration, rehabilitation and environmental obligations as at March 31, 2022 or 2021 as the disturbance to date is minimal.
Interest
Interest income and expenses are reported on an accrual basis using the effective interest method.
Operating Expenses
Operating expenses are recognised in profit or loss upon utilization of the service or at the date of their origin.
Leases
The Company assesses at inception of a contract, whether the contract is, or contains a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset for a period of time, the Company assesses whether the customer has the following through the period of use:
• The right to obtain substantially all of the economic benefits from use of the identified asset; and
• The right to direct the use of the identified asset.
At the lease commencement date, the Company recognises a right-of-use asset and a lease liability. The right-of-use asset is initially measured at cost. The cost of the right-of-use asset is comprised of the initial amount of the lease liability, any lease payments made at or before the commencement date less any lease incentives received, initial direct costs incurred by the Company, and an estimate of the costs to be incurred by the Company in dismantling and removing the underlying asset and restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease.
After the commencement date, the Company measures right-of-use assets related to property and equipment by applying the cost model, whereby the right-of-use asset is measured at cost less accumulated depreciation and impairment losses and adjusted for any remeasurement of the lease liability. The right-of-use asset is depreciated using the straight-line method from the commencement date to the end of the lease term or the end of the useful life of the right-of-use asset. The estimated useful life of the right-of-use assets are determined on the same basis as those of property, plant and equipment. The determination of the depreciation period is dependent on whether the Company expects that the ownership of the underlying asset will transfer to the Company by the end of the lease term or if the cost of the right-of-use asset reflects that the Company will exercise a purchase option.
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases (continued)
The lease liability is initially measured at the present value of the lease payments not paid at the lease commencement date, discounted using the interest rate implicit in the lease or the Company's incremental borrowing rate, if the interest rate implicit in the lease cannot be readily determined. The lease payments included in the measurement of the lease liability comprise of fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or rate, amounts expected to be payable by the Company under a residual value guarantee, the exercise price of a purchase option that the Company is reasonably certain to exercise, and payment of penalties for terminating the lease if the lease term reflects the Company exercising an option to terminate the lease. After the commencement date, the Company measures the lease liability at amortised cost using the effective interest method.
The Company remeasures the lease liability when there is a change in the lease term, a change in the Company's assessment of an option to purchase the underlying asset, a change in the Company's estimate of amounts expected to be payable under a residual value guarantee, or a change in future lease payments resulting from a change in an index or a rate used to determine those payments. On remeasurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Company has elected to not recognise right-of-use assets and lease liabilities for short-term leases of property and equipment and low value leases of property and equipment. Short-term leases are leases with a term of twelve months or less. The Company recognises the lease payments associated with these leases as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee's benefit.
Revenue Recognition
Revenue is recognised only when it is probable that the economic benefit associated with the transaction will flow to the Company. However, when an uncertainty arises about the collectability of an amount already included in revenue, the uncollectable amount, or the amount in respect of which recovery has ceased to be probable, it is recognised as an expense, rather than as an adjustment of the amount of revenue originally recognised.
The Company's accounting policy for revenue recognition under IFRS 15, Revenue from Contracts with Customers, follows a five-step model to determine the amount and timing of revenue to be recognized:
1. Identifying the contract with a customer;
2. Identifying the performance obligations within the contract;
3. Determining the transaction price;
4. Allocating the transaction price to the performance obligations; and
5. Recognizing revenue when/as performance obligation(s) are satisfied.
The Company generates revenue through the direct supply of product to customers and by entering into royalty agreements with customers.
Government grants
Government grants are recognised in profit or loss on a systematic basis over the periods in which the Company recognises expenses as related costs for which funded expenditures are incurred. Government grants are recognised when there is reasonable assurance that the Company will comply with the terms and conditions associated with the grants and the grants will be received. An unconditional government grant is recognised in profit or loss when the Company is entitled to receive the grant funding.
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ZENTEK LTD. (Stated in Canadian Dollars) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are comprised of raw materials. Inventories are recorded at the lower of cost and net realizable value. Cost is determined on a standard cost basis, and includes the purchase price and other costs, such as import duties, taxes and transportation costs. Inventory cost is determined on a first-in, first-out basis and any trade discounts and rebates are deducted from the purchase price. Raw material costs include the purchase cost of the materials and freight-in.
New Accounting Standards and Interpretations not yet Adopted
Certain pronouncements were issued by the IASB or the International Financial Reporting Interpretations Committee ("IFRIC") that are mandatory for accounting periods beginning on or after April 1, 2022 or later periods. Many are not applicable or do not have a significant impact to the Company and have been excluded. The following have not yet been adopted and are being evaluated to determine their impact on the Company.
IAS 1 - Presentation of Financial Statements ("IAS 1") was amended in January 2020 to provide a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments clarify that the classification of liabilities as current or noncurrent is based solely on a company's right to defer settlement at the reporting date. The right needs to be unconditional and must have substance. The amendments also clarify that the transfer of a company's own equity instruments is regarded as settlement of a liability, unless it results from the exercise of a conversion option meeting the definition of an equity instrument. The amendments are effective for annual periods beginning on January 1, 2023.
IAS 37 - Provisions, Contingent Liabilities, and Contingent Assets ("IAS 37") was amended. The amendments clarify that when assessing if a contract is onerous, the cost of fulfilling the contract includes all costs that relate directly to the contract - i.e. a full-cost approach. Such costs include both the incremental costs of the contract (i.e. costs a company would avoid if it did not have the contract) and an allocation of other direct costs incurred on activities required to fulfill the contract - e.g. contract management and supervision, or depreciation of equipment used in fulfilling the contract. The amendments are effective for annual periods beginning on January 1, 2022.
IAS 16 - Property, Plant and Equipment ("IAS 16") was amended. The amendments introduce new guidance, such that the proceeds from selling items before the related property, plant and equipment is available for its intended use can no longer be deducted from the cost. Instead, such proceeds are to be recognised in profit or loss, together with the costs of producing those items. The amendments are effective for annual periods beginning on January 1, 2022.
IAS 1 - Presentation of Financial Statements ("IAS 1") and IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors ("IAS 8") were amended in October 2018 to refine the definition of materiality and clarify its characteristics. The revised definition focuses on the idea that information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. The Company has adopted this new standard and has determined there was no significant impact on the consolidated financial statements.
IAS 12 Income Taxes. In May 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which amended IAS 12 Income Taxes. The amendments are effective beginning on or after January 1, 2023, with early adoption permitted.The amendments narrowed the scope of the recognition exemption in paragraphs 15 and 24 of IAS 12 (recognition exemption) so that it no longer applies to transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences, such as leases and reclamation provisions. The Company is assessing the impact of the amendment and does not expect it to have a significant effect on the Company's consolidated financial statements
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ZENTEK LTD. (Stated in Canadian Dollars) |
3. CRITICAL JUDGMENTS AND ESTIMATION UNCERTAINTIES
The preparation of consolidated financial statements in conformity with IFRS requires the Company's management to make judgments, estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and related notes. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may differ from those estimates and these differences could be material.
The areas which require management to make significant judgments, estimates and assumptions in determining carrying values include, but are not limited to:
Accounts receivable and loan receivable carrying values and impairment charges
In the determination of carrying values and impairment charges, management looks at the higher of recoverable amount or fair value less costs to sell in the case of assets and at objective evidence, significant or prolonged decline of fair value on financial assets indicating impairment. These determinations and their individual assumptions require that management make a decision based on the best available information at each reporting period.
Expected credit loss allowance and provision
The Company determines an expected credit loss allowance for trade receivables based on the estimated expected lifetime credit loss, considering the actual credit loss in prior years and forward-looking estimates of expected collections. This estimate varies depending on the nature of the trade receivables, the majority of which are associated with the health sciences business; however, also includes receivables from government agencies. The loss allowance is reviewed on a quarterly basis and any change in estimate is accounted for prospectively. The Company also assesses the expected credit loss of non-trade financial assets to determine if an allowance is required. Collectivity of customer balances classified as trade receivables may vary from the Company's estimation.
Impairment of exploration and evaluation assets
While assessing whether any indications of impairment exist for exploration and evaluation assets, consideration is given to both external and internal sources of information. Information the Company considers includes changes in the market, economic and legal environment in which the Company operates that are not within its control that could affect the recoverable amount of exploration and evaluation assets. Internal sources of information include the manner in which exploration and evaluation assets are being used or are expected to be used and indications of expected economic performance of the assets. Estimates include but are not limited to estimates of the discounted future pre-tax cash flows expected to be derived from the Company's mineral exploration properties, costs to sell the properties and the appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production, increases in estimated future capital costs, reductions in the amount of recoverable mineral reserves and mineral resources and/or adverse current economics can result in a write-down of the carrying amounts of the Company's exploration and evaluation assets.
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ZENTEK LTD. (Stated in Canadian Dollars) |
3. CRITICAL JUDGMENTS AND ESTIMATION UNCERTAINTIES (continued)
Income taxes and recoverability of potential deferred tax assets
In assessing the probability of realizing income tax assets recognised, management makes estimates related to expectations of future taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction.
The Company considers whether relevant tax planning opportunities are within the Company's control, are feasible, and are within management's ability to implement. Examination by applicable tax authorities is supported based on individual facts and circumstances of the relevant tax position examined in light of all available evidence. Where applicable tax laws and regulations are either unclear or subject to ongoing varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of income tax assets recognised. Also, future changes in tax laws could limit the Company from realizing the tax benefits from the deferred tax assets. The Company reassesses unrecognised income tax assets at each reporting period.
Discount rate on lease liability
All the components of the lease liability are required to be discounted to reflect the present value of the payments. The discount rate to use is the rate implicit in the lease, unless this cannot readily be determined, in which case the lessee's incremental borrowing rate is used instead. The definition of the lessee's incremental borrowing rate states that the rate should represent what the lessee would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. Significant judgment is required to estimate an incremental borrowing rate in the context of a right-of-use asset.
Share-based payments
Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques. Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors and corporate performance. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates.
Existence of decommissioning and restoration costs and the timing of expenditure
Decommissioning, restoration and similar liabilities are estimated based on the Company's interpretation of current regulatory requirements, constructive obligations and are measured at fair value. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of decommissioning, restoration or similar liabilities that may occur upon decommissioning of the mine. Such estimates are subject to change based on changes in laws and regulations and negotiations with regulatory authorities.
Contingencies
Refer to note 18.
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ZENTEK LTD. (Stated in Canadian Dollars) |
4. ACCOUNTS AND OTHER RECEIVABLES
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Trade receivables | 314,375 | - | ||||
| HST recoverable | 341,789 | 119,349 | ||||
| 656,164 | 119,349 |
5. LOAN RECEIVABLE
In March 2022, a loan was advanced to a third party, who is an insignificant shareholder of the Company and not an insider nor an employee of the Company, earning 6% interest per annum, calculated and payable monthly. The loan is secured by mortgages against property held by the borrower. The maturity date is July 1, 2022 with the borrower having the option to extend the maturity date for an additional three months. Should the option be exercised, the interest rate for the additional three months becomes 8% per annum, calculated and payable monthly.
6. INVENTORIES
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Raw materials | 477,095 | - | ||||
| Finished goods | 188,477 | - | ||||
| 665,572 | - |
Included in prepaids and deposits are $855,415 of prepayments made for inventory to be delivered subsequent to year end.
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ZENTEK LTD. (Stated in Canadian Dollars) |
7. PROPERTY AND EQUIPMENT
For the year ended March 31, 2022
| Cost | Balance at | Balance at | ||||||||||
| March 31 | March 31 | |||||||||||
| 2021 | Additions | Disposals | 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| Land | - | 516,248 | - | 516,248 | ||||||||
| Buildings | - | 1,548,745 | - | 1,548,745 | ||||||||
| Equipment - Automotive | 1,439 | - | - | 1,439 | ||||||||
| Equipment - Office | 15,799 | 142,075 | - | 157,874 | ||||||||
| Equipment - Lab and Field | 251,699 | 1,052,822 | - | 1,304,521 | ||||||||
| Computers | 51,151 | 69,125 | - | 120,276 | ||||||||
| Computer software | 19,846 | 18,544 | - | 38,390 | ||||||||
| Signage | 4,917 | - | - | 4,917 | ||||||||
| Leasehold improvements | 111,190 | 147,641 | - | 258,831 | ||||||||
| Asset under construction (i) | - | 2,439,710 | - | 2,439,710 | ||||||||
| Right-of-Use Asset - building (ii) | 478,223 | - | - | 478,223 | ||||||||
| Total | 934,264 | 5,934,910 | - | 6,869,174 | ||||||||
| Accumulated amortization | Balance at | Amortization | Balance at | |||||||||
| March 31 | for the | March 31 | ||||||||||
| 2021 | year | Disposals | 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| Buildings | - | 61,950 | - | 61,950 | ||||||||
| Equipment - Automotive | 1,325 | 23 | - | 1,348 | ||||||||
| Equipment - Office | 14,501 | 28,674 | - | 43,175 | ||||||||
| Equipment - Lab and Field | 89,881 | 242,928 | - | 332,809 | ||||||||
| Computers | 38,890 | 16,277 | - | 55,167 | ||||||||
| Computer software | 19,846 | 18,544 | - | 38,390 | ||||||||
| Signage | 1,770 | 629 | - | 2,399 | ||||||||
| Leasehold improvements | 37,063 | 86,277 | - | 123,340 | ||||||||
| Right-of-Use Asset - building (ii) | 25,767 | 159,408 | - | 185,175 | ||||||||
| Total | 229,043 | 614,710 | - | 843,753 | ||||||||
| Carrying amounts | At March 31, | At March 31, | ||||||||||
| 2021 | 2022 | |||||||||||
| $ | $ | |||||||||||
| Land | - | 516,248 | ||||||||||
| Buildings | - | 1,486,795 | ||||||||||
| Equipment - Automotive | 114 | 91 | ||||||||||
| Equipment - Office | 1,298 | 114,699 | ||||||||||
| Equipment - Lab and Field | 161,818 | 971,712 | ||||||||||
| Computers | 12,261 | 65,109 | ||||||||||
| Computer software | - | - | ||||||||||
| Signage | 3,147 | 2,518 | ||||||||||
| Leasehold improvements | 74,127 | 135,491 | ||||||||||
| Asset under construction (i) | - | 2,439,710 | ||||||||||
| Right-of-Use Asset - building (ii) | 452,456 | 293,048 | ||||||||||
| Total | 705,221 | 6,025,421 |
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ZENTEK LTD. (Stated in Canadian Dollars) |
7. PROPERTY AND EQUIPMENT (continued)
| For the year ended March 31, 2021 | ||||||||||||
| Cost | Balance at | Balance at | ||||||||||
| March 31 | March 31 | |||||||||||
| 2020 | Additions | Disposals | 2021 | |||||||||
| $ | $ | $ | $ | |||||||||
| Equipment - Automotive | 1,439 | - | - | 1,439 | ||||||||
| Equipment - Office | 15,799 | - | - | 15,799 | ||||||||
| Equipment - Lab and Field | 129,939 | 121,760 | - | 251,699 | ||||||||
| Computers | 49,127 | 2,024 | - | 51,151 | ||||||||
| Computer software | 538 | 19,308 | - | 19,846 | ||||||||
| Signage | 4,917 | - | - | 4,917 | ||||||||
| Leasehold improvements | - | 111,190 | - | 111,190 | ||||||||
| Right-of-Use Asset - building (ii) | - | 478,223 | - | 478,223 | ||||||||
| Total | 201,759 | 732,505 | - | 934,264 | ||||||||
| Accumulated amortization | Balance at | Amortization | Balance at | |||||||||
| March 31 | for the | March 31 | ||||||||||
| 2020 | year | Disposals | 2021 | |||||||||
| $ | $ | $ | $ | |||||||||
| Equipment - Automotive | 1,296 | 29 | - | 1,325 | ||||||||
| Equipment - Office | 14,177 | 324 | - | 14,501 | ||||||||
| Equipment - Lab and Field | 49,426 | 40,455 | - | 89,881 | ||||||||
| Computers | 35,824 | 3,066 | - | 38,890 | ||||||||
| Computer software | 538 | 19,308 | - | 19,846 | ||||||||
| Signage | 983 | 787 | - | 1,770 | ||||||||
| Leasehold improvements | - | 37,063 | - | 37,063 | ||||||||
| Right-of-Use Asset - building (ii) | - | 25,767 | - | 25,767 | ||||||||
| Total | 102,244 | 126,799 | - | 229,043 | ||||||||
| Carrying amounts | At March 31, | At March 31, | ||||||||||
| 2020 | 2021 | |||||||||||
| $ | $ | |||||||||||
| Equipment - Automotive | 143 | 114 | ||||||||||
| Equipment - Office | 1,622 | 1,298 | ||||||||||
| Equipment - Lab and Field | 80,513 | 161,818 | ||||||||||
| Computers | 13,303 | 12,261 | ||||||||||
| Computer software | - | - | ||||||||||
| Signage | 3,934 | 3,147 | ||||||||||
| Leasehold improvements | - | 74,127 | ||||||||||
| Right-of-Use Asset - building (ii) | - | 452,456 | ||||||||||
| Total | 99,515 | 705,221 |
20
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ZENTEK LTD. (Stated in Canadian Dollars) |
7. PROPERTY AND EQUIPMENT (continued)
(i) The Company's asset under construction relates to costs incurred for the design and development of a silver-graphene oxide pilot plant. No amortization has been recorded on this asset as it is not yet available for use.
(ii) The Company's right-of-use leased asset includes its manufacturing facility located in Guelph, Ontario. It is the Company's policy to amortise the right-of-use asset using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. Amortization expense on this leased asset for the year ended March 31, 2022 was $159,408 (2021: $25,767).
8. EXPLORATION AND EVALUATION PROPERTY
The 100%-owned Albany Graphite Deposit (the "Albany Property") is located in Northern Ontario, Canada. During the year ended March 31, 2013, the Company reached an agreement with the optionor pursuant to the following terms and conditions:
a) The Company will issue to the optionor a total of 1,250,000 shares. Total shares remaining to be issued are 750,000 common shares valued at $472,500 based on their fair market value on the date of the agreement;
b) The Company granted the optionor a net smelter return royalty of 0.75% on the 4F claim block, of which 0.5% can be purchased at any time for $500,000; and
c) The agreement provides a clawback right that allows the optionor to reduce the Company's interest in the other claims to 30% subsequent to the exercise of the second option by giving notice within 30 days that the optionor intends to commence sole funding up to completion of a feasibility study within 48 months and within 30 days deliver a payment of $27,500,000.
| Opening | Ending | |||||||||||
| Balance | Expenditures | Impairment | Balance | |||||||||
| Albany Property | $ | $ | $ | $ | ||||||||
| For the year ended March 31, 2021 | 25,065,071 | 1,094,658 | - | 26,159,729 | ||||||||
| For the year ended March 31, 2022 | 26,159,729 | 512,206 | (26,671,935 | ) | - |
Government assistance received and netted against the expenditures during the year ended March 31, 2022 totaled $72,349 (2021: $132,732).
As a result of the Company's change in business during the year, the Company conducted an impairment test and determined the recoverable amount of the exploration and evaluation property to be negligible. Accordingly, the Company recognised an impairment charge on the exploration and evaluation property to reduce the carrying value to $nil. The exploration and evaluation expenditures incurred during the year were recognised as an expense in the consolidated statements of loss and comprehensive loss as it was determined that the exploration and evaluation property was impaired and these expenditures had no future benefit.
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ZENTEK LTD. (Stated in Canadian Dollars) |
8. EXPLORATION AND EVALUATION PROPERTY (continued)
Operating results and cash flow of the Company's exploration and evaluation property for the period up to the date of impairment were classified as discontinued operations in the consolidated statements of loss and comprehensive loss and in the consolidated statements of cash flows, respectively.
Net loss and comprehensive loss from discontinued operations:
| For the year | For the year | |||||
| ended | ended | |||||
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Expenses | ||||||
| Impairment of exploration and evaluation assets | 26,671,935 | - | ||||
| Loss from discontinued operations | 26,671,935 | - | ||||
| Net cash flows from discontinued operations: | ||||||
| For the year | For the year | |||||
| ended | ended | |||||
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Operating cash flows used in discontinued operations | - | - | ||||
| Investing cash flows used in discontinued operations | (316,698 | ) | (1,111,693 | ) | ||
| Financing cash flows used in discontinued operations | - | - |
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Trade payables | 1,044,587 | 348,103 | ||||
| Accrued liabilities | 160,000 | 25,000 | ||||
| 1,204,587 | 373,103 |
22
|
ZENTEK LTD. (Stated in Canadian Dollars) |
10. LEASE LIABILITY
During the year ended March 31, 2021, the Company entered into an agreement for its future corporate headquarters and current manufacturing facility. The initial term of the lease is for three years commencing on February 1, 2021 and terminating on January 31, 2024, subject to a right of extension as described herein. The initial term of the lease is paid in monthly instalments of $16,050 plus HST for the base rent. Pursuant to the terms of the lease, at the end of the initial term the Company has the right to extend the lease for a further three-year period to be paid in monthly instalments of $17,120 plus HST.
The lease liability relates to the above noted agreement which expires on January 31, 2024. The lease liability for the years ended March 31, 2022 and March 31, 2021 is as follows:
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Lease liability | 281,872 | 404,325 | ||||
| Less: current portion | (149,317 | ) | (122,452 | ) | ||
| Long-term portion | 132,555 | 281,873 |
Interest expense recognised on the lease liability for the year ended March 31, 2022 was $70,148 (2021: $6,352) which is included under other expenses on the statement of loss and comprehensive loss.
11. LONG-TERM DEBT
Pursuant to an asset purchase agreement dated February 10, 2022, the Company acquired the land, building and chattels at 24 Corporate Court in Guelph, Ontario for cash consideration of $351,000 and assumed a mortgage of $1,949,000. The mortgage was assumed in a vendor-take-back agreement with the seller of the property who is an insignificant shareholder and not an insider of the Company.
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| First mortgage payable in monthly instalments of $85,504 including interest at 5% per annum, due March 1, 2024, with land and building, having a net book value of $2,003,043, pledged as collateral. | 1,949,000 | - | ||||
| Less current portion | (950,930 | ) | - | |||
| 998,070 | - |
Principal repayments on long-term debt in each of the next two years are estimated as follows:
| 2023 | 950,930 | ||
| 2024 | 998,070 | ||
| Total | 1,949,000 |
23
|
ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL
(a) Share Capital
The Company is authorised to issue an unlimited number of common shares, with no par value.
During the year ended March 31, 2022, the Company completed the following share capital transactions:
On April 8, 2021, the Company completed a private placement in which a total of 1,735,199 units were issued at $2.50 per unit for gross proceeds of $4,337,998. Each unit consisted of one common share and one-half of one common share purchase warrant with each whole warrant exercisable at $3.00 for a period of two years. Unit issue costs associated with this private placement totaled $102,343 of which $38,979 was settled through the issuance of 15,592 shares.
A total of 673,333 common shares were issued upon exercise of 673,333 stock options at exercise prices ranging from $0.40 to $0.72 per option for total proceeds of $406,967. The carrying value of the options, being $283,567, was removed from Share-based payment reserve and added to share capital.
A total of 4,256,064 common shares were issued upon exercise of 4,256,064 warrants at exercise prices ranging from $0.50 to $3.00 per warrant for total proceeds of $4,865,994. The carrying value of the warrants, being $1,133,008, was removed from warrants and added to share capital.
On December 9, 2021, the Company issued 19,157 common shares at an agreed upon price of $2.61 per common share as partial settlement for a license agreement allowing the Company to be the global commercializing partner for an aptamer-based, SATS-CoV-2, rapid detection technology. The Company also paid $50,000 in cash to settle the balance of the agreed upon license fee.
On January 4, 2022, the Company completed a bought-deal prospectus for gross proceeds of $23,005,060 and a concurrent non-brokered private placement for gross proceeds of $10,009,022. Pursuant to these offerings, the Company issued a total of 6,348,864 common shares at a price of $5.20 per common share. Cash commissions and issuance costs associated with the offerings totaled $1,592,488.
During the year ended March 31, 2021, the Company completed the following share capital transactions:
On June 26, 2020 and July 6, 2020, in a private placement, a total of 3,416,666 units were issued at $0.60 per unit for gross proceeds of $2,050,000. Each unit consisted of one common share and one-half of one common share purchase warrant with each whole warrant exercisable at $0.80 for a period of two years. Share issue costs associated with this private placement totaled $37,661.
On August 19, 2020, pursuant to a shares for debt agreement, the Company issued 115,711 common shares to a trade creditor at a variable agreed upon price of between $0.34 and $0.59 per common share in settlement of various amounts owing. There was no gain or loss as a result of this debt settlement.
A total of 653,333 common shares were issued upon exercise of 653,333 stock options at exercise prices ranging from $0.40 to $0.72 per option for total proceeds of $370,866. The carrying value of the options, being $242,167, was removed from Share-based payment reserve and added to share capital.
A total of 1,608,348 common shares were issued upon exercise of 1,608,348 warrants at exercise prices ranging from $0.50 to $0.80 per warrant for total proceeds of $995,493. The carrying value of the warrants, being $195,136, was removed from warrants and added to share capital.
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(b) Share Purchase Warrants
The Company had no share purchase warrants outstanding as of March 31, 2022 (March 31, 2021 - 3,393,965).
The following is a summary of warrants activity for the years ended March 31, 2022 and March 31, 2021:
| Year ended | Year ended | |||||||||||
| March 31, 2022 | March 31, 2021 | |||||||||||
| Weighted | Weighted | |||||||||||
| average | average | |||||||||||
| Number | exercise price | Number | exercise price | |||||||||
| $ | $ | |||||||||||
| Balance, beginning of year | 3,393,965 | 0.67 | 3,293,976 | 0.58 | ||||||||
| Granted | 867,598 | 3.00 | 1,708,337 | 0.80 | ||||||||
| Exercised | (4,256,064 | ) | 1.14 | (1,608,348 | ) | 0.62 | ||||||
| Expired | (5,499 | ) | 3.00 | - | - | |||||||
| Balance, end of year | - | - | 3,393,965 | 0.67 | ||||||||
On April 8, 2021, the Company issued 867,598 share purchase warrants as part of a private placement financing with an exercise price of $3.00 and an expiry date of April 8, 2023. The expiry date was accelerated to November 3, 2021. The grant date fair value of these warrants was $0.84. The fair value of these warrants was estimated on the grant date using the Black- Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 97%; risk- free interest rate of 0.31%; and expected life of 2 years.
On June 26, 2020 and July 6, 2020, the Company issued 1,708,337 share purchase warrants as part of a private placement financing with an exercise price of $0.80 and an expiry date of June 26, 2022. The expiry date was accelerated to November 3, 2021. The grant date fair value of these warrants was $0.16. The fair value of these warrants was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 79%; risk-free interest rate of 0.30%; and expected life of 2 years.
On December 19, 2019, the Company issued 137,100 share purchase warrants as part of the share issue costs related to a private placement financing with an exercise price of $0.50 and an expiry date of December 19, 2021. The grant date fair value of these warrants was $0.10. The fair value of these warrants was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 73%; risk-free interest rate of 1.67%; and expected life of 2 years.
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve
The Company has a stock option plan (the "Plan") for directors, officers, employees and consultants. The Plan authorises the granting of options to purchase up to a maximum of 10% of the issued and outstanding common shares at the time of grant, of which 8,692,334 options are outstanding as at March 31, 2022 (March 31, 2021 - 7,021,667).
The Plan provides that:
a) any options granted pursuant to the Plan shall expire no later than ten years after the date of grant;
b) any options granted pursuant to the Plan shall be non-assignable and non-transferable;
c) the number of common shares issuable pursuant to the Plan to any one person in any 12-month period shall not exceed 5% of the outstanding common shares;
d) the number of common shares issuable pursuant to the Plan to any one consultant in any 12-month period may not exceed 2% of the outstanding common shares;
e) the number of common shares issuable pursuant to the Plan to persons employed in investor relation activities may not exceed 2% of the outstanding common shares in any 12-month period.
f) the Plan provides that options shall expire and terminate 90 days following the date the optionee ceases to be an employee, director or officer of, or consultant to, the Company, provided that if such termination is as a result of death of the optionee, the optionee's personal representative shall have one year to exercise such options.
g) the number of common shares: (1) reserved for issuance to insiders of the Company may not exceed 10% of the issued and outstanding common shares; and (2) which may be issued to insiders within a one-year period may not exceed 10% of the issued and outstanding common shares.
h) the Plan provides that options granted under the Plan shall vest in the optionee, and may be exercisable by the optionee under certain vesting terms.
During the year ended March 31, 2022, the Company issued the following stock options:
On April 13, 2021, the Company issued 50,000 stock options to a consultant with an exercise price of $1.76 per share and an expiry date of April 13, 2023. The grant date fair value of these stock options was $0.92. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 100%; expected forfeiture rate of 0%; risk-free interest rate of 0.31%; and expected life of 2 years. The vesting period of the options granted to the consultant is as follows: 100% at August 13, 2021.
On April 13, 2021, the Company issued 50,000 stock options to an employee with an exercise price of $1.76 per share and an expiry date of April 13, 2026. The grant date fair value of these stock options was $1.16. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 85%; expected forfeiture rate of 0%; risk-free interest rate of 0.31%; and expected life of 5 years. The vesting period of the options granted to the employee is as follows: 1/3 at April 13, 2021; 1/3 at April 13, 2022; 1/3 at April 13, 2023.
On June 30, 2021, the Company issued 150,000 stock options to a consultant with an exercise price of $3.50 per share and an expiry date of June 30, 2024. The grant date fair value of these stock options was $2.01. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 93%; expected forfeiture rate of 0%; risk-free interest rate of 0.45%; and expected life of 3 years. The vesting period of the options granted to the consultant is as follows: 1/3 at June 30, 2021; 1/3 at June 30, 2022; 1/3 at June 30, 2023.
26
|
ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
On July 23, 2021, the Company issued 25,000 stock options to an employee with an exercise price of $3.10 per share and an expiry date of July 23, 2024. The grant date fair value of these stock options was $1.75. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 91%; expected forfeiture rate of 0%; risk-free interest rate of 0.45%; and expected life of 3 years. The vesting period of the options granted to the employee is as follows: 1/3 at July 23, 2021; 1/3 at July 23, 2022; 1/3 at July 23, 2023.
On September 3, 2021, the Company issued 100,000 stock options to numerous employees with an exercise price of $3.69 per share and an expiry date of September 3, 2024. The grant date fair value of these stock options was $2.12. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 91%; expected forfeiture rate of 0%; risk-free interest rate of 0.53%; and expected life of 3 years. The vesting period of the options granted to the employees is as follows: 1/3 at September 3, 2021; 1/3 at March 3, 2022; 1/3 at September 3, 2022.
On September 21, 2021, the Company issued 120,000 stock options to a consultant with an exercise price of $4.08 per share and an expiry date of September 21, 2024. The grant date fair value of these stock options was $2.31. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 91%; expected forfeiture rate of 0%; risk-free interest rate of 0.53%; and expected life of 3 years. The vesting period of the options granted to the consultant is as follows: 1/3 at September 21, 2021; 1/3 at September 21, 2022; 1/3 at September 21, 2023.
On October 13, 2021, the Company issued 100,000 stock options to numerous employees with an exercise price of $4.92 per share and an expiry date of October 13, 2024. The grant date fair value of these stock options was $2.84. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 91%; expected forfeiture rate of 0%; risk-free interest rate of 1.07%; and expected life of 3 years. The vesting period of the options granted to the employees is as follows: 1/3 at October 13, 2021; 1/3 at October 13, 2022; 1/3 at October 13, 2023.
On October 26, 2021, the Company issued 50,000 stock options to an employee with an exercise price of $4.77 per share and an expiry date of October 26, 2024. The grant date fair value of these stock options was $2.75. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 91%; expected forfeiture rate of 0%; risk-free interest rate of 1.07%; and expected life of 3 years. The vesting period of the options granted to the employee is as follows: 1/3 at October 26, 2021; 1/3 at October 26, 2022; 1/3 at October 26, 2023.
On November 1, 2021, the Company issued 100,000 stock options to numerous consultants with an exercise price of $5.67 per share and an expiry date of November 1, 2024. The grant date fair value of these stock options was $3.21. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 89%; expected forfeiture rate of 0%; risk-free interest rate of 1.05%; and expected life of 3 years. The vesting period of the options granted to the consultants is as follows: 1/3 at November 1, 2021; 1/3 at November 1, 2022; 1/3 at November 1, 2023.
27
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
On December 15, 2021, the Company issued 25,000 stock options to an employee with an exercise price of $5.20 per share and an expiry date of December 15, 2026. The grant date fair value of these stock options was $3.39. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 82%; expected forfeiture rate of 0%; risk-free interest rate of 0.99%; and expected life of 5 years. The vesting period of the options granted to the employee is as follows: 1/3 at December 15, 2021; 1/3 at December 15, 2022; 1/3 at December 15, 2023.
On December 29, 2021, the Company issued 200,000 stock options to an employee and a consultant with an exercise price of $5.22 per share and an expiry date of December 29, 2024. The grant date fair value of these stock options was $2.96. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 89%; expected forfeiture rate of 0%; risk-free interest rate of 0.99%; and expected life of 3 years. The vesting period of the options granted to the employee is as follows: 1/3 at December 29, 2021; 1/3 at June 29, 2022; 1/3 at December 29, 2022. The vesting period of the options granted to the consultant is as follows: 1/3 at December 29, 2021; 1/3 at December 29, 2022; 1/3 at December 29, 2023.
On January 14, 2022, the Company issued 1,100,000 stock options to a number of directors and officers with an exercise price of $4.25 per share and an expiry date of January 14, 2027. The grant date fair value of these stock options was $2.80. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 83%; expected forfeiture rate of 0%; risk-free interest rate of 1.26%; and expected life of 5 years. The vesting period of the options granted to the directors and officers is as follows: 1/3 at January 14, 2022; 1/3 at July 14, 2022; 1/3 at January 14, 2023.
On January 14, 2022, the Company issued 200,000 stock options to a number of employees and consultants with an exercise price of $4.25 per share and an expiry date of January 14, 2025. The grant date fair value of these stock options was $2.42. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 90%; expected forfeiture rate of 0%; risk-free interest rate of 1.26%; and expected life of 3 years. The vesting period of the options granted to the employees and consultants is as follows: 1/3 at January 14, 2022; 1/3 at January 14, 2023; 1/3 at January 14, 2024.
On January 17, 2022, the Company issued 20,000 stock options to an employee with an exercise price of $4.25 per share and an expiry date of January 17, 2025. The grant date fair value of these stock options was $2.80. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 83%; expected forfeiture rate of 0%; risk-free interest rate of 1.26%; and expected life of 5 years. The vesting period of the options granted to the employee is as follows: 1/3 at January 17, 2022; 1/3 at January 17, 2023; 1/3 at January 17, 2024.
On March 29, 2022, the Company issued 54,000 stock options to an employee with an exercise price of $3.88 per share and an expiry date of March 29, 2025. The grant date fair value of these stock options was $2.29. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 92%; expected forfeiture rate of 0%; risk-free interest rate of 2.31%; and expected life of 3 years. The vesting period of the options granted to the employee is as follows: 1/3 at March 29, 2022; 1/3 at March 29, 2023; 1/3 at March 29, 2024.
28
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
During the year ended March 31, 2021, the Company issued the following stock options:
On May 8, 2020, the Company issued 600,000 stock options to a number of directors, officers, employees and consultants with an exercise price of $0.40 per share and an expiry date of May 8, 2025. The grant date fair value of these stock options was $0.22. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 75%; expected forfeiture rate of 0%; risk-free interest rate of 0.30%; and expected life of 5 years. The vesting period of the options granted to directors is as follows: 1/3 at May 8, 2020; 1/3 at November 8, 2020; 1/3 at May 8, 2021. The vesting period of the options granted to the officers, employees and consultants is as follows: 1/3 at May 8, 2020; 1/3 at May 8, 2021; 1/3 at May 8, 2022.
On May 16, 2020, the Company issued 100,000 stock options to a consultant with an exercise price of $0.40 per share and an expiry date of May 16, 2025. The grant date fair value of these stock options was $0.24. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 75%; expected forfeiture rate of 0%; risk-free interest rate of 0.30%; and expected life of 5 years. The vesting period of the options granted to the consultant is as follows: 1/3 at May 16, 2020; 1/3 at November 16, 2020; 1/3 at May 16, 2021.
On July 6, 2020, the Company issued 100,000 stock options to a consultant with an exercise price of $0.68 per share and an expiry date of July 6, 2025. The grant date fair value of these stock options was $0.41. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 75%; expected forfeiture rate of 0%; risk-free interest rate of 0.26%; and expected life of 5 years. The vesting period of the options granted to the consultant is as follows: 1/3 at July 6, 2020; 1/3 at July 6, 2021; 1/3 at July 6, 2022.
On July 24, 2020, the Company issued 150,000 stock options to a consultant with an exercise price of $0.63 per share and an expiry date of July 24, 2025. The grant date fair value of these stock options was $0.38. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 75%; expected forfeiture rate of 0%; risk-free interest rate of 0.26%; and expected life of 5 years. The vesting period of the options granted to the consultant is as follows: 1/3 at July 24, 2020; 1/3 at July 24, 2021; 1/3 at July 24, 2022.
On October 6, 2020, the Company issued 400,000 stock options to a number of directors with an exercise price of $0.75 per share and an expiry date of October 6, 2025. The grant date fair value of these stock options was $0.45. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 79%; expected forfeiture rate of 0%; risk-free interest rate of 0.24%; and expected life of 5 years. The vesting period of the options granted to the directors is as follows: 1/3 at October 6, 2020; 1/3 at April 6, 2021; 1/3 at October 6, 2021.
On November 24, 2020, the Company issued 75,000 stock options to a consultant with an exercise price of $1.77 per share and an expiry date of November 24, 2025. The grant date fair value of these stock options was $1.14. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 82%; expected forfeiture rate of 0%; risk-free interest rate of 0.27%; and expected life of 5 years. The vesting period of the options granted to the consultant is as follows: 1/2 at November 24, 2020; 1/2 at May 24, 2021.
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
On December 9, 2020, the Company issued 250,000 stock options to a number of consultants with an exercise price of $1.64 per share and an expiry date of December 9, 2023. The grant date fair value of these stock options was $0.91. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 88%; expected forfeiture rate of 0%; risk-free interest rate of 0.20%; and expected life of 3 years. The vesting period of the options granted to the consultant is as follows: 1/3 at December 9, 2020; 1/3 at December 9, 2021; 1/3 at December 9, 2022.
On December 30, 2020, the Company issued 1,000,000 stock options to a number of directors with an exercise price of $3.32 per share and an expiry date of December 30, 2025. The grant date fair value of these stock options was $2.15. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 83%; expected forfeiture rate of 0%; risk-free interest rate of 0.20%; and expected life of 5 years. The vesting period of the options granted to the directors is as follows: 1/3 at December 30, 2020; 1/3 at June 30, 2021; 1/3 at December 30, 2021.
On December 30, 2020, the Company issued 425,000 stock options to a number of employees and consultants with an exercise price of $3.32 per share and an expiry date of December 30, 2023. The grant date fair value of these stock options was $1.92. The fair value of these options was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 92%; expected forfeiture rate of 0%; risk-free interest rate of 0.20%; and expected life of 3 years. The vesting period of the options granted to the employees and consultants is as follows: 1/3 at December 30, 2020; 1/3 at December 30, 2021; 1/3 at December 30, 2022.
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
The Company's computation of expected volatility for the years ended March 31, 2022 and 2021 is based on the Company's market close price over a prior period equal to the expected life of the options.
The Company applies the fair value method of accounting for share-based payment awards to directors, officers, employees and non-employees. Accordingly, the following amounts have been recognised as compensation expense, exploration and evaluation expense and under capital stock as share-based payment reserve:
| Year | Year | |||||
| Ended | Ended | |||||
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Stock-based compensation expense | 4,726,840 | 2,018,416 | ||||
| Exploration and evaluation expenditures | 47,869 | 177,541 | ||||
| 4,774,709 | 2,195,957 |
Stock option and share-based payment activity for the years ended March 31, 2022 and March 31, 2021 are summarised as follows:
| Year ended | Year ended | |||||||||||
| March 31, 2022 | March 31, 2021 | |||||||||||
| Weighted | Weighted | |||||||||||
| average | average | |||||||||||
| Number | exercise price | Number | exercise price | |||||||||
| $ | $ | |||||||||||
| Balance, beginning of year | 7,021,667 | 1.13 | 4,775,000 | 0.55 | ||||||||
| Granted | 2,344,000 | 4.24 | 3,100,000 | 1.94 | ||||||||
| Exercised | (673,333 | ) | 0.59 | (653,333 | ) | 0.57 | ||||||
| Expired | - | - | (200,000 | ) | 1.67 | |||||||
| Balance, end of year | 8,692,334 | 2.01 | 7,021,667 | 1.13 | ||||||||
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
At March 31, 2022, outstanding options to acquire common shares of the Company were as follows:
| Weighted | |||||
| Number of | Number of | average | |||
| Exercise | Options | Options | Grant date |
remaining | |
| Price | Issued | Exercisable | fair value | contractual life | |
| Expiry Date | $ | # | # | $ | (years) |
| April 13, 2023 | 1.76 | 50,000 | 50,000 | 46,000 | 1.04 |
| July 3, 2023 | 0.50 | 1,350,000 | 1,350,000 | 405,000 | 1.26 |
| August 13, 2023 | 0.53 | 650,000 | 650,000 | 214,500 | 1.37 |
| November 14, 2023 | 0.40 | 100,000 | 100,000 | 26,000 | 1.62 |
| December 9, 2023 | 1.64 | 250,000 | 166,667 | 227,500 | 1.69 |
| December 30, 2023 | 3.32 | 425,000 | 283,333 | 816,000 | 1.75 |
| June 30, 2024 | 3.50 | 150,000 | 50,000 | 301,500 | 2.25 |
| July 17, 2024 | 0.40 | 1,175,000 | 1,175,000 | 199,750 | 2.30 |
| July 23, 2024 | 3.10 | 25,000 | 8,333 | 43,750 | 2.32 |
| September 3, 2024 | 3.69 | 100,000 | 66,667 | 212,000 | 2.43 |
| September 21, 2024 | 4.08 | 120,000 | 40,000 | 277,200 | 2.48 |
| October 13, 2024 | 4.92 | 100,000 | 33,333 | 189,333 | 2.54 |
| October 26, 2024 | 4.77 | 50,000 | 16,667 | 137,500 | 2.58 |
| November 1, 2024 | 5.67 | 100,000 | 33,333 | 321,000 | 2.59 |
| December 10, 2024 | 0.40 | 40,000 | 40,000 | 7,600 | 2.70 |
| December 29, 2024 | 5.22 | 200,000 | 66,667 | 592,000 | 2.75 |
| January 14, 2025 | 4.25 | 200,000 | 66,667 | 484,000 | 2.79 |
| January 17, 2025 | 4.25 | 20,000 | 6,667 | 56,000 | 2.80 |
| March 29, 2025 | 3.88 | 54,000 | 18,000 | 123,660 | 3.00 |
| May 8, 2025 | 0.40 | 600,000 | 483,333 | 132,000 | 3.11 |
| May 16, 2025 | 0.40 | 100,000 | 66,667 | 24,000 | 3.13 |
| July 6, 2025 | 0.68 | 33,334 | - | 13,667 | 3.27 |
| July 24, 2025 | 0.63 | 150,000 | 100,000 | 57,000 | 3.32 |
| October 6, 2025 | 0.75 | 400,000 | 400,000 | 180,000 | 3.52 |
| November 24, 2025 | 1.77 | 75,000 | 75,000 | 85,500 | 3.65 |
| December 30, 2025 | 3.32 | 1,000,000 | 1,000,000 | 2,150,000 | 3.75 |
| April 13, 2026 | 1.76 | 50,000 | 16,667 | 58,000 | 4.04 |
| December 15, 2026 | 5.20 | 25,000 | 8,333 | 84,750 | 4.71 |
| January 14, 2027 | 4.25 | 1,100,000 | 366,667 | 3,080,000 | 4.79 |
| 8,692,334 | 6,738,001 | 10,545,210 | 2.70 |
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ZENTEK LTD. (Stated in Canadian Dollars) |
12. SHARE CAPITAL (continued)
(c) Stock Options and Share-Based Payment Reserve (continued)
At March 31, 2021, outstanding options to acquire common shares of the Company were as follows:
| Weighted | |||||
| Number of | Number of | average | |||
| Exercise | Options | Options | Grant date |
remaining | |
| Price | Issued | Exercisable | fair value | contractual life | |
| Expiry Date | $ | # | # | $ | (years) |
| July 5, 2021 | 0.72 | 340,000 | 340,000 | 190,400 | 0.26 |
| July 3, 2023 | 0.50 | 1,350,000 | 1,350,000 | 405,000 | 2.26 |
| August 13, 2023 | 0.53 | 800,000 | 800,000 | 264,000 | 2.37 |
| November 14, 2023 | 0.40 | 100,000 | 100,000 | 26,000 | 2.62 |
| December 9, 2023 | 1.64 | 250,000 | 83,333 | 227,500 | 2.69 |
| December 30, 2023 | 3.32 | 425,000 | 141,667 | 816,000 | 2.50 |
| July 17, 2024 | 0.40 | 1,225,000 | 1,225,000 | 208,250 | 3.30 |
| October 22, 2024 | 0.40 | 50,000 | 50,000 | 12,000 | 3.56 |
| December 10, 2024 | 0.40 | 90,000 | 90,000 | 17,100 | 3.70 |
| May 8, 2025 | 0.40 | 600,000 | 283,333 | 132,000 | 4.11 |
| May 16, 2025 | 0.40 | 100,000 | 33,333 | 24,000 | 4.13 |
| July 6, 2025 | 0.68 | 66,667 | - | 27,333 | 4.27 |
| July 24, 2025 | 0.63 | 150,000 | 50,000 | 57,000 | 4.32 |
| October 6, 2025 | 0.75 | 400,000 | 133,333 | 180,000 | 4.52 |
| November 24, 2025 | 1.77 | 75,000 | 37,500 | 85,500 | 4.65 |
| December 30, 2025 | 3.32 | 1,000,000 | 333,333 | 2,150,000 | 4.75 |
| 7,021,667 | 5,050,832 | 4,822,083 | 3.19 |
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ZENTEK LTD. (Stated in Canadian Dollars) |
13. SUPPLEMENTAL DISCLOSURES ON STATEMENTS OF CASH FLOWS
| Changes in non-cash working capital balances consist of: | ||||||
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Amounts and other receivables | (536,815 | ) | (41,812 | ) | ||
| Inventories | (665,572 | ) | - | |||
| Prepaids and deposits | (985,522 | ) | 16,108 | |||
| Accounts payable and accrued liabilities | 831,484 | 64,251 | ||||
| (1,356,425 | ) | 38,547 | ||||
| Supplementary disclosures: | ||||||
| Change in accrued exploration property expenditures | $ | - | $ | (61,844 | ) | |
| Assumption of mortgage to acquire building | $ | 1,949,000 | $ | - | ||
| Stock-based compensation charged to exploration and evaluation assets | $ | - | $ | 177,541 | ||
| Shares issued charged to share issue costs | $ | 38,979 | $ | - | ||
| Shares issued to settle debt | $ | - | $ | 45,200 |
| Cash and cash equivalents are comprised of: | March 31, | March 31, | ||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Cash in bank | 26,475,000 | 3,091,549 | ||||
| Cashable guaranteed investment certificate, 0.5%, maturing December 2022 | 200,000 | - | ||||
| 26,675,000 | 3,091,549 |
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ZENTEK LTD. (Stated in Canadian Dollars) |
14. INCOME TAXES
(a) Provision for Income Taxes
Major items causing the Company's effective income tax rate to differ from the combined Canadian federal and provincial statutory rate of 26.5% (2021 - 26.5%) were as follows:
| 2022 $ |
2021 $ |
|||||
| Loss from continuing operations before income taxes | (12,022,113 | ) | (3,868,650 | ) | ||
| Loss from discontinued operations before income taxes | (26,671,935 | ) | - | |||
| (Loss) before income taxes | (38,694,048 | ) | (3,868,650 | ) | ||
| Expected income tax recovery based on statutory rate | (10,254,000 | ) | (1,025,000 | ) | ||
| Adjustments to expected income tax benefit: | ||||||
| Stock-based compensation | 1,253,000 | 582,000 | ||||
| Non-deductible expenses and other | 8,000 | (361,000 | ) | |||
| Change in benefit of tax assets not recognised | 8,993,000 | 804,000 | ||||
| Deferred income tax provision (recovery) | - | - |
b) Deferred Income Tax
The components of deferred tax are summarised below. Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority and the Company has the legal right and intent to offset.
| 2022 | 2021 | |||||
| $ | $ | |||||
| Recognised deferred tax assets and liabilities | ||||||
| Non-capital losses carry-forwards | 78,000 | 120,000 | ||||
| Right-of-use assets | (78,000 | ) | (120,000 | ) | ||
| Net deferred tax assets | - | - |
Deferred income tax assets have not been recognised in respect of the following deductible temporary differences:
| 2022 | 2021 | |||||
| $ | $ | |||||
| Non-capital loss carry-forwards | 7,998,000 | 764,000 | ||||
| Equipment | 428,000 | 81,000 | ||||
| Interest in exploration and evaluation property | 35,560,000 | 8,881,000 | ||||
| Share issue costs | 1,433,000 | 212,000 | ||||
| Lease liability | 282,000 | 404,000 | ||||
| Deductible temporary differences | 45,701,000 | 10,342,000 |
Deferred tax assets have not been recognised in respect of these temporary differences because it is not probable that future taxable profits will be available against which the Company can utilise the benefits.
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ZENTEK LTD. (Stated in Canadian Dollars) |
14. INCOME TAXES (continued)
c) Loss Carry-Forwards
The Company has available non-capital losses for Canadian income tax purposes which may be carried forward to reduce taxable income in future years. If not utilised, the non-capital losses of approximately $8,000,000 will expire between the fiscal years ending March 31, 2032 and March 31, 2042.
The Company has approximately $35,500,000 of Canadian development and exploration expenditures as at March 31, 2022 (2021: $35,000,000), which under certain circumstances may be utilised to reduce the taxable income of future years.
15. RELATED PARTY TRANSACTIONS
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
The Company defines key management personnel as its key executive management and Board of Directors. In addition to their salaries, the Company provides a benefit plan and other allowances to its key management personnel. Key management personnel are also granted stock options at the discretion of the Board of Directors.
The remuneration of key management personnel during the years ended March 31, 2022 and 2021 were as follows:
| 2022 | 2021 | |||||
| $ | $ | |||||
| Salaries and benefits | 490,000 | 652,167 | ||||
| Stock-based compensation | 2,602,803 | 1,714,944 | ||||
| 3,092,803 | 2,367,111 |
As part of the private placement issued during the year ended March 31, 2022 as disclosed in note 12(a), officers and directors of the Company purchased 36,000 units for gross proceeds of $90,000.
See also note 18(b).
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ZENTEK LTD. (Stated in Canadian Dollars) |
16. FINANCIAL INSTRUMENTS AND RELATED RISKS
The Company's operations include the acquisition and commercialization of intellectual property in Canada and foreign jurisdictions. The Company examines the various financial risks to which it is exposed and assesses the impact and likelihood of occurrence. These risks may include credit risk, liquidity risk, currency risk, interest rate risk and other risks. Where material, these risks are reviewed and monitored by the Board of Directors. The Company's counterparty credit risk increased from the prior year as a result of the trade receivables and loan receivable in existence at year end.
a) Credit Risk
Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on its obligations under the contract. This includes any cash amounts owed to the Company by those counterparties, less any amounts owed to the counterparty by the Company where a legal right of set-off exists and also includes the fair values of contracts with individual counterparties which are recorded in the consolidated financial statements.
i) Credit Risk
As the Company has commenced production and sales, it is exposed to credit risk with respect to its accounts receivable. The Company also issued a loan receivable during the year further increasing its exposure to credit risk. The Company manages its credit risk by reviewing and assessing credit exposure prior to facilities being committed to customers. Overall the Company's credit risk has increased from the prior period as a result of trade receivables now being generated through sales as well as the issuance of the loan receivable. The Company's accounts and other receivables and loan receivable total $3,606,164 (2021: $119,349), representing the maximum exposure to credit risk from those financial assets.
ii) Cash and Cash Equivalents
In order to manage credit and liquidity risk, the Company's cash is held through a large Canadian Financial Institution and the Company invests only in highly rated investment grade instruments that have maturities of one year or less.
b) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure. Accounts payable and accrued liabilities are due within the current operating period.
The following are the undiscounted amounts and contractual maturities of the Company's long-term debt and anticipated timing of settlements of its other financial liabilities as at March 31, 2022:
| Balance, as at March 31, 2022 | < 1 year | 1-2 years | > 2 years | ||||||
| $ | $ | $ | |||||||
| Accounts payable and accrued liabilities | 1,725,622 | - | - | ||||||
| Lease liability | 149,317 | 132,555 | - | ||||||
| Long-term debt | 950,930 | 998,070 | - | ||||||
| Balance, as at March 31, 2021 | < 1 year | 1-2 years | > 2 years | ||||||
| $ | $ | $ | |||||||
| Accounts payable and accrued liabilities | 373,103 | - | - | ||||||
| Lease liability | 122,452 | 281,873 | - | ||||||
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ZENTEK LTD. (Stated in Canadian Dollars) |
16. FINANCIAL INSTRUMENTS AND RELATED RISKS (continued)
c) Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk that the Company will realise a significant loss as a result of a decline in the fair market value of investments or items held within cash and cash equivalents is limited given that the majority have a relatively short maturity. The Company manages its interest rate risk with investments by investing the majority of funds in short-term investments and therefore is not exposed to significant fluctuations in interest rates. The Company believes that its interest rate risk is minimal.
d) Currency Risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The functional and reporting currency of the Company is the Canadian dollar. The Company is involved with a number of foreign vendors in the United States of America. Changes in the currency exchange rates between the Canadian dollar relative to the U.S. dollar could have an effect on the Company's results of operations, financial position or cash flows. As a result, the Company is exposed to currency risk on these transactions. A 1% strengthening of the US dollar would affect net loss by approximately $23,000. The Company has not hedged its exposure to currency fluctuations as the exposure has been deemed to be minimal.
e) Fair Value of Financial Instruments
IFRS 7 establishes a fair value hierarchy that prioritizes the input to valuation techniques used to measure fair value as follows:
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).
As at March 31, 2022, the Company does not have any financial instruments recorded at fair value and that require classification within the fair value hierarchy.
The fair values of all of the Company's financial instruments approximate their carrying values.
17. MANAGEMENT OF CAPITAL
The Company's objective when managing capital is to safeguard the entity's ability to continue as a going concern. In the management of capital, the Company monitors its adjusted capital which comprises all components of shareholders' equity. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company's capital management objectives, policies and processes have remained unchanged during the years ended March 31, 2022 and 2021.
The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue common shares through private placements.
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ZENTEK LTD. (Stated in Canadian Dollars) |
18. COMMITMENTS AND CONTINGENCIES
a) Environmental Contingencies
The Company's activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Company believes its operations are materially in compliance with all applicable laws and regulations. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations.
b) Research Agreements
The Company has entered various agreements with arms' length parties pertaining to ongoing science efforts in pursuit of research and/or development and intellectual property with the objective of profitably bringing products to market. Many of the counterparties to these agreements are Canadian universities and affiliated individuals. These agreements can be generalized as having ‘no fault’ termination clauses regarding ongoing commitments and future liability when the Company determines that the pursuit becomes ineffective or unlikely to result in a profitable or commercially-viable product.
Under certain of these technology license agreements with Canadian universities, the Company has an obligation to pay royalties on revenues from any subject technologies. No such revenues have been earned to date.
c) Contingent liabilities
In September 2018, the Company received a statement of claim from a former employee. The Company is in the process of defending the claim, but views the claim as unmeritorious. On March 24, 2020, the Company commenced an action claim against the former employee for relief relating to contracts and transactions between that employee and the Company, seeking to set aside those agreements and, where applicable, seeking disgorgement of unspecified amounts relating to benefits obtained under those agreements.
19. LOSS PER SHARE
Basic loss per share figures are calculated using the weighted average number of common shares outstanding. The weighted average number of common shares issued and outstanding for the year ended March 31, 2022 is 92,091,983 (2021: 84,022,424). Diluted loss per share figures are calculated after taking into account all warrants and stock options granted. Exercise of the outstanding warrants and stock options would be anti-dilutive with respect to loss per share calculations, and therefore diluted loss per share is equal to basic loss per share. The number of potentially dilutive common shares resulting from the exercise of outstanding warrants and stock options that were not included in the calculation of diluted loss per share was 8,692,334 (March 31, 2021: 10,415,632).
20. GOVERNMENT GRANTS
The Company has entered into agreements with various government agencies under which the Company is entitled to receive assistance and cost recoveries for specific research and development activities.
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ZENTEK LTD. (Stated in Canadian Dollars) |
21. OTHER EXPENSES
| Year | Year | |||||
| Ended | Ended | |||||
| March 31, | March 31, | |||||
| 2022 | 2021 | |||||
| $ | $ | |||||
| Insurance | 162,640 | 38,913 | ||||
| Meals and entertainment | 61,815 | 13,618 | ||||
| Office expenses | 110,114 | 49,870 | ||||
| Other expenses | 183,461 | 69,161 | ||||
| Travel | 143,874 | 64,844 | ||||
| 661,904 | 236,406 |
22. SUBSEQUENT EVENTS
Subsequent to the year ended March 31, 2022, a total of 115,000 stock options were exercised at $0.40 per option resulting in proceeds of $46,000 to the Company.
On May 19, 2022, the Company announced that McMaster has received two Natural Sciences and Engineering Research Council (“NSERC”) grants related to the aptamer-based rapid detection technology; the Alliance Missions Grant for the amount of $1,000,000, and an Idea to Innovation (I2I) Grant for the amount of $350,000, of which the Company will make a $140,000 contribution.
(Formerly Zen Graphene Solutions Ltd.)
Management's Discussion and Analysis
For the year ended
March 31, 2022
Dated: June 29, 2022
(Expressed in Canadian Dollars)
Introduction
This Management Discussion and Analysis ("MD&A") is dated June 29, 2022 and is in respect of the year ended March 31, 2022. The following discussion of the financial condition and results of operations of Zentek Ltd. (formerly ZEN Graphene Solutions Ltd.) (the "Company") constitutes management's review of the factors that affected the Company's financial and operating performance for the year ended March 31, 2022.
This discussion should be read in conjunction with the Company's audited consolidated financial statements and corresponding notes to the consolidated financial statements for the year ended March 31, 2022. The Company's audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). Unless otherwise stated, all amounts discussed herein are denominated in Canadian dollars which is the Company's functional and reporting currency.
Additional information relating to the Company can be found under the Company's profile on SEDAR at www.sedar.com.
Forward Looking Statements
This MD&A of the Company contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as "forward-looking statements"). These statements relate to future events or the Company's future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects", "is expected", "budget", "scheduled", "estimates", "continues", "forecasts", "projects", "predicts", "intends", "anticipates" or "believes", or variations of, or the negatives of, such words and phrases or state that certain actions, events or results "may", "could", "would", "should", "might" or "will" be taken, occur or be achieved. Forward- looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those anticipated, expressed or implied in such forward-looking statements.
Factors that could affect these statements include, without limitation, negative operating cash flow, uncertainties relating to the Company's business plans, economic and political conditions, related revenue from graphene related product sales and complex sales cycles, intellectual property, product development and technical change, market development and growth, unpredictable sales cycles, governmental regulation and import/export controls, industry competition, , shortages, liquidity concerns and future financing, reliance on key personnel, qualified employees, cybersecurity threats, share price fluctuations, cost absorption and purchase orders, acquisitions, launch and operational costs, material commodity prices, uninsured risks, litigation, credit risk, interest rate risk, price risk, financial capability and additional financing, permits and governmental regulation, fluctuating prices, environmental regulation, economic dependence on supply agreement. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement.
Readers are cautioned not to place undue reliance on forward-looking information. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
These factors and other risks and uncertainties are detailed in the Company's reports and disclosure documents filed by the Company from time to time with Canadian securities regulatory authorities.
Company Overview and Discussion of Operations
The Company was incorporated in Ontario, Canada as 1774119 Ontario Limited on July 29, 2008. Pursuant to Articles of Amendment dated November 24, 2009, the Company changed its name to Zenyatta Ventures Ltd. On January 16, 2019, the Company filed Articles of Amendment changing its name from "Zenyatta Ventures Ltd." to "ZEN Graphene Solutions Ltd." On October 27, 2021 (effective October 28, 2021), the Company filed Articles of Amendment changing its name from "ZEN Graphene Solutions Ltd." to "Zentek Ltd." The common shares of the Company trade on the TSX Venture Exchange ("TSXV") under the symbol "ZEN" and in the United States on the Nasdaq Capital Market ("NASDAQ") under the symbol "ZTEK".
The Company commenced operations as a junior mineral exploration company focused primarily on mineral deposits in Northern Ontario, Canada. The Company was actively engaged in exploring mining projects and held an interest in exploration licenses on properties in the "Arc of Fire" area in Northern Ontario, Canada. The properties, located north of Lake Superior and west of James Bay in north-western Ontario, Canada, were unpatented, non-contiguous, and consisted of nine claim blocks, including 234 claims comprised of 3,549 claim units over a total of 56,784 ha. Within such claim blocks, the Company still holds a 100% undivided interest in Claim Block 4F, which hosts the igneous-hosted, fluid-derived graphite deposit (the "Albany Graphite Project"). The Company did extensive work to determine potential uses for the graphite materials extracted from the Albany Graphite Project, including engaging in testing and studies on graphene materials.
In May 2018, the Company began to focus resources on the research and development of graphene and related applications, which was supported by shareholders of the Company who voted in favour of a new Board of Directors with an interdisciplinary team to augment key management personnel with expertise in business, science, marketing, and government relations.
In March of 2020, the Company opened a research facility in Guelph, Ontario, to support its university and industrial partners' ongoing research and to scale-up production of graphene product. Subsequently, the COVID-19 pandemic halted research at the Company's collaborators' laboratories. The Company pivoted to focus its resources to develop graphene-based solutions for the fight against COVID-19.
Pursuant to a License Agreement dated September 22, 2020, between the Company and the University of Guelph, the Company holds the exclusive global rights to intellectual property regarding an electrochemical exfoliation ("ECE") process to produce graphene oxide ("GO").
On September 22, 2020, the Company announced, based on the results from a report to the Company dated September 18, 2020, from the ImPaKT Centre at the University of Western Ontario entitled "Zen Graphene - Lab Test Report No. Z03-092020", the development and successful testing of a patent-pending GO/silver compound that showed to be 99% effective against COVID-19 virus a minimum of 35 days after application of the coating to N95 mask material. On December 22, 2020, the Company announced the successful testing at the Department of Microbiology at Mount Sinai Hospital/University Health Network of the GO/silver compound that showed to be 99.9% effective against both gram-positive and gram-negative aerobic bacteria as well as against fungus/yeast, based on a report to the Company dated December 18, 2020 entitled "Evaluation of Graphene Oxide with Silver Cations (GO-Ag+) as an Antibacterial Agent against Respiratory Pathogens", which stated that if the compound could be shown to be safe and effective, it could provide a breakthrough alternative therapy for the practices of family medicine, otolaryngology, ophthalmology and intensive care units. The Company has filed three provisional patent applications relating to its antimicrobial coating, and on April 13, 2021, announced the brand name ZenGUARD™ for such coating.
On November 29, 2021, the Company announced that it had been issued a Medical Device Establishment License ("MDEL") from Health Canada (license number 18823) for the manufacture and distribution of any Class I medical devices, including any such devices with or without the ZenGUARD™ coating.
The Company is now an intellectual property development and commercialization company focused on healthcare solutions in the areas of prevention, detection, and treatment. The Company is currently focused primarily on commercializing ZenGUARD™, as well as on the development of aptamer-based rapid detection technologies. The Company is not currently conducting any significant work on the Albany Graphite Project and does not require materials extracted from the Albany Graphite Project for its current business plans, although such materials could hold significant value to the Company in the future. On October 18, 2021, the TSXV changed the Company's classification from a "mining issuer" to an "industrial, technology, or life sciences issuer", which was approved by the shareholders of the Company on September 27, 2021, in accordance with the rules and policies of the TSXV.
Current Business
ZenGUARD™ Antimicrobial Compound
The Company is currently producing the ZenGUARD™ antimicrobial coating at pilot-scale for application to non-woven, spunbond polypropylene material to be used in surgical mask manufacturing and potentially on other materials and products. Based on reports from GAP EnviroMicrobial Services Ltd. ("GAP Labs") dated May 3, 2021, the addition of ZenGUARD™ coating to surgical masks has shown to increase the bacterial and viral filtration efficiency of masks and acts as an antimicrobial agent providing increased protection when compared to similar uncoated masks.
The Company entered into a License and Supply Agreement dated September 24, 2021, with Trebor Rx Corp. ("Trebor"), pursuant to which the Company granted a non-exclusive non-transferable license to Trebor to use the ZenGUARD™ coating in certain specified Trebor personal protective equipment ("PPE") products displaying the Company's branding, including surgical masks, nitrile gloves, surgical gowns and scrubs and other healthcare and similar such products, and an additional exclusive license to sell and distribute ZenGUARD™ coated Elastomeric Respirator Mask filters i.e. Pro+ filters, whether fixed or replaceable, such exclusive license remaining in force only so long as Trebor sells a minimum of 60,000,000 filters per year with annual growth of at least 10%. Trebor agreed to use the ZenGUARD™ coating on all of its products sold unless the purchaser specifically refuses to purchase the ZenGUARD™ coated products and agreed to purchase the ZenGUARD™ coating from the Company by way of cash payments for a supply of ZenGUARD™ coating based on demand for Trebor products. The sale of ZenGUARD™ coated PPE masks received Health Canada authorization on September 22, 2021, under Interim Order No.2 - #329587 - Respecting the Importation and Sale of Medical Devices for Use in Relation to COVID-19. On September 23, 2021, The Company announced that it had delivered and generated revenue from its first shipment of ZenGUARD™ antimicrobial coating to Trebor.
Additionally, the Company has been issued a MDEL from Health Canada (license number 18823) for the manufacture and distribution of any Class I medical devices, including any such devices with or without the ZenGUARD™ coating. The MDEL allows the Company to potentially work with other manufacturers and distributors inside and outside of Canada in addition to Trebor to bring surgical masks and, potentially, other PPE (whether or not coated with ZenGUARD™ antimicrobial compound) to the Canadian market. The MDEL also allows the Company to produce and sell its own Class I medical device PPE products.
On April 12, 2022, the Company announced that it has also entered into a Reciprocal Supply Agreement dated March 31, 2022, with EkoMed Global Inc. ("EkoMed"), a globally integrated manufacturer and distributor of PPE, pursuant to which (i) the Company will sell quantities of ZenGUARD™ coating to EkoMed for use initially on EkoMed's surgical masks and potentially other PPE in the future, and (ii) the Company will purchase surgical masks manufactured by EkoMed, to be treated with ZenGUARD™ coating and resold by the Company.
On May 13, 2022, the Company announced that Mark's Work Wearhouse had placed an initial order for ZenGUARD™ coated-masks to be sold at select stores across Canada, and online.
Based on discussions with Trebor and management's reasonable business judgment in estimating demand for ZenGUARD™ coated masks during a global pandemic, to meet anticipated demand for its ZenGUARD™ proprietary antimicrobial compound, the Company began sourcing GO from third parties for the production of the ZenGUARD™ coating. On November 11, 2021, the Company announced that it had reached an agreement to secure the necessary supply of GO to produce enough ZenGUARD™ to meet anticipated demand, which has been estimated by the Company based on discussions with Trebor, with shipments that began in December 2021 and have continued through the first six months of 2022.
The Company continues to market its ZenGUARD™ product to be applied to various materials, and has targeted manufacturers including PPE manufacturers and heating, ventilation, and air conditioning ("HVAC") filter material companies.
To produce the ZenGUARD™ antimicrobial coating, quantities of GO are required. The Company currently purchases GO from third parties, and then uses the GO to produce the ZenGUARD™ coating formulation at its pilot scale production facility in Guelph, Ontario. The Company then ships the ZenGUARD™ coating formulation to a third party for application onto spunbond material to be used for surgical masks (and potentially other products). The Company has installed industrial scale manufacturing equipment in its Guelph, Ontario facility to produce ZenGUARD™ coating formulation at a higher scale and capacity (see below under the heading Construction of ZenGUARD™ Industrial Scale Production and Coating Facility). A completion of construction ceremony was held June 17, 2022, at the facility.
The Company also intends to construct a facility to produce its own GO. The Company believes that the ability to produce GO itself rather than relying on third party suppliers will be economically favourable to the Company over the long term, as well as reducing supply and shipping risk (see below under the heading Proposed Construction of Graphene Oxide Production Facility).
Construction of ZenGUARD™ Industrial Scale Production and Coating Facility
The Company has installed industrial scale production equipment to produce the ZenGUARD™ coating formulation at its York Rd., Guelph, Ontario location, as such location is permitted for industrial use. The Company has also purchased coating equipment so the process of applying the ZenGUARD™ coating formulation to spunbond polypropylene for use in surgical masks, other PPE equipment, and potentially other uses, can be completed by the Company on-site.
Preliminary engineering study by Bantrel Co. commenced in January 2021 for graphite purification, GO production, and ZenGUARD™ production equipment. Engineering efforts then shifted to the exclusive development of a ZenGUARD™ production facility due to the long lead time for construction of the proposed purification plant, and the availability of sufficient low-cost GO from an external supplier negating the immediate need to use and process internally sourced graphite from the Albany Graphite Project. The preliminary engineering study was further delayed by a fundamental change in the synthesis method in March 2021, resulting in a significantly more simplified design of the proposed ZenGUARD™ production equipment.
Detailed engineering of the proposed ZenGUARD™ compound manufacturing equipment began in July 2021. The Company announced on February 28, 2022 that the production facility was fully licensed and permitted for ZenGUARD™ production, and that substantially all equipment had been received to ramp-up industrial scale capacity. At this point the Company intends to continue to use third parties to coat the ZenGUARD™ Graphene compound onto materials until the coating capabilities are operational at the Company's facility and in circumstances when external coating capacity is required. Once this industrial process is in operation, the Company's production capacity of ZenGUARD™ coated material is expected to increase significantly. The Company hired a new director of Global Healthcare Sales, Moe Dieb on 24th of May 2022,, to increase market opportunities for its increased manufacturing capacity.
Industrial scale spray coating line equipment was researched, selected, and ordered in October 2021. Upon delivery of the industrial scale coating equipment, installation and commissioning of such equipment can commence, after which the Company expects to be able to coat materials with ZenGUARD™ on-site. The Company notes that there are potentially many variables involved with commissioning the industrial scale coating plant, including the timing of the delivery of equipment, potential restrictions on travel due to the COVID-19 pandemic, among others, and the Company is therefore unable to provide timing estimates about commissioning completion with a high level of certainty.
James Jordan, P.Eng., the Company's Project Engineer is primarily overseeing the construction of the proposed ZenGUARD™ production equipment. As of March 31, 2022, approximately $2,440,000 has been spent by the Company on this objective, and the Company currently estimates that approximately $400,000 in additional expenditures will be required to complete construction. The Company held a grand opening on June 17, 2022.
Pilot scale coating line equipment has been sourced by the Company, and the Company has spent approximately $811,000 as of March 31, 2022. Upon delivery of such equipment, installation and commission will be required. The Company expects additional expenditures of approximately $500,000 for such equipment purchase, installation and commissioning.
Proposed Construction of Graphene Oxide Production Facility
In addition to the construction of the ZenGUARD™ industrial scale production and coating equipment, as discussed above, the Company intends to construct a plant to produce GO. The Company believes that the ability to produce GO itself, which is the precursor for the ZenGUARD™ compound, rather than relying on third party suppliers of GO, will be economically favourable to the Company over the long term, as well as reducing supply and shipping risk. The Company believes that there are three primary reasons it would benefit from an ability to produce GO internally: (i) it should eliminate or significantly reduce supply chain risk; (ii) GO is not a homogeneous substance and by producing its own GO the Company could ensure product consistency; and (iii) the Company believes that the demand for GO is increasing and that a domestic production facility could have the potential to generate product for third-party users of the material.
In connection with the Company's proposed production of GO, the Company has conducted research and development to produce high-quality, few-layer GO via an ECE process designed to be scalable, low cost, low energy, and environmentally friendly. In collaboration with Prof. Aicheng Chen at the University of Guelph, the prototype ECE process was designed, developed, and optimized. A PCT patent has been filed by Guelph University for the processes to produce expanded graphite and electrochemically exfoliated GO, the exclusive global rights to which has been licensed by the Company pursuant to a License Agreement dated September 22, 2020.
The Company engaged Bantrel Co. in January 2021, and engineering work was initiated. Potential sites for a proposed GO production plant have been investigated, however a site has not been secured and no permits have been obtained to date. James Jordan, P.Eng., the Company's Project Engineer is primarily overseeing the proposed engineering and construction of such a facility, and possible alternatives. As of March 31, 2022, the Company has spent $35,000 in preliminary investigations relating to this project and expects that approximately $7,500,000 will be required to complete construction of a GO production facility.
The Company estimates that fifteen to eighteen months will be required to complete the construction of a GO production plant, which is a management estimate only based on the expectation of securing an agreement for the purchase of technology from an existing GO producer. Inherent risks include, but are not limited to, the inability to reach an acceptable agreement for the purchase of such technology, the inability to adapt existing technology to the Canadian regulatory requirements, scaling-up from known existing production capacities could become a requirement, and delays as a result of ongoing material and equipment supply shortages.
ZenGUARD™ Research and Development
The Company continues to seek the most effective, cost-efficient, and scalable process to produce high-quality graphene. The production of graphene requires a consistent source (or precursor) material for conversion to graphene, which is then applied to various products for enhancement. The Company believes that it has a potential competitive advantage with its interest in the large and high-quality supply of source material, from the Albany Graphite Project, if and when the Company determines it cost effective to use such material.
Advanced testing on potential new processes for commercial GO production is underway. The Company continues to work with universities on different processes that could potentially lead to a more efficient and/or lower cost process for GO production.
The Company's research and development, and project development activities during the year ended March 31, 2022 are summarized below:
On December 22, 2020, the Company announced that testing results from the University Health Network/Mount Sinai Hospital Department of Microbiology in Toronto indicated that the ZenGUARD™ compound may also be beneficial in the treatment of numerous human contracted pathogens, including upper and lower respiratory tract infections, where COVID-19 is a major contributor, as well as drug resistant organisms. The report delivered to the Company dated December 18, 2020, entitled "Evaluation of Graphene Oxide with Silver Cations (GO-Ag+) as an Antibacterial Agent against Respiratory Pathogens", stated that if the Graphene Compound could be shown to be safe and effective, it could provide a breakthrough alternative therapy for the practices of family medicine, otolaryngology, ophthalmology, and intensive care units.
On December 29, 2020, the Company announced an update on cytotoxicity testing of the ZenGUARD™ compound and the effectiveness as a coating following testing completed at McMaster University's Centre for Microbial Chemical Biology and Mount Sinai Hospital. The preliminary testing confirmed the ZenGUARD™ compound's efficacy with fungi and bacteria in vitro at low concentrations.
On March 17, 2021, the Company announced that testing of the Company's ZenGUARD™ compound against four gram-positive and nine-gram negative bacteria with antimicrobial-resistance, including multidrug-resistant variants like methicillin-resistant staphylococcus aureus, had been completed. Testing demonstrated that the compound was 99.9% effective against bacteria, and fungi at very low concentrations. Testing was conducted by Dr. Tony Mazzulli, the Microbiologist-in-chief at Mount Sinai Hospital.
In a news release on April 13, 2021, the Company confirmed that safety testing results received from Nucro Technics indicated that the ZenGUARD™ compound did not lead to skin irritation or sensitivity as required in ISO 10993-10 for its Class I medical device i.e., surgical masks.
On October 6, 2021, the Company announced the filing of an international patent application under the Patent Cooperation Treaty ("PCT") for ZenGUARD™, which patent application was published on March 24, 2022, and the transfer from the University of Guelph of the rights, under its PCT application, for the ECE process to produce GO. Pursuant to a License Agreement dated September 22, 2020, between the Company and the University of Guelph, the Company holds the exclusive global rights to this technology.
On February 28, 2022, the Company announced that it had purchased its research and development facility in Guelph, Ontario for $2.3 million. The facility continues to be a dedicated location to conduct ongoing research and development activities in pursuit of developing new intellectual property for graphene and other nanomaterials and refining the Company's existing technologies.
The Company continues to conduct testing on its ZenGUARD™ compound, which includes the increased challenge viral filtration efficiency and bacterial filtration efficiency test results announced by the Company on September 27, 2021. The results of third-party testing at GAP Labs demonstrated that ZenGUARD™ coated masks removed 98.9% more bacteria and 97.8% more virus particles than a typical ASTM level 3, 3-ply uncoated mask and resulted in a bacterial and viral filtration efficiency of over 99.99%.
Business in Development
Aptamer-Based Rapid Detection Technology
On June 17, 2021, the Company announced that it had signed an exclusive agreement with McMaster University to be the global commercializing partner for a newly developed aptamer-based rapid detection technology to detect SARS-CoV-2 in patients through saliva samples. The technology was developed by a team of researchers under the guidance of Drs. Yingfu Li, John Brennan and Leyla Soleymani, who have expertise in biosensing technologies, and applications as point of care diagnostics. This patent-pending technology was validated with clinical samples from patients recruited under the supervision of two clinicians, Drs. Deborah Yamamura and Bruno Salena, who also work at McMaster University. The project was funded by the Canadian Institutes of Health Research (CIHR). This technology has shown to be accurate (similar to current PCR tests), is saliva-based, affordable and scalable, and provides results in under 10 minutes. A license fee of $100,000, comprised of $50,000 cash and $50,000 in common shares of the Company (19,157 common shares at $2.61 per share) was paid to McMaster University as consideration. Although this technology is currently being developed specifically for COVID-19, this technology platform is designed to be able to detect other diseases by changing the aptamer to match new diseases.
The Company also received $148,000 from Innovations Solutions Canada ("ISC") to design and build a prototype for the use of this technology to help detect COVID-19 in wastewater. On November 4, 2021, the Company announced that it was selected as one of three technologies for Phase 1 of the ISC challenge to develop a portable detection device for SARS-CoV-2 in wastewater. On June 1, 2022, the Company announced that it would not proceed to Phase 2 of the ISC challenge, however the process and results produced would be useful for prioritizing future opportunities. The Company intends to reassess wastewater as a market opportunity.
The Company has contracted with NeoVentures Biotechnology Inc. ("NeoVentures"), a prominent entity in the aptamer development and applications field. NeoVentures has been engaged to validate the McMaster University results against spike proteins and develop a mathematical model to better understand the technology and results. NeoVentures has also been tasked to develop a standard operating procedure for the system, perform a pre-trial evaluation using saliva samples, and optimize buffers for sample preparation. The Company has incurred approximately $265,000 in expenditures related to the forgoing. Additionally, Dr. van der Kuur, the Company's Vice-President - Science and Research has undertaken supply chain activities including receiving samples and pricing from suppliers of hardware for the rapid COVID test including: potentiostat suppliers, screen printed electrode manufacturers and vetting the quality of chips, aptamer producers, and sample collection vials, pipettes etc. The Company continues to work with axiVEND, McMaster University and StarFish Product Engineering Inc., on product strategy alignment, usability analysis, device and architecture development, proof of concept and prototyping, and program development.
The Company currently intends to continue developing this technology, including the development of software and hardware, using outsourced third party developers. The Company intends to spend funds to bring the product to market as soon as practicable, which will require having a working prototype prepared, having conducted baseline studies, and having made application to Health Canada. On May 19, 2022, the Company announced that McMaster has received two Natural Sciences and Engineering Research Council ("NSERC") grants related to the aptamer-based rapid detection technology; the Alliance Missions Grant for the amount of $1,000,000, and an Idea to Innovation (I2I) Grant for the amount of $350,000, of which the Company will make a $140,000 contribution. The Company intends to continue working with Dr. Yingfu Li and the research team at McMaster through in-kind contributions, using these grants towards commercializing the rapid diagnostic platform. The grants will be used to further commercialization efforts by improving the performance of aptamers, optimizing chip synthesis, and initiating additional tests that can be incorporated into its pathogen detection platform. The Company currently expects the cost to reach commercialization to be approximately $2,500,000, and includes enhancements and further development of the technology.
On June 1, 2022, the Company announced that it had retained Halteres Associates ("Halteres"), a consultancy focused on global health, diagnostics, and point-of-care testing, to assist with the commercialization of the aptamer-based rapid detection technology. Market research from the Halteres group will be used to identify the most commercially important pathogens for detection which will guide the aptamer development program. Halteres will evaluate several commercialization opportunities for the aptamer technology including human diagnostics, agriculture, wastewater, veterinary, and other potential uses in healthcare.
To bring the product to market, the Company will be required to obtain authorization from Health Canada under an interim order, or to obtain a Class IV Medical Device Active License ("MDAL"). The process for obtaining an MDAL involves completing certain testing requirements and demonstrating that the product is (i) safe, (ii) effective, and (iii) fit for purpose. Assuming that process is completed, the Company would then start preparing a product technical file, seek to obtain an ISO 13485 Certificate, and then seek to complete a Health Canada Class IV application.
Diesel Fuel Additive
The Company is also working to develop a stable graphene-based diesel fuel additive to improve combustion, increase burn rate, reduce greenhouse gas emissions and to improve fuel economy of diesel fuels, which initial testing has shown to increase the performance of diesel fuel. The Company is working to improve on that these early results through additional optimization work. The Company has filed a provisional patent for its graphene-based fuel additive technology.
Primarily overseen by Dr. van der Kuur, the Company's Vice-President - Science and Research, the Company is developing a process to functionalize GO to produce a stable dispersion in diesel fuel. The fuel additive was tested by Conestoga College in a Gunt 159 single cylinder test engine, which reported an improvement in fuel economy of over 10% under certain rpm. The Company's research and development team improved the synthesis of the functionalized GO additive to reduce the size of the particles and increase the functional groups, which could lead to improved combustion. An NSERC alliance proposal has been submitted for $110,500 cash contribution and a total budget of $311,500 over two years to continue doped fuel research. The project will focus on measuring the combustion of doped fuel in both droplet and spray combustion. The Company has spent approximately $75,000 on this research and development project.
The Company intends to conduct further testing in 2022 and 2023, including: testing fuel economy, brake efficiency and emissions in a diesel engine for two different GO fuel additive concentrations; conducting spray combustion tests, which will provide an initial assessment of the GO additive; and testing and optimizing the GO fuel additive for diesel generator engines and marine engines and aviation usage. The Company currently estimates that the cost for such future testing is approximately $300,000.
Icephobic Coating
The Company is also working to develop a new, patent-pending, carbon-based, nanotechnology-enhanced coating designed to prevent or reduce ice accretion for aviation (including drone) and wind energy applications.
James Jordan, P.Eng., the Company's Project Engineer and Dr. van der Kuur, the Company's Vice-President - Science and Research are the primary overseers of the project, which has involved the use of dispersion technology to homogeneously mix graphene-based materials in an elastomer. The Company has filed a provisional patent on the technology. The Company has also conducted testing at National Research Council's Altitude Icing Wind Tunnel (AIWT) in Ottawa and prepared graphene-enhanced elastomer material and coated test coupons for testing.
The Company disclosed on February 28, 2022 that the icephobic coatings were undergoing full flight trials on a specially equipped research aircraft under real world ice-forming weather conditions. On March 14, 2022, the Company announced the results of three rounds of testing of its icephobic coating, including laboratory tests, real-world flights and applications related to drone operations in adverse weather. In real world testing the Company reported that video footage of icephobic coating on test pieces attached to a research aircraft undergoing flight trials targeting adverse weather environments has shown positive results and demonstrated that, under significant icing conditions, the coatings provide an effective deicing and anti-icing solution. Drone testing has shown that drone propellers coated with the icephobic material have demonstrated that higher thrust can be maintained when compared to a non-coated propeller due to the ability to shed ice that forms on the blades that would otherwise degrade the aerodynamic properties. Accelerated ageing testing involved the Company providing coated samples to be exposed to UV weathering for 1,000 hours, which approximates two years' worth of sun damage in typical Canadian weather. These samples were then tested in an icing wind tunnel under dynamic conditions and demonstrated significant retention of their icephobicity. The Company now intends to test its coating for sand and rain erosion, another important measurement that will demonstrate its use as a practical application. In addition, other tests are being planned to evaluate the coating as part of a hybrid ice protection system, where the icephobic properties are combined with a heated de-icing system with the aim to improve efficiency of current ice protection methods used in general and commercial aviation.
The Company continues to consider and seek collaborators to commercialize this technology, including drone companies and companies specializing in elastomer production. The Company has completed its ASTM G-154 accelerated weathering. The Company has not spent significant funds on this project and anticipates additional testing and development to cost approximately $150,000.
Fire-Retardant Additive
The Company announced on March 28, 2022 that it had filed a provisional patent with the United States Patent and Trademark Office for an innovative Graphene Oxide-Metal-Organic Framework ("GO-MOF") compound for use in fire retardant products. Management of the Company considers the manufacturing of the GO-MOF compound as relatively easily scalable and efficient, due to the patent-pending facile synthesis process. The Company believes the fire-retardant GO-MOF additive could potentially be placed in a variety of coating products, such as latex, epoxies or included in polymers. When integrated into a polymer, it could potentially create a fire-resistant plastic that could be used in electrical vehicles, providing a fire-resistant non-metal casing for the batteries. Management currently expects that GO-MOF production could be achieved on the existing ZenGUARD industrial scale production facility with minimal additional capital expense.
Dr. van der Kuur, the Company's Vice-President of Science and Research is the primary overseer of the project. The Company has spent approximately $20,000 on this research and development project, and intends to conduct further testing, and currently estimates that the cost for such future testing is approximately $100,000.
Other Use-Cases for ZenGUARD™
The Company intends to continue exploring other applications and uses for its ZenGUARD™ compound, including, but not limited to, use in HVAC filters. On September 30, 2020, the Company first announced testing on graphene use for HVAC systems. On January 13, 2021, the Company announced that testing by a major Canadian certification company had confirmed that there was very little effect on air flow and pressure drop with a ZenGUARD™ treated filter compared to an untreated filter. The Company spent approximately $60,000 on testing, including preliminary testing of ZenGUARD™-coated HVAC filter media for pressure drop, and increased challenge bacterial filtration efficiency on uncoated and coated MERV 8 and MERV 13 HVAC filters, overseen primarily by James Jordan, P.Eng., the Company's Project Engineer and Dr. van der Kuur, the Company's Vice-President - Science and Research and Peter Wood, P.Eng., the Company's Vice-President, Special Projects. The Company then determined to wait for government support in order to proceed with testing, which was subsequently awarded on November 30, 2021. Further to the press release dated November 30, 2021, the Company announced that it has been awarded a research and development test contract through the ISC Testing Stream Call for Proposals to test ZenGUARD™-coated HVAC filters with interest from three different units within the National Research Council of Canada ("NRC"). The goal of the testing, conducted by CremCo Laboratories ("CCL") with assistance by the Aerospace Research Centre ("ARC"), a department of the National Research Council of Canada ("NRC") was to demonstrate: (i) a net reduction in the airborne viral load with ZenGUARD™ coating applied to standard filters; (ii) no modifications required to existing HVAC systems to achieve (i) above; (iii) no reduction in air flow rates, which means air exchange rates in the space will be unchanged; and (iv) no reduction in the air quality as the ZenGUARD™ coating was tested to ensure it does not contribute particles into the air stream. Phase 1 testing commenced in December 2021 after an extensive design process, calibration and assessment of the testing rig, and involved the test rig being installed inside an aerobiology chamber to push air through HVAC filter material with test organisms to study how these live airborne organisms were reduced by the ZenGUARD™ coating. Testing used multiple samples with repeated tests so that each filter's performance could be compared. It was determined that all Phase 1 targets were met including sufficient reduction in live airborne test organisms, no significant shedding of the ZenGUARD™ coating, and air flow rates that were not impacted by the coating. On April 11, 2022, the Company announced that, after successful completion of Phase 1 testing, it will proceed to Phase 2 testing. Phase 2 testing commenced June 2022 and is being conducted at ARC with assistance from CCL. Airborne test organisms will again be used, and testing will be conducted in a controlled environment. The objective of Phase 2 testing is to demonstrate a reduction in live airborne surrogate contamination within a modular classroom environment, simulating a real world environment. By testing ZenGUARD™-coated HVAC filters, NRC is also expected to gain the knowledge and equipment to evaluate how airborne infectious diseases spread within aircraft cabins and other indoor spaces. The Company has approximately $400,000 budgeted for future testing (including a $200,000 grant).
In addition, the active ingredient in ZenGUARD™ has low minimum inhibitory concentrations against several bacteria as tested by Dr. Tony Mazzulli from Mount Sinai Hospital in Toronto. The Company is exploring the potential to use this compound in therapeutic or pharmaceutical applications based on these results. On February 4, 2021, and March 2, 2021, the Company announced results of the Phase 2 cytotoxicity testing, by Nucro Technics testing laboratory, and included cytotoxicity testing that noted no adverse effects after seven days of repeated dosing. The Company has received quotes for animal studies of MRSA-related skin infections and expects to award a contract as soon as practicable. On March 10, 2022, the Company announced that it had retained Vimta Labs Limited ("Vimta"), a leading clinical research organization in India, to begin studies of ZenGUARD™ active ingredient as a potential treatment of skin disease. Vimta will be performing pre-clinical research including collecting the in vitro and in vivo data that is required for the submission of an Investigational New Drug to the United States Food and Drug Administration which is a requirement for the administration of a new drug in humans. The pre-clinical work with Vimta is scheduled to be completed by Q3 2023 The Company decided to move forward with this work following cytotoxicity studies with Nucro-Technics and positive anecdotal results of various human skin infections including acne, warts and toenail fungal infections. There were no adverse effects recorded during these anecdotal trials. These human anecdotal cases form part of the Company's patent application filed December 21, 2021, under the Patent Cooperation Treaty entitled "Graphene-Silver Nanocomposites and Uses For Same As a Broad-Spectrum Antimicrobial" which is scheduled to be published on June 23, 2022.
Other
The Company is also working with a number of research institutions developing processes to synthesize graphene, GO and graphene quantum dots, along with other possible applications for graphene. Potential markets for graphene include composites (e.g., concrete, rubber, plastic polymers and ceramics), sensors, water purification and filtration, coatings and solid-state lubricants, silicon-graphene and graphene aerogel anode material for next generation batteries along with aerospace applications. On February 18, 2022, the Company announced the filing of a provisional patent with the United States Patent and Trademark Office relating to a graphene-wrapped silicon anode material. The Company has other research projects commenced or contemplated including for applications in aluminum alloys, corrosion protection, battery technology, conductive polymers and others. The Company will report on these when it is appropriate to do so.
Albany Graphite Project
The Company owns 100% of the Albany Graphite Project in Northern Ontario, Canada. The unusual nature of the graphite in the Albany deposit and its potential economic significance motivated additional exploration drilling from 2012 to 2014. The graphene nanomaterials market was not considered as part of the June 2015 Preliminary Economic Assessment model. The current claims require a total of $195,600 worth of assessment work per year to keep them in good standing and the Company has a total credit of approximately $5.8M in available exploration reserves. The Company has no near-term plans to continue any significant work on the Albany Graphite Project in Northern Ontario and is not dependent on materials extracted from the Albany Graphite Project for its current business plans. On October 18, 2021, the TSXV changed the Company's classification from a "mining issuer" to an "industrial, technology, or life sciences issuer." The change of classification was approved by the shareholders of the Company on September 27, 2021, in accordance with the rules and policies of the TSXV.
On April 18, 2022, the Company announced that it has engaged The Benchmark Company, LLC ("Benchmark") to act as strategic financial advisor with respect to potential transactions relating to the Albany Graphite Project.
Business Objectives and Milestones
As at March 31, 2022, the Company had working capital of $29,654,265.
On April 8, 2021, the Company completed a private placement in which a total of 1,735,199 units were issued at $2.50 per unit for gross proceeds of $4,337,998. The Company disclosed in its information circular dated August 19, 2021 (the "Information Circular") that it had a working capital of $4,050,000 as at the end of July 2021. The following table sets out the uses that the Company planned for such funds available as disclosed in the Information Circular, and an update on the actual expenditures using such funds:
|
Use of Available Funds |
Expected Amount as at |
Approximate Actual |
|
General and administrative costs(1) |
2,550,000 |
2,060,000 |
|
Research and Development |
|
|
|
Enhancement of development process for ZenGUARD™ |
100,000 |
528,000 |
|
Testing of GO coated HVAC filters |
300,000 |
410,000 |
|
Research and development of other potential products |
100,000 |
95,000 |
|
Development of graphene-enhanced polymers |
80,000 |
50,000 |
|
Development of rapid detection technology |
420,000 |
694,000 |
|
Albany Graphite Project Expenditures(2) |
300,000 |
216,000 |
|
Unallocated working capital |
200,000 |
Nil |
|
Total |
4,050,000 |
4,053,000 |
Notes:
(1) General and administrative expenses consist of salaries and consulting fees (which includes costs associated with the production of the Company anti-microbial coating for PPE), listing fees, transfer agent fees, audit fees, legal fees, office rent and other miscellaneous expenses.
(2) Expenditures include environmental studies (long-term baseline watershed studies that were commenced and that the Company intends to complete); First Nations outreach, including travel costs and expenditures pursuant to the Implementation Agreement between the Company and Constance Lake First Nation ("CLFN"); consulting fees relating to the Albany Graphite Project; storage facility and vehicle leases, and claims and other fees to maintain the Albany Graphite Project in good standing.
From August 2021 to March of 2022, the Company fully spent the $4,050,000 that was available. Increased spending on the enhancement of the development process for ZenGUARD™ was due to an increased scope of a commissioned engineering study for a new industrial scale facility for the Company to produce ZenGUARD™.
On January 4, 2022, the Company completed a bought-deal prospectus offering raising gross proceeds of $23,005,060 and a concurrent non-brokered private placement raising additional gross proceeds of $10,009,022, for total gross proceeds of $33,014,082. The Company disclosed in its final prospectus dated December 23, 2021 (the "Prospectus") that it expected the net proceeds of the financing to be (excluding any exercise of the over-allotment option) $28,813,158 after deducting the payment of the commission to the underwriters. The following table sets out the uses that the Company planned for such proceeds over the twenty-four month period following the financing, as disclosed in the Prospectus, and an update on the actual expenditures using such funds:
|
Use of Available Funds |
Expected Amount as at ($) |
Approximate Actual |
|
General and administrative costs |
4,000,000 |
1,044,000 |
|
Acquisition of GO supply |
1,300,000 |
104,000 |
|
Construction of ZenGUARD™ production facility |
1,500,000 |
629,000 |
|
Purchase of coating equipment |
1,900,000 |
439,000 |
|
Construction of GO production plant |
7,500,000 |
Nil |
|
Potential strategic acquisition |
1,500,000 |
Nil |
|
Development of rapid detection technology |
2,500,000 |
277,000 |
|
Building inventory of rapid detection tests |
3,000,000 |
Nil |
|
Research and development |
2,000,000 |
188,000 |
|
Purchase of research and development facility |
2,000,000 |
2,065,000 |
|
Estimated offering costs |
300,000 |
292,000 |
|
Unallocated funds added to working capital |
1,313,158 |
N/A |
|
Total |
28,813,158 |
5,038,000 |
From January 4, 2022 to March 31, 2022, the Company spent approximately $5,038,000 of the $28,813,158 that was expected to be available.
Overall Performance
During the year ended March 31, 2022, the Company was mainly involved in scaling the production process of the ZenGUARD™ antimicrobial coating formulation at the pilot scale along with completing the engineering work for the industrial production facility. The Company also continued its graphene R&D activities which led to two provisional patent filings and one provisional patent license during this year. Overall, during the year ended March 31, 2022, the Company had cash expenditures of approximately $14,759,000 consisting mainly of property and equipment purchases, research and development costs, professional and consulting fees and general operating expenses.
Results of Operations
Net loss
The Company recorded a loss from continued operations of $5,447,346 with basic and diluted loss per share of $0.06 for the three-month period ended March 31, 2022 (2021 - loss of $1,229,067 and $0.01). The loss from continued operations for the year ended March 31, 2022, was $12,562,665 with basic and diluted loss per share of $0.13 (2021 - loss of $3,868,650 and $0.05).
The Company recorded a loss from discontinued operations of $Nil with basic and diluted loss per share of $Nil for the three-month period ended March 31, 2022 (2021 - $Nil, and $Nil). The loss from discontinued operations for the year ended March 31, 2022, was $26,671,935 with basic and diluted loss per share of $0.29 (2021 - loss of $Nil and $Nil).
Revenue
Revenue generated from operations for the year ended March 31, 2022 was $347,183 (2021 - $2,355). Revenue during the three-month period ended March 31, 2022 was $161,618.
Expenses
Stock-based compensation costs were $2,271,882 for the three-month period ended March 31, 2022 (2021 - $706,207) and $4,726,840 for the year ended March 31, 2022 (2020 - $2,018,416). Stock-based compensation was based on the fair value of the options described in Note 12(c) of the audited consolidated financial statements as calculated using the Black-Scholes option pricing model. Stock-based compensation is recognized over the vesting period of the underlying options.
Other expenses were $212,145 for the three-month period ended March 31, 2022 (2021 - $95,618) and $661,904 for the year ended March 31, 2022 (2021 - $236,406). The following table details the material components of the Company's other expenses for the years ended March 31, 2022 and 2021.
|
|
Year Ended March 31, 2022 |
Year Ended March 31, 2021 |
|
Insurance |
162,640 |
38,913 |
|
Meals and entertainment |
61,815 |
13,618 |
|
Office expenses |
110,114 |
49,870 |
|
Other expenses |
183,461 |
69,161 |
|
Travel |
143,874 |
64,844 |
|
Total |
$661,904 |
$236,406 |
Professional fees were $768,697 for the three-month period ended March 31, 2022 (2021 - $86,899) and $1,849,888 for the year ended March 31, 2022 (2021 - $548,922). These fees consist primarily of the amounts charged for services provided by the Company's lawyers, auditors, and accountants.
Investor relations and promotion expenses were $52,385 for the three-month period ended March 31, 2022 (2021 - $39,203) and $280,740 for the year ended March 31, 2022 (2021 - $175,932). These expenses consist primarily of the costs of consultants, marketing trips and other costs such as attending industry conferences.
Listing and filing fees were $240,734 for the three-month period ended March 31, 2022 (2021 - $37,064) and $325,167 for the year ended March 31, 2022 (2021 - $52,466). These expenses consist primarily of the costs of maintaining registered status on various stock listing exchanges.
Consulting fees were $203,047 for the three-month period ended March 31, 2022 (2021 - $102,500) and $898,208 for the year ended March 31, 2022 (2021 - $392,752). The most significant component of the consulting costs incurred were for consultants working on metallurgical test work, field program planning and graphene product development activities.
Amortization expense was $342,851 for the three-month period ended March 31, 2022 (2021 - $96,823) and $614,710 for the year ended March 31, 2022 (2021 - $126,799). Amortization is taken on the capitalized cost of the Company's computers, equipment, leasehold improvements, and right-of-use asset.
Supplies and materials expense was $248,044 for the three-month period ended March 31, 2022 (2021 - $28,833) and $376,787 for the year ended March 31, 2022 (2021 - $196,028). These expenses mainly related to supplies and materials purchased to continue graphene development.
Research and development expenses were $187,911 for the three-month period ended March 31, 2022 (2021 - $nil) and $1,541,902 for the year ended March 31, 2022 (2021 - $nil). These expenses mainly related to continued research and development activities regarding graphene use and development.
Impairment of exploration and evaluation assets was $nil for the three-month period ended March 31, 2022 (2021 - $nil) and $26,671,935 for the year ended March 31, 2022 (2021 - $nil). As a result of the Company's change in business during the year, the Company conducted an impairment test and determined the recoverable amount of the exploration and evaluation property to be negligible. Accordingly, the Company recognized an impairment charge on the exploration and evaluation property to reduce the carrying value to $nil. The impairment expense for the year ended March 31, 2022 is a result of discontinued operations.
Cash Flows
During the three-month period ended March 31, 2022, cash increased overall by $23,598,762 (2021 - increased by $950,270). Operating activities resulted in a decrease in cash of $2,482,791 (2021 - decrease of $488,392) due to continued spending on consulting and professional fees, research and development, salaries and benefits and other expenses. Investing activities resulted in a decrease in cash of $5,381,524 (2021 - decrease of $638,670) due to property and equipment purchases and the advance of a loan receivable. Financing activities resulted in an increase in cash of $31,463,077 (2021 - increase of $2,077,332) due to net proceeds received from a bought-deal prospectus and a concurrent non-brokered private placement issuance of shares as well as proceeds received from the exercise of stock options.
During the year ended March 31, 2022, cash increased overall by $23,583,451 (2021 - increased by $2,285,602). Operating activities resulted in a decrease in cash of $7,988,872 (2021 - decrease of $1,794,683) due to continued spending on consulting and professional fees, research and development, salaries and benefits and other expenses. Investing activities resulted in a decrease in cash of $7,252,608 (2021 - decrease of $1,233,243) due to property and equipment purchases and the advance of a loan receivable. The cash used in investing activities includes $316,698 from discontinued operations (2021 - $1,111,693). Financing activities resulted in an increase in cash of $38,824,931 (2021 - increase of $5,313,528) due to net proceeds received from a bought-deal prospectus and a concurrent non-brokered private placement issuance of shares, a private placement issuance of units and proceeds received from the exercise of stock options and warrants.
Mineral Exploration and Development
Albany Graphite Project
The claims comprising the Albany Graphite Project are presently held in good standing by the Company and there are sufficient assessment credits available to keep all of the 4F (Albany Graphite Project) claims in good standing for at least 30 years. There are no environmental liability issues related to any previous exploration work on the claims. The Company has not received from any government authority, any communication or notice concerning any actual or alleged breach of any environmental laws, regulations, policies or permits. The claims are located in the traditional territory of the Constance Lake First Nation. In July 2011, the Company and CLFN signed an exploration agreement for a mutually beneficial and co-operative relationship regarding exploration and pre-feasibility activities on the Albany Graphite Project. Under this agreement, the Company committed to establishing a joint implementation committee and conveying preferential opportunities for employment and contracting as well as contributing to a social fund for the benefit of CLFN children, youth and elders. In 2018, the parties signed a new Memorandum of Understanding ("MOU") under which a project partnership structure will be created in support of the development of the Albany Graphite Project.
Subsequent to completion of the 2015 Preliminary Economic Assessment ("PEA"), most of the Albany Graphite Project work has been focused on metallurgical process development, environmental baseline studies, market studies, and research and development to determine the most attractive market opportunities for the Albany graphite products. Increasing interest in the materials produced from the Albany Graphite Project as a feed material for producing graphene or GO, is a consideration for management in potentially reconsidering the project development model conceived for the 2015 PEA, at some point in the future.
Graphene Business Development Work
The Company's graphene product development is being carried out under the direction of the Company's CEO, Mr. Gregory Fenton, and the Company's Executive Chairman, Dr. Francis Dubé. Dr. Colin van der Kuur, VP of Science and Research, continues to lead the research and development work. His work is supported by Dr. Adam MacIntosh, Director of Research and Development and the Company's Senior Government Relations Director, Ms. Monique Manaigre, who is coordinating collaborative research initiatives within government institutions such as the National Research Council, Clean Growth Hub, Accelerated Growth Hub, Federal Economic Development Agency for Northern Ontario (FedNor), Federal Economic Development Agency for Southern Ontario (FedDev), and others.
The business development team, led by Greg Fenton, continues to focus its efforts on applications where the Company has strategic advantages due to patents, trade secrets and business relationships. The Company announced its first patent application on September 22, 2020, when it reported that after five months of optimization, it had developed a novel graphene-based antimicrobial coating with 99% effectiveness against COVID-19.
Administration and Capitalization
On April 8, 2021, the Company completed a private placement in which a total of 1,735,199 units were issued at $2.50 per unit for gross proceeds of $4,337,998. Each unit consisted of one common share and one-half of one common share purchase warrant with each whole warrant exercisable at $3.00 for a period of two years. Unit issue costs associated with this private placement totaled $102,343 of which $38,979 was settled through the issuance of 15,592 shares.
On April 13, 2021, 100,000 stock options were issued to a number of employees and consultants. The stock options have an exercise price of $1.76 per share. The options granted to the employees expire on April 13, 2026 and have a vesting period as follows: 1/3 at April 13, 2021; 1/3 at April 13, 2022; 1/3 at April 13, 2023. The options grants to the consultants expire on April 13, 2023 and have a vesting period as follows: 100% on August 13, 2021.
On June 30, 2021, the Company announced that Dr. Kenneth Reed, Medical Director at DermASAP, had joined the Company's Advisory Board effective immediately. Dr. Reed, a Harvard Medical School trained dermatologist, has 38 years of clinical experience in the state of Massachusetts. In addition to his medical practice, he is the co-founder of Early Cell, a company focused on detection of circulating fetal cells in gestational mothers, and Lispiro, which focuses on fibrotic lung disorders. Dr. Reed has also been a Clinical Investigator for numerous pharma companies including Amgen, Astellas, Centocor (J&J) and Abbvie. He currently serves on the board of directors of Red Hill Biopharma, a NASDAQ-listed company, and sits on scientific advisory boards to a number of medical technology companies. Dr. Reed was awarded 150,000 stock options with an exercise price of $3.50 per share. The options will expire on June 30, 2024 and have a vesting period as follows: 1/3 at June 30, 2021; 1/3 at June 30, 2022; 1/3 at June 30, 2023.
On July 23, 2021, 25,000 stock options were issued to an employee of the Company. The stock options have an exercise price of $3.10 per share. The options granted to the employee expire on July 23, 2024 and have a vesting period as follows: 1/3 at July 23, 2021; 1/3 at July 23, 2022; 1/3 at July 23, 2023.
On September 3, 2021, 100,000 stock options were issued to certain employees of the Company. The stock options have an exercise price of $3.69 per share. The options granted to the employees expire on September 3, 2024 and have a vesting period as follows: 1/3 at September 3, 2021; 1/3 at March 3, 2022; 1/3 at September 3, 2022.
On September 21, 2021, 120,000 stock options were issued to a consultant. The stock options have an exercise price of $4.08 per share. The options granted to the consultant expire on September 21, 2024 and have a vesting period as follows: 1/3 at September 21, 2021; 1/3 at September 21, 2022; 1/3 at September 21, 2023.
On October 13, 2021, 100,000 stock options were issued to certain employees of the Company. The stock options have an exercise price of $4.92 per share. The options granted to the employees expire on October 13, 2024 and have a vesting period as follows: 1/3 at October 13, 2021; 1/3 at October 13, 2022; 1/3 at October 13, 2023.
On October 18, 2021, the TSXV changed the Company's classification from a "mining issuer" to an "industrial, technology, or life sciences issuer." The change of classification was approved by the shareholders of the Company on September 27, 2021, in accordance with the rules and policies of the TSXV.
On October 26, 2021, 50,000 stock options were issued to a consultant. The stock options have an exercise price of $4.77 per share. The options granted to the employees expire on October 26, 2024 and have a vesting period as follows: 1/3 at October 26, 2021; 1/3 at October 26, 2022; 1/3 at October 26, 2023.
The Company changed its name effective October 27, 2021 to Zentek Ltd.
On November 1, 2021, 100,000 stock options were issued to certain consultants. The stock options have an exercise price of $5.67 per share. The options granted to the consultants expire on November 1, 2024 and have a vesting period as follows: 1/3 at November 1, 2021; 1/3 at November 1, 2022; 1/3 at November 1, 2023.
On December 9, 2021, pursuant to a licensing agreement, the Company issued 19,157 common shares to a trade creditor at an agreed upon price of $2.61 per common share in settlement of amounts owing.
On December 15, 2021, 25,000 stock options were issued to an employee of the Company. The stock options have an exercise price of $5.20 per share. The options granted to the employee expire on December 15, 2026 and have a vesting period as follows: 1/3 at December 15, 2021; 1/3 at December 15, 2022; 1/3 at December 15, 2023.
On December 29, 2021, 200,000 stock options were issued to an employee and a consultant. The stock options have an exercise price of $5.22 per share. The options granted to the employee expire on December 29, 2024 and have a vesting period as follows: 1/3 at December 29, 2021; 1/3 at June 29, 2022; 1/3 at December 29, 2022. The options granted to the consultant expire on December 29, 2024 and have a vesting period as follows: 1/3 at December 29, 2021; 1/3 at December 29, 2022; 1/3 at December 29, 2023.
On January 4, 2022 the Company completed a bought-deal prospectus offering (the "Prospectus Offering") for gross proceeds of C$23,005,060, and a concurrent non-brokered private placement (the "Concurrent Private Placement") for aggregate gross proceeds of C$10,009,022. Pursuant to the Prospectus Offering, the Company issued a total of 4,424,050 common shares at a price of $5.20 per common share (the "Issue Price"), and pursuant to the Concurrent Private Placement the Company issued a total of 1,924,812 common shares at the Issue Price. The Prospectus Offering was completed by a syndicate of underwriters with Eight Capital as lead underwriter and sole bookrunner, Leede Jones Gable Inc. and Research Capital (collectively, the "Underwriters"). The Underwriters were paid a cash commission of C$1,380,303, equal to 6% of the gross proceeds raised.
On January 14, 2022, 1,300,000 stock options were issued to certain directors, officers, and employees of the Company. The stock options have an exercise price of $4.25 per share. The options granted to the employees expire on January 14, 2025 and have a vesting period as follows: 1/3 at January 14, 2022; 1/3 at January 14, 2023; 1/3 at January 14, 2024. The options granted to the directors and officers expire on January 14, 2027 and have a vesting period as follows: 1/3 at January 14, 2022; 1/3 at July 14, 2022; 1/3 at January 14, 2023.
On January 17, 2022, 20,000 stock options were issued to an employee of the Company. The stock options have an exercise price of $4.25 per share. The options granted to the employee expire on January 17, 2025 and have a vesting period as follows: 1/3 at January 17, 2022; 1/3 at January 17, 2023; 1/3 at January 17, 2024.
On March 7, 2022, the Company announced that it had obtained approval from NASDAQ, and its common shares commenced trading under the symbol "ZTEK" on March 22, 2022.
On March 8, 2022, the Company announced that Ravi Kaza had joined the Company's Advisory Board. Mr. Kaza graduated from The Wharton School of the University of Pennsylvania with a B.Sc. in Finance Summa Cum Laude at age 19 and has spent the last 25 years consistently focused on disruptive technologies. He started his career in Silicon Valley at a prominent investment banking group where he worked on numerous transactions involving very prominent technology companies. Mr. Kaza then entered the money management business as a Vice President at Pequot Capital Management, at the time one of the world's largest alternative asset managers with a focus on technology investing. He was then hired by Stanley Druckenmiller as a Managing Director at Duquesne Capital Management to focus primarily on technology investing. In 2003, Mr. Kaza founded Seasons Capital Management, which he helped grow into a multi-billion-dollar alternative investment manager that oversaw several technology-related investment strategies. In 2010, Mr. Kaza shifted his focus to running primarily internal capital with a continued primary focus on disruptive technologies.
On March 29, 2022, 54,000 stock options were issued to an employee of the Company. The stock options have an exercise price of $3.88 per share. The options granted to the employee expire on March 29, 2025 and have a vesting period as follows: 1/3 at March 29, 2022; 1/3 at March 29, 2023; 1/3 at March 29, 2024.
Subsequent Events
On May 16, 2022, the Company announced that Wendy Ford has been appointed as the new Chief Financial Officer ("CFO") of the Company, and that Brian Bosse was appointed as the Company's Chief Operations Officer. Ms. Ford served as VP of Finance and CFO of Mancor Industries, a precision manufacturer of metal components and sub-assemblies. Prior to this, Ms. Ford served as CFO of AirBoss of America, a publicly traded company on the TSX, focused on the compounding, defense, and automotive industries. She has served in leadership roles including financial reporting, auditing, taxation, and compliance. Ms. Ford is a Chartered Professional Accountant and is a graduate of the University of Toronto. As part of her employment contract, Ms. Ford will receive 200,000 stock options at a exercise price of $2.59, expiring three years from the date of grant.
Subsequent to the year ended March 31, 2022, a total of 115,000 stock options were exercised at $0.40 per option resulting in proceeds of $46,000 to the Company.
Selected Annual Information
The following table sets forth selected financial information with respect to the Company as at and for the years ended March 31, 2022 and 2021. The selected financial information has been derived from the audited consolidated financial statements of the Company for the financial years indicated. The following should be read in conjunction with the said consolidated financial statements and related notes thereto.
|
|
Year ended March 31, 2022 |
Year ended March 31, 2021 |
Year ended March 31, 2020 |
|
Total Revenue |
$347,183 |
$2,355 |
$Nil |
|
Total Other Income |
$604,329 |
$451,530 |
$136,998 |
|
Net Loss |
$(38,694,048) |
$(3,868,650) |
$(1,540,877) |
|
# Shares Outstanding |
99,248,058 |
86,199,849 |
80,405,791 |
|
Net Loss per Share (Basic) |
$(0.42) |
$(0.05) |
$(0.02) |
|
Net Loss per Share (Diluted) |
$(0.42) |
$(0.05) |
$(0.02) |
|
Total Assets |
$37,984,520 |
$30,250,328 |
$26,238,658 |
|
Total non-current financial liabilities |
$3,435,459 |
$2,788,040 |
$527,575 |
|
Total Equity |
$34,549,061 |
$27,462,288 |
$25,711,083 |
Summary of Quarterly Results
The following table sets out selected quarterly information for the eight most recently completed quarters, for which consolidated financial statements are prepared.
| Mar. 31, 2022 $ |
Dec. 31, 2021 as restated $ * |
Dec. 31, 2021 as originally presented $ |
Sep. 30, 2021 as restated $ * |
Sep 30, 2021 as originally presented $ |
Jun. 30, 2021 as restated $ $ * |
Mar. 31, 2021 $ |
Dec. 31, 2020 $ |
Sep. 30, 2020 $ |
Jun. 30, 2020 $ |
|
| Revenue | 161,618 | 35,420 | 555,097 | 150,145 | 150,145 | nil | nil | nil | nil | nil |
| Other income | - | 470,886 | 213,726 | 4,312 | 4,312 | 129,131 | 181,563 | 174,236 | 106,372 | 124,446 |
| Loss from discontinued operations | - | - | - | $26,671,935 | 26,051,796 | - | - | - | - | - |
| Net Loss | 4,964,841 | 2,177,696 | 1,915,179 | 29,619,623 | 28,999,484 | 1,931,888 | 1,655,188 | 2,275,202 | 576,924 | 455,994 |
| Net Loss per Share (basic and diluted) from discontinued operations |
- | - | - | 0.29 | 0.29 | - | - | - | - | - |
| Net Loss per Share (basic and diluted) from continuing operations |
0.05 | 0.02 | 0.02 | 0.03 | 0.03 | 0.02 | 0.02 | 0.03 | 0.01 | 0.01 |
| Net Loss per Share (basic and diluted) |
0.05 | 0.02 | 0.02 | .32 | 0.32 | 0.02 | - | - | - | - |
*Restatements
In the interim period ended March 31, 2022, management determined that the interim financial statements for the September 30, 2021 and December 31, 2021 interim periods required restatements due to the following:
- Revenue from royalties for the interim period ended December 31, 2021 was over estimated by $262,517.
- Loss from discontinued operations in the interim period ended September 30, 2021 (impairment of mineral property) was understated by $620,139 related mainly to a mineral property option payment obligation that was reversed; reversal recorded during the period.
- In the interim period ended December 31, 2021, management restated government grants received for HVAC testing programs from revenues to government grants (presented in other income) in the amount of $257,160. As a result, revenues and other income have been reduced and increased respectively for this interim period.
All discussion of interim period results in this MD&A considers the updated and restated interim period results as summarized in the above table.
Discussion of interim period results
The Company began generating revenue during the quarter ended September 30, 2021, as a result of its License and Supply Agreement dated September 24, 2021, with Trebor. The quarterly net loss figure has been trending higher since the quarter ended September 30, 2020 due to the following factors:
1. Increased salaries and benefits costs due to hiring of additional staff to further develop intellectual property and ramp up production.
2. Increased spending on research and development activities to further develop intellectual property.
3. Increased professional fees incurred as a result of increase in legal expenditures.
4. Increased stock-based compensation expense due to granting of options to several directors, officers, employees and consultants. The Company has seen an increase in its stock price on the TSX Venture Exchange over the past 12 months resulting in a higher Black-Scholes valuation for options leading to increased stock-based compensation expense.
5. As a result of the change in business during the year, the Company conducted an impairment test and determined the recoverable amount of the exploration and evaluation property to be negligible and the Company recognized an impairment charge on the exploration and evaluation property of $26,671,935 to reduce the carrying value to $nil.
Liquidity and Capital Resources
As at March 31, 2022, the Company had working capital of $29,654,265 (2021 - $879,211) and cash of $26,675,000 (2021 - $3,091,549). The Company believes that the working capital on hand as at March 31, 2022 is sufficient to fund requirements for at least the next twelve months. The Company funded operations during the year ended March 31, 2022 through the net proceeds of shares and units issued, stock options and warrants exercised as well as through sales and the use of existing cash.
The Company began generating sales revenue during the quarter ended September 30, 2021, and will use the proceeds of the sales to partially fund future operations. On January 4, 2022, the Company completed a financing for aggregate gross proceeds of $33,014,082, but may require additional financing in the future. The availability of equity capital, and the price at which additional equity could be issued, is dependent upon the success of the Company's activities, and upon the state of the capital markets generally. Additional financing may not be available on terms favourable to the Company or at all. If the Company does not receive future financing, it may not be possible for the Company to advance its business plans.
Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements which could have an effect on current or future results or operations, or the financial condition of the Company.
Transactions with Related Parties
The remuneration of key management personnel during the years ended March 31, 2022 and 2021 were as follows:
a) Salaries and benefits - $490,000 (2021 - $652,167)
b) Share-based payments - $2,602,803 (2021 - $1,714,944)
As part of the private placement issued during the year ended March 31, 2022, as disclosed in Note 12(a) of the audited consolidated financial statements, Officers and Directors of the Company purchased 36,000 units for gross proceeds of $90,000.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
Current and Future Changes in Accounting Policy
Statement of Compliance
The audited consolidated financial statements, including comparatives for the year ended March 31, 2022, have been prepared using accounting policies in compliance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
Future Accounting Changes
Certain pronouncements were issued by the IASB or the International Financial Reporting Interpretations Committee ("IFRIC") that are mandatory for accounting periods beginning on or after April 1, 2022 or later periods. Many are not applicable or do not have a significant impact to the Company and have been excluded.
Critical Judgments and estimation uncertainties
The areas which require management to make significant judgments, estimates and assumptions in determining carrying values include, but are not limited to:
Accounts receivable and loan receivable carrying values and impairment charges
In the determination of carrying values and impairment charges, management looks at the higher of recoverable amount or fair value less costs to sell in the case of assets and at objective evidence, significant or prolonged decline of fair value on financial assets indicating impairment. These determinations and their individual assumptions require that
management make a decision based on the best available information at each reporting period.
Expected credit loss allowance and provision
The Company determines an expected credit loss allowance for trade receivables based on the estimated expected lifetime credit loss, considering the actual credit loss in prior years and forward-looking estimates of expected collections. This estimate varies depending on the nature of the trade receivables, the majority of which are associated with the health sciences business; however, also includes receivables from government agencies. The loss allowance is reviewed on a quarterly basis and any change in estimate is accounted for prospectively. The Company also assesses the expected credit loss of non-trade financial assets to determine if an allowance is required. Collectivity of customer
balances classified as trade receivables may vary from the Company's estimation.
Impairment of exploration and evaluation assets
While assessing whether any indications of impairment exist for exploration and evaluation assets, consideration is given to both external and internal sources of information. Information the Company considers includes changes in the market, economic and legal environment in which the Company operates that are not within its control that could affect the recoverable amount of exploration and evaluation assets. Internal sources of information include the manner in which exploration and evaluation assets are being used or are expected to be used and indications of expected economic performance of the assets. Estimates include but are not limited to estimates of the discounted future pre-tax cash flows expected to be derived from the Company's mineral exploration properties, costs to sell the properties and the appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production, increases in estimated future capital costs, reductions in the amount of recoverable mineral reserves and mineral resources and/or adverse current economics can result in a write-down of the carrying amounts of the Company's exploration and evaluation assets.
Income taxes and recoverability of potential deferred tax assets
In assessing the probability of realizing income tax assets recognised, management makes estimates related to expectations of future taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified. Estimates of future taxable income are based on forecasted cash flows from operations and the
application of existing tax laws in each jurisdiction.
The Company considers whether relevant tax planning opportunities are within the Company's control, are feasible, and are within management's ability to implement. Examination by applicable tax authorities is supported based on individual facts and circumstances of the relevant tax position examined in light of all available evidence. Where applicable tax laws and regulations are either unclear or subject to ongoing varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of income tax assets recognised. Also, future changes in tax laws could limit the Company from realizing the tax benefits from the deferred tax assets. The Company reassesses unrecognised income tax assets at each reporting period.
Discount rate on lease liability
All the components of the lease liability are required to be discounted to reflect the present value of the payments. The discount rate to use is the rate implicit in the lease, unless this cannot readily be determined, in which case the lessee's incremental borrowing rate is used instead. The definition of the lessee's incremental borrowing rate states that the rate should represent what the lessee would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. Significant
judgment is required to estimate an incremental borrowing rate in the context of a right-of-use asset.
Share-based payments
Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques. Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors and corporate performance. Such judgments and
assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates.
Existence of decommissioning and restoration costs and the timing of expenditure
Decommissioning, restoration and similar liabilities are estimated based on the Company's interpretation of current regulatory requirements, constructive obligations and are measured at fair value. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of decommissioning, restoration or similar liabilities that may occur upon decommissioning of the mine. Such estimates are subject to change based on changes in
laws and regulations and negotiations with regulatory authorities.
Financial Instruments and Other Instruments
The Company's financial instruments consist of cash and cash equivalents, accounts and other receivables, loan receivable, accounts payable and accrued liabilities, lease liability and long-term debt. Unless otherwise noted, the Company does not expect to be exposed to significant interest, currency or credit risks arising from these financial instruments. The Company estimates that the fair value of these financial instruments approximates carrying values.
Financial instruments as at March 31, 2022 included cash and cash equivalents, accounts and other receivables and loan receivable which are classified as loans and receivables and are measured at amortized cost. Accounts payable and accrued liabilities, lease liability and long-term debt are classified as other financial liabilities, which are measured at amortized cost. As at March 31, 2022, the carrying and fair value amounts of the Company's financial instruments are approximately the same.
As at March 31, 2022, the Company does not have any financial instruments recorded at fair value and that require classification within the fair value hierarchy.
Fair value estimates are made at the balance sheet date based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties in significant matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
Disclosure of Outstanding Share Data
The Company is authorized to issue an unlimited number of shares, of which 99,248,058 (2021 - 86,199,849) shares were issued and outstanding as fully paid and non-assessable as at March 31, 2022.
Refer to Note 12(c) of the audited consolidated financial statements for details regarding stock options issued and exercisable as at March 31, 2022.
As at June 29, 2022, the Company had 99,363,058 common shares issued and outstanding as fully paid and non-assessable. The Company also had 8,577,334 stock options outstanding as at June 29, 2022.
Risks and Uncertainties
The operations of the Company are speculative due to the high-risk nature of its business, which includes the development of certain intellectual property and the manufacturing of graphene related products, and which may include the future acquisition, and financing. These risk factors could materially affect the Company's future operating results and could cause actual events to differ materially from those described in forward-looking information relating to the Company. Accordingly, any investment in securities of the Company is speculative and investors should not invest in securities of the Company unless they can afford to lose their entire investment.
The Company assesses and attempts to minimize the effects of these risks through careful management and planning of its operations and hiring qualified personnel, but is subject to a number of limitations in managing risk resulting from its early stage of development. Below is a non-exhaustive summary of the principal risks and related uncertainties that may impact the Company. Such risk factors, as well as additional risks and uncertainties set out elsewhere in the Company's publicly filed documents or that may not presently be known to the Company or that the Company currently deems immaterial, could have a material adverse effect on the Company's business, financial condition and results of operations or the trading price of the common shares of the Company.
As at March 31, 2022, there was an increase in credit risk as a result of trade receivables now being generated through sales and the loan receivable.
Negative Operating Cash Flow
During the financial year ended March 31, 2022, the Company had negative operating cash flow because its revenues did not exceed its operating expenses. In addition, as a result of the Company's business plans for the development of its products, the Company expects cash flow from operations to be negative until revenues improve to offset its operating expenditures. The Company's cash flow from operations may be affected in the future by expenditures incurred by the Company to continue to develop its products. To the extent the Company has negative cash flow in any future period, the Company may be required to allocate funds to fund such negative cash flow from operating activities. In order to stay in business, in the absence of cash flow from operations, the Company will have to raise funding through financing activities. However, there is no certainty the Company will be able to raise funds at all or on terms acceptable to the Company in the event it needs to do so. Furthermore, additional funds raised by the Company through the issuance of equity or convertible debt securities would cause the Company's current shareholders to experience dilution. Such securities also may grant rights, preferences or privileges senior to those of the Company's shareholders. The Company does not have any contractual restrictions on its ability to incur debt and, accordingly, the Company could incur significant amounts of indebtedness to finance its operations. Any such indebtedness could contain restrictive covenants, which likely would restrict the Company's operations.
Uncertainties Relating to the Company's Business Plans
There is no assurance that broad successful commercial applications may be feasible for the Company. The Company is continuing to explore, develop, and test its current products and new products, and there can be no assurance that new uses of existing products or new products will be fully developed for commercial application, that test results will be successful, if completed at all, that any necessary permits or approvals required in order to market such products will be obtained by the Company, or that existing technology or products will become profitable. Furthermore, there is no assurance that the Company will complete any acquisitions or acquire any know-how or trade secrets to carry out certain of its future objectives. Should the Company fail to achieve any of the foregoing, this could have a material adverse impact on the business and planned business of the Company.
The Company's business is in part dependent on patents, trade secret and other intellectual property laws of Canada, and potentially foreign jurisdictions. The Company may be unable to prevent third parties from using its intellectual property without its authorization. Some of the Company's current or future technologies and trade secrets may not be covered by any patent or patent application, and the Company's issued and pending patents may not provide the Company with any competitive advantage and could be challenged by third parties. The Company's inability to secure issuance of pending patent applications may limit its ability to protect the intellectual property rights these pending patent applications were intended to cover. The Company's competitors may attempt to design around its patents to avoid liability for infringement and, if successful, could adversely affect the Company's market share. Furthermore, the expiration of the Company's patents may lead to increased competition.
Additionally, the Company plans to construct facilities for some of its operations and business activities. There can be no assurance that locations will be secured on terms favourable to the Company or at all, that engineering plans will be completed or will be satisfactory for the intended business activities of the Company, that any required permitting will be obtained, that construction of such facilities will be completed, or that such facilities will ever become operational. If such facilities are not constructed, or do not become operational, or do not operate at the capacity required or anticipated, there could be a material adverse effect of the Company's planned business and operations.
Economic and Political Conditions
Worldwide financial and economic cycles or conditions are uncertain, and recovery from a business downturn or recession could be very slow and have significant impact on the Company's business. The Company's business is sensitive to changes in economic and political conditions, including interest rates, currency issues, energy prices, trade issues, international or domestic conflicts or political crises, and epidemics or pandemics, such as the strain of COVID-19.
As at the date hereof, the global reactions to the spread of COVID‐19 have led to, among other things, significant restrictions on travel and gatherings of individuals, quarantines, temporary business closures and a general reduction in consumer activity. While these effects are expected to be temporary, the duration of the disruptions to business internationally and the related financial impact cannot be estimated with any degree of certainty at this time. In addition, the increasing number of individuals infected with COVID‐19 could result in an even greater global health crisis that could adversely affect global economies and financial markets, resulting in a protracted economic downturn that could have an adverse effect on the Company's prospects.
The responses of governmental authorities and corporate entities, including through mandated or voluntary shutdowns, may also lead to a general long-term slow-down in the economy and may lead to disruptions to the Company's workforce and facilities, customers, sales and operations and supply chain.
Measures taken by the governments worldwide and voluntary measures undertaken by the Company with a view to the safety of the Company's employees, may adversely impact the Company's business.
In particular, as a result of the foregoing, COVID‐19 could materially and adversely impact the Company's business, including without limitation, employee health, workforce availability and productivity, limitations on travel, supply chain disruptions, increased insurance premiums, and restrictions to the Company's ability to conduct its business. Also, the Company's revenues and cash resources may be negatively affected, it may need to assist potential customers with obtaining financing or government incentives to help customers fund their purchases of the Company's products and demand for the Company's products may decrease as partners and potential customers defer their projects. Any such disruptions or closures could have a material adverse effect on the Company's business. In addition, parties with whom the Company does business or on whom the Company is reliant may also be adversely impacted by the COVID‐19 pandemic which may in turn cause further disruption to the Company's business. Any long-term closures or suspensions may also result in the loss of personnel or the workforce in general as employees seek employment elsewhere.
The impact of COVID‐19 and government responses thereto may also continue to have a material impact on financial results and could constrain the Company's ability to obtain equity or debt financing in the future, which may have a material adverse effect on its business, financial condition and results of operations.
The Company is actively monitoring the situation and will respond as the impact of the COVID-19 pandemic evolves, which will depend on several factors set out above. The extent to which the pandemic will impact the Company's operations in the future is highly uncertain and cannot be predicted with confidence as at the date hereof, but could have a material adverse effect on the Company's business, financial condition and results of operations. These uncertainties include, but are not limited to, the duration of the outbreak, the ability of governments in countries in which the Company conducts business to curtail the spreading of the virus, the economic recovery as well as community and social stabilities. Any of these uncertainties, and others, could have further material adverse effects on the Company's business and operations.
Revenue from Graphene related product Sales; Long and Complex Sales Cycle
To date, the Company has recorded minimal revenue from its graphene enhanced products sales. There can be no assurance that significant losses will not occur in the near future or that the Company will be profitable in the future. The Company's operating expenses and capital expenditures may increase in subsequent years. The Company expects to continue to incur losses unless and until such time as it enters into long term and large volume supply agreements and generates sufficient revenues to fund its continuing operations.
Intellectual Property
The Company relies on the patent, trade secret and other intellectual property laws of Canada, and foreign jurisdictions. The Company may be unable to prevent third parties from using its intellectual property without its authorization. The unauthorized use of the Company's intellectual property could reduce any competitive advantage that it has developed, reduce its market share or otherwise harm its business. In the event of unauthorized use of the Company's intellectual property, litigation to protect and enforce the Company's rights could be costly, and the Company may not prevail.
Some of the Company's current or future technologies and trade secrets may not be covered by any patent or patent application, and the Company's issued and pending patents may not provide the Company with any competitive advantage and could be challenged by third parties. The Company's inability to secure issuance of pending patent applications may limit its ability to protect the intellectual property rights these pending patent applications were intended to cover. The Company's competitors may attempt to design around its patents to avoid liability for infringement and, if successful, could adversely affect the Company's market share. Furthermore, the expiration of the Company's patents may lead to increased competition.
In addition, effective patent, trade secret and other intellectual property protection may be unavailable or limited in some foreign countries. In some countries, the Company may not apply for patent or other intellectual property protection. The Company also relies on unpatented technological innovation and other trade secrets to develop and maintain its competitive position. Although the Company generally enters into confidentiality agreements with its employees and third parties to protect its intellectual property, these confidentiality agreements are limited in duration, could be breached and may not provide meaningful protection of its trade secrets. Adequate remedies may not be available if there is an unauthorized use or disclosure of the Company's trade secrets and manufacturing expertise. In addition, others may obtain knowledge about the Company's trade secrets through independent development or by legal means. The failure to protect the Company's processes, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on its business by jeopardizing critical intellectual property.
Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to such trade secret products or processes. This could have a material adverse effect on the Company's ability to make and sell products or use such processes and could potentially result in costly litigation in which the Company might not prevail. The Company could face intellectual property infringement claims that could result in significant legal costs and damages and impede its ability to produce key products, which could have a material adverse effect on its business, financial condition, and results of operations.
Product Development and Technological Change
There is no assurance that broad successful commercial applications for the Company's products may be feasible. Most, if not all, of the scientific and engineering data related to the Company's products has been generated by the Company's own laboratories or laboratory environments of the Company's partners, such as universities. There can be no assurance that laboratory data translates to or is representative in commercial applications.
Additionally, the industries in which the Company seeks to operate are characterized by rapid technological change and frequent new product introductions. Part of the Company's business strategy is to monitor such change and take steps to remain technologically current, but there is no assurance that such strategy will be successful. If the Company is not able to adapt to new advances in materials sciences, or if unforeseen technologies or materials emerge that are not compatible with the Company's or that could replace its products, the Company's revenues and business would likely be adversely affected.
Market Development and Growth
Failure to further develop the Company's key markets and existing geographic markets or to successfully expand its business in the future into new markets could have an adverse impact on sales growth and operating results. The Company's ability to further penetrate its key markets and the existing geographic markets in which it competes and/or aims to compete, and to successfully expand its business into other countries, is subject to numerous factors, many of which are beyond its control. There can be no assurance that efforts to increase market penetration in the Company's key markets and existing geographic markets will be successful. Failure to achieve these goals may have a material adverse effect on the Company's operating results.
Unpredictable Sales Cycles
The sales cycle for graphene products may range considerably from one to multiple years from the time a customer begins testing the Company's product until the time that they could be used in a commercial product. Timing of product introduction could vary significantly based on the target market. Additionally, any demand for the Company's products based in whole or in part on the current coronavirus (COVID-19) pandemic could materially change in the event the pandemic ends or decreases in severity. The Company has demonstrated little track record of success in completing customer development projects, which makes it difficult to evaluate the likelihood of future success. The sales and development cycles for the Company's products are subject to customer budgetary constraints, internal acceptance procedures, competitive product assessments, scientific and development resource allocations, and other factors beyond the Company's control. If the Company is not able to successfully accommodate these factors to achieve commercial success, the Company may be unable to achieve sufficient sales to reach profitability.
Government Regulation and Import/Export Controls
The Company's future operations, including development, and commencement and continuation of commercial production, require licenses, permits or other approvals from various federal, provincial, local and potentially foreign governmental authorities, and such operations are or will be governed by laws and regulations relating to production, exports, taxes, labor standards, occupational health and safety, waste disposal, toxic substances, prospecting, development, mining, land use, water use, environmental protection, land claims of indigenous people and other matters. Furthermore, in certain foreign jurisdictions, these regulatory requirements may be more stringent than those in Canada. Certain export control laws or economic sanctions laws may include restrictions or prohibitions on the sale or supply of certain products and services to embargoed or sanctioned countries, governments, persons and entities. In addition, various countries regulate the import of certain technology, including import and export permitting and licensing requirements, and have enacted or could enact laws that could limit the Company's ability to distribute its products. Changes in the Company's products, or future changes in export and import regulations may prevent any potential international customers from utilizing the Company's products globally or, in some cases, prevent the export or import of the Company's products to certain countries, governments, or persons altogether.
Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of the Company's products in the future by, or in the Company's decreased ability to export or sell its products to, potential international customers. Any limitation on the Company's ability to export or sell its products would likely adversely affect the Company's future business, results of operations, and financial results.
Large volume production of graphene requires permits and approvals from various government authorities, and is subject to extensive federal, provincial, state, and local laws and regulations governing development, production, exports, taxes, labour standards, occupational health and safety, environment and other matters. As graphene is a new chemical substance, production and sale of graphene may be subject to specific occupational health and safety and environment regulatory approvals in different jurisdictions including, without limitations, under the Canadian Environmental Protection Act (Canada), the Food and Drug Act (Canada), the Toxic Substances Control Act (USA), the Food Drug and Cosmetic Act (USA) and the Registration, Evaluation, Authorization and Restriction of Chemicals (Europe).
Health Canada also regulates certain markets into which the Company intends to supply products or license its intellectual property. There is no assurance that Health Canada or any other body will grant license for sales into markets it regulates. Each foreign jurisdiction for the Company's products is regulated and no assurance exists that sales of graphene related products will be permitted. Any inability by the Company to obtain approval from Health Canada and/or international bodies could have a material adverse impact of the business of the Company.
The Company is also subject to consumer protection laws that may impact its sales and marketing efforts. These laws, as well as any changes in these laws, could make it more difficult for the Company to sell and market its products. These laws and regulations are subject to change over time and thus the Company must continue to monitor and dedicate resources to ensure continued compliance. Non-compliance with applicable regulations or requirements could subject the Company to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if the Company does not prevail in any possible civil or criminal litigation, its business, operating results, and financial condition could be materially adversely affected.
Additionally, in order for the Company to carry out its activities, any required licences and permits must be obtained and kept current. There can be no assurance, however, that the Company will obtain on reasonable terms or at all the permits and approvals, and the renewals thereof, which it may require for the conduct of its future operations or that compliance with applicable laws, regulations, permits and approvals will not have an adverse effect on the Company's business plans. Possible future environmental and mineral tax legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delay on the Company's planned exploration and operations, the extent of which cannot be predicted.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Industry Competition
The Company seeks to compete with other graphene and manufacturing companies, in highly competitive markets. Some of the Company's competitors have substantially greater financial, marketing and other resources and higher market share that the Company has in certain products or geographic areas. As the markets for the Company's products expand, additional competition may emerge, and competitors may commit more resources to products which directly compete with the Company's products. There can be no assurance that the Company will be able to compete successfully with existing competitors or be able to develop any market for its products, or that its business will not be adversely affected by increased competition or by new competitors.
There is no assurance that the Company will continue to be able to compete successfully with its competitors in acquiring such properties or prospects and any such inability could have a material adverse effect on the Company's business and financial condition.
Lack of Trading Market for Graphene
Unlike commodity minerals such as copper, gold or silver, industrial minerals such as graphene precursor graphene materials and graphite do not have a metals exchange or an open market upon which to trade and therefore prices are not set in an open market or publicly traded market, and there can be no assurance that certain items can be sold or purchased at any time. As prices are set with private suppliers and private customers, it is difficult to predict what market prices may be at the time of any transaction. There can be no guarantees that the Company will be able to sell its graphene products in a profitable manner, or at all.
Shortages
The Company will be dependent on various supplies, equipment, parts and labour, and the services of contractors to carry out its business objectives. The availability and cost of such supplies, equipment, parts or labour or the services of contractors could have a material adverse effect on the Company's ability to successfully carry out its exploration and development activities.
Liquidity Concerns and Future Financing
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As of March 31, 2022, the Company had a cash balance of $26,675,000 (2021 - $3,091,549) to settle current liabilities of $2,825,869 (2021 - $2,506,167). The Company is ultimately dependent on the commercial sales of its products. Any delay in the sales of such products could require additional financing. There can be no assurance that the Company will be successful in obtaining the required financing as and when needed. Volatile markets may make it difficult or impossible for the Company to obtain debt financing or equity financing on favorable terms, if at all. Failure to obtain additional financing on a timely basis may cause the Company to postpone or slow down its development plans or reduce or terminate some or all of its activities.
Reliance on Key Personnel
The Company's development to date has depended, and in the future, will depend largely on the efforts of key management and other key personnel. Loss of any of these people, particularly to competitors, could have a material adverse effect on the Company's business. Further, with respect to the future development of the Company's projects, it may become necessary to attract both international and local personnel for such development. The marketplace for key skilled personnel is becoming more competitive, which means the cost of hiring, training, and retaining such personnel may increase. Factors outside the Company's control, including competition for human capital and the high-level of technical expertise and experience required to execute this development will affect the Company's ability to employ the specific personnel required. The failure to retain or attract a sufficient number of key skilled personnel could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company has not taken out and does not intend to take out "key man insurance" in respect of any directors, officer or other employees.
Qualified Employees
Recruiting and retaining qualified personnel is critical to the Company's success. Especially if it relates to its graphene operations, finding skilled scientists and a sales team familiar with the subject matter is difficult. As the Company grows further, the need for skilled labour will increase. The number of persons skilled in the high-tech manufacturing business is limited and competition for this workforce is intense. This may adversely affect the business of the Company if it is unable to recruit and retain qualified personnel as and when required.
Cybersecurity Threats
The reliability and security of the Company's information technology ("IT") systems is important to the Company's business and operations. Although the Company has established and continues to enhance security controls intended to protect the Company's IT systems and infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical access or cyberattacks. A significant breach of the Company's IT systems could, among other things, cause disruptions in the Company's manufacturing operations (such as operational delays from production downtime, inability to manage the supply chain or produce product for customers, disruptions in inventory management), lead to the loss, destruction, corruption or inappropriate use of sensitive data, including employee information or intellectual property, result in lost revenues due to theft of funds or due to a disruption of activities, including remediation costs, or from litigation, fines and liability or higher insurance premiums, the costs of maintaining security and effective IT systems, which could negatively affect results of operations and the potential adverse impact of changing laws and regulations related to cybersecurity or result in theft of the Company's, its customers' or suppliers' intellectual property or confidential information. If any of the foregoing events (or other events related to cybersecurity) occurs, the Company may be subject to a number of consequences, including reputational damage, a diminished competitive advantage and negative impacts on future opportunities which could have a material adverse effect on the Company.
Share Price Fluctuations
The market price of securities of many companies, particularly development stage companies, experience wide fluctuations in price that are not necessarily related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that fluctuations in the Company's share price will not occur. In particular, the fluctuations may be exaggerated if the trading volume of the Company's common shares is low.
Cost Absorption and Purchase Orders
Especially as it relates to its activities in the transportation industry, and given the current trends in that industry, the Company is under continuing pressure to absorb costs related to product design and development, engineering, program management, prototypes and validation. In particular, OEMs are requesting that suppliers pay for the above costs and recover these costs through the piece price of the applicable component. Contract volumes for customer programs not yet in production are based on the Company's customers' estimates of their own future production levels. However, actual production volumes may vary significantly from these estimates due to a reduction in consumer demand or new product launch delays, often without any compensation to the supplier by its OEM customer. Typical purchase orders issued by customers do not require that they purchase a minimum number of the Company's products. For programs currently under production, the Company is generally unable to request price changes when volumes differ significantly from production estimates used during the quotation stage. If estimated production volumes are not achieved, the product development, design, engineering, prototype and validation costs incurred by the Company may not be fully recovered. Similarly, future pricing pressure or volume reductions by the Company's customers may also reduce the amount of amortized costs otherwise recoverable in the piece price of the Company's products. Either of these factors could have an adverse effect on the Company's profitability. While it is generally the case that once the Company receives a purchase order for products of a particular vehicle program it would continue to supply those products until the end of such program, customers could cease to source their production requirements from the Company for a variety of reasons, including the Company's refusal to accept demands for price reductions or other concessions.
Acquisitions
The Company could seek to acquire complementary businesses, assets, technologies, services or products, at competitive prices. The Company could pursue acquisitions in those product areas which were identified as key to the Company's long-term business strategy. However, as a result of intense competition in these strategic areas, the Company may not be able to acquire the targets needed to achieve its strategic objectives. The completion of such transactions poses additional risks to the Company's business. Acquisitions are subject to a range of inherent risks, including the assumption of incremental regulatory/compliance, pricing, supply chain, commodities, labor relations, litigation, environmental, pensions, warranty, recall, IT, tax or other risks. Although the Company seeks to conduct appropriate levels of due diligence on acquisition targets, these efforts may not always prove to be sufficient in identifying all risks and liabilities related to the acquisition, including as a result of: limited access to information; time constraints for conducting due diligence; inability to access target company facilities and/or personnel; or other limitations in the due diligence process. Additionally, the Company may identify risks and liabilities that cannot be sufficiently mitigated through appropriate contractual or other protections. The realization of any such risks could have a material adverse effect on the Company's operations or profitability. The benefit to the Company of previous and future acquisitions is highly dependent on the Company's ability to integrate the acquired businesses and their technologies, employees and products into the Company, and the Company may incur costs associated with integrating and rationalizing the facilities (some of which may need to be closed in the future). The Company cannot be certain that it will successfully integrate acquired businesses or that acquisitions will ultimately benefit the Company. Any failure to successfully integrate businesses or failure of the businesses to benefit the Company could have a material adverse effect on its business and results of operations. Such transactions may also result in additional dilution to the Company's shareholders or increased debt. Such transactions may involve partners, and the formula for determining contractual sale provisions may be subject to a variety of factors that may not be easily quantified or estimated until the time of sale (such as market conditions and determining fair market value).
Launch and Operational Costs
The launch of new business, in an existing or new facility, is a complex process, the success of which depends on a wide range of factors, including the production readiness of the Company and its suppliers, as well as factors related to tooling, equipment, employees, initial product quality and other factors. A failure to successfully launch material new or takeover business could have an adverse effect on profitability. The Company's manufacturing processes are vulnerable to operational problems that can impair its ability to manufacture its products in a timely manner, or which may not be performing at expected levels of profitability. The Company's facilities and proposed facilities contain complex and sophisticated equipment that is used in its manufacturing processes. The Company could experience equipment failure in the future due to wear and tear, design error or operator error, among other things, which could have an adverse effect on profitability. From time to time, the Company may have some operating divisions which are not performing at expected levels of profitability. Significant underperformance of one or more operating divisions could have a material adverse effect on the Company's profitability and operations.
Material and Commodity Prices
Prices for key raw materials and commodities used in the production of graphene-based products, as well as energy prices, have proven to be volatile at certain times. To the extent that the Company is unable to fully mitigate its exposure to price change of key raw materials and commodities, particularly through engineering products with reduced content, by passing price increases to customers, or otherwise, such additional costs could have a material adverse effect on profitability. Increased energy prices could also have an impact on production or transportation costs which in turn could affect competitiveness.
Uninsured Risks
The Company maintains insurance to cover normal business risks. In the course of its manufacturing businesses, certain risks and, in particular, unexpected or unusual catastrophic events including explosions and fire may occur. It is not always possible to fully insure against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the common shares of the Company.
Litigation
The Company has entered into legally binding agreements with various third parties, including supply, license, distribution, non-disclosure, consulting and partnership agreements. The interpretation of the rights and obligations that arise from such agreements is open to interpretation and the Company may disagree with the position taken by the various other parties resulting in a dispute that could potentially initiate litigation and cause the Company to incur legal costs in the future. Given the speculative and unpredictable nature of litigation, the outcome of any such disputes could have a material adverse effect on the Company's business.
Credit risk
As at March 31, 2022, the Company's credit risk was primarily attributable to cash, accounts and other receivables and loan receivable. The Company issued a loan receivable during the year further increasing its exposure to credit risk. Financial instruments included in accounts and other receivables consisted of trade receivables generated through sales as well as recoverable Harmonized Sale Tax. The Company's cash is held with reputable financial institutions. Management believes that the credit risk with respect to financial instruments included in accounts and other receivables is remote.
Interest rate risk
The Company has cash balances at federally regulated Canadian banks. The Company periodically monitors the investments it makes, the security of such investments and is satisfied with the credit ratings of its banks. The Company closely monitors interest rates to determine the appropriate course of action to be taken by the Company.
Price risk
The Company is exposed to price risk with respect to commodity prices. The Company closely monitors commodity prices to determine the appropriate course of action to be taken by the Company.
Financial Capability and Additional Financing
The Company has limited financial resources and there is no assurance that sufficient additional funding will be available to enable it to fulfill its business objectives or obligations, on acceptable terms or at all. Unanticipated expenses and other developments could cause existing funds to be depleted sooner than expected. In the event that its existing cash resources are inadequate to fund operational expenses, and in order to fund the planned business objectives of the Company, the Company will be required to raise additional financing from external sources, such as debt financing, equity financing or joint ventures. The Company's ability to raise additional equity financing may be affected by numerous factors beyond the Company's control, including, but not limited to, adverse market conditions, commodity price changes and an economic downturn. Failure to obtain additional funding on a timely basis could result in delay or indefinite postponement of the development of the Company's business and could cause the Company to reduce or terminate its operations. Additional funds raised by the Company from treasury share issuances may result in significant dilution to existing shareholders, a depressive effect on the price of the common shares and/or a change of control.
Permits and Government Regulation
Although the Company believes it has all of the necessary permits to carry out the proposed business programs, the operations of the Company may require licenses and permits from time to time from various governmental authorities to carry out exploration and development at its projects or locations. Obtaining permits can be a complex, time-consuming process. There can be no assurance that the Company will be able to obtain the necessary licenses and permits on acceptable terms, in a timely manner or at all. The costs and delays associated with obtaining permits and complying with these permits and applicable laws and regulations could stop or materially delay or restrict the Company from continuing or proceeding with existing or future operations or projects. Any failure to comply with permits and applicable laws and regulations, even if inadvertent, could result in the interruption or closure of operations or material fines, penalties or other liabilities. In addition, the requirements applicable to sustain existing permits and licenses may change or become more stringent over time and there is no assurance that the Company will have the resources or expertise to meet its obligations under such licenses and permits.
Fluctuating Prices
The profitability of the Company's operations will be dependent upon the market price of the ZenGUARD™ masks and other products, their global acceptance and demand along with their regulatory approvals in other jurisdictions. The level of interest rates, rate of inflation, production costs, healthcare and consumer demand, and stability of exchange rates can all cause significant fluctuations in revenue. Such external economic factors are in turn influenced by changes in international purchasing patterns, COVID-19 pandemic situation, monetary systems and political developments.
Environmental Regulation
The Company's Albany Graphite Project is subject to environmental laws and regulations which may materially and adversely affect its future operations. These laws and regulations control the exploration and development of the Albany Graphite Project and their effects on the environment, including air and water quality, waste handling and disposal, the protection of different species of plant and animal life, and the preservation of lands. These laws and regulations will require the Company to acquire permits and other authorizations for certain activities. There can be no assurance that the Company will be able to acquire such necessary permits or authorizations on a timely basis, if at all.
Further, environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company's operations.
The Company is not currently insured against most environmental risks. Without such insurance, and if the Company becomes subject to environmental liabilities, the payment of such liabilities would reduce or eliminate its available funds or could exceed the funds the Company has to pay such liabilities and result in bankruptcy.
Economic Dependence on Supply Agreements
Currently, the Company has entered into a limited number of supply or sales agreements for the sale of its products. Until additional supply agreements are executed by the Company, the Company's revenues will be completely dependent on such agreements. If such agreements are terminated, or if less of the Company's product than anticipated is purchased pursuant to such agreements, this could have a material adverse impact on the Company's business, operations and results.
Proposed Transactions
As is typical of rapidly growing companies, the Company is continually reviewing partnerships, potential merger, acquisition, investment and joint venture transactions and opportunities that could enhance shareholder value. At present, there are no proposed asset or business acquisition or disposition transactions being contemplated by management or the board that would affect the financial condition, financial performance and cash flows of the Company.
Employment Agreements
The Company has an employment agreement with its Chief Executive Officer. During the year ended March 31, 2022, the salary level for the individual pursuant to the employment agreement was $200,000 annually.
The Company has an employment agreement with its Executive Chairman. During the year ended March 31, 2022, the salary level for the individual pursuant to the employment agreement was $200,000 annually.
The Company has an employment agreement with its Chief Financial Officer. During the year ended March 31, 2022, the salary level for the individual pursuant to the employment agreement is $120,000 annually.
Contingent Liabilities
In September 2018, the Company received a statement of claim from a former employee. The Company is in the process of defending the claim but views the claim as unmeritorious. On March 24, 2020, the Company commenced an action claim against the former employee for relief relating to contracts and transactions between that employee and the Company, seeking to set aside those agreements and, where applicable, seeking disgorgement of unspecified amounts relating to benefits obtained under those agreements.
Significant Accounting Policies
A detailed summary of all of the Company's significant accounting policies is included in Note 2 to the March 31, 2022 audited annual consolidated financial statements.
Internal Controls over Financial Reporting
Management is responsible for the design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with accounting principles generally accepted in Canada. Based on regular reviews of its internal control procedures during and at the end of the period covered by this MD&A, management has determined that its internal controls and procedures are not effective in providing reasonable assurance that financial information is recorded, processed, summarized and reported in a timely manner due to the identification of material weaknesses in internal control.
Material weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual financial statements will not be prevented or detected on a timely basis. The material weaknesses that we identified in our internal controls over financial reporting as of March 31, 2022, were as follows:
Absence of effective activity-level controls over the purchase, ownership, shipment and recording of inventory.
Successful remediation will require the implementation of controls over the movement of purchased, held and sold inventory and the acquisition and adoption of an appropriate inventory software solution including training of production and accounting staff.
Lack of controls over the accurate recording of period revenue in accordance with International Financial Reporting Standards based on the underlying shipment terms and/or recognition criteria inherent in the contractual arrangements.
We have developed and commenced implementation of a remediation plan to address this weakness by strengthening our revenue recognition and financial reporting controls by adding new and additional resources with adequate technical knowledge and training, including the hiring of a new Chief Financial Officer in May 2022.
Changes to Internal Control over Financial Reporting
There have been no significant changes to the Company's internal controls over financial reporting that occurred during the year ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Disclosure Controls
Management is also responsible for the design and effectiveness of disclosure controls and procedures to provide reasonable assurance that material information related to the Company is made known to the Company's certifying officers. The Company's Chief Executive Officer and Chief Financial Officer have each evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2022 and have concluded that these controls and procedures are effective in providing reasonable assurance that material information relating to the Company is made known to them by others within the Company.
EXHIBIT 99.4
CERTIFICATION
I, Greg Fenton, Chief Executive Officer of Zentek Ltd., certify that;
1. I have reviewed this Annual Report on Form 40-F of Zentek Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2022
| By: | /s/ Greg Fenton |
| Name: Greg Fenton | |
| Title: Chief Executive Officer | |
EXHIBIT 99.5
CERTIFICATION
I, Wendy Ford, Chief Financial Officer of Zentek Ltd., certify that;
1. I have reviewed this Annual Report on Form 40-F of Zentek Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2022
| By: | /s/ Wendy Ford |
| Name: Wendy Ford | |
| Title: Chief Financial Officer | |
EXHIBIT 99.6
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Greg Fenton, Chief Executive Officer of Zentek Ltd. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
a. the Annual Report on Form 40-F of the Company for the fiscal year ended March 31, 2022 (the "Annual Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
b. the information contained in the Annual Report fairly presents in all material respects the financial condition and results of operations of the Company.
Date: June 29, 2022
| By: | |
| /s/ Greg Fenton | |
| Name: Greg Fenton | |
| Title: Chief Executive Officer |
EXHIBIT 99.7
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Wendy Ford, Chief Financial Officer of Zentek Ltd. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
a. the Annual Report on Form 40-F of the Company for the fiscal year ended March 31, 2022 (the "Annual Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
b. the information contained in the Annual Report fairly presents in all material respects the financial condition and results of operations of the Company.
Date: June 29, 2022
| By: | |
| /s/ Wendy Ford | |
| Name: Wendy Ford | |
| Title: Chief Financial Officer |
June 29, 2022
Re: Zentek Ltd.
We consent to the use of our reports to the shareholders of Zentek Ltd. (previously Zen Graphene Solutions Ltd.) (i) dated July 26, 2021 on the financial statements of Zentek Ltd., which comprise the statements of financial position as at March 31, 2021 and 2020, and the statements of loss and comprehensive loss, statements of cash flows and statements of changes in equity for the years then ended, and notes to the financial statements, including a summary of significant accounting policies and (ii) dated July 24, 2020 on the financial statements of Zentek Ltd., which comprise the statements of financial position as at March 31, 2020 and 2019, and the statements of loss and comprehensive loss, statements of cash flows and statements of changes in equity for the years then ended, and notes to the financial statements, including a summary of significant accounting policies, in the Annual Report on Form 40-F for the year ended March 31, 2022 to be filed by Zentek Ltd., with the Securities and Exchange Commission on EDGAR on June 29, 2022.
McGovern Hurley LLP
Chartered Professional Accountants
Licensed Public Accountants
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Tel: (604) 688-5421 |
BDO Canada LLP |
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Fax: (604) 688-5132 |
1100 Royal Centre |
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www.bdo.ca |
1055 West Georgia Street |
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Vancouver, BC |
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V6E 3P3 |
Exhibit 99.9
Consent of Independent Registered Public Accounting Firm
We hereby consent to the use of our report dated June 29, 2022 on the consolidated financial statements of Zentek Ltd. (formerly Zen Graphene Solutions Ltd.) ("the Company") for the year ended March 31, 2022 included in this annual report on Form 40-F.
/s/ BDO Canada LLP
BDO Canada LLP
Vancouver, British Columbia
June 29, 2022
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.