ZENTEK LTD. CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - Form 6-K

ZENTEK LTD.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended June 30, 2022 and 2021

(Unaudited)

(Expressed in Canadian Dollars)

ZENTEK LTD.

JUNE 30, 2022 AND 2021	PAGE
Unaudited Condensed Interim Consolidated Statements of Financial Position	1
Unaudited Condensed Interim Consolidated Statements of Loss and Comprehensive Loss	2
Unaudited Condensed Interim Consolidated Statements of Cash Flows	3
Unaudited Condensed Interim Consolidated Statements of Changes in Equity	4
Notes to the Unaudited Condensed Interim Consolidated Financial Statements	5-15

		June 30,			March 31,
		2022			2022
(Stated in Canadian Dollars)		$			$
ASSETS
Current assets		22,587,378
Cash and cash equivalents [note 11]					26,675,000
Accounts and other receivables [note 3]		513,072			656,164
Loan receivable [note 4]		2,950,000			2,950,000
Inventories [note 5]		1,176,463			665,572
Prepaids and deposits [note 5]		1,333,785			1,012,363
Total current assets		28,560,698			31,959,099
Non-current assets
Property and equipment [note 6]		6,737,424			6,025,421
Total assets		35,298,122			37,984,520
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities [note 8]		2,498,126			1,204,587
Current portion of lease liability		156,972			149,317
Current portion of long-term debt [note 9]		962,743			950,930
Total current liabilities		3,617,841			2,304,834
Non-current liabilities
Lease liability		90,386			132,555
Long-term debt [note 9]		752,909			998,070
Total non-current liabilities		843,295			1,130,625
Total liabilities		4,461,136			3,435,459
SHAREHOLDERS' EQUITY
Share capital [note 10(a)]		85,563,116			85,494,266
Share-based payment reserve [note 10(c)]		9,014,818			7,761,541
Shares to be issued [note 7(a)]		472,500			472,500
Deficit		(64,213,448	)		(59,179,246	)
Total shareholders' equity		30,836,986			34,549,061
Total shareholders' equity and liabilities		35,298,122			37,984,520

Nature of Business [note 1]
Commitments and Contingencies [note 13]

Subsequent Events [note 17]

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

These consolidated financial statements were authorised for issue by the Board of Directors on August 4, 2022.

Approved on behalf of the Board of Directors:

"Eric Wallman"	, Director
"Ilse Treurnicht"	, Director

		Three			Three
		Months			Months
		Ended			Ended
		June 30,			June 30,
		2022			2021
(Stated in Canadian Dollars)		$			$
REVENUE
Sales		33,105			-
Other income		15,000			-
		48,105			-
EXPENSES
Amortisation [note 6]		155,700			71,551
Consulting fees [note 12]		579,481			172,400
Investor relations and promotion		40,425			70,332
Listing and filing fees		136,271			19,776
Professional fees		489,235			223,885
Rent		31,630			31,230
Research and development		674,107			-
Salaries and benefits [note 12]		844,114			329,738
Stock-based compensation [notes 10(c) and 12]		1,276,127			821,850
Supplies and materials		542,491			54,873
Other expenses [note 16]		331,802			100,773
		5,101,383			1,896,408
Loss from continuing operations		(5,053,278	)		(1,896,408	)
Interest and other income		58,074			10,601
Interest expense		(38,998	)		(19,913	)
Premium on flow-through shares		-			267
Government grants [note 15]		-			45,914
Total other items		19,076			36,869
Net and comprehensive loss for the period		(5,034,202	)		(1,859,539	)
Basic and diluted net loss per share [note 14]		0.05			0.02

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

		Three			Three
		Months			Months
		Ended			Ended
		June 30,			June 30,
(Stated in Canadian Dollars)		2022			2021
	$			$
OPERATING ACTIVITIES
Loss for the period		(5,034,202	)		(1,859,539	)
Items not affecting cash
Amortisation [note 6]		155,700			71,551
Premium on flow-through shares		-			(267	)
Stock-based compensation [note 10(c)]		1,276,127			821,850
		(3,602,375	)		(966,405	)
Net change in non-cash working capital balances [note 11]		604,318			(29,211	)
Cash flows used in continuing operating activities		(2,998,057	)		(995,616	)
INVESTING ACTIVITIES
Purchase of property and equipment [note 6]		(867,703	)		(243,409	)
Cash flows used in continuing investing activities		(867,703	)		(243,409	)
Cash flows used in discontinued investing activities [note 7]		-			(316,698	)
FINANCING ACTIVITIES
Payments on lease liability		(34,514	)		(28,237	)
Payments on long-term debt		(233,348	)		-
Proceeds from stock options exercised [note 10(a)]		46,000			264,800
Proceeds from warrants exercised [note 10(a)]		-			441,317
Units issued [note 10(a)]		-			4,337,998
Unit issue costs [note 10(a)]		-			(63,364	)
Unit subscriber deposits		-			(2,008,728	)
Cash flows (used in) from continuing financing activities		(221,862	)		2,943,786
Change in cash and cash equivalents during the period		(4,087,622	)		1,388,063
Cash and cash equivalents, beginning of period		26,675,000			3,091,549
Cash and cash equivalents, end of period		22,587,378			4,479,612

Supplementary disclosures - see note 11

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

											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, 2021		86,199,849			43,801,952			407,264			3,270,399			472,500			(20,489,827	)		27,462,288
Issuance of units [note 10(a)]		1,735,199			3,589,111			748,887			-			-			-			4,337,998
Unit issue costs		15,592			(44,850	)		(18,514	)		-			-			-			(63,364	)
Stock options exercised [note 10(a)]		390,000			467,200			-			(202,400	)		-			-			264,800
Warrants exercised [note 10(a)]		606,557			505,298			(63,981	)		-			-			-			441,317
Recognition of stock-based compensation [note 10(c)]		-			-			-			869,719			-			-			869,719
Net loss and comprehensive loss for the period		-			-			-			-			-			(1,859,539	)		(1,859,539	)
Balance as at June 30, 2021		88,947,197			48,318,711			1,073,656			3,937,718			472,500			(22,349,366	)		31,453,219
Balance as at March 31, 2022		99,248,058			85,494,266			-			7,761,541			472,500			(59,179,246	)		34,549,061
Stock options exercised [note 10(a)]		115,000			68,850			-			(22,850	)		-			-			46,000
Recognition of stock-based compensation [note 10(c)]		-			-			-			1,276,127			-			-			1,276,127
Net loss and comprehensive loss for the period		-			-			-			-			-			(5,034,202	)		(5,034,202	)
Balance as at June 30, 2022		99,363,058			85,563,116			-			9,014,818			472,500			(64,213,448	)		30,836,986

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

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

1.NATURE OF BUSINESS

Zentek Ltd. (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 unaudited condensed interim consolidated financial statements of the Company for the three months ended June 30, 2022 were approved and authorised for issue by the Board of Directors on August 4, 2022.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

2.BASIS OF PRESENTATION

These unaudited condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and have been condensed with certain disclosures from the Company's audited consolidated financial statements for the year ended March 31, 2022 (the "Annual Financial Statements") omitted. Accordingly, these unaudited condensed interim consolidated financial statements should be read in conjunction with the Annual Financial Statements.

a)Changes in accounting policies

The accounting policies applied in the preparation of these unaudited condensed interim consolidated financial statements are consistent with those applied and disclosed in the Company's audited consolidated financial statements for the year ended March 31, 2022.

b)Future changes in accounting standards

Certain new accounting standards and interpretations have been published that are not mandatory for the current period and have not been early adopted. Management is still evaluating and does not expect any such pronouncements to have a material impact on the Company's consolidated financial statements upon adoption.

c)Significant judgments

In preparing the Company's unaudited condensed interim consolidated financial statements for the three months ended June 30, 2022, the Company applied the critical judgments and estimates disclosed in Note 3 of its audited consolidated financial statements for the year ended March 31, 2022.

3.ACCOUNTS AND OTHER RECEIVABLES

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

4.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 properties held by the borrower. The original maturity date was July 1, 2022 with the borrower having the option to extend the maturity date for an additional three months at an interest rate of 8% per annum, calculated and payable monthly. Subsequent to June 30, 2022, the loan terms are being renegotiated. The Company performed an analysis of collectivity and based on the collateral against the loan, determined that no provision was required. A continuity of the loan principal and interest balances is presented below:

5.INVENTORIES

Included in prepaids and deposits are $314,959 (March 31, 2022: $855,415) of prepayments made for inventory to be delivered subsequent to period end. A continuity of prepaid inventory is presented below:

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

6.PROPERTY AND EQUIPMENT

The following is a reconciliation of changes in the balances of property and equipment for the three month period ended June 30, 2022.

The following is a reconciliation of changes in the balances of property and equipment for the three month period ended June 30, 2021.

The Company's property and equipment includes an asset under construction in the amount of $2,849,519 related to costs incurred for the design and development of a silver-graphene oxide pilot plant. No amortisation has been recorded on this asset as it is not yet available for use.

The Company's right-of-use 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.

7.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.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

7.EXPLORATION AND EVALUATION PROPERTY (continued)

Albany Property

As a result of the Company's change in business during the year ended March 31, 2022, 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 ended March 31, 2022 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.

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.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

8.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

9.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.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

10.SHARE CAPITAL

(a)Share Capital

The Company is authorised to issue an unlimited number of common shares, with no par value.

During the three months ended June 30, 2022, the Company issued 115,000 common shares in connection with the exercise of options (2021: 390,000 common shares).

During the three months ended June 30, 2022, the Company issued nil common shares in connection with the exercise of warrants (2021: 606,557 common shares).

During the three months ended June 30, 2022, the Company issued nil common shares in connection with a private placement (2021: 1,735,199 common shares).

(b)Share Purchase Warrants

The Company had no share purchase warrants outstanding as of June 30, 2022 and March 31, 2022.

The following is a summary of warrants activity for the three month period ended June 30, 2022 and for the year ended March 31, 2022:

(c)Stock Options and Share-Based Payment Reserve

During the three months ended June 30, 2022, the Company issued 200,000 stock options to an employee at an exercise price of $2.59.

During the three months ended June 30, 2021, the Company issued 250,000 stock options to a number of employees and consultants at exercise prices ranging from $1.76 to $3.50.

A summary of the inputs used to value the options issued during the three months ended June 30 is presented below:

The Company's computation of expected volatility for the three months ended June 30, 2022 and 2021 is based on the Company's market close price over a prior period equal to the expected life of the options.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

10.SHARE CAPITAL (continued)

(c)Stock Options and Share-Based Payment Reserve (continued)

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:

Stock option and share-based payment activity for the periods ended June 30, 2022 and March 31, 2022 are summarised as follows:

At June 30, 2022, outstanding options to acquire common shares of the Company were as follows:

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

11.SUPPLEMENTAL DISCLOSURES ON STATEMENTS OF CASH FLOWS

Changes in non-cash working capital balances consist of:

12.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 three months ended June 30, 2022 and 2021 were as follows:

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

13.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.

14.NET LOSS PER SHARE

Basic net 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 three months ended June 30, 2022 is 99,298,388 (2021: 88,086,633). Diluted net 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 net loss per share calculations, and therefore diluted net loss per share is equal to basic net 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 net loss per share was 8,727,334 (June 30, 2021: 10,536,673).

15.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.

(Stated in Canadian Dollars) FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021

16.OTHER EXPENSES

17.SUBSEQUENT EVENTS

On July 4, 2022, the Company issued 250,000 stock options to a director with an exercise price of $2.44 per share. The options granted expire on July 4, 2027 and have a vesting period as follows: 1/3 at July 4, 2022; 1/3 at July 4, 2023; 1/3 at July 4, 2024.

In late July 2022, the Company was informed that one of its debtors had entered into receivership. Management will assert ownership rights over the Company's property as appropriate. Management expects no material loss, if any, from this receivership.

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