Exhibit 99.2





























NextSource Materials Inc.





Consolidated Financial Statements





For the
years ended June 30, 2020 and June 30, 2019





Expressed
in US Dollars
































1








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and Shareholders of NextSource Materials
Inc.,





Opinion on the Consolidated Financial Statements





We have
audited the accompanying consolidated statements of financial
position of NextSource Materials Inc. (the Company) as of June 30,
2020 and 2019, and the related consolidated statements of
operations and comprehensive loss, changes in shareholders’
equity, and cash flows for each of the years in the three year
period ended June 30, 2020 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 consolidated financial position of the
Company as of June 30, 2020 and 2019, and the results of its
consolidated operations and its consolidated cash flows for each of
the years in the three year period ended June 30, 2020, in
conformity with International Financial Reporting Standards as
issued by the International Accounting Standards
Board.





Material Uncertainty Related to Going Concern





The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has suffered accumulated deficit, recurring net losses and
negative operating cash flows that raise substantial doubt about
its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.





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 audits. 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 audits 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 audits, 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
audits 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 audits 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
audits provide a reasonable basis for our opinion.





Chartered Professional Accountants
Licensed Public AccountantsWe have
served as the Company’s auditor since 2012.Mississauga,
OntarioSeptember
22, 2020





2


NextSource Materials Inc.


Consolidated Statements of Financial Position





Expressed in US Dollars


June
30,
June
30,2020
2019AssetsCurrent
Assets:Cash and cash
equivalents (note 4)
$222,305
$529,331Amounts
receivable
7,539
33,640Prepaid expenses
(note 16)
25,484
50,432Total
Current Assets
255,328
613,403Plant and Equipment
(Note 7)
18,111
-Total
Assets
$273,439
$613,403LiabilitiesCurrent
Liabilities:Accounts payable
(note 16)
$323,876
$109,020Accrued liabilities
(note 16)
370,449
654,999Share subscriptions
(note 19)
68,411
-Short term debt
(note 17)
22,115
-Provision (note
13)
174,418
180,652Fair value of
warrant liability (note 12)
208,768
334,618Current portion of
lease obligations (note 8)
5,339
-Total
Current Liabilities
1,173,376
1,279,289Lease obligations
(note 8)
10,679
-Total
Liabilities
1,184,055
1,279,289Shareholders’
DeficitShare capital (note
9)
103,901,775
103,172,066Accumulated
deficit
(104,933,066)
(103,955,431)Accumulated other
comprehensive income
120,675
117,479Total
Shareholders’ Deficit
(910,616)
(665,886)Total
Liabilities and Shareholders’ Deficit
$273,439
$613,403





The accompanying notes are an integral part of these consolidated
financial statements.





Nature
of Operations and Going Concern (note 1)


Mineral
Exploration Properties (note 3)


Subsequent
Events (note 19)


3





NextSource Materials Inc.


Consolidated Statements of Operations and Comprehensive
Loss





Expressed in US Dollars


For the year
ended
For the year
ended
For the year
endedJune 30,
2020
June 30,
2019
(note
2)
June 30,
2018
(note
2)Revenues
$-
$-
$-Expenses
and other incomeExploration and
evaluation expenses (notes 3, 4, 5)
160,064
238,758
371,755Payroll and
benefits (note 16)
436,337
459,553
458,932Management fees
(note 16)
331,682
368,345
381,713Professional and
legal fees (note 6)
124,741
351,077
542,280Consulting
fees
91,671
852,049
522,341Public filing
expenses
72,137
87,093
105,461Travel
expenses
54,456
153,001
174,011Investor relation
expenses
22,993
49,711
86,946Insurance
expenses
22,624
18,315
12,491Rent
expenses
19,111
34,303
23,686Information
technology expenses
9,695
8,000
18,947Telecommunications
2,952
1,301
1General and
administrative expenses
6,677
11,748
5,639Bank
fees
4,313
3,655
5,300Amortization of
plant and equipment
6,053
-
-Foreign currency
translation (gain) loss
3,552
(4,565)
104,387Interest
expense
2,098
-
-Foreign
taxes
772
-
-Government
assistance (note 17)
(7,353)
-
-Change in value of
warrant liability (note 12)
(386,940)
(73,532)
-Share based
compensation
-
651,692
-Impairment (note
7)
-
-
27,805Reversal of
impairment of amount receivable
-
-
(45,132)Part XII.6 taxes
(note 13)
-
-
(11,741)Net
loss for the year
(977,635)
(3,210,504)
(2,784,822)Other comprehensive incomeItems that will be reclassified subsequently to lossTranslation
adjustment for foreign operations
3,196
41,713
75,766Net
loss and comprehensive loss for the year
(974,439)
(3,168,791)
(2,709,056)Weighted-average
common shares,
527,206,058
493,586,450
468,252,639-         
basic and dilutedNet loss per common
shares,
(0.00)
(0.01)
(0.01)-         
basic and diluted





The accompanying notes are an integral part of these consolidated
financial statements.


4


NextSource Materials Inc.


Consolidated Statements of Cash Flows





Expressed in US Dollars


For the year
ended
For the year
ended
For the year
endedJune 30,
2020
June 30,
2019
June 30,
2018Cash
flows from operating activitiesNet
loss for the year
$(977,635)
$(3,210,504)
$(2,784,822)Items not affecting
cash:Amortization and
impairment
6,053
-
27,805Change in value of
warrant derivative liability
(386,940)
(73,532)
-Change in value of
lease liability
(3,337)
-
-Government
assistance
(7,373)
-
-Shared based
compensation
-
651,692
-Change in working
capital balances:Decrease (increase)
in amounts receivable and prepaid expenses
51,049
(28,291)
22,756(Decrease) increase
in accounts payable and accrued liabilities
(69,693)
425,320
111,311Decrease in
provision
(6,234)
-
(2,231)Increase in share
subscriptions
68,411
-
-Net cash used in
operating activities
(1,325,698)
(2,235,315)
(2,625,181)Cash
flows from financing activitiesProceeds from short
term debt
29,486
-
-Lease liability
principal payment
(4,810)
-
-Proceeds from
issuance of common shares
998,620
2,444,015
-Proceeds from
exercise of warrants
-
-
923,169Common share issue
cost finder shares
-
17,966
-Common share issue
costs
(7,821)
(77,750)
-Net cash provided
by financing activities
1,015,475
2,384,231
923,169Effect of exchange
rate changes on cash
3,196
41,713
75,766(Decrease) increase
in cash and cash equivalents
(307,026)
190,629
(1,626,246)Cash and cash
equivalents - beginning of year
529,331
338,702
1,964,948Cash
and cash equivalents - end of year
$222,305
$529,331
$338,702


The accompanying notes are an integral part of these consolidated
financial statements.








5


NextSource Materials Inc.


Consolidated Statements of Changes in Shareholders’
Equity





Expressed in US Dollars


Shares
Share Capital
Accumulated Deficit
Accumulated Other Comprehensive Income
Total Deficit#
$
$
$
$Balance
– June 30, 2018
469,933,611
100,544,293
(100,744,927)
75,766
(124,868)Private
placement of common shares
37,145,696
2,444,015


2,444,015Reclassification
as warrant liability

(408,150)


(408,150)Cost
of issue of private placement of common shares

(77,750)


(77,750)Cost
of issue finder shares
337,714
17,966


17,966Share-based
compensation

651,692


651,692Net
loss for the year


(3,210,504)

(3,210,504)Cumulative
translation adjustment



41,713
41,713Balance
– June 30, 2019
507,417,021
103,172,066
(103,955,431)
117,479
(665,886)Private
placement of common shares
29,077,768
998,620


998,620Reclassification
as warrant liability

(261,090)


(261,090)Cost
of issue of private placement of common shares

(7,821)


(7,821)Net
loss for the year


(977,635)

(977,635)Cumulative
translation adjustment



3,196
3,196Balance
– June 30, 2020
536,494,789
103,901,775
(104,933,066)
120,675
(910,616)





The accompanying notes are an integral part of these consolidated
financial statements.


6
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





1.
 Nature
of Operations and Going Concern





NextSource
Materials Inc. (the "Company" or “NextSource”) is
incorporated under the laws of Canada and has a fiscal year end of
June 30. The Company's registered head office and primary location
of records is 130 King Street West, Exchange Tower Suite 1940,
Toronto, Ontario, Canada, M5X 2A2.





The
Company's principal business is the acquisition, exploration and
development of mineral resources. The Company has yet to generate
any revenue from mining operations. The Company has yet to pay
dividends and is unlikely to do so in the immediate or foreseeable
future.





The
Company, through a wholly owned foreign subsidiary, obtained a
mining permit and environmental certificate for its Molo Graphite
Project in Madagascar.





In
March 2020 the World Health Organization declared coronavirus
COVID-19 a global pandemic. This contagious disease outbreak, which
has continued to spread, and any related adverse public health
developments, has adversely affected workforces, economies, and
financial markets globally, potentially leading to further economic
downturn. It is not possible for the Company to predict the
duration or magnitude of the adverse results of the outbreak and
its effects on the Company’s business or results of
operations at this time. The impact of COVID-19 on the Company has
been limited since no exploration or development work was ongoing
at the start of the pandemic. The Company was already setup to
operate and communicate remotely through the internet although
certain of our overseas staff and contractors have been indirectly
impacted by intermittent COVID-19 lockdowns in Madagascar and in
South Africa.





These
consolidated financial statements were approved by the Board of
Directors on September 22, 2020.





Corporate Redomicile





The
Company completed a corporate redomicile from the State of
Minnesota to Canada on December 27, 2017.





Corporate Structure





NextSource
owns 100% of NextSource Materials (Mauritius) Ltd.
(“MATMAU”), a Mauritius subsidiary, and 2391938 Ontario
Inc., an Ontario Company.





MATMAU
owns 100% of NextSource Minerals (Mauritius) Ltd.
(“MINMAU”), a Mauritius subsidiary, NextSource Graphite
(Mauritius) Ltd (“GRAMAU”), a Mauritius subsidiary, and
NextSource Materials (Madagascar) SARLU (“MATMAD”), a
Madagascar subsidiary.





MINMAU
owns 100% of NextSource Minerals (Madagascar) SARLU
(“MINMAD”), a Madagascar subsidiary. MINMAD holds the
Green Giant Vanadium Project exploration permits.





GRAMAU
owns 100% of ERG Madagascar SARLU (“GRAMAD”), a
Madagascar subsidiary. GRAMAD holds the Molo Graphite Project
mining and exploration permits.





Going Concern Assumption





The
accompanying consolidated financial statements have been prepared
on the basis of a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of
business.





As of
June 30, 2020, the Company had an accumulated deficit of
$104,933,066 (June 30, 2019:
$103,955,431) has experienced
recurring net losses and has negative operating cash flows. As
such, conditions exist that may raise substantial doubt regarding
the Company's ability to continue as a going concern. In assessing
whether the going concern assumption is appropriate, management
considers all available information about the future, which is at
least, but not limited to, twelve months from the end of the
reporting period. The Company's ability to continue operations and
fund its exploration and development expenditures is dependent on
management's ability to secure additional financing. Management is
actively pursuing such additional sources of financing, and while
it has been successful in doing so in the past, there can be no
assurance it will be able to do so in the future. The Company has
obtained a mining permit for the Molo Graphite project but has not
secured all supporting permits and has not secured sufficient
financing to begin construction. The Company has not commenced
commercial operation of a mine. These conditions may raise
substantial doubt about the Company’s ability to continue as
a going concern.





These
consolidated financial statements do not give effect to adjustments
that would be necessary should the Company be unable to continue as
a going concern and therefore need to realize its assets and
liquidate its liabilities and commitments in other than the normal
course of business and at amounts different from those in the
accompanying consolidated financial statements.


7
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies





Statement of compliance with IFRS





These
consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards
(“IFRS”) issued by International Accounting Standards
Board (“IASB”).





Basis of measurement





These
consolidated financial statements have been prepared under the
historical cost basis except for certain financial instruments that
are measured at fair values, as explained in the accounting
policies below.





Basis of consolidation





These
consolidated financial statements include the financial position,
results of operations and cash flows of the Company and its wholly
owned subsidiaries. Intercompany balances, transactions, income and
expenses, profits and losses, including gains and losses relating
to subsidiaries have been eliminated on consolidation.





Significant accounting estimates, judgments and
assumptions





To
prepare consolidated financial statements in conformity with IFRS,
the Company must make estimates, judgements and assumptions
concerning the future that affect the carrying values of assets and
liabilities as of the date of the financial statements and the
reported values of revenues and expenses during the reporting
period. By their nature, these are uncertain and actual outcomes
could differ from the estimates, judgments and
assumptions.





The
impacts of such estimates are pervasive throughout the consolidated
financial statements and may require accounting adjustments based
on future occurrences. Revisions to accounting estimates are
recognized in the period in which the estimate is revised and also
in future periods when the revision affects both current and future
periods. Significant accounting judgments, estimates and
assumptions are reviewed on an ongoing basis.





Significant
assumptions about the future and other sources of estimation
uncertainty that management has made at the end of the reporting
period, that could have an effect on the amounts recognized in the
consolidated financial statements relate to the
following:





Going concern: The preparation of the consolidated financial
statements requires management to make judgments regarding the
ability to continue as a going concern.





Share-based compensation: Estimating fair value for granted
stock options requires determining the most appropriate valuation
model which is dependent on the terms and conditions of the grant.
This estimate also requires determining the most appropriate inputs
to the valuation model including the expected life of the option,
volatility, dividend yield, and rate of forfeitures and making
assumptions about them. The value of the share-based payment
expense along with the assumptions and model used for estimating
fair value for share-based compensation transactions are disclosed
in Note 10.





Derivative warrant liability: The Company measures the fair
value of the derivative liability using an option pricing model.
This estimate requires determining the most appropriate inputs to
the valuation model including the expected life of the warrant,
volatility, dividend yield, and rate of forfeitures and making
assumptions about them. The value of the warrant liability along
with the assumptions and model used for estimating fair value are
disclosed in Note 12.





Flow-Through Provision Estimates: The estimation of the
value of the provision for the Part XII.6 taxes for the
indemnification liability to subscribers of the flow-through shares
issued in fiscal 2014 for the additional taxes payable to such
subscribers related to the CEE renunciation shortfall that occurred
in fiscal 2015 is based on applying a blended tax rate of
approximately 35% against the CEE renunciation shortfall. The
assumptions and calculations used for estimating the value
attributed to the flow-through provision are disclosed in Note
13.


8
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars


2.
 Significant
Accounting Policies (continued)





Significant accounting estimates, judgments and assumptions -
continued





Deferred taxes: The estimation of income taxes includes
evaluating the recoverability of deferred tax assets based on an
assessment of the Company’s ability to utilize the underlying
future tax deductions against future taxable income prior to expiry
of those deductions. Management assesses whether it is probable
that some or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income, which in turn is dependent
upon the successful discovery, extraction, development and
commercialization of mineral reserves. To the extent that
management’s assessment of the Company’s ability to
utilize future tax deductions changes, the Company would be
required to recognize more or fewer deferred tax assets, and
deferred tax provisions or recoveries could be
affected.





Cash equivalents





The
Company considers cash equivalents to be cash and highly liquid
investments with original maturities of three months or
less.





Prepayments and deposits





The
Company makes prepayments and deposits to suppliers of services.
These are recognized as prepayments when made and recognized as
expenses when received. Prepayments and deposits on assets that are
long term in nature are recorded as long-term prepayments and
deposits.





Financial instruments





Under
IFRS 9, financial assets are classified and measured either at
amortized cost, fair value through other comprehensive income
(“FVOCI”) or fair value through profit or loss
(“FVTPL”) based on the business model in which they are
held and the characteristics of their contractual cash
flows.





All
financial assets not classified at amortized cost or FVOCI are
measured at FVTPL. Upon initial recognition, the Company can
irrevocably designate a financial asset at FVTPL if doing so
eliminates or significantly reduces an accounting
mismatch.





A
financial asset is measured at amortized cost if it meets both of
the following conditions and is not designated at
FVTPL:


●
 It is held within a
business model whose objective is to hold the financial asset to
collect the contractual cash flows associated with the financial
asset instead of selling the financial asset for a profit or
loss;


●
 Its contractual
terms give rise to cash flows that are solely payments of principal
and interest.





All
financial instruments are initially recognized at fair value on the
consolidated statement of financial position. Subsequent
measurement of financial instruments is based on their
classification. Financial assets and liabilities classified at
FVTPL are measured at fair value with changes in those fair values
recognized in the consolidated statement of operations and
comprehensive loss for the period. Financial assets classified at
amortized cost and financial liabilities are measured at amortized
cost using the effective interest method.





Financial assets





Financial assets
are classified as either financial assets at FVTPL, amortized cost,
or FVTOCI. The Company determines the classification of its
financial assets at initial recognition.





i.
Financial assets recorded at FVTPL





Financial assets
are classified as FVTPL if they do not meet the criteria of
amortized cost or FVTOCI. Gains or losses on these items are
recognized in profit or loss.





ii.
Amortized cost





Financial assets
classified as amortized cost are non-derivative financial assets
with fixed or determinable payments that are not quoted in an
active market. They are carried at amortized cost less any
provision for impairment. Individually significant receivables are
considered for impairment when they are past due or when other
objective evidence is received that a specific counterparty will
default.





The
Company’s cash and cash equivalents and amounts receivable
(excluding HST) are classified as financial assets measured at
amortized cost.








9
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies (continued)





Financial instruments (continued)





iii.
Financial assets recorded at FVTOCI





Financial assets
are recorded at FVTOCI when the change in fair value is
attributable to changes in the Company’s credit
risk.





Financial liabilities





Financial
liabilities are classified as either financial liabilities at FVTPL
or at amortized cost. The Company determines the classification of
its financial liabilities at initial recognition.





i.
Amortized cost





Financial
liabilities are measured at amortized cost, including borrowings,
are initially measured at fair value, net of transaction costs.
They are subsequently measured at amortized cost using the
effective interest method, with interest recognized on an effective
yield basis.





The
effective interest method is a method of calculating the amortized
cost of a financial liability and of allocating interest costs over
the relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash payments through the
expected life of the financial liability or to the next carrying
amount or initial recognition.





The
Company’s accounts payable, accrued liabilities, short-term
loan, lease obligations and provision do not satisfy any of the
exemptions and are therefore classified as measured at amortized
cost.





ii.
Financial liabilities recorded FVTPL





Financial
liabilities are classified as FVTPL if they do not fall into
amortized cost as detailed above.





The
Company’s warrant liability are classified as measured at
FVTPL.





Transaction costs





Transaction costs
associated with financial instruments, carried at FVTPL, are
expensed as incurred, while transaction costs associated with all
other financial instruments are included in the initial carrying
amount of the asset or the liability.





Subsequent measurement





Instruments
classified as FVTPL are measured at fair value with unrealized
gains and losses recognized in profit or loss. Instruments
classified as amortized cost are measured at amortized cost using
the effective interest rate method. Instruments classified as FVOCI
are measured at fair value with unrealized gains and losses
recognized in other comprehensive loss.





Derecognition





The
Company derecognizes financial liabilities only when its
obligations under the financial liabilities are discharged,
cancelled, or expired. The difference between the carrying amount
of the financial liability derecognized and the consideration paid
and payable, including any non-cash assets transferred or
liabilities assumed, is recognized in profit or loss.





Expected credit loss impairment model





The
expected credit loss impairment model is based on changes in credit
quality since initial application. Financial assets not measured at
FVTPL are assessed for indicators of impairment at the end of each
reporting period. Financial assets are impaired when there is
objective evidence that, as a result of one or more events that
occurred after initial recognition of the financial assets, the
estimated future cash flows of the financial asset has been
negatively impacted.





The
carrying amount of a financial asset is written off (either
partially or in full) to the extent that there is no realistic
prospect of recovery. This is generally the case when the Company
determines that the debtor does not have assets or sources of
income that could generate sufficient cash flows to repay the
amounts subject to the write-off.





10
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies (continued)





Financial instruments (continued)





Financial instruments recorded at fair value:





Financial
instruments recorded at fair value on the consolidated statements
of financial position are classified using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following
levels:





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


●
 Level 2 - valuation
techniques based on 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 - valuation
techniques using inputs for the asset or liability that are not
based on observable market data (unobservable inputs).





As of
June 30, 2020, and 2019, except for the warrant liability –
which is a Level 3 financial instrument (see Note 12) - none of the
Company’s financial instruments are recorded at fair value in
the consolidated statements of financial position.





Reclassification of prior year expenditures





For the
year ending June 30, 2020, the Company expanded the expenditure
classifications on the Statement of Operations and Comprehensive
Loss resulting in changes to the presentation of prior year
expenditures for comparative purposes, whereby certain expenditures
for the years ending June 30, 2019 and June 30, 2018 that were
previously included in exploration and evaluation expenses,
management and professional fees, and general and administrative
expenses have been reclassified into other expenditures
classifications.





Exploration and evaluation expenditures





Exploration
and evaluation expenses include all costs relating to mineral
property acquisition costs, exploration camp operating costs, local
payroll and consultants in Madagascar and Mauritius, directly
attributable overhead, exploration permits and licenses, technical
services, exploration drilling, seismic, geological, geophysical
and metallurgical studies, testing and sampling.





Once a
mineral project has been established as being technically feasible
and commercially viable, the related development expenditures are
capitalized. This includes costs incurred in preparing the site for
mining operations. Assessing commercial viability requires
management to make certain judgments as to future events and
circumstances, in particular whether an economically viable
operation can be established. Any such judgments may change as new
information becomes available. If after having capitalized the
expenditure, a decision is made that recovery of the expenditure is
unlikely, the amount capitalized is recognized in cost of sales in
the consolidated statements of operations and comprehensive
loss.





Capitalization
of development expenditures ceases when the mine is capable of
commercial production, with the exception of development costs that
give rise to a future benefit.





Plant and Equipment





Plant
and equipment are stated at cost less accumulated depreciation and
any impairment losses. Equipment is depreciated using the
straight-line method based on estimated useful lives, once the
assets are available for use. The estimated useful lives, residual
values and depreciation method are reviewed at each reporting
period, with the effect of any changes in estimates accounted for
on a prospective basis. The useful lives of the equipment are as
follows:





● 
Exploration vehicles and equipment     3 to 5
years


●  Right
of use
asset                                 
4 years





The
carrying values of equipment are reviewed for impairment at each
reporting period and when events or changes in circumstances
indicate that the carrying values may not be recoverable. Gains and
losses on disposals are determined by comparing net proceeds with
carrying amounts.








11
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies (continued)





Provisions





Provisions
are recognized when the Company has a present obligation (legal or
constructive) as a result of a past event, it is probable that an
outflow of resources will be required to settle the obligation and
a reliable estimate can be made of the amount of the obligation.
Where appropriate, the future cash flow estimates are adjusted to
reflect risks specific to the obligation. If the effect of the time
value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that
reflects current market assessments of the time value of money.
Where discounting is used, the increase in the provision due to the
passage of time is recognized as financing expense. A contingent
liability is disclosed where the existence of an obligation will
only be confirmed by future events or where the amount of the
obligation cannot be measured with reasonable reliability.
Contingent assets are not recognized but are disclosed where an
inflow of economic benefits is probable.





Warrant liabilities





The
Company issued share purchase warrants with an exercise price
denominated in a currency other than its functional currency. As a
result, the warrants are no longer considered solely indexed to the
Company’s common shares and are classified as financial
liabilities and recorded at the estimated fair value at each
reporting date using Level 3 inputs on the financial instrument
hierarchy. The Company records the change in fair value of the
warrant liability as a component of other income and expense on the
statement of operations and comprehensive loss.





Environmental rehabilitation and asset retirement
obligations





An
obligation to incur restoration, rehabilitation and environmental
costs arises when environmental disturbance is caused by the
exploration, development or ongoing production of a mineral
property interest. Such costs arising for the decommissioning of
plant and other site preparation work, discounted to their net
present value, are provided for and charged to expenses as an
exploration cost, 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. The
related liability is adjusted 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.





The
Company’s operations are subject to environmental regulations
in Madagascar. As at the date of these financial statements, the
Company did not have any environmental rehabilitation obligations
and had no asset retirement obligations.





Share-based compensation





The
Company operates a stock option plan, which measures equity-settled
share-based payments to eligible participants at the fair value of
the equity instruments at the grant date. Eligible participants are
the Company’s directors, officers, employees and consultants.
Broker warrants may also be issued in connection with
financings.





The
fair value of share-based compensation is determined at the date of
grant using the Black-Scholes option valuation model.
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 this fair value cannot be measured
reliably, in which case they are measured at the fair value of the
equity instruments granted, as at the date the Company obtains the
goods or the counterparty renders the service. The fair value of
the share-based compensation is only re-measured if there is a
modification to the terms of the instrument, such as a change in
exercise price or legal life. The fair value of the share-based
compensation is recognized as an expense over the expected vesting
period with a corresponding entry to shareholders’
equity.





Foreign currencies





The
presentation and functional currency of the Company is the US
dollar. The Company has primarily expended its cash on
international exploration projects and historically generated its
equity funding in US dollars. The Company expects to sell graphite
priced in US dollars once the Molo Graphite Project achieves
production.





The
Company offices are in Canada and the Company expends a portion of
its payroll, professional and general and administrative costs in
Canadian dollars, which are translated at the average exchange
rates for the period, unless exchange rates fluctuated
significantly during that period, in which case the exchange rates
at the dates of transactions are used.





The
functional currency of the Mauritius subsidiaries is the United
States dollar.





The
functional currency of the Madagascar subsidiaries is the
Madagascar Ariary. Transfers of cash from the Company to its
subsidiaries is typically completed using US dollars. All Ariary
transactions are translated at the average exchange rates for the
period, unless exchange rates fluctuated significantly during that
period, in which case the exchange rates at the dates of
transactions are used.





12
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies (continued)





Foreign currencies (continued)





For the
purpose of presenting consolidated financial statements, the
subsidiary companies assets and liabilities are expressed in United
States dollars using the prevailing exchange rates at the end of
the reporting period. Any exchange differences that arise are
recognized in other comprehensive income and cumulative translation
adjustment in equity.





Foreign
currency transactions are translated into the functional currency
using the exchange rates prevailing at the date of the
transactions. Generally, foreign exchange gains and losses
resulting from the settlement of foreign currency transactions and
from the translation at year-end exchange rates of monetary assets
and liabilities denominated in currencies other than the
operation’s functional currency are recognized in the
consolidated statement of operations and comprehensive
loss.





The
series of loans made to the subsidiary companies are considered
part of the parent company’s net investment in a foreign
operation as the Company does not plan to settle these balances in
the foreseeable future. As a result of this assessment, the
unrealized foreign exchange gains and losses on the intercompany
loans are recorded through comprehensive loss. If the Company
determined that settlement of these amounts was planned or likely
in the foreseeable future, the resultant foreign exchange gains and
losses would be recorded through profit or loss.





Income taxes





Income
tax expense consists of current and deferred tax expense. Current
and deferred tax are recognized in profit or loss except to the
extent they relate to items recognized directly in equity or other
comprehensive income.





Current
tax is recognized and measured at the amount expected to be
recovered from or payable to the taxation authorities based on the
income tax rates enacted or substantively enacted at the end of the
reporting period and includes any adjustment to taxes payable in
respect of previous years.





Deferred
tax is recognized on any temporary differences between the carrying
amounts of assets and liabilities in the consolidated financial
statements and the corresponding tax bases used in the computation
of taxable earnings. Deferred tax assets and liabilities are
measured at the tax rates that are expected to apply in the period
when the asset is realized, and the liability is settled. The
effect of a change in the enacted or substantively enacted tax
rates is recognized in net earnings and comprehensive income or
equity depending on the item to which the adjustment
relates.





Deferred
tax assets are recognized to the extent future recovery is
probable. At each reporting period end, deferred tax assets are
reduced to the extent that it is no longer probable that sufficient
taxable earnings will be available to allow all or part of the
asset to be recovered.





Loss per share





Basic
loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per
share is computed, using the treasury stock method, to show the
potential reduction in earnings per share that would occur if
dilutive securities or other contracts to issue common shares were
exercised or converted to common shares. The treasury stock method
assumes that proceeds received from the exercise of stock options
and warrants are used to repurchase common shares at the prevailing
market rate.








13
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





2.
 Significant
Accounting Policies (continued)





Accounting standards adopted during the period





The
Company adopted IFRS 16, Leases (‘‘IFRS
16’’) with the date of initial application of July 1,
2019. Comparative information has not been restated and continues
to be reported under IAS 17, Leases (‘‘IAS
17’’) (the accounting standard in effect for those
periods).





Policy applicable from July 1, 2019:





At
inception of a contract, the Company assesses whether a contract
is, or contains, a lease. A contract 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. The
Company assesses whether:





●
 The contract
involves the use of an explicitly or implicitly identified
asset;


●
 The Company has the
right to obtain substantially all of the economic benefits from the
use of the asset throughout the contract term;


●
 The Company has the
right to direct the use of the asset.





The
Company recognizes a right-of-use asset and a lease liability at
the commencement date of the lease (i.e. the date the underlying
asset is available for use).





Right-of-use
assets are measured at cost, less any accumulated depreciation and
impairment losses, and adjusted for any remeasurement of lease
liabilities. The cost of right-of-use assets includes the initial
amount of lease liabilities recognized, initial direct costs
incurred, and lease payments made at or before the commencement
date less any lease incentives received.





Unless
the Company is reasonably certain to obtain ownership of the leased
asset at the end of the lease term, the right-of-use assets are
depreciated on a straight-line basis over the shorter of the
estimated useful life and the lease term. Right-of-use assets are
subject to impairment.





At the
commencement date of the lease, the Company recognizes lease
liabilities measured at the present value of lease payments to be
made over the lease term, discounted using the interest rate
implicit in the lease or, if that rate cannot be readily
determined, the Company’s incremental borrowing rate. The
lease payments include fixed payments, variable lease payments that
depend on an index or a rate, amounts expected to be paid under
residual value guarantees and the exercise price of a purchase
option reasonably certain to be exercised by the
Company.





After
the commencement date, the amount of lease liabilities is increased
to reflect the accretion of interest and reduced for the lease
payments made. In addition, the carrying amount of lease
liabilities is remeasured if there is a modification, a change in
the lease term, a change in the fixed lease payments or a change in
the assessment to purchase the underlying asset.





The
Company presents right-of-use assets in the plant and equipment
line item on the consolidated statement of financial position and
lease liabilities in the lease obligations line item on the
consolidated financial position.





Short-term leases and leases of low value assets





The
Company has elected not to recognize right-of-use assets and lease
liabilities for leases that have a lease term of 12 months or less
and do not contain a purchase option or for leases related to low
value assets. Lease payments on short-term leases and leases of low
value assets are recognized as an expense in the consolidated
statements of operations and comprehensive loss.





14
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





3.
 Mineral
Exploration Properties





The
Company has not capitalized any acquisition and exploration costs
for its mineral properties.





Molo Graphite Property, Southern Madagascar Region,
Madagascar





On
December 14, 2011, the Company entered into a Definitive Joint
Venture Agreement ("JVA") with Malagasy Minerals Limited
("Malagasy"), a public company listed on the Australian Stock
Exchange, to acquire a 75% interest in a property package for the
exploration and development of industrial minerals, including
graphite, vanadium and 25 other minerals. The land position
consisted of 2,119 permits covering 827.7 square kilometers and is
mostly adjacent towards the south and east with the Company's 100%
owned Green Giant Vanadium Project. Pursuant to the JVA, the
Company paid $2,261,690 and issued 7,500,000 common shares that
were valued at $1,350,000.





On
April 16, 2014, the Company signed a Sale and Purchase Agreement
and a Mineral Rights Agreement (together “the
Agreements”) with Malagasy to acquire the remaining 25%
interest. Pursuant to the Agreements, the Company paid $364,480
(CAD$400,000), issued 2,500,000 common shares subject to a 12-month
voluntary vesting period that were valued at $325,000 and issued
3,500,000 common share purchase warrants, which were valued at
$320,950 using Black-Scholes, with an exercise price of $0.14 and
an expiry date of April 15, 2019. On May 20, 2015 and upon
completion of a bankable feasibility study (“BFS”) for
the Molo Graphite Property, the Company paid $546,000 (CAD$700,000)
and issued 1,000,000 common shares, which were valued at $100,000.
Malagasy retains a 1.5% net smelter return royalty ("NSR") on the
property. A further cash payment of approximately $771,510
(CAD$1,000,000) will be due within five days of the commencement of
commercial production.





The
Company also acquired a 100% interest in the industrial mineral
rights on approximately 1 1⁄2 additional claim blocks covering
10,811 hectares adjoining the east side of the Molo Graphite
Property.





The
Molo Graphite Project is located within Exploration Permit #3432
(“PR 3432”) as issued by the Bureau de Cadastre Minier
de Madagascar (“BCMM”) pursuant to the Mining Code 1999
(as amended) and its implementing decrees. The Molo Graphite
Project exploration permit PR 3432 is currently held under the name
of our Madagascar subsidiary GRAMAD. GRAMAD has paid all taxes and
administrative fees to the Madagascar government and its mining
ministry with respect to all the mining permits held in country.
These taxes and administrative fee payments have been acknowledged
and accepted by the Madagascar government.





During
fiscal 2017, the Company applied to the BCMM to have PR 3432
converted into a mining permit. On February 15, 2019, the Company
announced the Madagascar Government granted a 40-year mining
license for the Molo Graphite Project and that the mining license
does not limit mining to any specific volume.





Following
an Environmental Legal Review and an Environmental and Social
Screening Assessment, which provided crucial information to align
the project’s development and design with international best
practice on sustainable project development, the Company completed
a comprehensive Environmental and Social Impact Assessment
("ESIA"), which was developed to local Madagascar
(“Malagasy”), Equator Principles, World Bank and
International Finance Corporation (“IFC”) standards.
The ESIA was submitted to the Office National d’Environment
(“ONE”) (the Madagascar Environment Ministry) during
fiscal 2018. On April 11, 2019, the Company announced it had
received the Global Environmental Permit for the Molo Graphite
Project from ONE.





Application
for all other necessary permits to construct and operate the mine,
including water use, facilities construction, mineral processing,
transportation, export, and labour have been
initiated.





The
Company cannot provide any assurance as to the timing of the
receipt of sufficient capital and of any of the permits and
licenses necessary to initiate construction of the
mine.








15
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





3.
 Mineral
Exploration Properties – continued





Green Giant Vanadium Project, Southern Madagascar Region,
Madagascar





In
2007, the Company entered into a joint venture agreement with
Madagascar Minerals and Resources SARL ("MMR") to acquire a 75%
interest in the Green Giant property. Pursuant to the agreement,
the Company paid $765,000 in cash, issued 2,500,000 common shares
and issued 1,000,000 common share purchase warrants, which have now
expired.





On July
9, 2009, the Company acquired the remaining 25% interest by paying
$100,000. MMR retains a 2% NSR. The first 1% NSR can be acquired at
the Company's option by paying $500,000 in cash or common shares
and the second 1% NSR can be acquired at the Company’s option
by paying $1,000,000 in cash or common shares.





The
Green Giant property is located within exploration permits issued
by the BCMM pursuant to the Mining Code 1999 (as amended) and its
implementing decrees. The Green Giant property exploration permits
are currently held under the name of our Madagascar subsidiary
MINMAD. MINMAD has paid all taxes and administrative fees to the
Madagascar government and its mining ministry with respect to all
the mining permits held in country. These taxes and administrative
fee payments have been acknowledged and accepted by the Madagascar
government.





Since
early 2012, the Company has focused its efforts on the Molo
Graphite Project and as such only limited work has been completed
on the Green Giant Vanadium Project since that time.





Sagar Property, Labrador Trough Region, Quebec, Canada





In
2006, the Company purchased from Virginia Mines Inc. ("Virginia") a
100% interest in 369 claims located in northern Quebec, Canada.
Virginia retains a 2% net smelter return royalty ("NSR") on certain
claims within the property. Other unrelated parties also retain a
1% NSR and a 0.5% NSR on certain claims within the property, of
which half of the 1% NSR can be acquired by the Company by paying
$200,000 and half of the 0.5% NSR can be acquired by the Company by
paying $100,000.





On
February 28, 2014, the Company signed an agreement to sell a 35%
interest in the Sagar property to Honey Badger Exploration Inc.
(“Honey Badger”), a public company that is a related
party through common management. The terms of the agreement were
subsequently amended on July 31, 2014 and again on May 8, 2015. To
earn the 35% interest, Honey Badger was required to complete a
payment of $36,045 (CAD$50,000) by December 31, 2015, incur
exploration expenditures of $360,450 (CAD$500,000) by December 31,
2016 and issue 20,000,000 common shares to the Company by December
31, 2015. Honey Badger did not complete the earn-in requirements by
December 31, 2015 resulting in the termination of the option
agreement.





Since
early 2012, the Company has focused its efforts on the Molo
Graphite Project and as such only minimal work has been completed
on the Sagar Property since that time.





As of
June 30, 2020, the Sagar property consisted of 184 claims covering
a total area of 8,539.58 ha.





16
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





4.
 Segmented
Reporting





The
Company has one operating segment, which involves the acquisition,
exploration and development of mineral resources in Madagascar and
Canada. The Canadian exploration project is not a focus for the
Company at this time. No commercial revenue has ever been generated
by any mineral resource properties. Limited amounts of cash and
equipment are currently held in Madagascar. Substantially all of
the Company assets are held in Canada. The Company's President and
Chief Executive Officer and Chief Financial Officer are the
operating decision-makers and direct the allocation of resources to
its geographic segments.





The
following is the segmented information by geographic
region:





Exploration and
Evaluation Expenses
Madagascar
Canada
Total$
$
$Year ended June 30,
2020
153,440
6,624
160,064Year ended June 30,
2019
223,289
15,469
238,758Year ended June 30,
2018
356,899
14,856
371,755





Cash and Cash
Equivalents
Madagascar
Canada
Total$
$
$As
of June 30, 2020
14,054
208,251
222,305As
of June 30, 2019
54,701
474,630
529,331As
of June 30, 2018
17,958
320,744
338,702





5.
 Exploration
and Evaluation Expenses





Exploration
and evaluation expenses include all costs relating to exploration
activities (drilling, seismic, geological, geophysical, testing and
sampling), metallurgical evaluation activities, mineral claims and
camp operations.





The
following is the breakdown by nature of the expenses:





For the year
ended
For the year
ended
For the year
endedJune 30,
2020
June 30,
2019
June 30,
2018$
$
$Metallurgical
evaluation
-
18,863
107,185Mineral claims
(Canada)
6,623
15,469
14,856Mineral claims
(Madagascar)
143,954
121,844
227,280Local and camp
expenses (Madagascar)
9,487
82,582
22,434Total
exploration and evaluation expenses
160,064
238,758
371,755





17
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





6.
 Professional
and Legal Fees





Professional
and legal fees include accounting, auditor and lawyer
fees.





The
following is the breakdown by nature of the expenses:


For the year
ended
For the year
ended
For the year
endedJune 30,
2020
June 30,
2019
June 30,
2018$
$
$Accounting
fees
29,778
20,141
3,475Auditor
fees
36,129
23,760
27,247Tax
advisory fees
22,140
67,810
9,095Legal
fees
29,344
239,366
502,463Offshore
management fees
7,350
-
-Total professional and legal fees
124,741
351,077
542,280


7.
 Plant
and Equipment





Additions
to Plant and Equipment include $24,164 of transitional adjustments
for the recognition of leased right-of-use assets in relation to
the long-term lease for the exploration camp in Fotadrevo,
Madagascar upon the Company’s adoption of IFRS 16 on July 1,
2019 (see Note 2).





The
Company owns metallurgical testing equipment and several vehicles
in Madagascar that were previously used for exploration purposes
that have no carrying values.





Plant
Equipment
Total$
$
$Balance as of June 30, 2018
-
-
-Balance as of June 30, 2019
-
-
-Additions
24,164
-
24,164Amortization
(6,053)
-
(6,053)Balance as of June 30, 2020
18,111
-
18,111











18
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





8.
 Lease
obligations





The
Company is party to a number of contracts that contain a lease,
most of which include office facilities and exploration camp.
Leases of low value assets, short term leases and leases with
variable payments proportional to the rate of use of the underlying
asset do not give rise to a lease obligation.





Leases under IFRS 16 (from July 1, 2019)





The following table sets out the carrying amounts of right-of-use
assets recognized upon adoption of IFRS 16 that are included in
plant and equipment in the consolidated statement of financial
position and the movements during the year:





Property
Plant
Equipment
Total$
$
$
$As of July 1, 2019
-
-
-
-Adoption
of IFRS 16
-
24,164
-
24,164Amortization
of right of use assets
-
(4,810)
-
(4,810)Foreign
exchange
-
(3,336)
-
(3,336)As of June 30, 2020
-
16,018
-
16,018





The following table sets out the lease obligations included in the
consolidated statements of financial position:





Property
Plant
Equipment
Total$
$
$
$Current
portion of lease obligations
-
5,339
-
5,339Long-term
lease obligations
-
10,679
-
10,679Total lease obligations
-
16,018
-
16,018





Future minimum lease payments required to meet obligations that
have initial or remaining non-cancellable lease terms are set out
in the following table:





Property
Plant
Equipment
Total$
$
$
$Within
1 year
-
6,589
-
6,589Between
2 - 3 years
-
13,178
-
13,178Total undiscounted lease obligations
-
19,767
-
19,767








The
Company recognized rent expense relating to short-term leases of
$19,111 and interest expense on lease obligation of $1,779 in the
consolidated statements of operations and comprehensive loss with
respect to leases.


19
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





9.
 Share
Capital





The Company’s common shares have no par value and the
authorized share capital is composed of an unlimited number of
common shares. As of June 30, 2020, the Company had 536,494,789
common shares issued and outstanding (June 30, 2019:
507,417,021).





The Company issued the following common shares during the year
ended June 30, 2020:





(a)
 On
October 25, 2019, the Company closed a non-brokered private
placement offering of 29,077,768 units at a price of $0.034
(CAD$0.045) per unit for aggregate gross proceeds of $998,620
(CAD$1,308,500). Each unit consisted of one common share and
one-half common share purchase warrant, with each full warrant
exercisable into one common share at an exercise price of $0.07
(CAD$0.09) for a period of two years. The share issue costs
consisted of private placement listing fees paid to the
exchange.





The
Company issued the following common shares during the year ended
June 30, 2019:





(a)
 On
August 17, 2018, the Company closed a non-brokered private
placement offering of 21,059,270 units at a price of $0.053
(CAD$0.07) per unit for aggregate gross proceeds of $1,120,385
(CAD$1,474,149). Each unit consisted of one common share and
one-half common share purchase warrant, with each warrant
exercisable into one common share at an exercise price of $0.076
(CAD$0.10) for a period of two years. The share issue costs
included cash finder’s fees totaling $16,905, the issuance of
337,714 common shares valued at $17,966 and the issuance of 123,000
common share purchase warrants valued at $3,272 with each warrant
exercisable into one common share at an exercise price of $0.076
(CAD$0.10) for a period of two years. Other share issue costs were
$8,015.





(b)
 On
March 7, 2019, the Company closed a non-brokered private placement
offering of 16,086,426 common shares at a price of $0.08 (CAD$0.11)
per common share for aggregate gross proceeds of $1,323,630
(CAD$1,769,507). The share issue costs included cash finder’s
fees totaling $24,062 (CAD$35,300). Other share issue costs were
$6,999 and legal fees were $3,803.





The Company issued the following common shares during the year
ended June 30, 2018:





(a)
 On
September 30, 2017, the Company issued 1,500,000 common shares upon
the exercise of 1,500,000 common share purchase warrants for gross
proceeds of $105,000. There were no issue costs.





(b)
 On
February 1, 2018, the Company issued 6,437,900 common shares upon
the exercise of 6,437,900 common share purchase warrants for gross
proceeds of $708,169. There were no issue costs.





(c)
 On
April 13, 2018, the Company issued 1,000,000 common shares upon the
exercise of 1,000,000 common share purchase warrants for gross
proceeds of $110,000. There were no issue costs.














20
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





10.
 Stock
Options





The
Company’s stock option plan is restricted to a maximum of 10%
of the issued and outstanding common shares. Under the stock option
plan, the Company may grant stock options to directors, officers,
employees and consultants. The Board of Directors administers the
plan and determines the vesting and terms of each
grant.





The
Black-Scholes option valuation model is used to determine the fair
value of stock option grants based on the market price, the
exercise price, compound risk free interest rate, annualized
volatility and number of periods until expiration. Each stock
option entitles the holder to purchase one common share of the
Company at the respective exercise price prior to or on the
respective expiration date.





As of June 30, 2020, the Company had 36,250,000 stock options
issued and outstanding (June 30, 2019: 40,670,000) with a weighted
average expiration of 2.28 years (June 30, 2019: 3.0 years), which
are exercisable into 36,250,000 common shares (June 30, 2019:
40,670,000) at a weighted average exercise price of $0.067 (June
30, 2019: $0.08). All stock options that are currently outstanding
vested on the grant date.





The
following is a schedule of the outstanding stock options for the
year ended June 30, 2020:





Grant
Date
Expiration
Date
Exercise
Price
Balance
Outstanding
June
30,
2019
Options Granted
(Expired or
Cancelled)
Options
Exercised
Balance
Outstanding
June 30,
2020July 3,
2014
July 3,
2019
USD
$0.15
1,150,000
(1,150,000)
-
-February 26,
2015
February 26,
2020
USD
$0.20
2,870,000
(2,870,000)
-
-December 22,
2015
December 22,
2020
USD
$0.06
6,700,000
(400,000)
-
6,300,000June 9,
2017
June 9,
2022
USD
$0.07
18,100,000
-
-
18,100,000March 26,
2019
March 26,
2024
CAD
$0.10
11,850,000
-
-
11,850,000Total
Outstanding


40,670,000
(4,420,000)
-
36,250,000





The
following is a continuity schedule of the Company's outstanding
common stock purchase options:





Weighted-Average
Exercise
Price
$
Number
of
Stock
Options
#Outstanding
as of June 30, 2017
USD
$0.11
44,470,000Granted
-
-Exercised
-
-Expired/cancelled
USD
$0.18
(6,840,000)Outstanding
as of June 30, 2018
USD
$0.09
37,630,000Granted
CAD
$0.10
11,850,000Exercised
-
-Expired/cancelled
USD
$0.09
(8,810,000)Outstanding
as of June 30, 2019
USD
$0.08
40,670,000Granted
-
-Exercised
-
-Expired/cancelled
USD
$0.174
(4,420,000)Outstanding
as of June 30, 2020
USD
$0.067
36,250,000





The Company did not grant any stock options during the year ended
June 30, 2020.





The Company granted the following stock options during the year
ended June 30, 2019:





(a)
 On
March 26, 2019, the Company granted 11,850,000 stock options
exercisable at a price of CAD$0.10 for a period of five years. The
share price on the grant date was CAD$0.10. The stock options were
valued at $651,692 using the Black-Scholes pricing model based on a
risk-free rate of 1.66% and volatility of 97%. These stock options
vested on the grant date.





The
Company did not grant any stock options during the year ended June
30, 2018.











21
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





11.
 Warrants





The
Company has issued common share purchase warrants as part of equity
private placements.





The
Black-Scholes option valuation model is used to determine the fair
value of warrants issued based on the market price, the exercise
price, compound risk free interest rate, annualized volatility and
number of periods until expiration. Each warrant entitles the
holder to purchase one common share of the Company at the
respective exercise price prior to or on the respective expiration
date.





As of June 30, 2020, the Company had 25,191,522 common share
purchase warrants issued and outstanding (June 30, 2019:
10,652,636) with a weighted average expiration of 0.82 years (June
30, 2019: 1.1 years), which are exercisable into 25,191,522 (June
30, 2019: 10,652,636) common shares at a weighted average exercise
price of $0.07 (June 30, 2019: $0.08). All warrants that are
currently outstanding vested on the issue date.





The
following is a schedule of the outstanding common stock purchase
warrants for the year ended June 30, 2020:





Issue
Date
Expiration
Date
Exercise
Price
Balance
Outstanding
June
30,
2019
Warrants Granted
(Expired)
Warrants
Exercised
Balance
Outstanding
June
30,
2020August 17,
2018
August 17,
2020
CAD
$0.10
10,652,636
-
-
10,652,636October 25,
2019
October 25,
2021
CAD
$0.09
-
14,538,886
-
14,538,886Total
Outstanding


10,652,636
14,538,886
-
25,191,522





The
following is the continuity schedule of the Company's common share
purchase warrants:





Weighted-Average
Exercise
Price
$
Number
of
Warrants
#Outstanding
as of June 30, 2017
USD
$0.11
30,521,256Issued
-
-Expired
USD
$0.11
(18,083,356)Exercised
USD
$0.10
(8,937,900)Outstanding
as of June 30, 2018
USD
$0.14
3,500,000Issued
CAD
$0.10
10,652,636Expired
USD
$0.14
(3,500,000)Exercised
-
-Outstanding
as of June 30, 2019
USD
$0.08
10,652,636Issued
CAD
$0.09
14,538,886Expired
-
-Exercised
-
-Outstanding
as of June 30, 2020
USD
$0.07
25,191,522





The Company issued the following common share purchase warrants
during the year ended June 30, 2020:





(a)
 On
October 25, 2019, the Company closed a non-brokered private
placement offering of 29,077,768 units at a price of $0.034
(CAD$0.045) per unit for aggregate gross proceeds of $998,619
(CAD$1,308,500). Each unit consisted of one common share and
one-half common share purchase warrant, with each full warrant
exercisable into one common share at an exercise price of $0.07
(CAD$0.09) for a period of two years. The share issue costs
consisted of private placement listing fees paid to the
exchange.





The Company issued the following common share purchase warrants
during the year ended June 30, 2019:





(a)
 On
August 17, 2018, the Company closed a non-brokered private
placement offering of 21,059,270 units at a price of $0.053
(CAD$0.07) per unit for aggregate gross proceeds of $1,120,385
(CAD$1,474,149). Each unit consisted of one common share and
one-half common share purchase warrant, with each warrant
exercisable into one common share at an exercise price of $0.076
(CAD$0.10) for a period of two years. The share issue costs
included cash finder’s fees totaling $16,905, the issuance of
337,714 common shares valued at $17,966 and the issuance of 123,000
common share purchase warrants valued at $3,272 with each warrant
exercisable into one common share at an exercise price of $0.076
(CAD$0.10) for a period of two years.





The Company did not issue any common share purchase warrants during
the year ended June 30, 2018.





22
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars








12.
 Warrant
Liability





The
warrants issued on August 17, 2018 as part of the units as
described in notes 9 and 11 were issued in a currency other than
the Company’s functional currency and therefore are
considered a derivative equity instrument as per IFRS 9
Financial Instruments. The
warrant liability was measured at fair value in the statement of
financial position using the Black-Scholes option valuation model
and will be revalued at each reporting period through profit and
loss until expiration or exercise of the underlying
warrants.





The
fair value of the warrant liability for warrants expiring on August
17, 2020 was estimated using the following model inputs on the
following valuation dates:





Warrant
Liability
$As of
August 17, 2018 (issue date)
408,150Exercise
price
USD$0.076Share
price on measurement date
CAD$0.09Risk
free rate
1.50%Expected
volatility
115%Expected dividend
yield
NilExpected life (in
years)
2Change
in fair value
(73,532)As of
June 30, 2019
334,618Exercise
price
USD$0.076Share
price on measurement date
CAD$0.10Risk
free rate
1.67%Expected
volatility
100%Expected dividend
yield
NilExpected life (in
years)
1.13Change
in fair value
(327,537)As of
June 30, 2020
7,081Exercise
price
USD$0.073Share
price on measurement date
CAD$0.04Risk
free rate
0.20%Expected
volatility
162%Expected dividend
yield
NilExpected life (in
years)
0.13











23
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





12.
 Warrant
Liability (continued)





The
warrants issued on October 25, 2019 as part of the units as
described in notes 9 and 11 were issued in a currency other than
the Company’s functional currency and therefore are
considered a derivative equity instrument as per IFRS 9
Financial Instruments. The
warrant liability was measured at fair value in the statement of
financial position using the Black-Scholes option valuation model
and will be revalued at each reporting period through profit and
loss until expiration or exercise of the underlying
warrants.





The
fair value of the warrant liability for the warrants expiring on
October 25, 2021 was estimated using the following model inputs on
the following valuation dates:





Warrant
Liability
$As of
October 25, 2019 (issue date)
261,090Exercise
price
USD$0.069Share
price on measurement date
CAD$0.05Risk
free rate
1.66%Expected
volatility
115%Expected dividend
yield
NilExpected life (in
years)
2Change
in fair value
(59,403)As of
June 30, 2020
201,687Exercise
price
USD$0.064Share
price on measurement date
CAD$0.04Risk
free rate
0.25%Expected
volatility
156%Expected dividend
yield
NilExpected life (in
years)
1.32





13.
 Provision
and Contingent Liability





Provision





During fiscal 2014, the Company issued 17,889,215 flow-through
shares to eligible Canadian taxpayer subscribers which included a
contractual commitment for the Company to incur $3,812,642 in
eligible Canadian Exploration Expenditures (“CEEs”) by
December 31, 2014 as per the provision of the Income Tax Act of
Canada. The CEEs were renounced as a tax credit to the flow-through
share subscribers on December 31, 2013. As at December 31, 2014,
the Company had unfulfilled CEE obligations. During the year ended
June 30, 2015, the Company recorded a provision for the Part XII.6
taxes and related penalties payable to the Canada Revenue Agency
and for the indemnification liability to subscribers of the
flow-through shares for the additional taxes payable related to the
CEE renunciation shortfall. During the year ended June 30, 2017,
the Company paid $131,320 in Part XII.6 taxes, resulting in a
reduction in the provision, and following a reassessment of its
obligation to subscribers the Company increased the provision by
$131,320. During the year ended June 30, 2018, the provision was
adjusted due to foreign exchange fluctuations to $180,652. During
the year ended June 30, 2019, there were $Nil adjustments to the
provision balance. During the year ended June 30, 2020, the
provision was adjusted due to foreign exchange fluctuations to
$174,418.





Contingent Liabilities





On April 16, 2014, the Company signed a Sale and Purchase Agreement
and a Mineral Rights Agreement (together “the
Agreements”) with Malagasy to acquire the remaining 25%
interest in the Molo Graphite Property. Pursuant to the Agreements,
a further cash payment of approximately $771,510 (CAD$1,000,000)
will be due within five days of the commencement of commercial
production. Since this cash payment represents a possible
obligation that depends on the occurrence of an uncertain future
event, no amount has been recognized as a provision.





24
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





14.
 Capital
Management





There
were no changes in the Company's approach to capital management
during the year ended June 30, 2020.





In
managing liquidity, the Company’s primary objective is to
ensure the entity can continue as a going concern while raising
additional funding to meet its obligations as they come due. The
Company’s operations to date have been funded by issuing
equity. The Company expects to improve the working capital position
by securing additional financing.





The
Company’s investment policy is to invest excess cash in very
low risk financial instruments such as term deposits or by holding
funds in high yield savings accounts with major Canadian banks.
Financial instruments are exposed to certain financial risks, which
may include currency risk, credit risk, liquidity risk and interest
rate risk.





The
Company’s mineral property interests are all in the
exploration or development stage and the Company has yet to
generate any revenue from mining operations, as such the Company is
dependent on external financing to fund its exploration and
evaluation activities and its operating expenditures. Management
continues to assess the merits of mineral properties on an ongoing
basis and may seek to acquire new properties or to increase
ownership interests if it believes there is sufficient geologic and
economic potential.





Management
mitigates the risk and uncertainty associated with raising
additional capital in current economic conditions through cost
control measures that minimizes discretionary disbursements and
reduces exploration expenditures that are deemed of limited
strategic value.





The
Company manages the capital structure (consisting of
shareholders’ deficiency) on an ongoing basis and adjusts in
response to changes in economic conditions and risks
characteristics of its underlying assets. Adjustments to the
Company’s capital structure may involve the issuance of new
shares, assumption of new debt, acquisition or disposition of
assets, or adjustments to the amounts held in cash, cash
equivalents and short-term investments.





The
Company is not subject to any externally imposed capital
requirements.





As at
June 30, 2020, the Company had a working capital deficit of
$918,048 (June 30, 2019: deficit of $665,886).





25
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





15.
 Financial
Instruments and Risk Management





The
following disclosures are to enable users of the consolidated
financial statements to evaluate the nature and extent of risks
arising from financial instruments at the end of the reporting
period:





Credit risk





The
Company does not currently have commercial customers and therefore
does not have any credit risk related to accounts receivables. The
Company has credit risk arising from the potential from
counterparty default on cash and cash equivalents held on deposit
with financial institutions. The Company manages this risk by
ensuring that deposits are only held with large Canadian banks and
financial institutions.





Liquidity risk





Liquidity
risk is the risk that the Company will not be able to meet its
obligations associated with financial liabilities. Liquidity risk
arises from the Company’s financial obligations and in the
management of its assets, liabilities and capital structure. The
Company manages this risk by regularly evaluating its liquid
financial resources to fund current and long-term obligations and
to meet its capital commitments in a cost-effective
manner.





The
main factors that affect liquidity include working capital
requirements, capital-expenditure requirements and equity capital
market conditions. The Company’s liquidity requirements are
met through a variety of sources, including cash and cash
equivalents and equity capital markets.





As at
June 30, 2020, the Company expects to access public debt and equity
capital markets for financing over the next 12 months in order to
initiate construction of its Molo Graphite Project in Madagascar
and to satisfy working capital requirements. While the Company has
been successful in obtaining required funding in the past, there is
no assurance that future financings will be available.





As at
June 30, 2020, the Company had cash and cash equivalents of
$222,305 (June 30, 2019: $529,331) to settle current liabilities of
$1,173,376 (June 30, 2019: $1,279,289). As a result, the Company is
currently exposed to liquidity risk.





Based
on management’s assessment of its past ability to obtain
required funding, the Company believes that it will be able to
satisfy its current and long-term obligations as they come due.
Other than accounts payable, which are due within 30 days, and the
warrant liabilities, which will be fully expensed by October 2021,
none of the Company’s obligations have contractual
maturities.





Market risks





Market
risk is the potential for financial loss from adverse changes in
underlying market factors, including foreign exchange rates,
commodity prices and interest rates.





●
 Interest rate risk:
This is the sensitivity of the fair value or of the future cash
flows of a financial instrument to changes in interest rates. The
Company does not have any financial assets or liabilities that are
subject to variable interest rates.





●
 Commodity price
risks: This is the sensitivity of the fair value of, or of the
future cash flows, from mineral assets. The Company manages this
risk by monitoring mineral prices and commodity price trends to
determine the appropriate timing for funding the exploration or
development of its mineral assets, or for the acquisition or
disposition of mineral assets. The Company does not have any
mineral assets at the development or production stage carried at
historical cost. The Company has expensed the acquisition and
exploration costs of its exploration stage mineral
assets.





●
 Currency
risk:  This is the sensitivity of the fair value or of the
future cash flows of financial instruments to changes in foreign
exchange rates.  The Company transacts in currencies other
than the US dollar, including the Canadian dollar, the Madagascar
Ariary, the Euro and the South African Rand.  The Company
purchases services and has certain salary commitments in those
currencies.  The Company also has monetary and financial
instruments that may fluctuate due to changes in foreign exchange
rates.  Derivative financial instruments are not used to
reduce exposure to fluctuations in foreign exchange rates. The
Company is not sensitive to foreign exchange exposure since it has
not made any commitments to deliver products quoted in foreign
currencies. The Company is not sensitive to foreign exchange risk
arising from the translation of the financial statements of
subsidiaries with a functional currency other than the US dollar
since it does not have any material assets and liabilities measured
through other comprehensive income.








26
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





16.
 Related
Party Transactions





Parties
are related if one party has the direct or indirect ability to
control or exercise significant influence over the other party in
making operating and financial decisions. Parties are also related
if they are subject to common control or common significant
influence. A transaction is considered to be a related party
transaction when there is a transfer of economic resources or
financial obligations between related parties. Related party
transactions that are in the normal course of business and have
commercial substance are measured at the fair value.





Balances
and transactions between the Company and its wholly owned
subsidiaries, which are related parties of the Company, have been
eliminated and are not disclosed in this note.





Related
parties include companies controlled by key management personnel.
Key management personnel are composed of the Board of Directors,
Chief Executive Officer, Chief Financial Officer and the Senior
Vice Presidents of the Company.





The
following key management personnel related party transactions
occurred during the year ended June 30, 2020, 2019 and
2018.:


For
the year ended
For
the year ended
For
the year endedJune
30, 2020
June
30, 2019
June
30, 2018$
$
$Management
payroll
381,777
439,175
453,109Management
fees
331,682
335,045
353,643Share
based compensation
-
640,692
-Total
713,459
1,414,912
806,752





The
following key management related party balances existed as of June
30, 2020, June 30, 2019 and June 30, 2018:


As
at
As
at
As
atJune
30, 2020
June
30, 2019
June
30, 2018$
$
$Prepaid payroll to
officers of the Company
-
26,568
26,632Accounts payable
due to officers of the Company
86,685
16,400
16,400Accrued liabilities
due to officers of the Company
54,727
-
-





17.
 Short-Term
Debt





As of
June 30, 2020, the Company had CAD $40,000 outstanding in its
Canada Emergency Business Account, which is not subject to an
interest rate until after December 31, 2022 and has loan
forgiveness provisions whereby CAD $10,000 of principal will be
forgiven if CAD $30,000 of principal is repaid before December 31,
2022. The Company intends to repay CAD $30,000 of principal by
September 30, 2020 and therefore recognized a fair market value
balance of $22,115 as of June 30, 2020. As of June 30, 2019, the
Company did not have any outstanding long-term debt, loans or
credit facilities.





18.
 Income
Taxes





Below
is a reconciliation of the income tax provision, calculated using
the combined Canadian federal and provincial statutory income tax
rate of 26.5%.





27
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars





18.
 Income
Taxes (Continued)





June 30,
2020
June 30,
2019Net
Loss
(977,635)
(3,210,504)Statutory
rate
26.5%
26.5%Expected
income tax recovery
(259,073)
(850,784)Other
adjustments
22,553
24,585Share
issuance costs booked to equity
(2,070)
(21,471)Non-deductible
expenses
(102,150)
153,893Utilization
of losses not previously recognized
-
-Change
in tax benefits not recognized
340,740
693,777Income
tax recovery
-
-





Deferred Tax





Deferred
tax is recognized as a result of temporary differences between the
carrying amounts of assets and liabilities in the consolidated
financial statements and the corresponding income tax values.
Deferred tax assets have not been recognized in respect of the
following deductible temporary differences because it is not
probable that future taxable profit will be available against which
the group can utilize the benefits therefrom:





June 30,
2020
June 30,
2019Plant
and equipment
188,980
188,980Share
issue costs
128,300
219,290Canadian
capital losses carry-forward
53,000
53,000Canadian
non-capital losses carry-forward
23,419,560
22,069,720Canadian
exploration and development tax pools
4,198,270
4,191,650Non-Canadian
losses
1,316,520
1,215,070Deferred
tax assets
29,304,630
27,937,710





The
plant and equipment deductible temporary differences may be carried
forward indefinitely. Share issue costs will be fully amortized in
2024. The Canadian capital loss carry-forward may be carried
forward indefinitely but can only be used to reduce capital gains.
The Canadian non-capital loss carry-forward expires as noted in the
table below. Non-Canadian losses will expire in 2024.





2027
$833,5602028
808,2702029
817,4102030
1,382,8602031
1,948,6502032
2,491,1202033
2,077,4702034
2,528,5802035
2,013,7702036
1,448,9302037
1,837,3002038
2,104,6602039
1,777,1402040
1,349,840$23,419,560





NextSource
is treated as a United States corporation for United States federal
income tax purposes and is subject to United States federal income
tax on its worldwide income. However, for Canadian tax purposes,
NextSource is treated as a Canadian resident company for Canadian
income tax purposes. As a result, NextSource is subject to taxation
both in Canada and the United States.








28
  NextSource Materials Inc.
 Notes to Consolidated Financial Statements
 For the years ended June 30, 2020 and 2019
 
 Expressed in US Dollars











19.
 Subsequent
Events





On July
2, 2020, the Company completed a non-brokered private placement of
61,578,783 units at a price of $0.024 (CAD$0.0325) for gross
proceeds of $1,476,572 (CAD$2,001,310). Each Unit consists of one
common share of the Company and one-half of one common share
purchase warrant (a “Warrant”), with each full Warrant
entitling the holder to acquire one additional common share of the
Company at a price of $0.048 (CAD$0.065) per share for a period of
24 months. No finder fees or commissions were paid in association
with the private placement. In connection with the non-brokered
private placement, the Company incurred $9,292 (CAD$12,619) in
share issuance costs. As at June 30, 2020, the Company had received
share subscriptions received in advance totaling
$68,411.





On
August 24, 2020, the Company announced that management has agreed
to a plan to defer their monthly compensation payments by up to 30
percent and until total project financing has been secured. The
Company also announced its intention to implement a Performance
Share Units (“PSU”) plan for management.





























29