ITEM 1. FINANCIAL STATEMENTS

As used herein, the terms “Mobetize,” “we,” “our,” and “us” refer to Mobetize Corp., a Nevada corporation, and its predecessors and subsidiaries, unless otherwise indicated. In the opinion of management, the accompanying unaudited, consolidated financial statements included in this Form 10-Q reflect all adjustments necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

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

MOBETIZE CORP.

Condensed Consolidated Statements of Loss and Comprehensive Loss

(Expressed in US dollars)

(Unaudited) 

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

MOBETIZE CORP.

Condensed Consolidated Statements of Cash Flows

(Expressed in US dollars)

(Unaudited)

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

1. Nature of Operations and Continuance of Business

Mobetize Corp. (the “Company”) was incorporated in the state of Nevada on February 23, 2012, as Slavia, Corp. On August 13, 2013, its name changed to “Mobetize Corp.” The Company provides FinTech solutions and services to enable and support the convergence of global telecom and financial services providers (“Customers”) through its Global Mobile B2B FinTech and Financial Services Marketplace. The Company’s activities are subject to significant risks and uncertainties, including the need to secure additional funding to optimize the Company’s existing technology. 

On July 11, 2017, the Company completed a consolidation of the issued and outstanding common shares on a one for one hundred (1/100) basis and a decrease in the number of its authorized common and preferred shares. All share and per share amounts have been retroactively restated to reflect the share consolidation.  

Going Concern

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize assets and discharge liabilities in the normal course of business. As of June 30, 2018, the Company has an accumulated deficit of $9,090,328, a history of net losses and a working capital deficiency of $1,247,870. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon continuing financial support from management, increasing sales, securing debt or equity financing, cutting operating costs, launching viable products, and realizing profitable operations. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

2. Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim condensed consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiaries with all significant intercompany transactions eliminated. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial position, results of operations and cash flows for the interim periods have been made. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States of America (“US GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2018 and with our Annual Report on Form 10-K filed with the SEC on July 31, 2018. Operating results for the three-month period ended June 30, 2018 may not necessarily be indicative of the results for the year ending March 31, 2018.

These unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Mobetize Canada Inc., and Mobetize USA Inc. All significant intercompany accounts and transactions have been eliminated on consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

The Company regularly evaluates estimates and assumptions related to the collectability of accounts receivable, revenue recognition, useful life of long-lived assets, fair value of stock-based compensation, embedded derivative liabilities and beneficial conversion features of convertible debentures, fair values of shares issued for non-cash consideration, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

2. Basis of presentation- Continued

Fair value of financial assets and liabilities

The Company measures the fair value of financial assets and liabilities based on US GAAP guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

The Company classifies financial assets and liabilities as held-for-trading, available-for-sale, held-to-maturity, loans and receivables or other financial liabilities depending on their nature. Financial assets and financial liabilities are recognized at fair value on their initial recognition, except for those arising from certain related party transactions which are accounted for at the transferor’s carrying amount or exchange amount.

Financial assets and liabilities classified as held-for-trading are measured at fair value, with gains and losses recognized in net income. Financial assets classified as held-to-maturity, loans and receivables, and financial liabilities other than those classified as held-for-trading are measured at amortized cost, using the effective interest method of amortization. Financial assets classified as available-for-sale are measured at fair value, with unrealized gains and losses being recognized as other comprehensive income until realized, or if an unrealized loss is considered other than temporary, the unrealized loss is recorded in income.

Financial instruments, including accounts receivable, accounts payable and accrued liabilities, accounts payable and accrued liabilities – related party, promissory note and promissory note – related party are carried at amortized cost, which management believes approximates fair value due to the short-term nature of these instruments.

The following table presents information about the assets that are measured at fair value on a recurring basis as at June 30, 2018 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and included situations where there is little, if any, market activity for the asset:

2. Basis of presentation- Continued

Recent Accounting Pronouncements

In February 2016, Financial Accounting Standards Board (FASB) issued Topic 842, Leases to replace the leases requirements in Topic 840, Leases . The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. Topic 842 will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods and is to be retrospectively applied. Earlier application is permitted. The adoption of this standard is not expected to have a significant impact on the Company’s results of operations, financial condition, cash flows, and financial statement disclosures.

In November 2016, the FASB issued Accounting Standards Updates (ASU) 2016-18, requiring that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of- period total cash amounts shown on the statement of cash flows. Consequently, any transfers between cash and restricted cash are not presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The amendments were effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-18 has had only a limited impact on the presentation of the statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requiring certain changes to the recognition and measurement as well as disclosure of incurred and expected credit losses. The standard will become effective for the Company beginning January 1, 2020. The Company is assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

In July 2017, the FASB issued ASU 2017-11, requiring certain changes to the presentation and disclosures of changes to liability or equity classification of financial instruments. The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

3. Joint Venture

On January 12, 2017, the Company entered into a Gateway License Agreement and Joint Venture Agreement (“Joint Venture”) with CPT Secure, Inc. (“CPT”), a company controlled by a shareholder of the Company, to further develop certain payment processing technology (“CPT IP”) on a 50/50 basis. The Company issued 500,000 Series B Preferred Shares with a fair value of $125,000 to CPT for a license to use the CPT IP. The license has a term of two years that can be automatically renewed for successive two-year periods unless either party elects not to renew 60 days prior to expiration. The license fee of $125,000 is being amortized over the initial term of the license. During the three months ended June 30, 2018, the Company recognized amortization of $10,103 prior to the transfer of the license, which amount has been included in research and development expense. 

On May 29, 2017, the Company and CPT incorporated a joint venture company, MPAY Gateway Services Inc. (“MPAY”). The Company subsequently transferred the remaining carrying value of the license in the amount of $101,541 to MPAY, which has been presented on the balance sheet as an investment in joint venture. During the three months ended June 30, 2018, the Company recognized a loss on joint venture of $7,791 (2017 - $2,740), representing the Company’s 50% interest in the loss of MPAY. 

4. Equipment

Equipment, net consisted of the following: 

During the three months ended June 30, 2018, equipment cost decreased by $30, and accumulated amortization increased by $49 as a result of foreign currency translation adjustments.

5. Promissory Notes

On June 26, 2018, the Company issued an unsecured Promissory Note to one of its shareholders in the amount of $25,000, which bears interest at 12% per annum that matures on June 25, 2019.

6. Related Party Transactions

6. Related Party Transactions – Continued

7. Common Stock and Preferred Stock

a) Issuance of Common Stock:

b) Authorization and Issuance of Series A Preferred Shares:

c) Authorization and Issuance of Series B Preferred Shares:

8. Share Purchase Warrants

The following table summarizes the continuity of share purchase warrants:

As at June 30, 2018, the following share purchase warrants were outstanding: 

9. Stock Options

The Company has adopted a Stock Option Plan (“Stock Option Plan”) which permits the Company to issue stock options for up to 30,000 (post consolidation) common shares of the Company to directors, officers, employees and consultants of the Company with a maximum term of 5 years, exercise prices equal to the minimum fair market value per common share on the date of grant, and a vesting schedule determined by the Board of Directors at the time of granting the options.

The following table summarizes the continuity of stock options:

As at June 30, 2018, the following share purchase options were outstanding:

During the period ended June 30, 2018, $3,115 (2017–$19,480) in stock-based compensation expense was recorded and allocated amongst general and administrative, consulting fees, management fees, and research and development expenses. The intrinsic value of the options was $nil at June 30, 2018, and March 31, 2018. 

10. Concentration of Risk

Revenues are currently generated through licensing, professional services, and payment processing provided to our existing customers. During the three months ended June 30, 2018, the Company had revenues from five customers (2017 – five customers) with 57.4% (2017 – 55%) of revenues generated from the Company’s largest customer. At June 30, 2018, the Company’s accounts receivable is concentrated and due from three customers (March 31, 2018 – four customers) with 43% (March 31, 2018 – 43%) of accounts receivable due from the Company’s largest customer. 

11. Commitments and Contingencies

11. Commitments and Contingencies – Continued

12.  Segment Information

The Company has a single operating segment that provides FinTech solutions and services to businesses located in Canada and the United States of America (“USA”). Revenues are generated in Canada and the USA while all assets are located in Canada. During the three months ended June 30, 2018, the Company generated revenue of $51,139 (CDN$66,022) (2017 -$62,523 (CDN$84,082)) in Canada and $37,617 (2017 - $53,207) in the USA. The costs incurred to generate this revenue are expensed as research and development. At June 30, 2018, and 2017, the Company’s long-lived assets are located in Canada.  

13. Subsequent Events

Cash flows used in Operating Activities

During the three months ended June 30, 2018, Mobetize used net cash of $166,255 in operating activities as compared to $343,139 of net cash used in operating activities during the three months ended June 30, 2017. The change in cash used in operating activities over the comparative periods, is primarily attributed to payments towards accounts payable and the outstanding accounts owed to related parties.

Mobetize expects to continue to use net cash flow in operating activities until such time as losses decrease and revenues increase.

Cash flows used in Investing Activities

During the three months ended June 30, 2018, and June 30, 2017, Mobetize used $nil in investing activities.

Mobetize expects to use cash flow in investing activities in future periods as it will require additional investment in equipment and research and development to expand its business.

Cash flows provided by Financing Activities

During the three months ended June 30, 2018, Mobetize realized $203,024 in proceeds provided by financing activities compared to $nil in proceeds provided by financing activities during the three months ended June 30, 2017. The proceeds provided by financing activities in the current three-month period were realized in connection with related and non-related promissory notes.

Mobetize expects to realize cash flow from financing activities in future periods until such time as it can increase revenue to the point at which it can maintain operations and fund business growth.

Financing

We have financed operations to date from the proceeds of private placements of common stock, the exercise of warrants, the issuance of convertible promissory notes, and advances from directors and shareholders. Our business does anticipate increases in operating expenses and capital expenditures over the next twelve months in relation to: (i) product development; (ii) research and development to enhance existing products and create new ones; (iii) marketing expenses; and (iv) ongoing professional fees. We expect that our working capital requirements will be funded over this period by a combination of revenue, shareholder debt or equity private placements of our securities and if necessary, shareholder loans. Despite our expectation, we have no agreements to obtain funds through bank loans, lines of credit or any other sources. Our only expectation is that DPL will complete the financing described below, which completion can in no way be assured. Since we have no financing committed, our inability to realize financing would materially restrict our operations.

On August 14, 2018, Mobetize signed a non-binding letter of intent with DPL pursuant to which DPL will invest $500,000 into Mobetize. The letter of intent also anticipates DPL’s use of our Services.

Mobetize has adopted a stock option plan pursuant to which it can grant up to 30,000 (post consolidation) options to purchase shares of its common stock to employees, directors, officers, consultants or advisors on the terms and conditions set forth therein. As of June 30, 2018, 20,000 options with an exercise price of $60 remain outstanding, 19,765 of which have vested.

Mobetize has no lines of credit or other bank financing arrangements in place.

Mobetize has no commitments for future capital expenditures that are material.

Mobetize has no current plans for the purchase or sale of any plant or equipment.

Mobetize has no current plans to make any changes in the number of employees.

Mobetize does not expect to pay cash dividends in the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2018, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

GOING CONCERN

The independent auditors' report accompanying our March 31, 2018, financial statements contained an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. As of June 30, 2018, Mobetize had an accumulated deficit of $9,090,328, a history of net losses and cash used in operating activities, and a working capital deficiency of $1,247,870. These factors raise substantial doubt regarding Mobetize’s ability to continue as a going concern. Mobetize’s ability to continue as a going concern is dependent on continued financial support from management, increasing revenue, realizing additional debt or equity financing, decreasing operating costs and producing commercially viable products. Nonetheless, these consolidated financial statements have been prepared on a going concern basis, which implies that Mobetize will continue to realize its assets and discharge its liabilities in the normal course of business.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are summarized in Note 2 to our audited annual consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe that accounting policies identified in Note 2 are the most critical to our consolidated financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions.

Mobetize recognizes revenue from payment processing, licensing, and provision of professional services. Revenue will be recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service has been provided, and collectability is reasonably assured.

Stock-Based Compensation

Mobetize records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options.

ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. Mobetize uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by Mobetize’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to Mobetize’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statements of loss and comprehensive loss over the requisite service period. Options granted to consultants are valued at the fair value of the equity instruments issued, or the fair value of the services received, whichever is more reliably measurable.

Embedded Conversion Features

Mobetize evaluates embedded conversion features within convertible debt under ASC 815 Derivatives and Hedging to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in income (loss). If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, Debt with Conversion and Other Options for consideration of any beneficial conversion feature.

Derivative Financial Instruments

Mobetize does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Mobetize evaluates all of it financial instruments, including stock purchase warrants and stock options, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income (loss). For option-based simple derivative financial instruments, Mobetize uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Beneficial Conversion Feature

For conventional convertible debt where the rate of conversion is below market value, Mobetize records a Beneficial Conversion Feature and related debt discount.