Martello Technologies Group Inc. — Interim / Quarterly Report 2023

Aug 24, 2022

Unaudited condensed interim consolidated financial statements of

Martello Technologies Group Inc.

For the three months ended June 30, 2022 and 2021

Martello Technologies Group Inc.

“ Notice to Reader ”

The accompanying condensed unaudited interim consolidated financial statements of Martello Technologies Group Inc. for the three ended June 30, 2022, and 2021 have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company. These statements have not been reviewed by the Company ’ s external auditors.

Dated: August 23, 2022

“ Jim Clark ”

Jim Clark Chief Financial Officer

“ John Proctor ” John Proctor Chief Executive Officer

Martello Technologies Group Inc.

For the three months ended June 30, 2022 and 2021

Table of contents

Condensed interim consolidated statements of loss and comprehensive loss ............................................... 4 Condensed interim consolidated statements of financial position ................................................................ 5 Condensed interim consolidated statements of changes in shareholders’ equity .......................................... 6 Condensed interim consolidated statements of cash flows ........................................................................... 7 Notes to the condensed interim consolidated financial statements ......................................................... 8-18

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

Page 3

Martello Technologies Group Inc. Condensed interim consolidated statements of loss and comprehensive loss For the three months ended June 30, 2022 and 2021 Unaudited

(In Canadian dollars)

			June 30,		June 30,
	Notes		2022		2021
Income
Sales	5	$	4,178,191	$	4,400,560
Cost ofgoods sold	5,6		462,908		427,883
Gross margin			3,715,283		3,972,677
			1
Expenses
Research and development	7		1,627,640		1,735,642
Sales and marketing	7		1,675,669		1,961,045
General and administrative	7		1,235,666		1,348,647
Depreciation	12		88,812		111,766
Amortization			396,488		508,863
Acquisition-related costs			-		30,000
			5,024,275		5,695,963
Loss from operations			(1,308,992)		(1,723,286)
Other income (expense)
Interest income	13		3,046		4,339
Interest expense	12		(508,835)		(464,755)
Financing fees			(11,090)		(10,198)
Accretion of long-term debt	11		(21,546)		(15,841)
Gain on receipt of FedDev loan	11		1,036,191		-
Revaluation of forward contract			(18,097)		8,935
Foreign exchange loss	17		(322,607)		(47,633)
Other income			4,978		16,053
Loss from continuing operations before income tax			(1,146,952)		(2,232,386)
Income tax recovery (expense)			(79,118)		65,099
Net loss			(1,226,070)		(2,167,287)
Other comprehensive income (loss) that may be
reclassified to net income (loss):
Cumulative translation adjustment			(814,925)		34,075
Pension plan settlement / remeasurement	13		95,232		(61,050)
Pensionplan asset fair value adjustment	13		2,725		34,063
Total comprehensive loss			(1,943,038)		(2,160,199)
Weighted average shares outstanding	14		326,907,430	302,396,958
Basic and diluted
Net loss per share from continuing operations	8
Basic and diluted		$	(0.00)	$	(0.01)
Net loss per share from discontinued operations	8
Basic and diluted		$	0.00	$	0.00
Net loss per share, basic and diluted	8	$	(0.01)	$	(0.01)

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

Page 4

Martello Technologies Group Inc. Condensed interim consolidated statements of financial position As at June 30, 2022 and March 31, 2022 Unaudited

(In Canadian dollars)

Unaudited (In Canadian dollars)
			June 30,		March 31,
	Note		2022		2022
Assets
Current assets
Cash		$	5,671,369	$	4,853,218
Short-term investment			170,000		170,000
Trade and other accounts receivable	9		4,697,113		4,231,065
Investment tax credits and grants receivable	7		1,107,001		944,816
Prepaid expenses			1,005,932		887,910
Inventories			42,967		45,336
Lease receivable	19		21,753		35,394
Total current assets			12,716,135		11,167,739
Goodwill			17,712,169		18,310,397
Intangible assets			10,107,315		10,854,530
Equipment and leasehold improvements			159,336		180,165
Right-of-use assets	12		1,029,857		1,118,599
Investment			303,750		303,750
Total assets			42,028,562		41,935,180
Liabilities
Current liabilities
Accounts payable and accrued liabilities	10,17		3,601,701		3,113,352
Foreign exchange forward contract liability			22,864		5,015
Current portion of deferred revenue	5		5,512,348		5,215,919
Current portion of long-term debt	11,17		10,462,057		270,000
Current portion of lease obligation	12,17		282,612		296,759
Total current liabilities			19,881,582		8,901,045
Deferred revenue	5		2,025,745		2,099,188
Long-term debt	11,17		1,010,699		9,903,581
Lease obligation	12,17		844,637		917,115
Pension obligation	13		269,986		358,643
Deferred tax liability			157,012		79,621
Total liabilities			24,189,661		22,259,193
Shareholders' equity
Share capital	14		48,815,617		48,815,617
Contributed surplus	14		3,700,851		3,594,895
Warrants	14		2,319,977		2,319,977
Accumulated other comprehensive income			(2,002,960)		(1,285,987)
Deficit			(34,994,584)		(33,768,515)
Total shareholders' equity			17,838,901		19,675,987
Total liabilities and equity			42,028,562		41,935,180

Approved by the Board on August 23, 2022 and signed on its behalf by: Original signed “Colley Clarke” Director Original signed “Michael Michalyshyn” Director

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

Page 5

Martello Technologies Group Inc. Condensed interim consolidated statements of changes in shareholders’ equity for the three months ended June 30, 2022 and 2021

(In Canadian Dollars)

						Accumulated other	comprehensive
							Cumulative
					Contributed		translation		Total shareholders'
	Notes	Shares outstanding	Share capital	Warrants	surplus	Other	adjustment	Deficit	equity
		#	$	$	$	$	$	$	$
Balance at April 1, 2021		302,396,958	46,313,516	3,182,443	3,186,388	578,871	(431,954)	(26,194,456)	26,634,808
Net loss for the period		-	-	-	-	-	-	(2,167,287)	(2,167,287)
Actuarial gain on remeasurement	13	-	-	-	-	(61,050)	-	-	(61,050)
Pension plan fair value adjustment	13	-	-	-	-	34,063	-	-	34,063
Other comprehensive income		-	-	-	-	-	34,075	-	34,075
Total comprehensive loss for the period		-	-	-	-	(26,987)	34,075	(2,167,287)	(2,160,199)
Exercise of stock options	14	200,000	40,937	-	(15,737)	-	-	-	25,200
Share-based compensation	14	-	-	-	116,443	-	-	-	116,443
Balance as at June 30, 2021		302,596,958	46,354,453	3,182,443	3,287,094	551,884	**(397,879) **	**(28,361,743) **	24,616,252
Balance at April 1, 2022		326,707,430	48,815,617	2,319,977	3,594,895	616,336	(1,902,323)	(33,768,515)	19,675,987
Net loss for the period		-	-	-	-	-	-	(1,226,069)	(1,226,069)
Pension plan settlement	13	-	-	-	-	95,232	-	-	95,232
Pension plan fair value adjustment	13	-	-	-	-	2,725	-	-	2,725
Other comprehensive income		-	-	-	-	-	(814,930)	-	(814,930)
Total comprehensive loss for the period		-	-	-	-	97,957	(814,930)	(1,226,069)	(1,943,042)
Share-based compensation	14	-	-	-	105,956	-	-	-	105,956
Balance as at June 30, 2022		326,707,430	48,815,617	2,319,977	3,700,851	714,293	**(2,717,253) **	**(34,994,584) **	17,838,901

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

Page 6

Martello Technologies Group Inc.

Condensed interim consolidated statements of cash flows For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

			June 30,		June 30,
	Note		2022		2021
Operating activities
Net loss from continuing operations before income tax		$	(1,146,952)	$	(2,232,386)
Items not affecting cash:
Depreciation	12		88,812		111,766
Amortization of intangible assets			396,488		508,863
Amortization of debt issuance cost			142,110		138,110
decre(Increase) decrease in fair value of hedge liability			17,849		(8,935)
Accretion of long-term debt	11		21,546		15,841
Gain on receipt of FedDev loan	11		(1,036,191)		-
Share-based compensation	14		105,956		116,443
Deferred share units compensation	14		72,250		-
Defined benefit plan expense	13		31,717		38,501
Lease interest expense	12		19,867		7,705
Accrued interest expense	11		-		62,538
forei Unrealised foreign exchange loss			340,210		1,803
Net change in operatingcomponents of workingcapital	15		23,832		(531,500)
Total cash flows used in operatingactivities			(922,506)		(1,771,251)
Investing activities
Additions to equipment and leasehold improvements			(1,532)		-
Total net cash flows used in investingactivities			(1,532)		-
Financing activities
Proceeds from exercise of stock options	14		-		25,200
Proceeds from long-term debt	11		1,920,000		-
Repayment of long-term debt	11		(66,000)		(49,000)
Repayment of lease obligations	12		(81,682)		(90,765)
Total cash flowsprovided by (used in)financingactivities			1,772,318		(114,565)
Net change in cash			848,280		(1,885,816)
Cash, beginning of period			4,853,218		8,349,904
Effects of currencytranslation on cash			(30,129)		(514)
Cash, end ofperiod			5,671,369		6,463,574

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

Page 7

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

1. Corporate information

Martello Technologies Group Inc. (the “Corporation”) is a provider of digital experience monitoring (DEM) solutions. The Corporation’s common shares are traded on the TSX Venture Exchange (“TSXV”) under the trading symbol MTLO.

On April 1, 2021, Martello Technologies Corporation amalgamated with Savision Canada Limited and Elfiq Inc. (the “Amalgamating Corporations”) to form an amalgamated corporation, called Martello Technologies Corporation (the “Amalgamated Corporation”). Martello Technologies Corporation is a wholly owned subsidiary of the Corporation. All the properties and assets of the Amalgamating Corporations were continued as the properties and assets of the Amalgamated Corporation and the Amalgamated Corporation is liable, and will continue to be liable, for the obligations of Martello Technologies Corporation and the other Amalgamating Corporations to their creditors.

2. Basis of preparation and accounting policies

The condensed interim consolidated financial statements have been prepared under the going concern assumption and using the historical cost basis, except for foreign exchange forward contracts which are measured at fair market value.

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and should be read in conjunction with the Corporation’s most recent annual audited consolidated financial statements, which are for the year ended March 31, 2021.

Significant accounting policies

The significant accounting policies used in preparing these condensed interim consolidated financial statements are the same as those disclosed in note 2 of the Corporation’s annual audited consolidated financial statements for the year ended March 31, 2022.

3. Significant judgments and estimates

The preparation of the Corporation’s condensed interim consolidated financial statements requires management to make judgments, estimates, and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities, and the disclosure of contingent liabilities, at each reporting date. The outcome of these uncertainties about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

The judgments, estimates and assumptions applied in the preparation of these condensed interim consolidated financial statements are the same as those disclosed in note 3 to the 2022 annual audited consolidated financial statements.

4. Fair value measurement

The carrying amounts of the Corporation’s cash, short-term investments, trade and other receivables, investment tax credits and grants receivable, foreign exchange contract, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of these instruments. The line of credit is a demand instrument at a variable rate and therefore the carrying amount approximates fair value. The market interest rates that would apply to the Corporation’s long-term debt is not significantly different from the effective interest rates used to amortize these debts. Therefore, the carrying amounts are comparable to fair values.

Long-term debt is measured using observable interest rates at initial recognition and is categorized within Level 2 of the fair value hierarchy. The fair value of foreign exchange forward contracts, which were entered into on January 19, 2022, represented a net liability of $22,864 at June 30, 2022 (March 31,2022 -$5,015). The fair value is estimated using a market approach with forward exchange rates observable at the end of the reporting period and contract forward rates as inputs. Forward contracts are categorized within Level 2 of the fair value hierarchy. The hierarchy is described in Note 22 of the March 31, 2022 annual financial statements.

Page 8

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

5. Revenue

The geographic location of revenues, based on the location of its customers, is as follows:

	3 Months Ended
	June 30, June 30, 2022 2021 $ $
Revenue for the period ended Canada United States Europe Asia Latin America Australia Other	1,370,462 1,325,717 1,121,235 1,093,837 1,467,825 1,692,071 80,773 89,894 4,839 21,364 130,892 138,300 2,165 39,377
Total revenue	4,178,191 4,400,560

The Corporation’s revenue can be analyzed by type and by basis of their recognition as follows for the three-month periods ended:

three-month periods ended:
	3 Months	Ended
	June 30,		June 30,
	2022		2021
	$		$
Revenue at a point in time
Hardware	4,310		49,740
Training and professional services	19,564		30,936
Revenue recognized over time
Subscription licenses	3,618,307	3,495,026
Maintenance and support	508,086		776,287
Term licenses	27,924		48,571
Total revenue	4,178,191	4,400,560

At each reporting date, there are no unfulfilled performance obligations extending beyond a year for which the Corporation has not collected funds or deposits.

Deferred revenue is comprised of the following:

	June 30, 2022	March 31, 2022
	$	$
Current portion of deferred revenue
Subscription licenses	4,181,510	3,642,505
Maintenance and support	1,219,563	1,461,746
Term licenses	111,275	111,668
Long-term portion of deferred revenue
Subscription licenses	1,484,506	1,438,141
Maintenance and support	320,110	414,267
Term licenses	221,129	246,780
Total deferred revenue	7,538,093	7,315,107

Page 9

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Revenue (continued)

Non-current assets by geographic area are as follows:

	June 30, 2022	March 31, 2022
	$	$
Canada	818,292	848,656
Netherlands	9,680,905	10,088,616
Switzerland	18,806,609	19,822,658
Other	6,621	7,511
Total non-current assets	29,312,427	30,767,441

6. Operating segment information

The Corporation has assessed that it operates in two LoB, those being Modern Workplace Optimization and Mitel. These LoB’s engage in business activities from which they earn revenues from subscription and perpetual software licenses, hardware, maintenance and support, and training and professional services.

	Modern
	Workplace
	Optimization	Mitel	Total
Three months ended June 30, 2022	$	$	$
Revenue at a point in time
Hardware	-	4,310	4,310
Training and professional services	14,465	5,099	19,564
Revenue recognized over time
Subscription licenses	1,882,959	1,735,348	3,618,307
Maintenance and support	498,872	9,214	508,086
Term licenses	27,924	-	27,924
Total revenue	2,424,220	1,753,971	4,178,191
	Modern
	Workplace
	Optimization	Mitel	Total
Three months ended June 30, 2021	$	$	$
Revenue at a point in time
Hardware	-	49,740	49,740
Training and professional services	30,936	-	30,936
Revenue recognized over time
Subscription licenses	1,700,118	1,794,908	3,495,026
Maintenance and support	759,852	16,435	776,287
Term licenses	48,571	-	48,571
Total revenue	2,539,477	1,861,083	4,400,560

Sales and gross margin for the three months ended is as follows:

	Modern
	Workplace	Mitel	Total
	Optimization
Three months ended June 30, 2022	$	$	$
Sales	2,424,220	1,753,971	4,178,191
Cost ofgoods sold	429,167	33,741	462,908
Gross margin	1,995,053	1,720,230	3,715,283

Page 10

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Operating segment information (continued)

	Modern
	Workplace	Mitel	Total
	Optimization
Three months ended June 30, 2021	$	$	$
Sales	2,539,477	1,861,083	4,400,560
Cost ofgoods sold	345,853	82,030	427,883
Gross margin	2,193,624	1,779,053	3,972,677

7. Additional disclosures related to the statements of loss and comprehensive loss

• i. Research and development expense for the three months ended June 30, 2022 is net of investment tax credits recognized of $nil (three months ended June 30, 2021 - $10,231) and investment grants recognized of $190,117 (three months ended June 30, 2021 - $248,861).

The Corporation has investment tax credits receivable of $1,107,001 as of June 30, 2022 (March 31, 2022 – $944,816) which are earned as a result of qualifying Scientific Research and Experimental Development expenditures. The investment tax credits are recognized when the expenditures are made, and their realization is reasonably assured.

• ii. For the three months ended June 30, 2022 and 2021 the total staff expenses are $3,280,097 and $3,936,541 respectively.

8. Loss per share

Basic loss per share amounts are calculated by dividing net loss by the weighted average number of common shares outstanding during the period.

Diluted loss per share amounts are calculated by dividing the net loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period plus the weighted average number of common shares, if any, that would be issued on conversion of all the dilutive potential effects.

As at June 30, 2022 and 2021, all instruments were anti-dilutive.

The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:

	June 30,	June 30,
	2022	2021
	#	#
Share options	23,996,389	18,528,992
Warrants	49,148,201	61,925,474
Broker compensation unit options	3,018,575	3,018,575
	76,163,165	83,473,041
Movements in the expected credit losses	June 30, 2022	March 31, 2022
	$	$
Balance, beginning of period	18,481	12,080
Trade receivables written off	-	(12,080)
Additional allowance recognized	-	18,481
Balance, end of theperiod	18,481	18,481

Page 11

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

9. Trade and other accounts receivable

The aging analysis of trade and other accounts receivable is as follows:

==> picture [373 x 84] intentionally omitted <==

10. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities
	June 30, 2022	March 31, 2022
	$	$
Trade payables	1,131,261	302,843
Accrued key management compensation	378,664	326,316
Accrued professional fees	541,522	720,891
Salaries, benefits, and vacation payable	1,127,633	1,298,091
Commissions payable	36,381	34,464
Taxes payable	128,958	73,034
Other Payables	257,282	357,713
Total	3,601,701	3,113,352

11. Debt

Debt Other Payables 257,282 357,7 Total 3,601,701 3,113,3	13 52
	June 30,	March 31,
	2022	2022
	$	$
FedDev loan; advanced to support the commercialization of the Corporation's
activities; non-interest bearing, unsecured and repayable in increasing monthly payments between January 2018 and December 2023. The effective interest rate is	320,130	371,764
10%.
Canada Economic Development Agency (CEDA), non-interest bearing, unsecured
and repayable in 60 equal monthly payments commencing in February 2021. The	72,562	75,579
effective interest rate is 16%.
Vistara Technology Growth Fund III Limited Partnership ("Vistara"), US $8,000,000
subordinated secured term loan; repayable within 36 months of closing and carries
interest at the greater of: (i) 12.50% per annum; and (ii) the U.S. prime rate plus	10,186,058	9,726,238
8.75% per annum calculated monthly in arrears on the outstanding principal. The
effective interest rate is 20%.
FedDev loan - Jobs and Growth: advanced to support the commercialization of the
Corporation's activities; non-interest bearing, unsecured and repayable in increasing monthly payments between October 2024 and September 2030. The incremental	894,006	-
borrowing rate is 13.85%.
Total long-term debt	11,472,756	10,173,581
Amounts due within one year	(10,462,057)	(270,000)
Long-term debt	1,010,699	9,903,581

On March 7, 2022, the Corporation has entered into a new FedDev contribution agreement in total of $2,500,000. The funds provided under this contribution agreement are non-interest bearing, unsecured and are to be repaid over 72 months commencing on October 1, 2024. On May 16, 2022, the Corporation received a deposit of $1,920,000. An adjustment of $1,036,191 was recorded to recognize the government grant within the loan at fair value upon inception. The present value will be accreted into other income (expenses) over the remaining term of the loan to accrete the loan back to its face value of $1,920,000

Page 12

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Debt (continued)

On May 28[th] 2022 the Vistara loan moved from long term to current debt. Management with the Board of directors are actively engaged in debt refinancing discussions with a number of potential lenders and investors. This includes Vistara as well as National Bank of Canada, Export Development Canada and Wesley Clover International. There are other interested parties who will be engaged as appropriate. Management and the Board of Directors are confident that suitable debt refinancing will be finalized within the next 2 Quarters.

12. Right-of-use assets

Right-of-use asset:	$
Balance at March 31, 2022	1,118,599
Depreciation for the period	(67,692)
Foreign exchange translation	(21,050)
Balance at June 30, 2022	1,029,857
Lease obligation:	$
Balance at March 31, 2022	1,213,871
Interest expense	19,867
Payments	(97,394)
Foreign exchange translation	(9,095)
Balance at June 30, 2022	1,127,249

For the three months ended June 30, 2022, the Corporation recognized $67,692 (2021 - $77,040) as depreciation on right-of-use assets, and $19,867 (2021 - $7,705) as interest expense on the lease liability.

In applying the practical expedient for short-term leases, the Corporation has excluded rent payments of $24,010 (three months ended June 2021 - $24,827) from the right-of-use asset and lease liability calculations.

When measuring lease liabilities, the Corporation discounted lease payments using incremental borrowing rates of between 2.47% and 5.40% except for the renewed lease for office premises in Kanata, Ontario that has an incremental borrowing rate of 14.08%.

The Corporation has applied judgment in the process of applying IFRS 16 and determining the appropriate lease term on a lease-by-lease basis, which has a significant effect on the measurement of the lease liability and right-of-use assets recognized. Management considers many factors including any events that create an economic incentive to exercise a renewal option including expected future performance and past business practice. The Corporation has also exercised judgment in determining the incremental borrowing rate based on the term, security, the lessee entity’s economic environment, credit rating, level of indebtedness and asset specific adjustments.

13. Defined benefits retirement plan

For the three months ended June 30, 2022, the Corporation recognized $30,891 (2021 - $41,568) in current service cost and $826 in net interest expense (2021 - $1,985 in net interest income respectively). The current service cost is included in the operating expenses on the condensed interim consolidated statements of loss and comprehensive loss. The net interest income/expense is included in interest expense.

At June 30, 2022, the Plan was in a deficit position of $269,986 (March 31, 2022 - $358,643). The movements in the defined benefit obligation for the period ending June 30, 2022 are as follows:

Page 13

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Defined benefits retirement plan (continued)

Defined benefits retirement plan (continued)
	$
Defined benefit obligation at April 1, 2022	1,471,929
Current service cost	30,891
Interest cost	3,711
Foreign exchange translation	(7,224)
Participant contributions	8,858
Benefitspaid	(390,847)
Defined benefit obligation June 30, 2022	1,117,318

The movements in Plan assets for the period from March 31, 2022 to June 30, 2022 are:

The movements in Plan assets for the period from March	31, 2022 to June 30,
	$
Plan assets at April 1, 2022	1,113,286
Interest income	2,885
Return on plan assets, excluding interest income	2,725
Participant contributions	8,858
Employer contributions	20,667
Foreign exchange translation	(5,473)
Benefitspaid	(295,616)
Fair value ofpensionplan June 30, 2022	847,332

The weighted average duration of the obligation at June 30, 2021, which relates to active members, is 19.65 years.

The Corporation expects to make contributions to the Plan totaling $105,724 during the next 12 months.

14. Equity instruments

i. Warrants

During the three months ended June 30, 2022, no warrants were issued (three months ended June 30, 2021 – $nil) and no warrants expired (three months ended June 30, 2021 – $nil).

At June 30, 2022 the Corporation’s outstanding warrants consisted of the following:

Date of Issue	Expiry	Type	Exercise	Number
	Date		price	outstanding
			$	#
May 26, 2020	May 26, 2023	First Offering	0.30	32,861,250
March 18, 2021	March 18, 2023	Second Offering	0.30	15,131,700
March 18, 2021	March 18, 2023	Private Placement	0.30	1,155,251
				49,148,201

ii. Share-based payments

The Corporation has a stock option plan (the “Plan”) open to certain members of management, employees and consultants. Unless otherwise determined by the Board of Directors, options issued under the Plan vest over a three-year period and have expiry dates which are 5 years from issuance. The maximum number of common shares reserved for issuance of options that may be granted under the Plan is 10% of the total outstanding common shares of the Corporation, calculated on a fully-diluted basis.

Page 14

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Equity Instruments (continued)

The following table summarizes the continuity of options issued under the Plan:

Equity Instruments (continued) The following table summarizes the continuity of options issued under the Plan:	Equity Instruments (continued) The following table summarizes the continuity of options issued under the Plan:
Option exercise price Total $ #
Balance outstanding at March 31, 2021 0.11-0.38 17,854,992 Granted 0.06-0.19 8,687,000 Exercised 0.11-0.13 (200,000) Forfeited 0.11-0.34 (1,643,000) Expired 0.11-0.33 (352,603) Balance outstanding at March 31, 2022 0.11-0.38 24,346,389 Granted - Exercised - Forfeited 0.06-0.19 (350,000) Expired - -
Balance outstanding at June 30, 2022 23,996,389
Options exercisable:
At June 30, 2022 0.11-0.38	11,834,259
At March 31, 2022 0.11-0.38 11,635,938

	Option	Number
Grant date	exercise price	exercisable	Remaining life
	$	#	Years
July 17, 2017	0.110	-	0.05
December 18, 2017	0.110	1,488,000	0.47
April 3, 2018	0.130	5,733,334	0.76
January 18, 2019	0.335	352,000	1.55
February 28, 2019	0.380	424,000	1.67
September 3, 2019	0.375	13,332	2.18
November 26, 2019	0.330	1,422,588	2.41
December 10, 2019	0.320	6,666	2.45
February 13, 2020	0.305	13,332	2.63
March 5, 2020	0.225	6,666	2.68
July 28, 2020	0.195	1,191,146	3.08
August 31, 2020	0.205	665,215	3.17
November 20, 2020	0.220	79,663	3.39
February 19, 2021	0.220	58,331	3.64
June 30, 2021	0.135	379,986	4.00
September 8, 2021	0.11-0.19	-	4.19
November 3, 2021	0.190	-	4.35
November 30, 2021	0.100	-	4.42
January 13, 2022	0.06-0.10	-	4.54
February 15, 2022	0.060	-	4.63
Weighted average	0.179		1.49
Total		11,834,259

Page 15

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

Equity Instruments (continued)

At June 30, 2022, the fair value of share-based compensation to be recognized as an expense in future periods totaled $325,373 (March 31, 2022 – $440,442).

In determining the amount of share-based compensation, the Corporation uses the Black-Scholes option pricing model to establish the fair value of options granted. There were no options granted in the three months ended June 30, 2022 (1,330,000 - three months ended June 30, 2021).

15. Supplementary cash flow information

The net change in the operating components of working capital is as follows:

==> picture [384 x 135] intentionally omitted <==

16. Related party transactions and balances

During the period the Corporation entered into the following transactions with related parties in the normal course of operations.

• i. For the three months ended June 30, 2022, the Corporation paid rent to Wesley Clover International Corporation, which is reflected in the June 30, 2022 results as depreciation of right-of-use assets of $17,346 and -$63, in rent expense which is net of credit received for excess rent paid for prior periods (June 30, 2021 -24,601 of depreciation and $28,554 of rent expense). Included in accounts payable and accrued liabilities at June 30, 2022 and March 31, 2022 is $nil payable to Wesley Clover International Corporation.

• ii. One of the co-chairmen is chairman of Wesley Clover International Corporation, a shareholder of the Corporation.

• iii. Included in accounts payable and accrued liabilities are balances as at June 30, 2022 totaling $378,664 (March 31, 2022- $326,316) due to key management personnel for compensation and earned vacation pay.

• iv. The remuneration of directors and key management personnel during the three-month period ended June 30 was as follows:

ended June 30 was as follows:
	Jun 30,	Jun 30,
	2022	2021
	$	$
Salaries, wages and bonuses	371,443	505,355
Other employee benefits	11,939	13,947
Share-based compensation	121,839	69,306
Total	505,221	588,608

Page 16

Martello Technologies Group Inc. Notes to condensed interim consolidated financial statements For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

17. Financial risk management objectives and policies

There have been no significant changes to the nature and magnitude of risk exposures and to management's objectives and processes for managing them since the prior period.

Credit risk

Trade receivables at June 30, 2022 are presented net of an allowance for doubtful accounts of $18,481 (March 31, 2021 - $12,080). The Corporation’s largest customer, which is included in the Monitoring - Mitel UC segment reporting, accounted for revenue of $1,691,369, approximately 40% of total revenue, for the three months ended June 30, 2022 (three months ended June 30, 2021 - $1,800,409 and 41%). At June 30, 2022 the account receivable from this customer totaled $1,221,485 (March 31, 2022$1,305,334). The Corporation maintains strict credit policies and limits in respect to counterparties.

Liquidity risk

The following table summarizes the maturities of financial instruments by fiscal year on an undiscounted basis, including interest payments, as at June 30, 2022:

						2028 and
	2023	2024	2025	2026	2027	after	Total
	$	$	$	$	$	$	$
Accounts payable
and accrued liabilities	3,601,701	-	-	-	-	-	3,601,701
Lease obligation	370,330	328,000	328,000	217,539	103,350	104,738	1,451,957
Debtliabilties	204,000	10,886,127	93,120	217,627	276,480	1,390,080	13,067,434
Total	4,176,031	11,214,127	421,120	435,166	379,830	1,494,818	18,121,092

Foreign currency risk

For the three months ended June 30, 2022, 99% of revenue were in foreign currencies (June 30, 2021 – 99% of revenue). For the three months ended June 30, 2022, 46% of expenses were in foreign currencies (June 30, 2021 – 46%).

The Corporation’s exposure to the risk of changes in foreign exchange rates relates primarily to the Corporation’s operating activities, when revenue and expense transactions are denominated in a currency other than the Canadian dollar, the Corporation’s functional currency. The Corporation’s net exposure to the USD and EUR is denominated in CAD and is summarized in the following table:

	June 30,	March 31,	June 30,	March 31,
	2022	2022	2022	2022
	USD	USD	EUR	EUR
Cash and restricted cash	1,854,083	1,854,083	404,981	404,981
Trade and other accounts receivable	4,166,628	4,166,628	583,034	583,034
Accounts payable and accrued liabilities	(2,825,398)	(2,825,398)	(1,017,030)	(1,017,030)
Foreign exchange forward contract asset (liability)	22,864	22,864	-	-
Long-term debt	11,369,728	11,369,728	-	-
Net exposure	14,587,905	14,587,905	(29,015)	(29,015)

A 10% change of the US$ against the CAD$ at June 30, 2022 would have increased or decreased net loss by $1,455,889 (March 31, 2022: $903,010).

18. Capital management

Management defines capital as total shareholders’ equity. The Board of Directors has not established capital benchmarks or other targets. There have been no changes in the Corporation’s approach to capital management during the three months ended June 30, 2022. The Corporation will continually assess the adequacy of its capital structure and capacity and make adjustments within the context of the Corporation’s strategy, economic conditions, and the risk characteristics of the business.

Page 17

Notes to condensed interim consolidated financial statements

Martello Technologies Group Inc.

For the three months ended June 30, 2022 and 2021

(in Canadian Dollars)

19. Commitments

The Corporation entered into a 5-year lease for office premises in Kanata, Ontario, Canada commencing March 1, 2017, extending through to February 28, 2022. The lease was subsequently renewed, and the new maturity date is February 28, 2028. The lease is with a related party, as described in note 16 Related party transactions and balances. The Corporation is also committed to a 3-year lease for office premises in Montreal, Quebec (the “Elfiq Lease”) commencing November 1, 2019 and extending through to October 31, 2022. The Corporation has subleased the Elfiq Lease to a third party and the lease has been guaranteed by the Corporation.

Total lease commitments remaining for the year-ending March 31, 2023 is $101,204.

20. Subsequent events

Subordinate loan

Martello and Terry Matthews through Wesley Clover International (“WCI”) have agreed to a USD $1.5M (~CAD $2M) subordinate loan. Interest will accrue at US Prime plus 8.75%, consistent with the Vistara loan. Interest will accrue and be paid at loan maturity. Maturity is May 28, 2023. The company will use the WCI loan to pay down the Vistara loan. This will allow Martello the lead time to grow the revenue trajectory while meeting the Vistara loan covenants through to maturity.

Page 18