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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2022
   
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
   
  For the transition period from __________________ to ___________________

 

Commission File Number: 333-120120-01

 

KIDOZ inc.

 

(Exact name of small business issuer as specified in its charter)

 

anguilla   98-0206369
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

 

Hansa Bank Building, Ground Floor, Landsome Road

AI 2640, The Valley, Anguilla, B.W.I

(Address of principal executive offices)

 

(888) 374-2163

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares   KIDZ   Toronto Venture Stock Exchange

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS The number of outstanding shares of the Issuer’s common stock, no par value per share, was 131,581,499 as of August 15, 2022.

 

 

 

 

 

 

KIDOZ INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2022

 

TABLE OF CONTENTS

 

  PAGE
PART I - FINANCIAL INFORMATION 2
ITEM 1. Consolidated Financial Statements. 2
Consolidated Balance Sheets 2
Consolidated Statements of Operations and Comprehensive Loss 3
Consolidated Statements of Stockholders’ Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
ITEM 4. Controls and Procedures. 34
PART II - OTHER INFORMATION 35
ITEM 1. Legal Proceedings 35
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits and reports on Form 8-K 36
EXHIBITS 36
SIGNATURES 37
CERTIFICATIONS
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002

 

Page 1

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Consolidated Balance Sheets

(Unaudited)

 

As at  June 30, 2022   December 31, 2021 
Assets          
Current assets:          
Cash  $1,729,653   $2,078,607 
Accounts receivable, less allowance for doubtful accounts
$53,380 (December 31, 2021 - $56,605) (Note 3)
   3,819,896    6,627,864 
Prepaid expenses   98,273    105,468 
Total Current Assets   5,647,822    8,811,939 
           
Equipment (Note 4)   23,108    20,523 
Goodwill (Note 6)   3,301,439    3,301,439 
Intangible assets (Note 5)   1,420,326    1,694,917 
Long term cash equivalent   23,270    23,624 
Operating lease right-of-use assets (Note 12)   50,883    65,464 
Security deposit   11,238    7,625 
           
Total Assets  $10,478,086   $13,925,531 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $1,219,710   $3,693,944 
Accrued liabilities   483,890    471,882 
Accounts payable and accrued liabilities - related party
(Note 13)
   136,404    53,829 
Derivative liability – warrants (Note 2e and 9)   1,516    23,365 
Operating lease liabilities – current portion (Note 12)   32,341    32,068 
Total Current Liabilities   1,873,861    4,275,088 
           
Deferred tax liability   210,499    210,499 
Government CEBA loan (Note 8)   46,540    47,248 
Operating lease liabilities – non-current portion (Note 12)   24,911    41,999 
Total Liabilities   2,155,811    4,574,834 
           
Commitments (Note 11)   -       
           
Stockholders’ Equity (Note 9):          
Common stock, no par value, unlimited shares authorized, 131,581,499 shares issued and outstanding (December 31, 2021 - 131,424,989)   50,389,216    49,964,919 
Accumulated deficit   (42,091,521)   (40,638,802)
Accumulated other comprehensive income:
Foreign currency translation adjustment
   24,580    24,580 
Total Stockholders’ Equity   8,322,275    9,350,697 
           
Total Liabilities and Stockholders’ Equity  $10,478,086   $13,925,531 

 

See accompanying notes to the consolidated financial statements.

 

Page 2

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Consolidated Statements of Operations and Comprehensive Loss

For Periods Ended June 30, 2022 and 2021

(Unaudited)

 

                 
   Six Months ended June 30, 2022   Six Months ended June 30, 2021   Three Months ended June 30, 2022   Three Months ended June 30, 2021 
                 
Revenue:                    
Ad tech advertising revenue  $4,663,110   $3,624,800   $2,484,799   $2,120,500 
Content revenue   134,477    110,647    28,814    57,005 
Total revenue   4,797,587    3,735,447    2,513,613    2,177,505 
                     
Cost of sales:   2,994,727    2,026,073    1,541,648    1,153,172 
Total cost of sales   2,994,727    2,026,073    1,541,648    1,153,172 
                     
Gross profit   1,802,860    1,709,374    971,965    1,024,333 
                     
Operating expenses:                    
Amortization of operating lease right-of-use assets (Note 12)   14,581    26,112    7,178    8,603 
Depreciation and amortization (Notes 4 & 5)   278,985    282,929    138,614    141,097 
Directors fees (Note 13)   3,998    4,000    2,998    2,000 
General and administrative   402,013    324,056    186,119    166,361 
Salaries, wages, consultants and benefits   427,758    388,578    149,559    256,336 
Selling and marketing (Note 13)   431,802    309,832    251,788    181,144 
Stock awareness program   95,758    285,857    44,427    285,857 
Stock-based compensation (Note 9 & 13)   344,592    269,606    184,594    192,585 
Content and software development (Note 7 & 13)   1,160,693    703,339    644,054    366,046 
Total operating expenses   3,160,180    2,594,309    1,609,331    1,600,029 
                     
Loss before other income (expense) and income taxes   (1,357,320)   (884,935)   (637,366)   (575,696)
                     
Other income (expense):                    
Foreign exchange loss   (117,253)   (42,172)   (89,821)   (4,367)
Gain on derivative liability – warrants (Note 2e)   21,849    37,984    5,505    37,984 
                     
Loss before income taxes   (1,452,724)   (889,123)   (721,682)   (542,079)
                     
Income tax recovery (expense)   5    (2,998)   5    (2,998)
Loss after tax   (1,452,719)   (892,121)   (721,677)   (545,077)
                     
Other comprehensive income (loss)   -    -    -    - 
                     
Comprehensive loss  $(1,452,719)  $(892,121)  $(721,677)  $(545,077)
                     
Basic and diluted loss per common share  $(0.01)  $(0.01)  $(0.01)  $(0.00)
                     
Weighted average common shares outstanding, basic   131,424,989    131,255,597    131,424,989    131,384,769 
Weighted average common shares outstanding, diluted   131,424,989    131,255,597    131,424,989    131,384,769 

 

See accompanying notes to the consolidated financial statements.

 

Page 3

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Consolidated Statements of Stockholders’ EQUITY

For the periods ended June 30, 2022 and 2021

(Unaudited)

 

                     
   Three-Month period Ended June 30, 2022 
          

Accumulated Other

Comprehensive

     
           income     
           Foreign     
           currency   Total 
   Common stock   Accumulated   translation   Stockholders’ 
   Shares   Amount   Deficit   adjustment   Equity 
Balance, December 31, 2021   131,424,989   $49,964,919   $(40,638,802)  $24,580   $9,350,697 
                          
Stock-based compensation   -    159,998    -    -    159,998 
Net loss and comprehensive loss   -    -    (731,042)   -    (731,042)
Balance, March 31, 2022   131,424,989   $50,124,917   $(41,369,844)  $24,580   $8,779,653 
                          
Shares issued   156,510    79,705    -    -    79,705 
Stock-based compensation   -    184,594    -    -    184,594 
Net loss and comprehensive loss   -    -    (721,677)   -    (721,677)
Balance, June 30, 2022   131,581,499   $50,389,216   $(42,091,521)  $24,580   $8,322,275 

 

   Six-Month period Ended June 30, 2021 
          

Accumulated Other

Comprehensive

     
           income     
           Foreign     
           currency   Total 
   Common stock   Accumulated   translation   Stockholders’ 
   Shares   Amount   Deficit   adjustment   Equity 
Balance, December 31, 2020   131,124,989   $49,094,096   $(40,448,481)  $24,580   $8,670,195 
                          
Stock-based compensation   -    77,021    -    -    77,021 
Net loss and comprehensive loss   -    -    (347,044)   -    (347,044)
Balance, March 31, 2021   131,124,989   $49,171,117   $(40,795,525)  $24,580   $8,400,172 
                          
Shares issued   230,000    179,293    -    -    179,293 
Options exercised   70,000    31,264    -    -    31,264 
Stock-based compensation   -    192,585    -    -    192,585 
Net loss and comprehensive loss   -    -    (545,077)   -    (545,077)
Balance, June 30, 2021   131,424,989   $49,574,259   $(41,340,602)  $24,580   $8,258,237 

 

See accompanying notes to the consolidated financial statements.

 

Page 4

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Consolidated Statements of Cash Flows

For the six month periods ended June 30, 2022 and 2021

(Unaudited)

 

   2022   2021 
Cash flows from operating activities:          
Net loss  $(1,452,719)  $(892,121)
Adjustments to reconcile net loss to net cash used in operating
activities:
          
Depreciation and amortization   278,985    282,929 
Amortization of operating lease right-of-use assets   14,581    26,112 
Gain on derivative liability – warrants   (21,849)   (37,984)
Shares issued for services   -    179,293 
Stock awareness program – warrants granted for services   -    83,572 
Stock-based compensation   344,592    269,606 
Unrealized foreign exchange (loss) gain   (354)   225 
           
Changes in operating assets and liabilities:          
Accounts receivable   2,807,968    1,075,503 
Prepaid expenses   7,195    (19,558)
Accounts payable and accrued liabilities   (2,299,946)   (653,747)
Net cash (used in) provided by operating activities   (321,547)   313,830 
           
Cash flows from investing activities:          
Acquisition of equipment   (6,979)   (5,580)
Security deposits   (3,613)   - 
Net cash used in investing activities   (10,592)   (5,580)
           
Cash flows from financing activities:          
Options exercised   -    31,264 
Proceeds of short-term loan   -    200,000 
Repayment of short-term loan   -    (200,000)
Payments on operating lease liabilities   (16,815)   (11,933)
Net cash (used in) provided by financing activities   (16,815)   19,331 
           
Change in cash   (348,954)   327,581 
           
Cash, beginning of period   2,078,607    1,226,045 
Cash, end of period  $1,729,653   $1,553,626 
           
Supplementary information:          
Interest paid  $-   $987 
Income taxes paid  $3,206   $2,998 
Non-cash transaction          
Shares issued to settle accounts payable and accrued liabilities  $79,705   $- 

 

See accompanying notes to the consolidated financial statements.

 

Page 5

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

1. Basis of Presentation:

 

The accompanying unaudited interim consolidated financial statements have been prepared by Kidoz Inc. (“the Company”) in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments necessary for the fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature, except as otherwise noted below. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K, filed March 30, 2022, with the Securities and Exchange Commission and the TSX Venture Exchange. The results of operations for the interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

Continuing operations

 

These unaudited interim consolidated financial statements have been prepared assuming the realization of assets and the settlement of liabilities in the normal course of operations. The Company expects to continue to achieve profitable operations to generate sufficient cash flows to fund continued operations for the next 12 months, or, in the absence of adequate cash flows from operations, obtaining additional financing.

 

Management continues to review operations in order to identify additional strategies designed to generate cash flow, improve the Company’s financial position, and enable the timely discharge of the Company’s obligations.

 

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, has led to an economic downturn. It has also disrupted the normal operations of many businesses, including the Company’s. In early March 2020, the Company’s employees commenced working from home and commenced social distancing. This outbreak has affected spending, thereby affecting demand for the Company’s product and the Company’s business and results of operations. It is not possible for the Company to predict the duration or magnitude of the outbreak and while the pandemic appears to have slowed at this time its full continuing effects on the Company’s business, its future results of operations, or ability to raise funds remain impossible to predict.

 

2. Summary of significant accounting policies:

 

  (a) Basis of presentation:

 

These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to annual financial information and with the rules and regulations of the United States Securities and Exchange Commission. The financial statements include the accounts of the Company’s subsidiaries:

 

Page 6

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

2. Summary of significant accounting policies: (Continued)

 

  (a) Basis of presentation: (Continued)

Company   Registered   % Owned
Shoal Media (Canada) Inc.   British Columbia, Canada   100%
Coral Reef Marketing Inc.   Anguilla   100%
Kidoz Ltd.   Israel   100%
Rooplay Media Ltd.   British Columbia, Canada   100%
Rooplay Media Kenya Limited   Kenya   100%
Shoal Media Inc.   Anguilla   100%
Shoal Games (UK) Plc   United Kingdom   99%
Shoal Media (UK) Ltd.   United Kingdom   100%

 

In addition, there are the following dormant subsidiaries: Bingo.com (Antigua) Inc., Bingo.com (Wyoming) Inc., and Bingo Acquisition Corp.

 

All inter-company balances and transactions have been eliminated in the unaudited interim consolidated financial statements.

 

  (b) Use of estimates:

 

The preparation of unaudited interim 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 the disclosure of contingent assets and liabilities at the date of the financial statements and recognized revenues and expenses for the reporting periods.

 

Significant areas requiring the use of estimates include the collectability of accounts receivable, the valuation of stock-based compensation, the valuation of deferred tax assets and liabilities, the useful lives of intangible assets, and the derivative liability – warrants valuation. Actual results may differ significantly from these estimates.

 

  (c) Revenue recognition:

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.

 

We derive substantially all of our revenue from the sale of Ad tech advertising revenue.

 

Page 7

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)


 

2. Summary of significant accounting policies (Continued):

 

  (c) Revenue recognition: (Continued)

 

To achieve this core principle, the Company applied the following five steps:

 

1) Identify the contract with a customer

 

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred, whose impression count will form the basis of the revenue and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

2) Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.

 

3) Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. None of the Company’s contracts contain financing or variable consideration components.

 

4) Allocate the transaction price to performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

Page 8

 

 

Kidoz Inc. and subsidiaries

 

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

 

2. Summary of significant accounting policies (Continued):

 

  (c) Revenue recognition: (Continued)

 

5) Recognize revenue when or as the Company satisfies a performance obligation

 

The Company satisfies performance obligations at a point in time as discussed in further detail under “Disaggregation of Revenue” below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

 

Disaggregation of Revenue

 

All of the Company’s performance obligations, and associated revenue, are generally transferred to customers at a point in time. The Company has the following revenue streams:

 

1) Ad tech advertising revenue - The Company generally offers these services under a customer contract Cost-per-Impression (CPM), Cost-Per-Install or CPI arrangements, Cost per completed video view or CPC and/or Cost-Per-Action or CPA arrangements with third-party advertisers and developers, as well as advertising aggregators, generally in the form of insertion orders that specify the type of arrangement (as detailed above) at particular set budget amounts/restraints. These advertiser customer contracts are generally short term in nature at less than one year as the budget amounts are typically spent in full within this time period. These agreements typically include the delivery of Ad tech advertising through partner networks, defined as publishers / developers, to home screens of devices and agree on whose results will be relied on from a revenue point of view.

 

The Company has concluded that the delivery of the Ad tech advertising is delivered at a point in time and, as such, has concluded these deliveries are a single performance obligation. The Company invoices fees which are generally variable based on the arrangement, which would typically include the number of impressions delivered at a specified price per application. For impressions delivered, revenue is recognized in the month in which the Company delivers the application to the end consumer or the month when the campaign ends.

 

2) Content revenue – The Company recognizes content revenue on the following forms of revenue:

 

a) Carriers and OEMs - The Company generally offers these services under a customer contract per tablet device license fee model with OEMs. Monthly or quarterly license fees are based on the OEM agreement with the number of devices the Kidoz Kid Mode is installed upon.

 

Page 9

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

2. Summary of significant accounting policies (Continued):

 

  (c) Revenue recognition: (Continued)

 

b) The Company generates revenue through subscriptions or premium sales of Rooplay, (www.rooplay.com) the cloud-based EduGame system for kids to learn and play within its games on smartphones and tablet devices, such as Apple’s iPhone and iPad, and mobile devices utilizing Google’s Android operating system. Users can download the Company’s games through Digital Storefronts and decide to subscribe to the multiple of educational and fun games in the Rooplay, cloud-based EduGame system or make a premium per purchase of particular games. The revenue is recognized net of platform fees.

 

c) Rooplay licensing - The Company licenses its branded educational games under a monthly cost per game agreement license fee model. Monthly license fees are based on the number of games licensed.

 

d) In App purchases - The Company generates revenue through in-application purchases (“in-app purchases”) within its games; (i.e. Trophy Bingo (www.trophybingo.com)) on smartphones and tablet devices, such as Apple’s iPhone and iPad, and mobile devices utilizing Google’s Android operating system. Users can download the Company’s free-to-play games through Android, Amazon, iOS and Facebook Messenger (this was discontinued in fiscal 2021) and pay to acquire virtual currency which can be redeemed in the game for power plays. The initial download of the mobile game from the Digital Storefront does not create a contract under ASC 606 because of the lack of commercial substance; however, the separate election by the player to make an in-application purchase satisfies the criterion thus creating a contract under ASC 606.

 

The Company has identified the following performance obligations in these contracts:

 

i. Ongoing game related services such as hosting of game play, storage of customer content, when and if available content updates, maintaining the virtual currency management engine, tracking gameplay statistics, matchmaking as it relates to multiple player gameplay, etc.

 

ii. Obligation to the paying player to continue displaying and providing access to the virtual items within the game.

 

Neither of these obligations are considered distinct since the actual mobile game and the related ongoing services are both required to purchase and benefit from the related virtual items. As such, the Company’s performance obligations represent a single combined performance obligation which is to make the game and the ongoing game related services available to the players. The revenue is recognized net of platform fees.

 

  (d) Software development costs:

 

The Company expensed all software development costs as incurred for the period ended June 30, 2022 and 2021. As at June 30, 2022 and December 31, 2021, all capitalized software development costs have been fully amortized and the Company has no capitalized software development costs.

 

Page 10

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

2. Summary of significant accounting policies (Continued):

 

  (d) Software development costs: (Continued)

 

Total software development costs were $11,720,294 as at June 30, 2022 (December 31, 2021 - $10,559,601).

 

  (e) Derivative liability – warrants

 

The Company’s warrants have an exercise price in Canadian dollars whilst the Company’s functional currency is US Dollars. Therefore, in accordance with ASU 815 – Derivatives and Hedging, the warrants have a derivative liability value. This liability value has no effect on the cashflow of the Company and does not represent a cash payment of any kind.

 

  (f) Impairment of long-lived assets and long-lived assets to be disposed of:

 

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.

 

Intangible assets are recorded at cost less accumulated amortization. Amortization is provided for annually on the straight-line method over the following periods:

 

    Amortization period
Ad Tech technology   5 years
Kidoz OS technology   3 years
Customer relationship   8 years

 

 

  (g) Goodwill:

 

The Company accounts for goodwill in accordance with the provisions of ASC 350, Intangibles-Goodwill and Others. Goodwill is the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, in a business combination. The Company reviews goodwill for impairment. Goodwill is not amortized but is evaluated for impairment at least annually or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.

 

Page 11

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

2. Summary of significant accounting policies (Continued):

 

  (g) Goodwill: (Continued)

 

The goodwill impairment test is used to identify both the existence of impairment and the amount of impairment loss, and compares the fair value of a reporting unit with its carrying amount and is based on discounted future cash flows, based on market multiples applied to free cash flow. The determination of the fair value of our reporting units requires management to make significant estimates and assumptions including the selection of control premiums, discount rates, terminal growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation, amortization and capital expenditures. Changes in assumptions concerning future financial results, exogenous market conditions, or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

 

During the year ended December 31, 2021, the Company determined there was no impairment of the goodwill.

 

  (h)New accounting pronouncements and changes in accounting policy:

 

The Company has evaluated all of the recently issued, but not yet effective, accounting standards that have been issued or proposed by the Financial Accounting Standards Board or other standards-setting bodies through the filing date of these unaudited consolidated financial statements and does not believe the future adoption of any such pronouncements will have a material impact on its consolidated financial statements.

 

  (i) Financial instruments and fair value measurements:

 

(i) Fair values:

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on measurement date. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

 

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;

 

Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.

 

Page 12

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

2.Summary of significant accounting policies (Continued):

 

  (i) Financial instruments and fair value measurements: (Continued)

 

When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon valuations in which one or more significant inputs are unobservable, including internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

 

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

Fair value measurement includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.

 

The fair value of accounts receivable, accounts payable, accrued liabilities, and accounts payable and accrued liabilities - related party approximate their financial statement carrying amounts due to the short-term maturities of these instruments and are therefore carried at their historical cost basis.

 

The government CEBA loan is classified as a financial liability and its fair value was determined using the effective interest rate method, and is carried at amortized cost.

 

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. The Company’s cash and long-term cash equivalents were measured using Level 1 inputs. Stock-based compensation and derivative liability – warrants were measured using Level 2 inputs. Goodwill impairment was measured using Level 3 inputs.

 

(ii) Foreign currency risk:

 

The Company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations. The Company has not entered into any forward exchange contracts or other derivative instrument to hedge against foreign exchange risk.

 

3. Accounts receivable:

 

   June 30, 2022   December 31, 2021 
Accounts receivable  $3,873,276   $6,684,469 
Expected credit losses   (53,380)   (56,605)
           
Net accounts receivable  $3,819,896   $6,627,864 

 

Page 13

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

3. Accounts receivable: (Continued)

 

The Company had bank accounts with the National Bank of Anguilla. During the year ended December 31, 2016, the National Bank of Anguilla filed for chapter 11 protection. The Company expensed the balance on account of $27,666 in fiscal 2016 as a doubtful debt. Additionally, the Company has a doubtful debt provision of $25,714 for existing accounts receivable.

 

4. Equipment:

 

June 30, 2022  Cost   Accumulated depreciation   Net book
Value
 
             
Equipment and computers  $159,946   $143,418   $16,528 
Furniture and fixtures   16,517    9,937    6,580 
   $176,463   $153,355   $23,108 

 

December 31, 2021  Cost   Accumulated depreciation   Net book
Value
 
             
Equipment and computers  $152,967   $139,590   $13,377 
Furniture and fixtures   16,517    9,371    7,146 
   $169,484   $148,961   $20,523 

 

Depreciation expense was $2,180 (June 30, 2021 - $2,079) for the quarter ended June 30, 2022.

 

5. Intangible assets:

 

June 30, 2022  Cost   Accumulated depreciation   Net book
Value
 
             
Ad Tech technology  $1,877,415   $1,251,610   $625,805 
Kidoz OS technology   31,006    31,006    - 
Customer relationship   1,362,035    567,514    794,521 
   $3,270,456   $1,850,130   $1,420,326 

 

December 31, 2021  Cost   Accumulated amortization   Net book
Value
 
             
Ad Tech technology  $1,877,415   $1,063,869   $813,546 
Kidoz OS technology   31,006    29,283    1,723 
Customer relationship   1,362,035    482,387    879,648 
   $3,270,456   $1,575,539   $1,694,917 

 

Amortization expense was $136,434 (June 30, 2021 - $139,018) for the quarter ended June 30, 2022.

 

Page 14

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

6. Goodwill:

 

The changes in the carrying amount of goodwill for the period ended June 30, 2022, and the year ended December 31, 2021 were as follows:

 

   June 30, 2022   December 31, 2021 
Goodwill, balance at beginning of period  $3,301,439   $3,301,439 
Impairment of goodwill   -    - 
           
Goodwill, balance at end of period  $3,301,439   $3,301,439 

 

The Company’s annual goodwill impairment analysis performed during the fourth quarter of fiscal 2021 included a quantitative analysis of Kidoz Ltd. reporting unit (consisting of intangible assets (Note 5), deferred tax liability and goodwill). The reporting unit has a carrying amount of $4,511,266 (December 31, 2021 - $4,785,857) as at June 30, 2022. The Company performed a discounted cash flow analysis for Kidoz Ltd. for the year ended December 31, 2021. These discounted cash flow models included management assumptions for expected sales growth, margin expansion, operational leverage, capital expenditures, and overall operational forecasts. The Company classified these significant inputs and assumptions as Level 3 fair value measurements. Based on the annual impairment test described above there was no additional impairment determined for fiscal 2021 or 2020.

 

7. Content and software development assets:

 

Since the year ended December 31, 2014, the Company has been developing software technology and content for our business. This software technology and content includes the the continued development of the KIDOZ Safe Ad Network, the KIDOZ Kid-Mode Operating System, and the KIDOZ publisher SDK, development of Trophy Bingo, a social bingo game, the license, the development of the Rooplay platform and the development of the Rooplay Originals games.

 

During the period ended June 30, 2022, the Company has expensed the development costs of all its technology as incurred and has expensed the following software development costs.

 

   Six Months ended June 30, 2022   Six Months ended June 30, 2021   Three Months ended June 30, 2022   Three Months ended June 30, 2021 
                 
Opening total software development costs  $10,559,601   $8,880,753   $11,076,240   $9,218,046 
Software development during the period   1,160,693    703,339    644,054    366,046 
Closing total Software development costs  $11,720,294   $9,584,092   $11,720,294   $9,584,092 

 

8. Government CEBA loan:

 

During the year ended December 31, 2020, the Company was granted a loan of $47,089 (CAD$60,000) under the Canada Emergency Business Account (CEBA) loan program for small businesses. The CEBA loan program is one of the many incentives the Canadian Government put in place in response to COVID-19. The loan is interest free and as at June 30, 2022, a quarter of the loan $15,999 (CAD$20,000) is eligible for complete forgiveness if $31,978 (CAD$40,000) is fully repaid on or before December 31, 2023. If the loan cannot be repaid by December 31, 2023, it can be converted into a 3-year term loan charging an interest rate of 5%.

 

Page 15

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

8. Government CEBA loan:

 

During the quarter ended March 31, 2021, the Company drew $200,000 from its line of credit with the Leumi Bank. The loan was repaid in full during the quarter ended March 31, 2021 with interest costs of $987.

 

9. Stockholders’ equity:

 

The holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company’s ability to pay dividends on its common stock. The Company has not declared any dividends since incorporation. The Company’s common stock has no par value per common stock.

 

(a) Common stock issuances:

 

During the quarter ended June 30, 2021, the Company engaged with Agora Internet Relations Corp. for an online marketing campaign on the AGORACOM platform. The agreement was for 12 months for a fee of $79,705 (CAD$100,000) payable in shares of the Company. During the quarter ended June 30, 2022, the Company issued 156,510 shares in settlement of its obligation under the contract.

 

During the quarter ended June 30, 2021, the Company engaged Research Capital Corporation (“RCC”) as a financial and capital markets advisor. As part of the compensation for its services, RCC will receive a monthly fee of $5,200 (CAD$6,500) for its trading advisory services for a minimum of 6 months with extension by mutual agreement and a financial advisory fee to be satisfied by the issuance of 230,000 common shares of the Company valued at $179,293. In addition, the Company granted 230,000 common share purchase warrants to RCC. Each warrant will entitle the holder thereof to purchase one common share in the capital of the Company at an exercise price of $0.77 (CAD$0.98) at any time up to 24 months following the date of issuance. During the quarter ended June 30, 2021, the Company issued the shares and granted the warrants.

 

During the quarter ended June 30, 2021, the holder of 70,000 stock options exercised their options for 70,000 shares for $31,264 at an average exercise price of $0.45 (CAD$0.54) per share.

 

Page 16

 

 

Kidoz Inc. and subsidiaries

(Expressed in United States Dollars)

 

Notes to Consolidated Financial Statements

Six Months ended June 30, 2022 and 2021

(Unaudited)

 

 

9. Stockholders’ equity: (Continued)