The following Management's Discussion and Analysis or Plan of Operation contains
forward-looking statements that involve risks and uncertainties, as described
below.
FORWARD LOOKING STATEMENTS
All statements contained in this Quarterly Report on Form 10-Q and the documents
incorporated herein by reference, as well as statements made in press releases
and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Readers should consider statements that include the terms "believe," "belief,"
"expect," "plan," "anticipate," "intend" or the like to be uncertain and
forward-looking. In addition, all statements, trends, analyses and other
information contained in this report relative to trends in net sales, gross
margin, anticipated expense levels and liquidity and capital resources,
constitute forward-looking statements. Particular attention should be paid to
the facts of our limited operating history, the unpredictability of our future
revenues, our need for and the availability of capital resources, the evolving
nature of our business model, and the risks associated with systems development,
management of growth and business expansion. Except as required by law, we
undertake no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise. All cautionary statements
made herein should be read as being applicable to all forward-looking statements
wherever they appear. Readers should consider the risks more fully described in
our Annual Report on Form 10-K for the year ended
Page 31 OVERVIEW
For app developers focused on kids, the
By addressing the privacy concerns of our users, the children first, we ensure
regulatory compliance with privacy laws and Google and Apple's strict rules for
mobile apps on the Android and iOS platforms. Since Google's certification of
In 2019,
Driving our revenue growth is strong underlying system growth for both users and
publishers that are using our Kid Safe technology. Media budgets continue to
shift from linear TV to digital platforms like
Our sales, product, and operational strategies are custom fit to match the
favourable regulatory, consumer, and technological trends occurring in the
market. As developments in privacy laws in almost every country worldwide look
to provide additional protection to digital minors by controlling digital
services and, potentially in some cases, raising the age of minority,
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As we invest in the
References in this document to "the Company," "we," "us," and "our" refer to
Our executive offices are located at
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which except for lack of all detailed
note disclosures, have been prepared in conformity with accounting principles
generally accepted in
We consider the following accounting policies to be both those most important to the portrayal of our financial condition and require the most subjective judgment:
- Revenue recognition; - Software development
- Impairment of long-lived assets
-
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.
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
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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.
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
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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.
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.
b) Rooplay - 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 it 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) Trophy Bingo and Garfield Bingo - The Company generates revenue through in-application purchases ("in-app purchases") within its games; Garfield's Bingo (www.garfieldsbingo.com) and 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 Facebook Messenger, Android, Amazon and iOS 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.
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The Company also has relationships with certain advertising service providers for advertisements within smartphone games and revenue from these advertising providers is generated through impressions, clickthroughs, banner ads, and offers. Offers are the type of advertisements where the players are rewarded with virtual currency for completing specified actions, such as downloading another application, watching a short video, subscribing to a service or completing a survey. The Company has determined the advertising buyer to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.
Software Development Costs
Software development costs incurred in the research and development of new software products and enhancements to existing software products for external use are expensed as incurred, until technological feasibility has been established. After technological feasibility is established, any software development costs are capitalized and amortized at the greater of the straight-line basis over the estimated economic life of the related product or the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for the related product.
If a determination is made that capitalized amounts are not recoverable based on
the estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts are written off. Although the Company believes
that its approach to estimates and judgments as described herein is reasonable,
actual results could differ and the Company may be exposed to increases or
decreases in revenue that could be material. As at
Total software development costs were
Impairment of Long-lived Assets
The Company accounts for long-lived assets in accordance with the provisions of ASC 360, Property, Plant and Equipment and ASC 350, Intangibles-Goodwill and Others. During the periods presented, the only long-lived assets reported on the Company's consolidated balance sheet are equipment, and security deposits. These provisions require that long-lived assets and certain identifiable recorded intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
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.
The Company identified the following intangible assets in the acquisition of
Amortization period Ad Tech technology 5 years Kidoz OS technology 3 years Customer relationship 8 years Page 36Goodwill
The Company accounts for goodwill in accordance with the provisions of ASC 350,
Intangibles-Goodwill and Others.
The quantitative goodwill impairment test used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount and is based on discounted future cash flows, and a market approach, 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.
RESULTS OF OPERATIONS
Revenue
Total revenue, net of platform fees (to Apple, Google and Amazon) and
withholding taxes, for the quarter ended
Selling and marketing expenses
Selling and marketing expenses were
We expect to incur increased sales and marketing expenses to employ sales staff to selling the Ad tech advertising revenue and to grow the Ad tech advertising revenue and to bring new players to Rooplay; our Rooplay Originals; and our bingo games. There can be no assurances that these expenditures will result in increased traffic or significant additional revenue.
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General and administrative expenses
General and administrative expenses consist primarily of premises costs for our
offices, legal and professional fees, and other general corporate and office
expenses. General and administrative expenses increased to
We expect to continue to incur general and administrative expenses to support the business, and there can be no assurances that we will be able to generate sufficient revenue to cover these expenses.
Salaries, wages, consultants and benefits
Salaries, wages, consultants, and benefits decreased to
Depreciation and amortization
Intangible assets are amortized using a straight-line method over three to eight
years. These intangible assets include customer lists, the technology for Kidoz
OS and the software development kits (SDK) for advertising platform. These
intangible assets are as result of the acquisition of
Equipment is depreciated using the declining balance method over the useful
lives of the assets, ranging from three to five years. Depreciation and
amortization increased to
Content and software development
The Company does not capitalize its development costs. The Company expensed
Stock-based compensation expense
During the quarter ended
Acquisition of subsidiary
During the quarter ended
Net loss and loss per share
The net loss after taxation for the quarter ended
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Earnings before interest; depreciation and amortization; stock-based
compensation and impairment of goodwill ("EBITDA") for the period ended
LIQUIDITY AND CAPITAL RESOURCES
We had cash of
During the quarter ended
During the quarter ended
Net cash used by financing activities was (
Our future capital requirements will depend on a number of factors, including the revenues from the Ad tech business; the revenues from the Kidoz OS license fees; the revenues from the content platforms and games; the costs associated with the further development of the Ad tech advertising business, the further development of the content platform including, Rooplay; Rooplay Originals; Shoal.js; Garfield's Bingo and Trophy Bingo; the cost of sales and marketing of the Ad tech business, the Kidoz OS license fees and player acquisition costs for Rooplay; Rooplay Originals; Garfield's Bingo and Trophy Bingo, the development of new products, the acquisition of new companies and the success of Rooplay; Rooplay Originals; Garfield's Bingo and Trophy Bingo.
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