The following Management's Discussion and Analysis or Plan of Operation contains forward-looking statements that involve risks and uncertainties, as described below.Kidoz Inc's (the "Company", "we", or "us") actual results could differ materially from those anticipated in these forward-looking statements. The following discussion should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I - Item 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto and the Management Discussion and Analysis or plan of Operations included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
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 endedDecember 31, 2021 , filed with theToronto Venture Stock Exchange on SEDAR and theSecurities and Exchange Commission (the "SEC") and should not place undue reliance on any forward-looking statements. Page 25 OVERVIEWKidoz Inc. (TSXV:KIDZ) owns the leading Children's Online Privacy Protection Rule ("COPPA") & General Data Protection Regulation ("GDPR") compliant contextual mobile advertising network that safely reaches hundreds of million kids, teens, and families every month.Kidoz provides an essential suite of advertising technology that unites brands, content publishers and families. Trusted byDisney , Hasbro,Lego and more, the Kidoz Contextual Ad Network helps the world's largest brands to safely reach and engage kids across thousands of mobile apps, websites and video channels. TheKidoz network does not use location or Personally Identifiable Information ("PII") data tracking commonly used in digital advertising. Instead,Kidoz has developed advanced contextual targeting tools to enable brands to reach their ideal customers with complete brand safety. A focused AdTech solution provider, the Kidoz SDK and Kidoz Programmatic network have become essential products in the digital advertising ecosystem. Our commitment to advertising privacy and safety has created one of the fastest growing mobile networks in the world.Kidoz is the market leader in contextual mobile advertising and the segment is only beginning to develop as new rules and stricter regulations are enacted and enforced byKidoz builds and maintains the Kidoz SDK (Software Development Kit) that app developers install into their apps before releasing them into the App Stores. The Kidoz SDK is the core of the advertising technology that enablesKidoz to access advertising impressions available for sale. TheKidoz proprietary advertising system is compliant with COPPA, GDPR-K and other regulations adopted to protect the privacy and security of minors. TheKidoz proprietary advertising technology is installed in thousands of different apps, making it the most popular contextual mobile solution in the market.Kidoz has established its leadership position through continued investments into research and development. Mobile devices are the primary tool used for all digital activities in everyday life across the entire world. The predominance of mobile is well established andKidoz is well positioned to benefit from the wide adoption of its technology across thousands of popular apps. As the number of active campaigns live onKidoz has increased substantially over the past 18 months,Kidoz has recruited hundreds of new apps and developers that focus on a wide range of audience segments. As a result ofKidoz's rapid growth, the Company is now able to expand beyond its core advertising audience of children, and begin to contextually target teens and parents for its brand partners. Mobile AdTech systems are some of the most integrated and most valuable systems in the world. The scale of users we can reach with theKidoz network is powerful and it opens many new opportunities for the Company. Extending our media offering beyond children is the first step we are taking as our sales and agency partners are interested in accessing these related segments of our traffic.Kidoz is experiencing a period of rapid growth and we are extending our business model in ways that will fill our huge available inventory with safe and high performing media. Driving our revenue growth is strong underlying system growth for both users and publishers that are accessing theKidoz technology. Media budgets continue to shift from linear TV to digital platforms likeKidoz as brands seek to engage their customers where families spend most of their screen time. In addition, regulation at the government level is positively influencing growth of theKIDOZ Safe Ad Network. COPPA in America and GDPR inEurope have forced advertisers and publishers to ensure their data and advertising methodologies are safe. Regulators in America are updating COPPA to further enhance child safety online, and regulators inChina ,India and other regions are considering similar measures. AsKidoz is compliant, the Company benefits from all child-safe advertising regulation. Building on our performance in 2021, we plan to continue our successful growth strategies in 2022. Our sales, product, and operational strategies are custom fit to match the favourable regulatory, consumer, and technological trends occurring in the market. TheKidoz programmatic technology is live, growing, and actively filling publisher inventory with campaigns safely sourced from the programmatic marketplace. AsKidoz advances its multiple product offerings, new opportunities arise in the bountiful mobile advertising ecosystem that is projected by eMarketer to exceed overUS$400 billion by 2023 (eMarketer). It is our intention to explore expanding, either through additional uses of our new technology platforms for the entire mobile advertising market, or via synergistic M&A. Page 26 Furthermore, while the focus of the Company is the development and expansion of the Kidoz Safe Ad Network, we are developing our technology to expand into new markets, increase the scope of our market to include teens and families in a safe and secure manner either through new connections to the wider mobile advertising market, including the introduction and operation of our programmatic system, or via synergistic M&A. The Company continues to invest heavily in the first three quarters of 2022, increasing its overall staff from 30 atDecember 31, 2021 to 38 atSeptember 30, 2022 , with a further 3 hires subsequent to the quarter endedSeptember 30, 2022 , plus adding 7 sales partnerships throughout the world, preparing for the likely significant growth in advertising demand in its fourth quarter, which historically has accounted for over 50% of the Companies annual total business.
References in this document to "the Company," "we," "us," and "our" refer to
Our executive offices are located atHansa Bank Building , Ground Floor,Landsome Road , The Valley, AI 2640, The Valley,Anguilla , B.W.I. Our telephone number is (888) 374-2163. 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 inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these judgments and estimates, including whether there are any uncertainties as to compliance with the revenue recognition criteria described below, and recoverability of long-lived assets, as well as the assessment as to whether there are contingent assets and liabilities that should be recognized or disclosed for the consolidated financial statements to fairly present the information required to be set forth therein. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 -Goodwill 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.
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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.
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. Page 28 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:
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.
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.
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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. Software Development Costs The Company expensed all software development costs as incurred for the period endedSeptember 30, 2022 and 2021. As atSeptember 30, 2022 and 2021, all capitalized software development costs have been fully amortized and the Company has no capitalized software development costs.
Total software development costs were
Impairment of Long-lived Assets
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 yearsGoodwill
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. 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
Page 30 RESULTS OF OPERATIONS Revenue Total revenue, net of platform fees (to Apple,September 30, 2022 , increased to$3,505,812 , an increase of 25% from revenue of$2,814,642 for the third quarter of 2021 and an increase of 39% from revenue of$2,513,613 in the second quarter of 2022. Ad Tech advertising revenue increased to$3,454,824 for the quarter endedSeptember 30, 2022 , an increase of 25% from ad tech advertising revenue of$2,759,508 in the third quarter of 2021, and an increase of 39% from revenue of$2,484,799 in the second quarter of 2022. Content revenue decreased to$50,988 , for the quarter endedSeptember 30, 2022 , a decrease of 8% from revenue of$55,134 in the third quarter of 2021, and an increase of 77% from revenue of$28,814 in the second quarter of 2022. The increase in total revenue compared to the third quarter of fiscal 2021 and the second quarter of fiscal 2022 is due to the ongoing shift from TV advertising to mobile advertising with the strong demand for kid safe contextual advertising generated.
Selling and marketing expenses
Selling and marketing expenses were$222,379 for the quarter endedSeptember 30, 2022 , an increase of 42% over expenses of$156,122 in the third quarter of fiscal 2021 and a decrease over expenses of$251,788 in the second quarter of fiscal 2022. This increase in sales and marketing expenses in the quarter endedSeptember 30, 2022 , compared to the third quarter of fiscal 2021, is due to an increase in sales and marketing staff to anticipated manage the growth in the Direct, Programmatic and Performance segments of our AdTech business.
We expect to incur increased sales and marketing expenses in selling the Ad tech advertising and to grow the Ad tech advertising revenue. There can be no assurances that these expenditures will result in increased traffic or significant additional revenue.
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 of$178,717 for the quarter endedSeptember 30, 2022 , an increase of 23% from costs of$145,765 for the third quarter of fiscal 2021 and a decrease of 4% from costs of$186,119 for the second quarter of fiscal 2022. The increase in general and administrative expenses compared to the third quarter of fiscal 2021 is due an increase in fees paid to our professional advisors and increased travel due to easing of COVID restrictions. 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. Stock awareness program During the quarter endedSeptember 30, 2021 the Company commenced a corporate stock awareness program. The Company engagedResearch Capital Corporation ,Agora Internet Relations Corp. ,Stockhouse Publishing Ltd. and Proactive for financial and capital markets advisory services and to assist with general market outreach to increase investor awareness as the Company continues to achieve important milestones and grow its investor base. The Company stock awareness expenses decreased to$9,936 during the quarter endedSeptember 30, 2022 , a decrease of 85% from costs of$65,392 for the third quarter of fiscal 2021 and a decrease of 78% from costs of$44,427 for the second quarter of fiscal 2022. The decrease in Stock Awareness expenses compared to the third quarter of fiscal 2021 and the second quarter of fiscal 2022, is due to the planned reduction in stock awareness commitments. Page 31
Salaries, wages, consultants and benefits
Salaries, wages, consultants, and benefits increased 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 forKidoz OS and the software development kits (SDK) for our advertising platform. These intangible assets are as result of the acquisition ofKidoz Ltd. The amortization for the quarter endedSeptember 30, 2022 , was$136,434 , a decrease compared to amortization of$139,018 in the third quarter of 2021 and a decrease compared to amortization of$136,434 in the second quarter of 2022. The technology for Kidoz OS is now fully amortized. 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$2,323 , during the quarter endedSeptember 30, 2022 , an increase over costs of$2,308 in the third quarter of 2021 and an increase compared to depreciation and amortization of$2,180 in the second quarter of 2022. The increase in depreciation and amortization compared to the third quarter of fiscal 2021 and the second quarter of fiscal 2022 is due equipment acquisitions.
Content and software development
The Company does not capitalize its development costs. The Company expensed$613,196 in content and software development costs during the quarter endedSeptember 30, 2022 , an increase of 28% compared to content and software development costs of$477,559 expensed during the third quarter of fiscal 2021 and a decrease of 5% compared to content and software development costs of$644,054 expensed during the second quarter of fiscal 2022. The increase in development costs compared to the third quarter of fiscal 2021 is due to hiring additional development staff and the outsourcing of certain software development to increase the development of our base technology.
Stock-based compensation expense
During the quarter endedSeptember 30, 2022 , the Company incurred non-cash stock-based compensation expenses of$181,129 from the issuance of stock options granted in fiscal 2022 and fiscal 2021, an increase of 1% compared to stock-based compensation expense of$178,763 in the third quarter of fiscal 2021 and a decrease of 2% compared to stock-based compensation expense of$184,594 the second quarter of fiscal 2022. The increase compared to the third quarter of fiscal 2021 is due to the granting of stock options in fiscal 2022. The options are issued to consultants and employees as per the Company's amended 2015 Stock Option Plan.
Net loss and loss per share
The net loss after taxation for the quarter endedSeptember 30, 2022 , amounted to ($313,774 ), a loss of ($0.00 ) per share, compared to a net loss of ($75,040 ) or ($0.00 ) per share in the third quarter of fiscal 2021 and compared to a net loss of ($721,677 ) or ($0.01 ) per share in the second quarter of fiscal 2022. This increase in net loss for the quarter compared to the third quarter of fiscal 2021 is due to the hiring of additional staff, salary increases and the reduced margins and additional costs of establishing and growing the new Programmatic and Performance segments of our business. The 57% decrease in net loss compared to the second quarter of fiscal 2022, is due to the growth of revenue in all the advertising segments of our business. The overall level of expense increase in 2022 is due to the Companies investment in growth in the first three quarters of the year to efficiently manage the anticipated increase of demand caused by the sustained growth of the Company's business. Page 32 Adjusted earnings before interest; depreciation and amortization; stock awareness program; stock-based compensation and impairment of goodwill ("Adjusted EBITDA") for the three month period endedSeptember 30, 2022 , amounted to$4,435 , a decrease compared to an Adjusted EBITDA of$265,984 in the quarter endedSeptember 30, 2021 and Adjusted EBITDA of ($386,987 ) in the second quarter of fiscal 2022.
Our Adjusted EBITDA is reconciled as follows:
Nine Months ended Nine Months ended Three Months ended Three Months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Loss after tax $ (1,766,493 ) $ (967,161 ) $ (313,774 ) $ (75,040 ) Less : Depreciation and amortization 417,742 424,255 138,757 141,326 Income tax (recovery) expense (5 ) 2,989 - (9 ) Interest and other income (178 ) (266 ) (178 ) (266 ) Stock awareness program 26,334 296,865 - 33,539 Stock-based compensation 525,721 448,369 181,129 178,763 Gain on derivative liability - warrants (23,348 ) (50,313 ) (1,499 ) (12,329 ) Adjusted EBITDA $ (820,227 ) $ 154,738 $ 4,435 $ 265,984 We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net income (loss) plus depreciation expense, amortization expense, interest, stock-based compensation and impairment of goodwill), further adjusted to exclude certain non-cash expenses and other adjustments. We use Adjusted EBITDA because we believe it more clearly highlights business trends that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance. Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). We encourage investors to review the GAAP financial measures included in this Quarterly Report, including our unaudited consolidated financial statements, to aid in their analysis and understanding of our performance and in making comparisons. Page 33
LIQUIDITY AND CAPITAL RESOURCES
We had cash of$1,830,262 and working capital of$3,770,593 atSeptember 30, 2022 . This compares to cash of$2,078,607 and working capital of$4,536,851
as atDecember 31, 2021 .
During the three months ended
During the nine months endedSeptember 30, 2022 , we used cash of$207,798 in operating activities compared to cash used in operating activities of$45,247 in the same period in the prior year.
During the nine months ended
Net cash used in financing activities was ($27,556 ) in the nine months endedSeptember 30, 2022 . This compares to cash provided by financing activities of$9,288 in the same period in the prior year. Our future capital requirements will depend on a number of factors, including costs associated with the further development of the Ad tech advertising business, the cost of marketing and customer acquisition costs, the development of new products, the acquisition of new companies and the success of our overall business.
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