Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
1. Basis of
Presentation:
The accompanying unaudited financial statements
have been prepared by Kidoz Inc. (previously Shoal Games Ltd.) ("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, 2018, included in the Company's
Annual Report on Form 10-K, filed March 21, 2019, with the Securities and
Exchange Commission. 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 on the going
concern basis, which presumes the realization of assets and the settlement of
liabilities in the normal course of operations. The application of the going
concern basis is dependent upon the Company achieving profitable operations to
generate sufficient cash flows to fund continued operations, or, in the absence
of adequate cash flows from operations, obtaining additional financing. The
Company has reported losses from operations for the quarters ended September 30,
2019 and 2018, and has an accumulated deficit of $27,181,752 as at September 30,
2019. These material uncertainties raise substantial doubt about the Company's
ability to continue as a going concern.
In view of the matters described in the
preceding paragraph, recoverability of a major portion of the recorded asset
amounts and settlement of the liability amounts shown in the accompanying
balance sheets is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
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. If management is unable to identify sources of
additional cash flow in the short term, it may be required to further reduce or
limit operations.
Page 6
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies:
(a)
Basis of presentation:
These 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:
|
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.
During the quarter ended
March 31, 2019, the Company acquired
Kidoz Ltd. a company incorporated under the laws of Israel. (Note 3)
All inter-company
balances and transactions have been eliminated in the consolidated financial
statements.
(b)
Use of estimates:
The preparation of
consolidated financial statements in conformity with US GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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, stock-based compensation, the valuation of deferred tax assets, the
valuation of the acquisition of Kidoz Ltd. and the estimated interest rate of
12% for the license right of use assets and 4.12% for the rental unit right of
use asset. Actual results may differ significantly from these estimates.
Page 7
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue recognition:
Ad tech advertising revenues is recognized when advertising is served and when
collection of the amounts are reasonably assured.
The Company recognizes content revenue in accordance with general revenue
recognition accounting guidance, when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collection is probable.
The content revenue includes sale of in-game and premium purchases, net of
platform fees, in-game advertising, subscriptions. and revenue is recognized
when delivery has occurred, and the collection of the amounts are reasonably
assured.
(d)
Foreign currency:
The consolidated financial statements are presented in United States dollars,
the functional currency of the Company and its subsidiaries. The Company
accounts for foreign currency transactions and translation of foreign currency
financial statements under Statement ASC 830, Foreign Currency Matters.
Transaction amounts denominated in foreign currencies are translated at
exchange rates prevailing at the transaction dates. Carrying values of monetary
assets and liabilities are adjusted at each balance sheet date to reflect the
exchange rate at that date. Non-monetary assets and liabilities are translated
at the exchange rate on the original transaction date.
Gains and losses from restatement of foreign currency monetary and non-monetary
assets and liabilities are included in operations. Revenues and expenses are
translated at the rates of exchange prevailing on the dates such items are
recognized in earnings.
(e)
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.
Page 8
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(e)
Software Development Costs: (Continued)
Total software
development costs were $7,527,012 as at September 30, 2019 (December 31, 2018 -
$6,716,810).
(f) Equipment:
Equipment is recorded at cost less accumulated depreciation. Depreciation is
provided for annually on the declining balance method over the following
periods:
Equipment and computers 33.3%
Furniture and fixtures 20.0%
Expenditures for maintenance and repairs are charged to expenses as incurred.
Major improvements are capitalized. Gains and losses on disposition of equipment
are included in operations as realized.
(g)
Stock-based
compensation:
The Company
recognizes all stock-based compensation as an expense in the financial
statements and that such cost be measured at the fair value of the award.
The fair value of
each option grant has been estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
|
2019
|
|
2018
|
|
Expected dividend yield
|
|
-
|
|
-
|
|
Expected stock price
volatility
|
|
-
|
|
109%
|
|
Weighted average volatility
|
|
-
|
|
96%
|
|
Risk-free interest rate
|
|
-
|
|
1.97%
|
|
Expected life of options
|
|
-
|
|
5 years
|
|
Forfeiture rate
|
|
-
|
|
5%
|
(h) Right of use assets:
The Company determines if an
agreement is a lease at inception. The Company evaluates the
lease terms to determine whether the lease will be
accounted for as an operating or finance lease. Operating
leases are included in operating lease right-of-use
("ROU") assets, operating lease liabilities, current
portion, and operating lease liabilities, net of current
portion in the consolidated balance sheets.
ROU assets represent the Company's
right to use an underlying asset for the lease term and lease liabilities
represent our obligation to make lease payments arising from the lease.
Operating lease ROU assets and liabilities are recognized at commencement date
based on the present value of lease payments over the lease term. As most of the
Company leases do not provide an implicit rate, the
Page 9
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h) Right of use assets: (Continued)
Company uses the incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments. The Company uses the implicit
rate when readily determinable. The operating lease ROU asset also includes any
lease payments made and excludes lease incentives. The Company's lease terms may
include options to extend or terminate the lease when it is reasonably certain
that we will exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease term.
A lease that transfers
substantially all of the benefits and risks incidental to ownership of property
are accounted for as finance leases. At the inception of a finance lease, an
asset and finance lease obligation is recorded at an amount equal to the lesser
of the present value of the minimum lease payments and the property's fair
market value. Finance lease obligations are classified as either current or
long-term based on the due dates of future minimum lease payments, net of
interest.
(i) Business Combinations:
When the Company acquires a
business, the purchase consideration is allocated to the tangible assets
acquired, liabilities assumed, and intangible assets acquired based on their
estimated respective fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. Such valuations require the Company to make significant
estimates and assumptions, especially with respect to intangible assets.
Significant estimates in valuing certain intangible assets include, but are not
limited to, future expected cash flows from acquired users, acquired technology,
and trade names from a market participant perspective, useful lives and discount
rates. The Company's estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period,
which is one year from the acquisition date, the Company may record adjustments
to the assets acquired and liabilities assumed, with the corresponding offset to
goodwill. Upon the conclusion of the measurement period, any subsequent
adjustments are recorded to non-operating income (expense) in the consolidated
statements of operations.
(j) New
accounting pronouncements and changes in accounting policy:
In June 2016, the
FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments". The accounting standard
changes the methodology for measuring credit losses on financial instruments and
the timing when such losses are recorded. ASU No. 2016-13 is effective for
fiscal years, and interim periods within those years, beginning after December
15, 2019. Early adoption is permitted for fiscal years, and interim periods
within those years, beginning after December 15, 2018. In November 2018, the
FASB
Page 10
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(j) New
accounting pronouncements and changes in accounting policy: (Continued)
issued ASU
2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses ( "ASU 2018-19") . ASU 2018-19 clarifies that receivables arising from
operating leases are not within the scope of Subtopic 326-20. Instead,
impairment of receivables arising from operating leases should be accounted for
in accordance with Topic 842, Leases. In April 2019, the FASB issued ASU
2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments, which replaces the "incurred loss" impairment methodology with an
approach based on "expected losses" to estimate credit losses on certain types
of financial instruments and requires consideration of a broader range of
reasonable and supportable information to inform credit loss estimates.
The guidance
requires financial assets measured at amortized cost to be presented at the net
amount expected to be collected. The allowance for credit losses is a valuation
account that is deducted from the amortized cost of the financial asset to
present the net carrying value at the amount expected to be collected on the
financial asset. The Update also modified the accounting for available-for-sale
("AFS") debt securities, which must be individually assessed for credit losses
when fair value is less than the amortized cost basis, in accordance with
Subtopic 326-30, Financial Instruments-Credit Losses-Available-for-Sale Debt
Securities . Credit losses relating to AFS debt securities will be recorded
through an allowance for credit losses. The codification improvements in ASU
2019-04 clarify that an entity should include recoveries when estimating the
allowance for credit losses. The amendments specify that expected recoveries of
amounts previously written off and expected to be written off should be included
in the valuation account and should not exceed the aggregate of amounts
previously written off and expected to be written off by the entity. In
addition, for collateral dependent financial assets, the amendments clarify that
an allowance for credit losses that is added to the amortized cost basis of the
financial asset(s) should not exceed amounts previously written off. The
amendment also clarifies FASB's intent to include all reinsurance recoverables
that are within the scope of Topic 944 to be within the scope of Subtopic
326-20, regardless of the measurement basis of those recoverables. The Company
is currently evaluating the impact of the amended guidance and has not yet
determined the effect of the standard on its ongoing financial reporting.
In January 2017,
the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the
goodwill impairment test. The annual, or interim, goodwill impairment test is
performed by comparing the fair value of a reporting unit with its carrying
amount. An impairment charge should be recognized for the amount by which the
carrying amount exceeds the reporting unit's fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that
reporting unit. In
Page 11
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(j) New
accounting pronouncements and changes in accounting policy: (Continued)
addition, income
tax effects from any tax deductible goodwill on the carrying amount of the
reporting unit should be considered when measuring the goodwill impairment loss,
if applicable.
The amendments
also eliminate the requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment and, if it fails that
qualitative test, to perform Step 2 of the goodwill impairment test. An entity
still has the option to perform the qualitative assessment for a reporting unit
to determine if the quantitative impairment test is necessary. This guidance is
effective for annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted. ASU 2017-04
should be adopted on a prospective basis. The Company is in the process of
evaluating the potential impact of this new ASU on our condensed consolidated
financial statements.
In August 2018,
the FASB issued ASU No. 2018-13, "Fair Value Measurement: Disclosure Framework
(Topic 840) - Changes to the Disclosure Requirements for Fair Value
Measurement", which will improve the effectiveness of disclosure requirements
for recurring and nonrecurring Level 1, Level 2 and Level 3 instruments in the
fair value measurements. The standard removes, modifies, and adds certain
disclosure requirements, and is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. The Company is
evaluating the impact this standard will have on the Company's consolidated
financial statements.
In August 2018,
the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract, which
requires implementation costs in a hosting arrangement that is a service
contract to be capitalized consistent with the rules in ASC 350-40,
Intangibles-Goodwill and Other-Internal-Use Software. This aligns the
requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and
hosting arrangements that include an internal-use software license). Costs
incurred during the application development stage are to be capitalized and
expensed according to their nature, while costs incurred during the preliminary
project and post- implementation stages are to be expensed. This ASU also
contains guidance with regard to the amortization period, impairment and
presentation within the financial statements. The ASU is required to be adopted
by the Company during 2020, however early adoption is allowed in an interim
period before then, and may be applied retrospectively or prospectively to
applicable costs on the Company's condensed consolidated financial statements.
The Company is evaluating the impact this ASU will have on its consolidated
financial statements and whether to early adopt.
In March 2019, the FASB issued ASU No. 2019-01,
Leases (Topic 842) ("ASU 2019-01"), Codification Improvements , which aligned
the new leases guidance with existing guidance for fair
Page 12
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(j) New
accounting pronouncements and changes in accounting policy: (Continued)
value of the underlying asset by lessors that
are not manufacturers or dealers. As a result, the fair value of the underlying
asset at lease commencement is its cost, reflecting any volume or trade
discounts that may apply. However, if there has been a significant lapse of time
between when the underlying asset is acquired and when the lease commences, the
definition of fair value (in ASC 820, Fair Value Measurement) should be
applied. More importantly, the ASU also exempts both lessees and lessors from
having to provide certain interim disclosures in the fiscal year in which a
company adopts the new leases standard. This standard is effective for fiscal
years beginning after December 15, 2019. Early adoption is allowed. The Company
is evaluating the impact this ASU will have on its consolidated financial
statements.
In May 2019, the FASB issued ASU 2019-05,
Financial Instruments-Credit Losses (Topic 326) ("ASU 2019-05"). ASU 2019-05
provides entities that have certain instruments within the scope of Subtopic
326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an
option to irrevocably elect the fair value option in Subtopic 825-10, Financial
Instruments-Overall, applied on an instrument-by-instrument basis for eligible
instruments. ASU 2019-05 is effective for the Company's financial statements for
annual and interim periods beginning on or after December 15, 2019. The Company
does not believe that the adoption of this standard will have a material impact
on the Company's consolidated financial position or results of operations.
There have been no other recent accounting
standards, or changes in accounting standards, during the period ended September
30, 2019, as compared to the recent accounting standards described in the Annual
Report, that are of material significance, or have potential material
significance, to us.
(k) Financial
instruments:
(i) Fair values:
The fair value of
accounts receivable, accounts payable, accrued liabilities, short term loan and
accounts payable and accrued liabilities - related party approximate their
financial statement carrying amounts due to the short-term maturities of these
instruments. Cash is carried at fair value using a level 1 fair value
measurement.
In general, fair
values determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities. Fair values determined by Level 2
inputs utilize data points that are observable such as quoted prices, interest
rates and yield curves.
Fair values
determined by Level 3 inputs are unobservable data points for the asset or
liability, and included
situations where
there is little, if any, market activity for the asset. The Company's cash was
measured using Level 1 inputs. Stock-based compensation was measured using Level
2 inputs.
Page 13
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(k) Financial
instruments: (Continued)
(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. Acquisition of Kidoz Ltd. :
During the quarter ended March 31, 2019, the
Company issued 52,450,286 shares for total consideration of $20,603,655 in the
acquisition of all the issued and outstanding ordinary and preferred shares in
the capital stock of Kidoz Ltd., a company incorporated under the laws of the
State of Israel. Kidoz Ltd. is a global kids' content distribution and
monetization marketplace. The Company paid a commission of $130,000 and incurred
transaction costs of $60,228. The acquisition closed with the effective date of
acquisition being February 28, 2019.
The acquisition enables the global reach of
Kidoz Ltd.'s content network to be combined with the Company's Rooplay
subscription OTT platform.
This acquisition is accounted for as a business
combination. On acquisition of Kidoz Ltd., the Company allocated the purchase
price to the fair value of the net assets acquired. However, as certain
information regarding Kidoz Ltd.'s, intangible assets and resulting goodwill is
not yet finalized, these figures are subject to change. The provisional
measurements of assets and liabilities may be retrospectively adjusted when new
information is obtained until the final measurements are determined within one
year of the acquisition date. During the quarter ended September 30, 2019, the
provisional measurements have been updated to reflect new information on the
fair value of the net assets received.
The Company has estimated the following assets
and liabilities were acquired with the acquisition of Kidoz Ltd.
|
|
|
|
|
Cash
|
$
|
183,263
|
|
Accounts receivable
|
|
1,536,387
|
|
Prepaid expenses
|
|
22,253
|
|
Equipment
|
|
14,873
|
|
Accounts payable and accrued liabilities
|
|
(466,219)
|
|
Short term loan
|
|
(278,063)
|
|
Goodwill and identified intangible
assets
|
|
19,591,161
|
|
|
|
|
|
|
$
|
20,603,655
|
Page 14
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
4. Accounts Receivable:
The accounts receivable as at September 30, 2019, is summarized as follows:
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accounts receivable
|
$
|
1,962,828
|
$
|
39,769
|
|
|
|
|
|
|
|
Provision for doubtful
accounts
|
|
(53,513)
|
|
(27,666)
|
|
|
|
|
|
|
|
Net accounts receivable
|
$
|
1,909,315
|
|
12,103
|
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.
5. Equipment
|
September 30, 2019
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book
Value
|
|
|
|
|
|
|
|
|
|
Equipment and computers
|
$
|
142,498
|
$
|
123,014
|
$
|
19,484
|
|
Furniture and fixtures
|
|
14,787
|
|
8,498
|
|
6,289
|
|
|
$
|
157,285
|
$
|
131,512
|
$
|
25,773
|
|
December 31, 2018
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book
Value
|
|
|
|
|
|
|
|
|
|
Equipment and computers
|
$
|
128,097
|
$
|
112,845
|
$
|
15,252
|
|
Furniture and fixtures
|
|
8,037
|
|
7,034
|
|
1,003
|
|
|
$
|
136,134
|
$
|
119,879
|
$
|
16,255
|
Depreciation expense was $5,074 (September 30, 2018 - $1,495) for the quarter
ended September 30, 2019.
6. Content and
software development assets:
Since the year ended December 31, 2014, the
Company has been developing software technology and content for our websites.
This software technology and content includes the development of Trophy Bingo, a
social bingo game, the license and development of Garfield Bingo, a social bingo
game, the development of the Rooplay platform and the development of the Rooplay
Originals games and the continued
development of the Kidoz OS/SDK.
During the period
ended September 30, 2019, the Company has expensed the development costs of all
its technology as incurred and has expensed the following software development
costs.
Page 15
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
6. Content and
software development assets: (Continued)
|
|
|
Nine Months ended September
30, 2019
|
|
Nine Months ended September
30, 2018
|
|
Three Months ended September
30, 2019
|
|
Three Months ended September
30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Opening total software
development costs
|
$
|
6,716,810
|
$
|
5,768,476
|
$
|
7,256,571
|
$
|
6,304,540
|
|
|
|
|
|
|
|
|
|
|
|
Software development during
the period
|
|
810,202
|
|
743,547
|
|
270,441
|
|
207,483
|
|
Closing total Software
development costs
|
|
7,527,012
|
|
6,512,023
|
|
7,527,012
|
|
6,512,023
|
7.
Promissory notes:
The Company has issued unsecured promissory notes from shareholders of the
Company. The notes were repayable on September 30, 2018. The interest on the
notes are 2% per annum, calculated and compounded annually and paid annually.
Interest in arrears shall accrue interest. The unpaid principal amount due
hereunder may be reduced to zero from time to time without affecting the
validity of this note.
The promissory notes are accounted for by discounting the notes in a manner that
reflects the entity's borrowing rate when interest cost is recognized in
subsequent periods. The Company applied an estimated market rate of 15% to the
promissory notes. In doing so, the Company used the discounted cash flow
approach to value the present value of the notes. The cash flow stream from the
coupon interest payments and the final principal payment were discounted at 15%
to arrive at the valuations. The Company used a deemed rate of 15% as the
appropriate discount rate after examining the interest rates for similar
instruments issued in the same time frame for similar companies without the
conversion feature.
On March 31, 2017,
the maturity date on the promissory notes was extended to April 1, 2020. The
Company treated the change as an extinguishment and reissuance of the notes. The
Company recognized a discount on the promissory notes of $94,191 from the
extinguishment and reissuance of the notes.
During the quarter
ended September 30, 2018, the promissory notes were settled in exchange for the
exercise of warrants and the notes were extinguished. Since the extinguishment
of the promissory note is with related parties, then in accordance with ASC
470-50-40-2, the extinguishment transactions is in essence a capital
transaction. The Company recognized accretion interest and accrued interest of
$nil (September 30, 2018 - $18,796).
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Opening balance
|
$
|
-
|
$
|
502,313
|
|
|
|
|
|
|
|
Reduction of capital on
extinguishment of promissory notes with related parties
|
|
-
|
|
65,955
|
|
Extinguishment of promissory
notes to related parties
|
|
-
|
|
(605,358)
|
|
Accrued interest
|
|
-
|
|
5,124
|
|
Interest accretion
|
|
-
|
|
31,966
|
|
|
|
|
|
|
|
Closing balance
|
$
|
-
|
$
|
-
|
Page 16
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
8.
Short term loan
The Company had a short
term loan from the Bank Leumi. The loan was secured against the receivables of
the Company. The loan had an interest rate of 6.5%. During the quarter ended
June 30, 2019, the loan was repaid in full.
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 period ended March 31, 2019,
the Company closed a TSX Venture Exchange
approved private placement financing totaling $2,000,000.
The private placement consisted of 5,000,000 common
shares priced at $0.40 per share. Pursuant to the private placement the Company
paid a commission of $200,000 and incurred share issuance expense of $36,800.
During the
period ended March 31, 2019, the
Company issued 52,450,286 shares for total
consideration of $20,603,655 in the acquisition of all the issued and
outstanding ordinary and preferred shares in the capital stock of Kidoz Ltd., a
company incorporated under the laws of the State of Israel. (Note 3)
During the period ended September 30, 2018,
the related party warrant holders
exercised their warrants for 1,200,000 shares at CAD$0.65 (US$0.50) per share
through the settlement of the promissory notes, in a non-cash transaction.
During the period ended March 31, 2018,
a warrant holder exercised their warrant for
15,000 shares at $0.44 per share raising a total of $6,600.
During the period ended March 31, 2018,
the Company closed a TSX Venture Exchange
approved private placement financing totaling $2,551,500.
The private placement consisted of 7,290,000 common
shares priced at $0.35 per share. Pursuant to the private placement the Company
paid a commission of $253,750 and incurred share issuance expense of $18,342.
Page 17
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
9.
Stockholders' Equity: (Continued)
(b)
Warrants
A summary of
warrant activity for the period ended September 30, 2019 are as follows:
|
|
|
|
Number of warrants
|
|
Weighted average exercise
price
|
|
|
Outstanding, December 31,
2017
|
|
5,219,163
|
$
|
0.48
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
-
|
|
Exercised
|
|
(1,215,000)
|
|
(0.50)
|
|
Expired, unexercised
|
|
(4,004,163)
|
|
(0.51)
|
|
|
|
|
|
|
|
Outstanding December 31, 2018
and September 30, 2019
|
|
-
|
$
|
-
|
|
|
|
|
|
|
|
(c) Stock
option plans:
2015 stock
option plan
In the year ended December 31, 2015, the shareholders approved the 2015 stock
option plan and the 1999, 2001 and the 2005 plans were discontinued. The 2015
stock option plan is intended to provide incentive to employees, directors,
advisors and consultants of the Company to encourage proprietary interest in the
Company, to encourage such employees to remain in the employ of the Company or
such directors, advisors and consultants to remain in the service of the
Company, and to attract new employees, directors, advisors and consultants with
outstanding qualifications. The maximum number of shares issuable under the Plan
shall not exceed 10% of the number of Shares of the Company issued and
outstanding as of each Award Date unless shareholder approval is obtained in
advance in accordance unless shareholder approval is obtained in advance in
accordance. The Board of Directors determines the terms of the options granted,
including the number of options granted, the exercise price and their vesting
schedule. The maximum term possible is 10 years. Under the 2015 plan we have
reserved 10% of the number of Shares of the Company issued and outstanding as of
each Award Date.
No options were granted, cancelled or exercised
during the three month period ended September 30, 2019. During the nine months
ended September 30, 2019, 249,250 options were cancelled.
As at September
30, 2019, there were a total of 3,325,750 stock options (December 31, 2018 -
3,575,000) outstanding. Of the options outstanding at September 30, 2019, a
total of 3,210,250 (December 31, 2018 - 3,190,000) were fully vested and a total
of 115,500 (December 31, 2018 - 385,000) were issued where 10% vests at the
grant date, 15% one year following the grant date and 2% per month starting 13
months after the grant date.
Page 18
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
9.
Stockholders' Equity: (Continued)
(c) Stock
option plans: (Continued)
|
|
|
Number of options
|
|
Weighted average exercise
price
|
|
Outstanding, December 31,
2018
|
|
3,575,000
|
$
|
0.45
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
-
|
|
Exercised
|
|
-
|
|
-
|
|
Cancelled
|
|
(249,250)
|
|
(0.42)
|
|
|
|
|
|
|
|
Outstanding September 30,
2019
|
|
3,325,750
|
$
|
0.45
|
The following
table summarizes information concerning outstanding and exercisable stock
options at September 30, 2019:
|
Range of exercise
prices per share
|
Number outstanding
|
Number exercisable
|
Expiry date
|
|
|
$ 0.42
|
770,000
|
770,000
|
December 20, 2021
|
|
|
0.42
|
567,750
|
452,250
|
November 8, 2022
|
|
|
0.42
|
713,000
|
713,000
|
June 4, 2023
|
|
|
0.50
|
1,275,000
|
1,275,000
|
June 4, 2023
|
|
|
|
3,325,750
|
3,210,250
|
|
10.
Commitments:
The Company leases office facilities in
Vancouver, British Columbia, Canada, The Valley, Anguilla, British West Indies
and Netanya, Israel. These office facilities are leased under operating lease
agreements.
During the quarter ended March 31, 2019, the
Company signed a five year lease for a facility in Vancouver, Canada, commencing
April 1, 2019 and ending March 2024. This facility comprises approximately 1,459
square feet. The Anguillan operating
lease expired on April 1, 2011 but unless 3 month's notice is given it
automatically renews for a future 3 months until notice is given.
The Netanya, Israel operating lease expired on
July 14, 2017 but unless 3 month's notice is given it automatically renews for a
future 12 months until notice is given. Subsequent to the quarter ended
September 30, 2019, the lease was extended for a further 12 months. The Company
has accounted for this lease as a short-term lease.
The minimum lease
payments under these operating leases are approximately as follows:
|
|
|
|
|
2019
|
$
|
12,352
|
|
2020
|
|
41,971
|
|
2021
|
|
43,073
|
|
2022
|
|
44,175
|
|
2023
|
|
45,277
|
|
2024
|
|
11,388
|
|
|
|
|
Page 19
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
10.
Commitments: (Continued)
The Company paid rent expense totaling $22,109
for the quarter ended September 30, 2019 (September 30, 2018 - $7,637).
The Company has a management consulting
agreement with T.M. Williams (Row), Inc., an Anguilla incorporated company, and
Mr. T. M. Williams. During the year ended December 31, 2014, the Company amended
a previous agreement with Mr. T. M. Williams to provide for a consultancy
payment of 2.5% of the monthly social bingo business with a minimum of $11,000
and a maximum of $25,000 per month.
During the year ended December 31, 2014, the
Company entered into an agreement with Jayska Consulting Ltd. and Mr. J. M.
Williams, Chief Executive Officer of the Company for the provision of services
of Mr. J. M. Williams as Chief Executive Officer of the Company. The Consulting
agreement provides for a consultancy payment of GBP5,000 Sterling per month. In
addition, during the year ended December 31, 2014, the Company entered into an
agreement with LVA Media Inc. and Mr. J. M. Williams, for the provision of
services of Mr. J. M. Williams as Chief Executive Officer of the Company. The
Consulting agreement provides for a consultancy payment of 2.5% of the monthly
social bingo business with a minimum of $7,500 and a maximum of $25,000 per
month.
As at September
30, 2019, the Company had a number of renewable license commitments with large
brands, including, Garfield, Moomins, Mr. Men and Little Miss, Mr. Bean, Peter
Rabbit, Pororo and the Winx club.
These agreements
have commitments to pay royalties on the revenue from the licenses subject to
the following minimum guarantee payments:
The Company expensed the minimum guarantee payments over the life of the
agreement and recognized license expense of $16,458 (September 30, 2018 -
$9,577) for the quarter ended September 30, 2019 and $44,332 (September 30, 2018
- $22,562) for the nine months ended September 30, 2019 .
11. Income Taxes:
Shoal Games Ltd. is
domiciled in the tax-free jurisdiction of Anguilla, British West Indies. However
certain of the Company's subsidiaries incur income taxation.
During the quarter
ended September 30, 2019, Shoal Media (Canada) Inc., a subsidiary of Kidoz
Inc., received the British Columbia Interactive Digital Media Tax Credit of
CAD$130,145 ($97,895) for the year ended December 31, 2018 from the British
Columbia Provincial Government. The Company recognized this tax credit as a
recovery of income tax expense on the statement of operations upon receipt of
funds.
Page 20
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
12. Right of Use assets:
On January 1,
2019, the Company adopted ASC Topic 842 using the modified retrospective
transition method. Topic 842 requires the recognition of lease assets and
liabilities for operating leases, in addition to the finance lease assets and
liabilities previously recorded on our condensed consolidated balance sheets.
Beginning on January 1, 2019, our condensed consolidated financial statements
are presented in accordance with the revised policies, while prior period
amounts are not adjusted and continue to be reported in accordance with our
historical policies. The modified retrospective transition method required the
cumulative effect, if any, of initially applying the guidance to be recognized
as an adjustment to our accumulated deficit as of our adoption date. As a result
of adopting Topic 842, we recognized additional lease assets and liabilities of
$5,834 as of January 1, 2019, in relation to the brand licenses we currently
hold. There is no discount rate implicit in the license agreement so the
Company estimated a 12% the discount rate for the incremental borrowing rate for
the licenses as of the adoption date, January 1, 2019.
Effective April 1,
2019, we recognized lease assets and liabilities of $125,474, in relation to the
Vancouver office. We estimated a discount rate of 4.12%.
There was no
cumulative effect adjustment to our accumulated deficit as a result of initially
applying the guidance.
We elected the
package of practical expedients permitted under the transition guidance within
Topic 842, which allowed us to carry forward prior conclusions about lease
identification, classification and initial direct costs for leases entered into
prior to adoption of Topic 842. Additionally, we elected to not separate lease
and non-lease components for all of our leases. For leases with a term of 12
months or less, our current offices, we elected the short-term lease exemption,
which allowed us to not recognize right-of-use assets or lease liabilities for
qualifying leases existing at transition and new leases we may enter into in the
future.
Our operating leases primarily consist of license agreements for the use of
certain brands. These arrangements typically do not transfer ownership of the
underlying asset as we do not assume, nor do we intend to assume, the risks and
rewards of ownership.
13. Related Party Transactions:
The Company has a liability of $nil (December 31, 2018 - $nil) to a company
owned by a current director and officer of the Company for payment of consulting
services rendered
of $33,000
(September 30, 2018 - $33,000) by the
current director and officer of the Company.
The Company has a liability of $2,180 (December 31, 2018 - $1,647) to a current
director and officer of the Company for expenses incurred.
The Company has a liability of $nil (December 31, 2018 - $nil) to a company
owned by a current director and officer of the Company for payment of consulting
services rendered of $18,493 (September
30, 2018 - $19,543) by the current director
and officer of the Company.
Page 21
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
13. Related Party Transactions: (Continued)
The Company has a liability of $nil (December 31, 2018 - $nil) to a company
owned by a current director and officer of the Company for payment of consulting
services rendered of $22,500 (September
30, 2018 - $22,500) by the current director
and officer of the Company.
The Company has a
liability of $1,500 (December 31, 2018
- $1,500), to independent directors of the Company for payment of
directors' fees. During the quarter ended September 30, 2019, the Company
accrued $1,000 (September 30, 2018 - $500) to the independent directors in
director fees.
The Company has a
liability of $91 (December 31, 2018
- $7,317), to an officer of the Company for payment of consulting services
rendered and expenses incurred of $34,085 (September 30, 2018 - $25,588)
by the officer of the Company.
The Company has a receivable of $nil (December
31, 2018 - $2,305) from a company of which
a former director of the Company is a director.
The related party
transactions are in the normal course of operations and were measured at the
exchange amount, which is the amount of consideration established and agreed to
by the related party.
14. Segmented
information:
Revenue
The Company operates in reportable business
segments, the sale of Ad tech advertising and content revenue.
The Company had the following revenue by
geographical region.
|
|
|
Nine Months ended September
30, 2019
|
|
Nine Months ended September
30, 2018
|
|
Three Months ended September
30, 2019
|
|
Three Months ended September
30, 2018
|
|
Ad tech advertising revenue
|
|
|
|
|
|
|
|
|
|
Western Europe
|
$
|
485,540
|
$
|
-
|
$
|
366,262
|
$
|
-
|
|
North America
|
|
1,460,722
|
|
-
|
|
774,740
|
|
-
|
|
Other
|
|
29,261
|
|
-
|
|
24,607
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total ad tech advertising
revenue
|
$
|
1,975,523
|
$
|
-
|
$
|
1,165,609
|
$
|
-
|
Page 22
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
14. Segmented
information: (Continued)
|
|
|
Nine Months ended September
30, 2019
|
|
Nine Months ended September
30, 2018
|
|
Three Months ended September
30, 2019
|
|
Three Months ended September
30, 2018
|
|
Content revenue
|
|
|
|
|
|
|
|
|
|
Western Europe
|
$
|
62,836
|
$
|
11,391
|
$
|
28,610
|
$
|
2,917
|
|
Central, Eastern and Southern
Europe
|
|
152,572
|
|
1,472
|
|
52,677
|
|
464
|
|
North America
|
|
135,124
|
|
63,201
|
|
9,066
|
|
33,384
|
|
Other
|
|
69,215
|
|
13,572
|
|
15,066
|
|
4,177
|
|
|
|
|
|
|
|
|
|
|
|
Total content revenue
|
$
|
419,747
|
$
|
89,636
|
$
|
105,419
|
$
|
40,942
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
|
Western Europe
|
$
|
548,376
|
$
|
11,391
|
$
|
394,872
|
$
|
2,917
|
|
Central, Eastern and Southern
Europe
|
|
152,572
|
|
1,472
|
|
52,677
|
|
464
|
|
North America
|
|
1,595,846
|
|
63,201
|
|
783,806
|
|
33,384
|
|
Other
|
|
98,476
|
|
13,572
|
|
39,673
|
|
4,177
|
|
Total revenue
|
$
|
2,395,270
|
$
|
89,636
|
$
|
1,271,028
|
$
|
40,942
|
Equipment
The Company's equipment is
located as follows:
|
Net Book Value
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Anguilla
|
$
|
276
|
$
|
368
|
|
Canada
|
|
12,359
|
|
12,911
|
|
Israel
|
|
10,907
|
|
-
|
|
United Kingdom
|
|
2,231
|
|
2,976
|
|
|
$
|
25,773
|
$
|
16,255
|
15. Concentrations:
Major customers
During the quarter ended September 30, 2019, the
Company sold Ad tech revenue and during the quarter ended September 30, 2019 and
2018, sold content revenue including subscriptions on its site Rooplay, in-app
purchases on its social bingo sites, Trophy Bingo and Garfield's Bingo and
Rooplay Originals. During the quarter ended September 30, 2019, the Company had
two customers (September 30, 2019 - $680,192 and $184,376 respectively)
(September 30, 2018 - $nil)who
purchased more than 10% of the total revenue. The Company is reliant on the
Google App, iOS App and Amazon App Stores to provide a content platform for
Rooplay, Trophy Bingo and Garfield's Bingo to be played thereon and certain
advertising agencies for the Ad tech revenue.
Page 23
KIDOZ INC.
and subsidiaries
(Previously Shoal Games Ltd.)
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended September 30, 2019 and and 2018
(Unaudited)
15. Concentrations:
(Continued)
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and
accounts receivable. The Company places its cash with high quality financial
institutions and limits the amount of credit exposure with any one institution.
The Company currently maintains a substantial
portion of its day-to-day operating cash balances at financial institutions. At
September 30, 2019, the Company had total cash and cash equivalents balances of
$812,477 (December 31, 2018 - $641,536)
at financial institutions, where $527,373 (December 31, 2018 -
$489,235)
is in excess of federally insured limits.
The Company has concentrations of credit risk
with respect to accounts receivable, the majority of its accounts receivable are
concentrated geographically in the United States amongst a small number of
customers.
As of September 30, 2019, the Company had one
customer, totaling $1,296,246 who accounted for greater than 10% of the total
accounts receivable. As of December 31, 2018, the Company had three customers,
totaling $8,814 who accounted for greater than 10% of the total accounts
receivable.
The Company controls credit risk through
monitoring procedures and receiving prepayments of cash for services rendered.
The Company performs credit evaluations of its customers but generally does not
require collateral to secure accounts receivable.
Page 24