Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
1. Introduction:
Nature
of business
Kidoz Inc. is a kid-tech software developer
and owner of the leading mobile KidSafe advertising network (www.KIDOZ.net),
incorporated in Anguilla, British West Indies in 2005. We help create a free
and safe Internet for children, by enabling content producers to monetize
their apps and video with ads.
For Original Equipment Manufacturers ("OEM")
and Carriers, the Company's KIDOZ Mode is the software solution that powers
their youth-dedicated products, including custom content libraries, parental
control and kid-friendly monetization.
The games on the Rooplay system are designed
to both entertain and educate. Children engaging with Rooplay learn
technology, solve puzzles, paint pictures, practice language, learn math,
and other educational games. Kidoz Inc. is developing a content system with
Rooplay that builds tech literacy and encourages early learning.
Rooplay will generate revenue for the
Company from consumer subscriptions which customers pay to unlock the
Rooplay game catalog and the licensing of our Rooplay games.
Kidoz Ltd.'s
other mobile products, Garfield's Bingo (www.garfieldsbingo.com), and Trophy
Bingo (www.trophybingo.com), are free-to-play mobile games live in the
Apple, Google and Amazon App Stores. The Company has generated revenue
to-date from players making in-app purchases in Trophy Bingo and Garfield's
Bingo.
Continuing operations
These
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 income from operations for
the year ended December 31, 2020 and losses from operations for the year
ended December 31, 2019 and has an accumulated deficit of
$40,448,481
as at
December 31, 2020. This raises 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
Page 30
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
1. Introduction: (Continued)
cash flow in
the short term, it may be required to further reduce or limit operations.
In March 2020 the World Health
Organization declared coronavirus COVID-19 a global pandemic. This
contagious disease outbreak, which has continued to spread, and any related
adverse public health developments, has adversely affected workforces,
economies, and financial markets globally, has led to an economic downturn.
It has also disrupted the normal operations of many businesses, including
the Company's. In early March 2020, the Company's employees commenced
working from home and commenced social distancing. This outbreak has
affected spending, thereby affecting demand for the Company's product and
the Company's business and results of operations. It is not possible for the
Company to predict the duration or magnitude of the outbreak and at this
time its full effects on the Company's business, its future results of
operations, or ability to raise funds.
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 year ended December 31, 2019, the
Company acquired Kidoz Ltd. a company incorporated under the laws of the
State of Israel. (Note 3)
All
inter-company balances and transactions have been eliminated in the
consolidated financial statements.
Page 31
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(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, the valuation of stock-based compensation, the valuation of
deferred tax assets, the useful lives of intangible assets, the
determination of the fair value of goodwill after impairment, and the
estimated interest rate of 12% for the license right-of-use assets and 4.12%
- 5% for the rental units right-of-use asset. Actual results may differ
significantly from these estimates.
(c)
Revenue recognition:
In accordance with ASC 606, Revenue from Contracts with
Customers, revenue is recognized when a customer obtains control of promised
services. The amount of revenue recognized reflects the consideration to
which the Company expects to be entitled to receive in exchange for these
services.
We derive substantially all of our revenue from the sale of Ad tech
advertising revenue.
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
Page 32
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue recognition: (Continued)
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 (CPI) arrangements, Cost per completed video view (CPC)
and/or Cost-Per-Action (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
Page 33
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue recognition: (Continued)
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) 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 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) 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.
Page 34
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue recognition: (Continued)
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.
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,
click-throughs, 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.
(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 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.
Page 35
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(e)
Cash and Cash Equivalents:
Cash
and cash equivalents includes cash on hand, deposits held at call with
financial institutions and other short-term, highly liquid investments with
original maturities of three months or less that are readily convertible to
known amounts of cash, collateral accounts with maturities greater than 1
year and subject to an insignificant risk of change in value.
(f)
Accounts receivable:
Trade and other accounts receivable are reported at face value less any
provisions for uncollectible accounts considered necessary. Accounts
receivable includes receivables from online platforms and trade receivables
from customers. The Company estimates doubtful accounts on an item-by-item
basis and includes over-aged accounts as part of allowance for doubtful
accounts, which are generally ones that are greater than ninety-days
overdue. Bad debt expense, for the year ended December 31, 2020 was
$1,952 (2019 - $2,029).
(Note 4)
(g)
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 3 years
Furniture and fixtures 5 years
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.
In accordance with ASU No. 2016-02 "Leases (Topic 842),
leasehold improvements are accounted as a prepayment of rental payments
since they are deemed to be an asset of the lessor.
(h)
Software
Development Costs:
The
Company expensed all software development costs as incurred for the year
ended December 31, 2020 and 2019. As at December 31, 2020 and 2019, all
capitalized software development costs have been fully amortized and the
Company has no capitalized 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.
Page 36
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(h) Software Development Costs: (Continued)
Total software
development costs were $8,880,753 as at December 31, 2020 (2019 -
$7,730,851) (Note 9).
(i)
Selling, Marketing and Advertising:
The Company expenses the cost of advertising in the
period in which the advertising space or airtime is used.
Advertising costs from continuing operations charged to selling and
marketing expenses in 2020 totaled $397,948 (2019 - $369,321).
(j)
Stock-based compensation:
The
Company accounts for stock-based compensation under the provisions of
Accounting Standard Codification ("ASC") 718, "Compensation-Stock
Compensation". Under the fair value recognition provisions, stock-based
compensation expense is measured at the grant date for all stock-based
awards to employees, directors and non-employees and is recognized as an
expense over the requisite service period, which is generally the vesting
period. The Black-Scholes option valuation model is used to calculate fair
value.
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 weighted
average assumptions:
|
|
2020
|
|
2019
|
Expected
dividend yield
|
|
-
|
|
-
|
Volatility
|
|
123%
|
|
-
|
Risk-free
interest rate
|
|
0.32%
|
|
-
|
Expected life
of options
|
|
5 years
|
|
-
|
Forfeiture
rate
|
|
5%
|
|
-
|
(k) 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 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
Page 37
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(k) Right-of-use assets: (Continued)
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.
(l) 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.
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, goodwill, intangible
assets 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.
Page 38
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(m) Impairment
of long-lived assets and long-lived assets to be disposed of:
If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount
and the fair value less costs to sell.
The Company
identified the following intangible assets in the acquisition of Kidoz Ltd.
(Note 3).
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
relationships
|
|
8
years
|
(n) Goodwill :
The Company accounts for goodwill in
accordance with the provisions of ASC 350, Intangibles-Goodwill and Others.
Goodwill is the excess of the purchase price over the fair value of
identifiable assets acquired, less liabilities assumed, in a business
combination. The Company reviews goodwill for impairment. Goodwill is not
amortized but is evaluated for impairment at least annually or whenever
events or changes in circumstances indicate that it is more likely than not
that the carrying amount may not be recoverable.
The goodwill impairment test is used to identify
both the existence of impairment and the amount of impairment loss, and
compares the fair value of a reporting unit with its carrying amount and is
based on discounted future cash flows, based on market multiples applied to
free cash flow. The determination of the fair value of our reporting units
requires management to make significant estimates and assumptions including
the selection of control premiums, discount rates, terminal growth rates,
forecasts of revenue and expense growth rates, income tax rates, changes in
working capital, depreciation, amortization and capital expenditures.
Changes in assumptions concerning future financial results, exogenous market
conditions, or other underlying assumptions could have a significant impact
on either the fair value of the reporting unit or the amount of the goodwill
impairment charge. If the carrying value of the reporting unit exceeds its
fair value, an impairment loss is recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to that reporting
unit.
During the year ended December 31,
2020, the Company deemed there was no impairment of the goodwill, compared
to the year ended December 31, 2019, when the Company deemed there was
impairment and recognized an impairment charge of $13,877,385.
Page 39
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(o)
Income taxes:
The
Company follows the asset and liability method of accounting for income
taxes. Under this method, current income taxes are recognized for the
estimated income taxes payable for the current period. The Company
recognizes the income tax recovery from the receipt of tax credits upon
receipt of funds. Deferred income taxes are provided based on the estimated
future tax effects of temporary differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases,
as well as the benefit of losses available to be carried forward to future
years for tax purposes.
Deferred tax assets and liabilities are measured using the enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered and settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment date. A
valuation allowance is recorded for deferred tax assets when it is not more
likely than not that such future tax assets will be realized.
(p)
Net income (loss) per share:
ASC 260, "Earnings Per Share", requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS"). Basic earnings (loss) per share is computed by
dividing earnings (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution, using the treasury stock
method, that could occur if outstanding options or warrants were exercised
and converted into common stock. In computing diluted earnings per share,
the treasury stock method assumes that outstanding options and warrants are
exercised and the proceeds are used to purchase common stock at the average
market price during the period.
Options and warrants will have a
dilutive effect under the treasury stock method only when the average market
price of the common stock during the period exceeds the exercise price of
the options and warrants. In periods where losses are reported, the weighted
average number of common shares outstanding excludes common stock
equivalents because their inclusion would be anti-dilutive. A total of
5,875,750 (2019 - 3,200,750) stock options were excluded as at December 31,
2020.
Page 40
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(p)
Net income (loss) per share: (Continued)
The earnings per share data for the year ended
December 31, 2020 and 2019 are summarized as follows:
|
|
2020
|
|
2019
|
Income (Loss)
for the year
|
$
|
103,971
|
$
|
(14,654,232)
|
|
|
|
|
|
Basic and diluted
weighted average number
of
common shares outstanding
|
|
131,124,989
|
|
121,208,912
|
|
|
|
|
|
Basic and
diluted income (loss) per common share outstanding
|
$
|
0.00
|
$
|
(0.12)
|
(q)
New
accounting pronouncements and changes in accounting policies:
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. This guidance is effective for annual or
any interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. The Company adopted ASU 2017-04 as of January 1, 2020 and
ASU 2017-04 has not had a material impact on the consolidated financial
position or results of operations.
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 adopted ASU 2018-13 as of January 1, 2020 and ASU 2018-13
has not had a material impact on the consolidated financial position or
results of operations and liquidity.
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 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. This
standard is effective for fiscal years beginning after December 15, 2019.
The Company adopted ASU 2019-01 as of January 1, 2020 and ASU 2019-01 has
not had a material impact on the consolidated financial
position or results of operations and
liquidity.
Page 41
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(q)
New
accounting pronouncements and changes in accounting policies: (Continued)
In December 2019, the FASB issued ASU No.
2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes". The ASU is expected to reduce cost and complexity related to the
accounting for income taxes by removing specific exceptions to general
principles in Topic 740 (eliminating the need for an organization to analyze
whether certain exceptions apply in a given period) and improving financial
statement preparers' application of certain income tax-related guidance.
This standard is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years. Early adoption of this
standard is permitted. The Company does not expect the adoption of this
guidance will have a material impact on the Company's financial position,
results of operations and liquidity.
There have been no other recent accounting
standards, or changes in accounting standards, during the year ended
December 31, 2020, that are of material significance, or have potential
material significance, to us.
(r) Financial instruments and fair
value measurements:
(i)
Fair values:
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on measurement date. The Company classifies assets and
liabilities recorded at fair value under the fair value hierarchy based upon
the observability of inputs used in valuation techniques. Observable inputs
(highest level) reflect market data obtained from independent sources, while
unobservable inputs (lowest level) reflect internally developed market
assumptions. The fair value measurements are classified under the following
hierarchy:
Level
1-Observable inputs that reflect quoted market prices (unadjusted) for
identical assets and liabilities in active markets;
Level
2-Observable inputs, other than quoted market prices, that are either
directly or indirectly observable in the marketplace for identical or
similar assets and liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets and
liabilities; and
Level
3-Unobservable inputs that are supported by little or no market activity
that are significant to the fair value of assets or liabilities.
When
available, we use quoted market prices to determine fair value, and we
classify such measurements within Level 1. In some cases where market
prices are not available, we make
Page 42
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
2. Summary of
significant accounting policies: (Continued)
(r) Financial instruments and fair
value measurements: (Continued)
use
of observable market based inputs to calculate fair value, in which case the
measurements are classified within Level 2. If quoted or observable market
prices are not available, fair
value
is based upon valuations in which one or more significant inputs are
unobservable, including internally developed models that use, where
possible, current market-based parameters such as interest rates, yield
curves and currency rates. These measurements are classified within Level
3.
Fair
value measurements are classified according to the lowest level input or
value-driver that is significant to the valuation. A measurement may
therefore be classified within Level 3 even though there may be significant
inputs that are readily observable.
Fair
value measurement includes the consideration of nonperformance risk.
Nonperformance risk refers to the risk that an obligation (either by a
counterparty) will not be fulfilled. For financial assets traded in an
active market (Level 1 and certain Level 2), the nonperformance risk is
included in the market price. For certain other financial assets and
liabilities (certain Level 2 and Level 3), our fair value calculations have
been adjusted accordingly.
The
fair value of accounts receivable, accounts payable, accrued liabilities,
and accounts payable and accrued liabilities - related party approximate
their financial statement carrying amounts due to the short-term maturities
of these instruments and are therefore carried at historical cost basis.
The government CEBA loan is classified as a financial liability and its fair
value was determined using the effective interest rate method, and is
carried at amortized cost.
Fair
values determined by Level 3 inputs are unobservable data points for the
asset or liability, and included
situations where there is little, if any, market activity for the asset. The
Company's cash and long-term cash equivalents were measured using Level 1
inputs. Stock-based compensation was measured using Level 2 inputs. Goodwill
impairment was measured using Level 3 inputs.
(ii) Foreign currency risk:
The
Company operates internationally, which gives rise to the risk that cash
flows may be adversely impacted by exchange rate fluctuations. The Company
has not entered into any forward exchange contracts or other derivative
instrument to hedge against foreign exchange risk.
3. Acquisition of Kidoz Ltd.:
During the year ended December 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.
Page 43
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
3. Acquisition of Kidoz Ltd.: (Continued)
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 over-the-top ("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.
The Company
has estimated the following assets and liabilities were acquired with the
acquisition of Kidoz Ltd.
|
|
|
Cash
|
$
|
183,264
|
Accounts receivable
|
|
1,417,546
|
Prepaid expenses
|
|
35,179
|
Equipment
|
|
14,873
|
Accounts payable and accrued
liabilities
|
|
(466,219)
|
Short-term loan
|
|
(278,063)
|
Deferred tax liability
|
|
(752,205)
|
Intangible assets
|
|
3,270,456
|
Goodwill
|
|
17,178,824
|
|
|
|
|
$
|
20,603,655
|
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 year ended December 31, 2019, the loan was repaid
in full.
4. Accounts Receivable:
The accounts receivable as at December 31, 2020, is summarized as follows:
|
|
2020
|
|
2019
|
Accounts
receivable
|
$
|
3,989,200
|
$
|
2,446,486
|
|
|
|
|
|
Provision for
doubtful accounts
|
|
(55,660)
|
|
(53,708)
|
|
|
|
|
|
Net accounts
receivable
|
$
|
3,933,540
|
$
|
2,392,778
|
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. The Company has a doubtful debt provision of $27,994 for
existing accounts receivable.
Page 44
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
5. Prepaid
expenses
The Company has other prepaid expenses of $89,970
(2019 - $109,914) including leasehold improvements of $23,831 (2019 -
$32,484), which is recognized as prepaid rent
for the year
ended December 31, 2020.
6. Equipment:
2020
|
|
Cost
|
|
Accumulated depreciation
|
|
Net
book
Value
|
|
|
|
|
|
|
|
Equipment and
computers
|
$
|
146,545
|
$
|
130,798
|
$
|
15,747
|
Furniture and
fixtures
|
|
14,787
|
|
8,695
|
|
6,092
|
|
$
|
161,332
|
$
|
139,493
|
$
|
21,839
|
2019
|
|
Cost
|
|
Accumulated depreciation
|
|
Net
book
Value
|
|
|
|
|
|
|
|
Equipment and
computers
|
$
|
143,333
|
$
|
123,123
|
$
|
20,210
|
Furniture and
fixtures
|
|
14,787
|
|
7,815
|
|
6,972
|
|
$
|
158,120
|
$
|
130,938
|
$
|
27,182
|
Depreciation expense was $8,555 (2019 - $10,460) for the year ended December
31, 2020.
7. Intangible assets:
2020
|
|
Cost
|
|
Accumulated amortization
|
|
Net
book
Value
|
|
|
|
|
|
|
|
Ad Tech
technology
|
$
|
1,877,415
|
$
|
688,386
|
$
|
1,189,029
|
Kidoz OS
technology
|
|
31,006
|
|
18,948
|
|
12,058
|
Customer
relationship
|
|
1,362,035
|
|
312,133
|
|
1,049,902
|
|
$
|
3,270,456
|
$
|
1,019,467
|
$
|
2,250,989
|
2019
|
|
Cost
|
|
Accumulated amortization
|
|
Net
book
Value
|
|
|
|
|
|
|
|
Ad Tech
technology
|
$
|
1,877,415
|
$
|
312,902
|
$
|
1,564,513
|
Kidoz OS
technology
|
|
31,006
|
|
8,613
|
|
22,393
|
Customer
relationship
|
|
1,362,035
|
|
141,879
|
|
1,220,156
|
|
$
|
3,270,456
|
$
|
463,394
|
$
|
2,807,062
|
Amortization expense was $556,073 (2019 - $463,394) for the year ended
December 31, 2020.
Page 45
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
8. Goodwill:
The changes in the carrying amount of goodwill for year ended December 31,
2020 and 2019 were as follows:
|
|
2020
|
|
2019
|
Goodwill,
balance at beginning of year
|
$
|
3,301,439
|
$
|
-
|
|
|
|
|
|
Acquisition of
Kidoz Ltd. (Note 3)
|
|
-
|
|
17,178,824
|
Impairment of
goodwill
|
|
-
|
|
(13,877,385)
|
|
|
|
|
|
Goodwill,
balance at end of year
|
$
|
3,301,439
|
$
|
3,301,439
|
The Company's annual goodwill impairment
analysis performed during the fourth quarter of fiscal 2020 and 2019
included a quantitative analysis of the Kidoz Ltd. reporting unit
(consisting of intangible assets (Note 7) and goodwill). The reporting unit
has a carrying amount of $5,552,428 (2019 $6,108,501 as at December 31,
2020. The Company performed a discounted cash flow analysis for Kidoz Ltd. These discounted cash
flow models included management assumptions for expected sales growth,
margin expansion, operational leverage, capital expenditures, and overall
operational forecasts. The Company classified these significant inputs and
assumptions as Level 3 fair value measurements. For fiscal 2019, these analyses led to the conclusion
that the fair value of these reporting units was less than their carrying
values by an amount that exceeded the carrying value of goodwill.
Accordingly, for the year ended December 31, 2019, the full carrying value
of the goodwill was impaired by $13,877,385.
Based on the annual impairment test described above there was no additional
impairment determined for fiscal 2020.
9.
Content and software development costs:
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
Safe Ad Network, the KIDOZ Kid-Mode Operating System, and the KIDOZ
publisher SDK.
During the year ended December 31, 2020
and 2019, the Company has expensed the development costs of all products as
incurred and has expensed the following development costs.
|
|
2020
|
|
2019
|
Opening total content and
software development costs
|
$
|
7,730,851
|
$
|
6,716,810
|
|
|
|
|
|
Content and software
development during the year
|
|
1,149,902
|
|
1,014,041
|
Closing total Content and
software development costs
|
$
|
8,880,753
|
$
|
7,730,851
|
Page 46
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
10.
Government CEBA loan:
During the year ended December 31, 2020, the
Company was granted a loan of $47,089 (CAD$60,000) under the Canada
Emergency Business Account (CEBA) loan program for small businesses. The
CEBA loan program is one of the many incentives the Canadian Government
put in place in response to COVID-19. The
loan is interest free and a quarter of the loan $11,772 (CAD$20,000) is
eligible for complete forgiveness if $35,317 (CAD$40,000) is fully repaid on
or before December 31, 2022. If the loan cannot be repaid by December 31,
2022, it can be converted into a 3-year term loan charging an interest rate
of 5%.
11. 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
and there is only one class of common shares. The Company has an unlimited
number of common shares authorized for issue.
(a) Common stock issuances:
Fiscal 2020
There were no common stock issuances for the
year ended December 31, 2020.
Fiscal 2019
In March 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
expenses of $36,800.
In
March 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)
(b) 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.
Page 47
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
11. Stockholders' Equity: (Continued)
(b) Stock option plans: (Continued)
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.
During the year ended December 31, 2020, the Rolling Stock Option plan was
amended by inclusion of an Israeli Taxpayers Appendix.
During the year ended December 31,
2020, the Company granted to employees and consultants 2,745,000 options
with an exercise price of CAD$0.45 ($0.33) expiring on June 30, 2025, of
which 60,000 options were fully vested, 2,595,000 options were issued where
2.08% vests per month commencing June 30, 2021, and 90,000 options were
issued where 2% vests per month commencing on grant date. 1,250,000 of these
options were granted to directors and officers of the Company.
No options were granted during the year
ended December 31, 2019.
Subsequent to the year ended December 31, 2020, a further 1,040,000 options
were awarded where 10% vests on grant date, 15% one year following and 2%
per month thereafter, with an exercise price of CAD$0.50 ($0.39) and 35,000
options were awarded which were fully vested with an exercise price of
CAD$0.50 ($0.39).
A
summary of stock option activity for the stock option plans for the years
ended December 31, 2020 and 2019 are as follows:
|
|
Number of
options
|
|
Weighted
average exercise price
|
Outstanding December 31, 2018
|
|
3,575,000
|
$
|
0.45
|
|
|
|
|
|
Granted
|
|
-
|
|
-
|
Exercised
|
|
-
|
|
-
|
Cancelled
|
|
(374,250)
|
|
(0.41)
|
Outstanding December 31, 2019
|
|
3,200,750
|
$
|
0.45
|
|
|
|
|
|
Granted
|
|
2,745,000
|
|
0.33
|
Exercised
|
|
-
|
|
-
|
Cancelled
|
|
(70,000)
|
|
(0.42)
|
Outstanding December 31, 2019
|
|
5,875,750
|
$
|
0.39
|
The aggregate intrinsic value for options as of December 31, 2020 was
$3137,250 (2019 -
$nil).
Page 48
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
11. Stockholders' Equity: (Continued)
(b) Stock option plans: (Continued)
The following
table summarizes information concerning outstanding and exercisable stock
options at December 31, 2020:
Range of exercise
prices per option
|
Number outstanding
|
Number exercisable
|
Expiry date
|
|
$ 0.33
|
2,745,000
|
78,000
|
June 30, 2025
|
|
0.40
|
620,000
|
620,000
|
December 20, 2021
|
|
0.42
|
522,750
|
475,250
|
November 8,
2022
|
|
0.42
|
713,000
|
713,000
|
June 4, 2023
|
|
0.50
|
1,275,000
|
1,275,000
|
June 4, 2023
|
|
|
5,875,750
|
3,161,250
|
|
The Company
recorded stock-based compensation of $158,883 on the 2,935,000 options
granted and vested (2019 - $15,890 on the 2,130,000 options granted and
vested) and as per the
Black-Scholes option-pricing model,
with a
weighted average fair value per option grant of $0.27 (2019 - $0.29).
12. Fair value measurement:
The following
table sets forth the fair value of the Company's financial assets and
liabilities measured at fair value on a recurring basis based on the
three-tier fair value hierarchy.
|
Level 1
|
Level 2
|
Level 3
|
Total
|
As at December 31, 2020
|
|
|
|
|
Assets
|
|
|
|
|
Cash
|
$1,226,045
|
$-
|
$-
|
$1,226,045
|
Long term cash equivalent
|
31,392
|
-
|
-
|
31,392
|
Total assets measured and recorded at fair value
|
$1,257,437
|
$-
|
$-
|
$1,257,437
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
As at December 31, 2019
|
|
|
|
|
Assets
|
|
|
|
|
Cash
|
$967,212
|
$-
|
$-
|
$967,212
|
Long term cash equivalent
|
38,412
|
-
|
-
|
38,412
|
Total assets measured and recorded at fair value
|
$1,005,624
|
$-
|
$-
|
$1,005,624
|
13.
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.
Page 49
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
13.
Commitments: (Continued)
During the year ended December 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
Company accounts for the lease in accordance with ASU 2016-02 (Topic 842)
and recognizes a right-of-use asset and operating lease liability.
The Netanya, Israel operating lease expired
on July 14, 2017 but unless 3 months' notice is given it automatically
renews for a future 12 months until notice is given. During the year ended
December 31, 2020, the lease was extended for a further 12 months.
This facility comprises approximately 190
square metres. The Company has
accounted for this lease as a short-term lease.
The Anguillan
operating lease expired on April 1, 2011 but unless 3 months' notice is
given it automatically renews for a further 3 months.
The Company accounts for the
lease in accordance with ASU 2016-02 (Topic 842) and recognizes a
right-of-use asset and operating lease liability.
Minimum lease
payments under these leases are approximately as follows:
|
|
|
2021
|
$
|
73,327
|
2022
|
|
48,687
|
2023
|
|
49,832
|
2024
|
|
12,530
|
|
|
|
The Company paid rent expense totaling $119,055 for the year ended December
31, 2020 (2019 - $93,371).
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, Co-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
December 31, 2020, the Company had a number of renewable license commitments
with large brands, including, Garfield, Moomins, Mr. Men and Little Miss,
Mr. Bean, and Peter Rabbit. These agreements have commitments to pay
royalties on the revenue from the licenses
Page 50
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
13.
Commitments: (Continued)
subject to the minimum guarantee payments. As at December 31, 2020, there
were no further minimum guarantee payments commitments.
The Company expensed the minimum guarantee payments over the life of the
agreement and recognized license expense of $46,841 (2019 - $56,564) for the
year ended December 31, 2020.
14. Income taxes:
Kidoz Inc. is
domiciled in the tax-free jurisdiction of Anguilla, British West Indies.
However certain of the Company's subsidiaries incur income taxation.
The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2020
and 2019, are presented below:
|
|
2020
|
|
2019
|
Computed
"expected" tax benefit (expense)
|
$
|
(10,192)
|
$
|
3,255,948
|
Change in
statutory, foreign tax, foreign exchange rates and other
|
|
206,078
|
|
1,620,641
|
Permanent
differences
|
|
(180,123)
|
|
(3,382,662)
|
Change in
valuation allowance
|
|
39,480
|
|
(643,647)
|
Income tax
recovery
|
$
|
55,243
|
$
|
850,280
|
The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2020
and 2019 are presented below:
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry forwards
|
$
|
330,249
|
$
|
369,729
|
|
|
|
|
|
Valuation Allowance
|
|
(330,249)
|
|
(369,729)
|
|
$
|
-
|
$
|
-
|
The valuation allowance for deferred tax assets as of December 31, 2020 and
2019, was $330,249
and
$369,729,
respectively. The net change in the total valuation allowance was a
decrease of ($39,480) for the year ended December 31, 2020 (2019 -
an increase of $93,883).
As at December 31, 2020, the Company's had $2,915,457 of non-capital losses expiring
through December 31, 2040.
In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those differences become deductible.
Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in assessing the
realizability of deferred tax assets.
Page 51
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
14. Income taxes: (Continued)
During the
year ended December 31, 2020, Shoal Media (Canada) Inc., a subsidiary of
Kidoz Inc., received the British Columbia Interactive Digital Media Tax
Credit of CAD$73,828 ($55,243) (2019 - CAD$130,145 ($98,075)) 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.
15. Right-of-use
assets:
There is no discount rate implicit in
the Anguilla office operating lease agreement, so the Company estimated a 5%
discount rate for the incremental borrowing rate for the lease as of the
adoption date, January 1, 2019. There is no discount rate implicit in the
license agreement, so the Company estimated a 12% 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%.
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, as there is significant
uncertainty on whether the leases will be renewed.
The
right-of-use assets as at December 31, 2020, is summarized as follows:
|
|
2020
|
|
2019
|
|
|
|
|
|
Opening balance for the
year
|
$
|
134,914
|
$
|
-
|
Initial recognition of
operating lease right-of-use assets
|
|
-
|
|
76,557
|
Capitalization of
operating lease right-of-use assets
|
|
-
|
|
125,474
|
Capitalization of
additional license leases
|
|
25,472
|
|
5,299
|
Amortization of
operating lease right-of use assets
|
|
(54,071)
|
|
(72,416)
|
Closing balance for the
year
|
$
|
106,315
|
$
|
134,914
|
Page 52
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
15. Right-of-use
assets: (Continued)
The
operating lease as at December 31, 2020, is summarized as follows:
As at December 31, 2020
|
|
Operating lease
|
|
|
Office lease
|
|
Brand licenses
|
|
Total
|
2021
|
$
|
32,771
|
$
|
-
|
$
|
32,771
|
2022
|
|
33,916
|
|
-
|
|
33,916
|
2023
|
|
35,061
|
|
-
|
|
35,061
|
2024
|
|
8,087
|
|
-
|
|
8,087
|
Total lease
payments
|
$
|
110,555
|
$
|
-
|
$
|
110,555
|
Less:
Interest
|
|
(5,917)
|
|
-
|
|
(5,917)
|
Present
value of lease liabilities
|
$
|
103,918
|
$
|
-
|
$
|
103,918
|
|
|
|
|
|
Amounts
recognized on the balance sheet
|
|
|
|
|
Current
lease liabilities
|
$
|
30,083
|
$
|
-
|
$
|
30,083
|
Long-term
lease liabilities
|
|
73,835
|
|
-
|
|
73,835
|
Total lease
payments
|
$
|
103,918
|
$
|
-
|
$
|
103,918
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Opening balance for the
year
|
$
|
127,615
|
$
|
-
|
Initial recognition of
operating lease liabilities
|
|
-
|
|
81,856
|
Operating lease
liability incurred during the year
|
|
-
|
|
125,474
|
Payments on operating
lease liabilities
|
|
(23,697)
|
|
(79,715)
|
Closing balance for the
year
|
|
103,918
|
|
127,615
|
Less: current portion
|
|
(30,083)
|
|
(25,715)
|
Operating lease
liabilities - non-current portion as at end of year
|
$
|
73,835
|
$
|
101,900
|
As of
December 31, 2020, the ROU assets of $106,315 are included in non-current
assets on the balance sheet, and lease liabilities of $103,918 are included
in current liabilities and non-current liabilities on the balance sheet.
16.
Related party transactions:
As at and for the year ended December 31, 2020, the Company has the following
related party transactions:
The Company has a liability of $10,968 (2019 - $33,000) to a company owned
by a current director and officer of the Company for payment of consulting
fees of
$112,200 (2019 - $142,000) by the
current director and officer of the Company.
The Company has a liability of $nil (2019 - $9) to a current director and
officer of the Company for expenses incurred.
The Company has a liability of $nil (2019 - $267) to a current director and
officer of the Company for expenses incurred.
Page 53
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
16.
Related party transactions: (Continued)
The Company has a liability of $6,098 (2019 - $19,779) to a company owned by
a current director and officer of the Company for payment of consulting fees
of $45,371 (2019 - $76,729) by the current director and officer of the
Company.
The Company has a liability of $7,500 (2019 - $22,500) to a company owned by
a current director and officer of the Company for payment of consulting fees
of $95,696 (2019 - $100,000) by the current director and officer of the
Company.
The Company has a liability of $12,519 (2019 - $30,974) to a current
director and officer of the Company for payroll and bonuses.
The Company
has a liability of $1,500 (2019 - $5,500), to independent directors of the
Company for payment of director's fees. During the year ended December 31,
2020, the Company paid $8,248 (2019 - $9,500) to the independent directors
in director fees.
The Company
has a liability of $12,187 (2019 - $91), to an officer of the Company for
payment of consulting fees and
expenses incurred of $131,231 (2019 - $148,434)
by the officer of the Company.
The Company
has a liability of $nil (2019 - $nil), to an officer of the Company for
payment of consulting fees and
expenses incurred of $110,524 (2019 - $103,465)
by the officer of the Company.
During the year ended December 31, 2020, the Company granted 1,250,000 (2019
- nil) options with an exercise price of CAD$0.50 ($0.39) per share, to
related parties.
The
Company expensed $61,701 (2019 - $479) in stock-based compensation for these
options granted to related parties.
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 parties.
17. Segmented
information:
The Company operates in reportable business
segments, the sale of Ad tech advertising and content revenue, including the
sale of in-app purchases on Trophy Bingo and Garfield's Bingo; the premium
purchase for Rooplay Originals and recurring subscription revenues from
Rooplay and Kidoz OS and the sale of licenses of Kidoz OS.
Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or
decision-making group, in making decisions on how to allocate resources and
assess performance. The Company's chief operating decision maker is the Co-chief
executive officers. The Company and the chief decision maker view the Company's
operations and manage its business as two operating segments, namely Ad tech and
content revenue.
Page 54
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
17. Segmented
information: (Continued)
The Company had the following revenue by
geographical region.
|
|
2020
|
|
2019
|
Ad tech
advertising revenue
|
|
|
|
|
Western Europe
|
$
|
1,911,627
|
$
|
1,007,357
|
North America
|
|
4,702,565
|
|
2,752,955
|
Other
|
|
133,872
|
|
68,602
|
|
|
|
|
|
Total ad tech
advertising revenue
|
$
|
6,748,064
|
$
|
3,828,914
|
|
|
|
|
|
Content
revenue
|
|
|
|
|
Western Europe
|
$
|
100,625
|
$
|
104,741
|
Central, Eastern and Southern Europe
|
|
38,741
|
|
175,387
|
North America
|
|
182,676
|
|
326,598
|
Other
|
|
77,923
|
|
81,739
|
|
|
|
|
|
Total content revenue
|
$
|
399,965
|
$
|
688,465
|
|
|
|
|
|
Total revenue
|
|
|
|
|
Western Europe
|
$
|
2,012,252
|
$
|
1,112,098
|
Central, Eastern and Southern Europe
|
|
38,741
|
|
175,387
|
North America
|
|
4,885,241
|
|
3,079,553
|
Other
|
|
211,795
|
|
150,341
|
Total revenue
|
$
|
7,148,029
|
$
|
4,517,379
|
Equipment
The Company's equipment is located as
follows:
Net Book Value
|
|
2020
|
|
2019
|
|
|
|
|
|
Anguilla
|
$
|
164
|
$
|
245
|
Canada
|
|
7,482
|
|
11,061
|
Israel
|
|
12,870
|
|
13,892
|
United Kingdom
|
|
1,323
|
|
1,984
|
Total equipment
|
$
|
21,839
|
$
|
27,182
|
18. General and
administrative:
General and
administrative expenses were as follows:
|
|
2020
|
|
2019
|
|
|
|
|
|
Professional fees
|
$
|
183,475
|
$
|
209,857
|
Rental
|
|
119,055
|
|
93,371
|
Other general and administrative expenses
|
|
226,178
|
|
223,686
|
Total general and administrative expenses
|
$
|
528,708
|
$
|
526,914
|
Page 55
KIDOZ INC.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended December 31, 2020 and 2019
19. Concentrations:
Major customers
During the year ended December 31, 2020, and
2019, the Company sold Ad tech revenue; sold subscriptions on its site
Rooplay; sold in-app purchases on its social bingo sites, Trophy Bingo and
Garfield's Bingo and premium purchases of Rooplay Originals. During the year
ended December 31, 2020, the Company had revenues of $2,661,595 and
$1,551,661 from two customers (December 31, 2019 - one customer for
$2,847,897) which was 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.
20.
Concentrations of credit risk:
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
cash and accounts receivable. The Company places its cash and cash
equivalents 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 and long-term cash
equivalents balances at financial institutions. At December 31, 2020, the
Company had total cash of $1,257,437
(2019 - $1,005,624) at financial
institutions, where $970,453 (2019 - $661,741) 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 December 31, 2020, the Company had two
customers, totaling $1,618,244 and $807,346 respectively who accounted for
greater than 10% of the total accounts receivable. As of December 31, 2019,
the Company had one customer, totaling $1,430,646 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 56