Kidoz Inc. (TSXV: KIDZ) owns the popular Kid-Safe mobile network. Engaging more than 300 million kids a month across the company's leading mobile KidTech network, KIDOZ provides an essential suite of services that unites kids' brands, content publishers and families. KIDOZ is certified safe by Google and Apple-approved for use in the App Store. Trusted by Disney, Hasbro, Lego and more, the KIDOZ Safe Ad Network helps the world's largest brands to safely reach and engage kids across thousands of mobile apps and sites. The KIDOZ OS solution helps carriers and brands such as Lenovo, Acer, and PBS Kids bring a kid-focused experience to their family devices in a fully GDPR and COPPA compliant way. KIDOZ's Rooplay offers an interactive learning experience worldwide with original content featuring Moomin, Mr. Men, Little Miss, Mr. Bean, and hundreds of more kid-focused learning games.  

Brief History

Source: Company Filing

Investment Rationale

• 2020 Saw Kidoz Succeed: In the year just gone by, KIDZ achieved new milestones, experiencing record user growth and advertiser demand. The company's products have proven to be successful in the wider advertising ecosystem, and Kidoz technology now reaches hundreds of millions of kids and families every month. Mobile continues to grow, and Kidoz's proprietary products are only beginning to show their potential in the high-growth global market of in-app advertising. Building on the company's performance in 2020, Kidoz is well-positioned to continue to increase market share and continue on a path of growth in 2021. 

• Solid Financial Performance in FY20: In FY20, the group's total revenue, net of platform fees (to Apple, Google and Amazon) and withholding taxes, for the year ended December 31, 2020, increased to USD 7.15 million, an increase of 58% over total revenue net of fees and withholding taxes of USD 4.52 million for fiscal 2019. Ad Tech advertising revenue for the year ended December 31, 2019, was USD 6.7 million, an increase of 76% over Ad Tech advertising revenue of USD 3.8 million for fiscal 2019. The increase in total revenue over fiscal 2019 is due to the growth of the company's advertising customers and the company's growing publisher reach. Earnings before interest; depreciation and amortization; stock-based compensation, and impairment of goodwill (EBITDA) for the year ended December 31, 2020, amounted to USD 0.88 million compared to EBITDA of negative USD 0.78 million in the same period of the previous financial year. 

• Negligible Balance Sheet Risk: The company has virtually zero debt in its balance sheet, with the debt-to-equity ratio stood at 0.01x. This implies negligible balance sheet risk. Also, the company has adequate liquidity to cover its short-term as well as long-term obligation and finance growth. At the end of FY20, the group's current ratio stood at 2.41x, which implies adequate liquidity. Further, in the FY20, the group's current assets soared by 51% to 5.2 million against 3.5 million reported by the company in the previous financial year. 

• Technical Breakout - Closed Above Short-term Resistance Level: On the daily price chart, KIDZ shares registered a breakout as its shares traded above the near-term resistance level of CAD 0.97 and closed above the level for the second straight day. This implies that CAD 0.97 may now act as the key support level in the near term. After registering a breakout, the stock is now moving towards its next crucial resistance level of CAD 1.26. Also, the chart indicates that the stock has traded significantly above the crucial short-term support level of CAD 0.68. If the KIDZ shares get the adequate volume supply in the prevailing trend, its shares are likely to cross over the crucial near-term resistance of 1.26, which is approximately 22% above the last closing price.

Support & Resistance Chart (as on April 06, 2021). Source: Refinitiv (Thomson Reuters)

• Stock Traded Above 200-day and 50-day SMA: KIDZ shares are hovering in a long-term bullish zone, with stock traded well above the crucial short-term as well as the long-term support levels of 50-day SMA (CAD 0.81) and 200-day SMA (CAD 0.490), a bullish technical indicator. Moreover, the Price to 200-day SMA ratio stood at 2.01, which implies that the stock is trading approximately 101% above the long-term support level, which indicates a strong bullish trend. Further, the 14-day RSI is hovering in the neutral zone, with a bullish bias at 60.88. Therefore, technical indicators are suggesting an upside potential from the current trading levels.

Technical Price Chart (as on April 06, 20210. Source: Refinitiv (Thomson Reuters).

Risk Associated to Investment: Kidoz Inc is exposed to the following risks:               

• The company operates internationally, which gives rise to the risk that cash flows may be adversely impacted by exchange rate fluctuations.
• Also, continued reduction in OEM sales of kid’s tablets could have a weigh on the group’s Content segment revenue.
• The company’s business model is also exposed to regulatory risk such as licenses.
• Further, investors in the company are exposed to liquidity risk given the penny-cap categorization of the company. Also, any adverse development in the company could bring a large swing in the share price.

Financial Highlights: FY20

Source: Company Filing

• During the FY20, the group’s reported total revenue of USD 7.1 million, reflecting a growth of 58% over fiscal 2019.
• Ad Tech advertising revenue for the year ended December 31, 2019, was USD 6.7 million, an increase of 76% over Ad Tech advertising revenue of USD 3.8 million for fiscal 2019.
• The increase in total revenue over fiscal 2019 is due to the growth of the company’s advertising customers and the company’s growing publisher reach.
• However, Content revenue for the year ended December 31, 2020, decreased to USD 0.40 million, a decrease of 42% over content revenue of USD 0.7 million for fiscal 2019. The decrease in content revenue was due to the reduced OEM sales of kids tablets.
• Sales and marketing expenses for the year ended December 31, 2020, were USD 0.39 million, an increase of 8% overselling and marketing expenses of USD 0.37 million for fiscal 2019. The increase in sales and marketing expenses over fiscal 2019 was due to additional marketing expenses. Selling and marketing expenses consist primarily of sales staff salaries and benefits and publishing services, and user acquisition costs incurred to acquire game players.
• General and administrative expenses increased to USD 0.53 million for the year ended December 31, 2020, an increase from general and administrative expenses of USD 0.5 million in fiscal 2019.
• The company reported FY20 profit of USD 0.103 million, compared to a loss of USD 14.6 million in FY19.
• The group’s reported EBITDA stood at USD 0.88 million compared to an EBITDA loss of USD 078 million in fiscal 2019.
• Further, at the end of the FY20, the company’s reported Cash stood at USD 1.2 million and working capital of USD 3.0 million as of December 31, 2020.
• Total Current Assets as of December 31, 2020, were USD 5.2 million, compared to USD 3.4 million as of December 31, 2019, and Total Current Liabilities as of December 31, 2020, were USD 2.17 million, compared to USD 1.27 million as at December 31, 2019.

Top-10 Shareholders

Top-10 shareholders together hold ~75% stake in the company, with Pendinas, Ltd. and Williams (Tryon M) are major shareholders owning 21.23% and 12.60% stake in the group. Institutional ownership in the company stood at 15.36%, and Strategic ownership stood at 61.15%.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Sales Based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: Building on Kidoz's high-growth performance in 2020, management plans to further invest in similar growth strategies in 2021. Kidoz sales, product, and operational strategies are custom fit to match the favourable regulatory, consumer, and technological trends occurring in the market. Kidoz is actively recruiting the biggest and most successful apps in the world to offer their technology to their kid's audiences for monetization. Each time a new app adopts Kidoz's technology, the group's advertising inventory increases, and it offers increased value to the company's advertising partners.

Further, Kidoz has a global sales agency partnership strategy that places local sellers into many national and international markets. Through the company's direct sales and marketing channels, it locates, recruits and signs new international sales houses. As the Kidoz network is a unique advertising platform in the market, it commands high prices, and media sales houses want to represent the company.

Moreover, post-acquisition of Kidoz Ltd in December 2019, the company has transformed its financial position, solid balance sheet with virtually zero debt, and strong liquidity.

Also, the company's margin profile has gigantically improved in FY20 against the previous financial year, with an EBITA margin of 8.1% in FY20 against negative margin reported by the company in the previous financial year. Also, the group turned profitable at the bottom line, with a net margin of 1.5% against net loss reported by the company in the last fiscal period.

Also, technical indicators are indicating a potential upside from the current trading level.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Speculative Buy" recommendation at the closing price of CAD 1.02 on April 06, 2021.  

1-Year Price Chart (as on April 06, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 7, 2021 price as well.

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