The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the condensed financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.
The results for the period ended September 30, 2018 are not necessarily indicative of the results of operations for the full year. These condensed financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on April 2, 2018.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
CONDENSED BALANCE SHEETS
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
235,151
|
|
|
$
|
167,492
|
|
Accounts receivable
|
|
|
7,324
|
|
|
|
7,395
|
|
Prepaid expenses and other current assets
|
|
|
40,065
|
|
|
|
39,357
|
|
Total current assets
|
|
|
282,540
|
|
|
|
214,244
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
13,388
|
|
|
|
12,740
|
|
Intangible assets, net
|
|
|
364,030
|
|
|
|
432,640
|
|
Other assets
|
|
|
17,850
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
677,808
|
|
|
$
|
674,624
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
185,586
|
|
|
$
|
155,494
|
|
Accrued expenses
|
|
|
452,576
|
|
|
|
451,247
|
|
Unearned royalties
|
|
|
127,182
|
|
|
|
127,187
|
|
Total current liabilities
|
|
|
765,344
|
|
|
|
733,928
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
-
|
|
|
|
20,563
|
|
Notes payable – related party
|
|
|
379,825
|
|
|
|
379,825
|
|
|
|
|
379,825
|
|
|
|
400,388
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,145,169
|
|
|
|
1,134,316
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value, 10,000,000 shares authorized:
|
|
|
|
|
|
|
|
|
Series B; 2,480,482 and 2,585,882 shares issued and outstanding, respectively
|
|
|
25
|
|
|
|
26
|
|
Series C; 4,355,000 shares issued and outstanding
|
|
|
44
|
|
|
|
44
|
|
Common stock; $0.00001 par value, 800,000,000 shares authorized, 75,056,123 and 69,786,123 shares issued and outstanding, respectively
|
|
|
751
|
|
|
|
698
|
|
Additional paid-in capital
|
|
|
8,964,883
|
|
|
|
8,919,980
|
|
Common stock payable
|
|
|
16,800
|
|
|
|
16,800
|
|
Common stock subscription receivable
|
|
|
-
|
|
|
|
(5,000
|
)
|
Accumulated deficit
|
|
|
(9,449,864
|
)
|
|
|
(9,392,240
|
)
|
Total stockholders’ deficit
|
|
|
(467,361
|
)
|
|
|
(459,692
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
677,808
|
|
|
$
|
674,624
|
|
The accompanying notes are an integral part of the condensed financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
494,197
|
|
|
$
|
655,160
|
|
|
$
|
1,540,875
|
|
|
$
|
1,740,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
68,830
|
|
|
|
237,883
|
|
|
|
204,090
|
|
|
|
405,959
|
|
Selling, general and administrative expenses
|
|
|
435,186
|
|
|
|
397,772
|
|
|
|
1,347,722
|
|
|
|
1,258,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
504,016
|
|
|
|
635,655
|
|
|
|
1,551,812
|
|
|
|
1,664,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(9,819
|
)
|
|
|
19,505
|
|
|
|
(10,937
|
)
|
|
|
76,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(11,305
|
)
|
|
|
(424
|
)
|
|
|
(46,687
|
)
|
|
|
(4,870
|
)
|
Gain (loss) on disposition of property and equipment
|
|
|
-
|
|
|
|
2,871
|
|
|
|
-
|
|
|
|
(46,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(11,305
|
)
|
|
|
2,447
|
|
|
|
(46,687
|
)
|
|
|
(51,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(21,124
|
)
|
|
|
21,952
|
|
|
|
(57,624
|
)
|
|
|
25,474
|
|
Income tax provision
|
|
|
-
|
|
|
|
(1,141
|
)
|
|
|
-
|
|
|
|
(8,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,124
|
)
|
|
$
|
20,811
|
|
|
$
|
(57,624
|
)
|
|
$
|
16,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
74,159,384
|
|
|
|
6,278,696
|
|
|
|
72,376,819
|
|
|
|
6,076,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
The accompanying notes are an integral part of the condensed financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(57,624
|
)
|
|
$
|
16,833
|
|
Adjustments to reconcile net income (loss) to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
71,068
|
|
|
|
12,447
|
|
Imputed interest expense
|
|
|
44,955
|
|
|
|
-
|
|
Loss on disposition of property and equipment
|
|
|
-
|
|
|
|
46,230
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
71
|
|
|
|
(3,469
|
)
|
Prepaid expenses and other current assets
|
|
|
(708
|
)
|
|
|
(1,859
|
)
|
Other assets
|
|
|
(2,850
|
)
|
|
|
(15,000
|
)
|
Accounts payable
|
|
|
30,092
|
|
|
|
(27,856
|
)
|
Accrued expenses
|
|
|
(19,234
|
)
|
|
|
25,220
|
|
Unearned royalties
|
|
|
(5
|
)
|
|
|
-
|
|
Net cash provided by (used by) operating activities
|
|
|
65,765
|
|
|
|
52,546
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from disposition of property and equipment
|
|
|
-
|
|
|
|
39,251
|
|
Purchase of property and equipment
|
|
|
(3,106
|
)
|
|
|
-
|
|
Net cash provided by (used by) investing activities
|
|
|
(3,106
|
)
|
|
|
39,251
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds stock subscription receivable
|
|
|
5,000
|
|
|
|
-
|
|
Repayment of notes payable
|
|
|
-
|
|
|
|
(96,107
|
)
|
Net cash provided by (used by) financing activities
|
|
|
5,000
|
|
|
|
(96,107
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
67,659
|
|
|
|
(4,310
|
)
|
Cash at the beginning of the period
|
|
|
167,492
|
|
|
|
193,892
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
235,151
|
|
|
$
|
189,582
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Cash paid for interest expense
|
|
|
1,732
|
|
|
|
4,870
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Issuance of common shares in conversion of Series B preferred stock
|
|
$
|
53
|
|
|
$
|
-
|
|
Cancellation of common shares
|
|
|
-
|
|
|
|
(8
|
)
|
Common stock issued for stock subscription receivable
|
|
|
-
|
|
|
|
5,000
|
|
The accompanying notes are an integral part of the condensed financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
Notes to Condensed Financial Statements
Nine Months Ended September 30, 2018
(Unaudited)
NOTE 1 – THE COMPANY AND NATURE OF BUSINESS
Nature of Operations
Freeze Tag, Inc. (“Freeze Tag” or the “Company”) is a leading creator of mobile location-based games for consumers and businesses. The Company also offers gaming technology and services to businesses that want to leverage mobile gaming in their marketing and branding programs.
Merger Transaction
On October 18, 2017, the Company closed the merger transaction (the “Merger”) that was the subject of that certain Agreement and Plan of Merger (the “Merger Agreement”) with Munzee, Inc., a Delaware corporation (“Munzee”) dated July 26, 2017. At closing, in accordance with the Merger Agreement, Munzee merged with and into the Company, Freeze Tag, Inc., a Delaware corporation (the “Merger”), with Freeze Tag, Inc. being the surviving corporation. Under U.S. generally accepted accounting principles, the merger is treated as a “reverse merger” under the purchase method of accounting, with Munzee as the accounting acquirer. Accordingly, Munzee’s historical results of operations replace Freeze Tag’s historical results of operations for all periods prior to the Merger and, for all periods following the Merger, the results of operations of the combined company will be included in the Company’s financial statements.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and these differences may be material.
The following accounting policies involve significant judgments, assumptions and estimates by management.
Revenue Recognition
The Company’s revenues are derived primarily by licensing software products in the form of mobile games for smartphone and tablet platforms. The Company recognizes revenue from the sale of its products in accordance with current accounting standards upon the transfer of title and risk of loss to its customers, and once any performance obligations have been completed. Revenue from product sales is recorded net of processing costs.
Allowances for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future product returns and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends and changes in customer demand and acceptance of the Company’s products. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts and the aging of the related invoices, and represents the Company’s best estimate of probable credit losses in its existing trade accounts receivable. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We determined that no allowances for sales returns and doubtful accounts were required at September 30, 2018 and December 31, 2017.
Property and Equipment
Property and equipment is stated at cost and is depreciated or amortized using the straight-line method over the estimated useful life of the related asset as follows:
Computer equipment
|
|
5 years
|
Office furniture and equipment
|
|
7 years
|
Automobiles
|
|
5 years
|
Leasehold improvements
|
|
15 years
|
Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.
The Company will assess the recoverability of property and equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.
Intangible Assets
Intangible assets consist primarily of intellectual property, customer base and non-compete agreements acquired in the Merger, which are amortized on a straight-line basis over their estimated useful lives of 5 years. Intangible assets are reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds fair value. The testing of these intangibles under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.
Income Taxes
We account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC Topic 740 includes accounting guidance which clarifies the accounting for the uncertainty in recognizing income taxes in an organization by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions. This guidance requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized both upon the adoption of the related guidance and in subsequent periods.
The Company has no uncertain tax positions at any of the dates presented.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees (“ASC stock-based compensation guidance”). Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company had no stock-based compensation expense recognized in its statements of operations for the nine months ended September 30, 2018 and 2017.
Earnings per Share
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants, convertible preferred stock and other rights during the period.
For the three months and nine months ended September 30, 2018, the diluted weighted average number of shares is the same as the basic weighted average number of shares as the inclusion of any common stock equivalents would be anti-dilutive. For the three months and nine months ended September 30, 2017, the diluted weighted average number of shares is the same as the basic weighted average number of shares as the Company did not have any common stock equivalents.
Fair Value of Financial Instruments
In accordance with current accounting standards, certain assets and liabilities must be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. ASC 820 requires that certain assets and liabilities must be measured at fair value, and the standard details the disclosures that are required for items measured at fair value. The Company had no assets and liabilities required to be measured on a recurring basis at September 30, 2018 and December 31, 2017.
The current assets, and current liabilities reported on the Company’s balance sheets are estimated by management to approximate fair market value due to their short-term nature. The long-term notes payable – related party are considered to approximate fair value since their terms (including imputed interest expense) are considered to approximate terms for similar debt instruments.
Recent Accounting Pronouncements
Although there were new accounting pronouncements issued or proposed by the FASB during the nine months ended September 30, 2018 and through the date of filing of this report, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. As shown in the accompanying financial statements, the Company incurred a net loss of $57,624 for the nine months ended September 30, 2018. As of September 30, 2018, the Company had a working capital deficit of $482,804 and a total stockholders’ deficit of $467,361. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Management believes that by implementing cost reductions and realizing cost efficiencies from the Merger, operating cash flows will be sufficient to support the Company’s business plan. The Company will also continue to develop new games and launch updates to existing games to maximize revenues. However, management is currently evaluating alternative financing sources to fund the Company’s current business plan should cash provided by operations be insufficient.
The Company’s ability to continue as a going concern is dependent upon successfully executing its plans to attain a successful level of operations. The Company’s financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
7,435
|
|
|
$
|
7,170
|
|
Office furniture and equipment
|
|
|
10,055
|
|
|
|
7,214
|
|
Total
|
|
|
17,490
|
|
|
|
14,384
|
|
Less accumulated depreciation
|
|
|
(4,102
|
)
|
|
|
(1,644
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
13,388
|
|
|
$
|
12,740
|
|
Depreciation expense was $2,458 and $12,447 for the nine months ended September 30, 2018 and 2017, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following at:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
307,100
|
|
|
$
|
307,100
|
|
Customer base
|
|
|
142,000
|
|
|
|
142,000
|
|
Non-compete agreements
|
|
|
8,300
|
|
|
|
8,300
|
|
Less accumulated amortization
|
|
|
(93,370
|
)
|
|
|
(24,760
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
364,030
|
|
|
$
|
432,640
|
|
Amortization expense was $68,610 and $0 for the nine months ended September 30, 2018 and 2017, respectively.
NOTE 6 – NOTES PAYABLE – RELATED PARTY
Long-term notes payable - related party consisted of the following at September 30, 2018 and December 31, 2017:
Note payable to Craig Holland, non-interest bearing, maturing on December 31, 2019
|
|
$
|
6,925
|
|
Convertible note payable to Craig Holland, non-interest bearing, maturing on December 31, 2019
|
|
|
186,450
|
|
Convertible note payable to Mick Donahoo, non-interest bearing, maturing on December 31, 2019
|
|
|
186,450
|
|
|
|
|
|
|
Total
|
|
$
|
379,825
|
|
The note payable to Craig Holland, our Chief Executive Officer, was amended on July 25, 2017 to eliminate the option to convert the note to common stock of the Company and to make the note non-interest bearing.
The convertible notes payable to Craig Holland and Mick Donahoo, our Chief Financial Officer, were amended on July 25, 2017 to change the conversion terms of the notes and to make the notes non-interest bearing. Messrs. Holland and Donahoo have the right, at any time, at their election, to convert all or part of the amount due into shares of fully paid and non-assessable shares of common stock of the Company. The fixed conversion price is $0.02 per share.
The Company has imputed interest expense on the notes payable – related party using an annual rate of 10%. During the nine months ended September 30, 2018, total imputed interest expense was $44,955, which was recorded to additional paid-in capital. However, the imputed interest is a non-cash expense and does not impact cash generated from operations.
NOTE 7 – STOCKHOLDERS’ DEFICIT
Common Stock
The Company is authorized to issue up to 800,000,000 shares of its $0.00001 par value common stock and had 75,056,123 common shares issued and outstanding as of September 30, 2018.
On August 21, 2017, the Board of Directors of the Company adopted resolutions authorizing an amendment to the Company’s Articles of Incorporation to approve a reverse stock split of the Company’s outstanding common stock at a ratio of 1-for-100 and to decrease the number of the Company’s authorized common shares from 2,000,000,000 shares to 800,000,000 shares. The par value of the Company’s common stock of $0.00001 per share was not adjusted in connection with the reverse stock split. The reverse stock split was approved by FINRA and went effective on October 5, 2017. The Company has given retroactive effect to the reverse stock split in the accompanying financial statements for all periods presented.
During the three months ended September 30, 2018, the Company issued a total of 2,750,000 shares of its common stock recorded at par value of $53 to an accredited investor in conversion of a total of 105,400 shares of its Series B preferred stock. As the conversion was within the terms of the preferred stock, no gain or loss was recognized.
During the nine months ended September 30, 2017, Munzee cancelled 800,000 outstanding common shares at par value of $8.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of its $0.00001 par value preferred stock. The shares of preferred stock may be issued from time to time in one or more series. As of September 30, 2018, there were 2,480,482 shares of Series B preferred stock and 4,355,000 shares of Series C preferred stock issued and outstanding.
Series B Preferred Stock
The Company’s Series B preferred stock has 2,700,000 shares authorized and the following rights: (i) dividend rights equal to the Company’s common stock; (ii) no liquidation preference over the Company’s common stock; (iii) each share is convertible into 50 shares of the Company’s common stock; (iv) no redemption rights; (v) no call rights by the Company; and (vi) no voting rights. The holders of the Series B preferred stock cannot convert their shares of Series B preferred stock if such conversion would cause the holder to beneficially own more than 4.99% of our then-outstanding common stock.
On July 25, 2017, we entered into Securities Exchange and Preferred Stock Agreements (the “PS Exchange Agreements”) with certain accredited investors and lenders (together, the “PS Exchangers”). Under the PS Exchange Agreements, as amended, the PS Exchangers agreed to exchange certain promissory notes issued us to them into shares of our Series B preferred stock automatically upon us completing a reverse stock split of our common stock with FINRA. On October 5, 2017, FINRA took our reverse stock split effective at the open of market. As a result, on October 5, 2017, we issued the PS Exchangers a total of 2,663,182 shares of our Series B preferred stock.
In two transactions in November 2017, we issued a total of 3,865,000 common shares recorded at par value to an accredited investor in conversion of 77,300 shares of our Series B preferred stock.
During the nine months ended September 30, 2018, an accredited investor converted a total of 105,400 shares of Series B preferred stock into a total of 5,270,000 shares of the Company’s common stock.
Series C Preferred Stock
The Company’s Series C Preferred Stock has 4,500,000 shares authorized and the following rights: (i) dividend rights equal to the Company’s common stock; (ii) no liquidation preference over the Company’s common stock; (iii) each share is convertible into 50 shares of the Company’s common stock; (iv) no redemption rights; (v) no call rights by the Company; and (vi) each shares votes on an “as converted” basis, such that each share currently has 50 votes on all matters brought before the Company’s common stockholders for a vote.
At the closing of the Merger, we issued the owners of all of Munzee’s outstanding common stock 4,355,000 shares of our Series C preferred stock pursuant to the terms of the Agreement and Plan of Merger.
Stock Options
2017 Non-Qualified Stock Option Plan
On December 4, 2017, our Board of Directors approved the Freeze Tag, Inc. 2017 Non-Qualified Stock Option Plan (the “Plan”). Under the Plan, our Board of Directors may issue options to purchase up to an aggregate of 10,000,000 shares of common stock to individuals, including, but not limited to, our Board of Directors and/or our executive management. On December 5, 2017, our Board of Directors granted options to purchase a total of 1,512,821 shares of our common stock.
2006 Stock Option Plan
The Company’s 2006 Stock Option Plan adopted by our Board of Directors in March of 2006 terminated in the year ended December 31, 2016. As of September 30, 2018, there were 5,600 stock options outstanding under the 2006 Stock Option Plan.
We account for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the estimated value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests in general and administrative expenses.
The Company did not recognize any stock-based compensation during the nine months ended September 30, 2018 and 2017. As of September 30, 2018, future compensation cost related to non-vested stock options not yet recognized in the statements of operations totaled $39,333.
A summary of the status of the stock options issued by the Company under both plans as of September 30, 2018, and changes during the nine months then ended is presented below:
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
1,518,421
|
|
|
$
|
0.076
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2018
|
|
|
1,518,421
|
|
|
$
|
0.076
|
|
The outstanding options expire on various dates beginning August 2020 through December 2027.
NOTE 8 – RELATED PARTY TRANSACTIONS
The Company had a note payable to Craig Holland, its Chief Executive Officer, with a balance of $6,925 at September 30, 2018. The Company also had convertible notes payable to Mr. Holland and Mick Donahoo, its Chief Financial Officer, with a total balance of $372,900 as of September 30, 2018. See Note 6 for detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms.
The Company has imputed interest expense on the notes payable – related party using an annual rate of 10%. During the nine months ended September 30, 2018, total imputed interest expense was $44,955, which was recorded to additional paid-in capital.
NOTE 9 – SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and there are currently no subsequent events to report.
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q of Freeze Tag, Inc. (“Freeze Tag” or the “Company”) for the three months and nine months ended September 30, 2018 contains forward-looking statements, principally in this Section and “Business.” Generally, you can identify these statements because they use words like “anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar terms. These statements reflect only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described in this filing. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation of belief will be accomplished.
We believe it is important to communicate our expectations to our investors. There may be events in the future; however, that we are unable to predict accurately or over which we have no control. The risk factors listed in this filing, as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results or events to differ materially from those anticipated, include, but are not limited to: distributors not accepting our games; price reductions; unforeseen delays in game production; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental regulations; changes in various tax laws; and the availability of key management and other personnel.
Merger Transaction
On October 18, 2017, we closed the merger transaction (the “Merger”) that was the subject of that certain Agreement and Plan of Merger (the “Merger Agreement”) with Munzee, Inc., a Delaware corporation (“Munzee”) dated July 26, 2017. At closing, in accordance with the Merger Agreement, Munzee merged with and into our corporation, Freeze Tag, Inc., a Delaware corporation (the “Merger”), with Freeze Tag, Inc. being the surviving corporation. At the closing, we issued the current owners of all of Munzee’s outstanding common stock 4,355,000 shares of our Series C Convertible Preferred Stock in accordance with the Agreement and Plan of Merger. Under U.S. generally accepted accounting principles, the merger is treated as a “reverse merger” under the purchase method of accounting, with Munzee as the accounting acquirer. Accordingly, Munzee’s historical financial results of operations replace Freeze Tag’s historical financial results of operations for all periods prior to the Merger and, for all periods following the Merger, the financial results of operations of the combined company will be included in the Company’s financial statements. Accordingly, the results of operations and cash flows for the three months and nine months ended September 30, 2017 presented herein are those of Munzee and are not the same as the results of operations and cash flows for the three months and nine months ended September 30, 2017 contained in our Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed with the Commission on November 14, 2017.
Summary Overview
Freeze Tag, Inc. is a creator of location-based, mobile social games that are fun and engaging for consumers and businesses. Based on a free-to-play business model that has propelled games built and marketed by some of our competitors to worldwide success, we employ state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy our games for free, and, if they so choose, they can purchase virtual items and additional features within the game to increase the fun factor.
Founded by gaming industry veterans, Freeze Tag has launched several successful games over the course of its history. Our current portfolio includes hits such as Munzee, a social platform with over 7 million locations worldwide and hundreds of thousands of players that blends gamification and geolocation into an experience that rewards players for going places in the physical world, Garfield Go, a Pokemon Go style augmented reality game based on the iconic cat Garfield, WallaBee, an addictive collecting game with over 2,000 beautifully drawn digital cards, as well as many social mobile games that provide endless hours of family-friendly fun. We also offer our technology and services to businesses that want to leverage mobile gaming in their marketing and branding programs. For example, our Eventzee solution allows businesses to create private scavenger hunts in physical places such as malls, tradeshows, company events or campuses to create immersive brand experiences.
Our newest location-based product, ZeeTours, was launched in December 2017 through a marketing contract with Groupon. ZeeTours is a location-based smartphone game that combines fitness, learning and fun into a zany walking tour.
Central to our core strategy is capitalizing on two fast-growing trends in the mobile applications world: augmented reality gaming and location-based advertising. We plan to leverage the combined company’s proprietary technology and expertise to create more exciting augmented reality location-based games that can serve as a location-based advertising network.
Additionally, we intend to offer services to help advertisers explore new possibilities in location-based advertising where captive users are roaming around in the real world. For example, AR games can help drive foot traffic to malls and movie theatres, or create memorable real world interactions that help connect users to brands with deeply emotional experiences. This kind of experience based location-specific advertising can have consumer impacts far beyond that of Google AdWords or Facebook news feed videos.
Going Concern Uncertainty
The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. As shown in the accompanying financial statements, we incurred a net loss of $57,624 for the nine months ended September 30, 2018. As of September 30, 2018, we had a working capital deficit of $482,804 and a total stockholders’ deficit of $467,361. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
Management believes that by implementing cost reductions and realizing cost efficiencies from the Merger, operating cash flows will be sufficient to support our business plan. We will also continue to develop and launch new games to maximize revenues. However, management is currently evaluating alternative financing sources to fund our current business plan should cash provided by operations be insufficient.
Our ability to continue as a going concern is dependent upon successfully executing our plans to attain a successful level of operations. Our financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.
Critical Accounting Policies
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs, expenses and related disclosures. These estimates and assumptions are often based on historical experience and judgments that we believe to be reasonable under the circumstances at the time made. However, all such estimates and assumptions are inherently uncertain and unpredictable and actual results may differ. For further information on our significant accounting policies see Note 2 to our financial statements included in this filing.
The following is a summary of our critical accounting policies that involve estimates and management’s judgment.
Revenue Recognition
Our revenues are derived primarily by licensing software products in the form of mobile games for smartphone and tablet platforms. We recognize revenue from the sale of our products in accordance with current accounting standards upon the transfer of title and risk of loss to its customers, and once any performance obligations have been completed. Revenue from product sales is recorded net of processing costs.
Allowances for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on our estimates of potential future product returns and other allowances related to current period product revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products. The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts and the aging of the related invoices, and represents our best estimate of probable credit losses in its existing trade accounts receivable. We regularly review the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. We determined that no allowances for sales returns and doubtful accounts were required at September 30, 2018 and December 31, 2017.
Intangible Assets
Intangible assets consist primarily of intellectual property, customer base and non-compete agreements acquired in the Merger, which are amortized on a straight-line basis over their estimated useful lives of 5 years. Intangible assets are reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds fair value. The testing of these intangibles under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.
Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees (“ASC stock-based compensation guidance”). Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Fair Value of Financial Instruments
In accordance with current accounting standards, certain assets and liabilities must be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. ASC 820 requires that certain assets and liabilities must be measured at fair value, and the standard details the disclosures that are required for items measured at fair value. We had no assets and liabilities required to be measured on a recurring basis at September 30, 2018 and December 31, 2017.
The current assets, and current liabilities reported on our balance sheets are estimated by management to approximate fair market value due to their short-term nature. The long-term notes payable – related party are considered to approximate fair value since their terms (including imputed interest expense) are considered to approximate terms for similar debt instruments.
Recent Accounting Pronouncements
Although there were new accounting pronouncements issued or proposed by the FASB during the nine months ended September 30, 2018 and through the date of filing of this report, we do not believe any of these accounting pronouncements has had or will have a material impact on our financial position or results of operations.
Results of Operations
Revenues
As discussed above, revenues for the nine months ended September 30, 2017 are Munzee revenues only, while revenues for the nine months ended September 30, 2018 are the combined entities post-merger revenues. Revenue from product sales is recorded net of processing costs. Revenues decreased $160,963 to $494,197 for the three months ended September 30, 2018 from $655,160 for the three months ended September 30, 2017. The primary reason for the decrease in revenues in the current year was due to the closing down of the Munzee Marketplace store, which was shut down prior to the merger and which also resulted in a decrease in cost of sales and other expenses, partially offset by the contribution of Freeze Tag revenues during the period. The Munzee Marketplace store was shut down to focus on our core business of location-based games.
On a year-to-date basis, revenues decreased $199,907 to $1,540,875 for the nine months ended September 30, 2018 from $1,740,782 for the nine months ended September 30, 2017. As discussed above, the primary reason for the decrease in revenues in the current year was due to the closing down of the Munzee Marketplace store.
Cost of Sales
Cost of sales decreased $169,053 to $68,830 for the three months ended September 30, 2018 from $237,883 for the three months ended September 30, 2017. The decrease was a result of cost cutting measures put in place by management and shutting down operations of the Munzee Marketplace store prior to the merger.
On a year-to-date basis, cost of sales decreased $201,869 to $204,090 for the nine months ended September 30, 2018 from $405,959 for the nine months ended September 30, 2017. The decrease was a result of cost cutting measures put in place by management and shutting down operations of the Munzee Marketplace store prior to the merger.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $37,414 to $435,186 for the three months ended September 30, 2018 from $397,772 for the three months ended September 30, 2017. On a year-to-date basis, selling, general and administrative expenses increased $89,743 to $1,347,722 for the nine months ended September 30, 2018 from $1,258,249 for the nine months ended September 30, 2017. The increases are primarily due to the inclusion of Freeze Tag expenses during the first nine months of the current fiscal year, partially offset by merger operating efficiencies realized during the current year.
Other Income (Expense)
Interest expense increased to $11,305 for the three months ended September 30, 2018 from $424 for the three months ended September 30, 2017 and increased to $46,687 for the nine months ended September 30, 2018 from $4,870 for the nine months ended September 30, 2017. The increase in the current year is due primarily to the imputed interest on related party debt.
We had no gain or loss from disposition of property and equipment for the three months and nine months ended September 30, 2018. We wrote off the carrying value of certain leasehold improvements in the second quarter of the 2017 fiscal year. In addition, we received proceeds of $16,251 from the sale of an automobile. As a result, we recognized a gain on disposition of property and equipment of $2,871 for the three months ended September 30, 2017 and a loss on disposition of property and equipment of $46,230 for the nine months ended September 30, 2017.
Income Tax Benefit (Provision)
We recorded no income tax benefit (provision) for the three months and nine months ended September 30, 2018. We recorded an income tax provision of $1,141 and $8,641 for the three months and nine months ended September 30, 2017, respectively. The income tax provision recorded in the prior year periods is computed on the pre-merger income of Munzee.
Net Income (Loss)
As a result of the above, we reported net losses of $21,124 and $57,624 for the three months and nine months ended September 30, 2018, respectively, compared to net income of $20,811 and $16,833 for the three months and nine months ended September 30, 2017, respectively.
In the process of computing Net Income, we are required to record some non-cash expenses, such as imputed interest expense, which impact our final Net Income value but do not impact our cash position. The recording of these non-cash expenses overshadows the bottom line results of our cash management policies throughout 2018.
As identified in our Statement of Cash Flows for the nine months ended September 30, the Net Increase in Cash for the nine months ended September 30, 2018 of $67,659 versus the nine months ended September 30, 2017 of -$4,310 is $71,969. Similarly, Cash on Hand at the end of the current period (2018) is $235,151 vs. $189,582 in 2017.
So, while we reported net losses due to non-cash accounting procedures, we recorded a net increase in cash flows for the current 2018 period versus the same period in 2017.
Liquidity and Capital Resources
Introduction
As of September 30, 2018, we had current assets of $282,540, including cash of $235,151, and current liabilities of $765,344, resulting in a working capital deficit of $482,804. In addition, we had a total stockholders’ deficit of $467,361 at September 30, 2018.
During the nine months ended September 30, 2018, net cash provided by operating activities was $65,765. Management believes that by continuing to implement cost reductions and realizing cost efficiencies from the Merger, operating cash flows will be sufficient to support our business plan. We will also continue to develop and launch new games to maximize revenues. As a result, we may have short-term cash needs. Therefore, management is currently evaluating alternative financing sources to fund our current business plan should cash provided by operations be insufficient. There can be no assurance that we will be successful in these efforts.
Sources and Uses of Cash
Net cash provided by operating activities for the nine months ended September 30, 2018 was $65,765 as a result of our net loss of $57,624, increases in prepaid expenses and other current assets of $708 and other assets of $2,850 and decreases in accrued expenses of $19,234 and unearned royalties of $5, offset by non-cash expenses totaling $116,023, a decrease in accounts receivable of $71 and an increase in accounts payable of $30,092.
By comparison, net cash provided by operating activities for the nine months ended September 30, 2017 was $52,546 as a result of our net income of $16,833, non-cash expenses totaling $58,677 and increase in accrued expenses of $25,220, partially offset by increases in accounts receivable of $3,469, prepaid expenses and other current assets of $1,859 and other assets of $15,000 and a decrease in accounts payable of $27,856.
For the nine months ended September 30, 2018, we used net cash in investing activities of $3,106, comprised of the purchase of property and equipment. For the nine months ended September 30, 2017, we had net cash provided by investing activities of $39,251, comprised of proceeds from the disposition of property and equipment.
For the nine months ended September 30, 2018, we had net cash provided by financing activities of $5,000, comprised of proceeds from stock subscription receivable. For the nine months ended September 30, 2017, we used cash of $96,107 in financing activities, comprised of repayment of notes payable.
Notes Payable – Related Party
As of September 30, 2018, our debt was comprised of notes payable totaling $379,825 to Craig Holland, our Chief Executive Officer and Mick Donahoo, our Chief Financial Officer. These notes are non-interest bearing and mature on December 31, 2019. Of this related party indebtedness, there are two convertible notes payable of $186,450 to each of Messrs. Holland and Donahoo, who have the right, at any time, at their election, to convert all or part of the amount due into shares of fully paid and non-assessable shares of our common stock. The fixed conversion price is $0.02 per share. We have imputed interest on these notes payable using an annual rate of 10%.