The accompanying notes are an integral part of the condensed financial statements
The accompanying notes are an integral part of the condensed financial statements
The accompanying notes are an integral part of the condensed financial statements
The accompanying notes are an integral part of the condensed financial statements
Notes to Condensed Financial Statements
Nine Months Ended September 30, 2019
(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.
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. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
|
·
|
identification of the contract, or contracts, with a customer;
|
|
·
|
identification of the performance obligations in the contract;
|
|
·
|
determination of the transaction price;
|
|
·
|
allocation of the transaction price to the performance obligations in the contract; and
|
|
·
|
recognition of revenue when, or as, we satisfy a performance obligation.
|
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 carryforwards. 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 service 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 stock-based compensation expense recognized in its statements of operations of $12,251 for the nine months ended September 30, 2019 and $0 for the nine months ended September 30, 2018.
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 and nine months ended September 30, 2019 and 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.
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, 2019 and December 31, 2018.
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.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842),” which amends existing accounting standards for leases. The ASU requires lessees to recognize most leases on their balance sheet as a lease liability with a corresponding right-of-use asset. Right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments. The Company adopted the ASU effective January 1, 2019. We recognized an $88,325 right-of-use asset and $88,325 related lease liability as of January 1, 2019 for our operating lease. For our operating lease, the asset is included in Other long-term assets on the consolidated balance sheet and is amortized within operating income over the lease term. The long-term component of the lease liability is included in Other long-term liabilities, net, and the current component is included in Other current liabilities. The adoption of ASC 842 did not have a material impact on the Company’s consolidated results of operations, equity or cash flows as of the adoption date. Under the alternative method of adoption, comparative information was not restated, but will continue to be reported under the standards in effect for those periods. See Note 6 for further details regarding Freeze Tag’s leases.
Although there were new accounting pronouncements issued or proposed by the FASB during the nine months ended September 30, 2019 and through the date of filing of this report, the Company does not believe any of these accounting pronouncements, other than the item listed above, 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 net loss of $106,393 and used net cash of $94,206 in operations for the nine months ended September 30, 2019. As of September 30, 2019, the Company had a working capital deficit of $817,517 and a total stockholders’ deficit of $503,058. 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 and launch new 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,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
7,971
|
|
|
$
|
7,971
|
|
Office furniture and equipment
|
|
|
10,055
|
|
|
|
10,055
|
|
Total
|
|
|
18,026
|
|
|
|
18,026
|
|
Less accumulated depreciation
|
|
|
(7,591
|
)
|
|
|
(4,975
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
10,435
|
|
|
$
|
13,051
|
|
Depreciation expense was $2,616 and $2,458 for the nine months ended September 30, 2019 and 2018, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following at:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
307,100
|
|
|
$
|
307,100
|
|
Customer base
|
|
|
142,000
|
|
|
|
142,000
|
|
Non-compete agreements
|
|
|
8,300
|
|
|
|
8,300
|
|
Less accumulated depreciation
|
|
|
(184,850
|
)
|
|
|
(116,240
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
272,550
|
|
|
$
|
341,160
|
|
Amortization expense was $68,610 for the nine months ended September 30, 2019 and 2018.
NOTE 6 – LEASES
Our adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leases on the balance sheet as an ROU asset and a corresponding lease liability. The new guidance also requires additional disclosures as detailed below. We adopted this standard on the effective date of January 1, 2019 and used this effective date as the date of initial application. Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for prior periods. We elected the ‘package of practical expedients,’ which permitted us to not reassess our prior conclusions related to lease identification, lease classification, and initial direct costs, and we did not elect the use of hindsight.
We determine if a contract is a lease at the inception of the arrangement. We review all options to extend, terminate, or purchase the ROU assets, and when reasonably certain to exercise, we include the option in the determination of the lease term and lease liability. We have one operating lease related to our office space in Texas with a remaining lease terms of 3 years. We recognized $25,650 in operating lease costs for the nine months ended September 30, 2019.
Lease ROU assets and liabilities are recognized at commencement date of the lease, based on the present value of lease payments over the lease term. The lease ROU asset also includes any lease payments made and excludes any lease incentives. When readily determinable, we use the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date, including the lease term.
Short-term leases with an initial term of 12 months or less are not recorded on the Balance Sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of September 30, 2019, we did not have any short-term leases.
The tables below present financial information associated with our lease. This information is only presented as of, and for the nine months ended, September 30, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
|
|
Balance Sheet
Classification
|
|
September 30,
2019
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
Right-of-use assets
|
|
$
|
68,652
|
|
Current lease liabilities
|
|
Other current liabilities
|
|
|
28,623
|
|
Non-current lease liabilities
|
|
Other long-term liabilities
|
|
|
40,029
|
|
As of September 30, 2019, our maturities of our lease liability is as follows:
2019
|
|
$
|
8,550
|
|
2020
|
|
|
34,200
|
|
2021
|
|
|
34,200
|
|
Total
|
|
$
|
76,950
|
|
Less: Imputed interest
|
|
|
(8,298
|
)
|
Present value of lease liabilities
|
|
$
|
68,652
|
|
NOTE 7 – NOTES PAYABLE – RELATED PARTY
Long-term notes payable - related party consisted of the following at September 30, 2019 and December 31, 2018:
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
|
|
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, 2019 and 2018, total imputed interest expense was $28,409 and $44,955, respectively, which was recorded to additional paid-in capital.
NOTE 8 – 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, 2019.
There was no common stock activity during the nine months ended September 30, 2019. During the nine 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.
Preferred Stock
The Company is authorized to issue up to 25,000,000 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, 2019, 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.
There was no Series B Preferred Stock activity during the nine months ended September 30, 2019. 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.
There was no Series C Preferred Stock activity during the nine months ended September 30, 2019 and September 30, 2018.
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, 2019, 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 recognized $12,251 of stock-based compensation during the nine months ended September 30, 2019 and none during the nine months ended September 30, 2018. As of September 30, 2019, future compensation cost related to non-vested stock options not yet recognized in the statements of operations totaled $4,083.
A summary of the status of the stock options issued by the Company under both plans as of September 30, 2019, and changes during nine months then ended is presented below:
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
1,518,423
|
|
|
$
|
0.076
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
1,518,423
|
|
|
$
|
0.076
|
|
The outstanding options expire on various dates beginning August 2020 through December 2027.
NOTE 9 – SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
No subsequent events to report.