Forward-Looking Statements
This Quarterly Report on Form 10-Q of Freeze Tag, Inc. ("Freeze Tag" or the
"Company") for the nine months ended September 30, 2021 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 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 our
Annual Report on Form 10-K for the year ended December 31, 2020, as well as any
cautionary language in this Quarterly Report on Form 10-Q and our last Annual
Report on Form 10-K, 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. As noted in our risk factors in our Annual
Report on Form 10-K for year ended December 31, 2020, we are also closely
monitoring the ongoing COVID-19 pandemic and its effects on our business, as
well as its effects on general market and economic conditions.
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.
In October 2017, Rob Vardeman, former President of Munzee Inc. joined gaming
industry veterans, Craig Holland and Mick Donahoo, to form a stronger and
well-rounded Freeze Tag team through a merger. In addition to successful games
Freeze Tag has launched previously, the current portfolio of games includes hits
such as Munzee, a real world gaming adventure and social platform with over 8
million locations worldwide and hundreds of thousands of players, WallaBee, an
addictive collecting game with over 2,000 beautifully drawn digital cards, and
Garfield Go, a Pokemon Go style augmented reality game based on the iconic cat
Garfield.
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We also offer our technology and services to businesses that want to leverage
our expertise in location-based 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. Also, we offer ZeeTours, a
location-based smartphone game that combines fitness, learning and fun into a
zany walking tour, to resellers such as museums and tourism related businesses
around the world.
We are closely monitoring the coronavirus pandemic and the directives from
federal and local authorities regarding not only our workforce, but how it
impacts both the companies we work with for the development of our games and
apps, and our users. We believe these social distancing and "stay-at-home"
regulations may negatively impact our users and their ability to play our
geolocation games for the foreseeable future. The extent and duration of this
impact is difficult to predict at this time.
Central to Freeze Tag's core strategy is capitalizing on fast-growing trends in
the mobile applications world, including geofencing and location-based
advertising. We plan to leverage the combined company's proprietary technology
and expertise to create more exciting location-based experiences in our games.
Throughout 2021, we will continue to explore opportunities to incorporate
geofencing into our applications, and then, when the time is right, we will
examine opportunities to introduce advertising opportunities to Freeze Tag
clients and customers.
Beginning in the quarter ended March 31, 2020, our wholly-owned subsidiary,
Space Coast Geo Store, LLC, a Florida limited liability company, sells
merchandise to the geocaching industry.
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
condensed consolidated financial statements, the Company had net income of
$221,939 and provided net cash of $191,120 from operations for the nine months
ended September 30, 2021. As of September 30, 2021, the Company had a working
capital deficit of $291,551 and a total stockholders' deficit of $392,198. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern.
Management believes that by continuing to implement cost reductions, and by
increasing revenue from updated product lines, operating cash flows will be
sufficient to support the Company's business plan. 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.
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.
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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.
Intangible Assets
Intangible assets consist primarily of intellectual property, customer base and
non-compete agreements acquired in 2017, 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.
Accounting for 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.
Software Development Costs
Software development costs include direct costs incurred for internally
developed products and payments made to independent software developers and/or
contract engineers and artists. The Company accounts for software development
costs in accordance with the FASB guidance for the costs of computer software to
be sold, leased, or otherwise marketed ("ASC Subtopic 985-20"). On a case by
case basis, certain software development costs are capitalized once the
technological feasibility of a product is established and such costs are
determined to be recoverable. Technological feasibility of a product encompasses
both technical design documentation and game design documentation, or the
completed and tested product design and working model. Software development
costs are capitalized once technological feasibility of a product is established
and such costs are determined to be recoverable against future revenues. For
products where proven game engine technology exists, this may occur early in the
development cycle.
Significant management judgments and estimates are utilized in the assessment of
when technological feasibility is established. For most products, technological
feasibility is established when a detailed game design document containing
sufficient technical specifications written for a proven game engine or
framework technology had been created and approved by management. However,
technological feasibility is evaluated on a product-by-product basis. Amounts
related to software development that are not capitalized are charged immediately
to the appropriate expense account. Amounts that were considered 'research and
development' that are not capitalized are immediately charged to general and
administrative expense.
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Prior to a product's release, the Company expenses, as part of "Cost of
Sales-Product Development," capitalized costs when the Company believes such
amounts are not recoverable. Capitalized costs for those products that are
cancelled or abandoned are charged to product development expense in the period
of cancellation. Commencing upon product release, capitalized software
development costs are amortized to "Cost of Sales-Product Development" based on
the straight-line method.
The Company evaluates the future recoverability of capitalized software
development costs and intellectual property licenses on an annual basis. For
products that have been released in prior years, the primary evaluation
criterion is actual title performance. For products that are scheduled to be
released in future years, recoverability is evaluated based on the expected
performance of the specific products to which the costs relate or in which the
licensed trademark or copyright is to be used. Criteria used to evaluate
expected product performance include: historical performance of comparable
products developed with comparable technology; orders for the product prior to
its release; and, for any sequel product, estimated performance based on the
performance of the product on which the sequel was based.
Recent Accounting Pronouncements
Although there were new accounting pronouncements issued or proposed by the FASB
during the nine months ended September 30, 2021 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
Our revenues for the three months ended September 30, 2021 of $517,158 were up
$44,021 from revenues of $473,137 for the three months ended September 30, 2020.
Revenues for the nine months ended September 30, 2021 of $1,576,826 were up
$264,134 from revenues of $1,312,692 for the nine months ended September 30,
2020. The primary reason for the increase in revenues year over year was due to
increased revenues in our broader portfolio of apps and product offerings,
including increases in the use of our re-built Eventzee app.
Cost of Sales
Cost of sales increased $11,149 to $76,128 for the three months ended September
30, 2021 from $64,979 for the three months ended September 30, 2020. Cost of
sales for the nine months ended September 30, 2021 of $202,254 were up $15,402
from cost of sales of $186,852 for the nine months ended September 30, 2020. The
increase was a mainly a result of increased infrastructure costs to support our
games.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $36,160 to $401,961 for
the three months ended September 30, 2021 from $438,121 for the three months
ended September 30, 2020. The decrease is primarily due to a decrease in payroll
and contract programming expenses due to software capitalization of costs in the
quarter, offset by an increase in marketing expenses and insurance costs.
Selling, general and administrative expenses for the nine months ended September
30, 2021 of $1,290,532 were down $31,217 from $1,321,749 for the nine months
ended September 30, 2020. The decrease is primarily due to a decrease in payroll
and contract programming expenses due to software capitalization of costs,
offset by an increase in marketing expenses and insurance costs.
Other Income (Expense)
Total other income (expense) for the three months ended September 30, 2021 of
($12,311) was $26,786 lower than other income (expense) of $14,475 for the three
months ended September 30, 2020. Total other income (expense) for the nine
months ended September 30, 2021 of $137,899 was up $142,986 from ($5,087) for
the nine months ended September 30, 2020.The change is primarily driven by the
forgiveness of our first Paycheck Protection Program (PPP) loan in the amount of
$174,420. Interest expense and other income (expense) remained relatively
stable.
Net Income (Loss)
As a result of the above, we reported net income of $26,758 and $221,939 for the
three and nine months ended September 30, 2021 compared to net losses of
($15,488) and ($200,996) for the three and nine months ended September 30, 2020.
Liquidity and Capital Resources
Introduction
As of September 30, 2021, we had current assets of $773,400, including cash of
$713,465, and current liabilities of $1,064,951, resulting in a working capital
deficit of $291,551. In addition, we had a total stockholders' deficit of
$392,198 at September 30, 2021.
During the nine months ended September 30, 2021, we provided net cash of
$191,120 from operating activities. Management believes that by continuing to
implement cost reductions, and by increasing revenue from updated product lines,
operating cash flows will be sufficient to support our business plan. However,
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
We provided net cash of $191,120 from operating activities for the nine months
ended September 30, 2021. Net income of $221,939, an increase in accrued
expenses of $19,750 and non-cash expenses of $136,822 were partially offset by
loan forgiveness of $174,420, an increase in accounts receivable and prepaid and
other assets of $4,966 and a decrease in accounts payable and other liabilities
of $8,005.
By comparison, we used net cash of $48,862 from operating activities for the
nine months ended September 30, 2020. A net loss of $200,996, an increase in
accounts receivable of $2,197, a decrease in accounts payable of $10,797 and a
decrease in other current liabilities of $20,370 were partially offset by
non-cash expenses of $137,229, decreases of our current assets of $4,146 and
increases of accrued expenses of $44,123.
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We used $136,474 for capitalized software development costs the nine months
ended September 30, 2021. We used $46,609 for investing activities to purchase
of property and equipment during the nine months ended September 30, 2020.
Financing activities provided net cash of $167,180 for the nine months ended
September 30, 2021, primarily driven by a new PPP loan to alleviate the impact
of the COVID-19 crisis, partially offset by $7,241 of payments related to auto
financing. Financing activities for the nine months ended September 30, 2020
provided net cash of $369,994, related to three new loans during the period, the
significant portion to alleviate the impact of the COVID-19 crisis.
Notes Payable - Related Party
As of September 30, 2021, our related party 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, 2021. 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%.
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