ITEM 1 - BUSINESS
Corporate History
We were incorporated as Freeze Tag, Inc. in February 2006 in the State of Delaware. In March 2006, Freeze Tag, LLC, our predecessor which was formed in October 2005, was merged with and into Freeze Tag, Inc. In October of 2017, we completed a merger transaction with Munzee Inc. in a transaction in which Freeze Tag, Inc. became the surviving entity and both companies merged their operations together (the “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, our financial statements include the financial results of operations of the combined company. The combined entity maintains offices in Tustin, California and McKinney, Texas. Other corporate actions that occurred as a result of the merger are that Robert Vardeman, Jr., former CEO of Munzee Inc. became President of Freeze Tag, Inc. and both Robert Vardeman, Jr. and Robert D. Vardeman were added to the Freeze Tag, Inc. Board of Directors. Our Board of Directors currently consists of Craig Holland, Mick Donahoo, Robert Vardeman, Jr., and Robert D. Vardeman.
Business 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 9 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 third party 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.
We added another location based product, ZeeTours, 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. During 2018, we added many tour locations to our ZeeTours offering, bringing the total number of ZeeTours to approximately 40 tours worldwide.
In 2018, our main focus as a company was centered on our flagship product, Munzee. We dedicated virtually all of our product strategy, design, engineering, creative, and testing resources to bring the “next generation” version (called Munzee 4.0) to market. We successfully introduced the new version to the market in January 31, 2019.
In 2019, after successfully launching a new version of our flagship product, Munzee, we continued to develop and enhance the mobile application by adding more features and functionality, such as incorporating the ability for players to join teams (called “clans”) from anywhere in the world and play together, competing against other worldwide teams. Adding these features increased the usage of existing players and increased the retention of new players such that by the end of 2019, we achieved a marked increase in user retention.
In Q4 of 2019, we embarked upon another major development project involving our Eventzee app. We have completely re-designed the Eventzee app, adding many features requested by our customers over the years. Our current plan is to launch the revised Eventzee app in Q2 of 2020, barring any unforeseen events or obstacles.
Our mission is to design, develop and deliver innovative digital entertainment that surprises and delights. Our products bring families together by providing fun to kids of all ages. We also strive to create a workplace environment where creativity and fun can thrive in a demanding industry.
Business Strategy
In recent years, we have shifted our business strategy to focus our efforts on creating free-to-play (FTP) social games for the mobile market. We’ve made this change because we believe that games that are social and mobile will provide the greatest revenue opportunities now and in the foreseeable future. This change in direction has not been an easy one as we’ve had to deploy resources differently, learn new techniques, and experiment with new game designs and marketing processes. As we realize success with profitable free-to-play games like Munzee and WallaBee, we are realizing dividends from the many hours invested in learning, experimenting and testing FTP game mechanics and marketing techniques.
We have also announced our intention to grow through acquisition. The merger with Munzee Inc. is evidence that we are making progress on our intention to grow the business through merging and/or acquiring other companies in our field. During 2018, we focused a great deal of management effort on building a successful multi-office and multi-state team, developing communications, reporting, and working relationships to integrate all of the Freeze Tag employees and contractors into a cohesive, thriving worldwide team.
We still feel that the time is right to build an alliance of mobile game developers who can become stronger and more successful by working together to build a company that can leverage market intelligence, development expertise and cross-promotional opportunities to achieve great results for our customers and shareholders.
During 2020 and beyond, we will continue to look for acquisition candidates and propose transactions in cases where it makes sense for both parties and will enhance the value of the company.
In the event we do enter into any such transactions in the future, such transactions will likely be accomplished through the issuance of shares of our stock and/or in connection with a strategic financial investor, and not with cash directly from us unless and until our cash position improves.
Free-to-play Business Model
The free-to-play business model for games was pioneered on the PC platform and has exploded globally on the mobile platform. The free-to-play model allows users to download and play an enjoyable, but limited, portion of a game for free. If the user wants to access premium features or special virtual items to increase the fun factor, then the user is required to pay, usually $0.99 per feature or item or $0.99 for a bundle of virtual items. For example, if a player has run out of “lives” or “moves” in a game, the player is given two options: 1) Wait for the lives to re-charge which involves waiting but no expense of money or virtual currency; 2) Spend money or virtual currency to buy additional “lives” and keep playing immediately.
We adhere to the “free-to-play” business model in our currently live Freeze Tag games. In Munzee, players can purchase blast caps to capture virtual munzees deployed near them. WallaBee also offers players a chance to “forage” for honeycombs for free or they may be purchased as in-game items. In all cases, Munzee, WallaBee and Garfield Go are games that players can and do play for free, yet by spending money on additional items, the gameplay experience is enhanced.
Over the last several years, the free-to-play business model has proven to be a very successful model for mobile games. The revenue potential of a game largely depends on the fun-factor and popularity of the game and the game creator’s proprietary techniques for encouraging the player to make a purchase decision - without overly offending the player. The potential for rapidly spreading the game through social networks and small in-game purchases can add up to a very sizeable business opportunity, as evidenced by many mobile games generating millions and even billions of dollars based solely on an accumulation of players making many individual item purchases.
Going forward, we plan on the majority of Freeze Tag’s mobile games to be based on the free-to-play model. In addition, we believe that games are more fun with friends, so we connect our players with major social networks such as Facebook and Twitter to enhance the games’ addictiveness, enjoyment and world-of-mouth referrals. We also offer ways for players to communicate directly with each other in Munzee and WallaBee to enhance the feeling of community and comradery. In both Munzee and WallaBee mobile apps, there are certain aspects of gameplay that are more enjoyable when the experience is shared with other players.
Since mobile app development technology is constantly changing and evolving, we review and research platforms, tools, techniques, and third party SDK’s on a routine basis to ensure we are in synch with the market. In executing our business model, we have derived the most benefit from employing a proprietary game engine because using our own tools and techniques allows us to be nimble and anticipate market changes.
In the future, we plan to continue to employ our game engine. However, where and when appropriate, we will develop specific games using the Unity Development platform. Unity (www.unity3d.com) has become the development platform of choice for many game studios, and allows us to quickly access additional talent in game development. We also plan to utilize other technologies in their native development environment (such as HTML5) as circumstances dictate. This approach allows us to find the best development teams, engineering teams, and partners to help us quickly deploy our games.
Explosive Growth for Mobile Games
According to a 2018 report from Newzoo, the market for mobile games will continue to grow over the next few years. The report states:
“Mobile gaming will continue to be the largest segment following 10 years of double-digit growth since the first iPhone was launched in 2007. In total, mobile revenues will grow 25.5% year on year to reach $70.3 billion. This means for the first time, more than half of all game revenues will come from the mobile segment.” Newzoo Mobile Gaming report, August 2018
Source: Newzoo 2018 Mobile Games Report
As smartphones and tablets continue to become indispensable devices in the hands of most consumers, mobile gaming revenue will continue to increase. In fact, the Newzoo report projects that in the span of ten years, mobile gaming will have grown from the smallest segment in the gaming market in 2012 to a $100 billion dollar industry by 2021. In coming years, the mobile gaming market will grow at a faster pace than the overall games market. By 2021, revenue generated on smartphones and tablets are projected to generate over 59% of the revenues of the entire global game market.
The Female Player
The explosive growth of the mobile games market can be partly attributed to a relative increase in the number of female players. Gaming is historically a male dominated market with action-based games. But the modern female with disposable income, a smartphone and time on her hands has changed everything. This market development has opened the door wide for a previously niche category of games referred to as “casual” games.
At Freeze Tag, our games enjoy a broad base of players across all ages and gender. A large portion of our most popular games such as WallaBee are female players. Although we do have many male players of Munzee, the female player base has been growing rapidly.
The Freeze Tag Strategy
In targeting the global market for mobile games, we are highly focused on developing mobile social games that are casual, fun and engaging for all ages and gender. The free-to-play business model combined with the use of best-in-class development environments (be it the Freeze Tag Game Engine, Unity3D, HTML/CSS/Javascript engines or other technology) and Analytics and Deployment tools, allows us to systematically launch, optimize and monetize our games. We design our games to be never ending entertainment that our users will enjoy playing and be willing to pay us $0.99 or more from time-to-time for special features and virtual items to keep having fun. We believe that the free-to-play model should not be run as a sprint but rather as a marathon. Over the span of several months, or even years, each game is continuously subject to this optimization process to increase user enjoyment and financial return to the company.
Distribution and Marketing
We market, sell and distribute our games primarily through direct-to-consumer digital storefronts, such as Apple’s App Store, the Google Play Store and Amazon’s App Store. We also sell to our players directly through our own web site http://www.freezetag.com and http://store.freezetag.com. We work with payment vendors like Shopify, Square and PayPal to process our online payments. In addition to publishing our smartphone games on direct-to-consumer digital storefronts, we also publish some of our titles on other platforms, such as the Facebook App Store, the Mac App Store and PC Download portals such as Big Fish Games and Gamehouse.
User Acquisition
In the free-to-play business model, a constant stream of new players is necessary to be successful. So, we have partnered with advertising networks and lead generation companies such as Facebook and Google to help us reach the appropriate audience for our products. We also employ data analytics to determine which creative messages and which lead referral sources are bringing in the most players who spend money in our games.
To help reduce the cost of acquiring downloads, we have embedded social networking mechanisms into our games to enable our best customers to do the marketing for us. Every time a satisfied player invites her friend to play one of our games, we have been introduced to a new potential customer without incurring a cost to entice that player to download the game. We will continue to design methods to encourage our players to invite their friends and spread the word about our games. Each time a user downloads one of our games from a friend referral without a direct expense from us, our user acquisition cost is lower, and therefore our profitability is potentially higher.
Technology and Tools
Free-to-play Revenue Model
The game industry, like many other forms of entertainment (music, TV, books, etc.) is undergoing a major shift. The free-to-play business model increased in appeal to game players of every genre and platform. Nowhere has this been felt more deeply than the mobile market. Free is a very powerful marketing approach that is irresistible to game players. The top grossing charts on popular mobile app stores like Apple, Google, and Amazon continually show that “free” games earn the most revenue for their developers. So with all this “free-ness,” how does a game creator make any money?
Optimizing Customer Lifetime Value
The key business metric of any free-to-play game is the Customer Lifetime Value (CLV). A free-to-play gamer starts out as a zero revenue customer, but he or she may become a paying customer throughout the customer’s life of playing the game. The game creator’s business is an ongoing engagement with the game players to get them to buy things in the game, without ruining the fun. Optimizing this delicate balance is where the most revenue can be extracted.
The following graphic, developed by XEODesign identifies the approach to creating free-to-play games that are fun and engaging to consumers.
There are many techniques for generating free-to-play revenue. They range from a simple static “pay to access more levels” model to a more dynamic model where player behaviors are systematically analyzed to strategically introduce purchase options to help the user enjoy more of the game. Freeze Tag dynamically optimizes a game’s CLV by integrating two important elements: (1) Data Analytics and (2) a Dynamic Game Engine (whether it be the Freeze Tag Game Engine, Unity3D, or other native development environment).
This combination allows us to optimize the features of our games to refresh and update the content so that players are happily engaged and invite their friends to play with them. When players invite their friends, they lower our user acquisition costs. The longer and more often players come back to play, the more likely they are to spend money on virtual goods (through in-game purchases). The net result is a customer with a greater lifetime value. The happier customers are, the more they share with their friends and the more often they come back to spend money. Everything we do is geared to our players having more fun because ultimately customer fun translates into revenue.
Data Analytics
By using commercial and proprietary data analytics tools, we analyze various aspects of the game across the entire pool of players to determine what modifications can be made to the game, which allows us to: (1) make it more fun, and (2) induce a purchase.
Some of the analysis we perform regularly are:
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Analyze the number of users that complete the tutorial process
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Identify the Day 1, Day 7, and Day 30 retention metrics of how many players are returning to play
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Quantify the ARPDAU (average revenue per daily active user) to determine the monetization effectiveness of each game
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Determine the percentage of overall users that are converting to spenders
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Quantify the ARPPDAU (average revenue per paying daily active user)
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Determine what parts of the game users are playing most
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Identify where in the game users are dropping out, and find out why
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Average play time per day and per session
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Importance of social networks, like Facebook and Twitter, to the game and how many players login to social networks
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Frequency of users playing against friends
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Identify what events most correlate with purchase events
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Identify how many invites a user is sending out, how long it takes them to send the first invite out, and how many of those players are coming in.
Dynamic Game Engine(s)
Over the years, we have developed a proprietary dynamic game engine (Freeze Tag Engine) that allows us to make changes to game play and game economies on-the-fly, in most cases, without requiring the download of another update. We also integrate several business analytics packages, and other key game management tools into our games that provide us with real time data to measure detailed player behavior, and respond directly to that behavior. Starting in 2014 and continuing forward, we began using the Unity3D Development Engine (www.unity3d.com). We have optimized and are continuing to optimize this engine in many of the same ways that our own engine was optimized. However, we continue to develop our own game engine which uses web-friendly technology that can be easily ported to the most popular mobile platforms, iOS and Android. As our games have become more sophisticated with the need for constant data connection and several points of data required to be associated with physical locations on a map, we have developed server-side tools to handle these requirements.
Platform Portability - Dynamic Game Engine(s)
Over the years, the Freeze Tag Game Engine has allowed us to the ability to port across multiple platforms using a single codebase. We continue to look to contract with outside teams and outside contractors, allowing us to maintain a smaller internal team.
As we continue our development efforts in 2019, our approach is to review the technical requirements of the game we want to develop, then make a decision as to which Game Engine is the most appropriate to implement for that development effort, whether that be our own proprietary game engine based on web technologies or third party platforms such as Unity 3D.
As we make decisions about which Game Engine to employ, here are a few of the things that we look to have:
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A single codebase that can be easily ported to other platforms
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Ability to “bolt on” other technologies and codes to easily integrate with other SDK’s, platforms and special needs
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Interface easily with scalable backend databases and architecture
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Easily localized into new languages
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Updates can be pushed to the game allowing us to change things like:
○ adding new characters
○ changing the values in the economy
○ updating text
○ messaging users (in game) about new features
○ instigating a social network based contest
Integrated Feedback Mechanisms
In addition, we aim to integrate feedback mechanisms into our games to provide incentive for our players to communicate their favorite features and any technical difficulties they may be experiencing. By combining dynamic gaming technology and data analytics into one integrated business process, we can optimize the “fun” factor for our players and maximize our revenue potential.
Product Development
We have learned that establishing and following a fairly rigid process is essential to producing commercially successful products, regardless of the platform. The process all begins with the creative development process. The chart below describes the approach we use to filter ideas and make final decisions on which games we will actually produce. After choosing the game that we will focus on, we write a detailed design document. A thorough design document ensures that all of those involved in the creation of the game have a common reference source throughout the production process. Also critical to producing high quality games, a test plan accompanies every design document. Not only do we test for bugs, but also we test the game for usability. Since most casual gamers do not want to read instructions, it is critical that the finished game be easy to play by just tapping at objects on the screen.
As a developer of mobile social games, we have developed expertise in three core aspects of game production. These core competencies help to give us a competitive advantage in the industry. They are listed below, with the resulting benefit also identified.
1. Create High Quality Products (including art and sound assets). Benefit: Provides high value to distribution partners and consumers, resulting in increased downloads and purchases.
2. Maintain Flexible Engineering Tools and Processes. Benefit: Decreases time-to-market delivery of products.
3. Minimize Risk by doing the following: 1) selecting proven genres, 2) keeping development costs low, and 3) modifying designs “on the fly” based on consumer feedback. Benefit: Increases the number of games released per year and decreases reliance on any one title’s success, ultimately improving return on investment for each game.
Competition
The business of mobile games is very competitive. New products are introduced frequently and the platforms and devices change rapidly. To be successful in this crowded marketplace, we have to entice consumers to play our games based on the quality and “fun” of the experience. Players evaluate our games based on the game play, graphics quality, the music and sound effects and the efficiency and clarity of our software engineering and user interface design.
We compete with a continually increasing number of successful location based mobile game companies, including Niantic (makers of Pokemon Go), Geocaching, Seek, and many others.
In addition, given the open nature of the development and distribution for mobile devices, we also compete or will compete with a vast number of small companies and individuals who are able to create and launch games and other content for these devices using relatively limited resources and with relatively limited start-up time or expertise. As evidenced by the recent Flappy Bird phenomenon, it is possible for a one-man development team to build and launch a game that is able to achieve millions of downloads.
Some of our competitors and our potential competitors have one or more advantages over us, either globally or in particular geographic markets, which include:
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significantly greater financial resources;
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greater experience with the free-to-play games and games-as-a-service (GAAS) business models and more effective game monetization;
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stronger brand and consumer recognition regionally or worldwide;
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greater experience and effectiveness integrating community features into their games and increasing the revenues derived from their users;
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larger installed customer bases from their existing mobile games;
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the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;
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larger installed customer bases from related platforms, such as console gaming or social networking websites, to which they can market and sell mobile games;
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more substantial intellectual property of their own from which they can develop games without having to pay royalties;
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better overall economies of scale;
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greater platform-specific focus, experience and expertise; and
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broader global distribution and presence.
Intellectual Property
Our intellectual property is an essential element of our business. We use a combination of trademark, patent, copyright, trade secret and other intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. We have also registered a number of domain names, which we believe will be important to the branding and success of our games. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We intend to register ownership of software copyrights in the United States as well as seek registration of various trademarks associated with the Company’s name and mobile social games that we will develop.
Wherever possible, we own registered trademark protection for properties we develop. As the digital markets evolve, there are and will continue to be many competitors who will imitate successful game properties. We are investing in trademark protection to create game brands and protect them. For example, we have received approval from the United States Patent and Trademark Office to register Party Animals®, Unsolved Mystery®, Unsolved Mystery Club®, Ancient Astronauts®, Victorian Mysteries®, Grimm Reaper® and Rocket Weasel® for all gaming platforms. Munzee Inc. has previously received approval for the trademarks Munzee®, Eventzee®, and WallaBee®. These marks will assist us in defending against copycats who may try to incorporate these terms into their game titles.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot be assured that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.
Business Acquisitions
In addition to our current operations, we propose to seek, investigate and, if warranted, acquire an interest in one or more businesses. The merger with Munzee Inc. is evidence of our pursuit of this strategy. We propose to investigate potential opportunities, particularly focusing upon existing privately held businesses whose owners are willing to consider merging their businesses into our company in order to establish a public trading market for their common stock, and whose managements are willing to operate the acquired businesses as divisions or subsidiaries of our company. The businesses we acquire may or may not need an injection of cash to facilitate their future operations. Presently, if we acquire any businesses we envision such acquisition being completed either with our shares of our stock or with the assistance of a strategic funding partner. We currently do not have substantial funds, or a revenue stream, to make acquisitions utilizing cash.
We are primarily interested in other technology opportunities, but we currently do not intend to restrict our search for investment opportunities to any particular industry or geographical location and may, therefore, engage in essentially any business. Our executive officers will review material furnished to them by the proposed merger or acquisition candidates and will ultimately decide if a merger or acquisition is in our best interests and the interests of our shareholders. We intend to source business opportunities through our officers and directors and their contacts. Those contacts include professional advisors such as attorneys and accountants, securities broker dealers, venture capitalists, members of the financial community, other businesses and others who may present solicited and unsolicited proposals. Management believes that business opportunities and ventures may become available to it due to a number of factors, including, among others: (1) management’s willingness to consider a wide variety of businesses; (2) management’s contacts and acquaintances; and (3) our flexibility with respect to the manner in which we may be able to structure, finance, merge with or acquire any business opportunity.
The analysis of new business opportunities will be undertaken by or under the supervision of our executive officers and directors. Inasmuch as we will have limited funds available to search for business opportunities and ventures, we will not be able to expend significant funds on a complete and exhaustive investigation of such business or opportunity. We will, however, investigate, to the extent believed reasonable by our management, such potential business opportunities or ventures by conducting a so-called “due diligence investigation”.
In a so-called “due diligence investigation”, we intend to obtain and review materials regarding the business opportunity. Typically such materials will include information regarding a target business’ products, services, contracts, management, ownership, and financial information. In addition, we intend to cause our officers or agents to meet personally with management and key personnel of target businesses, ask questions regarding our prospects, tour facilities, and conduct other reasonable investigation of the target business to the extent of our limited financial resources and management and technical expertise.
Government Regulation
Because of our recent partnership with Paws Inc. (Garfield license), and our development of Augmented Reality / Geolocation games, and the types of data that we collect in those games, we must be more mindful of government regulations regarding the Children's Online Privacy Protection Act or COPPA. To protect minors on the Internet (and now mobile devices), U.S. officials passed The Children's Online Privacy Protection Act (COPPA). Essentially, COPPA governs online data collection of people aged 13 and younger. The COPPA rules define privacy policy requirements, data collection parameters, and the process of acquiring verifiable parental consent. In the past, we have disclosed the information that we collect in Privacy Policies, but now need to focus on getting parental approval for certain types of applications as they relate to children under the age of 13.
Our Employees
We have 14 employees and 8 contractors (22 total), that work in our offices in Tustin, California, McKinney, Texas, and other remote locations throughout the world. 5 of these are managers, 2 are administrative staff, and the remaining 15 are artists, engineers, production staff, etc. We also work with other artists, engineers, designers, and contractors on and as-needed basis.
Description of Property
Our executive offices are located in Tustin, California, at 18062 Irvine Blvd, Suite 103, Tustin, CA 92780 and are leased on a month-to-month basis at a cost of $1,173 per month. Our production office in Texas is located at 1441 Redbud Blvd., Suite 201, McKinney, TX 75069 and we are currently in the second year of a 3-year lease. Current monthly lease payment is $2,850 per month plus utilities.
Available Information
We are a fully reporting issuer, subject to the Securities Exchange Act of 1934. Our Quarterly Reports, Annual Reports, and other filings can be obtained from the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You may also obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov.
Our Internet website address is http://www.freezetag.com/.
ITEM 1A
ITEM 1A - RISK FACTORS
As a smaller reporting company we are not required to provide a statement of risk factors. However, we believe this information may be valuable to our shareholders for this filing. We reserve the right to not provide risk factors in our future filings. We face risks in developing our games and products and eventually bringing them to market. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed. Our primary risk factors and other considerations include:
Risk Factors Related to the Business of the Company
We have incurred losses from operations, and we may never generate substantial revenue or become profitable.
We incurred net losses of $142,627 for the year ended December 31, 2019. As of December 31, 2019, we had a working capital deficit of $395,583 and a total stockholders’ deficit of $483,970. The Company reported net cash used by operating activities of $54,440 for the year ended December 31, 2019. 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. There can be no assurance that we will be successful in these efforts.
Our ability to generate revenues from any of our games will depend on a number of factors, including our ability to satisfy consumer demand identify appropriate commercialization strategies, and successfully market and sell our games. Our ultimate success will depend on many factors, including factors outside of our control. We may never successfully commercialize or achieve and sustain market acceptance of any of our games, our game operations may not generate sufficient revenue to support our business, and we may never reach the level of sales and revenues necessary to achieve and sustain profitability.
If we are unable to meet our future capital needs, we may be required to reduce or curtail operations.
Since the Merger, we have relied on cash flow from operations to fund operations. We have limited cash liquidity and capital resources. Our cash on hand as of December 31, 2019, was $254,776, and our projected monthly expenditures rate is approximately $155,000. For the year ended December 31, 2019, our revenues were $2,083,461.
Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, and competing market developments. Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not receive additional financing in the near future. Consequently, although we currently have no specific plans or arrangements for financing, we intend to raise funds through private placements, public offerings or other financings. Any equity financings would result in dilution to our then-existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce or curtail operations. We anticipate that our existing capital resources will not be adequate to satisfy our operating expenses and capital requirements for any length of time. However, this estimate of expenses and capital requirements may prove to be inaccurate.
Debt financing is difficult to obtain.
Debt financing is difficult to obtain in the current credit markets. This difficulty may make future acquisitions either unlikely, or too difficult and expensive. This could materially adversely affect our company and the trading price of our common stock.
Raising capital by borrowing could be risky.
If we were to raise capital by borrowing to fund our operations or acquisitions, it could be risky. Borrowing through non-convertible instruments typically results in less dilution than in connection with equity financings, but it also would increase our risk, in that cash is required to service the debt, ongoing covenants are typically employed which can restrict the way in which we operate our business, and if the debt comes due either upon maturity or an event of default, we may lack the resources at that time to either pay off or refinance the debt, or if we are able to refinance, the refinancing may be on terms that are less favorable than those originally in place, and may require additional equity or quasi equity accommodations. These risks could materially adversely affect our company and the trading price of our common stock.
Current economic conditions and capital markets are in a period of disruption and instability which could adversely affect our ability to access the capital markets, and thus adversely affect our business and liquidity.
The current economic conditions largely caused by the coronavirus pandemic have had, and likely will continue to have for the foreseeable future, a negative impact on our ability to access the capital markets, and thus have a negative impact on our business and liquidity. The recent, substantial losses in worldwide equity markets could lead to an extended worldwide recession. We may face significant challenges if conditions in the capital markets do not improve. As a result, if we are forced to raise capital through the sale of our securities, it may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long the current conditions may continue.
Our financing decisions may be made without stockholder approval.
Our financing decisions and related decisions regarding levels of debt, capitalization, distributions, acquisitions and other key operating parameters, are determined by our board of directors in its discretion, in many cases without any notice to or vote by our stockholders. This could materially adversely affect our company and the trading price of our common stock.
Our independent registered public accounting firm has expressed doubts about our ability to continue as a going concern.
As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2019 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern, we must effectively balance many factors and increase our revenues to a point where we can better fund our operations from our sales and revenues. If we are not able to do this, we may not be able to continue as an operating company.
Because we face intense competition, we may not be able to operate profitably in our markets.
The market for casual games is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:
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develop and expand their product offerings more rapidly;
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adapt to new or emerging changes in customer requirements more quickly;
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take advantage of acquisition and other opportunities more readily; and
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devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can.
If we are unable to maintain brand image or product quality, our business may suffer.
Our success depends on our ability to maintain and build brand image for our existing products, new products and brand extensions. We have no assurance that our advertising, marketing and promotional programs will have the desired impact on our products’ brand image and on consumer preferences.
If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.
Our success will depend, in part, on our ability to attract and retain key management, including primarily Robert Vardeman, Jr., Craig Holland and Mick Donahoo, technical experts, and sales and marketing personnel. We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. Our inability to retain employees and attract and retain sufficient additional employees, and information technology, engineering and technical support resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows. The loss of key personnel could limit our ability to develop and market our products.
Because our officers and directors control our common stock vote, they have the ability to influence matters affecting our shareholders.
As of December 31, 2019, there were 75,056,123 outstanding shares of Common Stock, no outstanding shares of Series A Preferred Stock (“Series A Preferred”), 2,480,482 shares of Series B Preferred Stock (“Series B Preferred”), and 4,355,000 shares of Series C Preferred Stock (“Series C Preferred”). Our officers and directors own a significant portion of our outstanding voting rights on any matters that may be brought before our shareholders for a vote. As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because they control such shares, investors may find it difficult to replace our management if they disagree with the way our business is being operated. Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.
Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we operate.
A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, foreign currency devaluation, inflation or deflation. A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition.
The coronavirus pandemic is causing disruptions in the workplace, which will have negative repercussions on our business if they continue for an extended period time.
We are closely monitoring the coronavirus pandemic and the directives from federal and local authorities regarding not only our workforce, but how it impacts companies we work with for the development of our games and apps. As more states and localities implement social distancing and “work from home” regulations more and more companies will be forced to either shut down, slow down or alter their work routines. Since the development and testing of our suite of games can be a “hands on” process these alternative work arrangements could significantly slow down our anticipated schedules for the development, marketing and launch of our games, which could have a negative impact our business.
Social distancing and “stay-at-home” orders caused by the coronavirus may adversely impact our geolocation games, which require users to be outdoors and visiting various locations.
Some of our most successful games are geolocation games, in which the user plays the game while exploring outdoors with certain aspects of the outdoors augmented with gameplay features. With many state and localities encourage people to stay at home and/or apply social distancing due to the coronavirus, some of our users may not go outside as much, and, as a result, are less likely to play our geolocation games. If this occurs, users would not be purchasing the in-game additions, which would cause us to experience decreased revenue. Additionally, for some of our games, we host events for our users to attend and play the game together and receive certain promotional items. Many states and localities are limiting the number of people that be together in any one location to 10 or less people. As a result we have had to postpone certain events, and will likely have to postpone additional ones in the future, which may decrease both downloads of our games, as well in-game purchases.
We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.
We may experience rapid growth and development in a relatively short period of time by aggressively marketing our casual games. The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel. We intend to hire additional personnel in order to manage our expected growth and expansion. Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.
Failure to renew our existing licenses or to obtain additional licenses could harm our business.
Some of our game products are or will be based on or incorporate intellectual properties that we license from third parties. Our current licenses to use these properties do not extend beyond terms of two to three years. We may be unable to renew these licenses on terms favorable to us, or at all, and we may be unable to secure alternatives in a timely manner. We expect that licenses we obtain in the future may impose development, distribution and marketing obligations on us. If we breach our obligations, our licensors may have the right to terminate the license or change an exclusive license to a non-exclusive license.
Competition for licenses may also increase the advances, guarantees and royalties that we must pay to the licensor, which could significantly increase our costs. Failure to maintain our existing licenses or obtain additional licenses with significant commercial value could impair our ability to introduce new applications or continue our current game products and applications, which could materially harm our business.
If we fail to develop and introduce new casual games and other applications that achieve market acceptance, our sales could suffer.
Our business depends on providing casual games and applications that consumers initially want to download to their devices and then make subsequent in-game purchases. We must invest significant resources in research and development to enhance our offering of casual games and other applications and introduce new games and other applications. Our operating results would suffer if our games and other applications are not responsive to the preferences of our customers or are not effectively brought to market.
The planned timing or introduction of new casual games is subject to risks and uncertainties. Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new casual games, which could result in a loss of, or delay in, revenues or damage to our reputation and brand. If any of our applications is introduced with defects, errors or failures, we could experience decreased sales, loss of customers and damage to our reputation and brand. In addition, new applications may not achieve sufficient market acceptance to offset the costs of development. Our success depends, in part, on unpredictable and volatile factors beyond our control, including customer preferences, competing applications and the availability of other entertainment activities. A shift in Internet or mobile device usage or the entertainment preferences of our customers could cause a decline in our applications' popularity that could materially reduce our revenues and harm our business.
We intend to continuously develop and introduce new games and other applications for use on next-generation Internet and mobile devices. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of new mobile devices. New mobile devices for which we will develop applications may be delayed, may not be commercially successful, may have a shorter life cycle than anticipated or may not be adequately promoted by wireless carriers or the manufacturer. If the mobile devices for which we are developing games and other applications are not released when expected or do not achieve broad market penetration, our potential revenues will be limited and our business will suffer.
If our independent, third-party developers cease development of new applications for us and we are unable to find comparable replacements, our competitive position may be adversely impacted.
We rely on independent third-party developers to develop some of our game products which subjects us to the following risks:
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key developers who work for us may choose to work for or be acquired by our competitors;
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developers currently under contract may try to renegotiate our agreements with them on terms less favorable to us; and
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our developers may be unable or unwilling to allocate sufficient resources to complete our applications on a timely or satisfactory basis or at all.
If our developers terminate their relationships with us or negotiate agreements with terms less favorable to us, we may have to increase our internal development staff, which would be a time consuming and potentially costly process. If we are unable to increase our internal development staff in a cost-effective manner or if our current internal development staff fails to create successful applications, our earnings could be materially diminished.
In addition, although we require our third-party developers to sign agreements acknowledging that all inventions, trade secrets, works of authorship, development and other processes generated by them are our property and to assign to us any ownership they may have in those works, it may still be possible for third parties to obtain and use our intellectual properties without our consent.
Our industry is experiencing consolidation that may cause us to lose key relationships and intensify competition.
The Internet and media distribution industries are undergoing substantial change, which has resulted in increasing consolidation and formation of strategic relationships. We expect this consolidation and strategic partnering to continue. Acquisitions or other consolidating transactions could harm us in a number of ways, including:
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we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
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we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
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our current competitors could become stronger, or new competitors could form, from consolidations.
Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share. Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.
We rely on the continued reliable operation of third parties’ systems and networks and, if these systems and networks fail to operate or operate poorly, our business and operating results will be harmed.
Our operations are in part dependent upon the continued reliable operation of the information systems and networks of third parties. If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.
The Internet and our network are subject to security risks that could harm our business and reputation and expose us to litigation or liability.
Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks. Any compromise of our ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. We also may be required to expend significant capital or other resources to protect against the threat of security breaches or hacker attacks or to alleviate problems caused by such breaches or attacks. Any successful attack or breach of our security could hurt consumer demand for our products and services, expose us to consumer class action lawsuits and harm our business.
We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions and licensing agreement. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
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Our applications for trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated;
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Issued trademarks and registered copyrights may not provide us with any competitive advantages;
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Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
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Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop;
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Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products; or
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We may not be able to afford to pay the costs associated with protecting our intellectual property rights.
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
Interpretation of existing laws that did not originally contemplate the Internet could harm our business and operating results.
The application of existing laws governing issues such as property ownership, copyright and other intellectual property issues to the Internet is not clear. Many of these laws were adopted before the advent of the Internet and do not address the unique issues associated with the Internet and related technologies. In many cases, the relationship of these laws to the Internet has not yet been interpreted. New interpretations of existing laws may increase our costs, require us to change business practices or otherwise harm our business.
It is not yet clear how laws designed to protect children that use the Internet may be interpreted, and such laws may apply to our business in ways that may harm our business.
The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The COPPA rules define privacy policy requirements, data collection parameters, and the process of acquiring verifiable parental consent. In the past, we have disclosed the information that we collect in Privacy Policies, but now need to focus on getting parental approval for certain types of applications as they relate to children under the age of 13. Although we have verification procedures in place to ensure we do not violate COPPA, in the event those safeguards fail, we could be subject to fines and/or lawsuits, and harm our business in other ways.
We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.
Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, our products send information to our servers. Many of the services we provide also require that a user provide certain information to us. We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products.
Our planned venture into augmented reality and geolocation games could subject us to greater liability risks from our users and third parties.
As noted herein, we are currently planning to develop a number of augmented reality and geolocation games. Such games place characters on a user’s mobile device in real world surroundings and have the user interacting with the game while on the move in real life. Augmented reality games developed by some of our competitors have led users into situations that may not be ideal for the user, such as near roads, bodies of water and/or possibly on private property. Although we will use our best efforts to develop our games to minimize locations that could be dangerous for our users, there is a chance that they could wander into a dangerous situation or onto a third parties’ private property, potentially harming themselves or others. Although we will have appropriate disclaimers and disclosures on our games, any such harmful events could expose us to potential lawsuits and/or liability.
Risk Factors Relating to Future Acquisitions
We may not be able to identify, negotiate, finance or close future acquisitions.
A significant component of our growth strategy focuses on acquiring additional companies or assets. We may not, however, be able to identify, audit, or acquire companies or assets on acceptable terms, if at all. Additionally, we may need to finance all or a portion of the purchase price for an acquisition by incurring indebtedness. There can be no assurance that we will be able to obtain financing on terms that are favorable, if at all, which will limit our ability to acquire additional companies or assets in the future. Failure to acquire additional companies or assets on acceptable terms, if at all, would have a material adverse effect on our ability to increase assets, revenues and net income and on the trading price of our common Stock.
We may acquire businesses without any apparent synergies with our casual games related operations.
In an effort to diversify our sources of revenue and profits, we may decide to acquire businesses without any apparent synergies with our casual games related operations. For example, we believe that the acquisition of technologies unrelated to games and leisure may be an important way for us to enhance our stockholder value. Notwithstanding the critical importance of diversification, some members of the investment community and research analysts would prefer that micro-cap or small-cap companies restrict the scope of their activity to a single line of business, and may not be willing to make an investment in, or recommend an investment in, a micro-cap or small-cap company that undertakes multiple lines of business. This situation could materially adversely impact our company and the trading price of our stock.
We may not be able to properly manage multiple businesses.
We may not be able to properly manage multiple businesses. Managing multiple businesses would be more complicated than managing a single line of business, and would require that we hire and manage executives with experience and expertise in different fields. We can provide no assurance that we will be able to do so successfully. A failure to properly manage multiple businesses could materially adversely affect our company and the trading price of our stock.
We may not be able to successfully integrate new acquisitions.
Even if we are able to acquire additional companies or assets, we may not be able to successfully integrate those companies or assets. For example, we may need to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential requiring significant management time and attention. In addition, the successful integration of any companies we acquire will depend in large part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills or management expertise. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of the integrated company, resulting in disruption of operations, loss of key information, expertise or know-how, unanticipated additional recruitment and training costs, and otherwise diminishing anticipated benefits of these acquisitions, including loss of revenue and profitability. Failure to successfully integrate acquired businesses could have a material adverse effect on our company and the trading price of our stock.
Our acquisitions of businesses may be extremely risky and we could lose all of our investments.
We may invest in software companies, other technology businesses, or other risky industries. An investment in these companies may be extremely risky because, among other things, the companies we are likely to focus on: (1) typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; (2) tend to be privately-owned and generally have little publicly available information and, as a result, we may not learn all of the material information we need to know regarding these businesses; (3) are more likely to depend on the management talents and efforts of a small group of people; and, as a result, the death, disability, resignation or termination of one or more of these people could have an adverse impact on the operations of any business that we may acquire; (4) may have less predicable operating results; (5) may from time to time be parties to litigation; (6) may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence; and (7) may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. Our failure to make acquisitions efficiently and profitably could have a material adverse effect on our business, results of operations, financial condition and the trading price of our stock.
Future acquisitions may fail to perform as expected.
Future acquisitions may fail to perform as expected. We may overestimate cash flow, underestimate costs, or fail to understand risks. This could materially adversely affect our company and the trading price of our Stock.
Competition may result in overpaying for acquisitions.
Other investors with significant capital may compete with us for attractive investment opportunities. These competitors may include publicly traded companies, private equity firms, privately held buyers, individual investors, and other types of investors. Such competition may increase the price of acquisitions, or otherwise adversely affect the terms and conditions of acquisitions. This could materially adversely affect our company and the trading price of our stock.
We may have insufficient resources to cover our operating expenses and the expenses of raising money and consummating acquisitions.
We have limited cash to cover our operating expenses and to cover the expenses incurred in connection with money raising and a business combination. It is possible that we could incur substantial costs in connection with money raising or a business combination. If we do not have sufficient proceeds available to cover our expenses, we may be forced to obtain additional financing, either from our management or third parties. We may not be able to obtain additional financing on acceptable terms, if at all, and neither our management nor any third party is obligated to provide any financing. This could have a negative impact on our company and our stock price.
The nature of our proposed future operations is speculative and will depend to a great extent on the businesses which we acquire.
While management typically intends to seek a merger or acquisition of privately held entities with established operating histories, there can be no assurance that we will be successful in locating an acquisition candidate meeting such criteria. In the event we complete a merger or acquisition transaction, of which there can be no assurance, our success if any will be dependent upon the operations, financial condition and management of the acquired company, and upon numerous other factors beyond our control. If the operations, financial condition or management of the acquired company were to be disrupted or otherwise negatively impacted following an acquisition, our company and our stock price would be negatively impacted.
We may make actions that will not require our stockholders’ approval.
The terms and conditions of any acquisition could require us to take actions that would not require stockholder approval. In order to acquire certain companies or assets, we may issue additional shares of common or preferred stock, borrow money or issue debt instruments including debt convertible into capital stock. Not all of these actions would require our stockholders’ approval even if these actions dilute our shareholders’ economic or voting interest.
Our investigation of potential acquisitions will be limited.
Our analysis of new business opportunities will be undertaken by or under the supervision of our executive officers and directors. Inasmuch as we will have limited funds available to search for business opportunities and ventures, we will not be able to expend significant funds on a complete and exhaustive investigation of such business or opportunity. We will, however, investigate, to the extent believed reasonable by our management, such potential business opportunities or ventures by conducting a so-called “due diligence investigation”. In a so-called “due diligence investigation”, we intend to obtain and review materials regarding the business opportunity. Typically such materials will include information regarding a target business’ products, services, contracts, management, ownership, and financial information. In addition, we intend to cause our officers or agents to meet personally with management and key personnel of target businesses, ask questions regarding the company’s prospects, tour facilities, and conduct other reasonable investigation of the target business to the extent of our limited financial resources and management and technical expertise. Any failure of our typical “due diligence investigation” to uncover issues and problems relating to potential acquisition candidates could materially adversely affect our company and the trading price of our stock.
We will have only a limited ability to evaluate the directors and management of potential acquisitions.
We may make a determination that our current directors and officers should not remain, or should reduce their roles, following money raising or a business combination, based on an assessment of the experience and skill sets of new directors and officers and the management of target businesses. We cannot assure you that our assessment of these individuals will prove to be correct. This could have a negative impact on our company and our stock price.
We will be dependent on outside advisors to assist us.
In order to supplement the business experience of management, we may employ accountants, technical experts, appraisers, attorneys or other consultants or advisors. The selection of any such advisors will be made by management and without any control from shareholders. Additionally, it is anticipated that such persons may be engaged by us on an independent basis without a continuing fiduciary or other obligation to us.
We may be unable to protect or enforce the intellectual property rights of any target business that we acquire or the target business may become subject to claims of intellectual property infringement.
After completing a business combination, the procurement and protection of trademarks, copyrights, patents, domain names, and trade secrets may be critical to our success. We will likely rely on a combination of copyright, trademark, trade secret laws and contractual restrictions to protect any proprietary technology and rights that we may acquire. Despite our efforts to protect those proprietary technology and rights, we may not be able to prevent misappropriation of those proprietary rights or deter independent development of technologies that compete with the business we acquire. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. It is also possible that third parties may claim we have infringed their patent, trademark, copyright or other proprietary rights. Claims or litigation, with or without merit, could result in substantial costs and diversions of resources, either of which could have an adverse effect on our competitive position and business. Further, depending on the target business or businesses that we acquire, it is likely that we will have to protect trademarks, patents, and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location. These factors could negatively impact our company and the trading price of our stock.
Integrating acquired businesses may divert our management’s attention away from our day-to-day operations and harm our business.
Acquisitions generally involve significant risks, including the risk of overvaluation of potential acquisitions and risks in regard to the assimilation of personnel, operations, products, services, technologies, and corporate culture of acquired companies. Dealing with these risks may place a significant burden on our management and other internal resources. This could materially adversely affect our business and the trading price of our stock.
We may fail to manage our growth effectively.
Future growth through acquisitions and organic expansion would place a significant strain on our managerial, operational, technical, training, systems and financial resources. We can give you no assurance that we will be able to manage our expanding operations properly or cost effectively. A failure to properly and cost-effectively manage our expansion could materially adversely affect our company and the trading price of our stock.
The management of companies we acquire may lose their enthusiasm or entrepreneurship after the sale of their businesses.
We can give no assurance that the management of future companies we acquire will have the same level of enthusiasm for the operation of their businesses following their acquisition by us, or if they cease performing services for the acquired businesses that we will be able to install replacement management with the same skill sets and determination. There also is always a risk that management will attempt to reenter the market and possibly seek to recruit some of the former employees of the business, who may continue to be key employees of ours. This could materially adversely affect our business and the trading price of our Stock.
If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination.
We believe we will not be subject to regulation under the Investment Company Act insofar as we will not be engaged in the business of investing or trading in securities. However, in the event that we engage in business combinations which result in us holding passive investment interests in a number of entities, we may become subject to regulation under the Investment Company Act. In such event, we may be required to register as an investment company and may incur significant registration and compliance costs. We have obtained no formal determination from the government as to our status under the Investment Company Act, and consequently, any violation of such Act might subject us to material adverse consequences.
Risks Related To Our Common Stock
There is a limited public trading market for our common stock, which may impede our shareholders’ ability to sell our shares.
Currently, there is a limited trading market for our common stock, and there can be no assurance that a more robust market will be achieved in the future. There can be no assurance that an investor will be able to liquidate his or her investment without considerable delay, if at all. If the trading market for our common stock does increase, the price may be highly volatile. Factors discussed herein may have a significant impact on the market price of our shares. Moreover, due to the relatively low price of our securities, many brokerage firms may not effect transactions in our common stock if a market is established. Rules enacted by the SEC increase the likelihood that most brokerage firms will not participate in a potential future market for our common stock. Those rules require, as a condition to brokers effecting transactions in certain defined securities (unless such transaction is subject to one or more exemptions), that the broker obtain from its customer or client a written representation concerning the customer’s financial situation, investment experience and investment objectives. Compliance with these procedures tends to discourage most brokerage firms from participating in the market for certain low-priced securities.
If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTC Markets and/or we may be forced to discontinue operations.
We have significant costs associated with being a public, reporting company, which adds to the substantial doubt about our ability to continue trading on the OTC Markets and/or continue as a going concern. These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants. Accounting controls, in particular, are difficult and can be expensive to comply with.
Our ability to continue trading on the OTC Markets and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTC Markets and/or we may be forced to discontinue operations.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any dividends in the foreseeable future. We do not plan on making any cash distributions in the manner of a dividend or otherwise. Our Board presently intends to follow a policy of retaining earnings, if any.
We have the right to issue additional shares of common stock and preferred stock without consent of stockholders. This would have the effect of diluting investors’ ownership and could decrease the value of their investment.
We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute stockholders’ percentage ownership of our company.
In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors. Our certificate of incorporation has authorized issuance of up to 10,000,000 shares of preferred stock in the discretion of our Board. The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required. In addition, other shares of preferred stock could be designated and, if issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock. Such terms could include, among others, preferences as to dividends, voting, and distributions on liquidation.
As of the end of the period covered by this report, we have 2,480,482 shares of our Series B Preferred Stock outstanding, which are convertible into an aggregate of 124,024,100 shares of our common stock. In the event the holder(s) convert such shares of preferred stock into common stock significant dilution could occur to the other holders of our common stock and could significantly decrease the value of our common stock
As of the end of the period covered by this report, we have 2,480,482 shares of our Series B Preferred Stock outstanding, which are convertible into an aggregate of 124,024,100 shares of our common stock. Although under the terms of the agreements with the holders of our Series B Preferred Stock, the number of shares of common stock issuable upon the conversion of their shares of preferred stock cannot exceed an amount that would cause the beneficial ownership of the holder and its affiliates to own more than 4.99% of our outstanding shares of Common Stock, the issuance of almost 5% of our outstanding common stock in a short period time, possibly happening multiple times, would cause substantial dilution to our shareholders. In the event the holder(s) of such preferred stock convert shares of their preferred stock into common stock significant dilution could occur to the other holders of our common stock and could significantly decrease the value of our common stock. We also have 4,355,000 shares of our Series C Preferred Stock outstanding which is convertible into 217,750,000 shares of our common stock.
Sales of our stock could cause the trading price of our stock to fall.
Sellers of our stock might include convertible debt securities as discussed above, our existing stockholders who have held our stock for years, persons and entities who acquire our stock as consideration for services they provide to our company, or our directors, officers or employees who might receive and then exercise stock options and simultaneously sell our stock. Since the trading volume of our stock is typically very low, any sales or attempts to sell our stock, or the perception that sales or attempts to sell our stock could occur, could adversely affect the trading price of our stock.
Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.
ITEM 2
ITEM 2 - PROPERTIES
Our executive offices are located in Tustin, California, at 18062 Irvine Blvd, Suite 103, Tustin, CA 92780 and are leased on a month-to-month basis at a cost of $1,173 per month. Our production office in Texas is located at 1441 Redbud Blvd., Suite 201, McKinney, TX 75069 and we are currently at the beginning of the first year of a 3 year lease. Current monthly lease payment is $2,850 per month plus utilities.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES
There is no information required to be disclosed by this Item.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted for trading on the OTC Markets / OTC Pink tier. Our current trading symbol is “FRZT.” Since our stock has been quoted, there has been limited volume.
The following table sets forth the high and low bid information for each quarter within the fiscal years ended December 31, 2019 and 2018.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Holders
As of December 31, 2019, there were 75,056,123 shares of our common stock outstanding held by approximately 128 holders of record of our common stock. Aggregate market value of the voting stock held by non-affiliates as of June 30, 2019: $886,287 based on the closing price of $0.028 on June 30, 2019 of our common stock. The voting stock held by non-affiliates on that date consisted of 31,653,123 shares of common stock.
Dividends
We have not declared or paid a cash dividend on our capital stock in our last two fiscal years and we do not expect to pay cash dividends on our common stock in the foreseeable future. We currently intend to retain our earnings, if any, for use in our business. Any dividends declared in the future will be at the discretion of our Board of Directors and subject to any restrictions that may be imposed by our lenders.
Securities Authorized for Issuance Under Equity Compensation Plans
There are currently 7,768,421 options outstanding, to purchase shares of our common stock.
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. On December 18, 2019, our Board of Directors granted additional options to purchase 6,250,000 shares of our common stock. 3,750,000 options to purchase stock were issued to Mick Donahoo, our CFO, at an exercise price of $.02 with a ten-year expiration. The remaining 2,500,000 shares were issued to employees or independent consultants at an exercise price of $0.2 with a ten-year expiration. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, since the recipients are our executive management team, employees, or independent consultants, and they are either accredited or sophisticated investors, and familiar with our operations.
On March 20, 2006, our Board of Directors and shareholders approved the Freeze Tag, Inc. 2006 Stock Plan (the “2006 Plan”). The 2006 Plan terminated during the year ended December 31, 2016. As of December 31, 2017, there were 5,600 options outstanding to purchase shares of common stock, and no shares of common stock had been issued pursuant to stock purchase rights under the 2006 Plan.
As of December 31, 2019, we had the following options outstanding:
Recent Issuance of Unregistered Securities
We issued the following unregistered securities during the three months ended December 31, 2019:
On December 18, 2019, our Board of Directors granted options to purchase 6,250,000 shares of our common stock. All options have an exercise price of $0.020 and a ten year expiration. Of those options, options to acquire 3,750,000 shares of our common stock were issued to Mick Donahoo, our CFO, and the options to acquire the remaining 2,500,000 shares were issued to employees or independent consultants. The issuance of options was under our 2017 Non-Qualified Stock Option Plan and was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, due to the fact the recipients are all either employees or consultants that have been working with us for some time, they are a sophisticated investors and familiar with our operations.
If our stock is listed on an exchange we will be subject to the Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report on Form 10-K of Freeze Tag, Inc. (“Freeze Tag” or the “Company”) for the year ended December 31, 2019 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. 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, after the Merger date our financial statements include the financial results of operations of the combined company.
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.
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 will negatively impact our users and their ability to play our geolocation games, which will likely impact the revenue we generate from the 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 that can also serve as a location-based advertising network.
Additionally, the combined company is exploring opportunities to offer services to help advertisers gamify their location-based advertising campaigns and programs. According to many industry pundits, location-based marketing, including the integration of branded augmented reality experiences can help drive foot traffic to malls and movie theatres, or create memorable real world interactions that connect users to brands with deeply emotional experiences. Freeze Tag is moving forward now on business development programs to capitalize on this growing market.
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
The Company’s revenues are derived primarily by licensing software products in the form of mobile games for smartphone and tablet platforms. On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605). Results for reporting periods beginning after January 1, 2018 are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
Under Topic 606, 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.
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 December 31, 2019 and 2018.
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. 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. At December 31, 2019 and 2018, the Company reviewed the intangible assets and determined that no impairment was required.
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. The Company had no assets and liabilities required to be measured on a recurring basis at December 31, 2019 and 2018.
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.
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.
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 years ended December 31, 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.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting.” The amendments of ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance of ASU No. 2017-09 is effective for years beginning after December 15, 2017, including interim periods within those years. The adoption of this ASU did not have a significant impact on our financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and has subsequently issued a number of amendments to ASU 2014-09. The new standard, now codified as ASC 606, Revenue from Contracts with Customers, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASC 606 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the new revenue guidance effective January 1, 2018 using the cumulative effect method, and did not have an adjustment to retained earnings upon adoption.
In February 2016, the FASB issued 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, stockholder’ deficit 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 7 for further details regarding Freeze Tag’s leases.
Although there were new accounting pronouncements issued or proposed by the FASB during the year ended December 31, 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.
Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Revenues
Our revenue can typically fluctuate based on when we release our games and the popularity of the games we release. Previously, the majority of our released game titles were "pay-per-download", where the consumer paid to download the game onto their device, leading to revenue per download. Now our games are free to download and play, but have built-in features that require the consumer to pay if they want to access the feature, which means our revenue is tied to when the consumer pays to access the features.
Revenues decreased $29,686 to $2,083,461 for the year ended December 31, 2019 from $2,113,147 for the year ended December 31, 2018. The primary reason for the small decrease in revenues in the current year was due to an overall price decrease applied to some of the most popular products to encourage more unit sales and participation from a broader selection of Munzee players.
As noted above, we believe the coronavirus pandemic may negatively impact our revenue in 2020, especially the revenue we derive from our geolocation games. The extent of this impact is difficult to determine at this time.
Cost of Sales
Cost of sales increased $4,352 to $286,985 for the year ended December 31, 2019 from $282,633 for the year ended December 31, 2018. The increase was a result of minor increased costs in server and backend technology as well as additional sales of physical goods resulting in higher cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $73,158 to $1,898,987 for the year ended December 31, 2019 from $1,825,829 for the year ended December 31, 2018. The increase was primarily a result of increased development expenses related to improving our existing games.
Other Income (Expense)
Interest expense decreased to $40,465 for the year ended December 31, 2019 from $57,295 for the year ended December 31, 2018. The interest expense in the current year is comprised primarily of imputed interest accrued for the entire year on the related party debt assumed in the Merger. This imputed interest does not represent on obligation payable in cash, but is recorded as a contribution to capital.
Provision for Income Taxes
The provision for income taxes was $800 and $7,552 for the years ended December 31, 2019 and 2018, respectively.
Net Loss
As a result of the above, we reported a net loss of $142,627 and $60,162 for the years ended December 31, 2019 and 2018, respectively. The net loss in both years includes non-cash expenses such as imputed interest and impairment expense. Our net loss in 2019 also included increased spending for development of our games to improve them.
Liquidity and Capital Resources
Introduction
As of December 31, 2019, we had current assets of $282,176, including cash of $254,776, and current liabilities of $677,759, resulting in a working capital deficit of $395,583. In addition, we had a total stockholders’ deficit of $483,970 at December 31, 2019.
From a financial perspective, one of our focuses in 2019 was to improve our cash positions and increase flow management. Properly managing cash allows the company to move forward in development and growth without borrowing funds from investors or third parties. Freeze Tag management made a concentrated effort on managing cash flow.
During the years ended December 31, 2019 and 2018, operating activities used $54,440 net cash and generated net cash of $140,366, respectively. Management believes that by continuing 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 update and launch new components of our 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 used by operating activities was $54,440 for the year ended December 31, 2019 as a result of our net loss of $142,627 and decreases in accounts receivable of $4,693, increases in accounts payable of $13,544 and payment of unearned royalties of $119,639. These uses of cash were partially offset by increases in prepaid assets of $9,373 and accrued expenses of $25,740. Non-cash expenses totaled $190,950.
By comparison, net cash provided by operating activities was $140,366 for the year ended December 31, 2018 as a result of our net loss of $60,162 and decreases in accrued expenses of $19,155 and unearned royalties of $5, offset by non-cash expenses totaling $172,340, decreases in accounts receivable of $2,316, prepaid expenses and other current assets of $12,356 and other assets of $12,150, and an increase in accounts payable of $20,526.
Net cash used by investing activities was $3,642 for the year ended December 31, 2018, comprised of the purchase of property and equipment.
For the year ended December 31, 2018, we had net cash provided by financing activities of $5,000, comprised on proceeds from a stock subscription receivable.
Notes Payable - Related Party
As of December 31, 2019, our debt was comprised of long-term 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 common stock of the Company. The Company has imputed interest on these notes payable using an annual rate of 10%. This imputed interest does not represent on obligation payable in cash, but is recorded as a contribution to capital. The fixed conversion price is $0.02 per share.
Debt Instruments, Guarantees, and Related Covenants
We have no disclosures required by this item.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FREEZE TAG, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Freeze Tag, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Freeze Tag, Inc. (the Company) as of December 31, 2019 and 2018, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB .
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the overall presentation of the financial statements. We believe our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company suffered losses from operations which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
M&K CPAS, PLLC
We have served as the Company’s auditor since 2010
Houston, TX
March 30, 2020
FREEZE TAG, INC.
BALANCE SHEETS
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended December 31, 2019 and 2018
The accompanying notes are an integral part of the financial statement
FREEZE TAG, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2019 and 2018
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. We also offer our 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
Revenue Recognition
The Company’s revenues are derived primarily by licensing software products in the form of mobile games for smartphone and tablet platforms. On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605). Results for reporting periods beginning after January 1, 2018 are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
Under Topic 606, 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.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. At December 31, 2019 and 2018 there were no cash equivalents.
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 December 31, 2019 and 2018.
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:
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. 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. At December 31, 2019 and 2018, the Company reviewed the intangible assets and determined that no impairment was required.
Concentrations of Credit Risk, Major Customers and Major Vendors
The Company’s customers are the end-consumers that purchase its games from the websites where the Company has its games listed for sale. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue.
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.
Foreign Currency Translation
The Company derives a portion of its revenue from foreign countries, but customers pay in U.S. Dollars. Therefore, no adjustments are required in the accompanying financial statements for foreign currency transactions.
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.
The Company had stock-based compensation expense recognized in its statements of operations of $57,999 and $23,000 for the years ended December 31, 2019 and 2018 respectively.
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 years ended December 31, 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 December 31, 2019 and 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.
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.
Research and Development Costs
The Company charges costs related to research and development of products to general and administrative expense as incurred. The types of costs included in research and development expenses include research materials, salaries, contractor fees, and support material.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation-Stock Compensation: Scope of Modification Accounting.” The amendments of ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance of ASU No. 2017-09 is effective for years beginning after December 15, 2017, including interim periods within those years. The adoption of this ASU did not have a significant impact on our financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and has subsequently issued a number of amendments to ASU 2014-09. The new standard, now codified as ASC 606, Revenue from Contracts with Customers, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASC 606 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the new revenue guidance effective January 1, 2018 using the cumulative effect method, and did not have an adjustment to retained earnings upon adoption.
In February 2016, the FASB issued 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, stockholders’ deficit 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 7 for further details regarding Freeze Tag’s leases.
Although there were new accounting pronouncements issued or proposed by the FASB during the year ended December 31, 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
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 $142,627 for the year ended December 31, 2019. As of December 31, 2019, the Company had a working capital deficit of $395,583 and a total stockholders’ deficit of $483,970. 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 increase its user base and refine its existing stable of 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 December 31:
Depreciation and amortization expense was $3,488 and $3,331 for the years ended December 31, 2019 and 2018, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
Amortization expense was $91,480 for the years ended December 31, 2019 and 2018.
The intangible assets are amortized on a straight-line basis over an estimated useful life of 5 years. Estimated annual aggregate amortization expense for the intangible assets subsequent to 2018 is as follows:
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 $34,200 in operating lease costs for the year ended December 31, 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 December 31, 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 year ended, December 31, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
As of December 31, 2019, our maturities of our lease liability is as follows:
NOTE 7 - NOTES PAYABLE
Notes payable - related party consisted of Freeze Tag notes payable that were assumed in the Merger and were as follows at December 31:
The notes payable were extended in December 2019. The notes payable - related party were included in long-term liabilities at December 31, 2019 and current liabilities at December 31, 2018.
The convertible notes payable to Craig Holland and Mick Donahoo, our Chief Financial Officer, consist of amounts relating to accrued salary. The notes were amended on July 25, 2017 to change the conversion terms of the notes and to make the notes non-interest bearing. The Company has imputed interest on these notes payable using an annual rate of 10%. This imputed interest does not represent on obligation payable in cash, but is recorded as a contribution to capital. Imputed interest expense on related party debt was $37,983 and $54,529 for the years ended December 31, 2019 and 2018, respectively.
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.
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 December 31, 2019 and 2018.
There was no common stock activity during year ended December 31, 2019. During the year ended December 31, 2018, the Company issued a total of 5,270,000 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. Also, a stock subscription receivable of $5,000 was collected.
As of December 31, 2019 and 2018, the Company had common stock payable of $16,800 resulting from a technology transfer agreement with an unrelated party that obligated the Company to issue a total of 960 shares of its common stock, payable in 8 quarterly installments of 120 shares.
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 December 31, 2019 and 2018, there were 2,480,482 shares of Series B preferred stock issued and outstanding.
As of December 31, 2019 and 2018, the Company had 4,355,000 shares of Series C preferred stock issued and outstanding.
Series A Preferred Stock
The Company’s Series A Preferred Stock has 1,000 shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) the shares are automatically redeemed by the Company in the event: (a) Mr. Holland is no longer an officer, director or consultant with the Company, or (b) the Company’s common stock is listed on a national exchange, if the listing rules require the shares to be eliminated; (v) no call rights by the Company; (vi) non-transferable; and (vii) the aggregate 1,000 shares have votes equal to 51% of the then-outstanding voting rights of the Company (including all common stock and any other series of preferred stock) on any matter properly brought before the Company’s stockholders for a vote.
There was no Series A Preferred Stock activity during years ended December 31, 2019 and 2018.
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 year ended December 31, 2019. During the year ended December 31, 2018, the Company issued a total of 5,270,000 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.
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 years ended December 31, 2019 and 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.
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 December 31, 2019 and 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 recorded stock-based compensation expense of $57,999 and $23,000 during the years ended December 31, 2019 and 2018. As of December 31, 2019, future compensation cost related to non-vested stock options not yet recognized in the statements of operations totaled $83,334.
A summary of the status of the stock options issued by the Company under both plans as of December 31, 2019, and changes during the years ended December 31, 2018 and 2019 is presented below:
The outstanding options expire on various dates beginning in 2020 through 2029.
On December 5, 2017, our Board of Directors granted options to purchase a total of 1,512,821 shares of our common stock. This included 1,025,641 options issued to Mick Donahoo in lieu of $40,000 of accrued vacation time, 256,410 options issued to Cecie Newman, and 230,769 options issued to Other Employees / Consultants. All options were issued at an exercise price of $0.039 and have a ten year expiration. On December 18, 2019, our Board of Direcetors granted options to purchase an additional 6,250,000 shares of our common stock. All options have an exercise price of $0.020 and a ten year expiration. 3,750,000 options to purchase stock were issued to Mick Donahoo, our CFO, and the remaining 2,500,000 shares were issued to employees or independent consultants.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company had a note payable to Craig Holland, its Chief Executive Officer, with a balance of $6,925 at December 31, 2019 and 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 December 31, 2019 and 2018. See Note 7 for detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms. Imputed interest expense on the notes payable - related party totaled $37,983 and $54,529 for the years ended December 31, 2019 and 2018, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its California office facilities on a month-to-month lease with either party having the option to terminate with 30 days’ notice.
The Company also leases its Texas office facilities pursuant to a long-term operating lease agreement requiring an initial deposit of $2,850 and 36 montly payments of $2,850 commencing January 2019 through December 2021. See Note 7 for more details.
Total rent expense under all operating leases was $51,876 and $94,214 for the years ended December 31, 2019 and 2018, respectively.
NOTE 11 - INCOME TAXES
The Company accounts for income taxes in accordance with standards of disclosure propounded by the FASB, and any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Due to the uncertainty as to the utilization of net operating loss carry forwards, a valuation allowance has been made to the extent of any tax benefit that net operating losses may generate.
The provision for income taxes was $800 and $7,552 for the years ended December 31, 2019 and 2018, respectively.
For Federal and California income tax purposes, the Company has net operating loss carry forwards that expire through 2037. The net operating loss as of December 31, 2019 and 2018 was $4,711,990 and $4,620,078, respectively. The Company experienced a Section 382 change of ownership in connection with the Merger in 2017, thereby subjecting net operating loss carryovers generated previously to limitations on utilization. To-date, these limitations have not had an impact on the Company’s reported income tax.
The deferred tax asset and the valuation allowance consist of the following at December 31:
The ultimate realization of our deferred tax asset is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of December 31, 2019 and 2018, we recorded a 100% allowance against our deferred tax asset since we were unable to conclude that it is more likely than not that our deferred tax asset will be realized.
The Company is also currently under an Internal Revenue Service tax audit for 2015 and 2016. The Company is undergoing negotiations relating to tax matters with the taxing authorities and believes that it has provided adequate reserves related to all matters contained in tax periods open to examination. The years open to examination by taxing authorities vary by jurisdiction; no years prior to 2016 are open.
NOTE 12 - 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 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no items required to be reported under this Item.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a - 15(c) and 15d - 15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officers, respectively, concluded that, as of the end of the period ended December 31, 2019, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. No matter how well conceived and operated, our disclosure controls and procedures can provide only a reasonable level of assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Under the supervision of our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria established in the 2013 Internal Control-Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at December 31, 2019.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our registered, public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, we determined that there was a control deficiency that constituted a material weakness:
(1) Due to the Company not having formal Control procedures related to the approval of related party transactions;
(2) Management did not maintain effective internal controls relating to the quarter end closing and financial reporting process;
(3) The Company did not maintain effective internal controls to assure proper segregation of duties as the same employee was responsible for initiating and recording of transactions, thereby creating a segregation of duties weakness.
This control deficiency resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements could not have been prevented or detected on a timely basis. As a result of the material weakness described above, we concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control- 2013 Integrated Framework issued by COSO. Our management continues to evaluate remediation plans for the above deficiency. We plan to take steps to enhance and improve the design of our internal control over financial reporting.
(c) Changes in Internal Control over Financial Reporting
There are no changes to report during our fiscal quarter ended December 31, 2019.
ITEM 9B
ITEM 9B - OTHER INFORMATION
As noted in our previous filings, the Company is also currently under an Internal Revenue Service tax audit for 2015 and 2016. The Company is undergoing negotiations relating to tax matters with the taxing authorities and believes that it has provided adequate reserves related to all matters contained in tax periods open to examination. The years open to examination by taxing authorities vary by jurisdiction; no years prior to 2016 are open.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with the Company held by each person, and the date such person became a director or executive officer of the Company. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.
Craig Holland co-founded Freeze Tag in October 2005. Prior to founding Freeze Tag, Craig founded Thumbworks, a publisher of mobile gaming applications, in January 2002 and served as the CEO of Thumbworks from its formation until its acquisition by In-Fusio, a mobile game publisher and mobile entertainment platform provider in January 2005. As CEO of Thumbworks, Mr. Holland drove the organization's strategic direction, overseeing carrier relations, business development and licensing initiatives which led to partnerships with some of the world's leading brands such as Etch A Sketch®, Nickelodeon, Suzuki, Paramount Pictures, and Honda. Prior to founding Thumbworks, Mr. Holland founded Nine Dots, an interactive marketing firm in North America whose clients included a number of high profile consumer brands such as Nestle, Quaker Oats, Qualcomm and General Motors, in 1992. Mr. Holland served as the CEO of Nine Dots from its formation until its sale to CyberSight, a Canadian-based interactive marketing company, in September 2000. Mr. Holland holds an MBA with an emphasis in Marketing from the University of Southern California (USC) and a Bachelor of Arts in English Literature from the University of California at Los Angeles (UCLA).
Robert Vardeman, Jr., is our President and a member of our Board of Directors, appointed to both positions on October 18, 2017 when Munzee merged with and into our corporation. From 2013-2017 (prior to the merger), Mr. Vardeman was the President of Munzee, Inc., providing the strategic direction of the company, ensuring that the general day-to-day operations were adequately executed. Mr. Vardeman was the visionary for Munzee’s suite of applications. He was also responsible for pushing the Munzee brand and spearheading its sales efforts. Before starting Munzee, Mr. Vardeman taught at Allen I.S.D. for 15 years, teaching mathematics for grades four through eight. Mr. Vardeman has a Bachelors in Elementary Education from Dallas Baptist University and a Masters in Administration and Supervision from the University of Phoenix.
Mick Donahoo co-founded Freeze Tag in October 2005 and in his role as COO, Mr. Donahoo oversees product planning, design, and software development of all games and technology. With over 19 years of technology experience, Mr. Donahoo has produced over 25 mobile games distributed via 20 worldwide wireless carriers. Prior to founding Freeze Tag, Mr. Donahoo led North American development for Thumbworks and following its acquisition, by In-Fusio, oversaw overseas engineering teams located in Taiwan, Thailand, India, Russia, and Korea. Prior to In-Fusio, Mick was a consulting executive at Ernst & Young, LLP in the Financial Services and Aerospace and Defense industries architecting and developing large-scale, three-tiered client/server applications. Mick holds a Bachelor of Science degree in Business and Management Information Systems from Brigham Young University.
Don Vardeman, is a member of our Board of Directors, appointed on October 18, 2017 when Munzee merged with and into our corporation. From 2013-2017, Mr. Vardeman was an advisor of Munzee, Inc., until Munzee merged with and into Freeze Tag, Inc. As a shareholder of Munzee, Mr. Vardeman provided guidance and insight to senior management. From 1999 - 2016, Mr. Vardeman worked for Anadarko Petroleum, eventually retiring as vice president of worldwide project management. In his positions with Anadarko Petroleum, Mr. Vardeman had execution responsibility for Anadarko’s major projects in Algeria, Ghana, Mozambique, and the Gulf of Mexico. Mr. Vardeman began his career with Amoco in operations, drilling and facilities. He later joined Sun Exploration and Production Company, predecessor of Oryx Energy Company, where he held positions in facilities and project management. Kerr-McGee merged with Oryx in 1999 and he later became vice president of marine facilities engineering. Vardeman and his group led the execution of the company's deepwater developments including eight spar projects and other floating systems for the Gulf of Mexico and international locations. Mr. Vardeman graduated magna cum laude from Texas A&M University in 1975 with a degree in Electrical Engineering.
Family Relationships
Don Vardeman (Director) is the father of Rob Vardeman (President and Director). There are no other family relationships among our officers or directors.
Historical Compensation of Directors
Other than as set forth herein no compensation has been given to any of the directors, although they may be reimbursed for any pre-approved out-of-pocket expenses.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
During the most recent fiscal year, to the Company’s knowledge, there were no failures to timely file Section 16(a) forms
Board Meetings and Committees
During the 2019 fiscal year, the Board of Directors met on a regular basis and took written action on numerous other occasions. All the members of the Board attended the meetings. The written actions were by unanimous consent.
Code of Ethics
We have not adopted a written code of ethics, because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
Audit Committee
We do not currently have an audit committee.
Compensation Committee
We do not currently have a compensation committee.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Executive Officers and Directors
We do not currently have written employment agreements with our executives, Craig Holland, Robert D. Vardeman, Jr. (Rob), and Mick Donahoo. All are at-will employees whose compensation is set forth in the Summary Compensation Table below.
Summary Compensation Table
The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the fiscal years ended December 31, 2019, and 2018, and 2017.
*See Item 5 Non qualified Stock Option plan for additional information
Director Compensation
The following table sets forth director compensation for the fiscal year ended December 31, 2019:
Outstanding Equity Awards at Fiscal Year-End
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 March 20, 2006, our Board of Directors and shareholders approved the Freeze Tag, Inc. 2006 Stock Plan. During the year ended December 31, 2016, the 2006 Stock Plan was terminated.
The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers as of December 31, 2019:
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 25, 2020, certain information with respect to our equity securities owned of record or beneficially by (i) each of our Officers and Directors; (ii) each person who owns beneficially more than 5% of each class of our outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
Common Stock(1)
______________
(1) As of March 25, 2020, there were 75,056,123 shares of common stock outstanding (post reverse stock split). Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
(2) Indicates an officer and/or director of the Company.
(3) Unless indicated otherwise, the address of the shareholder is Freeze Tag, Inc., 18062 Irvine Blvd., Suite 103, Tustin, California 92780.
(4) Includes 41,207,942 shares of common stock, 9,668,750 shares of common stock underlying convertible promissory notes, and 1,150 shares of common stock underlying vested stock options, which has an exercise price of $10 per share.
(5) Includes 2,195,057 shares of common stock, 9,332,500 shares of common stock underlying a convertible promissory note, 1,025,641 shares of common stock underlying vested stock options, which has an exercise price of $0.039 per share, and 1,237,500 shares of common stock underlying vested stock options, which has an exercise price of $0.02 per share.
(6) Calculated based on the total votes currently outstanding (does not include votes from shares underlying promissory notes, options or warrants). As of March 25, 2020, there was a total of 292,806,123 votes outstanding, consisting of 75,056,123 votes from common stockholders and 217,750,000 votes from Series C Preferred Stock holders.
Series C Preferred Stock(1)
(1) As of March 25, 2020, there were 4,355,000 shares of our Series C Preferred Stock outstanding. Each share of our Series C Preferred Stock is convertible and votes at 50 to 1. Shares of Series C Preferred Stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
(2) Indicates an officer and/or director of the Company.
(3) Unless indicated otherwise, the address of the shareholder is Freeze Tag, Inc., 18062 Irvine Blvd., Suite 103, Tustin, California 92780.
(4) Calculated based on a total of 292,806,123 votes outstanding, consisting of 75,056,123 votes from common stockholders and 217,750,000 votes from Series C Preferred Stock holders.
We are not aware of any person who owns of record, or is known to own beneficially, five percent or more of the outstanding securities of any class of the issuer, other than as set forth above. We are not aware of any person who controls the issuer as specified in Section 2(a)(1) of the 1940 Act. There are no classes of stock other than common stock issued or outstanding. We do not have an investment advisor.
There are no current arrangements which will result in a change in control.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Notes Payable - Related Party
On July 25, 2017, we entered into an Amendment No. 1 to a Promissory Note with Craig Holland, our Chief Executive Officer, under which we agreed to amend the terms of that certain Convertible Promissory Note dated December 31, 2013, as extended by agreement dated December 31, 2016, and entered into by and between the parties (the “Holland Salary Note”) in order to (i) make the Holland Salary Note non-interest bearing, (ii) change the conversion price from a variable price to $0.02 per share, and (iii) waive all interest due and owing under the Holland Salary Note. The description of the Holland Salary Note set forth in this report is qualified in its entirety by reference to the full text of the “form of” document, which is incorporated herein by reference.
On July 25, 2017, we entered into an Amendment No. 1 to a Promissory Note with Mick Donahoo, our Chief Financial Officer, under which we agreed to amend the terms of that certain Convertible Promissory Note dated December 31, 2013, as extended by agreement dated December 31, 2016, and entered into by and between the parties (the “Donahoo Salary Note”) in order to (i) make the Donahoo Salary Note non-interest bearing, (ii) change the conversion price from a variable price to $0.02 per share, and (iii) waive all interest due and owing under the Donahoo Salary Note. The description of the Donahoo Salary Note set forth in this report is qualified in its entirety by reference to the full text of the “form of” document, which is incorporated herein by reference.
On July 25, 2017, we entered into an Amendment No. 1 to a Promissory Note with Craig Holland, our Chief Executive Officer, under which we agreed to amend the terms of that certain Convertible Promissory Note dated December 31, 2013, as extended by agreement dated December 31, 2016, and entered into by and between the parties (the “Holland Note”) in order to make the Holland Note non-interest bearing, (ii) make the Holland Note non-convertible, and (iii) waive all interest due and owing under the Holland Note. The description of the Holland Note set forth in this report is qualified in its entirety by reference to the full text of the “form of” document, which is incorporated herein by reference.
As of December 31, 2019, and 2018, we owed a total of $379,825 to Craig Holland, our Chief Executive Officer and Mick Donahoo, our Chief Financial Officer under these related party notes payable.
Imputed interest expense on the related party notes payable, calculated at 10% per annum, totaled $37,983 and $54,529 for the years ended December 31, 2019 and 2018, respectively. This imputed interest does not represent on obligation payable in cash, but is recorded as a contribution to capital.
Securities Exchange Agreements
On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with Craig Holland, our Chief Executive Officer (the “Holland Securities Exchange Agreement”). Under the Holland Securities Exchange Agreement, Mr. Holland agreed to exchange promissory notes issued by us dated December 31, 2013 and September 30, 2014 (the “Holland Notes”), and the $756,984 in principal owing under the Holland Notes, into 37,849,200 shares of our common stock (the “Holland Common Stock”), on a post-reverse basis (based on a prospective 1-for-100 reverse stock split we had planned for on or about September 1, 2017). At the time, the closing under the Holland Securities Exchange Agreement for the exchange of the Holland Notes for the Holland Common Stock was set to occur automatically upon the effectiveness of the referenced reverse stock split. The description of the Holland Securities Exchange Agreement set forth in this report is qualified in its entirety by reference to the full text of the “form of” document, which is incorporated herein by reference.
On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with Mick Donahoo, our Chief Financial Officer (the “Donahoo Securities Exchange Agreement”). Under the Donahoo Securities Exchange Agreement, Mr. Donahoo agreed to exchange a promissory note issued by us dated December 31, 2013 (“Donahoo Note”), and the $31,042 in principal owing under the Donahoo Notes, into 1,552,100 shares of our common stock (the “Donahoo Common Stock”), on a post-reverse basis (based on a prospective 1-for-100 reverse stock split planned for on or about September 1, 2017). At the time, the closing under the Donahoo Securities Exchange Agreement for the exchange of the Donahoo Notes for the Donahoo Common Stock will occur automatically upon the effectiveness of the referenced reverse stock split. The description of the Donahoo Securities Exchange Agreement set forth in this report is qualified in its entirety by reference to the full text of the “form of” document, which is incorporated herein by reference.
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 37,849,200 shares of common stock to Craig Holland under the Holland Securities Exchange Agreement and 1,552,100 shares of common stock to Mick Donahoo under the Donahoo Securities Exchange Agreement. At the closing, the $ 285,764 in interest due under the Holland Notes was waived and the $9,841 in interest due under the Donahoo Note was waived.
Stock Options
On August 2, 2010, we granted Craig Holland, our President, Chief Executive Officer, and a Director, options to purchase up to 115,000 shares of our common stock at an exercise price of $0.11 per share, which after the reverse merger in 2017 is now 1,150 shares at an exercise price of $11.00 per share. The options were granted under the Freeze Tag, Inc. 2006 Stock Plan, which was terminated in 2016. The options expire in August 2020.
On December 5, 2017, we granted Mick Donahoo, our Chief Financial Officer, and a Director, options to purchase up to 1,025,641 shares of our common stock at an exercise price of $0.039 per share. The options were granted under the Freeze Tag, Inc. 2017 Non-Qualified Stock Option Plan and were issued in lieu of $40,000 of accrued vacation time. The options expire in December 2027.
On December 18, 2019, our Board of Directors granted options to purchase an additional 6,250,000 shares of our common stock at an exercise price of $0.020, with options to purchase 3,750,000 shares granted to Mick Donahoo, our Chief Financial Officers, and the other options to purchase 2,500,000 shares granted to other employees and consultants. The options expire in December 2029.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Related Fees
During the years ended December 31, 2019 and 2018, M&K CPAS, PLLC charged us $43,000 and $43,000, respectively, in fees for professional services for the audit of our financial statements included in our annual report and for reviews of our quarterly reports.
Tax Fees
During the years ended December 31, 2019 and 2018, M&K CPAS, PLLC did not charge us for professional services for tax preparation.
All Other Fees
During the years ended December 31, 2019 and 2018, M&K CPAS, PLLC did not charge us for any other fees.
Of the fees described above for the years ended December 31, 2019 and 2018, 100% was approved by the entire Board of Directors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
(b) Exhibits
*
Filed herewith.
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
(1) Incorporated by reference from our Registration Statement on Form S-1, filed with the Commission on August 16, 2010.
(2) Incorporated by reference from Current Report on Form 8-K filed with the Commission on February 4, 2014.
(3) Incorporated by reference from Definitive Information Statement on Schedule 14-C filed with the Commission on December 31, 2013.
(4) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 14, 2014.
(5) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on May 15, 2015.
(6) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 16, 2015.
(7) Incorporated by reference from Annual Report on Form 10-K filed with the Commission on March 30, 2016.
(8) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on August 14, 2016.
(9) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016.
(10) Incorporated by reference from Annual Report on Form 10-K filed with the Commission on March 31, 2017.
(11) Incorporated by reference from Current Report on Form 8-K filed with the Commission on July 31, 2017.
(12) Incorporated by reference from Current Report on Form 8-K filed with the Commission on April 11, 2018
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 30, 2020
/s/ Craig Holland
By:
Craig Holland
Its:
Director and Chief Executive Officer
Dated: March 30, 2020
/s/ Mick Donahoo
By:
Mick Donahoo
Its:
Director, Chief Financial Officer, Chief Accounting Officer
Dated: March 30, 2020
/s/ Rob Vardeman
By:
Rob Vardeman
Its:
Director and President
Dated: March 30, 2020
/s/ Don Vardeman
By:
Don Vardeman
Its:
Director