FRZT Freeze Tag Inc (PK)

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q of Freeze Tag, Inc. (“Freeze Tag” or the “Company”) for the three months ended March 31, 2020 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 our Annual Report on Form 10-K for the year ended December 31, 2019, as well as any cautionary language in this Quarterly Report on Form 10-Q and our last Annual Report on Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Factors that could cause actual results or events to differ materially from those anticipated include but are not limited to: distributors not accepting our games; price reductions; unforeseen delays in game production; changes in product strategies; general economic, financial and business conditions; changes in and compliance with governmental regulations; changes in various tax laws; and the availability of key management and other personnel. As noted in our risk factors in our Annual Report on Form 10-K for year ended December 31, 2019, we are also closely monitoring the ongoing COVID-19 pandemic and its effects on our business, as well as its effects on general market and economic conditions.

Summary Overview

Freeze Tag, Inc. is a creator of location-based, mobile social games that are fun and engaging for consumers and businesses. Based on a free-to-play business model that has propelled games built and marketed by some of our competitors to worldwide success, we employ state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy our games for free, and, if they so choose, they can purchase virtual items and additional features within the game to increase the fun factor.

Founded by gaming industry veterans, Freeze Tag has launched several successful games over the course of its history. Our current portfolio includes hits such as Munzee®, a social platform with over 7 million locations worldwide and hundreds of thousands of players that blends gamification and geolocation into an experience that rewards players for going places in the physical world; Garfield Go, a Pokemon Go style augmented reality game based on the iconic cat Garfield; WallaBee®, an addictive collecting game with over 2,000 beautifully drawn digital cards; as well as many social mobile games that provide endless hours of family-friendly fun. We also offer our technology and services to 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.

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.

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.

Beginning in the quarter ended March 31, 2020, our wholly-owned subsidiary, Space Coast Geo Store, LLC, a Florida limited liability company, sells merchandise to the geocaching industry.

Going Concern Uncertainty

The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. As shown in the accompanying financial statements, the Company incurred a net loss of $114,047 and used total net cash of $78,292 for the three months ended March 31, 2020.  As of March 31, 2020, the Company had a working capital deficit of $469,354 and a total stockholders’ deficit of $578,130. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

Management believes that by implementing cost reductions and realizing cost efficiencies from the Merger, operating cash flows will be sufficient to support the Company’s business plan. The Company will also continue to develop and launch new games to maximize revenues. However, management is currently evaluating alternative financing sources to fund the Company’s current business plan should cash provided by operations be insufficient.

The Company’s ability to continue as a going concern is dependent upon successfully executing its plans to attain a successful level of operations. The Company’s financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.

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. 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:

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.

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.

Recent Accounting Pronouncements

Although there were new accounting pronouncements issued or proposed by the FASB during the three months ended March 31, 2020 and through the date of filing of this report, we do not believe any of these accounting pronouncements has had or will have a material impact on our financial position or results of operations.

Results of Operations for the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019.

Revenues

Revenues decreased $156,713 to $403,490 for the three months ended March 31, 2020 from $560,203 for the three months ended March 31, 2019. The primary reason for the decrease in revenues in the current year was due to the close-out in the first quarter of 2019 of a significant mobile distribution contract in that period allowing us to recognize deferred revenue of $119,639.

Cost of Sales

Cost of sales decreased $8,009 to $63,914 for the three months ended March 31, 2020 from $71,923 for the three months ended March 31, 2019. The decrease was a result of decreases in server and server usage fees.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $20,385 to $443,533 for the three months ended March 31, 2020 from $463,918 for the three months ended March 31, 2019. The decrease is primarily due to a decrease in employee and contractor expenses during the first quarter of the current fiscal year.

Other Income (Expense)

Interest expense increased slightly to $10,090 for the three months ended March 31, 2020 from $9,986 for the three months ended March 31, 2019. These amounts relate primarily to the imputed interest on related party debt.

Net Income (Loss)

As a result of the above, we reported a net loss of $114,047 for the three months ended March 31, 2020 and net income of $14,376 for the three months ended March 31, 2019.

Liquidity and Capital Resources

Introduction

As of March 31, 2020, we had current assets of $197,422, including cash of $176,484, and current liabilities of $666,776, resulting in a working capital deficit of $469,354. In addition, we had a total stockholders’ deficit of $578,130 at March 31, 2020.

During the three months ended March 31, 2020, we used net cash of $78,292. 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. 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

We used net cash of $81,908 in operating activities for the three months ended March 31, 2020 mainly as a result of a net loss of $114,047 and decreases of our accounts payable of $23,711 and other current liabilities of $23,370. These uses of cash were partially offset by a decrease of our prepaid expenses and other assets of $7,033 and increases in our accrued expenses of $25,327.

By comparison, we used net cash of $31,296 in operating activities for the three months ended March 31, 2019 mainly as a result of net income of $14,376, decreases of our prepaid expenses and other assets of $17,209 and increases in our accounts payable and accrued expenses of $16,439 and $3,010 being more than offset by the decrease of unearned royalties of $119,639.

We used $46,609 for the purchase of property and equipment for the three months ended March 31, 2020. For the three months ended March 31, 2019, we did not have any cash provided by or used in investing activities. 

Financing activities provided cash of $50,225 for the three months ended March 31, 2020, related to auto financing. For the three months ended March 31, 2019, we did not have any cash provided by or used in financing activities. 

Notes Payable – Related Party

As of March 31, 2020, our related party debt was comprised of notes payable totaling $379,825 to Craig Holland, our Chief Executive Officer and Mick Donahoo, our Chief Financial Officer. These notes are non-interest bearing and mature on December 31, 2021. Of this related party indebtedness, there are two convertible notes payable of $186,450 to each of Messrs. Holland and Donahoo, who have the right, at any time, at their election, to convert all or part of the amount due into shares of fully paid and non-assessable shares of our common stock. The fixed conversion price is $0.02 per share. We have imputed interest on these notes payable using an annual rate of 10%.