As filed with the Securities and Exchange Commission on July 18, 2018  October 31, 2019.

SEC FileRegistration No. 333-224531333-



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

____________________

 


form s-1

AMENDMENT NO. 2 TOregistration statement

FORM S-1UNDER


REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

____________________

 

Tapinator, Inc.

(Exact name of registrant as specified in its charter)

____________________

 

Delaware

Tapinator, Inc.7372

(Exact name of registrant as specified in its charter)46-3731133

Delaware

7372

46-3731133

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)Number)

____________________

110 West 40th Street, Suite 1902

New York, NY 10018

(914) 930-6232

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

____________________

Ilya Nikolayev

Chief Executive Officer

110 West 40th Street, Suite 1902

New York, NY 10018

(914) 930-6232

(Name, address, including zip code, and telephone number, including area code, of agent for service)

____________________

Copies to:

   

Rick A. Werner, Esq.

110 West 40thJeffrey M. Quick, Esq.

Aron Izower, Esq.

Haynes and Boone, LLP

Quick Law Group, P.C.

Reed Smith, LLP

30 Rockefeller Plaza, 26th Floor

1035 Pearl Street, Suite 1902 New York, NY 10018

(914) 930-6232403

 

599 Lexington Avenue

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)New York, New York 10112

Ilya NikolayevBoulder, CO 80302

Chief Executive Officer

110 West 40th Street, Suite 1902

New York, NY 10018

(914) 930-623210022

(Name, address, including zip code, and telephone number,(212) 659-7300

including area code, of agent for service)(720) 259-3393

(212) 521-5400

____________________

Copies of all communications, including communications sent to agent for service, should be sent to:

Jeffrey M. Quick, Esq.

Quick Law Group, P.C.

1035 Pearl Street, Suite 403

Boulder, CO 80302

Tel. (720) 259-3393

Fax. (303) 845-7315


 

Approximate date of commencement of proposed sale to the public:As soon as practicable after the effective date of this Registration Statement.registration statement is declared effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, of 1933 check the following box. ☒box: ☑

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b–212b-2 of the Exchange Act.

(Check (Check one):

 

Large accelerated filer ☐

Accelerated filer

  

Non-accelerated filer   

Smaller reporting company

(Do not check if a smaller reporting company)

 
 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 


____________________

CALCULATION OF REGISTRATION FEE

Title of each class of

securities to be registered

Proposed Maximum Aggregate

Offering Price(1)(2)(3)

Amount of Registration Fee

Units, consisting of:

$13,800,000

$1,792

Shares of common stock, par value $0.001 per share(4)

Warrants to purchase shares of common stock(4)

Common stock issuable upon exercise of warrants(5)

13,800,000

1,792

Underwriter’s warrants(6)

Common stock issuable upon exercise of underwriter’s warrants(5)

862,500(7)

112

Total

$28,462,500

$3,696

(1)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes the price of additional shares of common stock and/or warrants to purchase shares of common stock that the underwriter has the right to purchase to cover overallotments, if any. See “Underwriting.”

(3)

Pursuant to Rule 416 under the Securities Act of 1933, as amended, this registration statement also registers such indeterminate number of shares of common stock as may become issuable after the date hereof, as the same may be adjusted as a result of stock splits, stock dividends, recapitalizations or similar transactions.

(4)

No additional registration fee is payable pursuant to Rule 457(i) under the Securities Act of 1933, as amended.

(5)

Represents the aggregate exercise price of the shares issuable upon exercise of the warrants in accordance with Rule 457(i) and Staff Compliance and Disclosure Interpretation 240.06.

(6)

Represents warrants issuable to ThinkEquity, a division of Fordham Financial Management, Inc., or its designees (the “underwriter warrants”) to purchase a number of shares of common stock equal to 5% of the number of shares of common stock included in the units being offered (including shares of common stock that the underwriter has the right to purchase to cover overallotments) at an exercise price equal to 125% of the public offering price per unit. No additional registration fee is payable pursuant to Rule 457(g) under the Securities Act of 1933, as amended.

(7)

Represents a number of shares of common stock underlying the underwriter warrants equal to 5% of the number of shares of common stock included in the units being offered (including shares of common stock that the underwriter has the right to purchase to cover overallotments) at an exercise price equal to 125% of the public offering price per unit.

____________________

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordanceaccordance withSection8(a)oftheSecuritiesActof1933,asamended,oruntiltheregistrationstatementshallbecomeeffectiveonsuch date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), maydetermine.



 

 

 

Theinformationinthisprospectusisnotcompleteandmaybechanged. Wemaynotsellthesesecuritiesuntiltheregistrationstatement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is notpermitted.

SUBJECT TO COMPLETION, DATED JULY 18, 2018

PRELIMINARY PROSPECTUS

TAPINATOR, INC.

Up to 27,000,002 Shares of Common Stock and up to 31,400,002 Shares of Common Stock Underlying Warrants

This prospectus relates to the resale of up to (i) 27,000,002 shares of common stock and (ii) 31,400,002 shares of our common stock to be offered by the selling stockholders upon the exercise of outstanding common stock purchase warrants.

Our common stock trades in the over-the-counter market and is quoted on the OTCQB tier of the OTC Markets Group, Inc. under the symbol “TAPM.” Only a limited public market currently exists for our common stock. On July 17, 2018, the last reported sale price of our shares of common stock on the OTCQB was $0.0725 per share.

We will not receive any of the proceeds from the sale of common stock by the selling stockholders. However, we will receive proceeds from the exercise of the warrants if the warrants are exercised for cash. We intend to use those proceeds, if any, for general corporate purposes. All expenses of registration incurred in connection with this offering are being borne by us, but all selling and other expenses incurred by the selling stockholders will be borne by the selling stockholders.

We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, and have elected to comply with certain reduced public company reporting requirements in this and future filings. Please read the related disclosure beginning on page 15 of this prospectus.

Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties in the section entitled “Risk Factors” beginning on page 3 of this prospectus before making a decision to purchase our stock.

Our principal stockholders, officers and directors hold a majority of our shares of common stock issued and outstanding and will have the ability to substantially influence our corporate actions.  Please see the related disclosure on page 15 of this prospectus.

Wemayamendorsupplementthisprospectusfromtimetotimebyfilingamendmentsorsupplementsasrequired.Youshouldreadthe entire prospectus and any amendments or supplements carefully before you make your investmentdecision.

NeithertheSecuritiesandExchangeCommissionnoranystatesecuritiescommissionhasapprovedordisapprovedofthesesecuritiesor passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminaloffense.

The date of this prospectus is                   , 2018




 

 

 

TABLE OF CONTENTS

 

Prospectus

Page

INDUSTRY AND MARKET DATA

ii

 

PageTRADEMARKS, TRADE NAMES AND SERVICE MARKS

ii

Prospectus SummaryPROSPECTUS SUMMARY

1

Risk FactorsRISK FACTORS

39

Special Note Regarding Forward-Looking StatementsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

1721

Use of ProceedsUSE OF PROCEEDS

1723

Market for Common Equity and Related Stockholder MattersDIVIDEND POLICY

1723

Management’s Discussion and Analysis of Financial Condition and Results of OperationMARKET FOR COMMON EQUITY

1823

BusinessCAPITALIZATION

3024

Executive Officers and DirectorsDILUTION

3725

Executive CompensationMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

26

BUSINESS

39

Director CompensationMANAGEMENT

4145

Security Ownership of Certain Beneficial Owners and Management

42

Selling Stockholders

44

Description of SecuritiesEXECUTIVE COMPENSATION

48

Plan of DistributionCERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

51

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

52

Legal MattersDESCRIPTION OF CAPITAL STOCK

53

Material ChangesDESCRIPTION OF SECURITIES WE ARE OFFERING

5356

ExpertsMATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS

5358

Where You Can Find Additional Information

UNDERWRITING

5364

Index to Financial StatementsLEGAL MATTERS

68

EXPERTS

68

WHERE YOU CAN FIND MORE INFORMATION

68

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

 


You should rely only on

Unless otherwise indicated or the context otherwise requires, financial data included in this prospectus reflects the business and operations of Tapinator, Inc. and its consolidated subsidiaries and all references herein to “Tapinator, Inc.,” the “Company,” “we,” “our” or “us” refer to Tapinator, Inc. and its consolidated subsidiaries.

Neither we nor the underwriter have authorized anyone to provide any information or to make any representations other than those contained in this prospectus.prospectus or in any free writing prospectus we have prepared. We have not authorizedand the underwriter take no responsibility for, and can provide no assurance as to the reliability of, any other person to provide you with different information. If anyone provides you with different or inconsistent information you should not rely on it.that others may give you. We are not making an offeroffering to sell, theseand seeking offers to buy, our securities only under circumstances and in any jurisdictionjurisdictions where offer or saleit is not permitted. You should assume that thelawful to do so. The information appearingcontained in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, resultsprospectus, regardless of operations and prospects may have changed since that date.the time of delivery of this prospectus or of any sale of our securities.

 

Information contained on our website is not partFor investors outside the United States: Neither we nor the underwriter have done anything that would permit this offering or the possession or distribution of this prospectus.prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside the United States.

 

i

 

 

PROSPECTUS SUMMARYINDUSTRY AND MARKET DATA

 

The following summary highlights information contained elsewhereMarket data, industry statistics, and forecasts included in this prospectus, other than those provided by third party experts, are based on the good faith estimates of management, which in turn are based upon management’s reviews of independent industry publications, reports by market research firms, and other independent and publicly available sources. Data regarding the industry in which we compete and our market position and market share within this industry are inherently imprecise and are subject to significant business, economic and competitive uncertainties beyond our control, but we believe they generally indicate size, position and market share within this industry. Our own estimates are based on internally-derived metrics, as well as data from trade and business organizations and other contacts in the markets we operate.

We are responsible for all of the disclosure included in this prospectus, and we believe these estimates to be accurate as of the date of this prospectus or such other date stated in this prospectus. ItHowever, this information may prove to be inaccurate because of the method by which we obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. While we believe that each of the publications used throughout this prospectus are prepared by reputable sources, neither we nor the underwriter have independently verified market and industry data from third party sources. While we believe our internal company research and estimates are reliable, such research and estimates have not contain all the information that may be importantbeen verified by any independent source. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to you. You should read this entire prospectus carefully,a high degree of uncertainty and risk due to a variety of factors, including the sections entitledthose described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

Unless otherwise expressly stated, we obtained industry, business, market and other data from the reports, publications and other materials and sources listed below. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires. 

App Annie Inc. (“App Annie”), A Year in Review: Mobile Highlights of 2018 (December 2018);

App Annie, The State of Mobile in 2019 – The Most Important Trends to Know (January 2019);

App Annie, Forecast 2017 - 2022 (May 2018)

International Federation of the Phonographic Industry (the “IFPI”), Global Music Report 2018 – Annual State of the Industry, (March 2018);

Mediakix LLC (“Mediakix”), The Mobile Gaming Industry: Statistics, Revenue, Demographics, More (February 2019);

Motion Picture Association of America (the “MPAA”), New Report: Global Theatrical and Home Entertainment Market Reached $96.8 Billion in 2018 (March 2019);

Newzoo International B.V. (“NewZoo”), Global Mobile Market Report 2018 (September 2018);

Newzoo, Global Games Market Report 2019 (June 2019); and

The Business of Apps (“Business of Apps”), App Download and Usage Statistics (August 2019).

Certain information in this prospectus has also been derived from other reports, publications and other materials published or made available by Statista, IBIS World Research Group (“IBIS World”) and Think Gaming LLC (“Think Gaming”).

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

This prospectus includes some of our trademarks, including, among others, “Tapinator,” “Combo Quest,” “Video Poker VIP” and “Balance of the Shaolin.” Each one of these names is our registered trademark. This prospectus also includes additional trademarks, service marks and trade names of others, which are the property of their respective owners.

Solely for convenience, the references to our trademarks included in this prospectus are without the ™ symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.

ii

PROSPECTUS SUMMARY

This summary highlights certain significant aspects of our business and this offering and is a summary of information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our securities. You should read the entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our historical financial statements and related notes thereto included elsewhere in this prospectus, or any accompanying prospectus supplement before making an investment decision. In this prospectus, unless

Tapinator, Inc.

Our mission is to become one of the context requires otherwise, all references to “we,” “our,” “us”leading mobile gaming and social-casino companies in the “Company” refer to Tapinator, Inc.world.

Overview

 

Tapinator developsWe develop and publishespublish apps for mobile games and applicationsplatforms that we believe can be leaders within their respective categories, with a focus on the iOS, Google Play, Amazon, and Ethereum platforms. Tapinator's portfoliosocial-casino games. We refer to these titles as “Category Leading Apps.” Our library includes over 300 mobile gaming titles that, collectively, have achieved over 450470 million playermobile downloads, including gamesnotable properties such as ROCKY™, Video Poker Classic and Solitaire Dash and Dice Mage. Tapinator generates. We generate revenues through the sale of branded advertisements and via consumer transactions, including in-app purchases. Founded in 2013, Tapinator ispurchases and subscriptions. We are headquartered in New York, with product development and marketing teams located in North America, Europe and Asia. Consumers can find high-quality mobile applications from us wherever they see the “T” character logo. 

For the first six months of 2019, our revenues increased 33% year-over-year via the sale of virtual goods, advertising, and subscriptions, while our net loss decreased 37% during this same period. Our bookings related to Category Leading Apps and our adjusted EBITDA grew at year-over-year rates of 120% and 33%, respectively, in each case for the first six months of 2019.

Bookings and adjusted EBITDA are non-GAAP financial measures. For additional information concerning our use of bookings and adjusted EBITDA, including reconciliations of bookings and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “–Summary Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Trends in Key Non-GAAP Financial Metrics.”

Our Industry and Market Opportunity

A number of trends are driving significant change in digital gaming that we believe are causing growth in the casual mobile games market. We believe the following trends provide us with significant opportunities to grow our games and expand more deeply into the social-casino games market:

Consumer spending on digital gaming is growing. We believe that digital gaming has become a large and strategically important component of the overall entertainment market. Total consumer spending on digital gaming worldwide is expected to reach approximately $152 billion in 2019, which is more than double the approximately $60.2 billion that consumers spent at the movies and on music in 2018, according to data from Newzoo, the MPAA, and the IFPI.

Mobile devices have becomea leading medium to consume digital content such as games. We believe that consumers are increasingly using their mobile devices for entertainment, and mobile games are being played extensively by mobile device users.

Increasing number of players with the emergence of casual games. Digital game design and distribution in the casual game market has evolved as new game types and business models address expanding gaming audiences. We believe that the proliferation of smartphones and the availability of mobile app stores has increased access to digital games, including in the social-casino market and other areas of the mobile apps market.

Consumer spending in the social-casino category within digital gaming is growing. The social-casino market is characterized by games that are social and competitive and that are self-directed in pace and session length. We believe that social-casino games are generally “evergreen” in nature, meaning that these apps can continue to generate meaningful revenue years after their initial launch date, due to their loop-driven gameplay and ability to naturally incorporate a cadence of new in-game content and events. According to Statista, total consumer spending in the social-casino category on mobile and Facebook platforms grew 15% in 2018 to reach $5.2 billion and is expected to reach approximately $5.7 billion in 2019.

Our Value Proposition for Players

Our social-casino games simulate and enhance the gameplay that a player would find in a traditional casino, such as slots and video poker, but feature virtual currency instead of real-money winnings. We believe that consumers download and play our games for fun and entertainment without the risks and stress associated with gambling real-money. Specifically, we design our games to be: 

Authentic – our games are designed to provide an experience that reflects and improves upon the features and designs of land-based or online game machines. 

Engaging – our games are designed to be deeply engaging and utilize best-in-class systems to bring players back and create an immersive gameplay experience, including bonuses, minigames, login rewards, VIP clubs, and more.

Fun & Accessible – our titles are built on top of gameplay that has been demonstrated to be fun, both in the short- and long-term, and our products are accessible anytime and anywhere through mobile devices.


Our Core Strengths

We believe that our core strengths include:

Diverse portfolio of best-in-class, evergreen games. We have developed and published a small, but diverse, portfolio of enduring games that have consistently received high player review scores. We believe that our games appeal to multiple markets through varying game mechanics and unique progression sequences.

Lean organizational structure.Our talent pool currently includes 7 employees and 11 independent contractors spread across North America, Europe and Asia. We aim to invest in a transparent culture of mutual success that is driven by our founders and shared across our organization. Our culture fosters a pursuit of excellence, loyalty and teamwork, which we believe is a significant competitive advantage in the evolving mobile gaming industry and serves as the foundation of our continued success.

Strategic data-driven approach to launching new games and optimizing existing properties. We incorporate data-driven decision-making into our entire game development process. For example, we use data to help determine what games we should make, which new features we should pursue, and how we should present offers to and communicate with our players. We analyze both overall engagement of each feature within our games as well as individual player activity. The overall engagement metrics allow us to make decisions about which features we should continue to invest in. The individual player activity data allows us to segment our player base into a number of groups and send targeted communication, offers, and promotions to each of these groups, with the goal of increasing retention, monetization, and player happiness. Data also drives decisions in our marketing and user acquisition efforts. We strive to continue to improve the efficiency of our spending on marketing initiatives (our “return on acquisition spend” or “ROAS”) by focusing our spending on areas where our marketing initiatives have been successful in the past.

Scaleable, reusable and efficient technology stack. We have standardized our shared technology infrastructure to enable us to operate our games effectively at a global level without scale limitations. We utilize a proven, integrated third-party system of technology services that allows us to easily share best practices and successful features across games in our portfolio, which decreases the time it takes us to market new content and reduces overall development costs.

Strong relationships with platform providers. Our applications are hosted on platforms provided by Apple Inc. (“Apple”), Google Inc. (“Google”), Facebook, Inc. (“Facebook”) and Amazon.com, Inc. (“Amazon”), among others. These providers sometimes provide specialized promotions of our games and provide dedicated business and technical teams for the successful implementation and marketing of our games onto their platforms. Fourteen of our games have achieved the coveted “New Games We Love” promotional feature on Apple’s iOS platform.

Experienced management team. Our senior management team has worked together for over twelve years and has significant experience in the web, social and mobile application space. In addition to our team’s deep experience in high-growth startups, our board of directors also brings experience from large public companies such as Zynga Inc. (“Zynga”), Spotify Technology S.A. (“Spotify”) and Google.

Our Revenue Model

We rely primarily on a revenue model known as “free-to-play” (“F2P”) or “freemium,” which means that our games are free to download and play. Unlike traditional console-based video games, which are sold for a fixed retail price, the revenues from F2P mobile games are generated through a combination of in-app purchases (wherein the user purchases additional premium content, functionality or in-game currency with which they can improve or extend their game experience), and advertisements displayed within the game. As part of the process of developing and marketing a new game, we may enter into revenue share agreements with developers or publishers whereby we agree to share a portion of the revenue generated by a game in exchange for services related to the development or publication of the game.

In order for the F2P revenue model to be successful, it requires that a game have a large base of non-paying users and an adequately sized subset of recurring paying users. As a result, the tracking and optimization of measures such as daily active users (“DAUs”), average bookings per user (“ABPU”), player retention rates (e.g., Day 1, Day 7 and Day 30 retention), player conversion rates, average revenue per paying user, and player lifetime values (“LTVs”) are essential to the successful management of mobile games. Ongoing investments in marketing, product development, and active operations within a game, sometimes called “live ops,” are therefore important to acquire, accumulate and maintain an audience of loyal, paying users.

Our Products

Beginning in 2017, we shifted our focus from our legacy Rapid-Launch Games business to our Category Leading Apps business, with a focus on the social-casino market. While we continue to publish both types of games based on our substantial library, our new development and publishing activities are exclusively focused on Category Leading Apps.

Category Leading Apps

We believe our Category Leading Apps are visually beautiful, functionally in-depth products, with high production values and significant revenue potential. They are developed and published selectively based on both original and licensed intellectual property. These titles require considerable development investment and, in the opinion of management, have the potential to become evergreen mobile franchises that can become market leaders within their respective categories. These apps are monetized primarily through consumer app store transactions and, to a lesser extent, through brand advertising. These apps are published primarily under the Tapinator brand.

We have historically succeeded in getting our Category Leading Apps featured at launch by the major app stores, including within Apple’s “New Games We Love” category. Beyond initial product launch, we acquire customers for these products via paid acquisition channels for applications in which we achieve player LTVs that, on average, exceed the cost per player install (“CPI”).


The following is a summary of our Category Leading Apps in which we are currently actively investing. Beyond the list below, we are actively engaged in new product development, but typically do not announce such initiatives until a specific product launch date has been set:

Video Poker Classic: Released in April 2016, Video Poker Classic is, according to App Annie, the highest grossing video poker game in the United States Germany, Bulgaria, Pakistan, Indonesia,on iOS and Canada.Google Play as of October 25, 2019. On iOS, the title maintains over 30,000 reviews with an average score of 4.7 out of 5.0, a conversion rate of free-to-paid users of approximately 7.0%, and a Day-30 player retention rate of approximately 11.0%. Overall, the game has demonstrated ABPU of $0.23. We believe that one of the reasons behind the title’s success is its consistency with a real-world casino experience. In addition, we believe that Video Poker Classic currently has one of the most extensive offerings of any video poker title on mobile with regard to game types and functionality, including a skills trainer and both a single and multi-hand mode. Planned future updates are expected to further enhance the application’s prominent position in the video poker category.

Solitaire Dash: Released in December 2016, Solitaire Dash relies on an established form of gameplay, solitaire tripeaks, around which we have wrapped a horse racing theme and metagame, or game within a game. On iOS, the title maintains over 10,000 reviews with an average score of 4.7 out of 5.0, a conversion rate of free-to-paid users of approximately 4.7%, and a Day-30 player retention rate of approximately 11.0%. Overall, the game has demonstrated ABPU of $0.34. Solitaire Dash received a major update in June 2018 and, since then, we have produced significant updates to the game on a regular basis. Our updates have resulted in over 450 levels (new levels are launched each month), new power-ups that contribute to the monetization and engagement of the game, daily login rewards to help maximize user retention, and significant balancing/optimization to the game’s content. In short, we believe that Solitaire Dash is a best-in-class solitaire product based on its fundamental metrics. Solitaire Dash is currently subject to an exclusive licensing agreement with an affiliate of Cheetah Mobile, Inc. (“Cheetah Mobile”), pursuant to which we granted the rights to localize, publish, distribute and operate Solitaire Dash to Cheetah Mobile's affiliate (the “Solitaire Dash License Agreement”).

Solitaire is a category on mobile that has in the past supported multiple games with eight figure annualized bookings. Given the quality and metrics of Solitaire Dash, we expect it to be a property that could successfully capture a portion of the market share within the evergreen solitaire category. We plan on continuing to invest in the development of Solitaire Dash and look forward to the results of our efforts.

Crypto Trillionaire: Released in January 2019, Crypto Trillionaire is what we believe to be a best-in-class idle tapper game, or a game with gameplay largely consisting of performing simple “clicking” or “tapping” actions, with a fun cryptocurrency theme (there is no use of actual cryptocurrency in the game). The title was featured by Apple as a “New Game We Love” upon launch and has generated more than 400,000 player downloads to date. It has reached the top 100 grossing charts for strategy games in the United States and is a top ten search result for the term “crypto” in Apple’s App Store. Furthermore, it maintains an excellent review score of 4.8 out of 5.0 based on over 6,000 player reviews. Since its initial launch, we have released significant updates to the game with new functionality including vehicle upgrades, unlockable skins, and new/premium characters. Future updates are planned for Crypto Trillionaire that we believe will continue to improve the game’s core metrics, including long-term user retention.

My Horoscope: Released in April 2019, My Horoscope is our astrology application that monetizes users through subscriptions and focuses on user horoscopes, compatibility, birth charts, and numerology. We believe that subscription monetization on mobile represents a major opportunity to add recurring revenue to our business model.

According to IBIS World, supernatural and psychic services were a $2.0 billion market in 2018. Approximately 34% of women in the United States read their daily horoscope at least once per month and 41% share their horoscope with friends, but the industry has yet to enter the digital age, relying on eighty-seven thousand small business entrepreneurs who consult in person with limited marketing and digital offerings. The My Horoscope application features a clean, minimalistic design that we believe is appealing to both a younger and middle-aged demographic alike. We believe this application has the opportunity to become a best-in-class horoscope product and a category leader on mobile, within an area that could potentially achieve top 150 grossing potential based on the grossing performance of the current category leader.


Castle Builder: Currently in soft-launch in select international markets, Castle Builder is our new social-casino title that we plan on launching globally following the completion of this offering. Castle Builder is expected to be the first game on mobile that combines slots, role-playing, and city-building. The game features a slot mechanic, with innovative metagame systems that have been adapted from similar systems used in real money gaming. Each level in the game is interactive in that the player spins the slot to collect building materials and uses those materials to construct castles and unlock kingdoms. The slot machines themselves are, we believe, best-in-class, with features for free spins, wild symbols, and expanding wilds. The metagame and progression systems (unlocking content, login rewards, bonuses, VIP club, and other features) are extensive and, we believe, will result in significant long-term user retention and average revenue per daily active user.

 

The title is derived from a real-money online slot machine of the same name and has been developed in partnership with Rabcat Gambling (“Rabcat”). The real-money version of the product is currently a top performing slot game for Rabcat across more than 200 online casinos in a number of European countries. Based on the previous success of the similar indie title Coin Master, which, according to Think Gaming, has achieved $65 million in annual revenue, we are confident that the slots area is ripe for gameplay innovation.

Rapid-Launch Games

Our Rapid-Launch Games are legacy titles that we developed and published in significant quantity beginning in 2013. These are highly casual products that we built economically and rapidly based on a series of internally developed game engines. These games are monetized primarily through the sale of branded advertisements and via paid downloads. Since our formation, we have compiled a large library of over 300 such games and, while we are not currently developing new Rapid-Launch Games, we believe our existing portfolio will continue to produce a long-tail of revenues over the next several years. However, revenues from our Rapid-Launch Games have been declining over the past two years and we expect them to continue to decline during this revenue tail period over the next several years. Our Rapid-Launch Games are published primarily under our Tap2Play brand.

Our Strategy

In early 2017, we began a major strategic shift to focus more of our investment and management resources into our Category Leading Apps business and, more specifically, into the social-casino genre. We believe the potential size, quality and sustainability of revenues and earnings from this business is significantly greater than that of our legacy Rapid-Launch Games business. We completed this shift during the fourth quarter of 2018 and we are now focused on developing and operating these Category Leading Apps, primarily within the social-casino genre. In 2018, the revenue for the social-casino market reached $5.2 billion, according to Statista, and the social-casino market grew 10.9% year-on-year in the fourth quarter of 2018. The larger competitors in this market include Playtika Ltd. (“Playtika”) (acquired by Giant Interactive Group Inc. (“Giant Interactive”) for $4.4 billion in 2016), Zynga, SciPlay Corp. (“SciPlay”), HUUUGE, Inc. (“Huuuge Games”), and Murka Entertainment Limited (“Murka”) (acquired by The Blackstone Group (“Blackstone”) in 2019). We believe that these companies have achieved success by (i) focusing on the most well established social-casino game types (e.g., slots, bingo and multiplayer poker) and (ii) focusing on improving production values, running live ops, and adding content to their games rather than gameplay innovation. We believe this creates market opportunity for several winning strategies. First, with games such as Video Poker Classic, we have focused on niche casino game types that are not dominated by large competitors but that nonetheless have significant player followings. We believe similar niche opportunities continue to exist. Second, with the upcoming launch of Castle Builder, our new slots title, we believe that applying gameplay innovation to slots, an area that otherwise offers sparse differentiation between games, can result in a highly sustainable and successful product. 

Our goal for our Category Leading Apps business is to develop a small number of core franchise titles, primarily within the social-casino genre, that can achieve lifespans of at least five to ten years, and where we can grow these titles into sustainable market leaders within their respective product categories. In order to accomplish this, we are working to achieve customer LTVs that exceed customer acquisition cost, at scale. To date, we have been able to achieve this, at certain customer volumes, for two products: Video Poker Classic and Solitaire Dash. We seek to build a valuable portfolio of these core franchise titles that can represent repeatable, stackable and long-term revenue streams for us.

Our Growth Opportunities

We believe that we have several promising growth opportunities:

Existing Games:We are continuously investing in and growing our current games by enhancing their functionality and delivering fresh content, improving our monetization and marketing engines to improve player engagement, increase conversion of free players to paying players and drive per-player monetization. As we continue to develop our games, we believe we will be able to further monetize our existing user base and attract new players. With access to additional marketing capital, we believe there is significant opportunity to scale our existing games as we increase market penetration for these titles.

New Games: We intend to continue to capitalize on our ability to build successful social-casino games and evergreen apps by introducing new titles that appeal to specific audiences and offer highly differentiated, best-in-class experiences.

Live Operations: We use live operations, or live ops, to create and execute events and promotions that are designed to maximize retention, revenue and player happiness. We view live ops as having four key components: content delivery, offers/promotions, events and product improvements. Content delivery allows us to provide new content (for example, new levels) to our players. Offers/promotions allow us to tailor both free and paid virtual currency and other offers to each player, depending on that player's past history with the game. Events allows us to provide content in the game that is available for a limited time such as a theme that is unlocked for a specific holiday. Product improvements is a continuous process where we analyze each game's metrics to invest in existing functionality and new feature development.

Strategic Acquisitions:We expect to pursue select strategic acquisitions to augment our organic top line growth and continue to build out our app portfolio. We plan to seek small, entrepreneurial teams that are focused on a single evergreen product. We expect that we will specifically target products that operate at sub-scale or that otherwise have not been optimized to achieve their full monetization potential.


Reverse Stock Split

Subject to the approval of our stockholders at a special meeting of stockholders to be held on November 25, 2019 (the “Special Meeting”), we plan to implement a reverse stock split of our issued and outstanding shares of common stock prior to the closing of this offering at a ratio in a range of between 1-for-2 and 1-for-200, to be determined by our board of directors. If our stockholders approve the reverse stock split at the Special Meeting and the reverse stock split is implemented, we also plan to reduce the total number of shares of common stock that we are authorized to issue from 250,000,000 to 25,000,000, subject to the approval of our stockholders at the Special Meeting.

Implications of Being an Emerging Growth Company wasand a Smaller Reporting Company

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in April 2012. An “emerging growth company” may take advantage of exemptions from some of the reporting requirements that are otherwise applicable to public companies. These exceptions include:

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until December 31, 2023, the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under our Form S-1 registration statement declared effective by the Securities and Exchange Commission (the “SEC”) on September 17, 2018. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected not to take advantage of the benefits of this exemption and our election is irrevocable. Therefore, we will not be able to take advantage of this exemption at any time in the future. 

Finally, we are a “smaller reporting company” (and may continue to qualify as such even after we no longer qualify as an emerging growth company) and accordingly may provide less public disclosure than larger public companies. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Corporate Information

We were originally incorporated on December 9, 2013 asin the successor entity to Evolution Resources,state of Delaware. On December 12, 2013, we merged with Tapinator, Inc., a Nevada Corporation. We were the surviving corporation of this merger. On June 16, 2014, the Companywe executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, formed on November 27, 2012, whereby the Companywe issued 36,700,000 shares of itsour common stock (representing 80% of its then common stock outstanding after giving effect to the transaction) to the members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. For accounting and financial reporting purposes, Tapinator LLC launched its firstwas considered the acquirer and the transaction was treated as a reverse merger. We have been focused exclusively on mobile game, Drive with Zombies, on the Google Play platform in January 2012.

Our principal stockholders, officersgames and directors hold a majority ofapplications since our shares of common stock issued and outstanding and will have the ability to substantially influence our corporate actions.  Please see the related disclosure on page 15 of this prospectus.inception.

 

Our principal executive offices are located at 110 West 40th40th Street, Suite 1902, New York, NY 10018, telephone number (914) 930-6232. Our website address is www.tapinator.com.www.tapinator.com. Information accessed through our website is not incorporated into this prospectus and is not a part of this prospectus.

 


 

The Offering

 

Common

Units offeredby us

           units, each consisting of one share of common stock offered byand one warrant to purchase a share of common stock. The units will not be certificated and the selling stockholders:

Up to 27,000,002 shares of our common stock toand warrants that are part of such units will be offered by the selling stockholders,immediately separable and up to 31,400,002 shares of our common stock towill be offered by the selling stockholders upon the exercise of outstanding common stock purchase warrants.

Common stock outstanding prior to the offering:

95,625,972issued separately in this offering.

  

Common stock outstanding after this offering:Warrants offered as part of the units

95,625,972Each unit includes a warrant representing the right to purchase one share of common stock. Each warrant will have an exercise price of $         per share, will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the warrants.

Use of proceeds:Over-allotment option

We will not receive any proceeds fromhave granted the saleunderwriter a 45-day option to purchase up to an additional           shares of common stock and/or warrants to purchase up to an additional          shares of common stock at the public offering price, less underwriting discounts and commissions. Unless we indicate otherwise or the context otherwise requires, all information in this prospectus assumes no exercise of the commonunderwriter’s overallotment option.

Common stock offered by the selling stockholders. However, we will receive proceeds from the exercise priceto be outstandingimmediately after this offering

            shares (assuming that none of the warrants ifare exercised). If the underwriter’s over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering will be            (assuming that none of the warrants are exercised for cash. exercised).

Useof proceeds

We currently intend to use thosethe net proceeds if any,we receive from this offering for general corporate purposes.purposes, including marketing and development, both for our current games and additional titles, working capital, operating expenses and capital expenditures. A portion of the net proceeds may also be used to fund potential acquisitions or other strategic investments, although we have no present commitments or agreements to enter into any such acquisitions or to make any such investments.

Risk factors

Investing in our securities involves a high degree of risk. You should carefully read and consider the information set forth under “Risk Factors” and all other information in this prospectus before investing in our securities.

Reverse Stock Split

Subject to the approval of our stockholders at the Special Meeting, we plan to implement a reverse stock split of our issued and outstanding shares of common stock prior to the closing of this offering at a ratio in a range of between 1-for-2 and 1-for-200, to be determined by our board of directors. If our stockholders approve the reverse stock split and the reverse stock split is implemented, we also plan to reduce the total number of shares of common stock that we are authorized to issue from 250,000,000 to 25,000,000, subject to the approval of our stockholders at the Special Meeting.

OTCQB trading symbol:symbol

“TAPM”

Risk factors:Proposed Nasdaq Capital Market trading symbol

You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 3 of this prospectus before deciding whether or notWe have applied to invest in shares oflist our common stock.stock and the warrants offered hereby on The Nasdaq Capital Market under the symbols “TAPM” and “TAPMW,” respectively.

 

TheIn this prospectus, unless otherwise indicated, the number of shares of common stock is based on 87,979,526 outstanding after this offeringshares of common stock as of October 25, 2019. This number excludes:

 

 

5,050,00015,875,004 shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options at a weighted average exercise price of $0.13$0.081 per share;

 

 

10,750,000no shares of common stock granted as restricted stock units to various of employees, officers and directors which will begin to vest in August of 2019;directors;

 

 

34,200,002 shares of common stock issuable upon the exercise of warrants at a weighted average exercise price of approximately $0.14. These numbers include the 31,400,002 shares of common stock underlying the warrants being registered for resale pursuant to the registration statement of which this prospectus forms a part.$0.144; and

 

 

11,283,3332,124,996 shares of common stock issuable uponreserved for future issuance under the conversion of our Series B convertible preferred stock at a conversion price of $.12 per share.Tapinator, Inc. 2015 Equity Incentive Plan (the “2015 Equity Incentive Plan”).

 

In addition, except as otherwise indicated, all information in this prospectus reflects and assumes:

a 1-for-            reverse stock split of our issued and outstanding common stock, to be effected before the closing of this offering;

a reduction in our total authorized share capital from 250,000,000 shares to 25,000,000 shares, to be effected before the closing of this offering if, and only if, the reverse stock split is implemented;

no exercise by the underwriter of its option to purchase            additional shares of our common stock and/or warrants representing the right to purchase an additional            shares of our common stock;

no exercise of the warrants to be issued to investors in this offering; and

no exercise of the warrants to be issued to the underwriter in this offering.


Summary Consolidated Financial Information

The following table sets forth our summary consolidated historical financial data for the periods presented below. The summary consolidated financial data as of December 31, 2018 and 2017 and for each of the years in the two-year period ended December 31, 2018 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary unaudited condensed consolidated financial data as of June 30, 2019 and 2018 and for the six-month periods ended June 30, 2019 and 2018 have been derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus.

Our historical results are not necessarily indicative of the results of operations for future periods. You should read the following summary consolidated financial data in conjunction with the sections entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

  Six Months Ended
(unaudited)
  

Year Ended

 
  

June 30,

2019

  

June 30,

2018

  

December 31,

2018

  

December 31,

2017

 
Statements of Operations Data:                
Revenue $2,158,650  $1,622,361  $2,872,278  $3,141,360 
Operating expenses:                
Cost of revenue excluding depreciation and amortization  728,567   543,765   884,202   1,033,452 
Research and development  79,515   155,231   243,694   140,772 
Marketing and public relations  421,223   173,735   377,917   518,099 
General and administrative  1,511,923   1,619,514   3,098,353   1,383,565 
Impairment of capitalized software        320,311   256,310 
Amortization of software development costs  341,002   271,023   614,130   709,615 
Depreciation and amortization of other assets  3,106   5,748   9,933   21,927 
Total expenses                
   3,085,336   2,769,016   5,548,540   4,063,740 
Total other (income) expenses  (1,792)  322,477   320,232   2,767,766 
Income taxes     3,800       
Net loss $(924,894) $(1,472,932) $(2,996,494) $(3,690,146)
                 
Non-GAAP Financial Data (unaudited):                
Bookings (1) $1,752,374  $1,599,958  $3,341,014  $3,498,788 
Adjusted EBITDA (2) $226,172  $170,297  $132,615  $247,996 
                 
Balance Sheet Data (at end of period):                
Cash $509,905  $871,312  $871,312  $246,755 
Total assets  1,951,437   2,228,427   2,228,427   1,826,332 
Total stockholders’ equity (deficit)  1,052,299   1,168,443   1,168,443   (275,262)
                 
Cash Flow Data:                
Net cash (used in) provided by operating activities  (86,658)  140,688   341,153   274,867 
Net cash (used in) investing activities  (274,749)  (449,034)  (808,919)  (822,073)
Net cash provided by financing activities     1,401,887   1,092,323   203,500 

(1) Bookings is a non-GAAP financial measure that is equal to revenue recognized during the period plus or minus the change in deferred revenue during the period and amounts billed, but uncollected, pursuant to contractual license agreements. We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long term, the factors impacting our bookings and revenue are the same. However, in the short term, there are factors that may cause revenue to exceed or be less than bookings in any period.

We use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure. The following table presents a reconciliation of bookings to revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each period presented:

  Six Months Ended  

Year Ended

 

Unaudited

 

June 30,

2019

  

June 30,

2018

  

December 31,

2018

  

December 31,

2017

 

Bookings

 $1,752,374  $1,599,958  $3,341,014  $3,498,788 

Change in deferred revenue

  406,276   22,403   (468,736)  (357,428)

Revenue

 $2,158,650  $1,622,361  $2,872,278  $3,141,360 


(2) Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income (loss) adjusted to exclude interest (income) expense, net, income taxes, amortization of capitalized software development, depreciation and amortization of other assets, impairment of capitalized software, amortization of debt discount, loss on extinguishment and stock-based compensation expense.

We use adjusted EBITDA to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for net loss recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each period presented:

  Six Months Ended  

Year Ended

 

Unaudited

 

June 30,

2019

  

June 30,

2018

  

December 31,

2018

  

December 31,

2017

 

Net loss

 $(924,894) $(1,472,932) $(2,996,494) $(3,690,146)

Interest (income) expense, net

  (1,791)  134,601   132,356   533,511 

Tax expense

     3,800       

Amortization of capitalized software development

  341,002   271,023   614,130   709,615 

Depreciation and amortization of other assets

  3,106   5,748   9,933   21,927 

Impairment of capitalized software

        320,311   256,310 

Amortization of debt discount

     187,876   187,876   1,404,254 

Loss on extinguishment

           830,001 

Stock-based compensation expense

  808,750   1,040,182   1,857,274   173,552 

Adjusted EBITDA

 $226,173  $170,298  $125,386  $239,024 


 

RISK FACTORS

 

Investing in our common stocksecurities involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this offering memorandum,prospectus, before deciding whether to invest in shares of our common stock.securities. If any of the following risks actually occur, our business, financial condition and results of operations would suffer.and financial condition could be materially adversely affected. In thatthis case, the trading price of our common stock and/or warrants would likely decline and you might lose part or all your investment in our common stock and/or warrantslikelydeclineandyoumightloseallorpartofyourinvestmentinourcommonstock.Therisksdescribedbelowarenot theonlyoneswe face.Additionalrisksthatwecurrentlydonotknowaboutorthatwecurrentlybelievetobeimmaterialmayalsoimpairourbusiness,financial conditions and results ofoperations..

 

General Business and Industry Risk Factors

 

Our business will suffer if we are unable to continue to develop successful games for mobile platforms, successfully monetize mobile games, or successfully forecast mobile launches and/or monetization.

Our business depends on developing and publishing mobile games that consumers will download and spend time and money playing. We have devoted and we expect to continue to devote substantial resources to the research, development, analytics and marketing of our mobile games, however we cannot guarantee that we will continue to develop games that appeal to players. New games that we introduce need to generate sufficient bookings and revenues to offset the associated development and marketing costs. We may encounter difficulty in integrating features on games developed for mobile platforms that a sufficient number of players will pay for or otherwise sufficiently monetizingin sufficient quantities to effectively monetize our mobile games. The success of our games depends, in part, on unpredictable and volatile factors beyond our control including consumer preferences, competing games, new mobile platforms and the availability of other entertainment experiences. If our games are not launched on time or do not meet consumer expectations, or if they are not brought to market in a timely and effective manner, our ability to grow revenue and our financial performance will be negatively affected.

 

In addition to the market factors noted above, our ability to successfully develop games for mobile platforms and theirour ability to achieve commercial success will depend on our ability to:

 

effectively market mobile games to our existing mobile players and new players without excess cost;

effectively market mobile games to our existing mobile players and new players without excess cost;

 

effectively monetize the games;

effectively monetize the games;

 

adapt to changing player preferences;

adapt to changing player preferences;

 

adapt games quickly to make sure they are compatible with, and take advantage of feature sets for new releases of mobile phones and other devices;

adapt games quickly to make sure they are compatible with, and take advantage of feature sets for new releases of mobile phones and other devices;

 

expand and enhance games after their initial release;

expand and enhance games after their initial release;

 

attract, retain and motivate talented game designers, product managers and engineers who have experience developing games for mobile platforms;

attract, retain and motivate talented game designers, product managers and engineers who have experience developing games for mobile platforms;

 

partner with mobile platforms and obtain featuring opportunities;

partner with mobile platforms and obtain featuring opportunities;

 

adapt game feature sets for limited bandwidth, processing power and screen size of typical mobile devices;

adapt game feature sets for limited bandwidth, processing power and screen size of typical mobile devices;

 

minimize launch delays and cost overruns on the development of new games;

minimize launch delays and cost overruns on the development of new games;

 

effectively monetize the games;

maintain quality mobile game experience;

 

maintain quality mobile game experience;

release games compatible with an increasingly diverse set of mobile devices;

 

release games compatible with an increasingly diverse set of mobile devices;

compete successfully against a large and growing number of existing market participants;

 

compete successfully against a large and growing number of existing market participants;

minimize and quickly resolve bugs or outages; and

 

minimize and quickly resolve bugs or outages; and

acquire and successfully integrate high quality mobile game assets, personnel or companies.

acquire and successfully integrate high quality mobile game assets, personnel or companies.

 

These and other uncertainties make it difficult to know whether we will succeed in continuing to develop successful mobile games and launch these games in accordance with our financial plan. If we do not succeed in doing so, our business will suffer.

 


We are also a relatively new entrant in the mobile game market and, as a result have a relatively short history in developing and launching mobile games. As a result, of this we may have difficulty predicting the development schedule of a new game and forecasting bookings for a game. If launches are delayed and we are unable to monetize mobile games in the manner that we forecast, our ability to grow revenue and our financial performance will be negatively impacted.

 

One primary strategy to grow our business is to develop game titles for smartphones and tablets. If we are not able to generate revenues and gross margins from smartphones and tablets, our revenues, financial position and operating results may suffer.

As a result of the expected continued migration of users from traditional feature phones to smartphones, we intend to continue to publish mobile games that are widely accepted and commercially successful on the smartphone and tablet digital storefronts (primarily Google’s Play Store, Apple’s iOS App Store, and Amazon’s Appstore for Android), as well as incur marketing-related expenditures in connection with the launch of our games on these digital storefronts. Our efforts to generate revenues derived from games for smartphones and tablets may prove unsuccessful or, even if successful, it may take us longer to achieve revenue than anticipated because, among othersother reasons:

 

changes in digital storefront policies that

changes in digital storefront policies may limit our ability to use certain types of offers and other monetization techniques in our games;


 

the open nature of many of these digital storefronts increases substantially the number of competitors and competitive products and may make it more difficult for us to achieve prominent placement or featuring for our games;

the billing and provisioning capabilities of some smartphones are not currently optimized to enable users to purchase games or make in app-purchases, which could make it difficult for users of these smartphones to purchase games or make in-app purchases and could reduce our addressable market, at least in the short term;

our competitors may have substantially greater resources available to invest in developing and publishing products for smartphones and tablets;

these digital storefronts are relatively new markets, for which we are less able to forecast with accuracy revenue levels, required marketing and development expenses, and net income or loss;

the pricing and revenue models for titles on these digital storefronts are rapidly evolving; and

many OEMs, social networks, messaging services and carriers are developing their own storefronts which may compete with and become more successful than the storefronts on which our games are published, and we may expend time and resources developing games for storefronts that ultimately do not succeed.

We rely heavily on key mobile infrastructure providers such as Apple, Facebook, Google and Amazon, and if we are unable to maintain a good relationship with these infrastructure providers, our business will suffer.

We rely heavily on key mobile infrastructure providers such as Apple, Facebook, Google and Amazon.  We believe that we have good relationships with each of these infrastructure providers, which has contributed to the success of many of these digital storefronts increases substantially the number of competitors and competitive products and makes it more difficult for us to achieve prominent placement or featuring for our games;

the billing and provisioning capabilities of some smartphones are currently not optimized to enable users to purchase games or make in app purchases, which could make it difficult for users of these smartphones to purchase games or make in-app purchases and could reduce our addressable market, at least in the short term;

past.  However, if we, any of our partners, or developers violate (or if an infrastructure provider believes we, any of our partners, or developers have violated) its terms of service, that infrastructure provider could limit or terminate its relationship with us.  An infrastructure provider could also limit or terminate its relationship with us if it establishes more favorable relationships with one or more of our competitors may have substantially greater resources available to invest in developing and publishing products for smartphones and tablets;

these digital storefronts are relatively new markets, for whichor it determines that we are less able to forecasta competitor.  Any limitation or termination of our relationship with accuracy revenue levels, required marketing and developments expenses, and net incomeany of our infrastructure providers could materially adversely affect our business, financial condition or loss;results of operations. 

the pricing and revenue models for titles on these digital storefronts are rapidly evolving;

many OEMs, social networks, messaging services and carriers are developing their own storefronts which may compete with and become more successful than the storefronts on which our games are published, and we may expend time and resources developing games for storefronts that ultimately do not succeed.

 

If we do not achieve a sufficient return on our investment with respect to efforts to develop mobile, freemium games for smartphones and tablets, it could negatively affect our operating results.

We believe that a significant portion of our development activities for smartphones and tablets will be focused on mobile, freemium games — games that are downloadable without an initial charge, but which enable a variety of additional features to be accessed for a fee or otherwise monetized through various advertising and offer techniques. Our efforts to develop mobile, freemium games for smartphones and tablets may prove unsuccessful or, even if successful, may take us longer to achieve significant revenue than anticipated because, among other reasons:

 

we have relatively limited experience in successfully developing and marketing mobile, freemium games;

we have relatively limited experience in successfully developing and marketing mobile, freemium games;

 

our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertising and offers may cause us to have difficulty optimizing the monetization of our freemium games;

our relatively limited experience with respect to creating games that include micro-transaction capabilities, advertising and offers may cause us to have difficulty optimizing the monetization of our freemium games;

 

changes in digital storefront and carrier policies that limit our ability to use certain types of offers and other monetization techniques in our games;

changes in digital storefront policies that limit our ability to use certain types of offers and other monetization techniques in our games;

 

some of our competitors have released a significant number of mobile, freemium games on smartphones, and this competition will make it more difficult for us to differentiate our games and derive significant revenues from them;

some of our competitors have released a significant number of mobile, freemium games on smartphones, and this competition will make it more difficult for us to differentiate our games and derive significant revenues from them;

 

some of our competitors have substantially greater resources available to invest in developing and publishing mobile, freemium games;

some of our competitors have substantially greater resources available to invest in developing and publishing mobile, freemium games;

 

we intend to develop some of our mobile, freemium games based upon our own intellectual property rather than well-known licensed brands and, as a result, we may encounter difficulties in generating sufficient consumer interest in our games;

we intend to develop some of our mobile, freemium games based upon our own intellectual property rather than well-known licensed brands and, as a result, we may encounter difficulties in generating sufficient consumer interest in our games;

mobile, freemium games have a limited history, and it is unclear how popular this style of game will become or remain or its revenue potential;

our strategy with respect to developing mobile, freemium games for smartphones assumes that a large number of consumers will download our games because they are free and that we will subsequently be able to effectively monetize these games via in-app purchases, offers and advertisements; however, some smartphones charge users a fee for downloading content, and users of these smartphones may be reluctant to download our freemium games because of these fees, which would reduce the effectiveness of our product strategy;

our mobile, freemium games may otherwise not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games; and

even if our mobile, freemium games are widely downloaded, we may fail to retain users of these games or optimize the monetization of these games for a variety of reasons, including poor game design or quality, gameplay issues such as game unavailability, long load times or an unexpected termination of the game due to data server or other technical issues or failure to effectively respond and adapt to changing user preferences through updates to our games.

 


 

Because mobile, freemium games have a limited history, and it is unclear how popular this style of game will become or remain or its revenue potential;

our strategy with respect to developing mobile, freemium games for smartphones assumes that a large number of consumers will download our games because they are free and that we will subsequently be able to effectively monetize these games via in-app purchases, offers and advertisements; however, some smartphones charge users a fee for downloading content, and users of these smartphones may be reluctant to download our freemium games because of these fees, which would reduce the effectiveness of our product strategy;

our mobile, freemium games may otherwise not be widely downloaded by consumers for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient marketing efforts or a failure to achieve prominent storefront featuring for such games;

even if our mobile, freemium games are widely downloaded, we may fail to retain users of these games or optimize the monetization of these games for a variety of reasons, including poor game design or quality, gameplay issues such as game unavailability, long load times or an unexpected termination of the game due to data server or other technical issues or failure to effectively respond and adapt to changing user preferences through updates to our games; and

because these are effectively new products for us, we are less able to forecast with accuracy the potential revenue levels, required marketing and development expenses, and net income or loss.

loss associated with freemium games. If we do not achieve a sufficient return on itsour investment with respect to developing and selling mobile, freemium games, it will negatively affect our operating results and may require us to formulate a new business strategy.

We must continue to launch, innovate and enhance games that players like and attract and retain a significant number of players in order to grow our revenue and sustain our competitive position.

We recently announced that we will launch at least three new Full-Featured mobile games, including games in new categories, in 2018, however there is a risk that we may not launch these games or the other games we plan to launch in 2018 according to schedule, that these games do not attract and retain a significant number of players or that these games will not monetize well. If we do not launch games on schedule or our games do not monetize well, our business, revenue and bookings will be negatively impacted.

 

If our top games do not maintain their popularity, our results of operations could be harmed.

 

In addition to creating new games that are attractive to a significant number of players, we must extend the life of our existing games, in particular our most successful games. Historically, we have depended on a small number of games for a significant portion of our revenue and we expect that this dependency will continue for the foreseeable future. Our existing games compete with our new offerings and the offerings of our competitors. Traditionally, bookings from existing games decline over time. For a game to remain popular, we must constantly enhance, expand or upgrade the game with new features that players find attractive. Increased competition can result in increasing player acquisition and retention costs. Constant game enhancement requires the investment of significant resources, particularly with older games, and such costs on average have increased. We may not be able to successfully enhance, expand or upgrade our current games. Any reduction in the number of players of our most popular games, any decrease in the popularity of our games in general, any breach of game-related security or prolonged server interruption, any loss of rights to any intellectual property underlying such games, or any other adverse developments relating to our most popular games, could harm our results of operations.

 

Our business is intensely competitive and “hit” driven. If we do not deliver “hit” products and services, or if consumers prefer our competitors’ products or services over our own, our operating results could suffer.

 

Competition in our industry is intense. Many new games are introduced in each major industry segment (mobile, web PC and blockchain)PC), but only a relatively small number of “hit” titles account for a significant portion of total revenue in each segment. Our competitors range from large established companies to emerging start-ups, and we expect new competitors to continue to emerge throughout the world. If our competitors develop and market more successful products or services, offer competitive products or services at lower price points or based on payment models perceived as offering a better value proposition, or if we do not continue to develop consistently high-quality and well-received products and services, our revenue, margins, and profitability will decline.

 


A small number of games have generated a significant portion of our revenue, and we must continue to launch, innovate and enhance games that players like and attract and retain a significant number of players in order to grow our revenue and sustain our competitive position.

 

Historically, we have depended on a small number of games for a significant portion of our revenue and we expect that this dependency will continue for the foreseeable future. Bookings and revenue from many of our games tend to decline over time after reaching a peak of popularity and player usage. As a result of this natural decline in the life cycle of our games, our business depends on our ability to consistently and timely launch new games across multiple platforms and devices that achieve significant popularity and have the potential to become franchise games. We recently announced that we will launch at least three new Full-Featured mobile games, including games in new categories, in 2018, however there is a risk that we may not launch these games or the other games we plan to launch in 2018 according to schedule, that these games do not attract and retain a significant number of players or that these games will not monetize well.

 

Each of our games requires significant engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs on average have increased over the last several years. Our ability to successfully launch, sustain and expand games and attract and retain players largely will depend on our ability to:

 

anticipate and effectively respond to changing game player interests and preferences;

anticipate and effectively respond to changing game player interests and preferences;

 

anticipate or respond to changes in the competitive and technological landscape (including, but not limited to changes in mobile devices and gaming platforms);

anticipate or respond to changes in the competitive and technological landscape (including, but not limited to changes in mobile devices and gaming platforms);

 

attract, retain and motivate talented game designers, product managers and engineers;

attract, retain and motivate talented game designers, product managers and engineers;

 

develop, sustain and expand games that our players find fun, interesting and compelling to play;

develop, sustain and expand games that our players find fun, interesting and compelling to play;

 

develop games that can build upon or become franchise games;

develop games that can build upon or become franchise games;

 

effectively market and advertise new games and enhancements to our existing players and new players;

effectively market and advertise new games and enhancements to our existing players and new players;

 

acquire players in a cost-effective manner;

acquire players in a cost-effective manner;

 

minimize the launch delays and cost overruns on new games and game expansions;

minimize launch delays and cost overruns on new games and game expansions;

 

minimize downtime and other technical difficulties; and

minimize downtime and other technical difficulties; and

 

acquire and integrate high quality assets, personnel and companies.

acquire and integrate high quality assets, personnel and companies. 

 

It is difficult to consistently anticipate player demand on a large scale, particularly as we develop games in new categories or new markets, including international markets and mobile platforms. If we do not successfully launch games that attract and retain a significant number of players and extend the life of our existing games, our market share, brand and financial results will be harmed.

 


Apple and Google have recently introduced subscription gaming platforms that will allow players to play a certain number of mobile games for a set monthly fee. If their subscription model becomes popular, our freemium game business model may be negatively impacted along with our operating results in the event we were unable to adapt.

In the third quarter of 2019, Apple introduced and Google announced that it plans to introduce in the fourth quarter of 2019 new cloud-based platforms that will allow players to access and play a finite number of games on an unlimited basis that are not offered at other mobile gaming stores (including Apple’s App Store) for a set monthly fee rather than a per-play fee. To our knowledge, this subscription model has not been used in the mobile gaming industry in any substantial way in the past. In the event mobile game players begin to adopt this subscription model in a meaningful way, our freemium game business model, which is based on the free distribution of our games coupled with monetization through in-app purchases and advertisements, may be negatively impacted along with our operating results in the event we are unable to adapt in some way to the subscription model.

We operate in a new and rapidly changing evolvingindustry.

The mobile game industry, through which we derive substantially all of our revenue, is a relatively new and rapidly evolving industry. The growth of the mobile game industry and the level of demand and market acceptance of our games are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors affecting the mobile game industry, many of which are beyond our control, including:

 

our ability to extend our brand and games to mobile platforms and the timing and success of such mobile game launches;

our ability to extend our brand and games to mobile platforms and the timing and success of such mobile game launches;

 

our ability to maintain the popularity of our games on Google, iOS, Amazon and other platforms;

our ability to maintain the popularity of our games on Google, iOS, Amazon and other platforms;

 

our ability to effectively monetize games on mobile devices and across multiple platforms and devices;

our ability to effectively monetize games on mobile devices and across multiple platforms and devices;

 

our ability to maintain technological solutions and employee expertise to rapidly respond to continuous changes in mobile platforms and mobile devices;

our ability to maintain technological solutions and employee expertise to rapidly respond to continuous changes in mobile platforms and mobile devices;

 

our ability to maintain technological solutions and employee expertise to rapidly respond to changes in consumer demand for games on new gaming platforms;

changes in consumer demographics and public tastes and preferences;

 

changes in consumer demographics and public tastes and preferences;

the availability and popularity of other forms of entertainment;

 

the availability and popularity of other forms of entertainment;

the worldwide growth of mobile devices, broadband Internet and personal computer users, and the rate of any such growth; and

 

the worldwide growth of mobile devices, broadband Internet and personal computer users, and the rate of any such growth; and

general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending.


general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending.

 

Our ability to plan for game development, distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in the tastes and preferences of our current and potential players and relatively rapid changes in technology. New and different types of entertainment may increase in popularity at the expense of mobile games. A decline in the popularity of mobile games in general, or our games in particular, would harm our business and prospects.

 

Regulatory changes or actions may alter the nature of an investment in us or restrict the use of crypto-collectibles in a manner that adversely affects our business, prospects or operations.

We have recently entered the crypto-collectibles and blockchain game and application industries. As crypto-assets have grown in both popularity and market size, governments around the world have reacted differently to crypto-assets, with certain governments deeming certain crypto assets illegal while others have allowed their use and trade. On-going and future regulatory actions may impact our ability of to continue to operate this segment of our business, which could have a material adverse effect on our business, prospects or operations.

Governments may in the future curtail or outlaw the acquisition, use or redemption of crypto-assets. Ownership of, holding or trading in crypto-collectibles may then be considered illegal and subject to sanction. Governments may also take regulatory action that may increase the cost and/or subject crypto-collectibles companies to additional regulation.

On July 25, 2017 the SEC released an investigative report which states that the United States would, in some circumstances, consider the offer and sale of blockchain coins pursuant to an initial coin offering (“ICO”) subject to federal securities laws.  Thereafter, China released statements and took similar actions.  Although we do not participate in ICOs, our customers may participate in ICOs and these actions may be a prelude to further action which chills widespread acceptance of blockchain gaming and application adoption and have a material adverse effect our ability pursue this business segment at all, which could have a material adverse effect on our business, prospects or operations.

Governments may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade crypto-assets or to exchange crypto-assets for fiat currency. Similar actions by governments or regulatory bodies could result in restriction of the acquisition, ownership, holding, selling, use or trading in our securities. Such a restriction may adversely affect our shareholders and have a material adverse effect on our ability to pursue this segment at all or raise new capital which could have a material adverse effect on our business, prospects or operations and harm investors in our securities.

Laws and regulations which exist now, or which might exist in the future, may restrict the right to acquire, own, hold, sell or use Ethereum, participate in the blockchain or utilize similar digital assets, which could adversely affect us.

Many countries, including the United States and other large countries including China and Russia, may take regulatory and civil actions now or in the future that could severely restrict the right to acquire, own, hold, sell or use these digital assets or to exchange for fiat currency.  Such regulatory actions might be as a result of currently existing laws and regulations, such as those promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in the United States or as a result of regulatory laws and rules which do not currently exist.  For examples, if the virtual assets relating to our games or if Ethereum were deemed to be “securities” under Section 2(a)(1) of the Securities Act, we would either need to comply with the provisions of the Securities Act and Exchange Act, if it were possible to comply with such laws, or terminate this business segment. We may also be subject to civil penalties in this event.  These circumstances or others, if they were to occur, could have a material adverse effect on our overall business, prospects or operations.

Competing blockchain platforms and technologies may make it difficult for us to achieve our business objectives.

The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether.  This may adversely affect us and our exposure to Ethereum based technologies. Such circumstances could have a material adverse effect on the our ability to pursue this segment at all, which could have a material adverse effect on the business, prospects or operations

Incorrect or fraudulent token transactions may be irreversible.

Currently, crypto-collectibles game transactions are irrevocable and stolen or incorrectly transferred tokens may be irretrievable. As a result, any incorrectly executed or fraudulent token transactions could adversely affect our business and profitability.

Token transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction. In theory, crypto-collectibles transactions may be reversible with the control or consent of a majority of processing power on the network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of a token or a theft of token generally will not be reversible and we may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, our customers’ tokens could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. Such events could have a material adverse effect on our ability to pursue this segment at all, which could have a material adverse effect on our business, prospects or operations.

Security breaches, computer viruses and computer hacking attacks could harm our business, reputation, brand and results of operations.

Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry and may occur on our systems in the future. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and operating results. We may experience hacking attacks of varying degrees from time to time, including denial-of-service attacks. Because of our prominence in the mobile game industry, we believe we are a particularly attractive target for hackers.


 

In addition, our games involve the storage and transmission of players’ personal information in our facilities and on our equipment, networks and corporate systems run by us or managed by third-parties including Google, Apple, Amazon and Facebook. Security breaches of our systems or third-parties on whom we rely could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability. Our player data, corporate systems, third party systems and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to our data, our players’ data or our advertiser’s data. Additionally, outside parties may attempt to fraudulently induce employees or players to disclose sensitive information in order to gain access to our players’ data or our advertiser’s data. We must continuously examine and modify our security controls and business policies to address the use of new devices and technologies enabling players to share data and communicate in new ways, and the increasing focus by our players and regulators on controlling and protecting user data.

 

Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure or perceived failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of our players may harm our reputation and our ability to retain existing players and attract new players.

 

If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose players and advertisers, and we could suffer significant legal and financial exposure due to such events or in connection with remediation efforts, investigation costs or penalties, changed security and system protection measures. Any of these actions could have a material and adverse effect on our business, reputation and operating results.

 


Any failure or significant interruption in our infrastructure could impact our operations and harm our business.

Our technology infrastructure is critical to the performance of certain of our games and to player satisfaction within those games. These games run on complex distributed systems, or what is commonly known as cloud computing. We do not own, operate and maintain the primary elements of these systems, but instead these systems are operated by third parties that we do not control and which would require significant time and potential expense to replace. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all. A failure or significant interruption in our game service would harm our reputation and operations. We have suffered interruptions in service when releasing new software versions or bug fixes for specific games in the past and if any such interruption were significant, it could harm our business or reputation. We may decide to make significant investments to our technology infrastructure to maintain and improve all aspects of player experience and game performance. To the extent we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. Furthermore, our disaster recovery systems and those of third-parties with which we do business may not function as intended or may fail to adequately protect our critical business information in the event of a significant business interruption, which may cause interruption in service of our games, security breaches or the loss of data or functionality, leading to a negative effect on our business.

 

We must continue to spend significant resources to effectively manage our business and operations.

To effectively manage our business and operations, we will need to continue to focus on spending significant resources to improve our technology infrastructure, our operational, financial and management controls, and our reporting systems and procedures by, among other things:

 

monitoring and updating our technology infrastructure to maintain high performance and minimize down time;

monitoring and updating our technology infrastructure to maintain high performance and minimize down time; and

 

monitoring our internal controls to ensure timely and accurate reporting of all of our operations.


monitoring our internal controls to ensure timely and accurate reporting of all of our operations.

 

These enhancements and improvements will require capital expenditures and allocation of valuable management and employee resources.

 

Our business will suffer if we are unable to successfully acquire or integrate acquired companies into our business or otherwise manage the growth associated with multiple acquisitions.

We intend to evaluate and pursue acquisitions and strategic investments. These acquisitions and strategic investments could be material to our financial condition or results of operations. Challenges and risks from such investments and acquisitions include:

 

negative effects on products and product pipelines and the potential disruption that may follow acquisitions;

negative effects on products and product pipeline from the changes and potential disruption that may follow

diversion of our management’s attention away from our business;

declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future prospects;

significant competition from other game companies as the mobile game industry consolidates;

the need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented on a timely basis, and unforeseen difficulties and expenditures that may arise in connection with integration;

the difficulty in determining the appropriate purchase price for acquired companies may lead to the overpayment in certain acquisitions and the potential impairment of intangible assets and goodwill acquired in acquisitions;

the difficulty in successfully evaluating and utilizing the acquired products, technology or personnel;

the potential incurrence of debt, contingent liabilities, amortization expenses or restructuring charges in connection with any acquisition;

the need to implement controls, procedures and policies appropriate for a larger public company at companies that, prior to acquisition, lacked such controls, procedures and policies;

the difficulty in accurately forecasting and accounting for the financial impact of acquisitions, including accounting charges and integrating and reporting results for acquired companies that do not historically follow generally accepted accounting principles in the United States (“GAAP”);

under purchase accounting, we may be required to write off deferred revenue which may impair our ability to recognize revenue that would have otherwise been recognizable which may impact our financial performance or that of the acquired company;

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

in some cases, the need to transition operations and players onto our existing or new platforms and the potential loss of, or harm to, our relationships with employees, players and other suppliers as a result of integration of new businesses;

in certain instances, the ability to exert control of acquired businesses that include earnout provisions in the agreements relating to such acquisitions or the potential obligation to fund an earnout for a product that has not met expectations;


 

diversion of our management’s attention away from our business;

our dependence on the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, when conducting due diligence and evaluating the results of such due diligence; and

 

declining employee morale and retention issues resulting from changes in compensation, or changes in management, reporting relationships, or future prospects;

significant competition from other game companies as the mobile game industry consolidates;

the need to integrate the operations, systems, technologies, products and personnel of each acquired company, the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise in connection with integration;

the difficulty in determining the appropriate purchase price of acquired companies may lead to the overpayment from certain acquisitions and the potential impairment of intangible assets and goodwill acquired in the acquisitions;

the difficulty in successfully evaluating and utilizing the acquired products, technology or personnel;

the potential incurrence of debt, contingent liabilities, amortization expenses or restructuring charges in connection with any acquisition;

the need to implement controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition had lacked such controls, procedures and policies;

the difficulty in accurately forecasting and accounting for the financial impact of an acquisition transaction, including accounting charges and integrating and reporting results for acquired companies that do not historically follow U.S. GAAP;

under purchase accounting, we may be required to write off deferred revenue which may impair our ability to recognize revenue that would have otherwise been recognizable which may impact our financial performance or that of the acquired company;

`

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

in some cases, the need to transition operations and players onto our existing or new platforms and the potential loss of, or harm to, our relationships with employees, players and other suppliers as a result of integration of new businesses;

in certain instances, the ability to exert control of acquired businesses that include earnout provisions in the agreements relating to such acquisitions or the potential obligation to fund an earnout for a product that has not met expectations;

our dependence on the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, when conducting due diligence and evaluating the results of such due diligence; and

liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, information security vulnerabilities, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, information security vulnerabilities, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

 

The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits, which could adversely affect our business and operating results. Our ability to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. Acquisitions could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt (and increased interest expense), contingent liabilities or amortization expenses related to intangible assets or write-offs of goodwill and/or intangible assets, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders.

 


If we are able to develop new games that achieve success, it is possible that these games could divert players of our other games without growing our overall user base, which could harm operating results.

Although it is important to our future success that we develop new games that become popular with players, it is possible that theseany new games that we develop could causeresult in our existing players to reducereducing their playing time and purchase of virtual items in our existing games. We plan to cross-promote our new games in our other games, which could encourage players of existing games to divert some of their playing time and spendspending on existing games. If new games do not grow our player base or generate sufficient new bookings to offset any declines from our other games, our bookings and revenue could be adversely affected.

 

We derive a material portion of our revenues from advertisements and offers that are incorporated into our free-to-playF2P games through relationships with third parties. If we lose the ability to provide these advertisements and offers for any reason, or if any events occur that negatively impact the revenues we receive from these sources, it would negatively impact our operating results.

We derive revenues from our free-to-playF2P games though in-app purchases, advertisements and offers. We incorporate advertisements and offers into our games by implementing third parties’ software development kits and we have direct relationships with third parties regarding advertising. We rely on these third parties to continue our advertising relationships. If direct advertising relationships change or we exhaust the available inventory of these third parties, it will negatively impact our revenues. If our relationship with any of these third parties terminates for any reason, or if the commercial terms of our relationships do not continue to be renewed on favorable terms, we would need to locate and implement other third-party solutions, which could negatively impact our revenues, at least in the short term. Furthermore, the revenues that we derive from advertisements and offers is subject to seasonality, as companies’ advertising budgets are generally highest during the fourth quarter and decline significantly in the first quarter of the following year, which negatively impacts our revenues in the first quarter (and conversely significantly increases our marketing expenses in the fourth quarter).

 

Our revenue, bookings and operating margins may decline.

The industry in which we operate is highly competitive and rapidly changing, and relies heavily on successful new product launches and compelling content, products and services. As such, if we fail to deliver such content, products and services, do not execute our strategy successfully or if our new content launches are delayed, our revenue, bookings and audience numbers may decline, and our operating results will suffer. In addition, we believe that our operating margin will continue to experience downward pressure as a result of increasing competition. We expect to continue to expend substantial financial and other resources on game development, including mobile games, our technology stack, game engines, game technology and tools and international expansion. Our operating costs will increase and our operating margins may decline if we do not effectively manage costs, launch new products on schedule that monetize successfully and enhance our franchise games so that these games continue to monetize successfully. In addition, weak economic conditions or other factors could cause our business to contract, requiring us to implement significant additional cost cutting measures, including a decrease in research and development, which could harm our long-term prospects.

 

If we fail to effectively manage our human resources, our business may suffer.

Our ability to compete and grow depends in large part on the efforts and talents of our employees and executives. Our success depends in a large part upon the continued service of our senior management team. We do not maintain key-man insurance for our senior management team. The loss of any of the members of our senior management team could harm our business.

 

In addition, our ability to execute our strategy depends on our continued ability to identify, hire, develop motivate and retain highly skilled employees, particularly game designers, product managers and engineers. These employees are in high demand, and we devote significant resources to identifying, recruiting, hiring, training, successfully integrating and retaining them. Any significant turnover in our headcount will place significant demands on our management and our operational, financial and technological infrastructure.

 

If the use of mobile devices as game platforms and the proliferation of mobile devices generally do not continue to increase, our business could be adversely affected.

The number of people using mobile Internet-enabled devices has increased dramatically in the past few years and we expect that this trend will continue. However, the mobile market, particularly the market for mobile games, is still emergingmaturing and it may not grow as we anticipate. Our future success is substantially dependent upon the continued growth of the market for mobile games. The mobile market may not continue to grow at historic rates and consumers may not continue to use mobile-Internet enabled devices as a platform for games. In addition, we do not currently offer our games on all mobile devices. If the mobile devices on which our games are available decline in popularity we could experience a decline in bookings and revenue. Any decline in the growth of the mobile market or in the use of mobile devices for games could harm our business. Moreover, new and emerging technologies could make the mobile devices on which our games are currently released obsolete, requiring us to transition our business model to develop games for other next-generation platforms.

 


 

We have a relatively new business model and a short operating history, which make it difficult to evaluate our prospects and future financial results and may increase the risk that we will not be successful.

 

We incorporated in December 2013 and we have a short operating history and a relatively new business model, which makemakes it difficult to effectively assess our future prospects. Our business model is based on offering games that are free to play. To date, only a very small portion of our players pay for our products. We cannot assure that any of our efforts will be successful or result in the development or timely launch of additional products, or ultimately produce any material revenue.

 

Our existing and potential players may be attracted to competing forms of entertainment such as offline and traditional online games, television, movies and sports, as well as other entertainment options on the Internet.

Our players face a vast array of entertainment choices. Other forms of entertainment, such as offline, traditional online, personal computer and console games, television, movies, sports and the Internet, are much larger and more well-established markets and may be perceived by our players to offer greater variety, affordability, interactivity and enjoyment. These other forms of entertainment compete for the discretionary time and income of our players. If we are unable to sustain sufficient interest in our games in comparison to other forms of entertainment, including new forms of entertainment, our business model may no longer be viable.

 

Competition in our industry is intense and there are low barriers to entry.

Our industry is highly competitive and we expect more companies to enter the sector and a wider range of mobile games to be introduced. Our competitors that develop games for networks, on both web and mobile, vary in size and include companies such as Zynga, Inc., DeNA Co. Ltd. (Japan), Electronic Arts Inc., Gameloft SA, GREE International, Inc., Glu Mobile Inc., King.com Inc., Activision, Rovio Mobile Ltd., Supercell Inc., GungHo Online Entertainment, Inc., Kabam and The Walt Disney Company.Epic Games.

 

Some of these current and potential competitors have significant resources for developing or acquiring additional games, may be able to incorporate their own strong brands and assets into their games, have a more diversified set of revenue sources than we do and may be less severely affected by changes in consumer preferences, regulations or other developments that may impact our industry. In addition, we have relatively limited experience in developing games for mobile and other platforms and our ability to succeed on those platforms is uncertain. We expect new game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications.

 

As there are relatively low barriers to entry to develop a mobile game, we expect new game competitors to enter the market and existing competitors to allocate more resources to develop and market competing games and applications. 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 devices and platforms using relatively limited resources and with relatively limited start-up time or expertise. The proliferation of titles in these open developer channels makes it difficult for us to differentiate ourselves from other developers and to compete for players without substantially increasing our marketing expenses and development costs. Increasing competition could result in loss of players, loss of talent or loss of our ability to acquire new players in a cost-effective manner, all of which could harm our business.

 

Our revenue may be harmed by the proliferation of “cheating” programs and scam offers that seek to exploit our games and players, affects the game-playing experience and may lead players to stop playing our games.

Unrelated third parties have developed, and may continue to develop, “cheating” programs that enable players to exploit vulnerabilities in our games, play them in an automated way or obtain unfair advantages over other players who do play fairly. These programs harm the experience of players who play fairly, may disrupt the virtual economies of our games and may reduce the demand for virtual items. In addition, unrelated third parties attempt to scam our players with fake offers for virtual goods or other game benefits. WhileIf we attemptare unable to quickly discover and disable these programs and activities, and if we are unable to do so quickly our operations may be disrupted, our reputation damaged and players may stop playing our games. This may lead to lost revenue from paying players, increased cost of developing technological measures to combat these programs and activities, legal claims relating to the diminution in value of our virtual currency and goods, and increased customer service costs needed to respond to dissatisfied players.

 

Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results.

We regard the protection of our trade secrets, copyrights, trademarks, service marks, trade dress, domain names, patents, and other productintellectual property rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.

 

We pursue the registration of certain of our copyrights, trademarks, service marks, domain names, and patentsintellectual property rights in the United States and in certain locations outside the United States. This process can be expensive and time-consuming, may not always be successful depending on local laws or other circumstances, and we also may choose not to pursue registrations in every location depending on the nature of the project to which the intellectual property rights pertain. We may, over time, increase our investmentsinvest in protecting our creative works through increased copyright filings and our brands through increased trademark and other filings. Likewise, we may, over time, increase our investmentinvest in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. The Leahy-Smith America Invents Act (the “Leahy-Smith Act”) was adopted in September 2011. The Leahy-Smith Act includes a number of significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted, which could be detrimental to investors, and may also affect patent litigation. The Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business.

 


Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity, or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.

 


We may be involved in legal proceedings and commercial or contractual disputes that may result in adverse outcomes.

We may be involved in claims, suits, government investigations, proceedings and proceedingscommercial or contractual disputes arising in the ordinary course of our business, including actions with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, as well as stockholder derivative actions, class action lawsuits, and other matters. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of their outcomes, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results, and financial condition.

 

Programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games, which would harm our operating results.

Our games may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch, particularly as we launch new games and rapidly release new features to existing games under tight time constraints. We believe that if our players have a negative experience with our games, they may be less inclined to continue or resume playing our games or recommend our games to other potential players. Undetected programming errors, game vulnerabilities that may be exploited by cheating programs and other forms of misappropriation, game defects and data corruption can disrupt our operations, adversely affect the game experience of our players by allowing players to gain unfair advantage, misappropriate virtual goods, harm our reputation, cause our players to stop playing our games, divert our resources and delay market acceptance of our games, any of which could result in legal liability to us or harm our operating results.

 

Evolving regulations, industry standards and practices by platform providers concerning data privacy could prevent us from providing our games to our players, or require us to modify our games, thereby harming our business.

The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet and mobile platforms are under increased public scrutiny. The U.S.United States government, including the Federal Trade Commission the Department of Commerce,(“FTC”), U.S. Congress, and various State Attorneys General and legislatures are continuing to review the need for greater regulation for the collection and use of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. There is also increased attention being given to the collection of data from minors. For instance, the Children’s Online Privacy Protection Act (“COPPA”) requires companies to obtain parental consent before collecting personal information from children under the age of 13. In addition, California has passed the California Consumer Privacy Act (“CCPA”), which, once it goes into effect on January 1, 2020, will require companies to comply with requests by California residents to delete or opt-out of the sharing of personal data, among other requirements. In addition, the European Union has just enacted reforms to its existing data protection legal framework – the EU GeneralGlobal Data Protection Regulation (GDPR), which may result(“GDPR”) implements stringent operational requirements with respect to personal data collected about individuals located in a greater compliance burden for companies with users in Europe.the European Union. Various government and consumer agencies have also called for new regulation and changes in industry practices. For example, in February 2012, the California Attorney General announced a deal with Amazon, Apple, Google, Hewlett-Packard, Microsoft and Research in Motion to strengthen privacy protection for users that download third-party apps to smartphones and tablet devices. Additionally, in January 2014, the Federal Trade Commission announced a settlement with Apple related to in in-app purchases made by minors.

 

We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, data protection, consumer protection and protection of minors and our actual or perceived failure to comply with such obligations could harm our business.

We receive, store and process personal information and other player data, and we enable our players to share their personal information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other player data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable.protection. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It is also possible that new laws, policies, legal obligations or industry codes of conduct may be passed, or existing laws, policies, legal obligations or industry codes of conduct may be interpreted in such a way that could prevent us from being able to offer services to citizens of a certain jurisdiction or may make it more costly or difficult for us to do so. For example, if a country enacted legislation that required data of their citizens gathered by online services to be held within the country, we may not be able to comply with such legislation or compliance could be so difficult or costly that we chose not to stop offering services to citizens of that country. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to players or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our players to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as players, vendors or developers, violate applicable laws or our policies, such violations may also put our players’ information at risk and could in turn have an adverse effect on our business.

 


In this area manyAll 50 U.S. states have passed laws requiring notification to playersindividuals when there is a security breach for certain types of personal data, such as the 2002 amendment to California’s Information Practices Act, or requiringNotice of Data Breach Act. Many federal and state consumer protection laws require the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Moreover, in the areas of privacy, information security, data protection, consumer protection and protection of minors, foreign laws and regulations are often more restrictive than those in the United States. In particular, the European Union and its member states traditionally have taken broader views as to types of data that are subject to data protection, and have imposed legal obligations on companies in this regard. Any failure on our part to comply with laws in these areas hacker may subject us to significant liabilities.

 


Our business is subject to a variety of other U.S.United States and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

We are subject to a variety of laws in the United States and abroad, including state and Federal laws regarding consumer protection, electronic marketing, protection of minors, data protection, competition, taxation, intellectual property, export and national security, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. There is a risk that these laws may be interpreted in a manner that is not consistent with our current practices, and could have an adverse effect on our business. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. It is also likely that as our business grows and evolves and our games are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. In addition, there are ongoing academic, political and regulatory discussions in the United States and other jurisdictions regarding whether social casinosocial-casino applications should be subject to a higher level or different type of regulation than other mobile game applications and, if so, what this regulation should include.

 

If we fail to anticipate or successfully develop new games for new technologies, platforms and devices, the quality, timeliness and competitiveness of our games could suffer.

The games industry is characterized by rapid technological changes that can be difficult to anticipate. New technologies, including distribution platforms and gaming devices, such as consoles, virtual and augmented reality, messenger applications, blockchain technology, connected TVs, or a combination of existing and new technologies, may force us to adapt our current game development processes or adopt new processes. If consumers shift their time to platforms other than the mobile platforms where our games are currently primarily distributed, the size of our audience could decline and our performance could be impacted. It may take significant time and resources to shift our focus to such technologies, platforms and devices, putting us at a competitive disadvantage. Alternatively, we may increase the resources employed in research and development to adapt to these new technologies, distribution platforms and devices, either to preserve our games or a game launch schedule or to keep up with our competition, which would increase our development expenses. We could also devote significant resources to developing games to work with such technologies, platforms or devices, and these new technologies, platforms or devices may not experience sustained, widespread consumer acceptance. The occurrence of any of these events could adversely affect the quality, timelines and competitiveness of our games, or cause us to incur significantly increased costs, which could harm our operation results.

 

FinancialOur tax liabilities may be greater than anticipated.

We may be subject to audit by the Internal Revenue Service and Other Risk Factorsby taxing authorities of the state and local jurisdictions in which we operate. Our tax obligations are based in part on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property, the jurisdictions in which we operate, how tax authorities assess revenue-based taxes such as sales and use taxes, the scope of our international operations and the value we ascribe to our intercompany transactions. Taxing authorities may challenge our tax positions and methodologies for valuing developed technology or intercompany arrangements, as well as our positions regarding the collection of sales and use taxes and the jurisdictions in which we are subject to taxes, which could expose us to additional taxes, including interest and penalties.

 

U.S. tax legislation passed in 2017 may materially affect our financial condition, results of operations and cash flows.

U.S. tax legislation passed in 2017 has significantly changed the U.S. federal income taxation of U.S. corporations, including reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, adopting elements of a territorial tax system, revising the rules governing net operating losses and the rules governing foreign tax credits, and introducing new anti-base erosion provisions. The legislation could be subject to potential amendments, technical corrections and interpretations by the U.S. Treasury and Internal Revenue Service, any of which could affect the impacts of the legislation.

Risks Related to this Offering and Ownership of Our Common Stock and Warrants

Our share price has been, and will likely continue to be, volatile.

The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Between January 1, 2017 and July 17, 2018,October 25, 2019, the stock price of our common stock has ranged from $0.064$0.02 to $0.72. In addition to the factors discussed in these “Risk Factors,” factors that may cause volatility in our share price include:

 

changes in projected operational and financial results;

changes in projected operational and financial results;

 

issuance of new or updated research or reports by securities analysts;

issuance of new or updated research or reports by securities analysts;

 

market rumors or press reports;

market rumors or press reports;

 

our announcement of significant transactions or product developments;

our announcement of significant transactions or product developments;

 

the use by investors or analysts of third-party data regarding our business that may not reflect our actual performance;

the use by investors or analysts of third-party data regarding our business that may not reflect our actual performance;

 

fluctuations in the valuation of companies perceived by investors to be comparable to us;

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and

 

general economic and market conditions.


general economic and market conditions. 

 

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.


If our application to list our common stock and the warrants offered hereby on The Nasdaq Capital Market is approved, our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a delisting of our common stock and warrants.

 

We have applied to list our shares of common stock and the warrants offered hereby for trading on The Nasdaq Capital Market under the symbols “TAPM,” and “TAPMW,” respectively. No assurance can be given that our listing application will be approved. If after listing we fail to satisfy the continued listing requirements of The Nasdaq Stock Market, LLC (“Nasdaq”) such as the corporate governance requirements, the stockholder’s equity requirement or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock and warrants. Such a delisting or even notification of failure to comply with such requirements would likely have a negative effect on the price of our common stock and warrants and would impair your ability to sell or purchase our common stock and warrants when you wish to do so. In the event of a delisting, we expect that we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock and warrants to become listed again, stabilize the market price or improve the liquidity of our common stock and warrants, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

You may experience immediate and substantial dilution.

Because the effective price per share of common stock included in the units or issuable upon exercise of the warrants included in the units being offered may be substantially higher than the net tangible book value per share of our common stock, you may experience substantial dilution to the extent of the difference between the effective offering price per share of common stock you pay in this offering and the net tangible book value per share of our common stock immediately after this offering. Our net tangible book value as of June 30, 2019, was approximately $239,737, or $0.003 per share of common stock. Net tangible book value per share is equal to our total tangible assets minus total liabilities, all divided by the number of shares of common stock outstanding. See “Dilution.”

The warrants are speculative in nature.

Except as otherwise provided in the warrants, the warrants do not confer any rights of common stock ownership on their holders, such as voting rights, but rather represent the right to acquire shares of common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the warrants may exercise their right to acquire the common stock and pay an exercise price of $         per share of common stock, subject to certain adjustments, prior to five years from the date of issuance, after which date any unexercised warrants will expire and have no further value. Moreover, following this offering, the market value of the warrants, if any, is uncertain and there can be no assurance that the market value of the warrants will equal or exceed their imputed offering price. There can be no assurance that the market price of the common stock will ever equal or exceed the exercise price of the warrants, and consequently, it may never be profitable for holders of the warrants to exercise the warrants.

Holders of warrants purchased in this offering will have no rights as common stockholders until such holders exercise their warrants and acquire our common stock.

Until holders of the warrants acquire shares of our common stock upon exercise thereof, such holders will have no rights with respect to the shares of our common stock underlying the warrants. Upon exercise of the warrants, the holders will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

There is no established public market for the warrants being offered by us in this offering.

The warrants being offered hereby are a new issue and accordingly there is no established public trading market for the warrants. Although we have applied to list the warrants on The Nasdaq Capital Market, we cannot guarantee that our application will be approved. If our warrants are not approved for listing on The Nasdaq Capital Market, an active market may never develop and the liquidity of the warrants will be limited.

Provisions of the warrants offered by this prospectus could discourage an acquisition of us by a third party.

Certain provisions of the warrants offered by this prospectus could make it more difficult or expensive for a third party to acquire us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants. These and other provisions of the warrants offered by this prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.

It is possible that we will require additional capital to meet our financial obligations and support business growth, and this capital might not be available on acceptable terms or at all; new investors face possible future dilution.

We intend to continue to make significant investments to support our business growth and will possibly require additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when and if we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

 

Our shareholdersThe issuance of shares upon the exercise of derivative securities, including the warrants offered hereby, may be adversely affected bycause immediate and substantial dilution to our past history as a “shell company” making Rule 144 unavailable for ourexisting stockholders.

As of June 30, 2019, we had approximately 4,925,004 shares of common stock that were issuable upon the exercise of vested outstanding stock options, 10,750,000 shares issuable upon the vesting of restricted stock units and 34,200,002 shares issuable upon the exercise of vested outstanding warrants. The issuance of shares upon the exercise or vesting of these securities, exceptor upon the exercise of the warrants issued in certain circumstances.

Rule 144 underthis offering, may result in substantial dilution to the Securities Actequity interest and voting power of 1933, as amended, provides a safe harbor under which holders of restrictedour common stock.

In the future, we may also issue additional shares of common stock or other securities and affiliatesconvertible into or exchangeable for shares of an issuercommon stock. The issuance of additional shares of our common stock may resell their securities intosubstantially dilute the ownership interests of our existing stockholders. Furthermore, sales of a substantial amount of our common stock in the public market. However, Rule 144 is unavailable for securities of former shell companies until, among other things, twelve months have elapsed sincemarket, or the former “shell company” has filed “Form 10 information” withperception that these sales may occur, could reduce the Securities and Exchange Commission.

We are deemed a shell company under Rule 144 as a resultmarket price of our Share Exchange Agreement with Tapinator, Inc., the successor to Evolution Resources, Inc., on June 16, 2014. Evolution Resources was formerly known as BBN Global Consulting, Inc. BBN Global Consulting was marked as a shell company according to its (i) Form 10-Q’s for the fiscal quarters ended April 30, 2008 and January 31, 2009 and (ii) Form 10-K for the year ended October 31, 2008 filed with the Securities and Exchange Commission on June 12, 2008, March 3, 2009 and January 28, 2009, respectively. As a result, Rule 144 shall not be available to permit our shareholders to resell their securities until twelve months from the filing of this registration statement assuming we are able to be granted effectiveness by the SEC and remain current with our periodic filings under the Securities Exchange Act of 1934, as amended. No assurance can be provided that we will again become eligible for resale under Rule 144.

The unavailability of the Rule 144 resale exemption for our securities may adversely affectcommon stock. This could also impair our ability to raise additional financing on a private placement basis, and may adversely affectcapital through the abilitysale of our shareholderssecurities.


Management will have broad discretion as to resell their securities into the public market, alluse of whichthe net proceeds from this offering, and we may not use these proceeds effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our securities. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Our failure to apply these funds effectively could have a material adverse effect on us and our shareholders.

Any market that develops in sharesbusiness, delay the development of our common stock will be subject to the penny stock regulationsproducts and restrictions pertaining to low priced stocks that will create a lack of liquidity and make trading difficult or impossible.

The trading of our securities, if any, will be in the over-the-counter market which is commonly referred to as the “OTC”. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as tocause the price of our securities.securities to decline.

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.

 

Broker-dealer practicesOur assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in connectionour conclusion that as of December 31, 2018, our internal control over financial reporting was not effective due to material weaknesses resulting from (i) the failure to have appropriate policies and procedures in place to evaluate the proper accounting and disclosures of key documents and agreements and (ii) our lack of a sufficient and skilled accounting personnel with transactionsan appropriate level of technical accounting knowledge and experience in “penny stocks” are regulated by penny stock rules adopted by the SEC. The term “penny stock”application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements. In order to cure these material weaknesses, we have taken remediation actions, including engaging Carrollton Partners, LLC to assist with accounting and financial reporting services, but we can give no assurance that these efforts will be sufficient to remediate our material weaknesses. Designing and implementing effective disclosure controls and procedures is defineda continuous effort that requires us to anticipate and react to changes in Exchange Act Rule 3a51-1 as, among other things, as having a price of less than $5.00 per share as set forth in Exchange Act Rule 3a51-(1)(d). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocksour business and the natureeconomic and level of risksregulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the penny stock market.future.

 

The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salespersonIn addition, we have in the transaction,past, and if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock heldmay in the customer’s account.future, make corrections or out of period adjustments to our financial statements. In addition, broker-dealers who sell these securitiesmaking such corrections or adjustments we apply the analytical framework of SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may havedetermine whether the effect of reducing the levelany correction or out of trading activity, if any,period adjustment to our financial statements is material and whether such corrections or adjustments, individually or in the secondary marketaggregate, would require us to restate or revise our financial statements for previous periods. Under SAB 99, companies are required to apply quantitative and qualitative factors to determine the “materiality” of particular corrections and adjustments.

For example, we recently determined that a security subjectcorrection related to a change in our valuation allowance will be required with respect to the penny stock rules,calculation of our income tax provisions for the fiscal years ended December 31, 2018 and investors2017. The correction will have no effect on our consolidated balance sheets as of December 31, 2018 and 2017 or the consolidated statements of operations and cash flows for the years then ended. As a result, we determined that the error is not material to the prior reporting periods affected and a restatement of the previously issued financial statements is not required. In the future we may identify further corrections or out of period adjustments impacting our interim or annual financial statements. Depending upon the complete qualitative and quantitative analysis, this could result in our common stock may find it difficult to sell their shares.us restating or revising previously issued financial statements.

 

Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Additionally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares, in all probability, will be subject to such penny stock rules for the foreseeable future and our shareholders will in all likelihood find it difficult to sell their securities.


The interests of our principal stockholders, officers and directors, who collectively hold a majoritybeneficially own approximately 42% of our stock, may not coincide with yours and such controlling stockholder may makestockholders will have the ability to substantially influence decisions with which you may disagree.

As of July 17, 2018,October 25, 2019, our principal stockholders, officers and directors beneficially owned a majorityapproximately 42% of our common stock. As a result, our principal stockholders, officers and directors controlwill have the ability to substantially allinfluence matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company and make some future transactions more difficult or impossible without the support of our controlling stockholders. The interests of our controllingsuch stockholders may not coincide with ouryour interests or the interests of other stockholders.

 

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.

The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market (as a result of Sarbanes-Oxley), require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.

We may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.

While we currently qualify as an “emerging growth company” under the Jumpstart of Business Startups Act of 2012, or the JOBS Act, we will lose that status at the latest by the end ofDecember 31, 2023, which willcould increase the costs and demands placed upon our management. 

 

We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1$1.07 billion (as indexed for inflation); (ii) December 31, 2023, the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under thisour registration statement;statement on Form S-1 (File No. 333-224531) declared effective by the SEC on September 17, 2018; (iii) the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’ as defined by the Securities and Exchange Commission,SEC, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we wouldcould have to comply with additional disclosure and accounting requirements, particularly if we would also nonot qualify as a smaller reporting company.

 

We are an “emerging growth company” and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will may make our common stock less attractive to investors. 

 

The JOBS Act permits “emerging growth companies” like us to rely on some of the reduced disclosure requirements that are already available to smaller reporting companies. As long as we qualify as an emerging growth company or a smaller reporting company, we would be permitted to omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act, as described above, and are also exempt from the requirement to submit “say-on-pay”, “say-on-pay frequency” and “say-on-parachute” votes to our stockholders and may avail ourselves of reduced executive compensation disclosure that is already available to smaller reporting companies.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have not elected to take advantage of the benefits of this and such election is irrevocable, therefore we will not be able to take advantage of these exemptions at any time in the future. 


 

We will cease to be an emerging growth company at such time as described in the risk factor immediately above. Until such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile and could cause our stock price to decline. 

 

Banks and financial institutions may not provide banking services, or may cut off services, to businesses that provide digital asset related services or that accept digital assets as payment, including financial institutions of investors in our securities.

A number of companies that provide blockchain, Ethereum and/or other digital asset related services have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with crypto-assets may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions. We also may be unable to obtain or maintain these services for our business. The difficulty that many businesses that provide blockchain, Ethereum and/or other digital asset related services have and may continue to have in finding banks and financial institutions willing to provide them services may be decrease the usefulness of crypto-collectibles as a digital asset and harm public their public perception in the future. Similarly, the usefulness of crypto-assets as a payment method and the public perception of crypto-assets could be damaged if banks or financial institutions were to close the accounts of businesses providing blockchain, Ethereum and/or other digital asset related services.  This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and commodities exchanges, the over the counter market and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could result in the inability of our investors to open or maintain stock or commodities accounts, including the ability to deposit, maintain or trade our securities. Such factors could have a material adverse effect our ability to pursue this business segment at all, which could have a material adverse effect on our business, prospects or operations and harm investors.


Since there has been limited precedence set for financial accounting of Ethereum and other digital assets, it is unclear how we will be required to account for digital assets transactions in the future.

Since there has been limited precedence set for the financial accounting of digital assets, it is unclear how we will be required to account for digital asset transactions or assets. Furthermore, a change in regulatory or financial accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact our business, prospects, financial condition and results of operation. Such circumstances could have a material adverse effect on our ability to pursue this business segment at all, which could have a material adverse effect on our business, prospects or operations.

Our common stock price may be volatile due to third-party data regarding our games.

Third parties, such as AppAnnieApp Annie publish daily data about us and other mobile game companies with respect to DAUs, and MAUs, monthly revenue, time spent per user and other information concerning mobile game usage. These metrics can be volatile, particularly for specific games, and in many cases do not accurately reflect the actual levels of usage of our games across all platforms and may not correlate to our bookings or revenue from the sale of virtual goods. There is a possibility that third parties could change their methodologies for calculating these metrics in the future. To the extent that securities analysts or investors base their views of our business or prospects on such third-party data, the price of our common stock may be volatile and may not reflect the performance of our business.

 

If securities or industry analysts do not publish research about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock, to some extent, may at some point depend on the research and reports that securities or industry analysts publish about our business. We do not have any control over these analysts. If one or more of the analysts elect to cover us and downgrade our shares or lower their opinion of our shares, our share price would likely decline. If one or more of these analysts elect to cover us and subsequently cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

Future sales or potential sales of our common stock in the public market could cause our share price to decline.

If the existing holders of our common stock, particularly our directors and officers, sell a large number of shares, they could adversely affect the market price for our common stock. Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

If we are unable to maintain adequate internal controls for financial reporting in the future, investor confidence in the accuracy of our financial reports may be impacted or the market price of our common stock could be negatively impacted.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

No securities regulatory agencies have reviewedWe may be limited in our ability to utilize, or may not be able to utilize net operating loss carryforwards to reduce our future tax liability as a result of an “ownership change,” as defined in Section 382 of the Companies publicly available filings.Code (as defined below) triggered by past or future transactions.

PriorAs of December 31, 2018 and June 30, 2019, we had approximately $3.82 million and 3.87 million, respectively, of net operating loss (“NOL”) carryforwards for U.S. federal tax purposes. The amount of NOLs carryforwards that we present herein for the fiscal year ended December 31, 2018 is on an as-corrected basis to correct for an error related to the filingcalculation of this registration statement, neitherour income tax provisions for the U.S. Securitiesfiscal years ended December 31, 2018 and Exchange Commission (the “SEC”) nor any state or foreign securities regulatory agency2017. Our management has reviewed or passed upondetermined that the accuracy or adequacyerror was immaterial to the prior reporting periods affected and that a restatement of the Company’s past filings public filings, includingpreviously issued financial statements is not required. For additional information, see “–If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our past filings with OTC Markets. Accordingly, prospective investorsfinancial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.”

For NOLs generated prior to January 1, 2018 (“Old NOLs”), we generally can use our NOL carryforwards to offset U.S. federal taxable income, thereby reducing our U.S. federal income tax liability, for up to 20 years from the year in which the losses were generated, after which time they will not enjoyexpire. The rate at which we can utilize our NOL carryforwards is limited (which could result in NOL carryforwards expiring prior to their use) each time we experience an “ownership change,” as determined under Section 382 of the benefitsCode. A Section 382 ownership change generally occurs if a shareholder or security, if any,a group of shareholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an ownership change occurs, Section 382 generally would impose an annual limit on the amount of post-ownership change taxable income that may be derived from the registration or qualification processoffset with respectpre-ownership change NOL carryforwards equal to the accuracy or adequacyproduct of the disclosures containedtotal value of our outstanding equity immediately prior to the ownership change (reduced by certain items specified in Section 382) and the U.S. federal long-term tax-exempt interest rate in effect at the time of the ownership change. A number of complex rules apply in calculating this limitation. It is possible that we may experience ownership changes in the Company’s past public filings.

Prospective investors needfuture as a result of certain transactions, equity offerings and other shifts in our stock ownership. As a result, our ability to conduct an independent investment analysis and due diligence review.

No independent legal, accounting or business advisors have been appointeduse our pre-change NOL carryforwards to represent the interests of prospective investors in the Company. Neither the Company nor any of its officers, directors, employees or agents makes any representation or expresses any opinion with respectoffset U.S. federal taxable income may be subject to the merits of an investmentlimitation, which could result in the shares of the Company, including, without limitation, the proposed value of the Company or the shares. Each prospective investor is therefore encouragedincreased tax liability to engage independent accountants, appraisers, attorneys and other advisorsus. In addition, our ability to (i) conduct such due diligence review as such prospective investor may deem necessary and advisable, and (ii) provide such opinions with respectuse our NOL carryforwards will be limited to the meritsextent we fail to generate sufficient taxable income before they expire. Existing and future Section 382 limitations and our inability to generate sufficient taxable income could result in a portion of an investmentour NOL carryforwards expiring before they are used. In addition, under the 2017 Tax Cut and Jobs Act, losses arising in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but they may only be used to offset the Company and applicable risk factors as such prospective investor may deem necessary and advisable. The Company will cooperate fully with any prospective investor who desires to conduct such an independent analysis, so long as the Company determines, in its sole discretion, that such cooperation is not unduly burdensome.

Prospective investors need to review individual tax consequencestaxable income by a maximum of an investment in the Company.

An investment in the Company will have certain tax consequences that will be unique to each investor, depending upon his/her/its personal tax situation, his/her/its nationality and/or place of domicile, and other unique personal circumstances. The Company cannot and does not make any representations or assurances as to individual tax consequences. Investors are encouraged to consult with their own tax advisors in connection with any investment decision with respect to the shares.80%.

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward looking statements reflecting our current expectations that involve risks and uncertainties.  These forward-looking statements include, but are not limitedwithin the meaning of the federal securities laws. Forward-looking statements generally relate to statements related to industry prospects,future events or our future economic performance including anticipated revenues and expenditures, results of operationsfinancial or financial position, and other financial items, our business plans and objectives, including our growth strategies and intended product releases, and may include certain assumptions that underlie theoperating performance. In some cases, you can identify forward-looking statements. Forward-looking statements often includebecause they contain words such as “outlook,“may,“projected,“will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “will,” “anticipate,” “believe,” “target,” “expect,“projects,“contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, inincluding, without limitation, the future tense are generally forward-looking.following:

our ability to develop successful games that we are able to monetize;

our ability to generate revenues and gross margins from games designed for smartphones and tablets;

our heavy reliance on mobile infrastructure providers, including Apple, Facebook, Google and Amazon;

our ability to achieve a sufficient return on investment with respect to freemium mobile games;

our ability to maintain the popularity of our games;

our ability to deliver “hit” products and services and compete with products built by competitors;

our reliance on a small number of games for a significant portion of our revenue;

our ability to compete with, or, if necessary, adapt our business model to, subscription-based gaming services;

our ability to compete in a rapidly evolving industry;

our ability to prevent or mitigate the impact of security breaches, computer viruses and computer hacking attacks;

risks associated with interruptions in our technology infrastructure;

risks associated with the amount of resources required to manage our business and operations;

our ability to successfully identify, acquire and integrate acquisition candidates and manage the resulting growth therefrom;

risks associated with our games competing against each other for user attention;

our ability to generate revenue from advertisement arrangements within our games;

risks associated with declining revenue, bookings and operating margins;

our reliance on our senior management team and game designers;

risks associated with the adoption of mobile devices as a game platform;

risks associated with our relatively new business model and limited operating history;

risks associated with “cheating” programs that exploit our games and players;

our ability to protect and enforce our intellectual property rights;

risks associated with litigation;

our ability to comply with laws and regulations, including those related to data privacy and personal information;

risks associated with volatility in the price of our common stock;

our ability to maintain effective internal controls over financial reporting; and

the other factors identified under the heading “Risk Factors” elsewhere in this prospectus.


 

We caution you that the foregoing list may not contain all of the risk factors that may impact the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based thesethe forward-looking statements largelycontained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.prospects. The achievement or successoutcome of the matters covered by suchevents described in these forward-looking statements involves significantis subject to risks, uncertainties and assumptions, including thoseother factors described in the section titled “Risk Factors” beginning on page 3 ofand elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment and industry.environment. New risks may alsoand uncertainties emerge from time to time. Ittime, and it is not possible for our managementus to predict all of the risks related to our business and operations, nor can we assess theuncertainties that could have an impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated, predicted or implied in the forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, wecontained in this prospectus. We cannot guaranteeassure you that the future results, levels of activity, performance or events, and circumstances reflected in the forward-looking statements will be achieved or occur, and reportedactual results, should not be considered as an indication of future performance.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on suchevents, or circumstances could differ materially from those described in the forward-looking statements.

 

ExceptThe forward-looking statements made in this prospectus relate only to events as required by law, weof the date on which the statements are made. We undertake no obligation to update any forward-looking statements for any reasonmade in this prospectus to conform these statements to actual resultsreflect events or circumstances after the date of this prospectus or to changesreflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our expectations.forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.


 

USE OF PROCEEDS

 

AllWe estimate that the net proceeds from our issuance and sale of our units in this offering will be approximately $            (or approximately $            if the underwriter exercises its option to purchase additional shares of common stock and/or warrants to purchase common stock from us in full), assuming a public offering price of $            per unit, which is the last reported sale price of our common stock offeredon the OTCQB as of          , 2019, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by this prospectus are being registered forus and excluding the accounts of the selling stockholders and we will not receiveproceeds, if any, proceeds from the sale of these shares. However, we will receive proceeds from the exercise price of the warrants issued in this offering.

Each $0.10 increase or decrease in the assumed public offering price of $            per unit would increase or decrease our net proceeds from this offering by approximately $            million, assuming that the number of units offered by us remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of the warrants are exercised for cash.issued in this offering. An increase or decrease of 1,000,000 units in the number of units offered by us would increase or decrease our net proceeds from this offering by approximately $            million, assuming no change in the assumed public offering price per unit, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of the warrants issued in this offering. We do not expect that a change in the offering price or the number of units by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

We currently intend to use thosethe net proceeds if any,we receive from this offering for general corporate purposes.purposes, including marketing and development, both for our current games and additional titles, working capital, operating expenses and capital expenditures. A portion of the net proceeds may also be used to fund potential acquisitions or other strategic investments, although we have no present commitments or agreements to enter into any such acquisitions or to make any such investments.

The expected use of the net proceeds from this offering and our existing cash and our cash equivalents and short-term investments represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the proceeds to be received upon the closing of this offering or the actual amounts that we will spend on the uses set forth above. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, and other factors that our board of directors may deem relevant.

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

 

Our common stock currently trades on OTC MarketsOTCQB under the symbol “TAPM.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the OTC Markets.OTCQB. The quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not represent actual transactions. The historical per share numbers included in this section do not reflect the anticipated reverse stock split.

 

 Fiscal Year 2018  

High Bid

  

Low Bid

 
 

High

  

Low

 

2019:

        

Fourth Quarter (through October 25, 2019)

 $0.055  $0.033 

Third Quarter

 $0.065  $0.027 

Second Quarter

 $0.055  $0.028 

First Quarter

 $0.720  $0.120  $0.070  $0.022 

2018:

        

Fourth Quarter

 $0.068  $0.016 

Third Quarter

 $0.088  $0.030 
Second Quarter $0.150  $0.064  $0.150  $0.064 

First Quarter

 $0.720  $0.120 

2017:

        

Fourth Quarter

 $0.242  $0.080 

Third Quarter

 $0.145  $0.071 

Second Quarter

 $0.140  $0.080 

First Quarter

 $0.182  $0.086 

 

  Fiscal Year 2017 
  

High

  

Low

 

First Quarter

 $0.182  $0.086 

Second Quarter

 $0.140  $0.080 

Third Quarter

 $0.145  $0.071 

Fourth Quarter

 $0.242  $0.080 

  Fiscal Year 2016 
  

High

  

Low

 

First Quarter

 $0.340  $0.210 

Second Quarter

 $0.271  $0.171 

Third Quarter

 $0.310  $0.180 

Fourth Quarter

 $0.220  $0.150 

On October 25, 2019, the last reported sale price of our common stock on the OTCQB was $0.048 per share. As of October 25, 2019, we had 130 holders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or street name through various brokerage firms.

 

We have never paid cash dividends onapplied to list our common stock and do not anticipate paying anythe warrants offered hereby for trading on The Nasdaq Capital Market under the symbols “TAPM” and “TAPMW,” respectively, and we expect that our common stock and the warrants offered hereby will begin trading on The Nasdaq Capital Market immediately following the completion of this offering.


CAPITALIZATION

The following table sets forth our cash dividendsand capitalization as of June 30, 2019, on:

an actual basis;

an as adjusted basis, giving effect to the sale and issuance of            units by us in this offering, based upon the assumed public offering price of $            per unit, which is the last reported sale price of our common stock on the OTCQB as of           , 2019, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and excluding the proceeds, if any, from the exercise of warrants issued in this offering.

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” and our audited financial statements for the years ended December 31, 2018 and 2017 and our unaudited interim financial statements for the six month periods ended June 30, 2019 and 2018 and related notes included elsewhere in this prospectus.

  As of June 30, 2019 
  

Actual

  

As Adjusted

 

Cash and cash equivalents

 $509,905  $  

Stockholders’ equity:

        

Common stock, $0.001 par value; 250,000,000 shares authorized; 87,979,526 shares issued and outstanding at June 30, 2019; and as adjusted:         shares issued and outstanding

  87,980     

Additional paid-in capital

  12,856,400     

Accumulated deficit

  (11,892,081)    
         

Total stockholders’ equity

 $1,052,299  $  
         

Total capitalization

 $1,052,299  $  

Each $0.10 increase or decrease in the foreseeableassumed public offering price of $           per unit would increase or decrease, as applicable, our cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $           million, assuming that the number of units offered by us remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of warrants issued in this offering. Each increase or decrease of 1,000,000 units offered by us would increase or decrease the amount of our cash and total stockholders’ equity by approximately $ million, assuming a public offering price of $            per unit, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from the exercise of warrants issued in this offering.

The above discussion and table is based on 87,979,526 outstanding shares of common stock as of June 30, 2019. This number excludes:

4,925,004 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $0.128 per share;

10,750,000 shares of common stock granted as restricted stock units to various employees, officers and directors;

34,200,002 shares of common stock issuable upon the exercise of warrants at a weighted average exercise price of approximately $0.144; and

2,324,996 shares of common stock reserved for future issuance under the 2015 Equity Incentive Plan.

In addition, except as otherwise indicated, the information above reflects and assumes:

a 1-for-           reverse stock split of our issued and outstanding common stock, to be effected before the closing of this offering;

a reduction in our total authorized share capital from 250,000,000 shares to 25,000,000 shares, to be effected before the closing of this offering if, and only if, the reverse stock split is implemented;

no exercise by the underwriter of its option to purchase           additional shares of our common stock and/or warrants representing the right to purchase an additional           shares of our common stock;

no exercise of the warrants to be issued to investors in this offering; and

no exercise of the warrants to be issued to the underwriter in this offering.


DILUTION

As of June 30, 2019, our historical net tangible book value was $239,737, or $0.003 per share of our common stock. Our historical net tangible book value is the amount of our total tangible assets less our liabilities. Historical net tangible book value per share is our historical net tangible book value divided by the number of shares of common stock outstanding as of June 30, 2019.

Our as adjusted net tangible book value as of June 30, 2019, which is our net tangible book value at that date, after giving effect to the sale of            units in this offering by us at an assumed public offering price of $       per unit, which is the last reported sale price of our common stock on the OTCQB on        , 2019, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, would have been $       , or $         per share, which excludes the exercise of any of the warrants to purchase shares of our common stock to be issued in this offering. This amount represents an immediate increase in net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to investors participating in this offering. Dilution per share to investors participating in this offering is determined by subtracting as adjusted net tangible book value per share after this offering from the assumed public offering price per share paid by investors in this offering.

The following table illustrates this dilution on a per share basis:

Assumed public offering price per unit

     $  

Historical net tangible book value (deficit) per share as of June 30, 2019

 $239,737     

Increase in net tangible book value per share attributable to new investors purchasing units in this offering

 $      

As adjusted net tangible book value per share after giving effect to this offering

     $  

Dilution per share to investors participating in this offering

     $  

The information discussed above is illustrative only, and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. Each $0.10 increase or decrease in the assumed public offering price of $        per unit, would further increase or decrease the as adjusted net tangible book value per share after this offering by $        per share and the dilution per share to investors participating in this offering by $        per share, assuming that the number of units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from exercise of the warrants issued in this offering.

We may also increase or decrease the number of units we are offering. An increase of 1,000,000 in the number of units offered by us would increase or decrease our as adjusted net tangible book value per share by approximately $       , and the dilution per share to investors participating in this offering by $       , after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding the proceeds, if any, from exercise of the warrants issued in this offering. The information discussed above is illustrative only and will be adjusted based on the actual offering price, the actual number of units we offer in this offering, and other terms of this offering determined at pricing.

If the underwriter exercises its option to purchase additional securities in full, the as adjusted net tangible book value will increase to $        per share, representing an immediate increase in as adjusted net tangible book value to existing stockholders of $        per share and immediate dilution of $        per share to investors participating in this offering.

The above discussion and table is based on 87,979,526 outstanding shares of common stock as of June 30, 2019. This number excludes:

4,925,004 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $0.128 per share;

10,750,000 shares of common stock granted as restricted stock units to various employees, officers and directors;

34,200,002 shares of common stock issuable upon the exercise of warrants at a weighted average exercise price of approximately $0.144; and

2,324,996 shares of common stock reserved for future issuance under the 2015 Equity Incentive Plan.

In addition, except as otherwise indicated, the information above reflects and assumes:

a 1-for-           reverse stock split of our issued and outstanding common stock, to be effected before the closing of this offering;

a reduction in our total authorized share capital from 250,000,000 shares to 25,000,000 shares, to be effected before the closing of this offering if, and only if, the reverse stock split is implemented;

no exercise by the underwriter of its option to purchase additional           shares of our common stock and/or warrants representing the right to purchase an additional           shares of our common stock; and

no exercise of the warrants to be issued to investors in this offering; and

no exercise of the warrants to be issued to the underwriter in this offering.

To the extent that any outstanding options or warrants are exercised, new options or restricted stock units are issued under our stock-based compensation plans or we issue additional shares of common stock or other equity or convertible debt securities in the future, but intendthere will be further dilution to retain our capital resources for reinvestmentinvestors participating in our business.this offering.

 


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.You should read the following discussion and analysis of our financial condition and results of operations in conjunction with ourthe audited and unaudited consolidated financial statements and the related notes thereto that are included elsewhere in this prospectus. In addition to historical information, theThe following discussion and analysis includescontains forward-looking statements that reflect our plans, estimatesare subject to risks and beliefs. Our actualuncertainties. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in theor implied by forward-looking statements. Factors that could cause or contribute to these differences includestatements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.” See “Special Note Regarding Forward-Looking Statements.”

Overview

 

This overview providesWe develop and publish apps for mobile platforms that we believe can be leaders within their respective categories, with a high-level discussion of our operating results and some of the trends that affect our business.focus on social-casino games. We believe that an understanding ofrefer to these trends is important to understand our financial results for the years ended December 31, 2017 and 2016. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our audited consolidated financial statements and accompanying notes.

Tapinator develops and publishes mobile games and applications on the iOS, Google Play, Amazon and Ethereum platforms. Tapinator's portfoliotitles as “Category Leading Apps.” Our library includes over 300 active mobile gaming titles that, collectively, have achieved over 450470 million playermobile downloads, including notable gamesproperties such as ROCKY™, Video Poker Classic and Solitaire Dash and Dice Mage. Tapinator generates. We generate revenues through the sale of branded advertisingadvertisements and via consumer transactions, including in-app purchases.purchases and subscriptions. We are headquartered in New York, with product development and marketing teams located in North America, Europe and Asia. Consumers can find high-quality mobile applications from us wherever they see the “T” character logo. 

Key Metrics 

We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

Key Operating Metrics

We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The two metrics that we use most frequently are DAUs and ABPU.

Daily Active Users – DAUs. We define DAUs as the number of individuals who played a particular smartphone game on a particular day.  An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games.  In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time.  Average DAU for a particular period is the average of the DAUs for each day during that period.  We use DAU as a measure of player engagement with the titles that our players have downloaded.

Average Bookings Per User – ABPUs. We define ABPU as our total bookings in a given period, divided by the number of days in that period, divided by, the average DAUs during the period. We believe that ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as our management and board of directors. We use ABPU as a measure of overall monetization across all of our players through the sale of virtual goods and advertising.

Key Financial Metrics

Bookings. Bookings is a non-GAAP financial measure that is equal to revenue recognized during the period plus or minus the change in deferred revenue during the period and amounts billed, but uncollected, pursuant to contractual license agreements. We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long term, the factors impacting our bookings and revenue are the same. However, in the short term, there are factors that may cause revenue to exceed or be less than bookings in any period.

We use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure. 

Trends in Key Operating Metrics

Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

All Apps

                

Average DAUs

  173   509   201   585 

ABPU

  .05   .02   .05   .02 

The decrease in average DAU for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the continued decline in new player installs of our Rapid-Launch Games that began in the fourth quarter of 2016 and that has continued through the second quarter of 2019.


The ABPU increased for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps and because of the successful launch of Crypto Trillionaire in the three months ended March 31, 2019.

We expect further comparative decreases in DAU in 2019 as our Rapid-Launch Games continue to decline and we continue to focus our efforts on our better monetizing, but lower volume, Category Leading Apps.

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

Category Leading Apps

                

Average DAUs

  32   32   36   30 

ABPU

  0.20   0.10   0.19   0.10 

The average DAU within our Category Leading Apps remained unchanged for the three months ended June 30, 2019 as compared to the three ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

 

The Company currently develops twoaverage DAU within our Category Leading Apps increased for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were partially offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

The increase in our Category Leading Apps’ ABPU for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and monetization improvements in Video Poker Classic in 2019.

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

(In thousands)

 

Rapid-Launch Games

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average DAUs

 

 

141

 

 

 

477

 

 

 

165

 

 

 

555

 

ABPU

 

 

0.02

 

 

 

0.01

 

 

 

0.02

 

 

 

0.01

 

The decrease in average DAU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the continued weakening in new player installs stemming from our suspension of new Rapid-Launch Game development at the end of 2018. 

The increase in average ABPU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was driven by increases in advertising prices and player engagement (specifically impressions per DAU) during the relative periods.

Comparison of the Years Ended December 31, 2018and 2017

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

All Games

        

Average DAUs

  414   728 

ABPU

  0.02   0.01 

The decrease in average DAU for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the continued decline in new player installs of our Rapid-Launch Games that began in the fourth quarter of 2016 and that continued through the fourth quarter of 2018.

The ABPU increased for the year ended December 31, 2018 as compared to the year ended December 31, 2017 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps.

We expect further decreases in DAU in 2019 as our Rapid-Launch Games continue to decline and we continue to focus on our better monetizing, but lower volume, Category Leading Apps.

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Category Leading Apps

        

Average DAUs

  29   30 

ABPU

  0.11   0.12 


The slight decrease in average DAU within our Category Leading Apps for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the successful launches (and related audience spikes) of Dice Mage 2 and Big Sport Fishing 2 in the third quarter of 2017, which were only partially matched by audience gains in Video Poker Classic and the launch of Fusion Heroes and Dot to Dot - Relaxing Puzzles on iOS in 2018.

The slight decrease in our Category Leading Apps’ ABPU for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to a decrease in monetization from Video Poker Classic’s “whale players,” a player that spends more than $100 on the game, during the comparative periods.

 

 

Year ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Rapid-Launch Games

 

 

 

 

 

 

 

 

Average DAUs

 

 

384

 

 

 

699

 

ABPU

 

 

0.01

 

 

 

0.01

 

The decrease in average DAU within our Rapid-Launch Games for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the continued weakening in new player installs stemming from what we believe to be saturation for these types of mobile games. Tapinator’s Rapid-Launch Games are developed and published in significant quantity. These are titlesgames that are built economically and rapidly based on a series of internally developed, expandable and re-useable game engines. These games are currently published under the Tapinator, Tap2Play, and TapSim Game Studio brands. The Company’s Full-Featured Games are unique products with high production values and high revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have,began in the opinionfourth quarter of management,2016 and that continued through the potentialfourth quarter of 2018. In addition, changes to become well-known and long-lasting, successful mobile game franchises. These games are currently published exclusively under the Tapinator brand.

Google Play discovery algorithm that occurred late in the second quarter of 2018 also contributed to the decline in our

Trends in Key Operating Metrics

Rapid-LaunchThree and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018Mobile Games:We define a Rapid-Launch Game

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

All Apps

                

Average DAUs

  173   509   201   585 

ABPU

  .05   .02   .05   .02 

The decrease in average DAU for the three and six months ended June 30, 2019 as a product that is built on top of onecompared to the three and six months ended June 30, 2018 was primarily related to the continued decline in new player installs of our internally developed Rapid-Launch Game engines. To date, we have developed engines (and launched more than 300 Rapid-Launch titles) within the following game genres: parking, driving, stunts, shooters, fighting, animal sims, career sims and racing. For example, we have created a proprietary parking simulation engine and have used this to launch car, truck, limousine, ambulance, and other types of vehicle parking simulation games. These games are monetized primarily through branded advertisements which are typically sold via third-party advertising networks and trafficked via third-party ad mediation software installed within the games. These games are marketed primarily through cross-promotion within our existing Rapid-Launch Game network and via various app store optimization (“ASO”) strategies.

Full-FeaturedGamesMobile Games:We define a Full-Featured Game as a product that is designed and engineered on a completely custom basis (i.e. not based on an existing game engine), and one that contains unique components of gameplay, systems, themes, IP or some combination thereof. Full-Featured Games require significant development investment and have,began in the opinionfourth quarter of management,2016 and that has continued through the potential to become well-known and long-lasting successful mobile game franchises. To date, the Company has developed and/or published approximately 15 Full-Featured Games including notable titles such as: ROCKY™, Video Poker Classic, Solitaire Dash and Dice Mage. Elevensecond quarter of these games have been editorially featured as “Best New Games” or “New Games We Love” by Apple on the iOS platform, and a subset of these games have also been editorially featured by the Google Play and Amazon App Stores. These games are marketed primarily through app store feature placement and through paid marketing channels in cases where the Company calculates that a game’s average player Lifetime Value (“LTV”) exceeds that of the game’s average player acquisition cost. Full-Featured Games are monetized primarily via consumer app store transactions.

Blockchain Games: In December 2017, the Company formed a new subsidiary, Revolution Blockchain, LLC, to develop, publish and invest in decentralized games and applications (“DAPPS”) that leverage the Ethereum blockchain platform. The Company’s first two products from this subsidiary are currently available in live beta. These products include BitPainting, a digital platform for collecting iconic art on the blockchain, and DarkWinds, an online multiplayer collectable game with a pirate adventure theme, where Ethereum powers the ability to collect and battle with limited edition cards. Each of these products leverage blockchain technology for both payment (i.e. the purchase & sale of virtual assets as well as the payment to the Company for platform fees) and the storage of these assets via non-fungible tokens (“NFTs”) that live on the blockchain. All payments are made in Ethereum (or Ether). These games were initially launched on the web and may later be optimized for mobile devices or launched as standalone mobile applications.

Strategy

In early 2017, we announced a strategic shift to focus more of our investment and management resources into our Full-Featured Games business. We believe the potential size, quality and sustainability of revenues and earnings from the Full-Featured Games business is significantly greater than that of our existing Rapid-Launch Games business. Our goal in terms of our Full-Featured Games is to create franchise-type titles that have product lifespans of at least five to ten years. In order to accomplish this, we believe that we need to achieve player LTVs that exceeds player acquisition cost, at scale. To date, the Company has been able to achieve this, at certain player volumes, for two products: “Video Poker Classic” and “Solitaire Dash.”2019.

  


 

Current OutlookThe ABPU increased for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps and because of the successful launch of Crypto Trillionaire in the three months ended March 31, 2019.

 

As demonstrated byWe expect further comparative decreases in DAU in 2019 as our strategic shift, we believe and are confident in our ability toRapid-Launch Games continue to drive strong year-over-year growth in key operatingdecline and financial metrics within our Full-Featured Games business. This growth is expected to be derived from a combination of existing franchises such as Video Poker Classic and Solitaire Dash, and titles that we plan to this year including but not limited to Solitaire Dash 2.0, Divide & Conquer and Dice Mage Duel.

In our Rapid-Launch Games business, we experienced significant year-over-year declines in 2017 and Q1 2018. We believe this business to have peaked, thus we have recently reduced the number of new Rapid-Launch Games that we are developing on a monthly basis and we are carefully monitoring the projected return on investment from these new games.  We do believe there exists a long tail of revenue associated with our Rapid-Launch games portfolio and, accordingly, we have been forecasting flat year-over-year performance for this business in 2018. More recently, however, changes in the Google Play store have reduced the discovery of our existing Rapid Launch Games and have likely made the introduction of new Rapid Launch Games to be more challenging.  We will continue to assess the long-term impact of these changes.  However, we do expect to see a materially negative impact on our Rapid Launch Game results for the remainder of this year.  We will provide additional updates through public disclosure of what these impacts might be as we continue to collect additional data.focus our efforts on our better monetizing, but lower volume, Category Leading Apps.

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

Category Leading Apps

                

Average DAUs

  32   32   36   30 

ABPU

  0.20   0.10   0.19   0.10 

The average DAU within our Category Leading Apps remained unchanged for the three months ended June 30, 2019 as compared to the three ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

 

In termsThe average DAU within our Category Leading Apps increased for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were partially offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

The increase in our Category Leading Apps’ ABPU for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and monetization improvements in Video Poker Classic in 2019.

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

(In thousands)

 

Rapid-Launch Games

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average DAUs

 

 

141

 

 

 

477

 

 

 

165

 

 

 

555

 

ABPU

 

 

0.02

 

 

 

0.01

 

 

 

0.02

 

 

 

0.01

 

The decrease in average DAU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the continued weakening in new player installs stemming from our suspension of new Rapid-Launch Game development at the end of 2018. 

The increase in average ABPU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was driven by increases in advertising prices and player engagement (specifically impressions per DAU) during the relative periods.

Comparison of the Years Ended December 31, 2018and 2017

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

All Games

        

Average DAUs

  414   728 

ABPU

  0.02   0.01 

The decrease in average DAU for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the continued decline in new player installs of our recent entry into the BlockchainRapid-Launch Games market, given the current small size and nascent state of this market, we do not currently expect our initial games within this area to have a material impact on 2018 revenues. While we are extremely proud of the high quality of both of these products and how they were brought to market both efficiently and on schedule, we have been disappointed that began in the slow commercial adoptionfourth quarter of both products. While we will continue to selectively develop both products, we are taking a cautious go-forward approach regarding blockchain games as we recognize2016 and that continued through the addressable market may currently be too small to generate significant near term value for our shareholders.fourth quarter of 2018.

  

Key MetricsThe ABPU increased for the year ended December 31, 2018 as compared to the year ended December 31, 2017 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps.

 

We regularly review a number of metrics, including the following key operatingexpect further decreases in DAU in 2019 as our Rapid-Launch Games continue to decline and financial metrics,we continue to evaluatefocus on our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

better monetizing, but lower volume, Key Operating MetricsCategory Leading Apps

We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The three metrics that we use most frequently are Daily Active Users (“DAUs”), Monthly Active Users (“MAUs”) and Average Bookings Per User (“ABPU”).

 

Daily Active Users – DAUs. We define DAUs as the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players have downloaded.

Monthly Active Users – MAUs. We define MAUs as the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention.

Average Bookings Per User – ABPUs. We define ABPU as our total bookings in a given period, divided by the number of days in that period, divided by, the average DAUs during the period. We believe that ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as our management and board of directors. We use ABPU as a measure of overall monetization across all of our players through the sale of virtual goods and advertising.

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Category Leading Apps

        

Average DAUs

  29   30 

ABPU

  0.11   0.12 

 


 

The slight decrease in average DAU within our Key Financial MetricsCategory Leading Apps for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the successful launches (and related audience spikes) of Dice Mage 2 and Big Sport Fishing 2 in the third quarter of 2017, which were only partially matched by audience gains in Video Poker Classic and the launch of Fusion Heroes and Dot to Dot - Relaxing Puzzles on iOS in 2018.

 

The slight decrease in our Bookings. Category Leading Apps’Bookings is ABPU for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to a non-GAAP financial measuredecrease in monetization from Video Poker Classic’s “whale players,” a player that is equal to revenue recognizedspends more than $100 on the game, during the period pluscomparative periods.

 

 

Year ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Rapid-Launch Games

 

 

 

 

 

 

 

 

Average DAUs

 

 

384

 

 

 

699

 

ABPU

 

 

0.01

 

 

 

0.01

 

The decrease in average DAU within our Rapid-Launch Games for the changeyear ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the continued weakening in deferred revenue during the period. We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed. Bookings, as opposed to revenue, is the fundamental top-line metric we use to manage our business, asnew player installs stemming from what we believe it is a useful indicatorto be saturation for these types of the sales activity in a given period. Over the long term, the factors impacting our bookings and revenue are the same. However,games that began in the short term, there are factorsfourth quarter of 2016 and that may cause revenue to exceed or be less than bookings in any period.

We use bookings to evaluatecontinued through the resultsfourth quarter of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with U.S. GAAP.2018. In addition, other companies, including companieschanges to the Google Play discovery algorithm that occurred late in the second quarter of 2018 also contributed to the decline in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.

Trends in Key Operating Metrics

 

Three and Six Months Ended March 31, 2018June 30, 2019 Compared to Three and Six Months Ended March 31, 2017June 30, 2018

 

 

Three months Ended March 31,

  

Three months ended

June 30,

  

Six months ended

June 30,

 
 

2018

  

2017

  

2019

  

2018

  

2019

  

2018

 
 

(In thousands)

  

(In thousands)

  

(In thousands)

 

All Games

        

All Apps

                

Average DAUs

  662   891   173   509   201   585 

Average MAUs

  11,134   15,899 

ABPU

  0.01   0.01   .05   .02   .05   .02 

 

The decrease in average DAU for the three and MAUsix months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the continued decline in new player installs of our Rapid-Launch Games that began in the fourth quarter of 2016 and that has continued through the second quarter of 2019.


The ABPU increased for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps and because of the successful launch of Crypto Trillionaire in the three months ended March 31, 20182019.

We expect further comparative decreases in DAU in 2019 as comparedour Rapid-Launch Games continue to the three months ended March 31, 2017 was primarily relateddecline and we continue to a general weakening in new player installs offocus our Rapid-Launch Games that began in Q4 2016 and that has continued through Q1 2018, which was marginally offset by an increase in player engagement ofefforts on our Full-Featured Games.better monetizing, but lower volume, Category Leading Apps.

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

Category Leading Apps

                

Average DAUs

  32   32   36   30 

ABPU

  0.20   0.10   0.19   0.10 

 

The ABPUaverage DAU within our Category Leading Apps remained unchanged for the three months ended June 30, 2019 as compared to the three ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

The average DAU within our Category Leading Apps increased for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. This resulted from the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and audience gains in Video Poker Classic, both of which were partially offset by declines in Fusion Heroes and Dice Mage 2, games that we have not promoted since 2018.

The increase in our Category Leading Apps’ ABPU for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the successful launch of Crypto Trillionaire in the three months ended March 31, 2019 and monetization improvements in Video Poker Classic in 2019.

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

 

(In thousands)

 

Rapid-Launch Games

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average DAUs

 

 

141

 

 

 

477

 

 

 

165

 

 

 

555

 

ABPU

 

 

0.02

 

 

 

0.01

 

 

 

0.02

 

 

 

0.01

 

The decrease in average DAU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was primarily related to the continued weakening in new player installs stemming from our suspension of new Rapid-Launch Game development at the end of 2018. 

The increase in average ABPU within our Rapid-Launch Games for the three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018 was driven by increases in advertising prices and player engagement (specifically impressions per DAU) during the relative periods.

Comparison of the Years Ended December 31, 2018and 2017

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

All Games

        

Average DAUs

  414   728 

ABPU

  0.02   0.01 

The decrease in average DAU for the year ended December 31, 2018 as compared to the three monthsyear ended MarchDecember 31, 2017.2017 was primarily related to the continued decline in new player installs of our Rapid-Launch Games that began in the fourth quarter of 2016 and that continued through the fourth quarter of 2018.

  

Three Months Ended March 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Full-Featured Games

        

Average DAUs

  28   22 

Average MAUs

  284   246 

ABPU

  0.11   0.15 

  

The increase in average DAU and MAUABPU increased for the three monthsyear ended MarchDecember 31, 2018 as compared to the three monthsyear ended MarchDecember 31, 2017 because a larger percentage of our overall player base was derived from our better monetizing Category Leading Apps.

We expect further decreases in DAU in 2019 as our Rapid-Launch Games continue to decline and we continue to focus on our better monetizing, but lower volume, Category Leading Apps.

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Category Leading Apps

        

Average DAUs

  29   30 

ABPU

  0.11   0.12 


The slight decrease in average DAU within our Category Leading Apps for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was primarily related to the successful launchlaunches (and related audience spikes) of Dice Mage 2 and Big Sport Fishing 2 in Q3 2017.the third quarter of 2017, which were only partially matched by audience gains in Video Poker Classic and the launch of Fusion Heroes and Dot to Dot - Relaxing Puzzles on iOS in 2018.

 

The slight decrease in our Full-Featured Games’Category Leading Apps’ ABPU for the three monthsyear ended MarchDecember 31, 2018 as compared to the three monthsyear ended MarchDecember 31, 2017 was primarily related to a decrease in monetization from Video Poker Classic ABPU, which experiencedClassic’s “whale players,” a decrease in monetization from “whale players” inplayer that spends more than $100 on the game, during the comparative periods, and the inclusion of Dice Mage 2, a game with ABPU less favorable than our prior period overall Full-Featured Game average.periods.

 

 

Three months Ended March 31,

 

 

Year ended December 31,

 

 

2018

  

2017

 

 

2018

 

 

2017

 

 

(In thousands)

 

 

(In thousands)

 

Rapid-Launch Games

        

 

 

 

 

 

 

Average DAUs

  634   869 

 

384

 

 

699

 

Average MAUs

  10,850   15,653 

ABPU

  0.01   0.01 

 

0.01

 

 

0.01

 

 

The decrease in average DAU and MAU within our Rapid-Launch Games for the three monthsyear ended MarchDecember 31, 2018 as compared to the three monthsyear ended MarchDecember 31, 2017 was primarily related to a generalthe continued weakening in new player installs stemming from what we believe to be saturation for these types of games that began in Q4the fourth quarter of 2016 and that has continued through Q1the fourth quarter of 2018. In addition, changes to the Google Play discovery algorithm that occurred late in the second quarter of 2018 also contributed to the decline in our Rapid-LaunchGames audience metrics.

 

The ABPU within our Rapid-Launch Games remained unchangedconstant for the three monthsyear ended MarchDecember 31, 2018 as compared to the three monthsyear ended MarchDecember 31, 2017, driven by an increase in advertising prices, (“CPM’s” or “Cost Per Thousand Impressions”) but offset by a reduction in player engagement (specifically impressions per DAU) during the relative periods.

 


Twelve Months Ended December 31, 2017 Compared to Twelve Months Ended December 31, 2016

  Year Ended December 31, 
  2017  

2016

 

All Games

 

(In thousands)

 
    

Average DAUs

  728   959 
         

Average MAUs

  12,618   16,531 
         

ABPU

  0.01   0.01 

The decrease in average DAU and MAU for the year ended December 31, 2017 as compared to the year ended December 31, 2016 was primarily related to a significant, but temporary, strengthening of our Rapid-Launch Games business that we experienced in the second and third quarters of 2016, but that has not since been sustained. This strengthening occurred across our entire Rapid-Launch Games portfolio.

The ABPU remained unchanged for the year ended December 31, 2017 as compared to the year ended December 31, 2016.

  Year Ended December 31, 
  2017  

2016

 

Full-Featured Games

 

(In thousands)

 
    

Average DAUs

  30   17 
         

Average MAUs

  324   194 
         

ABPU

  0.12   0.07 

The increase in average DAU and MAU for the year ended December 31, 2017 as compared to the year ended December 31, 2016 was primarily related to the successful Full-Featured Game launches of Dice Mage 2 and Big Sport Fishing 2017 in 2017.

The increase in our Full-Featured Games’ ABPU for the year ended December 31, 2017 as compared to the year ended December 31, 2016 was primarily related to strong player monetization performance achieved within our Dice Mage 2, Video Poker Classic and Solitaire Dash games.

  Year Ended December 31, 
  2017  

2016

 

Rapid-Launch Games

 

(In thousands)

 
    

Average DAUs

  699   942 
         

Average MAUs

  12,293   16,337 
         

ABPU

  0.01   0.01 

The decrease in average DAU and MAU for the year ended December 31, 2017 as compared to the year ended December 31, 2016 was primarily related to a significant, but temporary, strengthening of our Rapid-Launch Games business that we experienced in the second and third quarters of 2016, but that has not since been sustained. This strengthening occurred across our entire Rapid-Launch Games portfolio.

The ABPU within our Rapid-Launch Games remained unchanged for the year ended December 31, 2017 as compared to the year ended December 31, 2016 driven by an increase in advertising prices (“CPM’s” or “Cost Per Thousand Impressions”) but offset by a reduction in player engagement (impressions per DAU) during the relative periods.


Results of Operations

 

The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.

 

Comparison of the Three Months Ended March 31,ended June 30, 2019 and 2018 and 2017

 

Revenue

 

 

Three months Ended March 31,

 

 

Three months ended June 30,

 

 

2018

  

2017

 

 

2019

 

 

2018

 

 

(In thousands)

 

 

(In thousands)

 

Revenue by Type

        

 

 

 

 

 

 

 

 

Consumer App Store Transactions

 $573  $284 

 

$

1,169

 

 

$

427

 

Advertising / Other

  316   528 

 

 

177

 

 

 

307

 

Total

 $889  $813 

 

$

1,346

 

 

$

734

 

 

Our revenue increased $76$612 thousand, or 9%83%, from $813to $1,346 thousand for the three months ended March 31, 2017 to $889June 30, 2019, from $734 thousand for the three months ended March 31,June 30, 2018. The increase in revenue iswas attributable primarily to an increase in Consumer App Store Transactions, driven byconsumer app store transactions from within our Full-Featured Games business, which wasCategory Leading Apps and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred revenue and a corresponding increase in revenue during the period in the amount of $521 thousand. Our revenue increases were partially offset by a decrease in Advertising revenue, driven by declinesadvertising-related bookings stemming from the continued decrease in DAUs across our Rapid-Launch Games business. portfolio.

 

  

Three months Ended March 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Revenue by Game Type

        

Full-Featured

 $277  $133 

Rapid-Launch

  612   680 

Total

 $889  $813 

 

 

Three months ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Revenue by App Type

 

 

 

 

 

 

 

 

Category Leading Apps

 

$

1,126

 

 

$

295

 

Rapid-Launch Games

 

 

220

 

 

 

439

 

Total

 

$

1,346

 

 

$

734

 

 

Our Full-Featured Games’Category Leading Apps revenue increased $143$831 thousand, or 108%282%, from $133to $1,126 thousand for the three months ended March 31, 2017 to $276June 30, 2019, from $295 thousand for the three months ended March 31,June 30, 2018.  The increase in Full-Featured Gamesour Category Leading Apps revenue iswas attributable primarily to an increase in both consumer app store transactions and advertising-related bookings resulting from strong user growth and monetization improvements in Video Poker Classic during the higher netmost recent period, the successful launch of Crypto Trillionaire during the three months ended March 31, 2019, and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred revenue recordedand a corresponding increase in the comparable period in 2017, resulting from a new revenue recognition policy implemented in Q4 2016, which was partially offset by a small decrease in bookings during the relative periods.period.


 

Our Rapid-Launch Games’Games revenue decreased $68$219 thousand, or 10%50%, from 680to $220 thousand for the three months ended March 31, 2017 to $612June 30, 2019, from $439 thousand for the three months ended March 31,June 30, 2018. The decrease in revenue iswas attributable primarily to a decrease in advertisingboth consumer app store transactions and advertising-related bookings resulting from the continued decrease in DAUs and new player downloads across our Rapid-Launch Games portfolio.

Cost of Revenue

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Platform Fees

 $397  $219 

Licensing + Royalties

  28   28 

Hosting

  4   3 

Total Cost of Revenue

 $429  $250 

Revenue

  1,346   734 

Gross Margin

  68

%

  66

%

Our cost of revenue increased $179 thousand, or 72%, to $429 thousand in the three months ended June 30, 2019, from $250 thousand in the three months ended June 30, 2018. Our gross margin increased to 68% during the three months ended June 30, 2019 compared to 66% during the three months ended June 30, 2018. The increase in our cost of revenue was primarily due to an increase in platform fees corresponding to our higher revenue in the three months ended June 30, 2019 and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred platform fees and a corresponding increase in our cost of revenue during the period.

Research and Development Expenses

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Research and development

 $36  $79 

Percentage of revenue

  3

%

  11

%

Our research and development expenses decreased $43 thousand, or 54%, to $36 thousand in the three months ended June 30, 2019, from $79 thousand in the three months ended June 30, 2018. The decrease in research and development costs was primarily due to a decrease in revenue share associated with our Rapid-Launch Games portfolios.

Marketing Expenses

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Marketing and public relations

 $235  $110 

Percentage of revenue

  17

%

  15

%

Our marketing expenses increased $125 thousand, or 114%, to $235 thousand in the three months ended June 30, 2019, from $110 thousand in the three months ended June 30, 2018.  The increase in 2019 was primarily due to an increase in marketing expenditures for both our Category Leading Apps and corporate marketing.

General and Administrative Expenses

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

General and administrative

 $757  $704 

Percentage of revenue

  56

%

  96

%

Our general and administrative expenses increased $53 thousand, or 7%, to $757 thousand in the three months ended June 30, 2019, from $704 thousand in the three months ended June 30, 2018. The increase in general and administrative expenses was primarily due to an increase in cash compensation related to our personnel primarily associated with expanded game marketing initiatives.

Amortization of Capitalized Software Development Costs

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Amortization of capitalized software development

 $156  $142 

Percentage of revenue

  12

%

  19

%


Our amortization of capitalized software development increased $14 thousand or 10%, to $156 thousand in the three months ended June 30, 2019 from $142 thousand in the three months ended June 30, 2018. The increase resulted from the commercial launch of My Horoscope during the three months ended March 31, 2019 and the initiation of the amortization period for this software product, combined with increased amortization attributable to Video Poker Classic software development costs that were incurred and capitalized in the three months ended March 31, 2019.

Other (Income) Expenses

  

Three months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Other (income) expenses

 $(4

)

 $(1

)

Percentage of revenue

  0

%

  0

%

Our other income increased $3 thousand to $4 thousand in the three months ended June 30, 2019, from $1 thousand in the three months ended June 30, 2018. The increase in other income was due to higher interest income related to greater cash balances held during the most recent periods.

Comparison of the Six Months Ended June 30, 2019 and 2018

Revenue

 

 

Six months ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Revenue by Type

 

 

 

 

 

 

 

 

Consumer App Store Transactions

 

$

1,711

 

 

$

1,000

 

Advertising / Other

 

 

448

 

 

 

622

 

Total

 

$

2,159

 

 

$

1,622

 

Our revenue increased $537 thousand, or 33%, to $2,159 thousand for the six months ended June 30, 2019, from $1,622 thousand for the six months ended June 30, 2018. The increase in revenue was attributable primarily to an increase in consumer app store transactions from within our Category Leading Apps and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred revenue and a corresponding increase in revenue during the period in the amount of $521 thousand. These increases were partially offset by a decrease in advertising-related bookings stemming from athe continued decrease in DAUs across our Rapid-Launch Games portfolio.

 

 

Six months ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Revenue by App Type

 

 

 

 

 

 

 

 

Category Leading Apps

 

$

1,616

 

 

$

570

 

Rapid-Launch Games

 

 

543

 

 

 

1,052

 

Total

 

$

2,159

 

 

$

1,622

 

Our Category Leading Apps revenue increased $1,046 thousand, or 184%, to $1,616 thousand for the six months ended June 30, 2019, from $570 thousand for the six months ended June 30, 2018. The increase in our Category Leading Apps revenue was attributable primarily to an increase in both consumer app store transactions and advertising-related bookings resulting from strong user growth and monetization improvements in Video Poker Classic during the most recent period, the successful launch of Crypto Trillionaire during the three months ended March 31, 2019, and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred revenue and a corresponding increase in revenue during the period in the amount of $521 thousand.

Our Rapid-Launch Games’ revenue decreased $509 thousand, or 48%, to $543 thousand for the six months ended June 30, 2019, from $1,052 thousand for the six months ended June 30, 2018. The decrease in revenue was attributable to a decrease in both consumer app store transactions and advertising-related bookings resulting from the continued decrease in DAUs and new player downloads across our Rapid-Launch Games portfolio.

 


 

Cost of Revenue

 

 

Three months Ended March 31,

 

 

Six months ended June 30,

 

 

2018

  

2017

 

 

2019

 

 

2018

 

 

(In thousands)

 

 

(In thousands)

 

Platform Fees

 $266  $244 

 

$

635

 

 

$

486

 

Licensing + Royalties

  24   10 

 

 

85

 

 

 

52

 

Hosting

  3   2 

 

 

9

 

 

 

6

 

Total Cost of Revenue

 $293  $256 

 

$

729

 

 

$

544

 

Revenue

  889   813 

 

 

2,159

 

 

 

1,622

 

Gross Margin

  67

%

  69

%

 

 

66

%

 

 

66

%

 

Our cost of revenue increased $22$185 thousand, or 9%34%, from $244to $729 thousand in the threesix months ended March 31, 2017 to $266June 30, 2019, from $544 thousand in the threesix months ended March 31,June 30, 2018. This increase wasOur gross margin remained unchanged during the six months ended June 30, 2019 from 66% during the six months ended June 30, 2018. Our gross margin remained unchanged primarily due to the ongoing licensing fee payout related to the 2019 release of Crypto Trillionaire, and due to the shortening of our statistical estimates for the average user life of paying players within our casino and card games, pursuant to our revenue recognition policy. This change in estimates resulted in a one-time reduction in deferred platform fees and a corresponding increase in our cost of revenue during the same periods. Our Gross Margin decreasedperiod. These increases in our cost of revenue were partially offset by two hundred basis points from 69% during the three months ended March 31, 2017a decrease in revenue that was subject to 67% during the three months ended March 31, 2018. This decrease was primarily due to an increase in Licensing and Royalties payments made during the respective periods, corresponding to certain of our Full-Featured Games launched in between the corresponding periods.platform fees.

 

Research and Development Expenses

 

 

Three months Ended March 31,

 

 

Six months ended June 30,

 

 

2018

  

2017

 

 

2019

 

 

2018

 

 

(In thousands)

 

 

(In thousands)

 

Research and development

 $76  $17 

 

$

80

 

 

$

155

 

Percentage of revenue

  8

%

  2

%

 

 

4

%

 

 

10

%

 

Our research and development expenses increased $59decreased $75 thousand, or 347%48.3%, from $17to $80 thousand in the threesix months ended March 31, 2017 to $76June 30, 2019, from $155 thousand in the threesix months ended March 31,June 30, 2018. The increasedecrease in research and development costs was primarily due to an increasea decrease in revenue share associated with our Rapid-Launch Games released beginning in March 2017, resulting from a contractual change we made in early 2017 with the developer of our Rapid-Launch Games. The strategic effect of this change was to reduce our initial capital risk associated with our Rapid-Launch Games, in exchange for a commensurate increase in the long term revenue share that we pay for these games. portfolios.

 

Marketing Expenses

 

 

Three months Ended March 31,

  

Six months ended June 30,

 
 

2018

  

2017

  

2019

  

2018

 
 

(In thousands)

  

(In thousands)

 

Marketing and public relations

 $64  $179  $421  $174 

Percentage of revenue

  7

%

  22

%

  19

%

  11

%

 

Our marketing expenses decreased $115increased $247 thousand, or 64%142%, from $179to $421 thousand in the threesix months ended March 31, 2017 to $64June 30, 2019, from $174 thousand in the threesix months ended March 31,June 30, 2018.  The decreaseincrease in 20182019 was primarily due to lower gamean increase in marketing expenditures for both our Full-Featured games.Category Leading Apps and corporate marketing.

 

General and Administrative Expenses

 

 

Three months Ended March 31,

  

Six months ended June 30,

 
 

2018

  

2017

  

2019

  

2018

 
 

(In thousands)

  

(In thousands)

 

General and administrative

 $915  $338  $1,512  $1,620 

Percentage of revenue

  103

%

  42

%

  70

%

  100

%

 

Our general and administrative expenses increased $577decreased $108 thousand, or 171%7%, from $338to $1,512 thousand in the threesix months ended March 31, 2017 to $915June 30, 2019, from $1,620 thousand in the threesix months ended March 31,June 30, 2018. The increasedecrease in general and administrative expenses was primarily due to a non-recurring, increasesnon-cash, stock-based professional fee related to certain investment banking services provided to us in the three months ended March 31, 2018, partially offset by an increase in non-cash, professional feesstock-based compensation expenses related to certain restricted stock unit incentive grants made in the three months ended March 31, 2018 to our employees and stock-based employee expenses.an increase in cash compensation related to our personnel primarily associated with expanded game marketing initiatives.

 

  

Three months Ended March 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Amortization of capitalized software development

 $129  $195 

Percentage of revenue

  15

%

  23

%


Amortization of Capitalized Software Development Costs

  

Six months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Amortization of capitalized software development

 $341  $271 

Percentage of revenue

  16

%

  17

%

 

Our amortization of capitalized software development decreased $66increased $70 thousand, or 34%26%, to $341 thousand in the six months ended June 30, 2019, from $195$271 thousand in the six months ended June 30, 2018. The increase resulted from the commercial launch of My Horoscope during the three months ended March 31, 2019 and the initiation of the amortization period for this software product, combined with increased amortization attributable to Video Poker Classic software development costs that were incurred and capitalized in the three months ended March 31, 20172019.

Other (Income) Expenses

  

Six months ended June 30,

 
  

2019

  

2018

 
  

(In thousands)

 

Other (income) expenses

 $(2

)

 $323 

Percentage of revenue

  0

%

  20

%

Our other (income) expenses decreased $325 thousand, or 101%, to $129$(2) thousand of other income in the threesix months ended March 31,June 30, 2019, from $323 thousand of other expenses in the six months ended June 30, 2018.  The decrease in amortization of capitalized software developmentother expenses was primarily attributable to a decrease in upfront development expenditures relatingdebt discount of $188 thousand to our Rapid-Launch Games$0 from $188 thousand, a decrease in interest expense, net, from $135 thousand in the six months ended June 30, 2018, to interest income of $2 thousand in the six months ended June 30, 2019 that we beganwas attributable to the repayment in March 2017, and a resultthe first quarter of impairment of capitalized software relating to one2018 of our Full-Featured Games8% Original Issue Discount Senior Convertible Debenture in Q4 2017.the original aggregate principal amount of $2,394,000, issued to Hillair Capital Investment L.P. (“Hillair”) in July 2016 (as amended, the “2016 Debenture”).

 


Comparison of the YearsYears Ended December 31, 20172018 and 20162017

Revenue

 

Year ended December 31,

 

 Year Ended December 31, 

 

2018

 

 

2017

 

 2017  

2016

 

 

(In thousands)

 

Revenue by Type

 

(In thousands)

 

 

 

 

 

 

 

 

 

Consumer App Store Transactions

 $1,337  $738 

 

$

1,718

 

 

$

1,337

 

Advertising / Other

  1,804   2,994 

 

 

1,154

 

 

 

1,804

 

Total

 $3,141  $3,732 

 

$

2,872

 

 

$

3,141

 

 

Our revenue decreased $591$269 thousand, or 16%9%, from $3.73 millionto $2,872 thousand for the year ended December 31, 2016 to $3.14 million2018, from $3,141 thousand for the year ended December 31, 2017. The decrease in revenue is attributable primarily to a decrease in advertising relatedadvertising-related bookings, driven primarily by DAU declines from within our Rapid-Launch Games business,Game portfolios which was partially offset by an increase in consumer app store transaction related bookingstransactions, driven from within both our Full-FeaturedCategory Leading Games business.and our Rapid-Launch Games and an increase in other revenue from licensing arrangements.

 

  Year Ended December 31, 
  2017  

2016

 

Revenue by Game Type

 

(In thousands)

 

Full-Featured

 $920  $351 

Rapid-Launch

  2,221   3,381 

Total

 $3,141  $3,732 

 

 

Year ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Revenue by App Type

 

 

 

 

 

 

 

 

Category Leading Apps

 

$

1,224

 

 

$

920

 

Rapid-Launch Games

 

 

1,648

 

 

 

2,221

 

Total

 

$

2,872

 

 

$

3,141

 

 

Our Full-Featured Games’Category Leading Apps revenue increased $569$304 thousand, or 162%33%, from $351to $1,224 thousand for the year ended December 31, 2016 to2018, from $920 thousand for the year ended December 31, 2017. The increase in Full-Featuredour Category Leading Apps revenue is attributable primarily to growthan increase in player engagementconsumer app store transaction bookings and monetization within Video Poker Classic, andan increase in other revenue associated with the global launches of Solitaire Dash and Dice Mage 2 between the comparable periods.License Agreement.

 

Our Rapid-Launch Games’ revenue decreased $1.16 million,$573 thousand, or 34%26%, from $3.38 millionto $1,648 thousand for the year ended December 31, 2016 to $2.22 million2018, from $2,221 thousand for the year ended December 31, 2017. The decrease in revenue is attributable primarily to a decrease in advertising relatedadvertising-related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio. portfolio, partially offset by an increase in consumer app store transaction bookings during the comparative periods.


 

Cost of Revenue

 

  Year Ended December 31, 
  2017  

2016

 
  

(In thousands)

 

Platform Fees

 $933  $1,114 

Licensing + Royalties

  91   44 

Hosting

  10   10 

Total Cost of Revenue

 $1,034  $1,168 

Revenue

  3,141   3,732 

Gross Margin

  67%  69%

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Platform Fees

 $806  $933 

Licensing + Royalties

  66   91 

Hosting

  12   10 

Total Cost of Revenue

 $884  $1,034 
         

Revenue

  2,872   3,141 

Gross Margin

  69

%

  67

%

  

Our cost of revenue decreased $134$150 thousand, or 11%15%, from $1.17 millionto $884 thousand in the year ended December 31, 2016 to $1.04 million2018, from $1,034 thousand in the year ended December 31, 2017. This decrease was primarily due to a corresponding decrease in revenue during the same periods. Our Gross Margin decreasedgross margin increased by two hundred basis points fromto 69% during the year ended December 31, 2016 to2018, from 67% during the year ended December 31, 2017. ThisThe decrease in our cost of revenue and increase in our gross margin was primarily due to an increase in Licensing and Royalties payments made during the respective periods,absence of platform fees associated with revenue corresponding to our 2017 Full-Featured Game launches.the Solitaire Dash License Agreement.

 

Research and Development Expenses

 Year Ended December 31,  

Year ended December 31,

 
 2017  

2016

  

2018

  

2017

 
 

(In thousands)

  

(In thousands)

 

Research and development

 $141  $81  $244  $141 

Percentage of revenue

  4%  2%  8

%

  4

%

Our research and development expenses increased $60$103 thousand, or 74%73%, from $81to $244 thousand in the year ended December 31, 2016 to2018, from $141 thousand in the year ended December 31, 2017. The increase in research and development costs was primarily due to an increase in revenue share associated with our Rapid-Launch Games released beginning in 2017.March 2017, resulting from a contractual change we made in early 2017 with the developer of our Rapid-Launch Games. The strategic effect of this change was to reduce our initial capital risk associated with our Rapid-Launch Games, in exchange for a commensurate increase in the long-term revenue share that we pay for these games.


 

Marketing Expenses

 

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Marketing and public relations

 $378  $518 

Percentage of revenue

  13

%

  16

%

  Year Ended December 31, 
  2017  

2016

 
  

(In thousands)

 

Marketing and public relations

 $518  $472 

Percentage of revenue

  16%  13%

Our marketing expenses increased $46decreased $140 thousand, or 10%27%, from $472to $378 thousand in the year ended December 31, 2016 to2018, from $518 thousand in the year ended December 31, 2017.  The increasedecrease in 20172018 was primarily due to highera decrease in corporate marketing expenditures which was offset byand lower game related marketing expenses.expenditures for our Category Leading Apps during the comparative periods.

 

General and Administrative Expenses

 

 Year Ended December 31,  

Year ended December 31,

 
 2017  

2016

  

2018

  

2017

 
 

(In thousands)

  

(In thousands)

 

General and administrative

 $1,375  $1,204  $3,098  $1,384 

Percentage of revenue

  44%  32%  108

%

  44

%

Our general and administrative expenses increased $171$1,714 thousand, or 14%124%, from $1.20 millionto $3,098 thousand in the year ended December 31, 2016 to $1.38 million2018, from $1,384 thousand in the year ended December 31, 2017. The increase in general and administrative expenses was primarily due to increasesnon-cash, stock-based compensation expenses of $1,228 thousand, related to certain restricted stock unit incentive grants made in personnelthe first quarter of 2018 and a non-recurring, non-cash, stock-based professional fee of $51 thousand related expenditures, professional fees, travel & related expenses and insurance premiumsto certain investment banking services provided to us during the comparable periods, combined with a one-time early move-out incentive received from our previous landlord during the fourthfirst quarter of 2016. We expect that our general and administrative expenses will increase for the foreseeable future as we continue to grow our business and incur additional expenses associated with being a publicly-traded company.2018.

 

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Impairment of capitalized software development

 $320  $256 

Percentage of revenue

  11

%

  8

%

 

  Year Ended December 31, 
  2017  

2016

 
  

(In thousands)

 

Amortization of capitalized software development

 $710  $767 

Percentage of revenue

  23%  21%

Our impairment of software development costs increased $64 thousand, or 25%, to $320 thousand in the year ended December 31, 2018, from $256 thousand in the year ended December 31, 2017. The software development costs are periodically evaluated to determine whether events or circumstances have occurred that indicate that the remaining useful lives of its capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable.

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Amortization of capitalized software development

 $614  $710 

Percentage of revenue

  21

%

  23

%


 

Our amortization of capitalized software development decreased $57$96 thousand, or 7% from $76714%, to $614 thousand in the year ended December 31, 2016 to2018, from $710 thousand in the year ended December 31, 2017. The decrease in amortization of capitalized software development was primarily attributable to the impairment of capitalized software relating to the termination of one of our Category Leading Apps in the fourth quarter of 2017.

Other (income) expenses

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Other expenses

 $320  $2,768 

Percentage of revenue

  11

%

  88

%

Our other expenses decreased $2,448 thousand, or 88%, to $320 thousand in the year ended December 31, 2018, from $2,768 thousand in the year ended December 31, 2017.  The decrease in other expenses was attributable to a decrease in development expenditures relatingdebt discount of $1,216 thousand, or 87%, to $188 thousand from $1,404 thousand, a decrease in interest expense, net, of $401 thousand, or 75%, to $133 thousand from $534 thousand that was attributable to the repayment of the 2016 Debenture in February 2018, and a prior year loss from debt extinguishment of $830 thousand resulting from our Rapid-Launch Games, which was partially offset by an increaserefinancing of the 2016 Debenture in in development expenditures relating to our Full-Featured Games.2017.

 

Liquidity and Capital Resources

 

Historical Cash Flows for Threethe Six Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017June 30, 2019and 2018

General

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United StatesAs of America, which contemplate continuation of the Company as a going concern. The Company has reportedJune 30, 2019, we had cash and cash equivalents of $1.6 million, a$510 thousand, working capital excesssurplus of $1.4 million as of March 31, 2017$339 thousand and a net loss of $916$925 thousand for the threesix months ended March 31, 2018. The Company does not currently anticipate that additional financing will be required within the next twelve months.June 30, 2019.

 

 

Three Months Ended March 31,

 

 

Six months ended June 30,

 

 

2018

  

2017

 

 

2019

 

 

2018

 

 

(In thousands)

 

 

(In thousands)

 

Cash flows provided by (used in):

        

 

 

 

 

 

 

 

 

Operating activities

 $147  $71 

 

$

(86

)

 

$

141

 

Investing activities

  (200

)

  (282

)

 

 

(275

)

 

 

(449

)

Financing activities

  1,402   100 

 

 

-

 

 

 

1,402

 

Increase (Decrease) in cash and cash equivalents

 $1,349  $(111

)

 

$

(361

)

 

$

1,094

 

 


Operating Activities

 

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing ofchanges in operating cash receiptsassets and payments.liabilities.

 

In the threesix months ended March 31, 2018,June 30, 2019, net cash provided byused in operating activities was $147$86 thousand, which was primarily due to a $916$93 thousand net loss and a $16 thousand increasedecrease in prepaid expenses. These amounts were offset by $48expenses, a $38 thousand increase in accounts payable and accrued expenses and a $17 thousand decrease in due to related parties, a $62 thousand decrease in accounts receivable, a $6 thousand decrease in deferred revenue and adjustments for non-cash items, including stock-based compensation expense of $620$809 thousand, amortization of software development costs of $129$341 thousand, and depreciation and amortization of other assets of $3 thousand. These amounts were offset by a $925 thousand net loss, an increase of $104 thousand of accounts receivable, a $2 thousand change in lease liability, net, a $206 thousand decrease in deferred revenue, and a $134 thousand decrease in amounts due to an affiliated entity of a major stockholder for the development of our Rapid Launch Games. See “Certain Relationships and Related-Party Transactions” in this prospectus.

In the six months ended June 30, 2018, net cash provided by operating activities was $141 thousand, which was primarily due to a $1,473 thousand net loss, a $25 thousand decrease in accounts payable and accrued expenses, a $22 thousand decrease in deferred revenue, and a $42 thousand decrease in amounts due to an affiliated entity of a major stockholder for the development of our Rapid Launch Games. These amounts were offset by a $100 thousand decrease in accounts receivable, a $16 thousand decrease in prepaid expenses, and adjustments for non-cash items, including stock-based compensation expense of $1,040 thousand, amortization of software development costs of $271 thousand, amortization of original issue discount of $51 thousand, depreciation and amortization of other assets of $3$6 thousand and amortization of debt discount of $188 thousand.

In the three months ended March 31, 2017, net cash provided by operating activities was $71 thousand, which was due to a net loss of $554 thousand, a $42 thousand increase in prepaid expenses, a $31 thousand increase in accounts payable and accrued expenses and a $53 thousand decrease in due to related parties. These amounts were offset by a $12 thousand increase in accounts receivable, and adjustments for non-cash items, amortization of software development costs of $195 thousand, depreciation and amortization of other assets of $6 thousand, amortization of debt discount of $229 thousand and amortization of original issue discount of $97 thousand. 

 

Investing Activities

 

Cash used in investing activities in the threesix months ended March 31,June 30, 2019 was $275 thousand, which was due to capitalized software development costs related to the development of our mobile apps and games.

Cash used in investing activities in the six months ended June 30, 2018 was $200$449 thousand, which was due to capitalized software development costs related to the development of our mobile games.

 

Cash used in investingFinancing Activities

There were no financing activities in the threesix months ended March 31, 2017 was $282 thousand, which was primarily due to $278 thousand of capitalized software development costs related to the development of our mobile games and $4 thousand of purchased property, plant and equipment.

Financing ActivitiesJune 30, 2019.

 

Cash provided by financing activities in the threesix months ended March 31,June 30, 2018 was $1.4 million,$1,402 thousand, which was primarily due to $2.6 million$2,582 thousand in net proceeds received from the issuance of common stock and $120 thousand in proceeds from exercised warrants, which were offset by a $1.14 million of a$1,143 thousand principal repayment of our Senior Secured Convertiblethe 2016 Debenture, $57 thousand of early payment penalty feefees related to the repayment of our Senior Secured Convertiblethe 2016 Debenture and a $100 thousand in cash used to buy back thea 4% non-controlling interest in our subsidiary, Revolution Mobile, LLC (f/k/a Revolution Blockchain LLC) (“Revolution Mobile”), that was sold to an individual investor in 2017. Following the repurchase of such 4% interest, Revolution Mobile became our wholly-owned subsidiary.

 

Cash used by financing activities in the three months ended March 31, 2017 was $100 thousand, which was which was due to $100 thousand in proceeds received from the issuance of common stock.


 

Contractual Obligations and Other Commercial Commitments

Smaller reporting companies are not required to provideHistorical Cash Flows for the information required by this item.

Off-Balance Sheet Arrangements

For the three months ended March 31, 2018 and 2017 we did not have any “off-balance sheet arrangements,” as defined in relevant Securities and Exchange Commission regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

YearsTwelve Months Ended December 31, 2017 Compared to Twelve Months Ended December 31, 20162018and 2017

 

General

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United StatesAs of America, which contemplate continuation of the Company as a going concern. The Company has reportedDecember 31, 2018, we had cash and cash equivalents of $247$871 thousand, a working capital deficitsurplus of $1.34 million as of December 31, 2017$484 thousand and a net loss of $3.69 million$2,996 thousand for the year ended December 31, 2017. Despite these metrics, however, based on the subsequent event financing activities described in Note 13 above, the Company does not currently anticipate that additional financing will be required within the next twelve months.2018.

 

 Year Ended December 31, 

 

Year ended December 31,

 

 2017  

2016

 

 

2018

 

 

2017

 

 (In thousands) 

 

(In thousands)

 

Cash flows (used in) provided by:

        

Cash flows provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 $275  $883 

 

$

341

 

 

$

275

 

Investing activities

  (822)  (1,195)

 

 

(809

)

 

 

(822

)

Financing activities

  204   (585)

 

 

1,092

 

 

 

204

 

(Decrease) in cash and cash equivalents

 $(343) $(897)

Increase (Decrease) in cash and cash equivalents

 

$

624

 

 

$

(343

)


Operating Activities

 

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and changes in operating assets and liabilities.

In the timingyear ended December 31, 2018, net cash provided by operating activities was $341 thousand, which was primarily due to a $2,996 thousand net loss, $37 thousand increase in prepaid expenses, and a $57 thousand decrease in amounts due to an affiliated entity of operating cash receiptsa major stockholder for the development of our Rapid Launch Games. These amounts were offset by a $105 thousand decrease in accounts receivable, a $17 thousand increase in accounts payable and payments.accrued expenses, a $269 thousand increase in deferred revenue, and adjustments for non-cash items, including stock-based compensation expense of $1,857 thousand, amortization of software development costs of $614 thousand, impairment of capitalized software of $320 thousand, amortization of original issue discount of $51 thousand, depreciation and amortization of other assets of $10 thousand and amortization of debt discount of $188 thousand.

 

In the year ended December 31, 2017, net cash provided by operating activities was $275 thousand, which was primarily due to a $3.69 million$3,690 thousand net loss, a $124$6 thousand decreaseincrease in accounts receivable, a $125 thousand increase in prepaid expenses, and a $1$9 thousand increasedecrease in accounts payable and accrued expenses and due to related parties.expenses. These amounts were offset by a $6 thousand decrease in accounts receivable, a $357 thousand increase in deferred revenue, a $10 thousand increase in amounts due to an affiliated entity of a major stockholder for the development of our Rapid Launch Games, and adjustments for non-cash items, including stock-based compensation expense of $173$174 thousand, amortization of software development costs of $710 thousand, impairment of capitalized software of $256 thousand, depreciation and amortization of other assets of $22 thousand, amortization of debt discount of $1.4 million,$1,404 thousand, amortization of original issue discount of $341$342 thousand and a loss on extinguishment of $830 thousand.

 

InInvesting Activities

Cash used in investing activities in the year ended December 31, 2016, net cash provided by operating activities2018 was $883$809 thousand, which was due to a net loss$807 thousand of $2.35 million, a $1 thousand increase in prepaid expenses, a $53 thousand decrease in accounts payable, accrued expenses and due to related parties. These amounts were offset by a $103 thousand increase in accounts receivable, and adjustments for non-cash items including amortization ofcapitalized software development costs related to the development of $767our mobile apps and games and $2 thousand depreciationof purchase of property and amortization of other assets of $50 thousand, amortization of debt discount of $1.11 million, and amortization of original issue discount of $270 thousand.equipment during the period.

 

Investing Activities

Cash used in investing activities in the year ended December 31, 2017 was $822 thousand, which was primarily due to $818 thousand of capitalized software development costs related to the development of our mobile apps and games and $4 thousand of purchase of property, plant and equipment during the period.

 

Financing Activities

Cash used in investingprovided by financing activities in the year ended December 31, 20162018 was $1.19 million,$1,092 thousand, which was primarily due to $1.19 million$2,582 thousand in net proceeds received from the issuance of capitalized software development costs related tocommon stock and $120 thousand proceeds from exercised stock warrants, which were offset by a $1,143 thousand principal repayment of the development2016 Debenture, $367 thousand in cash used for the repurchase of our mobile games, $14outstanding Series B Preferred Stock, and $100 thousand of purchase of property, plant and equipment and $14 thousand of Investment write-off duringin cash used to buy back the period.4% non-controlling interest in Revolution Mobile.

 

Financing Activities

Cash provided by financing activities in the year ended December 31, 2017 was $204 thousand, which was primarily due to $350 thousand in proceeds received from the sales of common stock and $100 thousand proceeds from capital contribution fromin cash received in the sale of a 4% non-controlling interest in Revolution Mobile, which was offset by a $234 thousand principal repayment of our Senior Secured Convertiblethe 2016 Debenture and $13 thousand of financing costs related to the 2017 Amended Agreement, incurred during the period.

 

Cash used by financing activities in the year ended December 31, 2016 was $585 thousand, which was due to a $560 thousand principal repayment of our Senior Secured Convertible Debenture and $25 thousand of financing costs, related to the 2016 Exchange Agreement, incurred during the period.

Contractual Obligations and Other Commercial Commitments

Smaller reporting companies are not required to provide the information required by this item.

Off-Balance Sheet Arrangements

 

For the year ended December 31, 2017 and 2016 we didWe do not have any “off-balance sheet arrangements,” as defined in relevant Securities and Exchange CommissionSEC regulations, that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

Trends in Key Non-GAAP Financial Metrics

 

We have provided in this releaseprospectus the non-GAAP financial measures of Bookingsbookings and adjusted EBITDA, as a supplement to the unaudited condensed consolidated financial statements, which are prepared in accordance with United States generally accepted accounting principles ("GAAP").GAAP. Management uses Bookingsbookings and adjusted EBITDA internally in analyzing our financial results to assess operational performance and liquidity. The presentation of Bookingsbookings and adjusted EBITDA is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP. We believe that both management and investors benefit from referring to Bookingsbookings and adjusted EBITDA in assessing our performance and when planning, forecasting and analyzing future periods. We believe Bookingsthat presenting bookings and adjusted EBITDA is useful to investors because it allows for greater transparency with respect to key financial metrics we use in making operating decisions and because our investors and analysts use them to help assess the health of our business. We have provided reconciliations between our historical Bookingsbookings and adjusted EBITDA to the most directly comparable GAAP financial measures below.

 


 

Comparison of the Three and Six Months Ended March 31,June 30, 2019 and 2018 Compared to Three Months Ended March 31, 2017

 

Bookings Results

 

Bookings increased $68 thousand, or 9%, to $785 thousand for the three months ended June 30, 2019, from $717 thousand for the three months ended June 30, 2018.

Bookings increased $153 thousand, or 10%, to $1,753 thousand for the six months ended June 30, 2019, from $1,600 thousand for the six months ended June 30, 2018.

The increase in bookings in both comparative periods was attributable primarily to the continued strengthening of our Category Leading Apps, resulting from strong user growth and monetization improvements in Video Poker Classic and the successful launch of Crypto Trillionaire during the three months ended March 31, 20182019, which was $883partially offset by the continued weakening of our Rapid-Launch Games, driven primarily by DAU declines from within our Rapid-Launch Games portfolio.

  

Three months ended

June 30,

  

Six months ended

June 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

  

(In thousands)

 

Bookings by Game Type

                

Category Leading Apps

 $566  $281  $1,211  $550 

Rapid-Launch

  219   436   542   1,050 

Total

 $785  $717  $1,753  $1,600 

Our Category Leading Apps bookings increased $285 thousand, or 101%, to $566 thousand for the three months ended June 30, 2019, from $281 thousand for the three months ended June 30, 2018.

Our Category Leading Apps bookings increased $661 thousand, or 120%, to $1,211 thousand for the six months ended June 30, 2019, from $550 thousand for the six months ended June 30, 2018.

The increase in our Category Leading Apps bookings in both comparative periods was due to an 9% decrease compared toincrease in both consumer app store transactions and advertising-related bookings resulting primarily from strong user growth and monetization improvements in Video Poker Classic, combined with the successful launch of Crypto Trillionaire during the three months ended March 31, 2017, in which we reported bookings of $969 thousand. The decrease was caused by a 10% bookings decrease in our Rapid Launch Games business and a 7% decrease in our Full-Featured Games business.2019.

  

Three Months Ended

 
  

March 31, 2018

  

March 31, 2017

 

Bookings by Game Type (In thousands)

        

Full-Featured

 $269  $289 

Rapid-Launch

  614   680 

Total

 $883  $969 

 

Our Full-Featured Games’Rapid-Launch Games bookings decreased $20$217 thousand, or 7%50%, from $289to $219 thousand for the three months ended March 31, 2017 to $269June 30, 2019, from $436 thousand for the three months ended March 31,June 30, 2018.

Our Rapid-Launch Games’ bookings decreased $508 thousand, or 48%, to $542 thousand for the six months ended June 30, 2019, from $1,050 thousand for the six months ended June 30, 2018.

The decrease in Full-Featuredthese bookings isin both comparative periods was attributable primarily to a reductiondecrease in both consumer app store transactions and advertising-related bookings for Video Poker Classic and Solitaire, both driven by a significant reduction in marketing for these titles in the comparable periods, and offset by an increase in bookingsresulting from the inclusion of Dice Mage 2 which launched globally in Q3 2017.

Our Rapid-Launch Games’ bookings decreased $66 thousand, or 10%, from $680 thousand for the three months ended March 31, 2017 to $614 thousand for the three months ended March 31, 2018. Thecontinued decrease in bookings is attributable primarily to a general weakening inDAUs and new player installs and corresponding DAU for these games that began in Q4 2016 and that has continued through Q1 2018.downloads across our Rapid-Launch Games portfolio.

 

The following table presents a reconciliation of bookings to revenue for each of the periods presented (in thousands):

 

 

Three months Ended

  

Three months ended

June 30,

  

Six months ended

June 30,

 
 

March 31, 2018

  

March 31, 2017

  

2019

  

2018

  

2019

  

2018

 

Bookings (In thousands)

 $883  $969 

(In thousands)

 

(In thousands)

  

(In thousands)

 

Bookings

 $768  $717  $1,752  $1,600 

Change in deferred revenue

  6   (156

)

  578   17   407   22 

Revenue

 $889  $813  $1,346  $734  $2,159  $1,622 

 

Adjusted EBITDA Results

Our adjusted EBITDA increased $282 thousand to $292 thousand for the three months ended June 30, 2019, from $10 thousand for the three months ended June 30, 2018. The increase in adjusted EBITDA is due to decreases in net loss, income taxes, depreciation and amortization of other assets, and stock-based compensation expense, and increases in interest income and amortization of capitalized software development during the comparative periods.

Our adjusted EBITDA increased $56 thousand to $226 thousand for the six months ended June 30, 2019, from $170 thousand for the six months ended June 30, 2018. The increase in adjusted EBITDA is due to decreases in net loss, interest expense, income taxes, depreciation and amortization of other assets, amortization of debt discount and stock-based compensation expense and an increase in amortization of capitalized software development during the comparative periods.


  

Three months ended

  

Six months ended

 
  

June

30,

2019

  

June

30,

2018

  

June

30,

2019

  

June

30,

2018

 

Reconciliation of Net Loss to Adjusted EBITDA: (in thousands)

                
                 

Net loss

 $(265

)

 $(557

)

 $(925

)

 $(1,473

)

                 

Interest (income) expense, net

  (4

)

  (1

)

  (2

)

  135 

Income taxes

  -   4   -   4 

Amortization of capitalized software development

  156   142   341   271 

Depreciation and amortization of other assets

  1   2   3   5 

Amortization of debt discount

  -   -   -   188 

Stock-based compensation expense

  405   420   809   1,040 

Adjusted EBITDA

 $293  $10  $226  $170 

Comparison of the Years Ended December 31, 2018and 2017

Bookings Results

Bookings decreased $158 thousand, or 5%, to $3,341 thousand for the year ended December 31, 2018 from $3,499 thousand for the year ended December 31, 2017. The decrease in bookings is attributable primarily to a decrease in advertising-related bookings, driven primarily by DAU declines from within our Rapid-Launch Game portfolios, which was partially offset by an increase in consumer app store transactions, driven from within both our Category Leading Games and our Rapid-Launch Games and an increase in other revenue from our Category Leading Apps associated with the Solitaire Dash License Agreement that we entered into during the third quarter of 2018.

  

Year ended December 31,

 
  

2018

  

2017

 
  

(In thousands)

 

Bookings by Game Type

        

(In thousands)

        

Category Leading Apps

 $1,700  $1,280 

Rapid-Launch Games

  1,641   2,219 

Total

 $3,341  $3,499 

Our Category Leading Apps bookings increased $420 thousand, or 33%, to $1,700 thousand for the year ended December 31, 2018, from $1,280 thousand for the year ended December 31, 2017. The increase was primarily due to the bookings associated with the Solitaire Dash License Agreement that we entered into during third quarter of 2018.

Our Rapid-Launch Games’ bookings decreased $578 thousand, or 26%, to $1,641 thousand for the year ended December 31, 2018, from $2,219 thousand for the year ended December 31, 2017. The decrease in bookings is attributable primarily to a decrease in advertising-related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio, which was partially offset by an increase in consumer app store transactions during the comparative periods.

The following table presents a reconciliation of bookings to revenue for each of the periods presented (in thousands):

 

 

Year ended December 31,

 

 

 

2018

 

 

2017

 

(In thousands)

 

(In thousands)

 

Bookings

 

$

3,341

 

 

$

3,490

 

Change in deferred revenue

 

 

(469

)

 

 

(349

)

Revenue

 

$

2,872

 

 

$

3,141

 


Adjusted EBITDA Results

Our adjusted EBITDA decreased $117 thousand to $132 thousand for the year ended December 31, 2018 from $249 thousand for the year ended December 31, 2017. The decrease in adjusted EBITDA is primarily due to decreases in interest expense, amortization of capitalized software development, amortization of debt discount and loss on extinguishment, which together were partially offset by a decrease in net loss, and increases in impairment of capitalized software and stock-based compensation expense during the comparative periods.


 

Year ended

 

 

December 31,

2018

 

 

December 31,

2017

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA: (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (loss)

 

$

(2,996

)

 

$

(3,690

)

Interest expense, net

 

 

132

 

 

 

533

 

Income taxes

 

 

-

 

 

 

-

 

Amortization of capitalized software development

 

 

614

 

 

 

710

 

Depreciation and amortization of other assets

 

 

10

 

 

 

22

 

Impairment of capitalized software

 

 

320

 

 

 

256

 

Amortization of debt discount

 

 

188

 

 

 

1,404

 

Loss on Extinguishment

 

 

-

 

 

 

830

 

Stock-based compensation expense

 

 

1,857

 

 

 

174

 

Adjusted EBITDA

 

$

125

 

 

$

239

 

Limitations of Bookings

 

 

Bookings doesdo not reflect that we defer and recognize certain mobile game revenue over the estimated life of durable virtual goods; and

 

 

other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces their usefulness as a comparative measure.

 

Because of these limitations, you should consider bookings along with other financial performance measures, including revenue, net income (loss) and our other financial results presented in accordance with U.S. GAAP.

Adjusted EBITDA Results

Our Adjusted EBITDA increased $118 thousand, from $41 thousand for the three months ended March 31, 2017 to $159 thousand for the three months ended March 31, 2018. The increase in adjusted EBITDA is primarily due to increases in net loss and non-recurring stock-based compensation, which were partially offset by decreases in income taxes, amortization of capitalized software development, amortization of debt discount, interest expense, and depreciation and amortization of other assets in the comparable period in 2017.

  

Three months Ended

 
  

March 31, 2018

  

March 31, 2017

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA: (In thousands)

        
         

Net Income (loss)

 $(916

)

 $(554

)

Interest expense, net

  135   145 

Income taxes

  0   2 

Amortization of capitalized software development

  129   195 

Depreciation and amortization of other assets

  3   6 

Amortization of debt discount

  188   229 

Stock-based expense

  620   18 

Adjusted EBITDA

 $159  $41 


Limitations of Adjusted EBITDA

 

 

Adjusted EBITDA does not include the impact of stock-based compensation expense, impairment of intangible assets previously acquired, acquisition-related transaction expenses, contingent consideration fair value adjustments and restructuring expense;

 

Adjusted EBITDA does not reflect income tax expense;

 

 

Adjusted EBITDA does not include other income or expense, which includes foreign exchange gains and losses and interest income or expense;

 

 

Adjusted EBITDA excludes depreciation and amortization of intangible assets. assets and impairment of capitalized software;

Although depreciation and amortization and impairment of capitalized software are non-cash charges, the assets being depreciated and amortized or impaired may have to be replaced in the future; and

 

 

Other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which will reduce their usefulness as a comparative measure.

 

Because of these limitations, you should consider adjusted EBITDA along with other financial performance measures, including revenue, net income (loss), diluted net income (loss) per share, cash flow from operations, GAAP operating expense, GAAP operating margin and our other financial results presented in accordance with GAAP.

 

Twelve Months Ended December 31, 2017 Compared to Twelve Months Ended December 31, 2016

Bookings Results

Bookings for the year ended December 31, 2017 was $3.50 million, an 8% decrease compared to the year ended December 31, 2016, in which we reported bookings of $3.82 million. The decrease was caused by a 34% bookings decrease in our Rapid Launch Games business, which was partially offset by a 198% increase in our Full-Featured Games business.

  Year Ended 
  

December 31,

2017

  

December 31,

2016

 

Bookings by Game Type (In thousands)

 

Full-Featured

 $1,280  $430 

Rapid-Launch

  2,219   3,387 

Total

 $3,499  $3,817 

Our Full-Featured Games’ bookings increased $850 thousand, or 197%, from $430 thousand for the year ended December 31, 2016 to $1.28 million for the year ended December 31, 2017. The increase in Full-Featured bookings is attributable primarily to growth in player engagement and monetization within Video Poker Classic and the successful global launches of Solitaire Dash, Dice Mage 2 and Big Sport Fishing 2017 between the comparable periods.

Our Rapid-Launch Games’ bookings decreased $1.17 million, or 34%, from $3.39 million for the year ended December 31, 2016 to $2.22 million for the year ended December 31, 2017. The decrease in bookings is attributable primarily to a decrease in DAUs across our Rapid-Launch Games portfolio.

The following table presents a reconciliation of bookings to revenue for each of the periods presented (in thousands):

  Year Ended 
  

December 31,

2017

  

December 31,

2016

 
         

Bookings (In thousands)

 $3,499  $3,817 

Change in deferred revenue

  (358)  (85)

Revenue

 $3,141  $3,732 


 

Limitations of Bookings

Bookingsdoesnotreflectthatwedeferandrecognizecertainmobilegamerevenueovertheestimatedlifeofdurablevirtual goods;and

other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces their usefulness as a comparative measure.

Because of these limitations, you should consider bookings along with other financial performance measures, including revenue, net income (loss) and our other financial results presented in accordance with U.S. GAAP.

Adjusted EBITDA Results

Our adjusted EBITDA decreased $622 thousand, from $871 thousand for the year Ended December 31, 2016 to $249 thousand for the year ended December 31, 2017. The decrease in adjusted EBITDA is primarily due to increases in net loss, amortization of debt discount, impairment of capitalized software, stock-based compensation, interest expense and loss on extinguishment, all of which were partially offset by decreases in amortization of capitalized software development and depreciation and amortization of other assets in the comparable period in 2016.

  Year Ended 
  

December 31,

2017

  

December 31,

2016

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA: (In thousands)

 
  

Net Income (loss)

 $(3,690) $(2,347)

Interest expense, net

  534   452 

Income taxes

  9   7 

Impairment of capitalized software

  256   0 

Amortization of capitalized software development

  710   767 

Depreciation and amortization of other assets

  22   50 

Amortization of debt discount

  1,404   1,106 

Loss On Extinguishment

  830   771 

Stock-based expense

  174   65 

Adjusted EBITDA

 $249  $871 

Limitations of Adjusted EBITDA

AdjustedEBITDAdoesnotincludetheimpactofstock-basedexpense,impairmentofintangibleassetspreviouslyacquired, acquisition-related transaction expenses, contingent consideration fair value adjustments and restructuringexpense;

Adjusted EBITDA does not reflect income taxexpense;

Adjusted EBITDA does not include other income or expense, which includes foreign exchange gains and losses and interest income or expense;

Adjusted EBITDA excludes depreciation and amortization of intangible assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;and

Othercompanies,includingcompaniesinourindustry,maycalculateadjustedEBITDAdifferentlyornotatall,whichwillreducetheir usefulness as a comparativemeasure.

Because of these limitations, you should consider adjusted EBITDA along with other financial performance measures, including revenue, net income (loss), diluted net income (loss) per share, cash flow from operations, GAAP operating expense, GAAP operating margin and our other financial results presented in accordance with GAAP.

BUSINESS

History

Tapinator, is a Delaware company that was incorporated on December 9, 2013. On June 16, 2014, the Company executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, whereby the Company issued 36,700,000 shares of its common stock (representing 80% of its then common stock outstanding after giving effect to the transaction) to the members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. Tapinator has been exclusively focused on mobile games since inception.

 

Overview

 

Tapinator developsWe develop and publishespublish apps for mobile games and applicationsplatforms that we believe can be leaders within their respective categories, with a focus on the iOS, Google Play, Amazon and Ethereum platforms. Tapinator’s portfoliosocial-casino games. We refer to these titles as “Category Leading Apps.” Our library includes over 300 mobile gaming titles that, collectively, have achieved over 450470 million playermobile downloads, including gamesnotable properties such as ROCKY™, Video Poker Classic and Solitaire Dash and Dice Mage. Tapinator generates. We generate revenues through the sale of branded advertisements and via consumer transactions, including in-app purchases. Founded in 2013, Tapinator ispurchases and subscriptions. We are headquartered in New York, with product development and marketing teams located in North America, Europe and Asia. Consumers can find high-quality mobile applications from us wherever they see the United States, Germany, Bulgaria, Pakistan, Indonesia, and Canada.“T” character logo. 


 

Mobile GamingApps and Games Market

 

The proliferation of easy-to-use touch-based smartphones and tablets has created a market with unique characteristics and explosive growth for mobile games.apps and games in particular. Portability enables playing wherever and whenever the user has spare time, and many games are specifically tailored to provide short play sessions for such occasions. Compared to PC and console games, the mobile games market has lowlower barriers to entry. Whereas many successful PC and console games have budgets for production and marketing in the tens of millions and often take years to develop, mobile games can be created for significantly less upfront capital and in a matter of weeks. Currently,months. We believe that digital gaming is a large and strategically important component of the overall entertainment market. Total consumer spending on digital gaming worldwide is expected to reach approximately $152 billion in 2019, which was more than double the approximately $61.1 billion that consumers spent at the movies and on music in 2018, according to data from Newzoo, the MPAA, and the IFPI.

According to Business of Apps, as of the first quarter of 2019, there arewere approximately 800,000 mobile games2.1 million Google Play apps and 1.8 million apps in Apple’s App Store, and from December 2017 to January 2018 alone, thereof which approximately 15% were approximately 3,000 newmobile game apps. Despite games added to the store. (Source: http://www.pocketgamer.biz/metrics/app-store/)

The mobile gaming market iscomprising a subsetsmall minority of the global app economy which will be worth $6.3 trillion by 2021, up from $1.3 trillion in 2016, according to a June 2017 report from app analytics firm App Annie. During that same time frame, the user base is expected to almost double from 3.4 billion people usingtotal apps to 6.3 billion, while the time spent in apps is forecast to grow to 3.5 trillion hours in 2021, up from 1.6 trillion in 2016. These figures represent more than justavailable on these platforms, games represented 76% of the revenue generated throughfrom the global apps market in 2018 according to NewZoo. According to an App Annie report, worldwide consumer spending in app stores the firm noted. It also took into account other formsis forecasted to reach up to $156.5 billion by 2022, representing a 5-year compound annual growth rate of monetization, like in-app ads and mobile commerce.13.9%, with games comprising 72.5% of this amount, or up to $113.5 billion.

 

WithinAccording to MediaKix, as of 2018, there were 2.2 billion mobile gamers in the world, of which 203 million were based in the United States and 459 million were based in China. According to NewZoo, the global app economy, Tapinator currently participates in the sub-sectors of 1) app store transactions relating to mobile games and 2) mobile in-app advertising. According to App Annie, thetablet gaming market for app store transactions relating to mobile games is expected to grow from $50at rate of 10.2% to approximately $68.5 billion in 20162019. According to $105 billion in 2021, representing a CAGR of 16%. At the same time, according to theJanuary 2019 report by App Annie, study,in 2018, mobile gaming consumer spending exceeded the combined game spending total on home consoles, home computers, and handheld consoles by 20%.   

Total consumer spending in the social-casino category on mobile in-app advertising marketand Facebook platforms grew 15% in 2018 to reach $5.2 billion, and is expected to nearly triple in size from $72reach approximately $5.7 billion in 20162019, according to $201 billion in 2021,Statista, representing what we believe to be a CAGR of 23%.significant total addressable market for our business given our focus on this category.

 

Revenue Model

 

The mobile gaming industry today reliesWe rely primarily on aan F2P or freemium revenue model, known as “free-to-play” (“F2P”) or “freemium,” which means that theour games are free to download and play. Unlike traditional console basedconsole-based video games, which are sold for a fixed retail price, the revenues from F2P mobile games are generated through a combination of in-gamein-app purchases (wherein the user purchases additional premium content, functionality or in-game currency with which they can improve or extend thetheir game experience), and advertisements serveddisplayed within the game. As part of the process of developing and marketing a new game, we may enter into revenue share agreements with developers or publishers whereby we agree to share a portion of the revenue generated by a game in exchange for services related to the development or publication of the game.

 

In order for the F2P revenue model to be successful, it requires that a game hashave a large base of non-paying users and an adequately sized subset of recurring paying users. As a result, the tracking and optimization of measures such as MAUs (Monthly Active Users)DAUs, ABPU, player retention rates (e.g., DAUs (Daily Active Users)Day 1, Day 7 and Day 30 retention), ABPU (Average Bookings Per User), Player Retention Rates,player conversion rates, average revenue per paying user, and Playerplayer LTVs (Life Time Values) are essential to the successful management of mobile games. Ongoing investments in marketing, product development, and live ops are therefore important to acquire, accumulate and maintain an audience of loyal, paying users.

 

Industry Value Chain

 

The components in the mobile gaming value chain from game development to player can be broken down intoconsist of four distinct segments:segments or functions: developers, publishers, distributors and the owners of the IP.intellectual property. These functions are in some cases split up between different companies and in some cases some of the functions are performed by the same company.

 

Developers

 

Game developers are the creators of games, and it is often theydevelopers who come up with the game concept, develop the history and characters behind the game, as well asand technically write the code and develop the game. There are game development teams ranging from a few people to several hundred developers.people. There are both internal game development teams, where thea publisher employs the game developers, as well as external game development teams whothat are independent offrom the publisher. It has also become increasingly common to outsource a growing number of content-creation functions to external studios. There are outsourcing studios that specialize in specific parts of the creative process e.g.(e.g., producing the artwork in a game.game). It is also quite common that the game development companies keepare responsible for the core of production and creativity in the company and then outsourcecreative process, while some of the more specific or technical aspects of game development are outsourced to other companies with specific skills.companies.

 

Publishers

 

The publisher’s role is to commercialize the game ideas and take overall responsibility for the product by partially or wholly funding its development, monitoring the development process, testing, adapting and controlling the quality and content of the game. Once the product is finalized, the publisher distributes and markets the game to distributors. Publishers can own the whole or only parts of the development project, or alternatively, only act as publisher to a third party that owns the IPintellectual property rights.

 

Distribution PlatformsApp Stores

 

Mobile games are primarily distributed via large application stores such as Google Play, Amazon and AppleApple’s App Store. According to App Annie, global app store downloads will grow from 111.2reached 194 billion in 20152018 and have been estimated to 284.3grow to 258 billion in 2020.by 2022. Developers either approachpublish their apps on application stores directly or viaindirectly through a publisher, if they are cooperating with one.publisher. The major distribution platforms offer a 70 per cent70% share in revenue share to developers for distributing their applications through their application stores.


Intellectual Property Owners

The intellectual property owner is another important player in the gaming market’s value chain. Game development studios, publishers that own portfolios of brands, and owners of copyrights to movies or books on which games are based are all examples of intellectual property owners.

Products

We currently publish two types of mobile apps and games: Category Leading Apps and Rapid-Launch Games.

Beginning in 2017, we shifted our focus from our legacy Rapid-Launch Games business to our Category Leading Apps business, and while we continue to publish both types of games based on our substantial library, our new development and publishing activities are exclusively focused on Category Leading Apps.

Category Leading Apps

We believe our Category Leading Apps are visually beautiful, functionally in-depth products, with high production values and significant revenue potential. They are developed and published selectively based on both original and licensed intellectual property. These titles require considerable development investment and, in the opinion of management, have the potential to become evergreen mobile franchises that can become market leaders within their respective categories. These apps are monetized primarily through consumer app store transactions and, to a lesser extent, through brand advertising. These apps are published primarily under the Tapinator brand.

We have historically succeeded in getting our Category Leading Apps featured at launch by the major app stores, including within Apple’s “New Games We Love” category. Beyond initial product launch, we acquire customers for these products via paid acquisition channels for applications in which we achieve player LTVs that, on average, exceed the CPI.

The following is a summary of our Category Leading Apps in which we are currently actively investing. Beyond the list below, we are actively engaged in new product development, but typically do not announce such initiatives until a specific product launch date has been set:

Video Poker Classic: Released in April 2016, Video Poker Classic is, according to App Annie, the highest grossing video poker game in the United States on iOS and Google Play as of October 25, 2019. On iOS, the title maintains over 30,000 reviews with an average score of 4.7 out of 5.0, a conversion rate of free-to-paid users of approximately 7.0%, and a Day-30 player retention rate of approximately 11.0%. Overall, the game has demonstrated ABPU of $0.23. We believe that one of the reasons behind the title’s success is its consistency with a real-world casino experience. In addition, we believe that Video Poker Classic currently has one of the most extensive offerings of any video poker title on mobile with regard to game types and functionality, including a skills trainer and both a single and multi-hand mode. Planned future updates are expected to further enhance the application’s prominent position in the video poker category.

Solitaire Dash: Released in December 2016, Solitaire Dash relies on an established form of gameplay, solitaire tripeaks, around which we have wrapped a horse racing theme and metagame, or game within a game. On iOS, the title maintains over 10,000 reviews with an average score of 4.7 out of 5.0, a conversion rate of free-to-paid users of approximately 4.7%, and a Day-30 player retention rate of approximately 11.0%. Overall, the game has demonstrated ABPU of $0.34. Solitaire Dash received a major update in June 2018 and, since then, we have produced significant updates to the game on a regular basis. Our updates have resulted in over 450 levels (new levels are launched each month), new power-ups that contribute to the monetization and engagement of the game, daily login rewards to help maximize user retention, and significant balancing/optimization to the game’s content. In short, we believe that Solitaire Dash is a best-in-class solitaire product based on its fundamental metrics. Solitaire Dash is currently subject to the Solitaire Dash License Agreement with an affiliate of Cheetah Mobile, pursuant to which we granted the rights to localize, publish, distribute and operate Solitaire Dash to Cheetah Mobile's affiliate.

Solitaire is a category on mobile that has in the past supported multiple games with eight figure annualized bookings. Given the quality and metrics of Solitaire Dash, we expect it to be a property that could successfully capture a portion of the market share within the evergreen solitaire category. We plan to continue to invest in the development of Solitaire Dash and look forward to the results of our efforts.

Crypto Trillionaire: Released in January 2019, Crypto Trillionaire is what we believe to be a best-in-class idle tapper game, or a game with gameplay largely consisting of performing simple “clicking” or “tapping” actions, with a fun cryptocurrency theme (there is no use of actual cryptocurrency in the game). The title was featured by Apple as a “New Game We Love” upon launch and has generated more than 400,000 player downloads to date. It has reached the top 100 grossing charts for strategy games in the United States and is a top ten search result for the term “crypto” in Apple’s App Store. Furthermore, it maintains an excellent review score of 4.8 out of 5.0 based on over 6,000 player reviews. Since its initial launch, we have released significant updates to the game with new functionality including vehicle upgrades, unlockable skins, and new/premium characters. Future updates are planned for Crypto Trillionaire that we believe will continue to improve the game’s core metrics, including long-term user retention.

 


 

My Horoscope: Released in April 2019, My Horoscope is our astrology application that monetizes users through subscriptions and focuses on user horoscopes, compatibility, birth charts, and numerology. We believe that subscription monetization on mobile represents a major opportunity to add recurring revenue to our business model.

According to IBIS World, supernatural and psychic services were a $2.0 billion market in 2018. Approximately 34% of women in the United States read their daily horoscope at least once per month and 41% share their horoscope with friends, but the industry has yet to enter the digital age, relying on eighty-seven thousand small business entrepreneurs who consult in person with limited marketing and digital offerings. The My Horoscope application features a clean, minimalistic design that we believe is appealing to both a younger and middle-aged demographic alike. We believe this application has the opportunity to become a best-in-class horoscope product and a category leader on mobile, within an area that could potentially achieve top 150 grossing potential based on the grossing performance of the current category leader.

Castle Builder: Currently in soft-launch in select international markets, Castle Builder is our new social-casino title that we plan on launching globally following the completion of this offering. Castle Builder is expected to be the first game on mobile that combines slots, role-playing, and city-building. The game features a slot mechanic, with innovative metagame systems that have been adapted from similar systems used in real money gaming. Each level in the game is interactive in that the player spins the slot to collect building materials and uses those materials to construct castles and unlock kingdoms. The slot machines themselves are, we believe, best-in-class, with features for free spins, wild symbols, and expanding wilds. The metagame and progression systems (unlocking content, login rewards, bonuses, VIP club, and other features) are extensive and, we believe, will result in significant long-term user retention and average revenue per daily active user.

The title is derived from a real-money online slot machine of the same name and has been developed in partnership with Rabcat. The real-money version of the product is currently a top performing slot game for Rabcat across more than 200 online casinos in a number of European countries. Based on the previous success of the similar indie title Coin Master, which, according to Think Gaming, has achieved $65 million in annual revenue, we are confident that the slots area is ripe for gameplay innovation.

IP OwnersRapid-Launch Games

 

Another important part in the gaming market’s value chain is the owner of the brand (the IP owner) upon which the game is based. The IP owner controls which game projects, based on their brand,Our Rapid-Launch Games are to be made. Who the IP owner is depends – it could either be a game development studiolegacy titles that has developed its own IP, a publisher which owns a portfolio of brands, or for example the copyright owner of a movie or book title on which a game is to be based.

Products

The Company currently develops two types of mobile games. Tapinator’s Rapid-Launch Games arewere developed and published in significant quantity.quantity beginning in 2013. These are titleshighly casual products that arewere built economically and rapidly based on a series of internally developed expandable and re-useable game engines. These games were historically published under the Tapinator brand but, beginning in March 2017, these games are now published exclusively under the Tap2Play and TapSim Game Studio brands. The Company’s Full-Featured Games are unique products with high production values and high revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have, in the opinion of management, the potential to become well-known and long-lasting, successful mobile game franchises. These games have historically been are currently published exclusively under the Tapinator brand.

Rapid-Launch Mobile Games

Tapinator’s Rapid-Launch Games are developed and published in significant quantity. These are titles that are built economically and rapidly based on a series of internally developed, expandable and reusable game engines. To date, these engines have been developed within the following game genres: parking, driving, stunts, animal sims, career sims, shooters and fighting. These games are monetized primarily through the sale of branded advertisements.

Figure 1: Rapid-Launch Games – genre & game examples

Historically, our Rapid-Launch games have been characterized by low costadvertisements and highly predictable returns.via paid downloads. Since our formation, we have managed to accumulatecompiled a significantlarge library of 300+over 300 such games thatand, while we are not currently developing new Rapid-Launch Games, we believe our existing portfolio will continue to produce a long-tail of revenues over an expected 3+ yr. average useful life for each game. We typically do not use significant paid marketing to acquire new players forthe next several years. However, revenues from our Rapid-Launch games, but rather we achieve customer acquisition by relying extensively on app store optimization (“ASO”) and cross promotion within the sizeable network of 300+ Rapid-Launch Games that we currently operate.

Figure 2: Rapid-Launch Mobile Games – Historical Economics


Full-Featured Mobile Games

Tapinator’s Full-Featured Games are unique products with high production values and high revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have, in the opinion of our management, the potential to become well-known and long-lasting, successful mobile game franchises. These games are monetized primarily via consumer app store transactions.

As of June 30, 2018 we have developed and published 17 unique Full-Featured Games. Thirteen of these games have been featured by Apple’s editors indeclining over the “Best New Games” or “Newpast two years and we expect them to continue to decline during this revenue tail period over the next several years. Our Rapid-Launch Games We Love” categories. Additionally, some of these games have also been featured by the Google Play and Amazon App Stores. We achieve customer acquisition for are published primarily under our Full-Featured Games by relying on app store featuring and via paid acquisition channels for those games in which we achieve player lifetime values (“LTV”) that exceed cost per mobile install (“CPI”).Tap2Play brand.

  

Figure 3: Full-Featured Mobile Games - Active Library

Blockchain Games

In December 2017, the Company formed a new subsidiary, Revolution Blockchain, LLC, to develop, publish and invest in decentralized games and apps (“DApps”) that leverage the Ethereum blockchain platform. The first product from this subsidiary, “Darkwinds,” is an online multiplayer collectable game with a pirate adventure theme, where Ethereum powers the ability to collect and battle with limited edition cards. The game was developed by Mego Corp. and is currently in live beta and accessible at www.playdarkwinds.com. The Company’s second product from this subsidiary, “BitPainting,” is a digital platform for collecting and interacting with iconic art on the blockchain. The product launched in beta form on May 31, 2018 at www.BitPainting.com. Both products leverage blockchain technology for both payment (i.e. the purchase & sale of virtual assets as well as the payment to the Company for platform fees) and the storage of these assets via ERC-721 non-fungible tokens (“NFTs”) that live on the blockchain. All payments are made in Ethereum (or Ether).

Figure 4: Blockchain Games - Active Library

Strategy

 

In early 2017, we announcedbegan a major strategic shift to focus more of our investment and management resources into our Full-Featured Games business.Category Leading Apps business and, more specifically, into the social-casino genre. We believe the potential size, quality and sustainability of revenues and earnings from the Full-Featured Gamesthis business is significantly greater than that of our existing legacy Rapid-Launch Games business. We completed this shift during the fourth quarter of 2018 and we are now focused on developing and operating these Category Leading Apps, primarily within the social-casino genre. In 2018, the revenue for the social-casino market reached $5.2 billion, according to Statista, and the social-casino market grew 10.9% year-on-year in the fourth quarter of 2018. The larger competitors in this market include Playtika (acquired by Giant Interactive for $4.4 billion in 2016), Zynga, SciPlay, Huuuge Games, and Murka (acquired by Blackstone in 2019). We believe that these companies have achieved success by (i) focusing on the most well established social-casino game types (e.g., slots, bingo and multiplayer poker) and (ii) focusing on improving production values, running live ops, and adding content to their games rather than gameplay innovation. We believe this creates market opportunity for several winning strategies. First, with games such as Video Poker Classic, we have focused on niche casino game types that are not dominated by large competitors but that nonetheless have significant player followings. We believe similar niche opportunities continue to exist. Second, with the upcoming launch of Castle Builder, our new slots title, we believe that applying gameplay innovation to slots, an area that otherwise offers sparse differentiation between games, can result in a highly sustainable and successful product. 

Our goal in terms offor our Full-Featured GamesCategory Leading Apps business is to create franchise-typedevelop a small number of core franchise titles, primarily within the social-casino genre, that have productcan achieve lifespans of at least five to ten years.years, and where we can grow these titles into sustainable market leaders within their respective product categories. In order to accomplish this, we believe that we needare working to achieve playercustomer LTVs that exceeds playerexceed customer acquisition cost, at scale. To date, the Company haswe have been able to achieve this, at certain playercustomer volumes, for two products: “VideoVideo Poker Classic”Classic and “Solitaire Dash.”Solitaire Dash. We seek to build a valuable portfolio of these core franchise titles which can represent repeatable, stackable and long-term revenue streams for us.

 


2018 Game PipelineGrowth Opportunities

 

We believe that we have several promising growth opportunities:

Existing Games:We are continuously investing in and growing our current games by enhancing their functionality and delivering fresh content, improving our monetization and marketing engines to improve player engagement, increase conversion of free players to paying players and drive per-player monetization. As we continue to develop our games, we believe we will be able to further monetize our existing user base and attract new players. With access to additional marketing capital, we believe there is significant opportunity to scale our existing games as we increase market penetration for these titles.

New Games: We intend to continue to capitalize on our ability to build successful social-casino games and evergreen apps by introducing new titles that appeal to specific audiences and offer highly differentiated, best-in-class experiences.

Live Operations: We use live ops to create and execute events and promotions that are designed to maximize retention, revenue and player happiness. We view live ops as having four key components: content delivery, offers/promotions, events and product improvements. Content delivery allows us to provide new content (for example, new levels) to our players. Offers/promotions allow us to tailor both free and paid virtual currency and other offers to each player, depending on that player's past history with the game. Events allows us to provide content in the game that is available for a limited time such as a theme that is unlocked for a specific holiday. Product improvements is a continuous process where we analyze each game's metrics to invest in existing functionality and new feature development.

Strategic Acquisitions:We expect to pursue select strategic acquisitions to augment our organic top line growth and continue to build out our app portfolio. We plan to seek small, entrepreneurial teams that are focused on a single evergreen product. We expect that we will specifically target products that operate at sub-scale or that otherwise have not been optimized to achieve their full monetization potential.

Current Outlook 

Our conviction regarding our social-casino focused, Category Leading Apps business has strengthened during 2019. We delivered year-over-year bookings growth in excess of 100% within this business during the first two quarters of this year. This growth is expected to be derived from our seasoned franchises such as Video Poker Classic and Solitaire Dash, combined with recently launched titles such as Crypto Trillionaire and My Horoscope, and from Castle Builder, our new social-casino title that we plan to launch following the completion of this offering, which features a slot mechanic, with innovative metagame systems that have proven their success in the world of real money gaming. The Company’s new game pipeline is updated regularly based on existing game performance, overall market dynamics, and specific opportunities developed by Tapinator’s team. The Companyreal-money version of the product is currently developing approximately four new Rapid-Launch games per month based on its existing suite ofa top performing slot game engines. With respect to its Full-Featured Games, in addition to certain titles that have not yet been announced, Tapinator has announced the following new or updated Full-Featured games for the remainder of 2018:

Solitaire Dash 2.0 - (released on iOS June 14, 2018 and on Amazon July 11, 2018 and scheduled for release on Google Play in late July 2018): our horse-racing themed tri-peaks solitaire game received a significant update for its 2.0 version. The user interface was completely redesigned in the form of a map to visually represent player progress. This redesign has resultedRabcat across more than 200 online casinos in a map featuring 324 unique levels across 18 racetracks. Players now have many additional waysnumber of European countries. As we look forward into 2020 and beyond, we are actively seeking to increase earning potentialadd to our growing portfolio of social-casino titles through both organic product development and in- game rewards, including purses for completing racetracks and "sponsorships" that are awarded for completing in-game content.via selective publishing or acquisition opportunities.

 

Divide & Conquer - scheduled to be released globally in Q4, 2018, Divide & Conquer is a synchronous, multiplayer strategy game and is our most ambitious title to date. The game represents a unique combination of synchronous multiplayer battles and long-term progress via unit upgrades and unlocks. Players of similar skill levels (based on tiers) are placed on a map. They must capture territory and special structures as they grow their empire and eliminate opponents - all in real time. As a player succeeds in battle, the player earns resources. This bounty is then used to level up units and, eventually, unlock new units as the player moves up in tiers.

Dice Mage Duel - (scheduled for release September 2018):  magical dice dueling is back. Battle other mages in this turn-based multiplayer card game. Summon monsters, conjure spells, and roll mystic dice! Collect cards, find and upgrade powerful loot to become the ultimate Dice Mage. The first two Dice Mage games have strong short-term retention and average revenue per daily active user (ARPDAU).

Competition

 

The mobile gaming industry is characterized by fiercesignificant competition, is growing rapidly, evolving constantly,rapid growth, and constant evolution, and the possibility for innovative companies to succeed within it is significant. The mobile gaming industry is, in all respects, global and Tapinator haswe have competitors around the world. Approximately two dozenMore than 30 public companies around the world have significant portions of their business in mobile gaming content creation including:

 

 

United States - Activision-Blizzard,– Activision Blizzard, Inc., Zynga, Glu Mobile Tapinator, TakeTwoInc., Take-Two Interactive Software, Inc., Electronic Arts Inc., and EA;SciPlay;

 

Japan - DeNa, Gree, Nexon Co., Sega Corporation, Sony Corp., Nintendo Co. Ltd. and Gung-Ho in Japan;Online Entertainment;

 

Korea - Gamevil Inc., Kakao Corp., NetMarble Corp. and Com2Us;

Australia – Aristocrat Leisure Limited;

 

China - Tencent Netease,Holdings Limited, NetEase, Inc., Boyaa Interactive, Forgame Holdings Limited, GameOne Holdings Limited, OurPalm Co. Ltd., IGG Inc., ZQ Games, Cheetah Mobile and ZQ Games;DoubleU Games Co. Ltd.; and

 

Europe – Rovio Entertainment Oyj, G5 Entertainment, Gameloft SE, Ubisoft Entertainment SA, Modern TinesTimes Group MTG, and Next Games.


 

Major privately held mobile gaming companies also include companies such as Epic Games, Inc., Riot Games, Inc., Niantic, Inc., Jam City, GSN, Playtika and Scopely.Scopely, Inc. Despite this seemingly large number of significant players in the market, there are also a large number of smaller developers with one or two games and the market remains very fragmented. The competition for users’ time and spending is decided primarily through factors such as game quality, brand recognition, and marketing & distribution channel power. Having players in one game also opens up the possibility of cross-promotion, which has also shown to be very important. We believe that, while it is still early for the mobile gaming industry, the market has begun to show signs of maturing and we believe that significant consolidation is likely to occur over the next five years. We face significant competition in all aspects of our business. We compete with other mobile developers for the leisure time, attention and discretionary spending of our players on the basis of a number of factors, including quality of player experience, brand awareness and reputation and access to distribution channels.

We compete more broadly for the leisure time and attention of our players with providers of other forms of Internet and mobile entertainment, including social networking, online casual entertainment and music. To the extent existing or potential players choose to read, watch or listen to online content or streaming video or radio, play interactive video games at home or on their computer or mobile devices rather than play social games, these other content services pose a competitive threat.

 

Suppliers

 

Tapinator’sOur game studios are organized by game or genre and consist primarily of independent contractors. Each studio focuses on a particular genreOur development studios are currently located in Tapinator’s game portfolio as follows:Hanover, Germany and Seattle, United States.

Hanover, Germany: Card & Casino

Vancouver, Canada: RPG

Lahore, Pakistan: Rapid-Launch Games

Sofia, Bulgaria: Blockchain Games

Seattle, United States: Multiplayer Strategy


 

Marketing

 

We acquireHistorically, we acquired most of our players through unpaid channels. We have beenwere able to build a large community of players through cross promotion, editorial featuring, the viral and sharing features provided by social networks, and app store optimization strategies.  We are committed to connecting with our players and we leverage various forms of social media, including Facebook, Twitter YouTube, Instagram and DiscordYouTube to communicate with them.

We also useengage in traditional advertising activities, primarily mobile advertising spending on Facebook, AppleGoogle and Google.various video advertising networks. Customer acquisition through paid marketing channels is a core component of our Category Leading Apps strategy. Therefore, in late 2018, we began increasing our investment in paid user acquisition (UA), in terms of media spending, infrastructure and human resources to support this kind of advertising. We expect to continue to invest in this area during the foreseeable future as we ramp up our UA efforts to support our Category Leading Apps. As we continue to invest more heavily in live ops, we also expect to increase our one-to-one marketing activities to existing customers via custom push notifications and email.

 

Intellectual Property

 

Tapinator ownsWe own trademarks for certain brands, namely the Company'sour own name, ("Tapinator")“Tapinator,” and specific mobile games “Combo Quest,” "Video Poker VIP" and "Balance of the Shaolin".Shaolin." These trademarks are formally registered with the United States Patent & Trademark Office (USPTO). The remainder of the Company'sour brands qualify as unregistered trademarks as these marks are used in commerce within the Company'sour games in the mobile app stores.

The Company licenses certain intellectual property from third parties, namely the "ROCKY" brand and character likenesses, which are licensed from MGM, and the "ROCKY" soundtrack which is licensed from Sony/ATV Music Publishing.

 

Government Regulation

 

We are subject to various federal, state and international laws and regulations geared toward companies that affect companies conductingdo any of the following: conduct business onvia the Internet and mobile platforms,platforms; accept virtual currencies; obtain and working with virtual currencies and storingstore information on thethrough blockchain including those relating to privacy, use and protection of player and employee personal information and data (including the collection of data from minors),technology, the Internet, and mobile applications; and engage in behavioral tracking, mobile applications, content publishing, advertising and marketing activities (including sweepstakes, contests and giveaways),. We are also subject to anti-corruption laws and anti-corruption.regulations. Additional laws in all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with our players, and deliver products and services, and may significantly increase our compliance costs. As our business expands to include new uses of or collection ofways to collect data that are subject to privacy or security regulations, our compliance requirements and costs will increase and we may be subject to increased regulatory scrutiny.

We are also subject to federal laws and regulations regarding content, privacy and the protection of user data, including The Communications Decency Act of 1996, as amended (“The Communications Decency Act”), COPPA, the Digital Millennium Copyright Act, the Electronic Communications Privacy Act of 1986, as amended, and the USA PATRIOT Act of 2001, among others. The Digital Millennium Copyright Act limits our liability as an online service provider for linking to or hosting third-party content that infringes copyrights. The Communications Decency Act provides statutory protections to online service providers like us who distribute third-party content. COPPA restricts the ability of online service providers to collect personal information from children under 13. Congress, the FTC, and many states have promulgated laws and regulations regarding email advertising, including the Controlling the Assault of Non-Solicited Pornography And Marketing (“CAN-SPAM”) Act of 2003. Any changes in these laws or judicial interpretations narrowing the protections of these laws may subject us to increased risk, increased costs of compliance, and limits on the operation of certain parts of our business.

Growing public concern about privacy and the use of personal information may subject us to increased regulatory scrutiny. The FTC has, over the last few years, begun investigating companies that have used personally identifiable information in a deceptive or unfair manner or in violation of a posted privacy policy. If we are accused of violating the terms of our privacy policy or implementing unfair privacy practices, we may be forced to expend significant financial and managerial resources to defend against an FTC action. On May 25, 2018, the European Union implemented the GDPR, a new privacy regulation that imposes new regulatory scrutiny on our business with customers in the European Economic Area, with possible financial consequences for noncompliance. If we are accused of violating the data protection and privacy rights of European Union citizens, we may be forced to expend significant financial and managerial resources to defend against a GDPR enforcement action by a European Union data protection authority or a European Union citizen. On January 1, 2020, the CCPA will become effective. Similar to the GDPR, the CCPA is expected to impose new regulatory scrutiny on our processing of the personal data of our customers in California, with possible financial consequences for noncompliance. If we are accused of violating the CCPA, we may be forced to expend significant financial and managerial resources to defend against an enforcement action by the California Attorney General or, in the event of a data breach, a lawsuit by customers located in California.

Our game database may hold the personal information of our users residing in the United States and other countries, and we could be sued by those users if any of the information is misappropriated. Any failure by us to adequately protect our users’ privacy and data could also result in loss of user confidence in our products and services and ultimately in a loss of users, which could adversely affect our business. There are a number of legislative proposals pending before the U.S. Congress and various state legislative bodies concerning data protection that could, if adopted, have an adverse effect on our business. We are unable to determine if and when such legislation may be adopted. Many jurisdictions, including all 50 U.S. states and the European Union, have adopted breach notification and other data protection notification laws that may require us to inform citizens of an unauthorized disclosure of personally identifiable information. The introduction of new privacy and data breach laws and the interpretation of existing privacy and data breach laws in the United States, Europe and other foreign jurisdictions is constantly evolving. There is a risk that new laws may be introduced or existing laws may be expanded or applied in a way that would conflict with our current data protection practices or prevent the transfer of data between countries in which we operate.

 

Some of our games and features are based upon traditional casino games, such as slots and poker. We have structured and operate these games and features with gambling laws in mind and believe that these games and features do not constitute gambling. Our games are offered for entertainment purposes only and do not offer an opportunity to win real money.

 

Seasonality

During the last several years, we have experienced increases in mobile game revenues in the fourth quarter and first quarter of the fiscal year corresponding to increases in smartphone and tablet purchases during the holiday shopping season. The video game industry in general has historically experienced significant sales increases during the fourth quarter. Approximately 36% of our revenue was derived from the “advertising and other” category during the twelve months ended June 30, 2019. Advertising budgets are generally highest during the fourth quarter and decline significantly in the first quarter of the following year, which affects the revenues we derive from advertisements in our games.


Employees

 

As of July 17, 2018,October 25, 2019, we had 4four full-time employees and 3three part-time employees. Additionally, we use consultants as needed to perform various specialized services. The Company reliesWe rely extensively on third party consultants and vendors for certain development and marketing activities. None of our employees are represented under a collective bargaining agreement.

 


Properties

In August 2016, the Company entered into a lease for approximately 1,000 square feet of office space to house the Company’s New York headquarters which expires in December 2021. Future minimum payments under this lease for the fiscal years ending December 31, 2018, 2019, 2020 and 2021 are $57,737, $59,469, $61,253, $63,090 respectively.

Legal Proceedings

 

From time to time, weWe may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arisebe from time to time that may harmsubject to or involved in litigation and other proceedings. To our business. Except as noted below, weknowledge, there are currently not aware of any such legal proceedingsno pending lawsuits or claims that we believe will have,may, individually or in the aggregate, have a material adverse effect on our business, financial condition or operating result.results of operations.

 

There are no material proceedingsCorporate Information

We were originally incorporated on December 9, 2013 in which anythe state of our directors, officers or affiliates or any registered or beneficial shareholderDelaware. On December 12, 2013, we merged with Tapinator, Inc., a Nevada Corporation. We were the surviving corporation of more than 5%this merger. On June 16, 2014, we executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, whereby we issued shares of our common stock to the members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. For accounting and financial reporting purposes, Tapinator LLC was considered the acquirer and the transaction was treated as a reverse merger. We have been focused exclusively on mobile games and applications since our inception.

Our principal executive offices are located at 110 West 40th Street, Suite 1902, New York, NY 10018, telephone number (914) 930-6232. Our website address is an adverse party or haswww.tapinator.com. Information accessed through our website is not incorporated into this prospectus and is not a material interest adverse to our interest.part of this prospectus.

 


 

EXECUTIVE OFFICERS AND DIRECTORSMANAGEMENT

Executive Officers and Directors

 

The following table and biographies that follow sets forth information regardingthe name, age, position and description of the business experience of individuals who serve as our executive officers and directors as of the membersdate of this prospectus and brief statements of those aspects of our directors’ backgrounds that led us to conclude that they should serve as directors. Prior to the consummation of this offering, we intend to appoint two additional non-employee directors to our board of directors.

 

Name

Age

Position

Position with theCompanyExecutive Officers

Ilya Nikolayev

3335

Chief Executive Officer, Chairman, Director

Andrew Merkatz

4951

President, Chief Financial Officer, Director

Brian Chan

 

3940

 

Vice President of Finance and Accounting, Secretary

Robert CratesNon-Employee Directors

 

56

 

Director

Teymour Farman-Famaian

5152

Director

 

Directors are elected by our stockholders and hold office until their successors are elected and qualified or until their earlier resignation or removal. Officers are appointed by our board of directors and serve at the discretion of the board of directors.

 

Biographical InformationBiographies of Executive Officers

 

Ilya Nikolayev. Nikolayev. Mr. Nikolayev has served as a director and as our director, executive chairman and chief executive officer since June 16, 2014. Mr. Nikolayev is an accomplished technology executive who previously served as the CEOchief executive officer and Co-Founderco-founder of Familybuilder.iFamily Inc. (“Familybuilder”). In 2007, Mr. Nikolayev created one of the first successful Facebook applications, Family Tree, and grew the property to over 6 million monthly active unique users and 45 million total users. Mr. Nikolayev raised venture capital funding, grew the business to profitability, and successfully sold Familybuilder to Intelius Inc. in 2011, generating a significant return for all of its investors. In 2013, Mr. Nikolayev co-founded InAppFuel, Inc. (“InAppFuel”), a developer of patented mini-game software for mobile game developers that waswe acquired by Tapinator in 2014. Prior to Familybuilder, Mr. Nikolayev worked in banking for JP Morgan.Morgan Chase & Co. Mr. Nikolayev speaks two languages and graduated cum laude from New York University.

 

Andrew Merkatz. Merkatz. Mr. Merkatz has served as a director and as our director, president and chief financial officer since June 1, 2015. Andrew Merkatz is a finance executive with 20 years of experience as an operator and investor in media and technology growth companies. From 2008-2015,2008 to 2015, Mr. Merkatz was a Managing Directormanaging director of Investmentsinvestments at Vision Capital LLC where he managed investments in emerging growth technology companies. Mr. Merkatz began his career at private equity firm, Interlaken Capital.Capital, Inc. He later served as Chief Operating Officerchief operating officer for Site-Specific Inc., one of the first internet advertising agencies (sold to CKS Group)Group Inc.), Vice Presidentvice president of Corporate Developmentcorporate development at FLOORgraphics Inc., a pioneering in-store media company (sold(later sold to News Corp.), and Presidentpresident of Predict It, Inc., a venture backed digital media company.developer of peer-to-peer sports and stock market prediction applications. In 2007, Mr. Merkatz co-founded Familybuilder, a leading Facebook app developer, which profitably scaled to more than 45 million users prior to the successfulits sale of the Company to Intelius Inc. in 2011. In 2013, Mr. Merkatz co-founded InAppFuel, a developer of patented mini-game software for mobile game developers that was acquired by Tapinator in 2014.InAppFuel. Mr. Merkatz holds a B.A. in Economics, with distinction, from the University of Pennsylvania, and an M.B.A. from Harvard Business School.

 

Brian Chan. Chan. Mr. Chan has served as our Vice Presidentvice president of Financefinance and Accountingaccounting since February 16, 2016. Mr. Chan has more than a decade of diversified experience in finance and accounting management and ITinformation technology systems, from start-up companies to the Fortune 100. Prior to joining Tapinator, Inc.,us, Brian was the Headhead of Financefinance and Operationsoperations of a start-up company, ONA Designs International, LLC, - a purveyor of high-end leather bags and accessories.accessories, where he served since 2013. At ONA Designs International, LLC, he was fully responsible for all matters related to accounting, financial planning &and reporting, operations, IT and human resources. Under his leadership, the company tripled its revenue in less than 3three years, and was ultimately acquired by a New York private investment firm. Brian was also served as a core member of the early finance team of Glaceau,Energy Brands Inc. (d/b/a Glaceau), the maker of VitaminWater and SmartWater, from 2004 to 2009. He was responsible for financial planning and analysis, sales reporting and marketing spend control for the company. The company developed into a $1 billion brand and was ultimately acquired by Coca- ColaThe Coca-Cola Company for $4.1 billion in 2007. In addition to his work with us, since 2018, Mr. Chan has also been the head of finance of VidMob, Inc., a leading venture-backed video creation platform, where he is responsible for all financial controls and accounting tasks of the company, including departmental budgeting, sales forecasting, financial audits, and business performance communications to all relevant stakeholders. Mr. Chan speaks three languages and holds an M.B.A from Pace University and B.A. from Baruch College.

 

RobertCrates.Mr. Crates has served as our director since May 26, 2014. Mr. Crates has over 25 yearsBiographies of experience in private equity, investing in a broad range of industries and asset categories. Mr. Crates has served on the board of directors of numerous public and private companies. He has invested in leading venture capital and hedge funds and served as an advisory director to iEurope, a venture capital fund manager focused on Eastern Europe, and as an advisor/initial investor in the Global Undervalued Securities Hedge Fund. He is currently Chairman of Power-by-Power Texas, an electricity procurement, brokerage, and management company. Mr. Crates was previously the President and Co-Founder of Crates Thompson Capital, a private equity investment management company, the General Partner of a private equity fund managed for the principals of Luther King Capital Management, an investment advisory company with more than $10 billion under management, and an analyst in corporate banking with the United States Trust Company of New York. He is a graduate of Yale University.Non-Employee Directors

 

Teymour Farman-Farmaian. Farman-Farmaian. Mr. Farman-Farmaian has served as oura director since December 14, 2015. Mr. Farman-Farmaian is currently Heada member of the board of directors and senior vice president and head of USA at XAPO, Inc. a fintech application company affiliated with Xapo, one of the world’s largest Bitcoin custodians.custodians prior to the sale of its custody business to Coinbase in August 2019. Previously he was CMOthe chief marketing officer at Spotify, the world’s leading music streaming service, a company he joined in 2011.from 2011 to 2012. Mr. Farman-Farmaian was responsible for subscription revenues and led a team of over 100 employees. He helped triple revenue growth to hit a $500 million run rate and achieve 7.5 million DAU. Before Spotify, Mr. Farman-Farmaian spent close to two years with Zynga (ZNGA) as GMgeneral manager of Partnerships.partnerships between 2009 and 2011 and also served as a member of the board of directors of one of Zynga’s European subsidiaries. There, he was responsible for Zynga’s multi-billion dollar partnership with Facebook, as well as relationships with Yahoo (YHOO)Inc. and Google (GOOG).Google. Mr. Farman-Farmaian joined Zynga after six years at Google, where he held various roles between 2003 and 2009, including Directordirector of European Sales Operations.european sales operations. Mr. Farman-Farmaian speaks six languages and has a BA from Duke University and an MBA from Harvard University.

 


 

Board Composition

Prior to the consummation of this offering, we intend to appoint two additional non-employee directors to our board of directors. Accordingly, after the closing of this offering, our board of directors is expected to consist of five directors, three of which will be non-employee directors.

Our restated certificate of incorporation and bylaws provide that directors are to be elected at each annual meeting of stockholders to hold office until the next annual meeting and until their respective successors are elected and qualified or until their earlier resignation or removal. Vacancies on the board of directors resulting from death, resignation, retirement, disqualification or removal may be filled by the affirmative vote of a majority of the remaining directors then in office, whether or not a quorum of the board of directors is present. Newly created directorships resulting from any increase in the number of directors may, unless the board of directors determines otherwise, be filled only by the affirmative vote of the directors then in office, whether or not a quorum of the board of directors is present. Any director elected as a result of a vacancy shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s successor shall have been elected and qualified.

Family RelationshipsBrian Chan. Mr. Chan has served as our vice president of finance and accounting since February 16, 2016. Mr. Chan has more than a decade of diversified experience in finance and accounting management and information technology systems, from start-up companies to the Fortune 100. Prior to joining us, Brian was the head of finance and operations of a start-up company, ONA Designs International, LLC, a purveyor of high-end leather bags and accessories, where he served since 2013. At ONA Designs International, LLC, he was fully responsible for all matters related to accounting, financial planning and reporting, operations, IT and human resources. Under his leadership, the company tripled its revenue in less than three years, and was ultimately acquired by a New York private investment firm. Brian also served as a core member of the early finance team of Energy Brands Inc. (d/b/a Glaceau), the maker of VitaminWater and SmartWater, from 2004 to 2009. He was responsible for financial planning and analysis, sales reporting and marketing spend control for the company. The company developed into a $1 billion brand and was ultimately acquired by The Coca-Cola Company for $4.1 billion in 2007. In addition to his work with us, since 2018, Mr. Chan has also been the head of finance of VidMob, Inc., a leading venture-backed video creation platform, where he is responsible for all financial controls and accounting tasks of the company, including departmental budgeting, sales forecasting, financial audits, and business performance communications to all relevant stakeholders. Mr. Chan speaks three languages and holds an M.B.A from Pace University and B.A. from Baruch College.

 

There are no family relationships among anyBiographies of our officers or executive officers.

IndependentNon-Employee Directors

 

OurTeymour Farman-Farmaian. Mr. Farman-Farmaian has served as a director since December 14, 2015. Mr. Farman-Farmaian is currently a member of the board of directors has determined that eachand senior vice president and head of Robert Crates and Teymour Farman-Farmaian is independent within the meaning of Rule 5605(a)(2)USA at XAPO, Inc. a fintech application company affiliated with Xapo, one of the NASDAQ Listing Rulesworld’s largest Bitcoin custodians prior to the sale of its custody business to Coinbase in August 2019. Previously he was the chief marketing officer at Spotify, the world’s leading music streaming service, from 2011 to 2012. Mr. Farman-Farmaian was responsible for subscription revenues and the rulesled a team of over 100 employees. He helped triple revenue growth to hit a $500 million run rate and regulations promulgated by the Securitiesachieve 7.5 million DAU. Before Spotify, Mr. Farman-Farmaian spent close to two years with Zynga as general manager of partnerships between 2009 and Exchange Commission.

Committees2011 and also served as a member of the Board of Directors

Our board of directors has established an audit committeeof one of Zynga’s European subsidiaries. There, he was responsible for Zynga’s multi-billion dollar partnership with Facebook, as well as relationships with Yahoo Inc. and a compensation committee, each of which has the composition and responsibilities described below.

Audit Committee

Our audit committee is currently comprised of Robert Crates and Teymour Farman-Farmaian, both of whom our board has determined to be financially literate and qualifies as an independent director under Section 5605(a)(2) and Section 5605(c)(2) of the rules of the NASDAQ Stock Market. Mr. Crates is the chairman of our audit committee. Our audit committee currently does not have a member who qualifies as a financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K.

Compensation Committee

Our compensation committee is currently comprised of Robert Crates and Teymour Farman-Farmaian, both of whom qualifies as an independent director under Section 5605(a)(2) of the rules of the NASDAQ Stock Market, an “outside director” for purposes of Section 162(m) of the Internal Revenue Code and a “non-employee director” for purposes of Section 16b-3 under the Securities Exchange Act of 1934, as amended, and does not have a relationship to us which is material to his ability to be independent from management in connection with the duties of a compensation committee member, as described in Section 5605(d)(2) of the rules of the NASDAQ Stock Market.Google. Mr. Farman-Farmaian is the chairmanjoined Zynga after six years at Google, where he held various roles between 2003 and 2009, including director of our compensation committee.

Code of Ethics

We have adoptedeuropean sales operations. Mr. Farman-Farmaian speaks six languages and has a code of business conductBA from Duke University and ethics that applies to our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The full text of our Code of Business Conduct and Ethics is published on the Investors section of our website at www.tapinator.com. We intend to disclose any future amendments to certain provisions of the Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of any such amendment or waiver.an MBA from Harvard University.

 


 

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides certain summary information concerning compensation, for our last two fiscal years awarded to, earned by or paid to our named executive officers: (i) Ilya Nikolayev, our chief executive officer, executive chairman and member of our board, (ii) Andrew Merkatz our president, chief financial officer and member of our board and (iii) Brian Chan, our vice president of finance and accounting.

Name and principal position

Year

 

 

 

Salary ($)

  

 

 

Bonus

($)

  

 

 

Stock

Awards

($)

  

 

 

Option

Awards ($)

  

 

 

Nonequity

Incentive Plan

Compensation

($)

  

 

 

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings ($)

  

 

 

All Other Compensation

($)

  

 

 

Total

($)

 

Ilya Nikolayev, Chief Executive

2017  207,900    48,300    -   150,000 (1)   -   -   -   406,200  
Officer, Executive Chairman and Director

2016

  189,000    122,554    -   -    -   -   -   311,554  
                                      

Andrew Merkatz, President, Chief

2017

  207,900    48,300    -   150,000 (2)   -   -   -   406,200  
Financial Officer and Director

2016

  189,000    122,554    -   -    -   -   -   311,554  
                                      

Brian Chan, Vice President of

2017

  130,000    12,075    -   50,000 (3)   -   -   -   192,075  
Finance and Accounting

2016

  64,000 (4)   22,029    -   48,125 (5)   -   -   -   134,154  

(1)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, the Company granted Mr. Nikolayev an option to purchase 1,500,000 shares of the Company’s common stock at an exercise price equal to $0.11 per share.

(2)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, the Company granted Mr. Merkatz an option to purchase 1,500,000 shares of the Company’s common stock at an exercise price equal to $0.11 per share.

(3)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, the Company granted Mr. Chan an option to purchase 500,000 shares of the Company’s common stock at an exercise price equal to $0.11 per share.

(4)

Represents pro-rated salary for the actual number of days employed during the 2016 fiscal year.

(5)

In May 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted Mr. Chan an option to purchase 250,000 shares of the Company’s common stock at an exercise price equal to $0.19 per share.

Agreements with Executive Officers and Change-In-Control Arrangements

Ilya Nikolayev

We entered into an employment agreement with Ilya Nikolayev on May 7, 2015. Certain provisions of the employment agreement have been amended effective as of August 25, 2016, March 31, 2017 and April 1, 2018. The terms set forth below reflect the current terms of the employment agreement, as amended. The term of the employment agreement is until March 31, 2021, which will automatically extend until March 31, 2023 unless either we or Mr. Nikolayev provide written notice of our desire not to extend prior to October 1, 2020. As of April 1, 2018, Mr. Nikolayev is entitled to receive an annual base salary of $250,000 with an automatic annual increase of 10% and will be eligible for annual bonuses based on our financial performance and will also be entitled to equity-based incentives as our board may determine. In the event, Mr. Nikolayev is terminated without cause or resigns for good reason (as such terms are defined in the employment agreement), Mr. Nikolayev will receive his then current salary for a period of 14 months and will also receive the bonus he would otherwise have been entitled during such 14 month period. Mr. Nikolayev is also subject to non-competition and non-solicitation obligations. Specifically, for a period lasting so long as Mr. Nikolayev is entitled to receive any post-termination benefits, he will not be permitted to, directly or indirectly, work for, consult with or establish a business that competes with our business. Also, for a period of 12 months following the termination of Mr. Nikolayev’s employment, he will not be entitled to solicit any of our customers with whom we did business in the preceding year or any of our employees.Board Composition

 

Prior to entering into his employment agreement, Mr. Nikolayev was an at-will employee.the consummation of this offering, we intend to appoint two additional non-employee directors to our board of directors. Accordingly, after the closing of this offering, our board of directors is expected to consist of five directors, three of which will be non-employee directors.

 

Andrew Merkatz

We entered into an employment agreement with Andrew MerkatzOur restated certificate of incorporation and bylaws provide that directors are to be elected at each annual meeting of stockholders to hold office until the next annual meeting and until their respective successors are elected and qualified or until their earlier resignation or removal. Vacancies on May 7, 2015. Certain provisionsthe board of directors resulting from death, resignation, retirement, disqualification or removal may be filled by the affirmative vote of a majority of the employment agreementremaining directors then in office, whether or not a quorum of the board of directors is present. Newly created directorships resulting from any increase in the number of directors may, unless the board of directors determines otherwise, be filled only by the affirmative vote of the directors then in office, whether or not a quorum of the board of directors is present. Any director elected as a result of a vacancy shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s successor shall have been amended effective as of August 25, 2016, March 31, 2017elected and April 1, 2018. The terms set forth below reflect the current terms of the employment agreement, as amended. The term of the employment agreement is until March 31, 2021, which will automatically extend until March 31, 2023 unless either we or Mr. Merkatz provide written notice of our desire not to extend prior to October 1, 2020. As of April 1, 2018, Mr. Merkatz is entitled to receive an annual base salary of $250,000 with an automatic annual increase of 10% and will be eligible for annual bonuses based on our financial performance and will also be entitled to equity-based incentives as our board may determine. In the event Mr. Merkatz is terminated without cause or resigns for good reason (as such terms are defined in the employment agreement), Mr. Merkatz will receive his then current salary for a period of 14 months and will also receive the bonus he would otherwise have been entitled during such 14 month period. Mr. Merkatz is also subject to non-competition and non-solicitation obligations. Specifically, for a period lasting so long as Mr. Merkatz is entitled to receive any post-termination benefits, he will not be permitted to, directly or indirectly, work for, consult with or establish a business that competes with our business. Also, for a period of 12 months following the termination of Mr. Merkatz’s employment, he will not be entitled to solicit any of our customers with whom we did business in the preceding year or any of our employees.qualified.

 


Brian Chan. Mr. Chan has served as our vice president of finance and accounting since February 16, 2016. Mr. Chan has more than a decade of diversified experience in finance and accounting management and information technology systems, from start-up companies to the Fortune 100. Prior to joining us, Brian was the head of finance and operations of a start-up company, ONA Designs International, LLC, a purveyor of high-end leather bags and accessories, where he served since 2013. At ONA Designs International, LLC, he was fully responsible for all matters related to accounting, financial planning and reporting, operations, IT and human resources. Under his leadership, the company tripled its revenue in less than three years, and was ultimately acquired by a New York private investment firm. Brian also served as a core member of the early finance team of Energy Brands Inc. (d/b/a Glaceau), the maker of VitaminWater and SmartWater, from 2004 to 2009. He was responsible for financial planning and analysis, sales reporting and marketing spend control for the company. The company developed into a $1 billion brand and was ultimately acquired by The Coca-Cola Company for $4.1 billion in 2007. In addition to his work with us, since 2018, Mr. Chan has also been the head of finance of VidMob, Inc., a leading venture-backed video creation platform, where he is responsible for all financial controls and accounting tasks of the company, including departmental budgeting, sales forecasting, financial audits, and business performance communications to all relevant stakeholders. Mr. Chan speaks three languages and holds an M.B.A from Pace University and B.A. from Baruch College.

Biographies of Non-Employee Directors

Teymour Farman-Farmaian. Mr. Farman-Farmaian has served as a director since December 14, 2015. Mr. Farman-Farmaian is currently a member of the board of directors and senior vice president and head of USA at XAPO, Inc. a fintech application company affiliated with Xapo, one of the world’s largest Bitcoin custodians prior to the sale of its custody business to Coinbase in August 2019. Previously he was the chief marketing officer at Spotify, the world’s leading music streaming service, from 2011 to 2012. Mr. Farman-Farmaian was responsible for subscription revenues and led a team of over 100 employees. He helped triple revenue growth to hit a $500 million run rate and achieve 7.5 million DAU. Before Spotify, Mr. Farman-Farmaian spent close to two years with Zynga as general manager of partnerships between 2009 and 2011 and also served as a member of the board of directors of one of Zynga’s European subsidiaries. There, he was responsible for Zynga’s multi-billion dollar partnership with Facebook, as well as relationships with Yahoo Inc. and Google. Mr. Farman-Farmaian joined Zynga after six years at Google, where he held various roles between 2003 and 2009, including director of european sales operations. Mr. Farman-Farmaian speaks six languages and has a BA from Duke University and an MBA from Harvard University.


Board Composition

Prior to the consummation of this offering, we intend to appoint two additional non-employee directors to our board of directors. Accordingly, after the closing of this offering, our board of directors is expected to consist of five directors, three of which will be non-employee directors.

Our restated certificate of incorporation and bylaws provide that directors are to be elected at each annual meeting of stockholders to hold office until the next annual meeting and until their respective successors are elected and qualified or until their earlier resignation or removal. Vacancies on the board of directors resulting from death, resignation, retirement, disqualification or removal may be filled by the affirmative vote of a majority of the remaining directors then in office, whether or not a quorum of the board of directors is present. Newly created directorships resulting from any increase in the number of directors may, unless the board of directors determines otherwise, be filled only by the affirmative vote of the directors then in office, whether or not a quorum of the board of directors is present. Any director elected as a result of a vacancy shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s successor shall have been elected and qualified.

Family Relationships

There are no family relationships among any of our officers or executive officers.

Director Independence

We have applied to list our shares of common stock and the warrants offered hereby for trading on The Nasdaq Capital Market under the symbols “TAPM” and “TAPMW,” respectively. Under the rules of Nasdaq, independent directors must comprise a majority of a listed company’s board of directors, subject to certain phase-in periods available to companies that do not yet have a class of common stock registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and corporate governance and nominating committees be independent.

Our board of directors has undertaken a review of the composition of our board of directors, our committees and the independence of each director. Based upon information requested from and provided by each director concerning their background, employment and affiliations, including family relationships, the board of directors has determined that only Mr. Farman-Famaian is “independent” as that term is defined under applicable Nasdaq rules.

In making these determinations, the board of directors considered the current and prior relationships that Mr. Farman-Famaian has with us and all other facts and circumstances the board of directors deemed relevant in determining his independence, including the beneficial ownership of capital stock by Mr. Farman-Famaian.

As described above, prior to the consummation of this offering, we intend to appoint two additional non-employee directors to our board of directors. We intend for these two additional non-employee directors to qualify as “independent” under applicable Nasdaq rules.

Committees of the Board of Directors

Our board of directors has established an audit committee and a compensation committee, each of which has the composition and responsibilities described below. Prior to the consummation of this offering, we intend to form a nominating and corporate governance committee of our board of directors, the expected composition and responsibilities of which are also described below.

Audit Committee

Our audit committee is currently comprised of Mr. Farman-Farmaian, who our board has determined is financially literate and qualifies as an independent director under Section 5605(a)(2) and Section 5605(c)(2) of the Nasdaq rules. Mr. Farman-Farmaian is the chairman of our audit committee. Our audit committee does not currently have a member who qualifies as an audit committee financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K. Prior to the consummation of this offering, we expect to appoint two additional non-employee directors to our audit committee, one of which we intend to qualify as an audit committee financial expert.

Prior to the consummation of this offering, we intend to adopt a written audit committee charter that will provide that the functions of our audit committee will include, among other things:

selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

helping to ensure the independence and performance of the independent registered public accounting firm;

discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

reviewing our policies on risk assessment and risk management;

reviewing and approving related party transactions;

obtaining and reviewing a report by the independent registered public accounting firm, at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.


Compensation Committee

 

In July 2016, we extendedOur compensation committee is currently comprised of Mr. Farman-Farmaian. Our board has determined that Mr. Farman-Farmaian qualifies as an offer letterindependent director under Section 5605(a)(2) of the Nasdaq rules and a “non-employee director” for purposes of Section 16b-3 under the Exchange Act and does not have a material relationship with us that would affect his ability to Brian Chan, our Vice President of Finance and Accounting. The offer letter had no specific term and constitutes an at-will employment arrangement. Mr. Chan’s current annual base salary is $60,000. Beginning on January 1, 2018, Mr. Chan became a part-time, rather than full-time employee, of ours. Inbe independent from management in connection with the commencementduties of hisa compensation committee member, as described in Section 5605(d)(2) of the Nasdaq rules. Mr. Farman-Farmaian is the chairman of our compensation committee. Prior to the consummation of this offering, we expect to appoint two additional non-employee directors to our compensation committee.

Prior to the consummation of this offering, we intend to adopt a written compensation committee charter that will provide that the functions of our compensation committee will include, among other things:

reviewing and approving, or recommending to our board of directors for approval, the compensation of our executive officers and any compensatory arrangement with our executive officers;

reviewing and recommending to our board of directors for approval the compensation of our directors and any changes to their compensation;

reviewing and approving, or recommending to our board of directors for approval, and administering incentive compensation and equity incentive plans; and

reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

Nominating and Corporate Governance Committee

Prior to the consummation of this offering, we intend to form a nominating and corporate governance committee of our board of directors consisting of at least two non-employee directors.

We expect that our nominating and corporate governance committee will be responsible for, among other things:

identifying, evaluating and selecting, or making recommendations to our board of directors regarding, nominees for election to our board of directors and its committees;

overseeing the evaluation and the performance of our board of directors and of individual directors;

considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;

overseeing our corporate governance practices;

contributing to succession planning; and

developing and making recommendations to our board of directors regarding corporate governance guidelines and matters.

Code of Ethics

We have adopted a code of business conduct and ethics that applies to our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The full text of our Code of Business Conduct and Ethics is published in the Investors section of our website at www.tapinator.com. We intend to disclose any future amendments to certain provisions of the Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of any such amendment or waiver.


EXECUTIVE COMPENSATION

Overview

The following discussion provides information about compensation that is paid to or earned by: (i) Ilya Nikolayev, the person who served as our principal executive officer during the fiscal year ended December 31, 2018; and (ii) Andrew Merkatz, our most highly compensated executive officer, other than our principal executive officer, who was serving as an executive officer as of December 31, 2018, and whose compensation for the 2018 fiscal year exceeded $100,000. We refer to these individuals as our “named executive officers” herein.

Our only other executive officer, Brian Chan, vice president of finance and accounting, had total compensation of less than $100,000 in our 2018 fiscal year and therefore does not qualify as a named executive officer for fiscal 2018.

Summary Compensation Table

The following table provides certain summary information concerning compensation, for our last two fiscal years awarded to, earned by or paid to our named executive officers.

Name and

Principal

Position

Year

Salary

($)

Bonus

($)

Stock

Awards (1)

($)

Option

Awards (1)

($)

Non-Equity

Incentive

Plan

Compens-

ation ($)

Nonquali-

fied

Deferred

Compen-

sation

Earnings

($)

All Other

Compensation

($)

Total ($)

Ilya Nikolayev

(CEO, Chairman and Director)

2018

$244,673 

$67,335 

$2,100,000 (2) 

-

-

-

-

$2,412,008 

2017

207,900

48,300

-

$150,000 (3)

-

-

-

406,200

          

Andrew Merkatz (President, CFO and Director)

2018

244,673

67,335

2,100,000 (2)

-

-

-

-

2,412,008

2017

207,900

48,300

-

150,000 (4)

-

-

-

406,200

(1)

The dollar amounts reported in this column represent the aggregate grant date fair value for financial statement reporting purposes of the stock awards and option awards granted during the respective fiscal year as calculated in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 718. These amounts reflect our accounting expense for these stock awards and option awards and do not represent the actual economic value that may be realized by each applicable named executive officer. There can be no assurance that these amounts will ever be realized. The valuation assumptions we used in calculating the fair value of these stock awards and option awards are set forth in Note 13 to our audited financial statements included elsewhere in this prospectus. The amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.

(2)

In February 2018, we granted each of Mr. Nikolayev and Mr. Merkatz 5,000,000 restricted stock units each at a price of $0.42. Each of the grants began vesting on the eighteenth month following the date of the grant and would have vested ratably over the following eighteen months for a total vesting period of thirty-six months. However, on September 30, 2019, the outstanding and unvested portion of these restricted stock units was cancelled and the vested portion of the restricted stock units was repurchased by us. As consideration for the repurchase and cancellation, we granted each of Mr. Nikolayev and Mr. Merkatz stock options representing the right to purchase 5,000,000 shares of common stock at an exercise price of $0.06 per share and made a one-time cash payment to each individual in the amount of $25,000. Each of the stock options vests (i) 50% in three substantially equal installments (with the first two installments rounded down for any fractional shares) on the last day of October, November, and December in 2019 (with the third installment including any fractional shares that were rounded down from the first and second installments) and (ii) the remaining 50% in 12 substantially equal installments (with the first 11 installments rounded down for any fractional shares) on the last day of each month in 2020 (with the 12th installment including any fractional shares that were rounded down from the first 11 installments).

(3)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, we granted Mr. Nikolayev an option to purchase 1,500,000 shares of our common stock at an exercise price equal to $0.11 per share.

(4)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, we granted Mr. Merkatz an option to purchase 1,500,000 shares of our common stock at an exercise price equal to $0.11 per share.

Agreements with Executive Officers and Change-In-Control Arrangements

Ilya Nikolayev

We entered into an employment agreement with Ilya Nikolayev on May 7, 2015. Certain provisions of the employment agreement have been amended, effective as of August 25, 2016, March 31, 2017 and April 1, 2018. The terms set forth below reflect the current terms of the employment agreement, as amended. The term of the employment agreement is until March 31, 2021, which will automatically extend until March 31, 2023 unless either we or Mr. Chan was granted a stock option for 250,000 sharesNikolayev provide written notice of common stock with an exercise priceour desire not to extend prior to October 1, 2020. As of $0.19 per share andJanuary 1, 2019, Mr. Nikolayev is eligibleentitled to receive an annual bonus up to 150%base salary of his base salary$275,000 with an automatic annual increase of 10% and will be eligible for annual bonuses based on our financial performance and will also be entitled to equity-based incentives as our board may determine. In the event, Mr. Nikolayev is terminated without cause or resigns for good reason (as such terms are defined in the employment agreement), Mr. Nikolayev will receive his then current salary for a period of 14 months and will also receive the bonus he would otherwise have been entitled during such 14 month period. Mr. Nikolayev is also subject to non-competition and non-solicitation obligations. Specifically, for a period lasting so long as Mr. Nikolayev is entitled to receive any post-termination benefits, he will not be permitted to, directly or indirectly, work for, consult with or establish a business that competes with our business. Also, for a period of 12 months following the termination of Mr. Nikolayev’s employment, he will not be entitled to solicit any of our customers with whom we did business in the preceding year or any of our employees. On September 6, 2019, our compensation committee approved a one-time $120,000 cash success bonus payable to Mr. Nikolayev only if and when we are able to uplist to either the Nasdaq or New York Stock Exchange. However, effective October 25, 2019, Mr. Nikolayev agreed to waive any and all rights to this cash bonus.


Andrew Merkatz

We entered into an employment agreement with Andrew Merkatz on May 7, 2015. Certain provisions of the employment agreement have been amended, effective as of August 25, 2016, March 31, 2017 and April 1, 2018. The terms set forth below reflect the current terms of the employment agreement, as amended. The term of the employment agreement is until March 31, 2021, which will automatically extend until March 31, 2023 unless either we or Mr. Merkatz provide written notice of our desire not to extend prior to October 1, 2020. As of January 1, 2019, Mr. Merkatz is entitled to receive an annual base salary of $275,000 with an automatic annual increase of 10% and will be eligible for annual bonuses based on our financial performance and will also be entitled to equity-based incentives as our board may determine. In the event Mr. Merkatz is terminated without cause or resigns for good reason (as such terms are defined in the employment agreement), Mr. Merkatz will receive his then current salary for a period of 14 months and will also receive the bonus he would otherwise have been entitled during such 14 month period. Mr. Merkatz is also subject to non-competition and non-solicitation obligations. Specifically, for a period lasting so long as Mr. Merkatz is entitled to receive any post-termination benefits, he will not be permitted to, directly or indirectly, work for, consult with or establish a business that competes with our business. Also, for a period of 12 months following the termination of Mr. Merkatz’s employment, he will not be entitled to solicit any of our customers with whom we did business in the preceding year or any of our employees. On September 6, 2019, our compensation committee approved a one-time $120,000 cash success bonus payable to Mr. Merkatz only if and when we are able to uplist to either the Nasdaq or New York Stock Exchange. However, effective October 25, 2019, Mr. Merkatz agreed to waive any and all rights to this cash bonus.

 

Outstanding Equity Awards at Fiscal Year End

 

The following table sets forth information regarding equity awards that have been previously awarded to each of the named executive officers and which remained outstanding as of December 31, 2017.2018.

 

Name

 

Number of Securities Underlying

Unexercised Options (#)

Exercisable

  

Number of Securities Underlying

Unexercised Options (#)

Unexercisable

  

Option

Exercise

Price

($/Sh)

 

Option

Expiration

Date

 

Number

of

Shares

or Units

of Stock

That

Have

Not

Vested (#)

  

Market

Value of Shares of

Units

That

Have

Not Vest

($)

  

Awards:

Number of Unearned

Shares, Units or Other Rights

that Have Not Vested (#)

  

Payout

Value of

Unearned

Shares, Units

or Other

Rights that

Have Not

Vested ($)

  

Number of Securities Underlying

Unexercised Options (#)

Exercisable

  

Number of Securities Underlying

Unexercised Options (#)

Unexercisable

  

Option

Exercise

Price

($/Sh)

 

Option

Expiration

Date

 

Number

of

Shares

or Units

of Stock

That

Have

Not

Vested

(#)

  

Market

Value of

Shares

of

Units

That

Have

Not

Vest

($)

  

Awards:

Number of Unearned

Shares,

Units or

Other

Rights

that Have

Not Vested

(#)

  

Payout

Value of

Unearned

Shares,

Units

or Other

Rights that

Have Not

Vested ($)

 

Ilya Nikolayev

 375,000  1,125,000  0.11 

5/11/2027

 -  -  -  -   875,000 (1)  625,000 (1)  0.11 

5/11/2027

  5,000,000 (2)  135,000   -   - 

Andrew Merkatz

 375,000  1,125,000  0.11 

5/11/2027

 -  -  -  -   875,000 (1)  625,000 (1)  0.11 

5/11/2027

  5,000,000 (2)  135,000   -   - 

Brian Chan

 187,500       62,500  0.19 

5/26/2026

 -  -  -  - 
 125,000     375,000  0.11 

5/11/2027

 -  -  -  - 

 

(1)

On June 30, 2017, we granted each of Mr. Nikolayev and Mr. Merkatz options to purchase up to 1,500,000 shares of common stock. Each of these grants began to vest on June 30, 2017 and will continue to become exercisable ratably in quarterly installments over the next three years thereafter.

(2)

In February 2018, we granted each of Mr. Nikolayev and Mr. Merkatz 5,000,000 restricted stock units. Each of the grants began vesting on the eighteenth month following the date of the grant and would have vested ratably over the following eighteen months for a total vesting period of thirty-six months. However, on September 30, 2019, the outstanding and unvested portion of these restricted stock units was cancelled and the vested portion of the restricted stock units was repurchased by us. As consideration for the repurchase and cancellation, we granted each of Mr. Nikolayev and Mr. Merkatz stock options representing the right to purchase 5,000,000 shares of common stock at an exercise price of $0.06 per share and made a one-time cash payment to each individual in the amount of $25,000. Each of the stock options vests (i) 50% in three substantially equal installments (with the first two installments rounded down for any fractional shares) on the last day of October, November, and December in 2019 (with the third installment including any fractional shares that were rounded down from the first and second installments) and (ii) the remaining 50% in 12 substantially equal installments (with the first 11 installments rounded down for any fractional shares) on the last day of each month in 2020 (with the 12th installment including any fractional shares that were rounded down from the first 11 installments).

 

Tapinator, Inc. 2015 Equity Incentive Plan

 

On December 14, 2015, our board of directors and shareholdersstockholders adopted the Tapinator, Inc. 2015 Equity Incentive Plan, which provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants, to be granted from time to time as determined by our board of directors or its designees. An aggregate of 18,000,000 shares of common stock are reserved for issuance under the Tapinator, Inc. 2015 Equity Incentive Plan. As of July 17, 2018,October 25, 2019, the aggregate number of options and restricted stock awards granted under the Tapinator, Inc. 2015 Equity Incentive Plan are 15,800,000is 15,875,004 shares and 2,200,0002,124,996 shares remain reserved for issuance.

 

On October 3, 2019, our board of directors adopted, subject to stockholder approval at the Special Meeting, an amendment to the 2015 Equity Incentive Plan to, among other things, add an “evergreen” provision to the 2015 Equity Incentive Plan whereby the number of shares reserved for issuance under the 2015 Equity Incentive Plan will automatically adjust on each March 31 and September 30 such that the number of shares of our common stock available for issuance pursuant to awards under the 2015 Equity Incentive Plan will continue to represent fifteen percent (15%) of the total number of shares of our common stock outstanding on such adjustment dates on a fully diluted basis.

Pension Benefits

Our named executive officers did not participate in, or otherwise receive any benefits under, any pension or defined benefit retirement plan sponsored by us during the year ended December 31, 2018.

Nonqualified Deferred Compensation

Our named executive officers did not participate in, or earn any benefits under, a non-qualified deferred compensation plan sponsored by us during the year ended December 31, 2018.


 

EquityDirector Compensation Plan Information

As of December 31, 2017

The following table provides certain information as of December 31, 2017, with respect to our equity compensation plans under which our equity securities are authorized for issuance:

Plan category

 

Number of

securities

to be issued

upon

exercise of

outstanding

options

(a)

  

Weighted-average

exercise price of

outstanding options

(b)

  

Securities

remaining

available for

future

issuance under

equity

compensation

plans

(excluding

securities

reflected in

column (a))

(c)

 

Equity compensation plans approved by security holders

  5,050,000  $0.13   - 

Equity compensation plans not approved by security holders

  -   -   - 

Total

  5,050,000   0.13   - 

DIRECTOR COMPENSATION

 

The following table sets forth summary information concerning the total compensation paid to our non-employee directors during the fiscal year ended December 31, 20172018 for services to our company. Our employee directors do not receive compensation for their service as directors.

 

Name

 

Fees Earned

or Paid in

Cash ($)

  

 

Equity

Awards ($)

  

 

 

Total ($)

 

 

Fees Earned

or Paid in

Cash ($)

 

 

 

Equity

Awards ($) (1)

 

 

 

 

Total ($)

 

Robert Crates(2)

 $10,000  (1) $27,500  (2) $37,500 

 

$

12,500

 (3)

 

$

105,000

 (4)

 

$

117,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Teymour Farman-Farmaian

 $-  (1) $27,500  (2) $27,500 

 

$

15,000

 (3)

 

$

105,000

 (4) (5)

 

$

120,000

 

Total:

 $10,000  $55,000  $65,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The dollar amounts reported in this column represent the aggregate grant date fair value for financial statement reporting purposes of the stock awards granted during the 2018 fiscal year as calculated in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 718. These amounts reflect our accounting expense for these stock awards and do not represent the actual economic value that may be realized by each applicable director. There can be no assurance that these amounts will ever be realized. The valuation assumptions we used in calculating the fair value of these stock awards are set forth in Note 13 to our audited financial statements included elsewhere in this prospectus. The amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.

(2)

Mr. Crates passed away on November 20, 2018.

(3)

Effective as of April 1, 2018, the annual cash payment to both Messrs. Crates and Farman-Farmaian was increased to $20,000. Mr. Farman-Farmaian’s fees were accrued as of December 31, 2018.

 

(2)(4)

In March 2017 and pursuant to the 2015 Equity Incentive Plan, the CompanyFebruary 2018, we granted botheach of Messrs. Crates and Farman-Farmaian an250,000 restricted stock units each at a price of $0.42. Mr. Crates’ grant expired automatically upon his death. Mr. Farman-Farmaian’s grant began vesting on the eighteenth month following the date of the grant and would have vested ratably over the following eighteen months for a total vesting period of thirty-six months. However, on September 30, 2019, the outstanding and unvested portion of Mr. Farman-Farmaian’s restricted stock units was cancelled and the vested portion of the restricted stock units was repurchased by us. As consideration for the repurchase and cancellation, we granted Mr. Farman-Farmaian a stock option representing the right to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.06 per share and made a one-time cash payment to Mr. Farman-Farmaian in the amount of $1,250. Mr. Farman-Farmaian’s stock option vests (i) 50% in three substantially equal installments (with the first two installments rounded down for any fractional shares) on the last day of October, November, and December in 2019 (with the third installment including any fractional shares that were rounded down from the first and second installments) and (ii) the remaining 50% in 12 substantially equal installments (with the first 11 installments rounded down for any fractional shares) on the last day of each month in 2020 (with the 12th installment including any fractional shares that were rounded down from the first 11 installments).

(5)

As of December 31, 2018, Mr. Farman-Farmaian held an aggregate of 550,000 outstanding and unexercised stock options.


CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

In addition to the compensation arrangements with our directors and executive officers, including those discussed in the sections titled “Management” and “Executive Compensation,” the following is a description of each transaction since January 1, 2016 and each currently proposed transaction in which:

we have been or are to $0.11 per share. Bothbe a participant;

the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years (which was approximately $20,274); and

any of our directors, executive officers or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with, any of these options began vesting on June 30, 2017 and shall become exercisable ratably in quarterly installments over the next three years thereafter.individuals or entities, had or will have a direct or indirect material interest.

We utilize the services of GenITeam Solutions, an entity affiliated with one of our major stockholders, Khurram Samad, for the development of certain of our mobile games. Amounts incurred by us for such development services, which were primarily attributed to capitalized software development costs, for the years ended December 31, 2018, 2017 and 2016 were $372,029, $433,578 and $835,356, respectively. As of December 31, 2018, 2017 and 2016, we had balances due to GenITeam Solutions related primarily to the software development services of $39,580, $100,115 and $89,697, respectively.

On December 28, 2018, we entered into a Games Revenue Share and Stock Repurchase Agreement with TapGames, a Pakistani registered firm, Khurram Samad, Rizwan Yousuf and Tap2Play, LLC, our wholly-owned subsidiary, whereby we repurchased 7,646,446 shares of our common stock for a per share purchase price of $0.02, or an aggregate purchase price of $144,639, from Mr. Samad. Under the terms of the agreement, TapGames is entitled to receive 60% of the revenue from certain of our Rapid Launch Games, and we have the right to receive the remaining 40% of revenue.

Related-Party Transaction Policy

Prior to the consummation of this offering, we plan to adopt an audit committee charter that will give our audit committee the primary responsibility for reviewing and approving or disapproving “related-party transactions,” which are generally transactions between us and related persons in which the aggregate amount involved exceeds or may be expected to exceed $120,000 and in which a related person has or will have a direct or indirect material interest. The written charter of our audit committee will provide that our audit committee shall review and approve in advance any related-party transaction.

In approving or rejecting any related party transactions, our audit committee will consider the relevant facts and circumstances available and deemed relevant to our audit committee, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

Historically, our entire board of directors has been responsible for approving related-party transactions. The transactions described above were approved by our board of directors.

 


 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Common Stock

 

The following table sets forth information with respect to the beneficial ownership of our common stock as of July 17, 2018:October 25, 2019:

 

by each person who is known by us to beneficially own more than 5.0%5% of our common stock;

 

by each of our named executive officers and directors; and

 

by all of our named executive officers and directors as a group.

 

The percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange CommissionSEC governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission,SEC, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. With respect to the Series B Preferred Stock held by the beneficial owners listed below, there exist contractual provisions limiting conversion and exercise to the extent such conversion or exercise would cause such beneficial owner, together with its affiliates or members of a “group,” to beneficially own a number of shares of common stock which would exceed 9.99% of our then outstanding shares of common stock following such conversion or exercise. The shares and percentage ownership of our outstanding shares indicated in the table below do not give effect to these limitations. Except as indicated in the footnotes to this table, to our knowledge and subject to community property laws where applicable, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned by such person and each person’s address is c/o Tapinator, Inc., 110 West 40th Street, Suite 1902, New York, NY 10018.

 

Name of Beneficial Owner 

Number of

Shares

Beneficially

Owned (1)

 

Percentage of Common

Stock Owned (1)(2)

5% Owners:

   

HSPL Holdings, LLC

13,350,000

(3)

12.5%

Khurram Samad

15,292,891

 

16.0%

David Unger

6,300,000

(4) 

6.4%

    

Officers and Directors:

   

Ilya Nikolayev

12,012,766

(5)

12.5%

Andy Merkatz

5,626,000

(6)

5.8%

Brian Chan

458,333

(7)

0.5%

Robert Crates

1,104,167

(8)

1.2%

Teymour Farman-Farmaian

604,167

(9)

0.6%

Name of Beneficial Owner

 

Number of

Shares

Beneficially

Owned (1)

 

 

Percentage

of Common

Stock

Owned (Pre-

Offering)

(1)(2)

 

Percentage of

Common

Stock Owned

(Post-

Offering)

(1)(2)

5% Owners:

 

 

 

 

 

 

 

 

 

Khurram Samad

 

 

7,646,445

 (3)

 

 

8.7

%

%

David Unger

 

 

6,300,000

 (4)

 

 

6.9

%

%

 

 

 

 

 

 

 

 

 

 

Officers and Directors:

 

 

 

 

 

 

 

 

 

Ilya Nikolayev

 

 

14,554,432

 (5)

 

 

16.0

%

%

Andrew Merkatz

 

 

7,917,666

 (6)

 

 

8.7

%

%

Teymour Farman-Farmaian

 

 

1,291,665

 (7)

 

 

1.5

%

%

All current executive officers and directors as a group (4 persons)

  

24,513,762

(8)

  

25.8

%

%

 

(1)

Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assume the exercise of all options and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of July 17, 2018,October 25, 2019, except as otherwise noted. Shares issuable pursuant to the exercise of stock options and other securities convertible into common stock exercisable within 60 days are deemed outstanding and held by the holder of such options or other securities for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.

 


 

(2)

TheseThe pre-offering percentages have been calculated based on 95,625,97287,979,526 shares of common stock outstanding as of July 17, 2018.October 25, 2019. The post-offering percentages are based upon           shares outstanding, assuming (i) no exercise of the underwriter’s overallotment option and (ii) no exercise of any warrants issued in this offering.

 

 

(3)

George Fox, as Managing Member of Titan Advisors, LLC, whichBased on information included in Amendment No. 1 to Schedule 13G filed by Mr. Samad with the SEC on January 2, 2019. Mr. Samad’s principal business address is the manager of HSPL Holdings, LLC, has sole voting and dispositive power over the securities held for the account of this selling stockholder. This number represents 2,066,667 common shares and 11,283,333 shares of common stock issuable upon conversion of Series B Preferred Stock. HSPL Holdings, LLC is subject to a 9.99% of our then outstanding shares of common stock following any conversion under the Series B Preferred stock.14D, L Block Gulberg 3, Lahora, Pakistan 54810.

 

(4)

ComprisedBased on information included in the Schedule 13G filed by Mr. Unger with the SEC on June 4, 2018, this number is comprised of (i) 3,500,000 shares of common stock and (ii) warrants to purchase 2,800,000 shares of common stock that are currently exercisable or will become exercisable within 60 days of July 17, 2018.October 25, 2019. Mr. Unger’s principal business address is 38 Silver Street, Great Barrington, Massachusetts 01230.

(5)

Comprised of (i) 11,387,76611,637,766 shares of common stock and (ii) options to purchase 625,000 shares of common stock2,916,666 that are currently exercisable or will become exercisable within 60 days of July 17, 2018.October 25, 2019.

 

(6)

Comprised of (i) 2,449,375 shares of common stock, (ii) 1,278,000 shares of common stock held by Lucienne Merkatz 2013 Trust for which Mr. Merkatz disclaims beneficial ownership, (iii) 1,273,625 shares of common stock held by Sebastian Merkatz 2013 Trust for which Mr. Merkatz disclaims beneficial ownership and (iv) options to purchase 625,0002,916,666 shares of common stock that are currently exercisable or will become exercisable within 60 days of July 17, 2018.October 25, 2019.

 

(7)

Comprised of (i) 700,000 shares of common stock and (ii) options to purchase 458,333591,665 shares of common stock that are currently exercisable or will become exercisable within 60 days of July 17, 2018.

(8)

Comprised of (i) 1,000,000 shares of common stock and (ii) options to purchase 104,167 shares of common stock that are currently exercisable or exercisable within 60 days of July 17, 2018.October 25, 2019.

   
 

(9)(8)

Comprised of (i) 200,000Includes shares of common stockbeneficially owned by the directors and (ii)officers listed immediately above, as well as options to purchase 404,167749,999 shares of common stock that are currently exercisable or will become exercisable within 60 days of July 17, 2018.October 25, 2019 beneficially owned by Brian Chan, our vice president of finance and accounting.

Changes in Control

We do not currently have any arrangements which if consummated may result in a change of control of our company.

 


 

SELLING STOCKHOLDERS

Up to 58,400,004 shares of our common stock are currently being offered by the selling stockholders under this prospectus. This reflects the sum of (a) shares of our common stock and (b) the number of shares of common stock into which various warrants are exercisable. Of these shares, 50,000,004 are being offered as a result of common stock and warrants purchased by selling stockholders in three closings from January 2018 to February 2018 pursuant to the same subscription agreement (the “Private Placement”). The selling stockholders that participated in the Private Placement paid a price per unit equal to $0.12 for one share of common stock and a five-year warrant to purchase one share of common stock. In addition to the shares relating to the Private Placement, we will be registering (i) 6,400,000 shares of common stock underlying two different warrants issued to our investment banker and their assignees as further described in the footnotes below and (ii) 2,000,000 shares of common stock held by the selling shareholder further described in the footnotes below.DESCRIPTION OF CAPITAL STOCK

 

The sharesfollowing descriptions of commonour capital stock referredand certain provisions of our restated certificate of incorporation, as amended (the “Certificate of Incorporation”) and bylaws are summaries and are qualified by reference to above are being registeredthe complete copies of our restated Certificate of Incorporation and bylaws. Copies of these documents have been filed with the SEC as exhibits to permit public sales of the shares, and the selling stockholders may offer the shares for resale from time to time pursuant to this prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration requirementsstatement of the Securities Act of 1933, as amended, or pursuant to another effective registration statement covering those shares.

The table below sets forth certain information regarding the selling stockholders and the shares of our common stock offered by them inwhich this prospectus. The selling stockholders have not hadprospectus forms a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of their acquisition of our shares or other securities. To our knowledge, subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name. None of the selling stockholders are broker-dealers or affiliates of broker-dealers, unless otherwise noted.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. With respect to the warrants held by the selling stockholders, there exist contractual provisions limiting conversion and exercise to the extent such conversion or exercise would cause such selling stockholder, together with its affiliates or members of a “group,” to beneficially own a number of shares of common stock which would exceed from 4.99% to 9.99% of our then outstanding shares of common stock following such conversion or exercise. The shares and percentage ownership of our outstanding shares indicated in the table below do not give effect to these limitations.

 Ownership Before Offering  Ownership After Offering 

Selling Stockholder

Number of

shares

of common

stock

beneficially

 owned (1)

 

 

Number of

shares

 offered

 

 

 

Number of

shares

of common stock

beneficially

 owned (1)

 

Percentage of

common stock

beneficially

owned

 (1)

 
           

Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B (2)

  1,533,334 

(3

)

1,533,334

(3

)

-

 

*

 

Anson Investments Master Fund LP (4)

5,000,000 

(5

)

5,000,000

(5

)

-

  

*

 

Arthur Berrick

1,083,334 

(6

)

1,083,334

(6

)

-

  

*

 

Aujla Mgmt Services (7)

441,666

(8

)

416,666

(8

)

25,000

  

*

 

Barry Donner

833,334

(9

)

833,334

(9

)

-

  

*

 

CamaPlan Administrator FBO Henry Banaszek IRA

833,334

(10

)

833,334

(10

)

-

  

*

 

CamaPlan Administrator FBO Jean Canfield IRA

625,000

(11

)

625,000

(11

)

-

  

*

 

Charles M. Merkel

500,000

(12

)

500,000

(12

)

-

  

*

 

Charles M. Merkel, JR

533,334 

(13

)

533,334

(13

)

-

  

*

 

Chris Swedzinski

1,333,334

(14

)

1,333,334

(14

)

-

  

*

 

David Unger

6,300,000

(15

)

2,000,000

(15

4,300,000

  (16)

 4.37% 

Donald A. Johnson

208,334

(17

)

208,334

(17

)

-

  

*

 

Felix Frayman

833,334

(18

)

833,334

(18

)

-

  

*

 

Frank Straw

558,334 

(19

)

558,334

(19

)

-

  

*

 

Gawaine Diekevers

1,200,000

(20

)

1,200,000

(20

)

-

  

*

 

Gerald J Quave

833,334

(21

)

833,334

(21

)

-

  

*

 

Gonzalo E Cortes

208,334

(22

)

208,334

(22

)

-

  

*

 

Gotham Corporation (23)

208,334

(24

)

208,334

(24

)

-

  

*

 

GSB Holdings, Inc. (25) 

833,334

(26

)

833,334

(26

)

-

  

*

 

Harry Leigh Severance

1,666,666 

(27

)

1,666,666

(27

)

-

  

*

 

Henry Banaszek

943,334

(28

)

833,334

(28

)

110,000

  

*

 

Hudson Bay Master Fund Ltd (29)

5,833,332

(30

)

5,833,332

(30

)

-

  

*

 

IMS Group LLC (31)

833,334

(32

)

833,334

(32

)

-

  

*

 

Intracoastal Capital LLC (33)

833,332

(34

)

833,332

(34

)

-

  

*

 


Iroquois Capital Investment Group LLC (35)

416,666

(36

)

416,666

(36

)

-

  

*

 

Iroquois Master Fund Ltd (37)

1,666,666

(38

)

1,666,666

(38

)

-

  

*

 

James R. McBrayer

383,334

(39

)

383,334

(39

)

-

  

*

 

Joel C. Gale, D.M.D., P.A

500,000

(40

)

500,000

(40

)

-

  

*

 

John Lahr

500,000

(41

)

500,000

(41

)

-

  

*

 

John O. Forrer

666,666

(42

)

666,666

(42

)

-

  

*

 

L1 Capital Global Opportunities Master Fund (43)

2,500,000

(44

)

2,500,000

(44

)

-

  

*

 

LC Targeted Opportunities Fund, LP (45)

2,500,000

(46

)

2,500,000

(46

)

-

  

*

 

Mark J. Butler

416,666

(47

)

416,666

(47

)

-

  

*

 

Max B. Mellman

6,666,666

(48

)

6,666,666

(48

)

-

  

*

 

Nancy Brody

208,334

(49

)

208,334

(49

)

-

  

*

 

Raymond Skubel

833,334

(50

)

833,334

(50

)

-

  

*

 

Richard Molinsky

416,666

(51

)

416,666

(51

)

-

  

*

 

Scott Jasper

500,000

(52

)

500,000

(52

)

-

  

*

 

TEC Opportunities Fund I LP (53)

833,334

(54

)

833,334

(54

)

-

  

*

 

Thomas Hartel

416,666

(55

)

416,666

(55

)

-

  

*

 

Thomas Loughlin

833,334

(56

)

833,334

(56

)

-

  

*

 

Thomas Nomeland

783,334

(57

)

783,334

(57

)

-

  

*

 

William G. Dress

966,666

(58

)

966,666

(58

)

-

  

*

 

William Griswold

416,666

(59

)

416,666

(59

)

-

  

*

 
WestPark Capital, Inc. (60)2,476,666(61)2,476,666(61)-  * 
Brandon Ross (62)1,586,167(62)1,586,167(62)-  * 
Doug Kaiser (63)100,000(63)100,000(63)-  * 
Frank Salvatore (64)100,000(64)100,000(64)-  * 
Gustavo Rodrigo (65)354,167(65)354,167(65)-  * 
Harry Datys (66)146,833(66)146,833(66)-  * 
Jonathan Blum (67)1,586,167(67)1,586,167(67)-  * 
Tom Jandt (68)50,000(68)50,000(68)-  * 

*

Less than 1%

(1)

In computing the percentage of our common stock beneficially owned by each selling stockholder after the offering, we have assumed the exercise by such selling stockholder of all warrants with respect to those shares being offered by such selling stockholder, and therefore the calculation is based on a number of shares of common stock outstanding comprised of (i) 95,625,972 shares of common stock outstanding as of July 17, 2018 plus (ii) the number of shares offered by the selling stockholder in this offering underlying warrants held by such selling stockholder. The shares offered by one selling stockholder underlying warrants held by such selling stockholder are not deemed outstanding for the purpose of computing the percentage ownership of any other selling stockholder.

(2)

Ayrton Capital LLC, the investment manager to Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B, has discretionary authority to vote and dispose of the shares held by Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B and may be deemed to be the beneficial owner of these shares. Waqas Khatri, in his capacity as Managing Member of Ayrton Capital LLC, may also be deemed to have investment discretion and voting power over the shares held by Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B. Alto Opportunity Master Fund, SPC - Segregated Master Portfolio B and Mr. Khatri each disclaim any beneficial ownership of these shares. The address of Ayrton Capital LLC is 222 Broadway, 19th Fl, New York, NY 10038.  

(3)

Includes 766,667 shares of common stock issuable upon the exercise of warrants.

(4)

Anson Advisors Inc and Anson Funds Management LP, the Co-Investment Advisers of Anson Investments Master Fund LP (“Anson”), hold voting and dispositive power over the Common Shares held by Anson. Bruce Winson is the managing member of Anson Management GP LLC, which is the general partner of Anson Funds Management LP. Moez Kassam and Amin Nathoo are directors of Anson Advisors Inc. Mr. Winson, Mr. Kassam and Mr. Nathoo each disclaim beneficial ownership of these Common Shares except to the extent of their pecuniary interest therein. The principal business address of Anson is 190 Elgin Ave; George Town, Grand Cayman

(5)

Includes 2,500,000 shares of common stock issuable upon the exercise of warrants.

(6)

Includes 541,667 shares of common stock issuable upon the exercise of warrants.

(7)

Gurvinder Singh Aujla has sole voting and dispositive power over the securities held for the account of this selling stockholder.

(8)

Includes 208,333shares of common stock issuable upon the exercise of warrants.

(9)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(10)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(11)

Includes 312,500 shares of common stock issuable upon the exercise of warrants..

(12)

Includes 250,000 shares of common stock issuable upon the exercise of warrants.


(13)

Includes 266,667 shares of common stock issuable upon the exercise of warrants.

(14)

Includes 666,667 shares of common stock issuable upon the exercise of warrants.

(15)

David Unger obtained these shares are a result of certain private placements with the Company.

(16)

Includes 2,800,000 shares of common stock issuable upon the exercise of warrants and 1,500,000 shares of common stock.

(17)

Includes 104,167 shares of common stock issuable upon the exercise of warrants.

(18)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(19)

Includes 279,167 shares of common stock issuable upon the exercise of warrants.

(20)

Includes 600,00 shares of common stock issuable upon the exercise of warrants.

(21)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(22)

Includes 104,167 shares of common stock issuable upon the exercise of warrants.

(23)

Nelson Rodriguez has sole voting and dispositive power over the securities held for the account of this selling stockholder.

(24)

Includes 104,167 shares of common stock issuable upon the exercise of warrants.

(25)

David H. Clarke and Leslie M. Clarke have joint voting and dispositive power over the securities held for the account of this selling stockholder.

(26)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(27)

Includes 833,333 shares of common stock issuable upon the exercise of warrants.

(28)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(29)

Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Each of Hudson Bay Master Fund Ltd. and Sander Gerber disclaims beneficial ownership over these securities.

(30)

Includes 2,916,666 shares of common stock issuable upon the exercise of warrants.

(31)

Maria Hernandez has sole voting and dispositive power over the securities held for the account of this selling stockholder.

(32)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(33)

Mitchell P. Kopin (“Mr. Kopin”) and Daniel B. Asher (“Mr. Asher”), each of whom are managers of Intracoastal Capital LLC (“Intracoastal”), have shared voting control and investment discretion over the securities reported herein that are held by Intracoastal. As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities reported herein that are held by Intracoastal.

(34)

Includes 416,666 shares of common stock issuable upon the exercise of warrants.

(35)

Richard Abbe is the managing member of Iroquois Capital Investment Group LLC.   Mr. Abbe has voting control and investment discretion over securities held by Iroquois Capital Investment Group LLC. As such, Mr. Abbe may be deemed to be the beneficial owner (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held by Iroquois Capital Investment Group LLC.

(36)

Includes 208,333 shares of common stock issuable upon the exercise of warrants.

(37)

Iroquois Capital Management L.L.C. is the investment manager of Iroquois Master Fund, Ltd. Iroquois Capital Management, LLC has voting control and investment discretion over securities held by Iroquois Master Fund. As President of Iroquois Capital Management, LLC, Richard Abbe makes voting and investment decisions on behalf of Iroquois Capital Management, LLC in its capacity as investment manager to Iroquois Master Fund Ltd. As a result of the foregoing, Mr. Abbe may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held by Iroquois Capital Management and Iroquois Master Fund.

(38)

Includes 833,333shares of common stock issuable upon the exercise of warrants.

(39)

Includes 191,667 shares of common stock issuable upon the exercise of warrants.

(40)

Includes 250,000 shares of common stock issuable upon the exercise of warrants.

(41)

Includes 250,000 shares of common stock issuable upon the exercise of warrants.


(42)

Includes 333,000 shares of common stock issuable upon the exercise of warrants.

(43)

David Feldman has sole voting and dispositive power over the securities held for the account of this selling stockholder.

(44)

Includes 1,250,000 shares of common stock issuable upon the exercise of warrants.

(45)

Steven G. Lampe and Richard F. Conway, Managing Members of Lampe, Conway & Co LLC, Investment Manager of LC Capital Targeted Opportunities Fund, LP and authorized signatories of LC Capital Targeted Opportunities Fund, LP have the power to vote and dispose of the shares held by LC Capital Targeted Opportunities Fund, LP.

(46)

Includes 1,250,000 shares of common stock issuable upon the exercise of warrants.

(47)

Includes 208,333 shares of common stock issuable upon the exercise of warrants.

(48)

Includes 3,333,333 shares of common stock issuable upon the exercise of warrants.

(49)

Includes 104,167 shares of common stock issuable upon the exercise of warrants.

(50)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(51)

Includes 208,333 shares of common stock issuable upon the exercise of warrants.

(52)

Includes 250,000 shares of common stock issuable upon the exercise of warrants.

(53)

Michael E. Venezia has sole voting and dispositive power over the securities held for the account of this selling stockholder.

(54)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(55)

Includes 208,333 shares of common stock issuable upon the exercise of warrants.

(56)

Includes 416,667 shares of common stock issuable upon the exercise of warrants.

(57)

Includes 391,667 shares of common stock issuable upon the exercise of warrants.

(58)

Includes 483,333 shares of common stock issuable upon the exercise of warrants.

(59)

Includes 208,333 shares of common stock issuable upon the exercise of warrants.

(60)

Richard Rappaport has sole voting and dispositive power over the securities held for the account of this selling stockholder. WestPark Capital, Inc. is a registered broker-dealer (“WestPark”).

(61)

Includes (i) 1,846,666 shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark and (ii) 630,000 shares of common stock issuable upon the exercise of warrants issued in consideration of investment banking advisory services of WestPark.

(62)

Includes (i) 1,201,167 shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark and (ii) 385,000 shares of common stock issuable upon the exercise of warrants issued in consideration of investment banking advisory services of WestPark.  Mr. Ross is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Ross is not individually a registered broker-dealer.

(63)

Represents shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark .  Mr. Kaiser is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Kaiser is not individually a registered broker-dealer.

(64)

Represents shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark .  Mr. Salvatore is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Salvatore is not individually a registered broker-dealer.

(65)

Represents shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark .  Mr. Rodrigo is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Rodrigo is not individually a registered broker-dealer.

(66)

Represents shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark .  Mr. Datys is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Datys is not individually a registered broker-dealer.

(67)

Includes (i) 1,201,167 shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark and (ii) 385,000 shares of common stock issuable upon the exercise of warrants issued in consideration of investment banking advisory services of WestPark.  Mr. Blum is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Blum is not individually a registered broker-dealer.

(68)

Represents shares of common stock issuable upon the exercise of warrants issued in consideration of placement agent services of WestPark .  Mr. Jandt is affiliated with WestPark, a registered broker-dealer, and received these warrants from WestPark.  Mr. Jandt is not individually a registered broker-dealer.


CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The Company utilizes the services of an affiliated entity of a major shareholder, Khurram Samad, for the development of certain of its mobile games. Amounts incurred by the Company for such development services, which were primarily attributed to capitalized software development costs, for the year ended December 31, 2017 and December 31, 2016 were $668,162 and $835,356, respectively. As of December 31, 2017, and December 31, 2016, the Company had balances due to related parties related primarily to the software development services of $100,115 and $89,697, respectively.

DESCRIPTION OF SECURITIESpart.

 

We have authorized 251,532,500 shares of capital stock, par value $0.001 per share, 250,000,000 of which 250,000,000 are shares ofdesignated as common stock and 1,532,500 of which are shares ofdesignated as “blank check” preferred stock, none of which 840 are authorizedcurrently designated as Series A Preferred Stock, 1,500 are authorized as Series A-1 Preferred Stock and 1,854 are authorized as Series B Preferred Stock.an outstanding series. On July 17, 2018,October 25, 2019, there were 95,625,97287,979,526 shares of common stock issued and outstanding 1,354 shares of Series B Preferred Stock issued and outstanding, and no shares of Series A Preferred Stock or Series A-1 Preferred Stockpreferred stock issued and outstanding.

 

Holders of Capital Stock

As of July 17, 2018, there were approximately 150 holdersSubject to the approval of our stockholders at the Special Meeting, we plan to implement a reverse stock split of our issued and outstanding shares of common stock asprior to the closing of this offering at a ratio in a range of between 1-for-2 and 1-for-200, to be determined by counting our record holdersboard of directors. If our stockholders approve the reverse stock split at the Special Meeting and the reverse stock split is implemented, we also plan to amend our Certificate of Incorporation to reduce the total number of participants reflected in a security position listing provided to us by the Depository Trust Company. Because the “DTC participants” are brokers and other institutions holding shares of our common stock on behalf of their customers,that we do not knoware authorized to issue from 250,000,000 to 25,000,000, subject to the actual number of unique shareholders represented by these record holders. As of July 17, 2018, there were: no holdersapproval of our Series A Preferred Stock or Series A-1 Preferred Stock and 1 holder of our Series B Preferred Stock.stockholders at the Special Meeting.

  

Common Stock

 

Voting Rights

 

For all matters submitted to a vote of stockholders, each holder of the Company’sour common stock is entitled to one vote for each share registered in his, her, or its name. Holders of common stock vote together as a single class. Holders of our common stock do not have any cumulative voting rights.

 

Dividend Rights

 

Subject to preferential dividend rights of any other class or series of stock, the holders of shares of common stock are entitled to receive dividends, including dividends of equity, as and when declared by the Company’sour board of directors, subject to any limitations applicable by law and to the rights of the holders, if any, of the Company’sour preferred stock.

 

Liquidation

 

In the event the Company is liquidated, dissolvedof our liquidation or itsdissolution or if our affairs are wound up, after we pay or make adequate provision for all of the Company’sour debts and liabilities, each holder of common stock will be entitled to share ratably in all assets that remain, subject to any rights that are granted to the holders of any class or series of preferred stock.

 

Other Rights and Preferences

 

Subject to the preferential rights of any other class or series of stock, all shares of common stock have equal dividend, distribution, liquidation and other rights, and have no preference, appraisal or exchange rights, except for any appraisal rights provided by Delaware law. Furthermore, holders of common stock have no conversion, sinking fund or redemption rights, or preemptive rights to subscribe for any of the Company’sour securities.

 

The rights, powers, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock which we may designate and issue in the future.

 

Preferred Stock

 

There are presently no issuedOur board of directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and outstandingto fix the designation, powers, preferences, and rights of the shares of Series A Preferred Stockeach series and any of its qualifications, limitations, or Series A-1 Preferred Stock.


Series B Preferred Stock

Conversion Rights and Conversion Price

There are 1,854 sharesrestrictions, in each case without further vote or action by our stockholders. Our board of Series B Preferred authorized and 1,354 shares of Series B Preferred outstanding, which shares of Series B Preferred are currently subject to beneficial ownership blockers and are exchangeable at the option of the holder into 11,283,333 shares of common stock. The shares of common stock underlying the Series B Preferred Stock are subject to being issued without restrictive legend pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended, subject to various conditions and limitations. Each share of Series B Preferred has a stated value of $1,000 and a conversion price of $0.12 (1,354 multiplied by $1,000 divided by 0.12 equals 11,283,333).

In the event the Company issues shares of common stock below $0.082 (with certain exceptions), the conversion price will be reduced from $0.12 to the price at which such shares of common are issued and, as such, will result in a higher number of common stock issuable under the Series B Preferred based on the calculation above.

Conversion Restriction

At no time may a holder of shares of Series B Preferred convert shares of the Series B Preferred ifdirectors can also increase or decrease the number of shares of commonany series of preferred stock, to be issued pursuant to such conversion would result in such holder beneficially owning (as determined in accordance with Section 13(d)but not below the number of the Exchange Act and the rules thereunder) more than 9.99%shares of all of the common stockthat series then outstanding, at such time; provided, however, that this limitation may be reduced to 4.99% written notice to us.

Dividend Rights

The Series B Preferred has no separate dividend rights. However, whenever thewithout any further vote or action by our stockholders. Our board of directors declares a dividend onmay authorize the commonissuance of preferred stock each holder of record of a share of Series B Preferred,with voting or any fraction of a share of Series B Preferred, onconversion rights that could adversely affect the date set by the board of directors to determine the ownersvoting power or other rights of the common stockholders of record entitled to receive such dividend (the “Record Date”) shall be entitled to receive out of any assets at the time legally available therefor, an amount equal to such dividend declared on one share of common stock on an as-if-converted-to-Common Stock basis as of the Record Date.

Voting Rights

The Series B Preferred has no voting rights, except with respect to transactions upon which the Series B Preferred shall be entitled to vote separately as a class. The common stock into which the Series B Preferred is exchangeable shall, upon issuance, have all of the same voting rights as other issued and outstanding shares of the Company’sour common stock. The initial holderissuance of the Series B Preferred has the right so long as it owns at least 464 shares of Series B Preferred to appoint a member to our Board of Directors. As of the date of this filing, the initial holder of the Series B Preferred has not exercised its right to do so and has not indicated that it plans topreferred stock, while providing flexibility in future.

Liquidation Rights

In the event of the liquidation, dissolution or winding up of the Company’s affairs, after payment or provision for payment of the Company’s debtsconnection with possible acquisitions and other liabilities,corporate purposes, could, among other things, have the effect of delaying, deferring, or preventing a change in control of our company and might adversely affect the market price of our common stock and the voting and other rights of the holders of Series B Preferred then outstanding shall be entitledour common stock. We have no current plan to receive, outissue any shares of the Company’s assets, if any, an amount equal to such distribution on one share of common stock on an as-if-converted-to-Common Stock as of the date of the distribution.preferred stock.

 

Options

 

As of July 17, 2018,October 25, 2019, we had 5,050,00015,875,004 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of approximately $0.13$0.081 per share under our 2015 Equity Incentive Plan.

 

Restricted Stock Units

 

As of July 17, 2018,October 25, 2019, we had 10,750,000no shares of common stock issuable upon the vesting of outstanding restricted stock units granted under our 2015 Equity Incentive Plan.

 

Warrants

 

As of July 17, 2018,October 25, 2019, we had 34,200,002 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of approximately $0.14. These numbers include the warrants set forth below under the “Warrants Offered Hereby” subheading.$0.144.

 

Warrants Offered Hereby


 

Private Placement Warrants

 

In connection with the closing of three tranches of oura private placement during January and February 2018, we issued to the investors of such private placement five-year warrants to purchase up to an aggregate of 25,000,002 shares of common stock at an exercise price of $0.144 per share. The warrants do not contain anti-dilution price protection but are subject to customary adjustments in the event of certain corporate events. The warrants are exercisable for cash;cash or if at any time after August 28, 2018, there is no effectiveour registration statement on Form S-1 (File No. 333-22451) registering the resale, or no current prospectus available for the resale of the shares of common stock underlying thethese warrants becomes unavailable, the warrants may be exercised by means of a “cashless exercise”.exercise.”


 

WestPark Warrants

 

Also onOn February 15, 2018, and in connection with the three closings of ourthe private placement described above, we issued to ourthe placement agent for the private placement, WestPark Capital, Inc. (“WestPark”), a common stock purchase warrant to purchase up to 5,000,000 shares of our common stock at an exercise price of $0.15. These warrants will haveThis warrant has a five-year term and will havepermits cashless exercise provisions at all times. As noted in the Selling Stockholders table, certain of these warrants have been assigned to individuals affiliated with WestPark.

 

On March 1, 2018 and in connection with an amendment to a six-month investment banking advisory agreement with Westpark initially dated February 20, 2018, with Westpark, we issued to Westpark, for a purchase price of $100, a common stock purchase warrant to purchase up 1,400,000 shares of our common stock at an exercise price of $.01 per share. These warrants will haveThis warrant has a three-year term and will havepermits cashless exercise provisions at all times. As noted in the Selling Stockholders table, certain of these warrants have been assigned to individuals affiliated with WestPark.

 

Delaware Anti-Takeover Law and Provisions of our Amended and Restated CertificateCertificate of Incorporation and By-lawsBylaws

 

Section 203 of the Delaware General Corporation Law, in general, prohibits a business combination between a corporation and an interested stockholder within three years of the time such stockholder became an interested stockholder, unless:

 

prior to such time the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, exclusive of shares owned by directors who are also officers and by certain employee stock plans; or

 

at or subsequent to such time, the business combination is approved by the board of directors and authorized by the affirmative vote at a stockholders’ meeting of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

 

The term “business combination” is defined to include, among other transactions between an interested stockholder and a corporation or any direct or indirect majority owned subsidiary thereof: a merger or consolidation; a sale, lease, exchange, mortgage, pledge, transfer or other disposition (including as part of a dissolution) of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; certain transactions that would result in the issuance or transfer by the corporation of any of its stock to the interested stockholder; certain transactions that would increase the interested stockholder’s proportionate share ownership of the stock of any class or series of the corporation or such subsidiary; and any receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation or any such subsidiary.

 

In general, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with, or controlling, or controlled by, the entity or person. The term “owner” is broadly defined to include any person that individually, with or through that person’s affiliates or associates, among other things, beneficially owns the stock, or has the right to acquire the stock, whether or not the right is immediately exercisable, under any agreement or understanding or upon the exercise of warrants or options or otherwise or has the right to vote the stock under any agreement or understanding, or has an agreement or understanding with the beneficial owner of the stock for the purpose of acquiring, holding, voting or disposing of the stock.

 

The restrictions in Section 203 do not apply to corporations that have elected, in the manner provided in Section 203, not to be subject to Section 203 of the Delaware General Corporation Law or, with certain exceptions, which do not have a class of voting stock that is listed on a national securities exchange or held of record by more than 2,000 stockholders. Our Amendedrestated certificate of incorporation and Restated Certificate of Incorporation and By-lawsbylaws do not opt out of Section 203.

 

Section 203 could delay or prohibit mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

Provisions of our Amended and Restated Certificate of Incorporation and By-lawsbylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, for example, our Amended and Restated Certificate of Incorporation and By-lawsbylaws do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose).

 

Indemnification of Directors and Officers

 

Pursuant to Section 145 of the Delaware General Corporation Law, a corporation has the power to indemnify its directors and officers against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with a third-party action, other than a derivative action, and against expenses actually and reasonably incurred in the defense or settlement of a derivative action, provided that there is a determination that the individual acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the individual’s conduct was unlawful. Such determination will be made, in the case of an individual who is a director or officer at the time of such determination:

 

by a majority of the disinterested directors, even though less than a quorum;

 


if there are no disinterested directors, or if such directors so direct, by independent legal counsel; or

 


by a majority vote of the stockholders, at a meeting at which a quorum is present.

 

Without court approval, however, no indemnification may be made in respect of any derivative action in which such individual is adjudged liable to the corporation.

 

The Delaware General Corporation Law requires indemnification of directors and officers for expenses relating to a successful defense on the merits or otherwise of a derivative or third-party action.

 

The Delaware General Corporation Law permits a corporation to advance expenses relating to the defense of any proceeding to directors and officers, contingent upon such individuals’ commitment to repay any advances unless it is determined ultimately that such individuals are entitled to be indemnified.

 

Under the Delaware General Corporation Law, the rights to indemnification and advancement of expenses provided in the law are non-exclusive, in that, subject to public policy issues, indemnification and advancement of expenses beyond that provided by statute may be provided by law, agreement, vote of stockholders, disinterested directors or otherwise.

 

Our restated certificate of incorporation and bylaws provide for indemnification by us of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law.

Limitation of Personal Liability of Directors

 

The Delaware General Corporation Law provides that a corporation’s certificate of incorporation may include a provision limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. However, no such provision can eliminate or limit the liability of a director for:

 

any breach of the director’s duty of loyalty to the corporation or its stockholders;

 

acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of the law;

 

violation of certain provisions of the Delaware General Corporation Law;

 

any transaction from which the director derived an improper personal benefit; or

 

any act or omission prior to the adoption of such a provision in the certificate of incorporation.

 

Our Amended and Restated Certificaterestated certificate of Incorporationincorporation provides that our directors will not be personally liable to us or any of our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the Delaware General Corporation Law.

 


Disclosure of Commission Position on Indemnification for Securities Act Liabilities

DESCRIPTION OF SECURITIES WE ARE OFFERING

 

InsofarUnits

We are offering units in this offering at an assumed initial offering price of $          per unit. Each unit consists of one share of our common stock and a warrant to purchase one share of our common stock at an exercise price equal to $             . The units will not be certificated and the shares of common stock and warrants included in the units will be issued separately and will be immediately separable upon issuance.

Common Stock

The material terms and provisions of our common stock are described under the caption “Description of Capital Stock” in this prospectus.

Warrants

Warrants to Be Issued as indemnification for liabilities arisingPart of the Units

The following summary of certain terms and provisions of the warrants to be included in the units offered by this prospectus is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us and Continental Stock Transfer & Trust Company, as warrant agent, and the form of warrant, both of which are filed as exhibits to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and form of warrant.

Exercisability. The warrants are exercisable at any time after their original issuance and at any time up to the date that is five years after their original issuance. The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is effective and available for the issuance of 1933, as amended, may be permitted to our directors, officers and persons controlling us, we have been advised that it is the Securities and Exchange Commission’s opinion that such indemnification is against public policy as expressed inshares, or an exemption from registration under the Securities Act is available for the issuance of 1933,such shares, by payment in full in immediately available funds for the number of shares of common stock purchased upon such exercise. If a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.

Exercise Limitation. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as amended,such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days following notice from the holder to us.

Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the warrants is $            per share (based on an assumed public offering price of $          per unit), or       % of the public offering price of the units. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and is, therefore, unenforceable.distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.

Transferability. Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.

Warrant Agent. The warrants will be issued in registered form under a warrant agent agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrants shall initially be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.

Fundamental Transactions. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the warrants immediately prior to such fundamental transaction.

Rights as a Stockholder. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of our common stock, the holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the warrant.

Governing Law. The warrants and the warrant agent agreement are governed by New York law.

Representative’s Warrants

Please see “Underwriting—Representative’s Warrants” for a description of the warrants we have agreed to issue to the underwriter in this offering, subject to the completion of the offering. We expect to enter into a warrant agreement in respect of the representative’s warrants in connection with the closing of this offering.

Listing

We have applied to list our shares of common stock and the warrants offered hereby for trading on The Nasdaq Capital Market under the symbols “TAPM” and “TAPMW,” respectively. No assurance can be given that our listing application will be approved.

 


 

PLAN OF DISTRIBUTIONReverse Stock Split

 

Each Selling Stockholder (the “Selling Stockholders”)Subject to the approval of our stockholders at the Special Meeting, we plan to implement a reverse stock split of our issued and outstanding shares of common stock prior to the closing of this offering at a ratio in a range of between 1-for-2 and 1-for-200, to be determined by our board of directors. If our stockholders approve the reverse stock split at the Special Meeting and the reverse stock split is implemented, we also plan to amend our Certificate of Incorporation to reduce the total number of shares of common stock that we are authorized to issue from 250,000,000 to 25,000,000, subject to the approval of our stockholders at the Special Meeting.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is currently Action Stock Transfer. Prior to the completion of this offering, we expect to appoint Continental Stock Transfer & Trust Company to serve as the transfer agent and registrar of our common stock.


MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS

The following is a summary of the securitiesmaterial U.S. federal income tax considerations relating to the purchase, ownership and anydisposition of their pledgees, assigneesour common stock and successors-in-interest may, from timewarrants purchased in this offering but is for general information purposes only and does not purport to time, sell any orbe a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of their securities covered hereby on the OTCQB or any other stock exchange, market or trading facility on whichInternal Revenue Code of 1986, as amended (the “Code”), existing and proposed Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the securities are traded or in private transactions.date hereof. These salesauthorities may be at fixed or negotiated prices. A Selling Stockholder may use anychanged, possibly retroactively, so as to result in U.S. federal income and estate tax consequences different from those set forth below. There can be no assurance that the Internal Revenue Service (the “IRS”) will not challenge one or more of the following methods when selling securities:tax consequences described herein, and we have not obtained, and do not intend to obtain, an opinion of counsel or ruling from the IRS with respect to the U.S. federal income tax considerations relating to the purchase, ownership or disposition of our common stock or warrants.

This summary does not address any alternative minimum tax considerations, any considerations regarding the tax on net investment income, or the tax considerations arising under the laws of any state, local or non-U.S. jurisdiction, or under any non-income tax laws, including U.S. federal gift and estate tax laws, except to the limited extent set forth below. In addition, this summary does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:

 

 

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;banks, insurance companies or other financial institutions;

 

block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;tax-exempt organizations or governmental organizations;

 

purchases by a broker-dealer as principalregulated investment companies and resale by the broker-dealer for its account;real estate investment trusts;

controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S. federal income tax;

brokers or dealers in securities or currencies;

traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

persons that own, or are deemed to own, more than five percent of our capital stock (except to the extent specifically set forth below);

tax-qualified retirement plans;

certain former citizens or long-term residents of the United States;

partnerships or entities or arrangements classified as partnerships for U.S. federal income tax purposes and other pass-through entities (and investors therein);

persons who hold our common stock or warrants as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction or integrated investment;

persons who hold or receive our common stock or warrants pursuant to the exercise of any employee stock option or otherwise as compensation;

persons who do not hold our common stock or warrants as a capital asset within the meaning of Section 1221 of the Code; or

persons deemed to sell our common stock or warrants under the constructive sale provisions of the Code.

In addition, if a partnership (or entity or arrangement classified as a partnership for U.S. federal income tax purposes) holds our common stock or warrants, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock or warrants, and partners in such partnerships, should consult their tax advisors.


You are urged to consult your own tax advisors with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and dispositionof our common stock and warrants arising under the U.S. federal estate or gift tax laws or under the laws of any state, local, non-U.S., or other taxing jurisdiction or under any applicable tax treaty.

General Treatment of Units and Allocation of Purchase Price

For U.S. federal income tax purposes, the purchase of our common stock and associated warrant in this offering by holders should be treated for U.S. federal income tax purposes as a “unit” consisting of one share of our common stock and its associated warrant. Each holder must allocate its purchase price of such unit between each share of our common stock and its associated warrant, as applicable based on their respective relative fair market values of each at the time of issuance. This allocation of the purchase price will establish the holder’s initial tax basis for U.S. federal income tax purposes for each share of our common stock and its associated warrant.

Any disposition of a unit should be treated for U.S. federal income tax purposes as a disposition of the share of common stock and one warrant comprising the unit, and the amount realized on the disposition should be allocated between the common stock and the warrant based on their respective relative fair market values (as determined by each such unit holder on all the relevant facts and circumstances) at the time of disposition. The separation of shares of common stock and warrants comprising the units should not be a taxable event for U.S. federal income tax purposes.

The foregoing treatment of the shares of common stock and warrants and a holder’s purchase price allocation are not binding on the IRS or the courts. Because there are no authorities that directly address instruments that are similar to the units, no assurance can be given that the IRS or the courts will agree with the characterization described above or the discussion below. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax consequences of an investment in a unit (including alternative characterizations of such unit). The balance of this discussion assumes that the characterization of the units described above is respected for U.S. federal income tax purposes.

Consequences to U.S. Holders

The following is a summary of the U.S. federal income tax consequences that will apply to a U.S. holder of our common stock or warrants. For purposes of this discussion, you are a U.S. holder if, for U.S. federal income tax purposes, you are a beneficial owner of our common stock or warrants, other than a partnership, that is:

 

an exchange distribution in accordance with the rulesindividual citizen or resident of the applicable exchange;United States;

 

privately negotiated transactions;a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia;

 

settlementan estate whose income is subject to U.S. federal income tax regardless of short sales;its source; or

a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a “United States person.”

Distributions

As described in the section titled “Dividend Policy,” we have never declared or paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, the excess will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “—Sale, Exchange or Other Taxable Disposition of Common Stock.”


Dividend income may be taxed to an individual U.S. holder at rates applicable to long-term capital gains, provided that a minimum holding period and other limitations and requirements are satisfied. Any dividends that we pay to a U.S. holder that is a taxable corporation generally will qualify for a dividends received deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations equal to a portion of any dividends received, subject to generally applicable limitations on that deduction. U.S. holders should consult their own tax advisors regarding the holding period and other requirements that must be satisfied in order to qualify for the reduced tax rate on dividends or the dividends-received deduction.

Constructive Distributions

The terms of the warrants may allow for changes in the exercise price of the warrants under certain circumstances. A change in exercise price of a warrant that allows holders to receive more shares of common stock on exercise may increase a holder’s proportionate interest in our earnings and profits or assets. In that case, such holder may be treated as though it received a taxable distribution in the form of our common stock. A taxable constructive stock distribution would generally result, for example, if the exercise price is adjusted to compensate holders for distributions of cash or property to our stockholders.

Not all changes in the exercise price that result in a holder’s receiving more common stock on exercise, however, would be considered as increasing a holder’s proportionate interest in our earnings and profits or assets. For instance, a change in exercise price could simply prevent the dilution of a holder’s interest upon a stock split or other change in capital structure. Changes of this type, if made pursuant to a bona fide reasonable adjustment formula, are not treated as constructive stock distributions for these purposes. Conversely, if an event occurs that dilutes a holder’s interest and the exercise price is not adjusted, the resulting increase in the proportionate interests of our stockholders could be treated as a taxable stock distribution to our stockholders.

Any taxable constructive stock distributions resulting from a change to, or a failure to change, the exercise price of the warrants that is treated as a distribution of common stock would be treated for U.S. federal income tax purposes in the same manner as distributions on our common stock paid in cash or other property, resulting in a taxable dividend to the recipient to the extent of our current or accumulated earnings and profits (with the recipient’s tax basis in its common stock or warrants, as applicable, being increased by the amount of such dividend), and with any excess treated as a return of capital or as capital gain. U.S. holders should consult their own tax advisors regarding whether any taxable constructive stock dividend would be eligible for tax rates applicable to long-term capital gains or the dividends-received deduction described under “—Distributions,” as the requisite applicable holding period requirements might not be considered to be satisfied.

Sale, Exchange or Other Taxable Disposition of Common Stock

A U.S. holder will generally recognize capital gain or loss on the sale, exchange or other taxable disposition of our common stock. The amount of gain or loss will equal the difference between the amount realized on the sale and such U.S. holder’s tax basis in such common stock. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for such common stock. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the common stock for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.

Sale, Exchange, Redemption, Lapse or Other Taxable Disposition of a Warrant

Upon a sale, exchange, redemption, lapse or other taxable disposition of a warrant, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized (if any) on the disposition and such U.S. holder’s tax basis in the warrant. The amount realized will include the amount of any cash and the fair market value of any other property received in exchange for the warrant. The U.S. holder’s tax basis in the warrant generally will equal the amount the holder paid for the warrant. Gain or loss will be long-term capital gain or loss if the U.S. holder has held the warrant for more than one year. Long-term capital gains of non-corporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to certain limitations.


Exercise of a Warrant

Except as discussed below with respect to the cashless exercise of a warrant, a U.S. holder generally will not recognize taxable gain or loss on the acquisition of common stock upon exercise of a warrant for cash. The U.S. holder’s tax basis in the share of our common stock received upon exercise of the warrant generally will be an amount equal to the sum of the U.S. holder’s initial investment in the warrant (i.e., the portion of the U.S. holder’s purchase price for units that is allocated to the warrant, as described above under “— General Treatment of Units and Allocation of Purchase Price”) and the exercise price. It is unclear whether the U.S. holder’s holding period for the common stock received upon exercise of the warrants will begin on the date following the date of exercise or on the date of exercise of the warrants; in either case, the holding period will not include the period during which the U.S. holder held the warrants.

The U.S. federal income tax consequences of a cashless exercise of a warrant are not clear. A cashless exercise may be tax-free, either because the exercise is not a realization event or because the exercise is treated as a recapitalization for U.S. federal income tax purposes. In either tax-free situation, a U.S. holder’s basis in the common stock received would equal the holder’s basis in the warrants exercised therefor. If the cashless exercise were treated as not being a realization event, it is unclear whether a U.S. holder’s holding period in the common stock would be treated as commencing on the date following the date of exercise or on the date of exercise of the warrant; in either case, the holding period would not include the period during which the U.S. holder held the warrants. If the cashless exercise were treated as a recapitalization, the holding period of the common stock would include the holding period of the warrants exercised therefor.

It is possible that a cashless exercise could be treated in part as a taxable exchange in which gain or loss would be recognized. In such event, a U.S. holder could be deemed to have surrendered warrants equal to the number of shares of common stock having a value equal to the exercise price for the total number of warrants to be exercised. The U.S. holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the common stock received in respect of the warrants deemed surrendered and the U.S. holder’s tax basis in the warrants deemed surrendered. In this case, a U.S. holder’s tax basis in the common stock received would equal the sum of the fair market value of the common stock received in respect of the warrants deemed surrendered and the U.S. holder’s tax basis in the warrants exercised. Alternatively, it is possible that a cashless exercise could be treated as a fully taxable exchange of the warrants for the common stock in which case the U.S. holder would generally recognize taxable gain to the extent the fair market value of the common stock exceeds the U.S. holder’s basis in its warrants exchanged therefor. It is unclear whether a U.S. holder’s holding period for the common stock would commence on the date following the date of exercise or on the date of exercise of the warrant; in either case, the holding period would not include the period during which the U.S. holder held the warrant. 

Due to the absence of authority on the U.S. federal income tax treatment of a cashless exercise, including when a U.S. holder’s holding period would commence with respect to the common stock received, there can be no assurance which, if any, of the alternative tax consequences and holding periods described above would be adopted by the IRS or a court of law. Accordingly, U.S. holders should consult their tax advisors regarding the tax consequences of a cashless exercise of a warrant.

Consequences to Non-U.S. Holders

The following is a summary of the U.S. federal income tax consequences that will apply to a non-U.S. holder of our common stock or warrants. A “non-U.S. holder” is a beneficial owner of our common stock or warrants (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that, for U.S. federal income tax purposes, is not a U.S. holder.

Distributions

Distributions will be treated as described above under “Consequences to U.S. Holders—Distributions.”  Subject to the discussion below regarding effectively connected income, any dividend, including any taxable constructive stock dividend resulting from certain adjustments, or failure to make adjustments, to the exercise price of a warrant (as described above under “Consequences to U.S. Holders—Constructive Distributions”), paid to a non-U.S. holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, a non-U.S. holder must provide us with an IRS Form W-8BEN, IRS Form W-8BEN-E or other applicable IRS Form W-8 properly certifying qualification for the reduced rate. These forms must be updated periodically. A non-U.S. holder eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. If a non-U.S. holder holds our common stock or warrants through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then may be required to provide certification to us or our paying agent, either directly or through other intermediaries.


Dividends received by a non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States) are generally exempt from such withholding tax if the non-U.S. holder satisfies certain certification and disclosure requirements. In order to obtain this exemption, the non-U.S. holder must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated U.S. federal income tax rates applicable to U.S. holders, net of certain deductions and credits. In addition, dividends received by a corporate non-U.S. holder that are effectively connected with its conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. holders should consult their own tax advisors regarding any applicable tax treaties that may provide for different rules.

Constructive Distributions

Constructive distributions will be treated as described above under “Consequences to U.S. Holders—Constructive Distributions.”

Gain on Sale, Exchange or Other Taxable Disposition of Common Stock or Warrants

Subject to the discussion below regarding backup withholding and foreign accounts, a non-U.S. holder generally will not be required to pay U.S. federal income tax on any gain realized upon the sale, exchange or other taxable disposition of our common stock or a warrant unless:

the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States);

the non-U.S. holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or

shares of our common stock or our warrants, as applicable, constitute U.S. real property interests by reason of our status as a “United States real property holding corporation” (a “USRPHC”) for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non-U.S. holder’s holding period for, our common stock or warrants, as applicable.

We believe that we are not currently and will not become a USRPHC for U.S. federal income tax purposes, and the remainder of this discussion so assumes. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, if our common stock becomes regularly traded on an established securities market (as defined by applicable Treasury regulations), such common stock will be treated as U.S. real property interests only if the non-U.S. holder actually or constructively held more than five percent of such regularly traded common stock at any time during the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or the non-U.S. holder’s holding period for, our common stock. In addition, provided that our common stock is regularly traded on an established securities market (as defined by applicable Treasury regulations), a warrant will not be treated as a U.S. real property interest with respect to a non-U.S. holder if such holder did not own, actually or constructively, warrants whose total fair market value on the date they were acquired (and on the date or dates any additional warrants were acquired) exceeded the fair market value on that date (and on the date or dates any additional warrants were acquired) of five percent of all our common stock.


If the non-U.S. holder is described in the first bullet above, it will be required to pay tax on the net gain derived from the sale, exchange or other taxable disposition under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a rate of 30%, or such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in the second bullet above will be required to pay a flat 30% tax (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, exchange or other taxable disposition, which gain may be offset by U.S. source capital losses for the year (provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses). Non-U.S. holders should consult their own tax advisors regarding any applicable income tax or other treaties that may provide for different rules.

Exercise of a Warrant

A non-U.S. holder generally will not be subject to U.S. federal income tax on the exercise of warrants into shares of our common stock.  However, if a cashless exercise of the warrants results in a taxable exchange, as described in “Consequences to U.S. Holders — Exercise of a Warrant,” the rules described above under “—Gain on Sale, Exchange or Other Taxable Disposition of Common Stock or Warrants” would apply.Non-U.S. holders should consult their tax advisors regarding the tax consequences of a cashless exercise.

Federal Estate Tax

Common stock or warrants beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal estate tax purposes) at the time of their death will generally be includable in the decedent’s gross estate for U.S. federal estate tax purposes. Such securities, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.

Backup Withholding and Information Reporting

Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence if you reside outside of the United States.

Payments of dividends on or of proceeds from the disposition of our common stock or warrants made to you may be subject to information reporting and backup withholding. Backup withholding may apply at a current rate of 24% unless you (i) provide the payor with a correct taxpayer identification number and comply with applicable certification requirements, or (ii) establish an exemption, for example, by properly certifying your non-U.S. status on an IRS Form W-8BEN or IRS Form W-8BEN-E or other applicable IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person that is not an exempt recipient.

Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (“FATCA”) generally imposes withholding tax at a rate of 30% on dividends on our common stock or warrants paid to a “foreign financial institution” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. FATCA also generally imposes a U.S. federal withholding tax of 30% on dividends on our common stock or warrants paid to a “non-financial foreign entity” (as specially defined for purposes of these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends paid by us. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in our common stock or warrants.

Under applicable Treasury regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our securities. While withholding under FATCA would have also applied to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, recently proposed Treasury regulations eliminate FATCA withholding on payments of gross proceeds.

Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. consequences of purchasing, owning and disposing of our common stock or warrants, including the consequences of any proposed changes in applicable laws.


UNDERWRITING

ThinkEquity, a division of Fordham Financial Management, Inc., is acting as the underwriter for this offering. We have entered into an underwriting agreement dated                      , 2019 with the underwriter. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us, at the public offering price per unit less the underwriting discounts set forth on the cover page of this prospectus, the number of units listed next to its name in the following table:

Underwriter

Number of
Units

ThinkEquity, a division of Fordham Financial Management, Inc.

Total

All of the units to be purchased by the underwriter will be purchased from us.

The underwriting agreement provides that the obligations of the underwriter to pay for and accept delivery of the units offered by this prospectus are subject to various conditions and representations and warranties, including the approval of certain legal matters by their counsel and other conditions specified in the underwriting agreement. The units are offered by the underwriter, subject to prior sale, when, as and if issued to and accepted by it. The underwriter reserves the right to withdraw, cancel or modify the offer to the public and to reject orders in whole or in part. The underwriter is obligated to take and pay for all of the units offered by this prospectus if any such units are taken, other than those shares of common stock and/or warrants covered by the over-allotment option described below.

Over-Allotment Option

We have granted to the underwriter an option, exercisable no later than 45 calendar days after the closing of this offering, to purchase up to an additional             shares of common stock and/or additional warrants to purchase up to             shares of common stock, in any combination thereof, from us to cover over-allotments, if any. If the underwriter exercises all or any part of this option, it will purchase shares and/or warrants covered by the option at the public offering price per share and the public offering price per warrant, respectively, less the underwriting discount. If this option is exercised in full, the total offering price to the public will be $           and the total net proceeds, before expenses, to us will be $          .

Discounts and Commissions

The underwriter has advised us that it proposes to offer the units to the public at the public offering price per unit set forth on the cover page of this prospectus. The underwriter may offer units to securities dealers at that price less a concession of not more than $         per unit, of which up to $           per unit may be re-allowed to other dealers. After the initial offering to the public, the public offering price and other selling terms may be changed by the underwriter.

The following table summarizes the public offering price, underwriting discounts and commissions and proceeds before expenses to us assuming both no exercise and full exercise by the underwriter of its over-allotment option:

Per Unit

Total Without
Over-allotment
Option

Total With
Over-allotment
Option

Public offering price(1)

$

$

$

Underwriting discounts and commissions (7.5%)

$

$

$

Non-accountable expense allowance (1%)

Proceeds, before expenses, to us

$

$

$

(1)

The public offering price corresponds to a public offering price per share of common stock of $ and a public offering price per warrant of $          .

We have paid an expense deposit of $40,000 to the underwriter, which will be applied against the out-of-pocket accountable expenses that will be paid by us to the underwriter in connection with this offering, and will be reimbursed to us to the extent not incurred.

In addition, we have also agreed to pay the following expenses of the underwriter relating to the offering including: (a) all fees, expenses and disbursements relating to background checks of our officers and directors in an amount not to exceed $15,000 in the aggregate; (b) $29,500 for the underwriter’s use of Ipreo’s book-building, prospectus tracking and compliance software for this offering; (c) the underwriter’s legal fees incurred in connection with this offering in an amount up to $125,000; (d) up to $20,000 of the underwriter’s actual accountable road show expenses for the offering; (e) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and Lucite tombstones in an amount not to exceed $3,000; and (f) the costs associated with data services and communications in an amount not to exceed $10,000.

We estimate the expenses of this offering payable by us, not including underwriting discounts and commissions, will be approximately $                .

Underwriter’s Warrants

Upon closing of this offering, we have agreed to issue to the underwriter as compensation warrants to purchase a number of shares of common stock equal to 5% of the aggregate number of shares of common stock sold as part of the units sold in this offering (including units sold as part of the over-allotment option). The underwriter’s warrants will be exercisable at a per share exercise price equal to 125% of the public offering price per unit sold in this offering. The underwriter’s warrants are exercisable at any time and from time to time, in whole or in part, during the four and one-half year period commencing six months from the effective date of the registration statement related to this offering. We have registered the shares of our common stock issuable upon the exercise of the underwriter’s warrants in the registration statement of which this prospectus is a part.


The underwriter’s warrants have been deemed compensation by the Financial Industry Regulatory Authority, Inc. (“FINRA”) and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriter (or permitted assignees under Rule 5110(g)(1)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the effective date of the registration statement. In addition, the warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(iv). The piggyback registration right provided will not be greater than seven years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.

Right of First Refusal

Until 24 months from the date the offering is completed, the underwriter will have, subject to certain exceptions, an irrevocable right of first refusal to act as sole investment banker, sole book-runner and/or sole placement agent, at the underwriter’s discretion, for each and every future public and private equity and debt offerings for us, or any successor to or any subsidiary of us, including all equity linked financings, on terms customary for the underwriter. The underwriter will have the sole right to determine whether or not any other broker-dealer shall have the right to participate in any such offering and the economic terms of any such participation.

Determination of Public Offering Price

Our common stock is presently quoted on OTCQB under the symbol “TAPM,” and there has not been any public market for our common stock on a national securities exchange. Consequently, the public offering price for the units will be determined by negotiations between us and the underwriter. Among the factors considered in determining the public offering price of the units, in addition to prevailing market conditions, were the information set forth in this prospectus and otherwise available to the underwriter; our history and prospects and the history and prospects for the industry in which we compete; estimates of our business potential and earnings prospects; an assessment of our management; recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and other factors deemed relevant by the underwriter and us.

Neither we nor the underwriter can assure investors that an active trading market for our securities will develop. It is also possible that, after the offering, the securities will not trade in the public market at or above the public offering price and that the warrants will not trade above their exercise price.

The underwriter has advised us that it proposes to offer the securities directly to the public at the public offering price set forth on the cover of this prospectus. After the offering to the public, the offering price and other selling terms may be changed by the underwriter without changing our proceeds from the underwriter’s purchase of the securities.

The underwriter and its affiliates may in the future provide various investment banking and other financial services for us, for which they may receive, in the future, customary fees.

Listing

We have applied to list our shares of common stock and the warrants offered hereby for trading on The Nasdaq Capital Market under the symbols “TAPM” and “TAPMW,” respectively. No assurance can be given that our listing application will be approved.

Lock-Up Agreements

We have agreed, on behalf of the company and any successor entity, that, without the prior written consent of the underwriter, we will not, for a period of 90 days after the date of this prospectus (subject to limited exceptions), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (ii) file or caused to be filed any registration statement with the SEC relating to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (iii) complete any offering of debt securities, other than entering into a line of credit with a traditional bank or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock, whether any such transaction described in clause (i), (ii), (iii) or (iv) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.

Each of our directors and officers have agreed, for a period of 180 days after the date of this prospectus, and certain stockholders have agreed, for a period of 90 days after the date of this prospectus, without the prior written consent of the underwriter, not to directly or indirectly (subject to limited exceptions):

offer, pledge, sell, contract to sell, grant lend or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock (the “Lock-Up Securities”), whether any such transaction is to be settled by delivery of Lock-Up Securities, in cash or otherwise;

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction is to be settled by delivery of Lock-Up Securities, in cash or otherwise;

make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or

publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities.


M&A Capital Raising Advisory Agreement

On June 7, 2019, we entered into a M&A and Capital Raising Advisory Agreement with the underwriter, pursuant to which the underwriter agreed to serve as our exclusive financial advisor in connection with a potential business combination transaction or transactions. As of the date of this prospectus, we have paid $30,000 in non-refundable monthly retainer fees to the underwriter under this agreement.

Price Stabilization, Short Positions and Penalty Bids

In connection with this offering, the underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock or warrants. Specifically, the underwriter may over-allot in connection with this offering by selling more securities than are set forth on the cover page of this prospectus. This creates a short position in our securities for its own account. The short position may be either a covered short position or a naked short position. In a covered short position, the number of securities over-allotted by the underwriter is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than the number of securities in the over-allotment option. To close out a short position, the underwriter may elect to exercise all or part of the over-allotment option. The underwriter may also elect to stabilize the price of our securities or reduce any short position by bidding for, and purchasing, our securities in the open market.

The underwriter may also impose a penalty bid. This occurs when a particular underwriter or dealer repays selling concessions allowed to it for distributing our securities in this offering because the underwriter repurchases our securities in stabilizing or short covering transactions.

Finally, the underwriter may bid for, and purchase, securities in market making transactions, including “passive” market making transactions as described below.

These activities may stabilize or maintain the market price of our securities at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriter is not required to engage in these activities, and may discontinue any of these activities at any time without notice. These transactions may be effected on the national securities exchange on which our shares of common stock and warrants are traded, in the over-the-counter market, or otherwise.

Indemnification

We have agreed to indemnify the underwriter against liabilities relating to the offering arising under the Securities Act and the Exchange Act, liabilities arising from breaches of some or all of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriter may be required to make for these liabilities.

Electronic Distribution

A prospectus in electronic format may be made available on a website maintained by the underwriter, or selling group members, if any, participating in this offering. The underwriter may agree to allocate a number of shares to selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriter to selling group members that may make internet distributions on the same basis as other allocations. In connection with the offering, the underwriter may distribute prospectuses electronically.

The underwriter has informed us that it does not intend to confirm sales to accounts over which it exercises discretionary authority in excess of five percent of the total number of shares of common stock offered by it.

Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus is a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.

Selling Restrictions

No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of our securities, or the possession, circulation or distribution of this prospectus or any other material relating to us or our securities in any jurisdiction where action for that purpose is required. Accordingly, our securities may not be offered or sold, directly or indirectly, and none of this prospectus or any other offering material or advertisements in connection with our securities may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each a “Relevant Member State”, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the “Relevant Implementation Date”, our securities will not be offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to our securities that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of our securities may be made to the public in that Relevant Member State at any time:

to any legal entity that is a qualified investor as defined in the Prospectus Directive;

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the manager for any such offer; or

 

in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security;

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

a combination of any such methods of sale; or

any other method permittedcircumstances which do not require the publication by the issuer of a prospectus pursuant to applicable law.Article 3(2) of the Prospectus Directive, provided that no such offer of the securities shall require the issuer or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

 


The Selling Stockholders

For the purposes of this provision, the expression an “offer of securities to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and securities to be offered so as to enable an investor to decide to purchase or subscribe securities, as the same may also sell securities under Rule 144 orbe varied in that Relevant Member State by any other exemption from registration undermeasure implementing the SecuritiesProspectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

United Kingdom

In the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act of 1933,2000 (Financial Promotion) Order 2005, as amended (the “Securities Act”)Order), ifand/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together, the relevant persons). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available rather than under this prospectus.to, and will be engaged in with, relevant persons.

 

Broker-dealers engagedCanada

The offering of our securities in Canada is being made on a private placement basis in reliance on exemptions from the prospectus requirements under the securities laws of each applicable Canadian province and territory where our securities may be offered and sold, and therein may only be made with investors that are purchasing, or deemed to be purchasing, as principal and that qualify as both an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario) and as a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any offer and sale of our securities in any province or territory of Canada may only be made through a dealer that is properly registered under the securities legislation of the applicable province or territory wherein our securities are offered and/or sold or, alternatively, where such registration is not required.

Any resale of our common stock and/or warrants by an investor resident in Canada must be made in accordance with applicable Canadian securities laws, which require resales to be made in accordance with an exemption from, or in a transaction not subject to, prospectus requirements under applicable Canadian securities laws. These resale restrictions may under certain circumstances apply to resales of the common stock and/or warrants outside of Canada.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the Selling Stockholders may arrangepurchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for other brokers-dealersparticulars of these rights or consult with a legal advisor.

Pursuant to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholderssection 3A.3 (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excesssecurities issued or guaranteed by the government of a customary brokerage commissionnon-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (“NI 33-105”), the underwriter is not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in complianceconnection with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.this offering.

 

In connection withUpon receipt of this prospectus, each Québec investor hereby confirms that it has expressly requested that all documents evidencing or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securitiesany notice) be drawn up in the course of hedging the positions they assume. The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities.

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliverEnglish language only. Par la réception de ce document, chaque investisseur québecois confirme par les présentes qu’il a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act)expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude, toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.

 


 

LEGAL MATTERS

 

Quick Law Group P.C. will pass upon theThe validity of the shares of our common stocksecurities offered hereby will be passed upon for us by Haynes and Boone, LLP, New York, New York. Reed Smith LLP, New York, New York, is acting as counsel for the selling stockholders under this prospectus.

MATERIAL CHANGES

There have been no material changes to us since December 31, 2017 that have not been describedunderwriter in this prospectus that should be included.connection with offering.

 

EXPERTS

 

Our financial statements as of December 31, 20172018 and 20162017 and for the years then ended included in this prospectus have been audited by Liggett & Webb, P.A., an independent registered public accounting firm, as stated in its report appearing in the registration statement, and are included in reliance upon the report of such firm given upon its authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND ADDITIONALMORE INFORMATION

 

We have filed with the Securities and Exchange CommissionSEC a registration statement on Form S-1 together with any amendments and related exhibits, under the Securities Act of 1933, as amended, with respect to our shares of common stockthe securities offered by this prospectus. TheThis prospectus, which constitutes a part of the registration statement, contains additionaldoes not contain all of the information aboutset forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our sharessecurities, we refer you to the registration statement, including the exhibits filed as a part of common stock that the selling stockholders are offeringregistration statement. Statements contained in this prospectus.prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit.

 

Following this offering, we will be requiredYou can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at http://www.sec.gov. We are subject to the information reporting requirements of the Exchange Act, and file annual, quarterly and currentspecial reports, proxy statements and other information with the SecuritiesSEC. These reports, proxy statements and Exchange Commission under the Securities Exchange Act of 1934, as amended. Our Securities and Exchange Commission filingsother information are available for inspection on the website of the SEC referred to the public over the Internet at the Securities and Exchange Commission’sabove. We also maintain a website at http://www.sec.gov. Youwww.tapinator.com, at which you may also read and copy any document we file at the Securities and Exchange Commission’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Access to those electronic filings is availableaccess these materials free of charge as soon as reasonably practicable after filingthey are electronically filed with, or furnished to, the SecuritiesSEC. The information contained in, or that can be accessed through, our website is not part of, and Exchange Commission. You may also request a copy of those filings, excluding exhibits, from us at no cost. Any such request should be addressed to us at: 110 West 40th Street, Suite 1902, New York, NY 10018, Attention: Ilya Nikolayev, Chief Executive Officer.is not incorporated into, this prospectus.

 


 

TAPINATOR, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Tapinator, Inc.

Table of Contents

 

Annual Financial Statements (Audited):

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 20172018 and 20162017

F-3

Consolidated Statements of Operations for the Years Ended December 31, 20172018 and 20162017

F-4F-5

Consolidated Statement of Stockholders’ Equity (Deficit) Equity for the Years Ended December 31, 20172018 and 20162017

F-5F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 20172018 and 20162017

F-6F-9

Notes to Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016

F-7F-11

  

Interim Financial Statements:

Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited)June 30, 2019 (Unaudited) and December 31, 20172018

F-24

F-35

Condensed Consolidated Statements of Operations for the Three Months Ended March 31,three and six months ended June 30, 2019 and 2018 and 2017 (unaudited)(Unaudited)

F-25

F-37

Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2018 (unaudited)six months ended June 30, 2019 (Unaudited)

F-26

F-38

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2018 (Unaudited)

F-39

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,six months ended June 30, 2019 and 2018 and 2017 (unaudited)(Unaudited)

F-27

F-41

Notes to Unaudited Condensed Consolidated Financial Statements for the Three Months ended March 31, 2018 and 2017 (unaudited)

F-28

F-43

 


  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Tapinator, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Tapinator, Inc. (“the Company”(the “Company”) as of December 31, 20172018 and 2016,2017, and the related consolidated statements of operations, stockholders’ equity (deficit) equity,, and cash flows for each of the years thenin the two-year period ended December 31, 2018, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and 2016, and the consolidated results of its consolidated operations and its cash flows for each of the years thenin the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 audit to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Liggett & Webb, P.A.

 

We have served as the Company's auditor since 2013.

 

New York, New York

March 30, 201826, 2019

 


 

Tapinator, Inc.

Consolidated Balance Sheets

As of December 31, 2017 and 2016

PART I. FINANCIAL INFORMATION

  

 
  2017  2016 
         
Assets        
Current assets:        

Cash and cash equivalents

 $246,755  $590,461 

Accounts receivable

  333,090   326,607 

Prepaid expenses

  177,829   53,089 

Total current assets

  757,674   970,157 
         

Property and equipment, net

  14,412   20,429 

Software development costs, net

  1,026,548   1,174,377 

Investments

  5,000   5,000 

Security deposits

  22,698   22,698 

Total assets

 $1,826,332  $2,192,661 
         

Liabilities and stockholders' (deficit) equity

        

Current liabilities:

        

Accounts payable and accrued expenses

 $155,366  $165,744 

Due to related parties

  100,115   89,697 

Deferred Revenue

  442,831   85,402 

Accrued interest

  86,400   95,760 

Senior convertible debenture, net of debt discount (current portion)

  1,316,882   158,682 

Total current liabilities

  2,101,594   595,285 
         

Senior convertible debenture, net of debt discount (less current portion)

  -   476,045 

Total Liabilities

  2,101,594   1,071,330 
         

Commitments and Contingencies (see Note 7)

  -   - 
         

Stockholders' (Deficit) Equity:

        

Preferred stock, $0.001 par value; 1,532,500 shares authorized within any series of designation Series A convertible preferred stock, $0.001 par value; 840 shares designated at December 31, 2017 and December 31, 2016; 420 shares issued and outstanding at December 31, 2017 and December 31, 2016,

  1   1 

Series A-1 convertible preferred stock, $0.001 par value; 1,500 and 0 shares designated at December 31, 2017 and December 31, 2016 respectively; 1,500 and 0 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively

  2   - 

Common stock, $0.001 par value; 150,000,000 shares authorized; 59,459,303 and 56,959,303 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively

  59,459   56,959 

Additional paid-in capital

  7,535,969   5,344,918 

Accumulated deficit

  (7,970,693)  (4,280,547)

Stockholders' (deficit) equity attributable to Tapinator, Inc.

  (375,262)  1,121,331 

Non-controlling interest

  100,000   - 

Total stockholders' (deficit) equity

  (275,262)  1,121,331 

Total liabilities and stockholders' (deficit) equity

 $1,826,332  $2,192,661 

(See accompanying notes to the consolidated financial statements)


Tapinator, Inc.

Consolidated Statements of Operations

For The Years Ended December 31, 2017 and 2016

  

2017

  

2016

 

Revenue

 $3,141,360  $3,731,773 
         
Operating expenses        

Cost of revenue excluding depreciation and amortization

  1,033,452   1,168,176 

Research and development

  140,772   81,200 

Marketing and public relations

  518,099   472,351 

General and administrative

  1,374,592   1,203,796 

Impairment of capitalized software

  256,310   - 

Amortization of software development costs

  709,615   767,187 

Depreciation and amortization of other assets

  21,927   50,275 

Total expenses

  4,054,767   3,742,985 
         

Operating loss

  (913,407)  (11,212)
         
Other expenses        

Amortization of debt discount

  1,404,254   1,105,869 

Interest expense, net

  533,511   451,990 

Loss on extinguishment of debt

  830,001   770,526 

Total other expenses

  2,767,766   2,328,385 
         

Loss before income taxes

  (3,681,173)  (2,339,597)
         

Income taxes

  8,973   7,027 
         

Net loss

 $(3,690,146) $(2,346,624)
         
Net loss per share:        

Basic / Diluted

 $(0.06) $(0.04)
         
Weighted average common shares outstanding:        
Basic / Diluted  58,478,481   56,989,631 

(See accompanying notes to the consolidated financial statements)


Tapinator, Inc.

Consolidated Statement of Stockholders’ (Deficit) Equity

For The Years Ended December 31, 2017 and 2016

  Common Stock  

Series A

Preferred Stock

  

Series A-1

Preferred Stock

  

Series B

Preferred Stock

  Additional  Accumulated  Non-controlling     
  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Paid-In-Capital  Deficit  Interest  TOTAL 
Balances at December 31, 2015  57,109,303  $57,109   -  $-   -  $-   -  $-  $3,633,868  $(1,933,923) $-  $1,757,054 

Common stock redemption and cancellation

  (150,000)  (150)  -   -   -   -   -   -   (28,350)  -   -   (28,500)

Stock based compensation

  -   -   -   -   -   -   -   -   59,401   -   -   59,401 

Issuance of Series A preferred stock

  -   -   420   1   -   -   -   -   419,999   -   -   420,000 

Debt discount related to conversion feature of convertible debenture and

warrant extension

  -   -   -   -   -   -   -   -   1,260,000   -   -   1,260,000 

Net loss

  -   -   -   -   -   -   -   -   -   (2,346,624)  -   (2,346,624)

Balances at December 31, 2016

  56,959,303  $56,959   420  $1   -   -   -   -  $5,344,918  $(4,280,547)  -  $1,121,331 

Common shares issued for cash related to stock purchase agreement

  2,500,000   2,500   -   -   -   -   -   -   347,500   -   -   350,000 

Stock based compensation

  -   -   -   -   -   -   -   -   173,552   -   -   173,552 

Shares issued Series A-1 preferred stock related to warrant exchange

  -   -   -   -   1,500   2   -   -   659,998   -   -   660,000 

Debt discount related to conversion feature of convertible debenture and

warrant exchange

  -   -   -   -   -   -   -   -   1,010,001   -   -   1,010,001 

Capital contribution from non-controlling interest

  -   -   -   -   -   -   -   -   -   -   100,000   100,000 

Net loss

  -   -   -   -   -   -   -   -   -   (3,690,146)  -   (3,690,146)

Balances at December 31, 2017

  59,459,303  $59,459   420  $1   1,500  $2   -  $-  $7,535,969  $(7,970,693) $100,000  $(275,262)

(See accompanying notes to the consolidated financial statements)


Tapinator, Inc.

Consolidated Statements of Cash Flows

For The Years Ended December 31, 2017 and 2016

  Year Ended December 31, 

 

 

2017

  

2016

 
Cash flows from operating activities:        

Net (loss)

 $(3,690,146) $(2,346,624)
Adjustments to reconcile net loss to net cash provided by operating activities:        

Amortization of software development costs

  709,615   767,187 

Depreciation and amortization of other assets

  21,927   50,275 

Amortization of debt discount

  1,404,254   1,105,869 

Amortization of original issue discount

  341,577   270,517 

Loss on extinguishment of debt

  830,001   770,526 

Stock based compensation

  173,552   30,902 

Impairment of capitalized software

  256,310   - 

Decrease (increase) in assets

        

Accounts receivable

  (6,483)  102,958 

Prepaid expenses

  (124,741)  1,500 

Security deposits

  -   (8,646)

Increase (decrease) in liabilities

        

Accounts payable and accrued expenses

  (8,846)  64,470 

Deferred Revenue

  357,429   85,402 

Due to related parties

  10,418   (10,943)

Net cash provided by operating activities

  274,867   883,393 
         

Cash flows from investing activities:

        

Capitalized software development costs

  (818,094)  (1,194,628)

Purchase of property, plant and equipment

  (3,979)  (14,585)

Investment write-off

  -   14,085 

Net cash (used in) investing activities

  (822,073)  (1,195,128)
         

Cash flows from financing activities:

        

Proceeds from issuance of common stock

  350,000   - 

Proceeds from capital contribution from non-controlling interest

  100,000   - 

Senior convertible debenture principal payment

  (234,000)  (560,000)

Payment for senior convertible debenture financing costs

  (12,500)  (25,000)

Net cash provided by (used in) financing activities

  203,500   (585,000)
         

Net change to cash and cash equivalents

  (343,706)  (896,735)

Cash and cash equivalents at beginning of period

  590,461   1,487,196 

Cash and cash equivalents at end of period

 $246,755  $590,461 
         

Supplemental disclosure of cash flow information:

        

Cash paid for interest

 $191,517  $89,600 

Cash paid for taxes

 $6,550  $7,027 
         

Non-cash investing and financing activities:

        

Series A & A-1 convertible preferred stock issued related to debt extinguishment

 $660,000  $420,000 

Debt discount related to conversion feature of convertible debt and warrant exchange

 $1,010,001  $1,260,000 

(See accompanying notes to the consolidated financial statements)


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS

Tapinator, Inc. (“Tapinator” or the “Company”) develops and publishes mobile games and applications on the iOS, Google Play, Amazon and Ethereum platforms. Tapinator's portfolio includes over 300 mobile gaming titles that, collectively, have achieved over 450 million player downloads, including notable games such as ROCKY™, Video Poker Classic, Solitaire Dash and Dice Mage. Tapinator generates revenues through the sale of branded advertising and via consumer transactions, including in-app purchases. Founded in 2013, Tapinator is headquartered in New York, with product development teams located in the United States, Germany, Bulgaria, Pakistan, Indonesia and Canada.

The Company was originally incorporated on December 9, 2013 in the state of Delaware. On December 12, 2013, the Company merged with Tapinator, Inc., a Nevada Corporation. The Company was the surviving corporation from this merger. On June 16, 2014, the Company executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, whereby the Company issued 36,700,000 shares of its common stock (representing 80% of its then common stock outstanding after giving effect to the transaction) to the members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. For accounting and financial reporting purposes, Tapinator LLC was considered the acquirer and the transaction was treated as a reverse merger.

The Company currently develops two types of games within its mobile games business. Tapinator’s Rapid-Launch Games are developed and published in significant quantity. These are titles that are built economically and rapidly based on a series of internally developed, expandable and re-useable game engines. These games are currently published under the Tapinator, Tap2Play, TapSim Game Studio and TopTap Games brands. The Company’s Full- Featured Games are unique products with high production values and high revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have, in the opinion of management, the potential to become well-known and long-lasting, successful mobile game franchises. These games are currently published exclusively under the Tapinator brand.

In December 2017, the Company formed a new subsidiary, Revolution Blockchain, LLC, to develop, publish and invest in games and applications that leverage blockchain technology. The firsttwo products from this subsidiary are currently under development and are both expected to be released into live beta by the second quarter of 2018. These products will leverage blockchain technology for both payment (i.e. the purchase & sale of virtual assets) and the storage of these assets via nonfungible tokens that live on the blockchain.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying consolidated financial statements and related notes have been prepared in conformity with United States generally accepted accounting principles (“GAAP”). The consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, Tapinator, LLC, Tap2Play, LLC, and Tapinator IAF, LLC, and its majority-owned subsidiary Revolution Blockchain, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include assumptions used in the recognition of revenue, realization of platform and advertising fees and related costs of revenue, long-lived assets, stock-based compensation, and the fair value of other equity and debt instruments.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

The Company derives revenue from the three gaming platforms on which it currently markets its mobile games in the form of app store transactions and from various advertising networks in the form of branded advertising placements within its mobile games.

In accordance with Accounting Standards Codification Topic (“ASC”) 605-45,Revenue Recognition: Principal Agent Considerations, the Company evaluates its agreements with the gaming platforms and advertising networks to determine whether it is acting as the principal or as an agent when selling its games or when selling premium in-game content or advertisements within its games, which it considers in determining if revenue should be reported gross or net. Key indicators that the Company evaluates to reach this determination include:

the terms and conditions of the Company’s contracts with the gaming platforms and ad networks;

the party responsible for determining the type, category and quantity of the methods to generate game revenue;

whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game, transaction, or advertisement;

the party which sets the pricing with the end-user, and has the credit and inventory risk; and

the party responsible for the fulfillment of the game or serving of advertisements and that determines the specifications of the game or advertisement.

Based on the evaluation of the above indicators, the Company has determined that it is generally acting as a principal and is the primary obligor to end-users for its games distributed on the gaming platforms and for advertisements served by the advertising networks and has the contractual right to determine the price to be paid by the player. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the gaming platforms and advertising networks. The Company records the related platform fees and advertising network revenue share as expenses in the period incurred.

The Company recognizes revenue when all of the following conditions are satisfied: there is persuasive evidence of an arrangement; the content or service is delivered to the player; the collection of fees is reasonably assured; and the amount of fees to be paid by the player is fixed or determinable. For purposes of determining when the service has been provided to the player, we have determined that an implied obligation exists to the paying player to continue displaying the purchased premium in-game content over its estimated life or until it is consumed. Accordingly, we categorize our premium in-game content as either consumable or durable virtual goods. Consumable virtual goods are items consumed at a predetermined time or otherwise have limitations on repeated use, while durable virtual goods are items, such as virtual currency, that remain in the game for as long as the player continues to play. Our revenues from consumable virtual goods have been insignificant since the Company’s formation.

We recognize revenue, and the associated costs, from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods. For the sale of consumable virtual goods, we recognize revenue, and the associated costs, as the goods are consumed. If we do not have the ability to differentiate revenue attributable to durable virtual goods from consumable virtual goods for a specific game, we recognize revenue and the associated costs on the sale of durable and consumable virtual goods for that game ratably over the estimated average period that paying players typically play that game.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)

On an annual basis, we determine the estimated average playing period for paying players by genre across a sample of our games beginning at the time of a player’s first purchase in that game and ending on a date when that paying player is no longer playing the game. To determine when paying players are no longer playing a given game, we measure the populations of paying players (the “daily cohort”) from the date of their first installation of the game and track each daily cohort to understand the number of players from each daily cohort who played the game after their initial purchase. For titles where we have one or more years of paying players’ historical usage data (“Tracked Titles”), we compute a weighted average playing period for paying users using this dataset.

For titles where we have less than one year of paying player data (“New/Untracked Titles”), we use a linear interpolation model on a representative sample of our games within each genre to estimate the average playing period of paying users. Using actual retention data for all players from these games for the period between game installation and up to 90 days thereafter, this data is inputted into a linear interpolation curve to estimate an average playing period for these titles. These calculated curves and their associated one-year average playing periods are mapped against the corresponding curves and associated average one-year playing periods for the Tracked Titles. Based on this mapping, the average playing period of paying users for Tracked Titles is then indexed up or down accordingly, and then applied against the New/Untracked Titles within the sample.

We then compute revenue-based weighted averages of the estimated playing period across all of the games in the sample, by genre, to arrive at the overall weighted average playing period of paying users for each of our major game genres, rounded to the nearest month. As of the fourth quarter of 2017 (our most recent determination date), the estimated weighted average life of our durable virtual goods was 16 months for our Casino / Card games, 2 months for our RPG / Arcade games and 2 months for our Rapid Launch / Simulation games. The estimated weighted average life of our durable virtual goods across all of our games was 13 months as of the fourth quarter of 2017.

While we believe our estimates to be reasonable based on available game player information and based on the disclosed methodologies of larger publicly reporting mobile game companies, we may revise such estimates in the future based on changes in the operational lives of our games, and based on changes in our ability to make such estimates. Any future adjustments arising from changes in the estimates of the lives of these virtual goods would be applied to the then current quarter, and prospectively on the basis that such changes are caused by new information indicating a change in game player behavior patterns compared to historical titles. Any changes in our estimates of useful lives of these virtual goods may result in revenues being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.

Accounts Receivable and Allowance for Doubtful Accounts

The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection. As of December 31, 2017 and 2016, based upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash Equivalents

For purposes of the Company’s financial statements, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents.

Concentrations of Credit Risk

Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit of $250,000. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. As of December 31, 2017, the total amount exceeding such limit was $0.

The Company derives revenue from gaming platforms and advertising networks which individually may contribute 10% or more of the Company’s revenues in any given year. For the year ended December 31, 2017, revenue derived from two gaming platforms comprised 44% of such period’s total revenue and revenue derived from three advertising networks comprised 36% of such period’s total revenue. For the year ended December 31, 2016, revenue derived from two gaming platforms comprised 17% of such period’s total revenue and revenue derived from four advertising networks comprised 72% of such period’s total revenue.

As of December 31, 2017, the receivable balance from two advertising networks comprised 27% of the Company’s total accounts receivable balance and the receivable balance from two gaming platforms comprised 49% of the Company’s total accounts receivable balance. As of December 31, 2016, the receivable balance from three advertising networks comprised 57% of the Company’s total accounts receivable balance and the receivable balance from two gaming platforms comprised 24% of the Company’s total accounts receivable balance.

Property and Equipment

Property and equipment are stated at cost. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference, less any amount realized from disposition, is reflected in earnings. Property and equipment are depreciated using the straight-line method over their estimated useful lives as follows:

Estimated Useful Life:
Computer equipment (Years)3
Furniture and Fixtures (Years)5
Leasehold improvementsRemaining term of lease

Software Development Costs

In accordance with ASC 985-20, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products for use in our product offerings. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working program design to the point in time that the product is available for general release to customers. Software development costs are amortized on a straight-line basis over the estimated economic lives of the products, beginning when the product is placed into service.

Prior to March 31, 2016, the Company amortized its Rapid-Launch Game software development costs over 18-months. After an internal re-assessment of estimated economic lives, the Company discovered that the useful lives and expected revenue life of its Rapid-Launch software surpassed 18 months. Therefore, all new Rapid-Launch software development


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Software Development Costs (Continued)

costs incurred after March 31, 2016 are amortized over 36 months. The software development costs incurred prior to March 31, 2016 will continue to amortize under an 18-month basis until they are fully amortized.

Prior to March 31, 2016, the Company generally amortized its Full-Featured Game software development costs over 18 months. After March 31, 2016, the amortization period of its Full-Featured Game software development costs have been determined based on the lesser of their expected revenue lives or the agreement terms with third party IP licensors, typically ranging from 2 to 5 years. The software development costs incurred prior to March 31, 2016 will continue to amortize under an 18-month basis until they are fully amortized.

The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of its capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. Software costs incurred prior to establishing technological feasibility are charged to Research and Development expense as incurred.

Impairment of Long-lived Assets

The Company regularly reviews property, equipment, software development costs and other long-lived assets for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Based upon management’s assessment, there were no indicators of impairment of the Company’s property and equipment at December 31, 2017 and 2016. Management has deemed that certain software development costs were impaired at December 31, 2017, and such impairment is more fully described in Note 4 below.

In general, investments in which the Company owns less than 20 percent of an entity’s equity interest or does not hold significant influence over the investee are accounted for under the cost method. Under the cost method, these investments are carried at the lower of cost or fair value. The Company periodically assesses its cost method investments for impairment. If determination that a decline in fair value is other than temporary, the Company will write-down the investment and charge the impairment against operations. At December 31, 2017 and 2016, the carrying value of its investments totaled $5,000. For the years ended December 31, 2017 and 2016, the Company recorded a loss on investment of $0 and $14,086, respectively.

Derivative Instrument Liability

The Company accounts for derivative instruments in accordance with ASC 815,Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At December 31, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three- level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date of identical, unrestricted assets or liabilities.

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

For the years ended December 31, 2017 and 2016, the Company did not identify any assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC 825, Financial Instruments.

Cost of Revenue (excluding amortization of software development costs)

Cost of revenue includes primarily platform and advertising network fees, licensing costs and hosting fees. The Company, along with all mobile application publishers, is required to pay platform fees to Apple, Google and Amazon equal to approximately 30% of gross revenue. The Company is also required to pay a revenue share of approximately 30% to advertising networks and similar service providers.

Marketing and Public Relations

The Company follows the policy of charging the costs of marketing, and public relations to expense as incurred. Such costs were $518,099 and $472,351 for the years ended December 31, 2017 and 2016, respectively.

Income Taxes

The Company accounts for income taxes pursuant to the asset and liability method under ASC 740,Income Taxes, which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company records interest and penalties related to income taxes as a component of income taxes. The Company did not recognize any interest and penalty expense for the years ended December 31, 2017 and 2016.

Prior to June 2014, Tapinator LLC had elected to be treated under the Internal Revenue Code as a Limited Liability Company. As such, the Company’s taxable income or loss was allocated to its members in accordance with their respective percentage ownership. In accordance with the share exchange agreement, the Company is treated under the Internal Revenue Code as a C-Corporation.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. As of December 31, 2017 and 2016, the Company had not recorded any unrecognized tax benefits.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes(Continued)

On December 22, 2017, the Tax Cuts and Job Act (TCJA) was signed into law by the President of the United States. TCJA is a tax reform act that among other things, reduced corporate tax rates to 21 percent effective January 1, 2018. FASB ASC 740, Income Taxes, requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates in the year of enactment, which is the year in which the change was signed into law. Accordingly, the Company adjusted its deferred tax assets and liabilities at December 31, 2017, using the new corporate tax rate of 21 percent. See Note 12.

Stock-Based Compensation

The Company measures the fair value of stock-based compensation issued to employees and non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions), or the fair value of the award (for non-stock transactions), which are considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or

(2) the date at which the counterparty’s performance is complete.

Basic and Diluted Net Income (Loss) per Share Calculations

The Company computes per share amounts in accordance with FASB ASC Topic 260 “Earnings per Share” (“EPS”), which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of Common Stock and Common Stock equivalents outstanding during the periods; however, potential common shares are excluded for period in which the Company incurs losses, as their effect is anti-dilutive.

For the year ended December 31, 2017, potentially dilutive securities excluded from the computation of basic and diluted net (loss) per share include 10,800,000 potentially convertible common shares related to the Company’s Senior Secured Convertible Debenture, 1,680,000 potentially convertible common shares related to the Company’s Series A Preferred Stock, 6,000,000 potentially convertible shares related to the Company’s Series A-1 Preferred Stock, 5,050,000 Common Stock Options and 3,500,000 Common Stock Warrants.

For the year ended December 31, 2016, potentially dilutive securities excluded from the computation of basic and diluted net (loss) per share include 9,576,000 potentially convertible shares related to the Company’s Senior Secured Convertible Debenture, 1,680,000 potentially convertible common shares related to the Company’s Serial A Preferred stock, 550,000 Common Stock Options and 10,926,829 Common Stock Warrants.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. While we are currently evaluating the impact of the adoption of this ASU, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance requires lessees to recognize a right-of- use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. This new guidance must be adopted using a modified retrospective approach whereby lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. We are currently evaluating the impact of adopting this update on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases, mostly for office space.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration, which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB recently issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company will adopt the new standard effective January 1, 2018. We are currently evaluating the impact of adopting this standard on our Consolidated Financial Statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of December 31, 2017 and 2016:

  

December 31, 2017

  

December 31, 2016

 

Leasehold improvements

 $2,435  $2,435 

Furniture and fixtures

  10,337   8,238 

Computer equipment

  24,285   22,406 

Property and equipment cost

  37,057   33,079 

Less: accumulated depreciation

  (22,645)  (12,650)

Property and equipment, net

 $14,412  $20,429 

During the years ended December 31, 2017 and December 31, 2016, depreciation expense was $9,995 and $7,871, respectively.

NOTE 4 — SOFTWARE DEVELOPMENT COSTS

Capitalized software development costs at December 31, 2017 and December 31, 2016 were as follows:

  

December 31, 2017

  

December 31, 2016

 

Software development cost

 $3,259,719  $2,441,625 

Less: accumulated amortization

  (1,976,861)  (1,267,248)

Less: Impairment of capitalized software

  (256,310)  - 

Capitalized software development cost, net

 $1,026,548  $1,174,377 

During the year ended December 31, 2017 and December 31, 2016, amortization expense related to capitalized software was $709,615 and $767,187, respectively. At December 31, 2017, management has deemed that the net software development cost carrying amount related to certain of our released and unreleased mobile games is likely not recoverable, thus we have taken an impairment charge of $256,310 as of December 31, 2017.

NOTE 5 — RELATED PARTY TRANSACTIONS

The Company utilizes the services of an affiliated entity of a major shareholder for the development of certain of its mobile games. Amounts incurred by the Company for such development services, which were primarily attributed to capitalized software development costs, for the year ended December 31, 2017 and December 31, 2016 were $668,162 and $835,356, respectively. As of December 31, 2017, and December 31, 2016, the Company had balances due to related parties related primarily to the software development services of $100,115 and $89,697, respectively.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 6 — SENIOR SECURED CONVERTIBLE DEBENTURE

In July 2016, the Company and the Holder entered into an agreement (the “2016 Exchange Agreement”) to amend and refinance the terms of the $2,240,0008% Original Issue Discount Senior Secured Convertible Debenture (the “2015 Debenture”) originally issued to the Holder in June, 2015. In connection with the 2015 Debenture, the Company and Holder entered into that certain Securities Purchase Agreement, dated June 19, 2015 (the “Purchase Agreement”) pursuant to which the Company issued to the Holder the following (i) the 2015 Debenture which was convertible into shares of the Company’s common stock at a price per share of $.205, (ii) Series A Common Stock purchase warrants (the “Series A Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 and (iii) Series B Common Stock purchase warrants (the “Series B Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 (collectively, the terms of which are referred to herein as the “2015 Financing”). Immediately prior to the 2016 Exchange Agreement, the Company owed remaining cash payments to the Holder of $560,000 on October 1, 2016 and $1,120,000 on January 1, 2017 under the 2015 Debenture. Pursuant to the 2016 Exchange Agreement, the following material terms of the Original Financing were amended, altered and/or ratified (collectively, the terms of which are referred to herein as the “2016 Financing”): (i) the 2015 Debenture was exchanged in its entirety for the issuance of a new 8% Original Issue Discount Senior Secured Convertible Debenture with an original principal amount of $2,394,000 and an increased conversion price of $0.25 (the “2016 Debenture”), (ii) the issuance of 420 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock which may be converted into 1,680,000 shares of Company’s common stock, (iii) the extension of the maturity date of the Series A Warrants from June 22, 2020 until July 28, 2021, (iv) the cancellation of the Series B Warrants in their entirety, (v) the ratification of the Security Agreement executed by the Company with respect to all of its assets (as required by the initial Purchase Agreement and 2015 Debenture) as continued collateral for the 2016 Debenture as well as the ratification of the Subsidiary Guarantee and Pledge and Security Agreement as such agreements are referenced in the Purchase Agreement and Exchange Agreement, and (vi) the creation of a new right for the Holder, subject to the written consent of the Company, for a $2,100,000 cash investment in the Company with identical terms to the 2016 Financing.

In June 2017, the Company and the holder of its Senior Secured Convertible Debenture (the “Holder”) entered into an amendment agreement (the “2017 Amended Agreement”) to amend and refinance the terms of the $2,394,0008% Original Issue Discount Senior Secured Convertible Debenture (the “2016 Debenture”) originally issued to the Holder in July, 2016. Pursuant to the 2017 Amended Agreement, the Company prepaid the Holder a portion of the outstanding principal on the 2016 Debenture in the amount of $234,000 and all of the accrued interest on the 2016 Debenture through June 30, 2017 in the amount of $191,520. Following such payments, the remaining principal amount of the Holder’s amended 2016 Debenture was $2,160,000 (the “Amended 2016 Debenture”). In addition, the Company and the Holder agreed to reduce the Conversion Price from $0.25 in the 2016 Debenture to $0.20 in the Amended 2016 Debenture. The Amended 2016 Debenture is due on July 31, 2018, and the Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this debenture at the rate of 8% per annum, payable on each December 31, March 31, July 31, and October 31, thereafter, beginning on December 31, 2017. As of December 31, 2017, the accrued interest for the note is $86,400.

In June 2017, the Company and Holder also entered into an exchange agreement (the “2017 Exchange Agreement”) to exchange the existing 10,926,829 shares of Series A Common Stock purchase warrants (the “Series A Warrants”) for 1,500 shares of Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”) as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Convertible Preferred Stock, and which may be converted into 6,000,000 shares of the Company’s common stock.

The Amended 2016 Debenture and the Series A Preferred Stock contain anti-dilution protection such that the conversion and exercise price, respectively, will be adjusted for any subsequent equity transactions with an effective price per share lower than the conversion price, but not lower than $0.10 per share. The Series A-1 Preferred Stock does not provide for anti-dilution protection.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 6 — SENIOR SECURED CONVERTIBLE DEBENTURE (CONTINUED)

During the years ended December 31, 2017 and 2016, amortization of the debt discount related to the Senior Secured Convertible Debentures was $1,404,254 and $1,105,869, respectively. During the years ended December 31, 2017 and 2016, amortization of the original issue discount related to the Senior Secured Convertible Debentures was $341,577 and $270,517, respectively. Pursuant to the 2017 Amended Agreement and the 2016 Exchange Agreement, the Company recorded debt extinguishment losses of $830,001 and $770,526 for the years ended December 31, 2017 and 2016, respectively.

Senior secured convertible debenture payable as of December 31, 2017, and December 31, 2016 were comprised of the following:

  

December 31, 2017

  

December 31, 2016

 

Principal balance outstanding

 $2,160,000  $2,394,000 
Less:        
Debt discount – beneficial conversion feature  (657,564)  (1,221,818)

Debt discount – original issue discount

  (179,304)  (519,273)

Debt discount – financing costs

  (6,250)  (18,182)

Principal balance outstanding, net

  1,316,882   634,727 

Less current portion

  1,316,882   158,682 

Long term portion

 $-  $476,045 

NOTE 7 — COMMITMENTS

In August 2016, the Company entered into a lease for office space which expires in November 2021. Future minimum lease payments under this lease are as follows:

Year ended December 31,

    

2018

 $57,737 

2019

  59,469 

2020

  61,253 

2021

  63,090 

Total

 $241,549 

For the years ended December 31, 2017 and 2016, rent expense totaled $56,398 and $56,160 and respectively.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 8 — OPTIONS

In December 2015, the Company approved the 2015 Equity Incentive Plan (the “Plan”). The Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, performance stock awards and other stock-based awards (collectively, “Stock Awards”). Under the Plan, the Company may grant Stock Awards to its employees, directors and consultants of up to 6,000,000 shares of common stock.

In January 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted a non-executive member of the Company’s Board of Directors an option to purchase 300,000 shares of the Company’s common stock at an exercise price equal to $0.33 per share. Such option shall vest in eight quarterly installments of 37,500 shares at the end of each quarterly anniversary commencing on March 31, 2016, contingent upon the grantee’s continual service as a member of the Board of Directors as of each vesting installment date. Total stock-based compensation related to this option grant was $49,489 and $45,365 during the years ended December 31, 2017 and 2016 respectively.

In May 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted an executive officer an option to purchase 250,000 shares of the Company’s common stock at an exercise price equal to $0.1925 per share. Such option shall vest in eight quarterly installments of 31,250 shares at the end of each quarterly anniversary commencing on August 31, 2016, contingent upon the grantee’s continual employment by the Company as of each vesting installment date. Total stock-based compensation related to this option grant was $24,063 and $14,036 during the years ended December 31, 2017 and 2016 respectively.

On May 11, 2017 and pursuant to the 2015 Equity Incentive Plan, the Company granted executive officers, directors and employees options to purchase 4,500,000 shares of the Company’s common stock at an exercise price equal to $0.11 per share. Such options shall vest in twelve quarterly installments of 375,000 shares at the end of each quarterly anniversary commencing on June 30, 2017, contingent upon the grantee’s continual employment or service with the Company as of each vesting installment date. Total stock-based compensation related to these option grants was $100,000 during the year ended December 31, 2017.

The fair value of the stock options issued in 2017 was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%; volatility: 304.61%; risk free rate: 2.39%; term 10 years.

The fair value of the stock options issued in 2016 was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%; volatility: 232.41%-333.7%; risk free rate: 0.87%-1.78%; term 10 years.

  

 

Number

of

Options

  

Weighted

average

exercise

price

  

Weighted

average

life

(years)

  

Intrinsic

value

of

Options

 

Outstanding, January 1, 2016

  -   -   -     
Granted  550,000  $0.27   10.00     
Exercised  -   -   -     

Expired

  -   -   -     

Outstanding, December 31, 2016

  550,000  $0.27   9.23     

Granted

  4,500,000   0.11   10.00     
Exercised  -   -   -     
Expired  -   -   -     

Outstanding, December 31, 2017

  5,050,000  $0.13   9.24  $247,500 

Exercisable, December 31, 2017

  1,612,500  $0.16   9.01  $61,875 


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 9 — COMMON STOCK WARRANTS

During the year ended December 31, 2017, the Company granted warrants in connection with the Stock Purchase Agreements described in Note 10. The warrant terms are 3 years expiring in February, 2020 and June, 2020. During the year ended December 31, 2017, the Company cancelled 10,926,829 warrants in connection with the 2017 Exchange Agreement described in Note 5 above.

  

Number

of

Common Stock

Warrants

  

Weighted

average

exercise

price

  

Weighted

average

life

(years)

  

Intrinsic

value

of

Warrants

 

Outstanding, December 31, 2015

  10,926,829  $0.30   4.58     
Granted  -   -   -     
Exercised  -   -   -     
Canceled  -   -   -     

Outstanding, December 31, 2016

  10,926,829  $0.30   4.47     
Granted  3,500,000  $0.24   3.00     
Exercised  -   -   -     

Canceled

  (10,926,829) $0.30   2.47     

Outstanding, December 31, 2017

  3,500,000  $0.24   2.35  $- 

Exercisable, December 31, 2017

  3,500,000  $0.24   2.35  $- 

NOTE 10 — STOCKHOLDERS’ EQUITY

At December 31, 2017, the authorized capital of the Company consisted of 150,000,000 shares of common stock, par value $0.001 per share, and 1,532,500 shares of blank check preferred stock, par value $0.001 per share.

The Company issued 300,000 shares of restricted Common Stock, valued at $57,000, pursuant to an investor relations consulting agreement dated August 6, 2015. On March 14, 2016, the agreement was cancelled and 150,000 shares of the Company’s common stock valued at $28,500 were returned to the Company at which time the shares were cancelled.

In July 2016, the Company and the holder of its Senior Secured Convertible Debenture entered into an agreement to amend and refinance the terms of the $2.4 million 8% Original Issue Discount Senior Secured Convertible Debenture originally issued in June, 2015.

Pursuant to the Exchange Agreement, the following material terms of the Original Financing were amended, altered and/or ratified: (i) the Original Debenture was exchanged in its entirety for the issuance of a new 8% Original Issue Discount Senior Secured Convertible Debenture with an original principal amount of $2,394,000 and an increased conversion price of $0.25, (ii) the issuance of 420 shares of Series A Convertible Stock as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock which may be exercised for up to 1,680,000 shares of Company’s common stock, (iii) the extension of the maturity date of the Series A Warrant from June 22, 2020 until July 28, 2021, (iv) the cancellation of the Series B Warrants in their entirety, (v) the ratification of the Security Agreement executed by the Company with respect to all of its assets (as required by the initial Purchase Agreement and Original Debenture) as continued collateral for the New Debenture as well as the ratification of the Subsidiary Guarantee and Pledge and Security Agreement as such agreements are referenced in the Purchase Agreement and Exchange Agreement, and (vi) the creation of a new right for the Holder, subject to the written consent of the Company, for a $2,100,000 cash investment in the Company with identical terms to the New Financing.


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 10 — STOCKHOLDERS’ EQUITY (CONTINUED)

In June, 2017, the Company entered into a Stock Purchase Agreement with an individual investor for the purchase of 2,000,000 shares of the Company's common stock for an aggregate purchase price of $200,000. In connection with the financing, the Company also issued to the investor a warrant, which has a term of three years and shall enable the investor to purchase up to an additional 2,500,000 shares of the Company's common stock at an exercise price of $.20 per share.

In February, 2017, the Company entered into a Stock Purchase Agreement with an individual investor for the purchase of 500,000 shares of the Company's common stock for an aggregate purchase price of $150,000, or $0.30 per share. In connection with the financing, the Company also issued to the investor two warrants. Each warrant has a term of three years and each warrant shall enable the investor to purchase up to an additional 500,000 shares of the Company's common stock at an exercise price of $.30 per share and $.36 per share, respectively.

NOTE 11 – NON-CONTROLLING INTEREST

On December 29, 2017, the Company, jointly with an individual investor, organized Revolution Blockchain, LLC (“RB”), a Colorado limited liability company for the purpose of developing, marketing and monetizing games and applications that, other than for payment purposes, write to or read from a blockchain, with ownership interests of 96% and 4% for the Company and the individual investor, respectively.

In connection with entering into the RB joint venture with the individual investor, RB issued to the individual investor a four percent (4%) membership interest as a Class A Member of RB for an aggregate purchase price of $100,000. The Class A Members have the right to convert their entire initial capital investment into shares of the Company’s common stock at a conversion price of $0.25 per share. RB shall distribute to the Class A Members no later than (i) forty-five days from the end of each fiscal quarter and (ii) ninety days from the end of each fiscal year, on a pro rata basis, 50% of all net revenue earned by RB in the previous fiscal period, as applicable, until the Class A Members have received two times the Class A Member’s initial capital commitment. At such time the distribution percentage shall be decreased from 50% to 20% of net revenue. For purposes of illustration, for each $100,000 Initial Capital Commitment, a Class A Member shall initially receive a 10% distribution right of Net Revenue until such time as such Class A Member has received $200,000. At such time, such Class A Member’s distribution right shall decrease from 10% to 4% of the Net Revenue.

NOTE 12— INCOME TAXES

A reconciliation of the U.S. Federal Statutory income tax rate to the Company’s effective income tax rate is as follows:

  

2017

  

2016

 

Federal statutory income tax rate

  23.9%  34.0%

State taxes, net of Federal benefit

  5.5%  5.5%

Valuation allowance

  (29.4%)  (39.5%)

Effective income tax rate

  -%  -%

Net deferred tax assets as of December 31, 2017 and 2016 consist of the following:

  

2017

  

2016

 

Net operating loss carryforwards

 $1,900,740  $1,683,782 

Valuation allowance

  (1,900,740)  (1,683,782)
Net deferred tax asset $-  $- 


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 12— INCOME TAXES (CONTINUED)

As of December 31, 2017, the Company has federal net operating loss carryforwards (“NOL’s”) of approximately $7,950,000 that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2034. Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full utilization.

The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. No tax benefit has been reported in the financial statements, since the potential tax benefit is offset by a valuation allowance of the same amount.

During the year ended December 31, 2017, the Company decreased its valuation allowance by $216,957 due to the continued likelihood that realization of any future benefit from deductible temporary differences and net operating loss carryforwards cannot be sufficiently assumed at December 31, 2017.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $1,240,650 with a corresponding adjustment to valuation allowance of $1,240,650 as of December 2017.

As of December 31, 2017, open tax years include the period from July 1, 2013 (inception) through December 31, 2017.

The Company applies the standard relating to accounting (ASC 740-10) for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. There were no significant unrecognized tax benefits recorded as of December 31, 2017 and 2016.

NOTE 13 —SUBSEQUENT EVENTS

On January 18, 2018, the Company and one of its non-affiliated shareholders agreed to amend the terms of two Warrants, each providing for the purchase of 500,000 common shares, held by the shareholder. The per share exercise price on the two Warrants was reduced from $.36 to $.12 and from $.30 to $.12, respectively. On the same day, said shareholder elected to exercise both Warrants for an aggregate cash payment to the Company of $120,000. The 1,000,000 shares of common stock issued under the Warrants are “restricted securities” as such term is defined in the Securities Act.

On January 22, 2018, the holder of all of the Company’s Series A-1 Stock elected to convert all of the 1,500 shares of such stock into 6,000,000 shares of the Company’s common stock. The 6,000,000 shares of common stock converted under the Series A-1 Stock will be issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.

On January 23, 2018 and via the written consent of a majority of its stockholders, the Company increased the number of its authorized common stock from 150,000,000 to 250,000,000 and increased the number of shares of common stock underlying its 2015 Equity Incentive Plan from 6,000,000 to 18,000,000.

On January 30, 2018, we consummated the first closing of the Company’s private placement announced on September 7, 2017 (the “Offering”). Specifically, the Company entered into Subscription Agreements (the “Subscription Agreement”) with various investors (collectively, the “Investors”) for the purchase of 11,791,668 shares of the


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

Company’s Common Stock for an aggregate purchase price of $1,415,000, or $0.12 per share. The Company received net proceeds of $1,162,805 from the first closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering and other expenses of the Company. In connection with the first closing and pursuant to the terms of the Offering, the Company issued to the Investors Common Stock Purchase Warrants (the “Warrants”) to purchase up to 11,791,668 shares of the Company’s Common Stock at a per share exercise price of $0.144. The Warrants have five-year terms and do not allow for cashless exercise unless the Company is unable to obtain an effective registration statement with the Securities and Exchange Commission regarding the shares underlying the Warrants, subject to certain conditions.

On February 7, 2018, we consummated the second closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 8,562,499 shares of the Company’s Common Stock for an aggregate purchase price of $1,027,500, or $0.12 per share. The Company received net proceeds of $920,680 from the second closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the second closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 8,562,499 shares of the Company’s Common Stock at a per share exercise price of $0.144.

On February 15, 2018, we consummated the third and final closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 4,645,835 shares of the Company’s Common Stock for an aggregate purchase price of $557,500, or $0.12 per share. The Company received net proceeds of $498,303 from the third closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the third closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 4,645,835 shares of the Company’s Common Stock at a per share exercise price of $0.144.

Also on February 15, 2018 and in connection with the three closings and pursuant to the terms of the Offering, the Company issued to the placement agent Common Stock Purchase Warrants (the “Placement Agent Warrants”) to purchase up to 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.15. The Placement Agent Warrants will have a five-year term and will have cashless exercise provisions at all times.

The Offering is now concluded. In connection with the three closings of the Offering, the Company raised gross proceeds of $3,000,000, received net proceeds of $2,581,788, issued 25,000,002 shares of common stock to the Investors, and issued Warrants to the Investors to purchase up to 25,000,002 shares of the Company’s Common Stock at a per share exercise price of $0.144. The shares of common stock sold under the Subscription Agreement and the shares of common stock underlying the Warrants and the Placement Agent Warrant were issued in reliance upon an exemption from registration provided by Rule 506(c) of Regulation D under the Securities Act. All such shares issued relating to the Offering will be “restricted securities” in accordance with Rule 144(a)(3) of the Securities Act and all of the Investors are “accredited investor” as defined by Rule 501(a) of Regulation D under the Securities Act.

On February 21, 2018, the Board of Directors of the Company approved grants of Restricted Stock Units (as defined by the Company’s 2015 Equity Incentive Plan) to the following officers, directors and employees of the Company as follows (the “RSU Grants”):

Name

No. of RSU’s

Title

Robert Crates

250,000

Director

Boris Dimembort

250,000

Employee

Teymour Farman-Farmaian

250,000

Director

Andrew Merkatz

5,000,000

Director, President, CFO

Ilya Nikolayev

5,000,000

Director, CEO

Subject to each recipient continuing as an officer, director, or employee (as appropriate) of the Company, each of the RSU Grants shall vest as follows: beginning on the eighteenth month following the date of the grant, the RSU Grants shall vest ratably over the following eighteen months for a total vesting period of thirty-six months. The RSU Grants shall include a provision for acceleration upon a Corporate Transaction (as defined in the 2015 Equity Incentive Plan).


Tapinator, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2017 and 2016

NOTE 13 —SUBSEQUENT EVENTS (CONTINUED)

The RSU Grants to the officers and directors of the Company were approved by each of the non- employee members of the Board of Directors of the Company.

On February 23, 2018, the Company entered into a Series B Exchange Agreement (the “Series B Exchange Agreement”) with HSPL Holdings, LLC (“HSPL”) to amend the terms of the 2017 Amended Agreement and 2017 Exchange Agreement to which the Company and HSPL are parties (collectively, the “2017 Exchange Agreements”). On February 23, 2018, the Company paid to HSPL $1,200,000 in cash for a net reduction of the principal amount of the 2016 Debenture of $1,142,857 after giving effect to a 5% prepayment penalty which resulted in a remaining principal balance of $1,017,143 plus all accrued but unpaid interest under the 2016 Debenture (the “Remaining 2016 Debenture Balance”). Pursuant to the Series B Exchange Agreement, the Remaining 2016 Debenture Balance and the Series A Preferred Stock were exchanged in their entirety (and thus cancelled) for issuance of 1,854 shares of Series B Convertible Stock (the “Series B Preferred Stock”) as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock which may be initially exercised for up to 15,450,000 shares of Company’s common stock, subject to adjustment (the “Certification of Designations”). As a result of the Series B Exchange Agreement, the Company eliminated all of its outstanding debt.

Each share of the Series B Preferred Stock has a conversion price of $0.12 and a stated value of $1,000. Subject to certain exceptions, in the event the Company issues shares of its common stock at a price below $0.082, the conversion price of the Series B Preferred Stock will be reduced to the price of such issuance. HSPL and any subsequent holders of the Series B Preferred Stock are prohibited from converting the Series B Preferred Stock into more than 9.99% of the Company’s then outstanding number of shares of common stock after giving effect to such conversion.

The shares of Series B Preferred Stock will be issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act. The shares of common stock underlying the Series B Preferred Stock are subject to being issued without restrictive legend pursuant to Section 3(a)(9) of the Securities Act, subject to various conditions and limitations. HSPL is an “accredited investor” as defined under the Securities Act.

On February 20, 2018 and as amended on March 1, 2018, the Company entered into an investment banking advisory agreement with Westpark Capital, Inc. with an initial term of six months. In connection with this agreement, Westpark Capital purchased a three-year common stock warrant to purchase up 1,400,000 share of the Company’s common stock at an exercise price of $.01 per share from the Company for a purchase price of $100.

On March 26, 2018, the Company purchased the 4% interest in its Revolution Blockchain, LLC majority-owned subsidiary that it did not otherwise own for a purchase price equal to the following: (i) $100,000 in cash and (ii) the issuance of a three-year common stock warrant to purchase up to 300,000 shares of the Company’s common stock at an exercise price of $0.25. Following the transaction, Revolution Blockchain LLC became a wholly-owned subsidiary of the Company.


TAPINATOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

 March 31, 2018 December 31, 2017  

December 31,

2018

  

December 31,

2017

 
 (Unaudited)           

Assets

                

Current assets:

                

Cash

 $1,595,789  $246,755  $871,312  $246,755 

Accounts receivable

  271,457   333,090   227,803   333,090 

Prepaid expenses

  158,463   177,829   215,216   177,829 

Total current assets

  2,025,709   757,674   1,314,331   757,674 
                

Property and equipment, net

  11,954   14,412   7,583   14,412 

Software development costs, net

  1,097,925   1,026,548   878,815   1,026,548 

Investments

  5,000   5,000   5,000   5,000 

Security deposits

  22,698   22,698   22,698   22,698 

Total assets

 $3,163,286  $1,826,332  $2,228,427  $1,826,332 
                

Liabilities and stockholders' equity (deficit)

                

Current liabilities:

                

Accounts payable and accrued expenses

 $119,444  $155,366  $160,484  $155,366 

Due to related parties

  83,075   100,115   187,932   100,115 

Deferred Revenue

  437,220   442,831   481,886   442,831 

Accrued interest

  -   86,400   -   86,400 

Senior convertible debenture, net of debt discount

  -   1,316,882   -   1,316,882 

Total current liabilities

  639,739   2,101,594   830,302   2,101,594 
                

Commitments and Contingencies (see Note 12)

        

Long term liabilities:

        

Deferred Revenue

  229,682   - 

Total liabilities

  1,059,984   2,101,594 
                

Stockholders' Equity (Deficit) :

        

Commitments and contingencies (see Note 12)

  -   - 
        

Stockholders' Equity (Deficit):

        

Preferred stock, $0.001 par value, 1,532,500 shares authorized with any series of designation:

  -   -         

Series A convertible preferred stock, $0.001 par value; 840 shares designated at March 31, 2018 and December 31, 2017; 0 and 420 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

  -   1 

Series A-1 convertible preferred stock, $0.001 par value; 1,500 shares designated at March 31, 2018 and December 31, 2017; 0 and 1,500 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

  -   2 

Series B convertible preferred stock, $0.001 par value; 1,854 and 0 shares designated at March 31, 2018 and December 31, 2017 respectively; 1,854 and 0 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

  2   - 

Common stock, $0.001 par value; 250,000,000 shares authorized; 91,459,305 and 59,459,303 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

  91,459   59,459 

Series A convertible preferred stock, $0.001 par value; 840 shares designated at December 31, 2018 and 2017; 0 and 420 shares issued and outstanding at December 31, 2018 and 2017, respectively

  -   1 

Series A-1 convertible preferred stock, $0.001 par value; 1,500 shares designated at December 31, 2018 and 2017; 0 and 1,500 shares issued and outstanding at December 31, 2018 and 2017, respectively

  -   2 

Series B convertible preferred stock, $0.001 par value; 1,854 and 0 shares designated at December 31, 2018 and 2017 respectively; 0 shares issued and outstanding at December 31, 2018 and 2017

  -   - 

Common stock, $0.001 par value; 250,000,000 shares authorized; 87,979,526 and 59,459,303 shares issued and outstanding at December 31, 2018 and 2017, respectively

  87,980   59,459 

Additional paid-in capital

  11,318,659   7,535,969   12,047,650   7,535,969 

Accumulated deficit

  (8,886,573)  (7,970,693)  (10,967,187

)

  (7,970,693

)

Stockholders' equity (deficit) attributable to Tapinator, Inc.

  2,523,547   (375,262)  1,168,443   (375,262

)

Non-controlling interest

  -   100,000   -   100,000 

Total stockholders' equity (deficit)

  2,523,547   (275,262)  1,168,443   (275,262

)

Total liabilities and stockholders' equity (deficit)

 $3,163,286  $1,826,332  $2,228,427  $1,826,332 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

   


 

TAPINATOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

 

 Three Months Ended March 31,  

Years ended

December 31,

 
 2018  2017  

2018

  

2017

 

Revenue

 $888,688  $812,794  $2,872,278  $3,141,360 
        

Operating expenses:

                

Cost of revenue excluding depreciation and amortization

  293,353   256,369   884,202   1,033,452 

Research and development

  76,426   17,052   243,694   140,772 

Marketing and public relations

  63,921   178,525   377,917   518,099 

General and administrative

  915,299   337,898   3,098,353   1,383,565 

Impairment of capitalized software

  320,311   256,310 

Amortization of software development costs

  129,009   195,412   614,130   709,615 

Depreciation and amortization of other assets

  3,351   5,878   9,933   21,927 

Total expenses

  1,481,359   991,134   5,548,540   4,063,740 
                

(Loss) from operations

  (592,671)  (178,340)

Operating loss

  (2,676,262

)

  (922,380

)

                

Other expenses

                

Amortization of debt discount

  187,876   229,091   187,876   1,404,254 

Interest expense, net

  135,333   144,674   132,356   533,511 

Loss on extinguishment of debt

  -   830,001 

Total other expenses

  323,209   373,765   320,232   2,767,766 

(Loss) before income taxes

  (915,880)  (552,105)
        

Loss before income taxes

  (2,996,494

)

  (3,690,146

)

        

Income taxes

  -   2,150   -   - 

Net (loss)

 $(915,880) $(554,255)
                

Net (loss) per share:

        

Net loss

 $(2,996,494

)

 $(3,690,146

)

                

Net (loss) per common share - basic and diluted

 $(0.01) $(0.01)

Net loss per share:

        
        

Net loss per common share - basic and diluted

 $(0.03

)

 $(0.06

)

                

Weighted average common shares outstanding - basic and diluted

  78,031,758   57,100,044   90,976,652   58,478,481 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 


 

TAPINATOR, INC.

Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

 

  Common Stock  

Series A Preferred

Stock

  

Series A-1

Preferred Stock

  

Series B Preferred

Stock

  

Additional

Paid-In-

  Accumulated  

Non-

controlling

     
  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Total 

Balances at

December 31, 2017

  59,459,303  $59,459   420  $1   1,500  $2   -  $-  $7,535,969  $(7,970,693) $100,000  $(275,262)

Issuance of common

stock upon exercise of

warrants

  1,000,000   1,000   -   -   -   -   -   -   119,000   -   -   120,000 

Issuance of common

stock for cash at $0.12

  25,000,002   25,000   -   -   -   -   -   -   2,975,000   -   -   3,000,000 
Issuance costs from common stock offering  -   -   -   -   -   -   -   -   (418,213)  -   -   (418,213)

Conversion of Series A1

Preferred Stock to

Common Stock

  6,000,000   6,000   -   -   (1,500)  (2)  -   -   (5,998)  -   -   - 

Conversion Series A

Preferred Stock, Senior Debenture and accrued interest to Series B

Preferred Stock

  -   -   (420)  (1)  -   -   1,854   2   492,383   -   -   492,384 

Issuance of purchased

warrants for cash of

$100

  -   -   -   -   -   -   -   -   416,106   -   -   416,106 

Stock based

compensation

  -   -   -   -   -   -   -   -   204,412   -   -   204,412 

Non-controlling

interest buyback

  -   -   -   -   -   -   -   -   -   -   (100,000)  (100,000)

Net loss

  -   -   -   -   -   -   -   -   -   (915,880)  -   (915,880)

Balances at March 31,

2018 (unaudited)

  91,459,305  $91,459   -  $-   -  $-   1,854  $2  $11,318,659  $(8,886,573) $-  $2,523,547 


  

Common Stock

  

Series A

Preferred Stock

  

Series A-1

Preferred Stock

  

Series B

Preferred Stock

  

Additional

Paid-In-

  

Accumulated

  

Non-

controlling

     
  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Interest

  

Total

 

Balances at December 31, 2016

  56,959,303  $56,959   420  $1   -  $-   -  $-  $5,344,918  $(4,280,547

)

 $-  $1,121,331 
                                                 

Common shares issued for cash related to stock purchase agreement

  2,500,000   2,500   -   -   -   -   -   -   347,500   -   -   350,000 
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   173,552   -   -   173,552 
                                                 

Shares issued Series A-1 preferred stock related to warrant exchange

  -   -   -   -   1,500   2   -   -   659,998   -   -   660,000 
                                                 

Debt discount related to conversion feature of convertible debentures and warrant exchange

  -   -   -   -   -   -   -   -   1,010,001   -   -   1,010,001 
                                                 

Capital contribution from non-controlling interest

  -   -   -   -   -   -   -   -   -   -   100,000   100,000 
                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (3,690,146

)

  -   (3,690,146

)

                                                 

Balances at December 31, 2017

  59,459,303  $59,459   420  $1   1,500  $2   -  $-  $7,535,969  $(7,970,693

)

 $100,000  $(275,262

)

                                                 

Issuance of common stock upon exercise of warrants

  1,000,000   1,000   -   -   -   -   -   -   119,000   -   -   120,000 
                                                 

Issuance of common stock for cash at $0.12

  25,000,002   25,000   -   -   -   -   -   -   2,975,000   -   -   3,000,000 
                                                 

Issuance costs from common stock offering

  -   -   -   -   -   -   -   -   (418,213

)

  -   -   (418,213

)

                                                 

Conversion of Series A1 Preferred Stock to Common Stock

  6,000,000   6,000   -   -   (1,500

)

  (2

)

  -   -   (5,998

)

  -   -   - 
                                                 

Conversion Series A Preferred Stock, Senior Debenture and accrued interest to Series B Preferred Stock

  -   -   (420

)

  (1

)

  -   -   1,854   2   492,383   -   -   492,384 
                                                 

Conversion Series B Preferred Stock to common stock

  4,166,667   4,167   -   -   -   -   (500

)

  (1

)

  (4,166

)

  -   -   - 
                                                 

Issuance of purchased warrants for cash of $100

  -   -   -   -   -   -   -   -   416,106   -   -   416,106 
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   1,441,268   -   -   1,441,268 
                                                 

Non-controlling interest buyback

  -   -   -   -   -   -   -   -   -   -   (100,000

)

  (100,000

)

                                                 

Repurchase of Series B Preferred Stock

  -   -   -   -   -   -   (1,354

)

  (1

)

  (366,706

)

  -   -   (366,707

)

                                                 

Repurchase of shares in conjunction with license agreement

  (7,646,446

)

  (7,646

)

  -   -   -   -   -   -   (136,993

)

  -   -   (144,639

)

                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (2,996,494

)

  -   (2,996,494

)

Balances at December 31, 2018

  87,979,526  $87,980   -  $-   -  $-   -  $-  $12,047,650  $(10,967,187

)

 $-  $1,168,443 

TAPINATOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  Three Months Ended March 31 
  2018  2017 

Cash flows from operating activities:

        

Net (loss)

 $(915,880) $(554,255)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Amortization of software development costs

  129,009   195,412 

Depreciation and amortization of other assets

  3,351   5,878 

Amortization of debt discount

  187,876   229,091 

Amortization of original issue discount

  51,230   97,364 

Stock based compensation

  620,418   18,388 

Decrease (increase) in assets

        

Accounts receivable

  61,633   (12,815)

Prepaid expenses

  (15,633)  (42,585)

Increase (decrease) in liabilities

        

Accounts payable and accrued expenses

  48,181   30,910 

Deferred Revenue

  (5,611)  156,051 

Due to related parties

  (17,040)  (52,655)

Net cash provided by operating activities

  147,534   70,784 
         

Cash flows from investing activities:

        

Capitalized software development costs

  (200,387)  (277,800)

Purchase of property, plant and equipment

  -   (3,880)

Net cash (used in) investing activities

  (200,387)  (281,680)
         

Cash flows from financing activities:

        

Net proceeds from exercise of common stock warrants

  120,000   - 

Net proceeds from issuance of common stock

  2,581,787   100,000 

Senior convertible debenture principal payment

  (1,142,857)  - 

Senior convertible debenture early payment penalty

  (57,143)  - 

Buyback of non-controlling interest

  (100,000)  - 

Net proceeds from sale of common stock warrants

  100   - 

Net cash provided by financing activities

  1,401,887   100,000 
         

Net change to cash and cash equivalents

  1,349,034   (110,896)

Cash and cash equivalents at beginning of period

  246,755   590,461 

Cash and cash equivalents at end of period

 $1,595,789  $479,565 
         

Supplemental disclosure of cash flow information:

        

Cash paid for interest and penalties

 $57,143  $- 

Cash paid for taxes

 $750  $2,150 
         

Non-cash investing and financing activities:

        

Prepaid asset reclassed as transaction costs

 $10,000  $- 

Conversion of Series A Preferred stock, Senior Debenture and accrued interest to Series B Preferred Stock

 $492,384  $- 

 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


TAPINATOR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

Year Ended December 31,

 
  

2018

  

2017

 

Cash flows from operating activities:

        

Net (loss)

 $(2,996,494

)

 $(3,690,146

)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Amortization of software development costs

  614,130   709,615 

Depreciation and amortization of other assets

  9,933   21,927 

Amortization of debt discount

  187,876   1,404,254 

Amortization of original issue discount

  51,230   341,577 

Loss on extinguishment of debt

  -   830,001 

Stock based compensation

  1,857,274   173,552 

Impairment of software development costs

  320,311   256,310 
         

Decrease (increase) in assets:

        

Accounts receivable

  105,287   (6,483

)

Prepaid expenses

  (37,387

)

  (124,741

)

Increase (decrease) in liabilities:

        

Accounts payable and accrued expenses

  17,078   (8,846

)

Deferred Revenue

  268,737   357,429 

Due to related parties

  (56,822

)

  10,418 

Net cash provided by operating activities

  341,153   274,867 
         

Cash flows from investing activities:

        

Capitalized software development costs

  (806,708

)

  (818,094

)

Purchase of property and equipment

  (2,211

)

  (3,979

)

Net cash (used in) investing activities

  (808,919

)

  (822,073

)

         

Cash flows from financing activities:

        

Net proceeds from exercise of common stock warrants

  120,000   - 

Net proceeds from issuance of common stock

  2,581,787   350,000 

Proceeds from capital contribution from non-controlling interest

  -   100,000 

Repurchase of Series B Preferred Stock

  (366,707

)

  - 

Senior convertible debenture principal payment

  (1,142,857

)

  (234,000

)

Repayment for Senior convertible debenture financing costs

  -   (12,500

)

Buyback of non-controlling interest

  (100,000

)

  - 

Net proceeds from sale of common stock warrants

  100   - 

Net cash provided by financing activities

  1,092,323   203,500 
         

Net change to cash and cash equivalents

  624,557   (343,706

)

Cash at beginning of period

  246,755   590,461 

Cash at end of period

 $871,312  $246,755 
         

Supplemental disclosure of cash flow information:

        

Cash paid for interest

 $57,143  $191,517 

Cash paid for taxes

 $4,383  $6,550 
         

Non-cash investing and financing activities:

        

Repurchase of common stock due to related parties

 $144,639  $- 

Conversion of Series A Preferred stock, Senior Debenture and accrued interest to Series B Preferred Stock

 $492,384  $- 

Series A-1 convertible preferred stock issued related to debt extinguishment

 $-  $660,000 

Debt discount related to conversion feature of convertible debt and warrant exchange

 $-  $1,010,001 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 


 

TAPINATOR, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

Note 1 — The Company

 

Tapinator, Inc. (“Tapinator” or the “Company”) develops and publishes mobile games and applications on the iOS, Google Play, Amazon and EthereumAmazon platforms. Tapinator's portfolio includes over 300 mobile gaming titles that, collectively, have achieved over 450 million playermobile downloads, including notable gamesproducts such asROCKY™, Video Poker Classic, Solitaire Dash and Dice MageCrypto Trillionaire. Tapinator generates revenues through the sale of branded advertising and via consumer transactions, including inapp purchases.in-app purchases and subscriptions. Founded in 2013, Tapinator is headquartered in New York, with product development teams located in the United States, Germany, Bulgaria, Pakistan, IndonesiaNorth America, Europe and Canada.Asia.

 

The Company was originally incorporated on December 9, 2013 in the state of Delaware. On December 12, 2013, the Company merged with Tapinator, Inc., a Nevada

Corporation. The Company was the surviving corporation from this merger. On June 16, 2014, the Company executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, whereby the Company issued shares of its common stock to the members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. For accounting and financial reporting purposes, Tapinator LLC was considered the acquirer and the transaction was treated as a reverse merger.

 

The Company currently develops and publishes two types of games within its mobile games business.applications. Tapinator’s Rapid-Launch Games are developed and published in significant quantity. These are titles that are built economically and rapidly based on a series of internally developed, re-useable game engines. These games were historically published under the Tapinator brand and are currently published under the Tap2Play, TapSim Game Studio and TopTap Games brands. The Company’s CategoryLeading Apps (formerly known as Full-Featured Games) are unique products with high production values and high revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have, in the opinion of our management, the potential to become well-known and long-lasting, successful mobile game franchises.franchises which can become market leaders within their respective categories. These gamesapps are currentlymonetized primarily through consumer app store transactions and, to a lesser extent, through brand advertising. These apps are published exclusivelyprimarily under the Tapinator brand.

 

In December 2017,late 2018, the Company formeddeveloped plans to expand its Category Leading Apps strategy to include subscription-based, freemium mobile applications within the Games, Entertainment and Lifestyle categories.

Tapinator’s Rapid-Launch Games are legacy titles that were developed and published in significant quantity beginning in 2013. These are titles that were built economically and rapidly based on a new subsidiary, Revolution Blockchain, LLC, to develop, publishseries of internally developed, expandable and invest inreusable game engines. To date, these engines have been developed within the following game genres: parking, driving, stunts, animal sims, career sims, shooters and fighting. These games are monetized primarily through the sale of branded advertisements. Historically, our Rapid-Launch Games were characterized by low development and marketing cost and predictable portfolio returns. Since our formation, we have compiled a significant library of 300+ such games and, applicationswhile the Company is not currently developing new Rapid-Launch Games, we believe our existing portfolio will continue to produce a long-tail of revenues over the next several years. We do not currently use paid marketing to acquire new players for our Rapid-Launch games, but rather we achieve customer acquisition by relying extensively on app store optimization (“ASO”) and cross promotion within the sizeable network of 300+ Rapid-Launch Games that leverage blockchain technology. The first two products from this subsidiary,we currently operate. Tapinator’s DarkWindsRapid-Launch Games andare published primarily under the Company’s BitPainting, are currently under development. DarkWindsTap2Play was released into live beta mode in March 2018 (available at www.playdarkwinds.com) and BitPainting is expected to be released into live beta mode in May 2018 (available at www.bitpainting.com). These products will leverage blockchain technology for both payment (i.e. the purchase & sale of virtual assets) and the storage of these assets via nonfungible tokens recorded on the blockchain.brand.

 

Note 2 —Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The unaudited condensedaccompanying consolidated financial statements and related notes included herein have been prepared in conformity with United States generally accepted accounting principles (“GAAP”) and pursuant to. The consolidated financial statements include the rules and regulationsoperations of the U.S. SecuritiesCompany and Exchange Commission (“SEC”). The financial statementsits wholly-owned subsidiaries, Tapinator, LLC, Tap2Play, LLC, and notes are presented as permitted on Form 10-QRevolution Blockchain, LLC. All significant intercompany balances and do not contain certain information included in the Company’s annual financial statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of Americatransactions have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be readeliminated in conjunction with the April 30, 2018 Form S-1 filed with the SEC, including the audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts is in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.consolidation.

  

These unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated operations and cash flows for the periods presented.

 

Principals of ConsolidationReclassifications

 

The accompanying unaudited condensed consolidatedCertain Statements of Operations reclassifications have been made in the presentation of our prior financial statements and relatedaccompanying notes includeto conform to the operationspresentation as of and for the Company and its wholly-owned subsidiaries, Tapinator, LLC, Tap2Play, LLC, Tapinator IAF, LLC (this subsidiary was dissolved by the Company onyear ended December 31, 2017), and Revolution Blockchain, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.2018.

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include assumptions used in the recognition of revenue, realization of platform and advertising fees and related costs of revenue, long-lived assets, stock-based compensation, and the fair value of other equity and debt instruments.

 

Revenue Recognition

 

The Company derives revenue primarily from the three gamingmobile platforms (iOS, Google Play and Amazon) on which it currently markets its mobile games and applications in the form of app store transactions and from various advertising networks in the form of branded advertising placements within its mobile games.applications.


 

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 606. A five-step analysis a must be met as outlined in Topic 606: (i) identify the contractcontrsact with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

In accordance with Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company evaluates its agreements with the gamingmobile platforms and advertising networks to determine whether it is acting as the principal or as an agent when selling its games or when selling premium in-game content or advertisements within its games, which it considers in determining if revenue should be reported gross or net. Key indicators that the Company evaluates to reach this determination include:

  

the terms and conditions of the Company’s contracts with the gaming platforms and ad networks;

the party responsible for determining the type, category and quantity of the methods to generate game revenue;

whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game, transaction, or advertisement;

the party which sets the pricing with the end-user, and has the credit and inventory risk; and

the terms and conditions of the Company’s contracts with the mobile platforms and ad networks;

the party responsible for determining the type, category and quantity of the methods to generate game revenue;

whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game, transaction, or advertisement;

the party which sets the pricing with the end-user, and has the credit and inventory risk; and

the party responsible for the fulfillment of the game or serving of advertisements and that determines the specifications of the game or advertisement.

 

Based on the evaluation of the above indicators, the Company has determined that it is generally acting as a principal and is the primary obligor to end-users for its games distributed on the gamingmobile platforms and for advertisements served by the advertising networks and has the contractual right to determine the price to be paid by the player. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the gamingmobile platforms and advertising networks. The Company records the related platform fees and advertising network revenue share as expenses in the period incurred.

 

Display Advertising and Offers:

We have contractual relationships with advertising networks for display advertisements and offers served within our games. For these arrangements, we are the principal and our performance obligation is to provide the inventory for advertisements and offers to be displayed within our games. The Company recognizes revenue whenhas determined the advertising buyer to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.

The pricing and terms for all our advertising arrangements are governed by either a master contract or insertion order and generally stipulate payment terms as a specific number of days subsequent to the end of the following conditionsmonth, generally ranging from 30 to 60 days. The transaction price in advertising arrangements is generally the product of the number of advertising units delivered (e.g., impressions, offers completed, videos viewed, etc.) and the contractually agreed upon price per advertising unit. The number of advertising units delivered is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period. 

Paid Downloadable Games:

Some of our legacy Rapid Launch Mobile Games are satisfied: there is persuasive evidenceoffered as paid downloadable games on certain mobile platforms. For an individual sale of an arrangement;a game with both online and offline functionality, we would typically have three distinct performance obligations; (1) the content or servicesoftware license; (2) a right to receive future updates; and (3) online hosting. The software license performance obligation represents the game that is delivered digitally at the time of sale and typically provides access to offline core game content. The future update rights performance obligation would include updates on a when-and-if-available basis such as software patches or updates, and/or additional free content to be delivered in the future. The online hosting performance obligation consists of providing the customer with a hosted connection for online playability. For these legacy Rapid-Launch games, since we do not provide software updates or additional content, and since we do not host any online content for these games as they are not playable online, the only performance obligation that we recognize is the software license. The sales price allocated to the player;software license performance obligation is recognized at a point in time upon delivery (which is usually at or near the collectionsame time as the booking of fees is reasonably assured; and the amounttransaction).

Virtual Goods:

Our games allow for players to purchase or otherwise earn in-game currency or other premium in-game content in the form of fees to be paid by the player is fixed or determinable.virtual goods. For purposes of determining when the service has been provided as it relates to the player,virtual goods, we have determined that an implied obligation exists to the paying player to continue displaying the purchased premium in-game contentor otherwise earned virtual good over its estimated life or until it is consumed. Accordingly, we categorize our premium in-game contentvirtual goods as either consumable or durable virtual goods.

Consumable Virtual Goods:

Consumable virtual goods are items such as one-time game boosts consumed at a predetermined time or otherwise have limitations on repeated use, while durable virtual goods are items, such as virtual currency, that remain in the game for as long as the player continues to play. Our revenues from consumable virtual goods have been insignificant since the Company’s formation. In addition, we have partnered with third parties to provide rewarded video advertising to players of our games. A rewarded video advertisement enables users to acquire virtual currency, a durable virtual good, in exchange for watching a short video instead of paying cash.

We recognize revenue, and the associated costs, from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods.use. For the sale of consumable virtual goods, we recognize revenue, and the associated costs, as the goods are consumed. Our revenues from consumable virtual goods have been insignificant since the Company’s formation.

Durable Virtual Goods:

Durable virtual goods are items including virtual currency and premium in-game content such as power-ups, skins and equipment that remain in the game for as long as the player continues to play. If we do not have the ability to differentiate revenue attributable to durable virtual goods from consumable virtual goods for a specific game, we recognize revenue and the associated costs on the sale of durable and consumable virtual goods for that game ratably over the estimated average period that paying players typically play that game. We recognize revenue, and the associated costs, from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods.

We have partnered with third party advertising networks to provide rewarded video advertising to players of our games. A rewarded video advertisement enables users to acquire virtual currency, a durable virtual good, in exchange for watching a short video instead of paying cash. For rewarded video advertisements, similar to purchased durable virtual goods, revenue is initially recorded to deferred revenue and then recognized ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods,


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

 

On an annuala periodic basis, we determine the estimated average playing period for paying players by genre across a sample of our games beginning at the time of a player’s first purchase in that game and ending on a date when that paying player is no longer playing the game. To determine when paying players are no longer playing a given game, we measure the populations of paying players (the “daily cohort”) from the date of their first installation of the game and track each daily cohort to understand the number of players from each daily cohort who played the game after their initial purchase. For titles where we have one or more years of paying players’ historical usage data (“Tracked Titles”), we compute a weighted average playing period for paying users using this dataset.


 

For titles where we have less than one year of paying player data (“New/Untracked Titles”), we use a linear interpolation model on a representative sample of our games within each genre to estimate the average playing period of paying users. Using actual retention data for all players from these games for the period between game installation and up to 90 days thereafter, this data is inputted into a linear interpolation curve to estimate an average playing period for these titles. These calculated curves and their associated one-year average playing periods are mapped against the corresponding curves and associated average one-year playing periods for the Tracked Titles. Based on this mapping, the average playing period of paying users for Tracked Titles is then indexed up or down accordingly, and then applied against the New/Untracked Titles within the sample.

 

We then compute revenue-based weighted averages of the estimated playing period across all of the games in the sample, by genre, to arrive at the overall weighted average playing period of paying users for each of our major game genres, rounded to the nearest month. As of the fourthfirst quarter of 20172018 (our most recent determination date), the estimated weighted average life of our durable virtual goods was 16 months for our Casino / Card games, 2 months for our RPG / Arcade games and 2 months for our Rapid Launch / Simulation games. The estimated weighted average life of our durable virtual goods across all of our games was 13 months as of the fourth quarter of 2017.13.

 

While we believe our estimates to be reasonable based on available game player information and based on the disclosed methodologies of larger publicly reporting mobile game companies, we may revise such estimates in the future based on changes in the operational lives of our games, and based on changes in our ability to make such estimates. Any future adjustments arising from changes in the estimates of the lives of these virtual goods would be applied to the then current quarter, and prospectively on the basis that such changes are caused by new information indicating a change in game player behavior patterns compared to historical titles. Any changes in our estimates of useful lives of these virtual goods may result in revenues being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.

 

Arrangements with Multiple Performance Obligations: 

For arrangements with multiple performance obligations, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation, which is based on the standalone selling price. The standalone selling price represents the observable price which we would sell the advertising placement separately in a similar circumstance, to a similar customer.  

On August 7, 2018, we entered into a License Agreement (the “License Agreement”) pursuant to which the we granted Licensee the exclusive, worldwide right to localize, publish, distribute and operate one of the Company’s mobile games. The License Agreement represents an Arrangement with Multiple Performance Obligations.

As consideration for the grant of rights to Licensee under the License Agreement, Licensee agreed to make upfront payments to the Company (the “Minimum Guarantee”). The Minimum Guarantee impacts our revenue recognition as it relates to the distinction between functional intellectual property and symbolic intellectual property for licensing arrangements. We are required to make such distinction based on the nature of the license and recognize revenue at a point in time for functional intellectual property and over time for symbolic intellectual property (such as trademarks, brands and character images). The License Agreement also requires that the Company provide specific goods and services in the form of regular software updates.

We have determined the License Agreement includes multiple performance obligations related to functional intellectual property, symbolic intellectual property and software-related services (updates). For these three components, revenue associated with individual performance obligations is recorded separately as they are each distinct obligations. The standalone selling price for each component is determined by using an expected cost plus margin approach. The amounts assigned to each product or services is recognized when the product is delivered and/or when the services are performed. The obligation associated with functional intellectual property is deemed satisfied when we have transferred the software license to Licensee and the Licensee has deployed the intellectual property into the market. The symbolic intellectual property obligations are deemed to be performed over an extended period, whereby revenue is generally recognized over time on a ratable basis over the initial term of the License Agreement. The software-related services obligations (updates) are also deemed to be performed over an extended period, whereby revenue is generally recognized over time, on a ratable basis over the initial term of the License Agreement.

Disaggregation of Revenue:

The following table summarizes revenue from contracts with customers for the three monthsyear ended MarchDecember 31, 2018 and 2017:

 

  

Three Months Ended

March 31, 2018

 
     

Durable Virtual Goods (over-time revenue recognition)

 $257,385 

Paid Downloadable Games (point-in-time revenue recognition)

  315,398 

General Display Ads (point-in-time revenue recognition)

  290,239 

Rewarded Video Ads (over-time revenue recognition)

  25,666 

Total Revenue

 $888,688 
  

Year ended

 
  

December

31,

2018

  

December

31,

2017

 
         

Display Ads & Offers (point-in-time revenue)

 $878,590  $1,804,268 

Paid Downloadable Games (point-in-time recognition)

  806,784   592,222 

Durable Virtual Goods (over-time recognition):

        

In-Game Currency and Premium In-Game Content

  910,737   744,870 

Rewarded Video Ads

  93,352   - 

Arrangements with Multiple Performance Obligations (over-time recognition):

        

License Agreement Minimum Guarantee

  182,815   - 

Total Revenue

 $2,872,278  $3,141,360 

 

The Company reports as a single segment - mobile games.applications.  In the disaggregation above, the Company categorizes revenue by type, and by over-time or point-in-time recognition

 


 

TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection. As of MarchDecember 31, 2018 and December 31, 2017, based upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.

 

Cash Equivalents

 

For purposes of the Company’s financial statements, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. The Company had no cash equivalents as of MarchDecember 31, 2018 and December 31, 2017.

 

Concentrations of Credit Risk

 

Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit of $250,000. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. As of MarchDecember 31, 2018, the total amount exceeding such limit was $1,345,789.$608,762.

 

The Company derives revenue from gamingmobile app platforms, and advertising networks and licensing which individually may contribute 10% or more of the Company’s revenues in any given year. For the three monthsYear ended MarchDecember 31, 2018, revenue derived from two gamingmobile app platforms comprised 62%44% and one licensee comprised 10% of such period’s total revenue. For the Year ended December 31, 2017, revenue derived from two mobile app platforms comprised 44% of such period’s total revenue and revenue derived from three advertising networks comprised 21% of such period’s total revenue. For the three months ended March 31, 2017, revenue derived from two gaming platforms comprised 40% of such period’s total revenue and revenue derived from four advertising networks comprised 38%36% of such period’s total revenue.

 

As of MarchDecember 31, 2018, the receivable balance from two advertising networksmobile app platforms comprised 20%66% of the Company’s total accounts receivable balance and the receivable balance from two gaming platformsone advertising network comprised 53%10% of the Company’s total accounts receivable balance. As of December 31, 2017, the receivable balance from two advertising networks comprised 27% of the Company’s total accounts receivable balance and the receivable balance from two gamingmobile app platforms comprised 49% of the Company’s total accounts receivable balance.

 

Property and Equipment

 

Property and equipment are stated at cost. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference, less any amount realized from disposition, is reflected in earnings. Property and equipment are depreciated using the straight-line method over their estimated useful lives as follows:

 

Estimated Useful Life:

Years

Computer equipment (Years)

3 Years

Furniture and Fixtures (Years)

5 Years

Leasehold improvements

Remaining term of lease

3

                      

Software Development Costs

 

In accordance with ASC 985-20, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products for use in our product offerings. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working program design to the point in time that the product is available for general release to customers. Software development costs are amortized on a straight-line basis over the estimated economic lives of the products, beginning when the product is placed into service.

 

The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of its capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. Software costs incurred prior to establishing technological feasibility are charged to Research and Development expense as incurred.

 


Impairment of Long-lived Assets

 

The Company regularly reviews property, equipment, software development costs and other long-lived assets for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Based upon management’s assessment, there was no impairment of the Company’s property and equipment at MarchDecember 31, 2018 and December 31, 2017. Management has deemed that certain software development costs were impaired at December 31, 2018 and 2017, and such impairment is more fully described in Note 8 below. There was no impairment of software development costs during the three months ended March 31, 2018.

 

In general, investments in which the Company owns less than 20 percent20% of an entity’s equity interest or does not hold significant influence over the investee are accounted for under the cost method. Under the cost method, these investments are carried at the lower of cost or fair value. The Company periodically assesses its cost method investments for impairment. If determination that a decline in fair value is other than temporary, the Company will write-down the investment and charge the impairment against operations. At MarchDecember 31, 2018 and December 31, 2017, the carrying value of our investments totaled $5,000 and $5,000, respectively.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

Derivative Instrument Liability

 

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At MarchDecember 31, 2018 and December 31, 2017, the Company did not have any derivative instruments that were designated as hedges.

 

Cost of Revenue (excluding amortization of software development costs)

 

Cost of revenue includes primarily platform and advertising network fees, licensing costs and hosting fees. The Company, along with all mobile application publishers, is required to pay platform fees to Apple, Google and Amazon equal to approximately 30% of gross revenue. The Company is also required to pay a revenue share of approximately 30% to advertising networks and similar service providers.

 

Stock-Based Compensation

 

The Company measures the fair value of stock-based compensation issued to employees and non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions), or the fair value of the award (for non-stock transactions), which are considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

 

Basic and Diluted Net (Loss) per Share Calculations

 

The Company computes per share amounts in accordance with FASB ASC Topic 260 “Earnings per Share” (“EPS”), which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of Common Stock and Common Stock equivalents outstanding during the periods;periods; however, potential common shares are excluded for period in which the Company incurs losses, as their effect is anti-dilutive.

 

For the three monthsyear ended MarchDecember 31, 2018, potentially dilutive securities excluded from the computation of basic and diluted net (loss) per share include 10,750,000 Restricted Stock Units, 5,050,0004,925,004 Common Stock Options and 34,200,002 Common Stock Warrants and 15,450,000 potentially convertible common shares related to the Company's Series B Preferred Stock.Warrants.

 

For the three monthsyear ended MarchDecember 31, 2017, potentially dilutive securities excluded from the computation of basic and diluted net (loss) per share include 10,800,000 potentially convertible common shares related to the Company’s Senior Secured Convertible Debenture, 1,680,000 potentially convertible common shares related to the Company’s Series A Preferred Stock, 550,0006,000,000 potentially convertible shares related to the Company’s Series A-1 Preferred Stock, 5,050,000 Common Stock Options and 10,926,8293,500,000 Common Stock Warrants.


Subsequent Events

 

In accordance with ASC 855 “Subsequent Events” the Company evaluated subsequent events after the balance sheet date through the date of issuance.

 

Reclassifications

Certain prior year amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on the net loss or cash flows of the Company.

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. While we are currently evaluating the impact of the adoption of this ASU, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In April 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016–10 “Revenue from Contract with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The Company adopted the new standard effective January 1, 2018 using the modified retrospective method. The adoption of the new standard did not have an impact on the Company’s consolidated financial statements.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires lesseesadditional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a right-of-use assetdistinction between finance leases and a lease liabilityoperating leases. The classification criteria for virtually alldistinguishing between finance leases (other thanand operating leases that meet the definition of a short-term lease). The liability will be equalare substantially similar to the present value of lease payments.classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. This updateASU is effective for annual periods andbeginning after December 15, 2018, including interim periods within those years, beginning after December 15, 2018. This new guidance mustfiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be adopted using a modified retrospective approach whereby lesseesmeasured and lessors are required to recognize and measure leasesrecognized at the beginning of the earliest comparative period presented usingwith an adjustment to equity. Practical expedients are available for election as a modified retrospective approach. Early adoption is permitted.package and if applied consistently to all leases. An additional update was issued by FASB in January 2018 to ASC Topic 842. We are currently evaluatingfinalizing the impactadoption of the new standard effective January 1, 2019 and will be adopting this updatethe standard using the optional transition method by recognizing a cumulative-effect adjustment to the balance sheet at January 1, 2019 and not revising prior period presented amounts. The processes that are in final refinement related to our full implementation of the standard include: i) finalizing our estimates related to the applicable incremental borrowing rate at January 1, 2019 and ii) process enhancements for refining our financial reporting procedures to develop the additional required qualitative and quantitative disclosures required beginning in 2019. We have elected the following practical expedients: i) we have not reassessed whether any expired or existing contracts are or contain leases, ii) we have not reassessed lease classification for any expired or existing leases, iii) we have not reassessed initial direct costs for any existing leases, and iv) it has not separated lease and nonlease components.

The standard will not have a material impact on our Consolidated Financial Statements, whichconsolidated balance sheets or on our consolidated statements of operations. The most significant impact will consist primarilybe the Right-Of-Use (“ROU”) assets and lease liabilities for real estate operating leases.

Adoption of a balance sheet gross upthe standard will result in the recognition of ouradditional ROU assets and lease liabilities for its operating leases, mostlylease of approximately $170,000 on the present value of the remaining minimum rental payments under current leasing standards for office space.the existing operating lease.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

 

Note 3 — Net Loss Per Share

 

The Company computes net loss per share by dividing its net loss for the period by the weighted average number of common shares outstanding during the period less the weighted average common shares subject to restrictions imposed by the Company.

 

  

Three Months Ended

March 31,

 
  2018  2017 

Net loss

 $(915,880)  (554,255)

Shares used to compute net loss per share:

        

Weighted average common shares outstanding

  78,031,758   57,100,044 

Weighted average common shares subject to restrictions

      

Weighted average shares used to compute basic and diluted net loss per share

  78,031,758   57,100,044 

Net loss per share - basic and diluted

 $(0.01)  (0.01)


  

Year ended

 
  

December 31,

 
  

2018

  

2017

 

Net loss

 $(2,996,494

)

 $(3,690,146

)

Shares used to compute net loss per share:

        

Weighted average common shares outstanding

  90,976,652   58,478,481 

Weighted average common shares subject to restrictions

      

Weighted average shares used to compute basic and diluted net loss per share

  90,976,652   58,478,481 

Net loss per share - basic and diluted

 $(0.03

)

 $(0.06

)

 

The following warrants to purchase common stock, options to purchase common stock, warrants to purchase common stock, unvested shares of common stock subject to restrictions, and restricted stock units (“RSUs”) and preferred stock have been excluded from the computation of net loss per share of common stock for the periods presented because including them would have had an antidilutiveanti-dilutive effect:

 

 

Year ended

 
 

Three Months Ended

March 31,

  

December 31,

 
 2018  2017  

2018

  

2017

 

Warrants to purchase common stock

  34,200,000   10,926,829   34,200,002   3,500,000 

Potentially convertible common stock underlying senior debenture

     10,800,000      10,800,000 

Options to purchase common stock

  5,050,000   550,000   4,925,004   5,050,000 

RSUs

  10,750,000      10,750,000    

Series B Preferred stock

  15,450,000    

Series A Preferred stock

     1,680,000      1,680,000 

Series A-1 Preferred stock

     6,000,000 
  65,450,000   23,956,829   49,875,006   27,030,000 

 

Note 4 — Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date of identical, unrestricted assets or liabilities.

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;liability; and

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

As of MarchDecember 31, 2018 and December 31, 2017, the Company did not identify any assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC 825, Financial Instruments.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

Note 5 — Accounts Receivable

 

 March 31,  December 31,  

December 31,

  

December 31,

 
 2018  2017  

2018

  

2017

 

Accounts receivable

 $271,457  $330,090  $227,803  $333,090 

Less: Allowance for doubtful accounts

  -   -   -   - 
 $271,457  $330,090 

Accounts receivable, Net

 $227,803  $333,090 

 

The Company had no bad debts during the three monthsyear ended MarchDecember 31, 2018 and 2017.

 

Note 6 — Prepaid Expenses and Other Assets

 

Prepaid expense and other assets consisted of the following as of MarchDecember 31, 2018 and December 31, 2017:

 

 March 31,  December 31,  

December 31,

  

December 31,

 
 2018  2017  

2018

  

2017

 

Deferred platform commission fees

 $144,445  $146,708  $178,692  $146,708 

Deferred royalties

  2,924   3,704   1,157   3,704 

Prepaid Professional fees

  -   15,000   -   15,000 

Other

  11,094   12,417   35,367   12,417 
 $158,463  $177,829 

Total Prepaid Expenses

 $215,216  $177,829 

 

Note 7 — Property and Equipment

 

Property and equipment consisted of the following as of MarchDecember 31, 2018 and December 31, 2017:

 

 March 31, 2018  December 31, 2017  

December 31,

2018

  

December 31,

2017

 

Leasehold improvements

 $2,435  $2,435  $2,435  $2,435 

Furniture and fixtures

  10,337   10,337   10,337   10,337 

Computer equipment

  24,285   24,285   26,496   24,285 

Property and equipment cost

  37,057   37,057   39,268   37,057 

Less: accumulated depreciation

  (25,103)  (22,645)  (31,685

)

  (22,645

)

Property and equipment, net

 $11,954  $14,412  $7,583  $14,412 

 

During the three monthsyear ended MarchDecember 31, 2018 and March 31, 2017, depreciation expense was $2,458$9,040 and $2,469,$9,995, respectively.

 


Note 8 — Capitalized Software Development

 

Capitalized software development costs at MarchDecember 31, 2018 and December 31, 2017 were as follows:

 

 March 31, 2018  December 31, 2017  

December 31,

2018

  

December 31,

2017

 

Software development cost

 $3,460,105  $3,259,719  $4,066,427  $3,259,719 

Less: accumulated amortization

  (2,362,180)  (1,976,861)  (2,610,991

)

  (1,976,861

)

Less: Impairment of capitalized software

  -   (256,310)

Capitalized software development cost, net

 $1,097,925  $1,026,548 

Less: Impairment of software development cost

  (576,621

)

  (256,310

)

Software development cost, net

 $878,815  $1,026,548 

 

During the three monthsyear ended MarchDecember 31, 2018 and March 31, 2017, amortization expense related to capitalized software was $129,009$614,130 and $195,412,$709,615, respectively. At December 31, 2017, managementManagement deemed that the net software development cost carrying amount related to certain of our released and unreleased mobile games was likely not recoverable, thus we took an impairment charge of $320,311 and $256,310 as of December 31, 2017.2018 and 2017, respectively.

  

Note 9 - Investments

 

In January 2015, the Company made a $5,000 passive investment into Peer5, a Palo Alto, CA and Tel Aviv, Israel based internet infrastructure company focused on improving the scalability and efficiency of mobile and internet content delivery.

 

Note 10 - Related party transactionsParty Transactions

 

The Company utilizes the services of an affiliated entity of a major shareholder for the development of certain of its mobile games.Rapid-Launch Games. Amounts incurred by the Company for such development services, which were primarily attributed to capitalized software development costs, for the three monthsyear ended MarchDecember 31, 2018 and March 31, 2017 were $174,212$372,029 and $164,597,$433,578, respectively. As of MarchDecember 31, 2018 and December 31, 2017, the Company had balances due to related parties related primarily due to the software development services of $83,075$43,293 and $100,115, respectively.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

Stock repurchase agreement

On December 28, 2018, the Company entered into a Games Revenue Share and Stock Repurchase Agreement (the “Agreement”) with TapGames, a Pakistani registered firm (“TapGames”), Khurram Samad (the “Stockholder”), Rizwan Yousuf and Tap2Play, LLC, a wholly-owned subsidiary of the Company, whereby the Company repurchased 7,646,446 shares (the “Repurchased Shares”) of the Company’s common stock, for a per share purchase price of $0.02, or an aggregate purchase price of $144,639 from the Stockholder.

In consideration for the Repurchased Shares, the Company agreed to share all revenue net of any and all third-party platform fees generated from the Company’s Rapid Launch Games identified in the Agreement (the “Subject Games”) with TapGames, an entity in which the Stockholder has an equity interest. Pursuant to the terms of the Agreement and effective as of January 1, 2019, 60% of all such revenue will be paid to TapGames with the Company retaining the remaining 40%. The Company and its Tap2Play subsidiary will retain all intellectual property rights and title to the Subject Games but will not be responsible for any updates or maintenance with respect to the Subject Games, including any advertising or marketing expenses. The Company has recorded an amount due to related parties in the amount of $144,639 at December 31, 2018 whereby the Repurchased Shares are paid from net revenue share proceeds.

Note 11 — Senior Secured Convertible Debenture

 

On June 19, 2015, the Company and Hillair Capital Investment L.P. (“Hillair”) entered into a Securities Purchase Agreement, dated June 19, 2015 (the “Purchase Agreement”) pursuant to which the Company issued to Hillair the following (i) $2,240,000 8% Original Issue Discount Senior Secured Convertible Debenture (the “Original Debenture”) which was convertible into shares of the Company’s common stock at a price per share of $.205, (ii) Series A Common Stock purchase warrants (the “Series A Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 and (iii) Series B Common Stock purchase warrants (the “Series B Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 (collectively, the terms of which are referred to herein as the “Original Financing”).

 

In July 28, 2016, the Company and Hillair entered into an Exchange Agreement (“2016 Exchange Agreement”) to amend and refinance the terms of the $2.24 million 8% Original Issue Discount Senior Secured Convertible Debenture originally issued in June, 2015. Immediately prior to the 2016 Exchange Agreement, the Company owed cash payments to Hillair of $560,000 on October 1, 2016 and $1,120,000 on January 1, 2017 under the Original Debenture.  Pursuant to the 2016 Exchange Agreement, the following material terms of the Original Financing were amended, altered and/or ratified: (i) the Original Debenture was exchanged in its entirety for the issuance of a new 8% Original Issue Discount Senior Secured Convertible Debenture with an original principal amount of $2,394,000 and an increased conversion price of $0.25 (the “2016 Debenture”), (ii) the issuance of 420 shares of a new Series A Convertible Preferred Stock as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock which may be exercised for up to 1,680,000 shares of Company’s common stock, (iii) the extension of the maturity date of the Series A Warrant from June 22, 2020 until July 28, 2021, (iv) the cancellation of the Series B Warrants in their entirety, (v) the ratification of the Security Agreement executed by the Company with respect to all of its assets (as required by the initial Purchase Agreement and Original Debenture) as continued collateral for the New Debenture as well as the ratification of the Subsidiary Guarantee and Pledge and Security Agreement as such agreements are referenced in the Purchase Agreement and Exchange Agreement, and (vi) the creation of a new right for the Holder, subject to the written consent of the Company, for a $2,100,000 cash investment in the Company with identical terms to the new financing.

 

In June 2017, the Company and Hillair entered into an amendment agreement (the “2017 Amended Agreement”) to amend and refinance the terms of the 2016 Debenture. Pursuant to the 2017 Amended Agreement, the Company prepaid to Hillair a portion of the outstanding principal on the 2016 Debenture in the amount of $234,000 and all of the accrued interest on the 2016 Debenture through June 30, 2017 in the amount of $191,520. Following such payments, the remaining principal amount of the Holder’s amended 2016 Debenture was $2,160,000 (the “Amended 2016 Debenture”). In addition, the Company and Hillair agreed to reduce the conversion price of the 2016 Debenture from $0.25 to $0.20. The Amended 2016 Debenture iswas due on July 31, 2018, and the Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this debenture at the rate of 8% per annum, payable on each December 31, March 31, July 31, and October 31, thereafter, beginning on December 31, 2017. In June 2017, the Company and Holder also entered into an exchange agreement (the “2017 Exchange Agreement”) to exchange the existing 10,926,829 shares of Series A Common Stock purchase warrants for 1,500 shares of Series A-1 Convertible Preferred Stock.

 

On September 7, 2017, Hillair assigned all of its rights under and relating to the Senior Debenture to HSPL Holdings, LLC (“HSPL”), including the Series A-1 Convertible Preferred Stock.

 

On January 22, 2018, HSPL elected to convert all of the 1,500 shares of Series A-1 Stock into 6,000,000 shares of the Company’s common stock. The 6,000,000 shares of common stock converted under the Series A-1 Preferred Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.


 

On February 23, 2018, the Company entered into a Series B Exchange Agreement (the “Series B Exchange Agreement”) with HSPL to amend the terms of the 2017 Amended Agreement. On February 23, 2018, the Company paid to HSPL $1,200,000 in cash for a net reduction of the principal amount of the Amended 2016 Debenture of $1,142,857 after giving effect to a 5% prepayment penalty which resulted in a remaining principal balance of $1,017,143 plus all accrued but unpaid interest under the 2016 Debenture (the “Remaining 2016 Debenture Balance”). Pursuant to the Series B Exchange Agreement, the Remaining 2016 Debenture Balance and the Series A Preferred Stock were exchanged in their entirety (and thus cancelled) for issuance of 1,854 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock which may be initially exercised for up to 15,450,000 shares of Company’s common stock, subject to adjustment. As a result of the Series B Exchange Agreement, the Company eliminated all of its outstanding debt. Each share of the Series B Preferred Stock has a conversion price of $0.12 and a stated value of $1,000. Subject to certain exceptions, in the event the Company issues shares of its common stock at a price below $0.082, the conversion price of the Series B Preferred Stock will be reduced to the price of such issuance. HSPL and any subsequent holders of the Series B Preferred Stock are prohibited from converting the Series B Preferred Stock into more than 9.99% of the Company’s then outstanding number of shares of common stock after giving effect to such conversion.  The shares of Series B Preferred Stock were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act. The shares of common stock underlying the Series B Preferred Stock are subject to being issued without restrictive legend pursuant to Section 3(a)(9) of the Securities Act, subject to various conditions and limitations.

 

DuringOn May 2, 2018, HSPL elected to convert 500 shares of its 1,854 shares of Series B Preferred Stock into 4,166,667 shares of the three months ended MarchCompany’s common stock. The 4,166,667 shares of common stock converted under the Series B Preferred Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and March2017

On September 7, 2018, the Company repurchased 1,354 shares of the Company’s Series B Preferred Stock from HSPL for a per share purchase price of $270.83, or an aggregate purchase price of $366,707. The repurchased shares represented all of the outstanding shares of the Series B Preferred Stock and, following the transaction, the Company has no Preferred Stock outstanding in any class. Pursuant to the terms of the Series B Preferred Stock, the repurchased shares were convertible into 11,283,333 shares of the Company’s common stock.   The repurchase purchase price represents a per share common stock purchase price of $0.0325, if conversion had occurred.

During the year ended December 31, 2018 and 2017, amortization of the debt discount related to the Senior Secured Convertible Debentures was $187,876 and $229,091,$1,404,254, respectively. During the three monthsyear ended MarchDecember 31, 2018 and March 31, 2017, amortization of the original issue discount related to the Senior Secured Convertible Debentures was $51,230 and $97,364,$341,577, respectively. As a result of the 2017 Amendment Agreement, the Company recorded a loss of $830,001 related to the debt original debt extinguishment for the year ended December 31, 2017.

 

Senior secured convertible debenture payable as of MarchDecember 31, 2018 and December 31, 2017 were comprised of the following:

 

 March 31, 2018  December 31, 2017  

December 31,

2018

  

December 31,

2017

 

Principal balance outstanding

 $-  $2,160,000  $-  $2,160,000 

Less:

                

Debt discount – beneficial conversion feature

  -   (657,564)  -   (657,564

)

Debt discount – original issue discount

  -   (179,304)  -   (179,304

)

Debt discount – financing costs

  -   (6,250)  -   (6,250

)

Principal balance outstanding, net

  -   1,316,882   -   1,316,882 

Less current portion

  -   1,316,882   -   1,316,882 

Long term portion

 $-  $-   -   - 

 

Note 12 — Commitments and Contingencies

 

Leases

 

In August 2016, the Company entered into a lease for office space which expires in November 2021. Future minimum lease payments under this lease are as follows:

 

Year ended December 31,

        

2018

 $57,737 

2019

  59,469  $59,469 

2020

  61,253   61,253 

2021

  63,090   63,090 

Total

 $241,549   183,812 

  

For the quartersyear ended MarchDecember 31, 2018 and 2017 rent expense totaled $14,456$58,000 and $13,973 and$56,398, respectively.

 


License Agreement

 

On August 7, 2018 (“Effective Date”), the Company entered into a License Agreement (the “Solitaire Dash License Agreement”), pursuant to which the Company granted Licensee the exclusive, worldwide right to localize, publish, distribute and operate the Company’s mobile game titled Solitaire Dash – Card Game (“Solitaire Dash”). 

As consideration for the grant of rights to Licensee under the Solitaire Dash License Agreement, Licensee agreed to make upfront payments to the Company in the aggregate of $500,000 payable in installments (the “Upfront Payments”). As of December 31, 2018, the Company has received $300,000 in upfront payments. In addition, for sales of Solitaire Dash, the Solitaire Dash License Agreement provides an ongoing net revenue share formula which would allow the Company to receive certain percentages of the revenues received by the Licensee based on certain revenue targets in addition to the Upfront Payments.  As part of a separate agreement, the Company agreed to pay the third-party who introduced the Company and Licensee 6.5% of all payments received by the Company under the Solitaire Dash License Agreement. In accordance with the agreement, the Company has recognized $182,815 in revenue in the period ending December 31, 2018 and deferred revenue of $117,187 as of December 31, 2018.

The Solitaire Dash License Agreement is for a term of four years from the Effective Date and will automatically renew for subsequent one year periods unless Licensee notifies the Company of its intent to terminate within 90 days before the end of the fourth year or any subsequent renewal period. During the term on the contract, the Company is responsible to maintain and develop updates of Solitaire Dash and provide such versions to the Licensee. Either party may also unilaterally terminate the Solitaire Dash License Agreement under certain circumstances.

Minimum Developer Commitments

 

Future developer commitments as of MarchDecember 31, 2018, were $307,733.$629,727. These developer commitments reflect the Company’s estimated minimum cash obligations to external software developers (“third-party developers”) to design and develop its software applications but do not necessarily represent the periods in which they will be expensed. The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones.

 


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

At MarchDecember 31, 2018, future unpaid developer commitments were as follows:

 

 

Future

  

Future

 
 

Minimum

  

Minimum

 
 

Developer

  

Developer

 

Year Ending December 31,

 

Commitments

  

Commitments

 

2018 (remaining 9 months)

 $307,733 

2019

    $419,818 

2020

     209,909 

2021

   
 $307,733  $629,727 

 

The amounts represented in the table above reflect the Company’s minimum cash obligations for the respective calendar years, but do not necessarily represent the periods in which they will be expensed in the Company’s consolidated financial statements.

 

Note 13 — Stockholders’ Equity (Deficit)

 

Common and Preferred Stock

On January 23, 2018, via written consent of a majority of its stockholders, the Company increased the number of its authorized share of common stock from 150,000,000 to 250,000,000.

 

At MarchDecember 31, 2018, the authorized capital of the Company consisted of 250,000,000 shares of common stock, par value $0.001 per share, and 1,532,500 shares of blank check preferred stock, par value $0.001 per share. The Company has designated 840 shares as Series A Convertible Preferred Stock, 1,500 shares as Series A-1 Convertible Preferred Stock, and 1,854 as Series B Convertible Preferred Stock.

 

In February, 2017, the Company entered into a Stock Purchase Agreement with an individual investor for the purchase of 500,000 shares of the Company's common stock for an aggregate purchase price of $150,000, or $0.30 per share. In connection with the financing, the Company also issued to the investor two warrants. Each warrant has a term of three years and each warrant shall enable the investor to purchase up to an additional 500,000 shares of the Company's common stock at an exercise price of $.30 per share and $.36 per share, respectively. On January 18, 2018, the Company reduced the price per share of the two warrants from $0.36 and $0.30 to $0.12.  Upon the reduction of the exercise price, the shareholder elected to exercise both warrants for an aggregate cash payment of $120,000 for 1,000,000 shares of common stock.

 

In June, 2017, the Company entered into a Stock Purchase Agreement with an individual investor for the purchase of 2,000,000 shares of the Company's common stock for an aggregate purchase price of $200,000. In connection with the financing, the Company also issued to the investor a warrant, which has a term of three years and shall enable the investor to purchase up to an additional 2,500,000 shares of the Company's common stock at an exercise price of $.20 per share.

 

In June 2017, the holder of the Senior Secured Convertible Debenture and the Company agreed to exchange 10,926,829 Series A Common Stock Purchase Warrants for 1,500 shares of the Company’s Series A-1 Convertible Preferred Stock. See Note 11.

On January 22, 2018, the holder of the Company’s Series A-1 Preferred stockStock elected to convert all of the 1,500 shares of such stock into 6,000,000 shareshares of common stock.

 

On January 30, 2018, we consummated the first closing of the Company’s private placement announced on September 7, 2017 (the “Offering”). Specifically, the Company entered into Subscription Agreements (the “Subscription Agreement”) with various investors (collectively, the “Investors”) for the purchase of 11,791,668 shares of the Company’s Common Stock for an aggregate purchase price of $1,415,000, or $0.12 per share. The Company received net proceeds of $1,162,804 from the first closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering and other expenses of the Company. In connection with the first closing and pursuant to the terms of the Offering, the Company issued to the Investors Common Stock Purchase Warrants (the “Warrants”) to purchase up to 11,791,668 shares of the Company’s Common Stock at a per share exercise price of $0.144. The Warrants have five-year terms and do not allow for cashless exercise unless the Company is unable to obtain an effective registration statement with the Securities and Exchange Commission regarding the shares underlying the Warrants, subject to certain conditions.

 

On February 7, 2018, we consummated the second closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 8,562,499 shares of the Company’s Common Stock for an aggregate purchase price of $1,027,500, or $0.12 per share. The Company received net proceeds of $920,680 from the second closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the second closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 8,562,499 shares of the Company’s Common Stock at a per share exercise price of $0.144.

 

On February 15, 2018, we consummated the third and final closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 4,645,835 shares of the Company’s Common Stock for an aggregate purchase price of $557,500, or $0.12 per share. The Company received net proceeds of $498,303 from the third closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the third closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 4,645,835 shares of the Company’s Common Stock at a per share exercise price of $0.144.

 

On February 23, 2018, the Company entered into a Series B Exchange Agreement with HSPL. Pursuant to the agreement the remaining 2016 debenture balance and the 420 shares of Series A Preferred Stock outstanding, held by HSPL, were exchanged in their entirety (and thus cancelled) for the issuance of 1,854 shares of Series B Convertible Preferred Stock. See Note 11.

On May 2, 2018, the holder of our Series B Convertible Preferred Stock (“Series B Stock”) elected to convert 500 of its 1,854 shares of Series B Stock into 4,166,667 shares of the Company’s common stock.  The 4,166,667 shares of common stock converted under the Series B Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.


 

TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

On September 7, 2018, we entered into a Stock Repurchase Agreement whereby the Company repurchased 1,354 shares of the Company’s Series B Stock for a per share purchase price of $270.83, or an aggregate purchase price of $366,707. The Repurchased Shares represent all of the outstanding shares of the Series B Stock. Pursuant to the terms of the Series B Stock, the Repurchased Shares were convertible into 11,283,333 shares of the Company’s common stock. The Repurchase Amount represents a per share purchase price of the Conversion Shares, if conversion had occurred, equal to $0.0325. Pursuant to the terms of the Series B Repurchase Agreement, the Repurchased Shares were canceled in full and of no further force or effect as of the Effective Date. After the Effective Date, there are no shares of Series B Stock outstanding and, following the transaction, the Company has no Preferred Stock outstanding in any class.

On December 28, 2018, the Company entered into a Games Revenue Share and Stock Repurchase Agreement with a related party whereby the Company repurchased 7,646,446 shares of the Company’s common stock, for a per share purchase price of $0.02, or an aggregate purchase price of $144,639 from the Stockholder (See Note 10).

Options

 

In December 2015, the Company approved the 2015 Equity Incentive Plan (the “Plan”). The Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, performance stock awards and other stock-based awards (collectively, “Stock Awards”). Under theThe initial Plan provided the Company maythe ability to grant Stock Awards to its employees, directors and consultants of up to 6,000,000 shares of common stock.

 

InOn January 2016 and pursuant to23, 2018 via written consent of a majority of its stockholders, the Company increased the number of shares of common stock underlying its 2015 Equity Incentive Plan the Company granted a non-executive memberfrom 6,000,000 to 18,000,000.

A summary of stock option activity under the Company’s Board of Directors an option to purchase 300,000 shares of2015 Equity Incentive Plan for the Company’s common stock at an exercise price equal to $0.33 per share. Such option shall vest in eight quarterly installments of 37,500 shares at the end of each quarterly anniversary commencing on March 31, 2016, contingent upon the grantee’s continual service as a member of the Board of Directors as of each vesting installment date. Total stock-based compensation related to this option grant was $4,124 and $12,372 during the three monthsyears ended MarchDecember 31, 2018 and 2017 respectively.is as follows:

 

In May 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted an executive officer an option to purchase 250,000 shares of the Company’s common stock at an exercise price equal to $0.1925 per share. Such option shall vest in eight quarterly installments of 31,250 shares at the end of each quarterly anniversary commencing on August 31, 2016, contingent upon the grantee’s continual employment by the Company as of each vesting installment date. Total stock-based compensation related to this option grant was $6,015 and $6,015 during the three months ended March 31, 2018 and 2017 respectively.

      

Weighted

  

Weighted

  

Intrinsic

 
  

Number

  

average

  

average

  

value

 
  

of

  

exercise

  

life

  

of

 
  

Options

  

price

  

(years)

  

Options

 

Outstanding, January 1, 2017

  550,000  $0.27   9.23     

Granted

  4,500,000   0.11   10.00     

Exercised

  -   -   -     

Expired/Cancelled

  -   -   -     

Outstanding, December 31, 2017

  5,050,000  $0.13   9.24     

Granted

  -   -   -     

Exercised

  -   -   -     

Expired/Cancelled

  (124,996

)

  0.11   8.48     

Outstanding, December 31, 2018

  4,925,004  $0.13   8.24   - 
                 

Exercisable, December 31, 2018

  3,154,171  $0.14   7.87   - 

 

On May 11, 2017 and pursuant to the 2015 Equity Incentive Plan, the Company granted executive officers, directors and employees options to purchase 4,500,000 shares of the Company’s common stock at an exercise price equal to $0.11 per share. Such options shall vest in twelve quarterly installments of 375,000 shares at the end of each quarterly anniversary commencing on June 30, 2017, contingent upon the grantee’s continual employment or service with the Company as of each vesting installment date. Total stock-based compensation related to this option grant was $37,500 and $0 during the three months ended March 31, 2018 and 2017 respectively.

On January 23, 2018 and via the written consent of a majority of its stockholders, the Company increased the number of its authorized common stock from 150,000,000 to 250,000,000 and increased the number of shares of common stock underlying its 2015 Equity Incentive Plan from 6,000,000 to 18,000,000.

The fair value of the stock options issued in 2017 was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%;; volatility: 304.61%;; risk free rate: 2.39%;; term 10 years.

 

  

Number

of

Options

  

Weighted

average

exercise

price

  

Weighted

average

life

(years)

  

Intrinsic

value

of

Options

 

Outstanding, January 1, 2017

  550,000   0.27   9.23     

Granted

  4,500,000   0.11   10.00     

Exercised

  -   -   -     

Expired

  -   -   -     

Outstanding, December 31, 2017

  5,050,000   0.13   9.24     

Granted

  -   -   -     

Exercised

  -   -   -     

Expired

  -   -   -     

Outstanding, March 31, 2018

  5,050,000   0.13   8.99  $99,000 
                 

Exercisable, March 31, 2018

  2,056,250   0.15   8.81  $33,000 

Stock option expense included in stock compensation expense for the year ended December 31, 2018 and 2017 was $162,067 and $173,552, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

 

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock on The OTC Markets of $0.132$0.03 per share as of March 29, 2018 (the last trading day in the three months ended March 31. 2018).December 31, 2018.

 


Restricted Stock Units

 

On February 21, 2018, the Board of Directors of the Company approved grants of 10,750,000 Restricted Stock Units (as defined by the Company’s 2015 Equity Incentive Plan) to certain named officers and directors as well as a key employee of the Company as follows (the “RSU Grants”).Company. The total value of the grantgrants was $4,515,000 and the shares have a thirty-six-month vesting period.

 

TheOn August 2, 2018, the Board of Directors of the Company approved grantsa grant of 250,000 Restricted Stock Units were issued(as defined by the Company’s 2015 Equity Incentive Plan) to the followinga named officers and directors as well as a key employeeofficer of the Company as follows (the “RSU Grants”):Company. The total value of the grant was $17,500 and the shares have a thirty-six-month vesting period. 

NameNo. of RSU'sTitle
Robert Crates250,000Director
Employee250,000Employee(s)
Teymour Farman-Farmaian250,000Director
Andrew Merkatz5,000,000Director, President, CFO
Ilya Nikolayev5,000,000Director, CEO
Total RSU's10,750,000

 

Subject to each recipient continuing as an officer, director, or employee (as appropriate) of the Company, each of the RSU Grants shall vest as follows: beginning on the eighteenth month following the date of the grant, the RSU Grants shall vest ratably over the following eighteen months for a total vesting period of thirty-six months. The RSU Grants shall include a provision for acceleration upon a Corporate Transaction (as defined in the 2015 Equity Incentive Plan).  The RSU Grants to the officers and directors of the Company were approved by each of the non- employee members of the Board of Directors of the Company. Compensation expense will be recognized ratably over the total vesting schedule The Company will periodically adjust the cumulative compensation expense for forfeited awards. As of MarchDecember 31, 2018, the Company has recorded $156,771$1,279,201 in compensation expense related to the February and August 2018 RSU grants.


TAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 and 2017

 

The following table shows a summary of RSU activity for the three months and year ended MarchDecember 31, 2018:

 

     

Weighted

 
 

Number

  

average

 
 

of

  

Grant Date

 
 

Number

of

Units

  

Weighted

average

Grant

Date

Fair Value

  

Units

  

Fair Value

 

Awarded and unvested, December 31, 2017

  -  $-   -  $- 

Granted

  10,750,000   0.42   11,000,000   0.41 

Vested

  -   -   -   - 

Forfeited

  -   - 

Awarded and unvested, March 31, 2018

  10,750,000  $0.42 

Forfeited/cancelled

  (250,000

)

  0.42 

Awarded and unvested, December 31, 2018

  10,750,000  $0.41 

  

Under ASC 718, Compensation-Stock Compensation (“ASC 718”), the Company has measured the value of its February 2018 award as if it were vested and issued on the grant date with a value of $4,515,000 based on the closing price of the Company's stock at the grant date of the RSU's grantsRSU Grant ($0.42 per share). The Company has measured the value of its August 2018 award as if it were vested and issued on the grant date with a value of $17,500 based on the closing price of the Company's stock at the grant date of the RSU Grant ($0.07 per share).

 

Common stock warrants

In February 2017, in connection with a stock purchase agreement, the Company issued to the investor two warrants to purchase up to an additional 500,000 shares of common stock at an exercise price of $0.30 per share and $0.36 per share. Each of the warrants has a term of three years.

In June 2017, in connection with a stock purchase agreement, the Company issued to the investor a warrant to purchase 2,500,000 shares of common stock at an exercise price of $0.20 per share. The warrants have a term of three years.

In June 2017, in connection with the debt refinancing (see Note 11) the Company cancelled 10,926,829 warrants.

In January 2018, the Company agreed to reduce the exercise price of 1,000,000 warrants issued in connection with the February 2017 Stock Purchase Agreement describe above to $0.12 per share.  These warrants were subsequently exercised in January 2018 totaling $120,000.

 

On February 15, 2018 and in connection with the three closings and pursuant to the terms of the Offering described above, the Company issued to the placement agent Common Stock Purchase Warrants (the “Placement Agent Warrants”) to purchase up to 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.15. The Placement Agent Warrants will have a five-year term and will have cashless exercise provisions at all times.

 

In connection with the three closings of the Offering described above, the Company issued Warrants to the Investors to purchase up to 25,000,002 shares of the Company’s Common Stock at a per share exercise price of $0.144. The warrant terms are 5 years expiring in January 2023 and February 2023.

 

On February 20, 2018 and as amended on March 1, 2018, the Company entered into an investment banking advisory agreement with Westpark Capital, Inc. with an initial term of six months. In connection with this agreement, Westpark Capital purchased a three-year common stock warrant to purchase up 1,400,000 share of the Company’s common stock at an exercise price of $.01 per share from the Company for a purchase price of $100. Stock based compensation of $416,006 was recorded during the year ended December 31, 2018. For a total fair value of $416,106.

On March 26, 2018, in conjunction with the purchased 4% interest in Revolution Blockchain, LLC, the company issued three-year common stock warrants to purchase up to 300,000 shares of the Company’s common stock at an exercise price of $0.25 (See note 14). The fair value of the warrants of $35,385 has been eliminated in consolidation. The fair value of the warrants was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%, volatility: 209.65%, risk free rate: 1.90%, term: 3 years.

  

Number

  

Weighted

  

Weighted

  

Intrinsic

 
  

of

  

average

  

average

  

value

 
  

Common Stock

  

exercise

  

life

  

of

 
  

Warrants

  

price

  

(years)

  

Warrants

 

Outstanding, January 1, 2017

  10,926,829  $0.30   4.47     

Granted

  3,500,000   0.24   3.00     

Exercised

  -   -   -     

Canceled

  (10,926,829

)

  0.30   2.47     

Outstanding, December 31, 2017

  3,500,000   0.24   2.35     

Granted

  31,700,002   0.14   4.89     

Exercised

  (1,000,000

)

  0.12   2.01     

Canceled

  -   -   -     

Outstanding, December 31, 2018

  34,200,002  $0.14   3.90  $23,800 
                 

Exercisable, December 31, 2018

  34,200,002  $0.14   3.91  $23,800 

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying warrants and the quoted closing price of the Company's common stock on the OTC Markets of $0.03 per share as of December 31, 2018.

 


 

During the quarter ended MarchTAPINATOR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2018 the Company granted warrants in connection with the offering described above. The warrant terms are 5 years expiring in January, 2023 and February, 2023. During the quarter ended March 31, 2018, the Company agreed to reduce the exercise price of 1,000,000 warrants issued in connection with the February 2017 Stock Purchase Agreement describe above to $0.12 per share. These warrants were subsequently exercised during the quarter ended March 31, 2018.

 

  

Number

of

Common Stock

Warrants

  

Weighted

average

exercise

price

  

Weighted

average

life

(years)

  

Intrinsic

value

of

Warrants

 

Outstanding, January 1, 2017

  10,926,829  $0.30   4.47     

Granted

  3,500,000   0.24   3.00     

Exercised

  -   -   -     

Canceled

  (10,926,829)  0.30   2.47     

Outstanding, December 31, 2017

  3,500,000   0.24   2.35     

Granted

  31,700,002   0.14   4.85     

Exercised

  1,000,000   0.12   1.90     

Canceled

  -   -   -     

Outstanding, March 31, 2018

  34,200,002   0.14  $4.66  $170,800 
                 

Exercisable, March 31, 2018

  34,200,002   0.14  $4.66  $170,800 

Note 14 – Non-Controlling Interest

 

On December 29, 2017, the Company, jointly with an individual investor, organized Revolution Blockchain, LLC (“RB”), a Colorado limited liability company for the purpose of developing, marketing and monetizing games and applications that, other than for payment purposes, write to or read from a blockchain, with ownership interests of 96% and 4% for the Company and the individual investor, respectively.

 

In connection with entering into the RB joint venture with the individual investor, RB issued to the individual investor a four percent (4%) membership interest as a Class A Member of RB for an aggregate purchase price of $100,000. The Class A Members have the right to convert their entire initial capital investment into shares of the Company’s common stock at a conversion price of $0.25 per share. RB shall distribute to the Class A Members no later than (i) forty-five days from the end of each fiscal quarter and (ii) ninety days from the end of each fiscal year, on a pro rata basis, 50% of all net revenue earned by RB in the previous fiscal period, as applicable, until the Class A Members have received two times the Class A Member’s initial capital commitment. At such time the distribution percentage shall be decreased from 50% to 20% of net revenue. For purposes of illustration, for each $100,000 Initial Capital Commitment, a Class A Member shall initially receive a 10% distribution right of Net Revenue until such time as such Class A Member has received $200,000. At such time, such Class A Member’s distribution right shall decrease from 10% to 4% of the Net Revenue.

 

On March 26, 2018, the Company purchased the 4% interest in its Revolution Blockchain, LLC majority-owned subsidiary that it did not otherwise own for a purchase price equal to the following: (i) $100,000 in cash and (ii) the issuance of a three-year common stock warrant to purchase up to 300,000 shares of the Company’s common stock at an exercise price of $0.25. Following the transaction, Revolution Blockchain LLC became a wholly-owned subsidiary of the Company.

Note15— Income Taxes

 

A reconciliation of the U.S. Federal Statutory income tax rate to the Company’s effective income tax rate is as follows:

  

2018

  

2017

 

Federal statutory income tax rate

  23.9

%

  23.9

%

State taxes, net of Federal benefit

  5.5

%

  5.5

%

Valuation allowance

  (29.4

%)

  (29.4

%)

Effective income tax rate

  -

%

  -

%

Net deferred tax assets as of December 31, 2017 and 2016 consist of the following:

  

2018

  

2017

 

Net operating loss carryforwards

 $2,616,900  $1,900,740 

Valuation allowance

  (2,616,900

)

  (1,900,740

)

Net deferred tax asset

 $-  $- 

As of December 31, 2018, the Company has federal net operating loss carryforwards (“NOL’s”) of approximately $10,970,000 that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2034. Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full utilization.

The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. No tax benefit has been reported in the financial statements, since the potential tax benefit is offset by a valuation allowance of the same amount.

During the years ended December 31, 2018 and 2017, the Company increased its valuation allowance by approximately $716,000 and $217,000 due to the continued likelihood that realization of any future benefit from deductible temporary differences and net operating loss carryforwards cannot be sufficiently assumed at December 31, 2018.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affects 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $1,240,650 with a corresponding adjustment to valuation allowance of $1,240,650 as of December 2017.

As of December 31, 2018, open tax years include the period from January 1, 2014 through December 31, 2017.

The Company applies the standard relating to accounting (ASC 740-10) for uncertainty in income taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. There were no significant unrecognized tax benefits recorded as of December 31, 2018 and 2017.

Note 1516 – Subsequent Events

 

The Company has analyzed its operations subsequent to MarchDecember 31, 2018 to the date these condensedaudited consolidated financial statements were issued and has the followingno transactions or events requiring disclosure:disclosure.


PART I. FINANCIAL INFORMATION

 

On May 2, 2018, the holderTAPINATOR, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

June 30,

2019

(Unaudited)

  

December 31,

2018

 
         

Assets

        

Current assets:

        

Cash

 $509,905  $871,312 

Accounts receivable

  331,534   227,803 

Prepaid expenses

  122,250   215,216 

Total current assets

  963,689   1,314,331 
         

Property and equipment, net

  4,477   7,583 

Right-to-use asset, net

  143,011   - 

Software development costs, net

  812,562   878,815 

Investments

  5,000   5,000 

Security deposits

  22,698   22,698 

Total assets

 $1,951,437  $2,228,427 
         

Liabilities and stockholders' equity

        

Current liabilities:

        

Accounts payable and accrued expenses

 $183,519  $145,484 

Due to related parties

  69,237   202,932 

Deferred Revenue

  319,363   481,886 

Lease liability – short term

  52,119   - 

Total current liabilities

  624,238   830,302 
         

Long term liabilities:

        

Lease liability – long term

  88,969   - 

Deferred Revenue

  185,931   229,682 

Total liabilities

  899,138   1,059,984 
         

Commitments and contingencies (see Note 13)

  -   - 
         

Stockholders' Equity:

        

Preferred stock, $0.001 par value, 1,532,500 shares authorized with any series of designation:

        

Series A convertible preferred stock, $0.001 par value; 0 shares and 840 shares designated at June 30, 2019 and December 31, 2018; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018

  -   - 

Series A-1 convertible preferred stock, $0.001 par value; 0 shares and 1,500 shares designated at June 30, 2019 and December 31, 2018; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018

  -   - 

Series B convertible preferred stock, $0.001 par value; 0 shares and 1,854 shares designated at June 30, 2019 and December 31, 2018; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018

  -   - 

Common stock, $0.001 par value; 250,000,000 shares authorized; 87,979,526 shares issued and outstanding at June 30, 2019 and December 31, 2018

  87,980   87,980 

Additional paid-in capital

  12,856,400   12,047,650 

Accumulated deficit

  (11,892,081

)

  (10,967,187

)

Total stockholders' equity

  1,052,299   1,168,443 

Total liabilities and stockholders' equity

 $1,951,437  $2,228,427 

The accompanying Notes are an integral part of our Series B Convertible Preferred Stock (“Series B Stock”) elected to convert 500 of its 1,854 shares of Series B Stock into 4,166,667 shares of the Company’s common stock. The 4,166,667 shares of common stock converted under the Series B Stock were issued without restrictive legend pursuant to Section 4(a) (1) of the Securities Act.these Unaudited Condensed Consolidated Financial Statements. 

 


 

 

TAPINATOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2019

  

2018

  

2019

  

2018

 
                 

Revenue

 $1,345,595  $733,673  $2,158,650  $1,622,361 
                 

Operating expenses:

                

Cost of revenue excluding depreciation and amortization

  429,517   250,412   728,567   543,765 

Research and development

  35,972   78,805   79,515   155,231 

Marketing and public relations

  234,585   109,814   421,223   173,735 

General and administrative

  756,658   704,215   1,511,923   1,619,514 

Amortization of software development costs

  156,303   142,014   341,002   271,023 

Depreciation and amortization of other assets

  1,316   2,397   3,106   5,748 

Total expenses

  1,614,351   1,287,657   3,085,336   2,769,016 
                 

Operating loss

  (268,756)  (553,984)  (926,686)  (1,146,655)
                 

Other (income) expenses

                

Amortization of debt discount

  -   -   -   187,876 

Interest (income) expense, net

  (3,565)  (732)  (1,792)  134,601 

Total other (income) expenses

  (3,565)  (732)  (1,792)  322,477 
                 

Loss before income taxes

  (265,191)  (553,252)  (924,894)  (1,469,132)
                 

Income taxes

  -   3,800   -   3,800 
                 

Net loss

 $(265,191) $(557,052) $(924,894) $(1,472,932)
                 

Net loss per share:

                
                 

Net loss per common share - basic and diluted

 $(0.00) $(0.01) $(0.01) $(0.02)
                 

Weighted average common shares outstanding - basic and diluted

  87,979,526   94,190,787   87,979,526   86,377,007 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


TAPINATOR, INC.

Condensed Consolidated Statement of Stockholders’ Equity

Three and Six months ended June 30, 2019

  

Common Stock

  

Series A

  

Series A-1

  

Series B

  

Additional

      

Non-

     
          

Preferred Stock

  

Preferred Stock

  

Preferred Stock

  

Paid-In-

  Accumulated  controlling     
  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Interest

  

Total

 
                                                 

Balances at December 31, 2018

  87,979,526  $87,980   -  $-   -  $-   -  $-  $12,047,650  $(10,967,187) $-  $1,168,443 
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   404,375   -   -   404,375 
                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (659,703)  -   (659,703)

Balances at March 31, 2019 (unaudited)

  87,979,526   87,980   -   -   -   -   -   -   12,452,025   (11,626,890)  -   913,115 
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   404,375   -   -   404,375 
                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (265,191)  -   (265,191)

Balances at June 30, 2019 (unaudited)

  87,979,526  $87,980   -  $-   -  $-   -  $-  $12,856,400  $(11,892,081) $-  $1,052,299 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


 

TAPINATOR, INC.

Condensed Consolidated Statement of Stockholders’ Equity

UpThree and Six months endedJune 30, 2018

  

Common Stock

  

Series A

  

Series A-1

  

Series B

  

Additional

      

Non-

     
          

Preferred Stock

  

Preferred Stock

  

Preferred Stock

  

Paid-In-

  Accumulated  controlling     
  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Interest

  

Total

 
                                                 

Balances at December 31, 2017

  59,459,303  $59,459   420  $1   1,500  $2   -  $-  $7,535,969  $(7,970,693) $100,000  $(275,262)
                                                 

Issuance of common stock upon exercise of warrants

  1,000,000   1,000   -   -   -   -   -   -   119,000   -   -   120,000 
                                                 

Issuance of common stock for cash at $0.12

  25,000,002   25,000   -   -   -   -   -   -   2,975,000   -   -   3,000,000 
                                                 

Issuance costs from common stock offering

  -   -   -   -   -   -   -   -   (418,213)  -   -   (418,213)
                                                 

Conversion of Series A1 Preferred Stock to Common Stock

  6,000,000   6,000   -   -   (1,500)  (2)  -   -   (5,998)  -   -   - 
                                                 

Conversion Series A Preferred Stock, Senior Debenture and accrued interest to Series B Preferred Stock

  -   -   (420)  (1)  -   -   1,854   2   492,383   -   -   492,384 
                                                 

Issuance of purchased warrants for cash of $100

  -   -   -   -   -   -   -   -   416,106   -   -   416,106 
                                                 

Non-controlling interest buyback

  -   -   -   -   -   -   -   -   -   -   (100,000)  (100,000)
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   204,412   -   -   204,412 
                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (915,880)  -   (915,880)

Balances at March 31, 2018 (unaudited)

  91,459,305   91,459   -   -   -   -   1,854   2   11,318,659   (8,886,573)  -   2,523,547 
                                                 

Conversion of Series B Preferred Stock to Common Stock

  4,166,667   4,167   -   -   -   -   (500)  (1)  (4,166)  -   -   - 
                                                 

Stock based compensation

  -   -   -   -   -   -   -   -   419,764   -   -   419,764 
                                                 

Net loss

  -   -   -   -   -   -   -   -   -   (557,052)  -   (557,052)

Balances at June 30, 2018 (unaudited)

  95,625,972  $95,626   -  $-   -  $-   1,354  $1  $11,734,257  $(9,443,625) $-  $2,386,259 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


TAPINATOR, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

Six Months Ended

June 30

 
  

2019

  

2018

 

Cash flows from operating activities:

        

Net loss

 $(924,894

)

 $(1,472,932

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

        

Amortization of software development costs

  341,002   271,023 

Depreciation and amortization of other assets

  3,106   5,748 

Amortization of debt discount

  -   187,876 

Amortization of original issue discount

  -   51,230 

Stock based compensation

  808,750   1,040,182 

Financing costs

  -   32,142 
(Increase) decrease in assets:        

Accounts receivable

  (103,731

)

  99,648 

Prepaid expenses

  92,966   15,730 

Increase (decrease) in liabilities:

        

Accounts payable and accrued expenses

  38,035   (25,394)

Deferred Revenue

  (206,274

)

  (22,403)

Lease liability, net

  (1,923)  - 

Due to related parties

  (133,695)  (42,162)

Net cash (used in) provided by operating activities

  (86,658)  140,688 
         

Cash flows from investing activities:

        

Capitalized software development costs

  (274,749

)

  (449,034

)

Net cash (used in) investing activities

  (274,749

)

  (449,034

)

         

Cash flows from financing activities:

        

Net proceeds from exercise of common stock warrants

  -   120,000 

Net proceeds from issuance of common stock

  -   2,581,787 

Senior convertible debenture principal payment

  -   (1,142,857)

Senior convertible debenture early payment penalty/financing costs

  -   (57,143)

Buyback of non-controlling interest

  -   (100,000)

Net proceeds from sale of common stock warrants

  -   100 

Net cash provided by financing activities

  -   1,401,887 
         

Net change to cash and cash equivalents

  (361,407)  1,093,541 

Cash at beginning of period

  871,312   246,755 

Cash at end of period

 $509,905  $1,340,296 
         

Supplemental disclosure of cash flow information:

        

Cash paid for interest

 $-  $57,143 

Cash paid for taxes

 $-  $3,800 
         

Non-cash investing and financing activities:

        

Prepaid asset reclassed as transaction costs

 $-  $10,000 

Conversion of Series A Preferred stock, Senior Debenture and accrued interest to Series B Preferred Stock

 $-  $492,384 

Right-to-use asset and lease liability recorded upon the adoption of ASC 842

 $165,096  $- 

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — The Company

Tapinator, Inc. (“ Tapinator” or “ the Company”) develops and publishes category leading apps for mobile platforms, with a significant emphasis on social-casino games. Tapinator’s library includes over 300 titles that, collectively, have achieved over 470 million mobile downloads, including notable properties such as Video Poker Classic, Crypto Trillionaire and Solitaire Dash. Tapinator generates revenues through the sale of branded advertisements and via consumer transactions, including in-app purchases and subscriptions. Founded in 2013, Tapinator is headquartered in New York, with product development and marketing teams located in North America, Europe and Asia.

The Company was originally incorporated on December 9, 2013 in the state of Delaware. On December 12, 2013, the Company merged with Tapinator, Inc., a Nevada Corporation. The Company was the surviving corporation from this merger. On June 16, 2014, the Company executed a securities exchange agreement with the members of Tapinator LLC, a New York limited liability company, whereby the Company issued shares of its common stock to 27,000,002 Sharesthe members of Tapinator LLC in exchange for 100% of the outstanding membership interests of Tapinator LLC. The transaction resulted in a business combination and a change of control within its business purpose. For accounting and financial reporting purposes, Tapinator LLC was considered the acquirer and the transaction was treated as a reverse merger.

The Company currently develops and publishes two types of mobile applications. Tapinator’s Category Leading Apps are unique products, primarily within the social-casino genre, with high production values and significant revenue potential, developed and published selectively based on both original and licensed IP. These titles require significant development investment and have, in the opinion of our management, the potential to become evergreen mobile franchises which can become market leaders within their respective categories. These apps are monetized primarily through consumer app store transactions and, to a lesser extent, through brand advertising. These apps are published primarily under the Tapinator brand.

Tapinator’s Rapid-Launch Games are legacy titles that were developed and published in significant quantity beginning in 2013. These are titles that were built economically and rapidly based on a series of internally developed game engines. These engines were developed within the following game genres: parking, driving, stunts, animal sims, career sims, shooters and fighting. These games are monetized primarily through the sale of branded advertisements and paid downloads. Since our formation, we have compiled a significant library of over 300 such games and, while the Company is not currently developing new Rapid-Launch Games, we believe our existing portfolio will continue to produce a long-tail of revenues over the next several years. However, revenues from our Rapid-Launch Games have been declining over the past two years and we expect them to continue to decline during this revenue tail period. Tapinator’s Rapid-Launch Games are published primarily under the Company’s Tap2Play brand.

Note 2 —Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements and related notes have been prepared in conformity with United States generally accepted accounting principles (“GAAP”). The condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries, Tapinator, LLC, Tap2Play, LLC, and Revolution Blockchain, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

These condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated operations and cash flows for the periods presented.

Reclassifications

Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform to the presentation used in the June 30, 2019, condensed consolidated financial statements.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates include assumptions used in the recognition of revenue, realization of platform and advertising fees and related costs of revenue, long-lived assets, stock-based compensation, and the fair value of other equity and debt instruments.

Revenue Recognition

The Company derives revenue primarily from the three mobile platforms (iOS, Google Play and Amazon) on which it currently markets its mobile games and applications in the form of app store transactions and from various advertising networks in the form of branded advertising placements within its mobile applications.

For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 606. A five-step analysis must be met as outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In accordance with Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company evaluates its agreements with the mobile platforms and advertising networks to determine whether it is acting as the principal or as an agent when selling its games or when selling premium in-game content or advertisements within its games, which it considers in determining if revenue should be reported gross or net. Key indicators that the Company evaluates to reach this determination include:

the terms and conditions of the Company’s contracts with the mobile platforms and ad networks;

the party responsible for determining the type, category and quantity of the methods to generate game revenue;

whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game, transaction, or advertisement;

the party which sets the pricing with the end-user, and has the credit and inventory risk; and

the party responsible for the fulfillment of the game or serving of advertisements and that determines the specifications of the game or advertisement.

Based on the evaluation of the above indicators, the Company has determined that it is generally acting as a principal and is the primary obligor to end-users for its games distributed on the mobile platforms and for advertisements served by the advertising networks and has the contractual right to determine the price to be paid by the player. Therefore, the Company recognizes revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the mobile platforms and advertising networks. The Company records the related platform fees and advertising network revenue share as expenses in the period incurred.

Display Advertising and Offers:

We have contractual relationships with advertising networks for display advertisements and offers served within our games. For these arrangements, we are the principal and our performance obligation is to provide the inventory for advertisements and offers to be displayed within our games. The Company has determined the advertising buyer to be its customer and displaying the advertisements within the mobile games is identified as the single performance obligation. Revenue from advertisements and offers are recognized at the point-in-time the advertisements are displayed in the game or the offer has been completed by the user as the customer simultaneously receives and consumes the benefits provided from these services.

The pricing and terms for all our advertising arrangements are governed by either a master contract or insertion order and generally stipulate payment terms as a specific number of days subsequent to the end of the month, generally ranging from 30 to 60 days. The transaction price in advertising arrangements is generally the product of the number of advertising units delivered (e.g., impressions, offers completed, videos viewed, etc.) and the contractually agreed upon price per advertising unit. The number of advertising units delivered is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting period.

Paid Downloadable Games:

Some of our legacy Rapid-Launch Games are offered as paid downloadable games on certain mobile platforms. For an individual sale of a game with both online and offline functionality, we would typically have three distinct performance obligations; (1) the software license; (2) a right to receive future updates; and (3) online hosting. The software license performance obligation represents the game that is delivered digitally at the time of sale and typically provides access to offline core game content. The future update rights performance obligation would include updates on a when-and-if-available basis such as software patches or updates, and/or additional free content to be delivered in the future. The online hosting performance obligation consists of providing the customer with a hosted connection for online playability. For these legacy Rapid-Launch Games, since we do not provide software updates or additional content, and since we do not host any online content for these games as they are not playable online, the only performance obligation that we recognize is the software license. The sales price allocated to the software license performance obligation is recognized at a point in time upon delivery (which is usually at or near the same time as the booking of the transaction).

Virtual Goods:

Our games allow for players to purchase or otherwise earn in-game currency or other premium in-game content in the form of virtual goods. For purposes of determining when the service has been provided as it relates to virtual goods, we have determined that an implied obligation exists to the paying player to continue displaying the purchased or otherwise earned virtual good over its estimated life or until it is consumed. Accordingly, we categorize our virtual goods as either consumable or durable virtual goods.

Consumable Virtual Goods:

Consumable virtual goods are items such as one-time game boosts consumed at a predetermined time or otherwise have limitations on repeated use. For the sale of consumable virtual goods, we recognize revenue, and the associated costs, as the goods are consumed. Our revenues from consumable virtual goods have been insignificant since the Company’s formation.

Durable Virtual Goods:

Durable virtual goods are items including virtual currency and premium in-game content such as power-ups, skins and equipment that remain in the game for as long as the player continues to play. If we do not have the ability to differentiate revenue attributable to durable virtual goods from consumable virtual goods for a specific game, we recognize revenue and the associated costs on the sale of durable and consumable virtual goods for that game ratably over the estimated average period that paying players typically play that game. We recognize revenue, and the associated costs, from the sale of durable virtual goods ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods.

We have partnered with third party advertising networks to provide rewarded video advertising to players of our games. A rewarded video advertisement enables users to acquire virtual currency, a durable virtual good, in exchange for watching a short video instead of paying cash. For rewarded video advertisements, similar to purchased durable virtual goods, revenue is initially recorded to deferred revenue and then recognized ratably over the estimated average playing period of paying players for the applicable game, which represents our best estimate of the average life of durable virtual goods,


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On a periodic basis, we determine the estimated average playing period for paying players by game or genre, via a representative proxy game from within that specific game. To make this estimate, we examine player data beginning at the time of a player’s first purchase within that game and ending on a date when that paying player is no longer playing the game. To determine when paying players are no longer playing a given game, we measure the populations of paying players (the “daily cohort”) from the date of their first installation of the game and track each daily cohort to understand the number of players from each daily cohort who played the game after their initial purchase. For titles where we have at least 90 days of paying players’ historical usage data on a daily cohort size of at least 100 paying players (“Tracked Titles”), we compute an expected average playing period for paying users using this dataset and applying a curve-fitting model.

For new titles where we do not have requisite paying player data (“Untracked Titles”), and such title is in a genre that is substantially different from one of our existing game genres for which we have Tracked Title estimates, we examine actual retention data for all players from these games for the period between game installation and up to 90 days thereafter, this data is then inputted into a curve-fitting model to estimate an average playing period for these titles. These calculated curves and their associated one-year average playing periods are mapped against the corresponding curves and associated average one-year playing periods for our most similar Tracked Titles. Based on this mapping, the average playing period of paying users for the Tracked Titles is then indexed up or down accordingly, and then applied against the Untracked Titles within the sample.

As of the second quarter of 2019 (our most recent determination date), the estimated weighted average life of our durable virtual goods was 4 months for our Casino & Card games, 2 months for our Role Playing & Arcade games and 2 months for our Rapid-Launch Games. Prior to the change, the weighted average life of the Casino & Card games was 16 months.

While we believe our estimates to be reasonable based on available game player information and based on the disclosed methodologies of larger publicly reporting mobile game companies, we may revise such estimates in the future based on changes in the operational lives of our games, and based on changes in our ability to make such estimates. Any future adjustments arising from changes in the estimates of the lives of these virtual goods would be applied to the then current quarter, and prospectively on the basis that such changes are caused by new information indicating a change in game player behavior patterns compared to historical titles. Any changes in our estimates of useful lives of these virtual goods may result in revenues and associated costs being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.

For the three and six months ended June 30, 2019, as a result of a change in our estimates regarding the average useful lives of certain of our durable virtual goods, we recognized approximately $521,000 of previously deferred mobile game revenue and corresponding platform fee expense of $156,000 resulting in a net increase in income from operations of approximately $365,000 for the periods. This change in estimates impacted our earnings per share by $0.01 and $0.00 for the three and six months ended June 30, 2019, respectively. For the three and six months ended June 30, 2018, there were no change in estimates regarding the average useful lives of durable virtual goods that required adjusting the recognition period of deferred revenue and associated costs in prior periods.

Arrangements with Multiple Performance Obligations: 

For arrangements with multiple performance obligations, we allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which we expect to be entitled in exchange for satisfying each performance obligation, which is based on the standalone selling price. The standalone selling price represents the observable price which we would sell the advertising placement separately in a similar circumstance, to a similar customer.  

On August 7, 2018, we entered into a License Agreement (the “License Agreement”) pursuant to which we granted Licensee the exclusive, worldwide right to localize, publish, distribute and operate one of the Company’s mobile games. The License Agreement represents an Arrangement with Multiple Performance Obligations.

As consideration for the grant of rights to Licensee under the License Agreement, Licensee agreed to make upfront payments to the Company (the “Minimum Guarantee”). The Minimum Guarantee impacts our revenue recognition as it relates to the distinction between functional intellectual property and symbolic intellectual property for licensing arrangements. We are required to make such distinction based on the nature of the license and recognize revenue at a point in time for functional intellectual property and over time for symbolic intellectual property (such as trademarks, brands and character images). The License Agreement also requires that the Company provide specific goods and services in the form of regular software updates.

We have determined the License Agreement includes multiple performance obligations related to functional intellectual property, symbolic intellectual property and software-related services (updates). For these three components, revenue associated with individual performance obligations is recorded separately as they are each distinct obligations. The standalone selling price for each component is determined by using an expected cost plus margin approach. The amounts assigned to each product or services is recognized when the product is delivered and/or when the services are performed. The obligation associated with functional intellectual property is deemed satisfied when we have transferred the software license to Licensee and the Licensee has deployed the intellectual property into the market. The symbolic intellectual property obligations are deemed to be performed over an extended period, whereby revenue is generally recognized over time on a ratable basis over the initial term of the License Agreement. The software-related services obligations (updates) are also deemed to be performed over an extended period, whereby revenue is generally recognized over time, on a ratable basis over the initial term of the License Agreement.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Disaggregation of Revenue:

The following table summarizes revenue from contracts with customers for the three months and six months ended June 30, 2019 and 2018:

  

Three months ended

  

Six months ended

 
  

June

30,

2019

  

June

30,

2018

  

June

30,

2019

  

June

30,

2018

 
                 

Display Ads & Offers (point-in-time revenue)

 $116,524  $291,960  $298,232  $581,055 

Paid Downloadable Games (point-in-time recognition)

  144,798   193,466   315,158   508,863 

Durable Virtual Goods (over-time recognition):

                

In-Game Currency and Premium In-Game Content

  987,077   233,796   1,342,806   491,182 

Rewarded Video Ads

  52,905   14,451   121,138   41,261 

Subscriptions

  22,414   -   37,563   - 

Arrangements with Multiple Performance Obligations (over-time recognition):

                

License Agreement Minimum Guarantee

  21,877   -   43,753   - 

Total Revenue

 $1,345,595  $733,673  $2,158,650  $1,622,361 


The Company reports as a single segment - mobile applications.  In the disaggregation above, the Company categorizes revenue by type, and by over-time or point-in-time recognition    

Accounts Receivable and Allowance for Doubtful Accounts

The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection. As of June 30, 2019 and December 31, 2018, based upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.

Cash Equivalents

For purposes of the Company’s financial statements, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. The Company had no cash equivalents as of June 30, 2019 and December 31, 2018.

Concentrations of Credit Risk

Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit of $250,000. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. As of June 30, 2019, the total amount exceeding such limit was $259,905.

The Company derives revenue from mobile app platforms, advertising networks and licensing which individually may contribute 10% or more of the Company’s revenues in any given year. For the six months ended June 30, 2019, revenue derived from two mobile app platforms comprised 56% of total revenue. For the six months ended June 30, 2018, revenue derived from two mobile app platforms comprised 50% of such period’s total revenue.

As of June 30, 2019, the receivable balance from two mobile app platforms comprised 73% of the Company’s total accounts receivable balance. As of December 31, 2018, the receivable balance from two mobile app platforms comprised 66% of the Company’s total accounts receivable balance and the receivable balance from one advertising network comprised 10% of the Company’s total accounts receivable balance.

Property and Equipment

Property and equipment are stated at cost. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference, less any amount realized from disposition, is reflected in earnings. Property and equipment are depreciated using the straight-line method over their estimated useful lives as follows:

Estimated Useful Life:

Years

Computer equipment

3

Furniture and Fixtures

5

Leasehold improvements

3


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Software Development Costs

In accordance with ASC 985-20, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products for use in our product offerings. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working program design to the point in time that the product is available for general release to customers. Software development costs are amortized on a straight-line basis typically over three years, the estimated economic lives of the products, beginning when the product is placed into service.

The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of its capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable. Software costs incurred prior to establishing technological feasibility are charged to Research and Development expense as incurred.

Impairment of Long-lived Assets

The Company regularly reviews property, equipment, software development costs and other long-lived assets for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Based upon management’s assessment, there was no impairment of the Company’s property and equipment at June 30, 2019 and December 31, 2018. Management has deemed that certain software development costs were impaired at June 30, 2018 and such impairments are more fully described in Note 9.

In general, investments in which the Company owns less than 20% of an entity’s equity interest or does not hold significant influence over the investee are accounted for under the cost method. Under the cost method, these investments are carried at the lower of cost or fair value. The Company periodically assesses its cost method investments for impairment. If determination that a decline in fair value is other than temporary, the Company will write-down the investment and charge the impairment against operations. At June 30, 2019 and December 31, 2018, the carrying value of our investments totaled $5,000.

Derivative Instruments

The Company accounts for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2019 and December 31, 2018, the Company did not have any derivative instruments that were designated as hedges.

Cost of Revenue (excluding amortization of software development costs)

Cost of revenue includes primarily platform and advertising network fees, licensing costs and hosting fees. The Company, along with all mobile application publishers, is required to pay platform fees to Apple, Google and Amazon equal to approximately 30% of gross revenue. The Company is also required to pay a revenue share of approximately 30% to advertising networks and similar service providers.

Stock-Based Compensation

The Company measures the fair value of stock-based compensation issued to employees and non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions), or the fair value of the award (for non-stock transactions), which are considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

Basic and Diluted Net Income (Loss) per Share Calculations

The Company computes per share amounts in accordance with FASB ASC Topic 260 “Earnings per Share” (“EPS”), which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of Common Stock and up to 31,400,002 Shares of Common Stock Underlying Warrantsequivalents outstanding during the periods; however, potential common shares are excluded for periods in which the Company incurs losses, as their effect is anti-dilutive.

For the six months ended June 30, 2019 and 2018, potentially dilutive securities excluded from the computation of basic and diluted net (loss) per share amounted to 49,875,006 and 61,283,335, respectively, consisting of Restricted Stock Units, Common Stock Options and Common Stock Warrants.

Subsequent Events

In accordance with ASC 855 “Subsequent Events” the Company evaluated subsequent events after the balance sheet date through the date of issuance.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, this ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. While we are currently evaluating the impact of the adoption of this ASU, we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all leases. An additional update was issued by FASB in January 2018 to ASC Topic 842. We adopted the standard using the optional transition method by recognizing a cumulative-effect adjustment to the balance sheet at January 1, 2019 and not revising prior period presented amounts. The processes that are in final refinement related to our full implementation of the standard include: i) finalizing our estimates related to the applicable incremental borrowing rate at January 1, 2019 and ii) process enhancements for refining our financial reporting procedures to develop the additional required qualitative and quantitative disclosures required beginning in 2019. We have elected the following practical expedients: i) we have not reassessed whether any expired or existing contracts are or contain leases, ii) we have not reassessed lease classification for any expired or existing leases, iii) we have not reassessed initial direct costs for any existing leases, and iv) it has not separated lease and non-lease components.

Management does not believe that any other recently issued, but not yet effective, accounting standards��if currently adopted would have a material effect on the accompanying consolidated financial statements.

Note 3 — Net Loss Per Share

The Company computes net loss per share by dividing its net loss for the period by the weighted average number of common shares outstanding during the period less the weighted average common shares subject to restrictions imposed by the Company.

  

Three months ended

 
  

June 30,

 
  

2019

  

2018

 

Net loss

 $(265,191

)

 $(557,052

)

Shares used to compute net loss per share:

        

Weighted average common shares outstanding

  87,979,526   94,190,797 

Weighted average common shares subject to restrictions

      

Weighted average shares used to compute basic and diluted net loss per share

  87,979,526   94,190,797 

Net loss per share - basic and diluted

 $(0.00

)

 $(0.01

)

  

Six months ended

 
  

June 30,

 
  

2019

  

2018

 

Net loss

 $(924,894

)

 $(1,472,932

)

Shares used to compute net loss per share:

        

Weighted average common shares outstanding

  87,979,526   86,377,007 

Weighted average common shares subject to restrictions

      

Weighted average shares used to compute basic and diluted net loss per share

  87,979,526   86,377,007 

Net loss per share - basic and diluted

 $(0.01

)

 $(0.02

)


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following warrants to purchase common stock, options to purchase common stock, restricted stock units (“RSUs”) and preferred stock have been excluded from the computation of net loss per share of common stock for the periods presented because including them would have had an anti-dilutive effect: 

  

Six months ended

 
  

June 30,

 
  

2019

  

2018

 

Warrants to purchase common stock

  34,200,002   34,200,002 

Options to purchase common stock

  4,925,004   5,050,000 

RSU’s

  10,750,000   10,750,000 

Series B Preferred Stock

  -   11,283,333 
Total excluded securities  49,875,006   61,283,335 

Note 4 — Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date of identical, unrestricted assets or liabilities.

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

As of June 30, 2019 and December 31, 2018, the Company did not identify any assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC 825, Financial Instruments.

Note 5 — Accounts Receivable                                            

Accounts receivable consisted of the following as of June 30, 2019 and December 31, 2018:

  

June 30,

  

December 31,

 
  

2019

  

2018

 

Accounts receivable

 $331,534  $227,803 

Less: Allowance for doubtful accounts

  -   - 

Accounts receivable, Net

 $331,534  $227,803 

The Company had no bad debts during the six months ended June 30, 2019 and 2018.

Note 6 — Prepaid Expenses

Prepaid expense consisted of the following as of June 30, 2019 and December 31, 2018:

  

June 30,

  

December 31

 
  

2019

  

2018

 

Deferred platform commission fees

 $69,701  $178,692 

Deferred royalties

  3,408   1,157 

Other

  49,141   35,367 

Total Prepaid Expenses

 $122,250  $215,216 

Note 7 — Property and Equipment

Property and equipment consisted of the following as of June 30, 2019 and December 31, 2018.

  

June 30,

2019

  

December 31,

2018

 

Leasehold improvements

 $2,435  $2,435 

Furniture and fixtures

  10,337   10,337 

Computer equipment

  26,496   26,496 

Property and equipment cost

  39,268   39,268 

Less: accumulated depreciation

  (34,791

)

  (31,685

)

Property and equipment, net

 $4,477  $7,583 

During the six months ended June 30, 2019 and 2018, depreciation expense was $3,106 and $4,855, respectively.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 — Right-to-use assets and lease liability

In August, 2016, the Company entered into a lease agreement, whereby the Company agreed to extend the lease for office space in New York, NY, commencing September 1, 2016 and expiring on December 31, 2021 at an initial rate of $4,625 per month with escalating payments.

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. In determining the length of the lease term to its long term lease, the Company determined not to consider an embedded 3 year option primarily due to i) the renewal rate is at future market rate to be determined and ii) Company does not have significant leasehold improvements that would restrict its ability to consider relocation. At lease commencement date, the Company estimated the lease liability and the right of use assets at present value using the Company’s estimated incremental borrowing rate of 7% and determined the initial present value, at inception, of $165,096. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-to-use assets of $165,096, lease liability of $165,096 and eliminated deferred rent of $3,377.

Right-to-use assets is summarized below:

  

June 30,

2019

 

Office lease

 $165,096 

Less accumulated amortization

  (22,085

)

Right-to-use assets, net

 $143,011 

During the six months ended June 30, 2019, the Company recorded $27,729 as lease expense to current period operations.

 

 

PROSPECTUS

              , 2018Lease liability is summarized below:

 


  

June 30,

2019

 

Office lease

 $141,088 

Less: short term portion

  (52,119

)

Long term portion

 $88,969 

 

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.

Other Expenses of Issuance and Distribution.

We are paying all ofMaturity analysis under the selling stockholders’ expenses related to this offering, except that the selling stockholders will pay any applicable underwriting discounts and commissions. The fees and expenses payable by us in connection with this Registration Statement are estimatedlease agreement is as follows:

 

Securities and Exchange Commission Registration Fee

 $

945.21

 

Accounting Fees and Expenses

 $

7,500.00

 

Legal Fees and Expenses

 $40,000.00 

Printing Expenses

 $

None

 

Miscellaneous Fees and Expenses

 $

None

 

Total

 $

48,445.21

 

Six months ended December 31, 2019

 $30,029 

Year ended December 31, 2020

  61,253 

Year ended December 31, 2021

  63,090 

Total

  154,372 

Less: Present value discount

  (13,284

)

Lease liability

 $141,088 

Lease expense for the six months ended June 30, 2019 was comprised of the following:

Operating lease expense

 $27,729 

Short-term lease expense

  - 

Variable lease expense

  - 
  $27,729 

Note 9 — Capitalized Software Development

Capitalized software development costs at June 30, 2019 and December 31, 2018 were as follows:

  

June 30,

2019

  

December 31,

2018

 

Software development cost

 $4,341,176  $4,066,427 

Less: accumulated amortization

  (2,951,993

)

  (2,610,991

)

Less: Impairment of software development cost

  (576,621

)

  (576,621

)

Software development cost, net

 $812,562  $878,815 

During the six months ended June 30, 2019 and 2018, amortization expense related to capitalized software was $341,002 and $271,023 respectively. At December 31, 2018, management deemed that the net software development cost carrying amount related to certain of our released and unreleased mobile games was likely not recoverable, thus the Company took an impairment charge of $320,311 as of December 31, 2018.


 

 TAPINATOR, INC.

Item 14.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 - Investments

Indemnification of Directors and Officers.

 

Section 145In January 2015, the Company made a $5,000 passive investment into Peer5, a Tel Aviv, Israel based internet infrastructure company focused on improving the scalability and efficiency of mobile and internet content delivery. 

Note 11 - Related Party Transactions

License Agreement and Stock Repurchase Agreement

On December 28, 2018, the Company entered into a Games Revenue Share and Stock Repurchase Agreement (the “Agreement”) with TapGames, a Pakistani registered firm (“TapGames”), Khurram Samad, a major shareholder, (the “Stockholder”), Rizwan Yousuf and Tap2Play, LLC, a wholly-owned subsidiary of the General Corporation LawCompany, whereby the Company repurchased 7,646,446 shares (the “Repurchased Shares”) of the StateCompany’s common stock, for a per share purchase price of Delaware provides,$0.02, or an aggregate purchase price of $144,639 as further described below from the Stockholders.

In consideration for the Repurchased Shares, the Company agreed to share all revenue, net of any and all third-party platform fees, generated from the Company’s Rapid-Launch Games identified in general, that a corporation incorporated under the lawsAgreement (the “Subject Games”) with TapGames, an entity in which the Stockholder has an equity interest. Pursuant to the terms of the StateAgreement and effective as of Delaware, as we are, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than a derivative action by or in the rightJanuary 1, 2019, 60% of the corporation) by reason of the fact thatall such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposedrevenue relating to the best interests ofSubject Games will be paid to TapGames with the corporationCompany retaining the remaining 40%. The Company and its Tap2Play subsidiary will retain all intellectual property rights and title to the Subject Games but will not be responsible for any updates or maintenance with respect to the Subject Games, including any criminal actionadvertising or proceeding, had no reasonable causemarketing expenses. The Company has recorded an amount due to believe such person’s conductrelated parties in the amount of $144,639 at December 31, 2018 whereby the Repurchased Shares are paid from net revenue share proceeds. The Company’s remaining balance due on the share repurchase was unlawful. In the case$35,137 and $144,639 as of a derivative action, a Delaware corporation may indemnify any such person against expenses (including attorneys’ fees) actuallyJune 30, 2019 and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made in respect of any claim, issue or matter as to which such person will have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or any other court in which such action was brought determines such person is fairly and reasonably entitled to indemnity for such expenses.December 31, 2018, respectively.

 

We are also permitted to apply for, and currently maintain, insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the General Corporation Law of the State of Delaware would permit indemnification.Game Development

 

Item 15.

As of June 30, 2019 and December 31, 2018, the Company had balances due to related parties, related to software development services, of $29,100 and $43,293, respectively.

Recent Sales of Unregistered Securities.

 

Transactions with PreviousDirector Fees

As of June 30, 2019 and December 31, 2018, the Company had balances due to related parties, related to quarterly director fees, of $5,000 and $15,000, respectively.

Note 12 — Senior Debt HoldersSecured Convertible Debenture

On June 19, 2015, the Company and Hillair Capital Investment L.P. (“Hillair”) entered into a Securities Purchase Agreement, dated June 19, 2015 (the “Purchase Agreement”) pursuant to which the Company issued to Hillair the following (i) $2,240,000 8% Original Issue Discount Senior Secured Convertible Debenture (the “Original Debenture”) which was convertible into shares of the Company’s common stock at a price per share of $.205, (ii) Series A Common Stock purchase warrants (the “Series A Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 and (iii) Series B Common Stock purchase warrants (the “Series B Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $.30 (collectively, the terms of which are referred to herein as the “Original Financing”).

In July 28, 2016, the Company and Hillair entered into an Exchange Agreement (“2016 Exchange Agreement”) to amend and refinance the terms of the $2.24 million 8% Original Issue Discount Senior Secured Convertible Debenture originally issued in June, 2015. Immediately prior to the 2016 Exchange Agreement, the Company owed cash payments to Hillair of $560,000 on October 1, 2016 and $1,120,000 on January 1, 2017 under the Original Debenture.

In July 28, 2016, the Company and Hillair entered into an agreement to amend and refinance the terms of the $2.24 million 8% Original Issue Discount Senior Secured Convertible Debenture originally issued in June, 2015.  Pursuant to the 2016 Exchange Agreement, the following material terms of the Original Financing were amended, altered and/or ratified: (i) the Original Debenture was exchanged in its entirety for the issuance of a new 8% Original Issue Discount Senior Secured Convertible Debenture with an original principal amount of $2,394,000 and an increased conversion price of $0.25 (the “2016 Debenture”), (ii) the issuance of 420 shares of a new Series A Convertible Preferred Stock as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock which may be exercised for up to 1,680,000 shares of Company’s common stock, (iii) the extension of the maturity date of the Series A Warrant from June 22, 2020 until July 28, 2021, (iv) the cancellation of the Series B Warrants in their entirety, (v) the ratification of the Security Agreement executed by the Company with respect to all of its assets (as required by the initial Purchase Agreement and Original Debenture) as continued collateral for the New Debenture as well as the ratification of the Subsidiary Guarantee and Pledge and Security Agreement as such agreements are referenced in the Purchase Agreement and Exchange Agreement, and (vi) the creation of a new right for the Holder, subject to the written consent of the Company, for a $2,100,000 cash investment in the Company with identical terms to the new financing.

 

II-1

In June 2017, the Company and Hillair entered into an amendment agreement (the “2017 Amended Agreement”) to amend and refinance the terms of the 2016 Debenture. Pursuant to the 2017 Amended Agreement, the Company prepaid to Hillair a portion of the outstanding principal on the 2016 Debenture in the amount of $234,000 and all of the accrued interest on the 2016 Debenture through June 30, 2017 in the amount of $191,520. Following such payments, the remaining principal amount of the Holder’s amended 2016 Debenture was $2,160,000 (the “Amended 2016 Debenture”). In addition, the Company and Hillair agreed to reduce the conversion price of the 2016 Debenture from $0.25 to $0.20. The Amended 2016 Debenture iswas due on July 31, 2018, and the Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this debenture at the rate of 8% per annum, payable on each December 31, March 31, July 31, and October 31, thereafter, beginning on December 31, 2017. In June 2017, the Company and Holder also entered into an exchange agreement (the “2017 Exchange Agreement”) to exchange the existing 10,926,829 shares of Series A Common Stock purchase warrants for 1,500 shares of Series A-1 Convertible Preferred Stock.

 

On September 7, 2017, Hillair assigned all of its rights under and relating to the Senior Debenture to HSPL Holdings, LLC (“HSPL”), including the Series A-1 Convertible Preferred Stock.

 

On January 22, 2018, HSPL elected to convert all of the 1,500 shares of Series A-1 Stock into 6,000,000 shares of the Company’s common stock. The 6,000,000 shares of common stock converted under the Series A-1 Preferred Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On February 23, 2018, the Company entered into a Series B Exchange Agreement (the “Series B Exchange Agreement”) with HSPL to amend the terms of the 2017 Amended Agreement. On February 23, 2018, the Company paid to HSPL $1,200,000 in cash for a net reduction of the principal amount of the Amended 2016 Debenture of $1,142,857 after giving effect to a 5% prepayment penalty which resulted in a remaining principal balance of $1,017,143 plus all accrued but unpaid interest under the 2016 Debenture (the “Remaining 2016 Debenture Balance”). Pursuant to the Series B Exchange Agreement, the Remaining 2016 Debenture Balance and the Series A Preferred Stock were exchanged in their entirety (and thus cancelled) for issuance of 1,854 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”) as further described by the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock which may be initially exercised for up to 15,450,000 shares of Company’s common stock, subject to adjustment. The shares of common stock underlying the Series B Preferred Stock are subject to being issued without restrictive legend pursuant to Section 3(a)(9) of the Securities Act, subject to various conditions and limitations. As a result of the Series B Exchange Agreement, the Company eliminated all of its outstanding debt. Each share of the Series B Preferred Stock has a conversion price of $0.12 and a stated value of $1,000. Subject to certain exceptions, in the event the Company issues shares of its common stock at a price below $0.082, the conversion price of the Series B Preferred Stock will be reduced to the price of such issuance. HSPL and any subsequent holders of the Series B Preferred Stock are prohibited from converting the Series B Preferred Stock into more than 9.99% of the Company’s then outstanding number of shares of common stock after giving effect to such conversion.  The shares of Series B Preferred Stock were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act. The shares of common stock underlying the Series B Preferred Stock are subject to being issued without restrictive legend pursuant to Section 3(a)(9) of the Securities Act, subject to various conditions and limitations.

On May 2, 2018, HSPL elected to convert 500 shares of its 1,854 shares of Series B Preferred Stock into 4,166,667 shares of the Company’s common stock. The 4,166,667 shares of common stock converted under the Series B Preferred Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.

On September 7, 2018, the Company repurchased 1,354 shares of the Company’s Series B Preferred Stock from HSPL for a per share purchase price of $270.83, or an aggregate purchase price of $366,707. The repurchased shares represented all of the outstanding shares of the Series B Preferred Stock and, following the transaction, the Company has no Preferred Stock outstanding in any class. Pursuant to the terms of the Series B Preferred Stock, the repurchased shares were convertible into 11,283,333 shares of the Company’s common stock.   The repurchase purchase price represents a per share common stock purchase price of $0.0325, if conversion had occurred.

During the six months ended June 30, 2018, amortization of the debt discount related to the Senior Secured Convertible Debentures was $187,876 and amortization of the original issue discount related to the Senior Secured Convertible Debentures was $51,230. 

Note 13 — Commitments and Contingencies

 

2018 Private PlacementLicense Agreement

On August 7, 2018 (the “Effective Date”), the Company entered into a License Agreement (the “SD License Agreement”), pursuant to which the Company granted Licensee the exclusive, worldwide right to localize, publish, distribute and operate the Company’s mobile game titled Solitaire Dash – Card Game (“Solitaire Dash”). 

As consideration for the grant of rights to Licensee under the SD License Agreement, Licensee agreed to make upfront payments to the Company in the aggregate of $500,000 payable in installments (the “Upfront Payments”). The Company received $200,000 in the six months ended June 30, 2019 and $300,000 in upfront payments in September 2018. In addition, for sales of Solitaire Dash, the SD License Agreement provides an ongoing net revenue share formula which would allow the Company to receive certain percentages of the revenues received by the Licensee based on certain revenue targets in addition to the Upfront Payments.  As part of a separate agreement, the Company agreed to pay the third-party who introduced the Company and Licensee 6.5% of all payments received by the Company under the SD License Agreement. In connection with the SD License Agreement, the Company has recognized cumulative revenue of $226,565 as of June 30, 2019. The remaining balance of deferred revenue, in connection with the SD License Agreement, as of June 30, 2019 and December 31, 2018 amounts to $273,435 and $317,187, respectively.

The SD License Agreement provides for a term of four years from the Effective Date and will automatically renew for subsequent one year periods unless Licensee notifies the Company of its intent to terminate within 90 days before the end of the fourth year or any subsequent renewal period. During the term of the contract, the Company is responsible to maintain and develop updates of Solitaire Dash and provide such versions to the Licensee. Either party may also unilaterally terminate the SD License Agreement under certain circumstances.

Minimum Developer Commitments 

Future developer commitments as of June 30, 2019 were $419,818. These developer commitments reflect the Company’s estimated minimum cash obligations to external software developers (“third-party developers”) to design and develop its software applications but do not necessarily represent the periods in which they will be expensed. The Company advances funds to these third-party developers, in installments, payable upon the completion of specified development milestones.

At June 30, 2019, future unpaid developer commitments were as follows:

  

Future

 
  

Minimum

 
  

Developer

 

Year Ending December 31,

 

Commitments

 

2019

 $209,909 

2020

  209,909 
  $419,818 

The amounts represented in the table above reflect the Company’s minimum cash obligations for the respective calendar years, but do not necessarily represent the periods in which they will be expensed in the Company’s consolidated financial statements.


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14 — Stockholders’ Equity

Common and Preferred Stock

At June 30, 2019 and December 31, 2018, the authorized capital of the Company consisted of 250,000,000 shares of common stock, par value $0.001 per share, and 1,532,500 shares of blank check preferred stock, par value $0.001 per share. At December 31, 2018, the Company had designated 840 shares as Series A Convertible Preferred Stock (“Series A Preferred”), 1,500 shares as Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”), and 1,854 as Series B Convertible Preferred Stock (“Series B Preferred”). On June 27, 2019, the Company filed three Certificates of Elimination with the Secretary of State of the State of Delaware eliminating the designated Series A Preferred, Series A-1 Preferred and Series B Preferred. On January 23, 2018, via written consent of a majority of its stockholders, the Company increased the number of its authorized share of common stock from 150,000,000 to 250,000,000.

In February, 2017, the Company entered into a Stock Purchase Agreement with an individual investor for the purchase of 500,000 shares of the Company's common stock for an aggregate purchase price of $150,000, or $0.30 per share. In connection with the financing, the Company also issued to the investor two warrants. Each warrant has a term of three years and each warrant shall enable the investor to purchase up to an additional 500,000 shares of the Company's common stock at an exercise price of $.30 per share and $.36 per share, respectively. On January 18, 2018, the Company reduced the price per share of the two warrants from $0.36 and $0.30 to $0.12.  Upon the reduction of the exercise price, the shareholder elected to exercise both warrants for an aggregate cash payment of $120,000 for 1,000,000 shares of common stock.

On January 22, 2018, the holder of the Company’s Series A-1 Preferred Stock elected to convert all of the 1,500 shares of such stock into 6,000,000 shares of common stock.

On January 30, 2018, the Companywe consummated the first closing of itsthe Company’s private placement announced on September 7, 2017 (the “Offering”). Specifically, the Company entered into Subscription Agreements (the “Subscription Agreement”) with various investors (collectively, the “Investors”) for the purchase of 11,791,668 shares of the Company’s Common Stock for an aggregate purchase price of $1,415,000, or $0.12 per share. The Company received net proceeds of $1,162,805$1,162,804 from the first closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering and other expenses of the Company. In connection with the first closing and pursuant to the terms of the Offering, the Company issued to the Investors Common Stock Purchase Warrants (the “Warrants”) to purchase up to 11,791,668 shares of the Company’s Common Stock at a per share exercise price of $0.144. The Warrants have five-year terms and do not allow for cashless exercise unless the Company is unable to obtain an effective registration statement with the Securities and Exchange Commission regarding the shares underlying the Warrants, subject to certain conditions.

 

On February 7, 2018, the Companywe consummated the second closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 8,562,499 shares of the Company’s Common Stock for an aggregate purchase price of $1,027,500, or $0.12 per share. The Company received net proceeds of $920,680 from the second closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the second closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 8,562,499 shares of the Company’s Common Stock at a per share exercise price of $0.144.

 

On February 15, 2018, the Companywe consummated the third and final closing of the Offering. Specifically, the Company entered into Subscription Agreements with Investors for the purchase of 4,645,835 shares of the Company’s Common Stock for an aggregate purchase price of $557,500, or $0.12 per share. The Company received net proceeds of $498,303 from the third closing after payment of the placement agent’s 10% cash commission as well as other expenses relating to the Offering. In connection with the third closing and pursuant to the terms of the Offering, the Company issued to the Investors Warrants to purchase up to 4,645,835 shares of the Company’s Common Stock at a per share exercise price of $0.144.

 

On February 23, 2018, the Company entered into a Series B Exchange Agreement with HSPL. Pursuant to the agreement the remaining 2016 debenture balance and the 420 shares of Series A Preferred Stock outstanding, held by HSPL, were exchanged in their entirety (and thus cancelled) for the issuance of 1,854 shares of Series B Convertible Preferred Stock. See Note 12.

On May 2, 2018, the holder of our Series B Convertible Preferred Stock (“Series B Stock”) elected to convert 500 of its 1,854 shares of Series B Stock into 4,166,667 shares of the Company’s common stock.  The 4,166,667 shares of common stock converted under the Series B Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.

On September 7, 2018, we entered into a Stock Repurchase Agreement whereby the Company repurchased 1,354 shares of the Company’s Series B Stock for a per share purchase price of $270.83, or an aggregate purchase price of $366,707. The Repurchased Shares represent all of the outstanding shares of the Series B Stock. Pursuant to the terms of the Series B Stock, the Repurchased Shares were convertible into 11,283,333 shares of the Company’s common stock. The Repurchase Amount represents a per share purchase price of the Conversion Shares, if conversion had occurred, equal to $0.0325. Pursuant to the terms of the Series B Repurchase Agreement, the Repurchased Shares were canceled in full and of no further force or effect as of the Effective Date. After the Effective Date, there are no shares of Series B Stock outstanding and, following the transaction, the Company has no Preferred Stock outstanding in any class.

On December 28, 2018, the Company entered into a Games Revenue Share and Stock Repurchase Agreement with a related party whereby the Company repurchased 7,646,446 shares of the Company’s common stock, for a per share purchase price of $0.02, or an aggregate purchase price of $144,639 from the Stockholder (See Note 11).

Options

In December 2015, the Company approved the 2015 Equity Incentive Plan (the “Plan”). The Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, performance stock awards and other stock-based awards (collectively, “Stock Awards”). The initial Plan provided the Company the ability to grant Stock Awards to its employees, directors and consultants of up to 6,000,000 shares of common stock.

On January 23, 2018 via written consent of a majority of its stockholders, the Company increased the number of shares of common stock underlying its 2015 Equity Incentive Plan from 6,000,000 to 18,000,000.

II-2


 

AlsoTAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of stock option activity under the Company’s 2015 Equity Incentive Plan for the year ended December 31, 2018 and the six months ended June 30, 2019 is as follows:

      

Weighted

  

Weighted

  

Intrinsic

 
  

Number

  

average

  

average

  

value

 
  

of

  

exercise

  

life

  

of

 
  

Options

  

price

  

(years)

  

Options

 

Outstanding, January 1, 2018

  5,050,000  $0.13   9.24   - 

Granted

  -   -   -   - 

Exercised

  -   -   -   - 

Expired/Cancelled

  (124,996

)

 $0.11   8.48   - 

Outstanding, December 31, 2018

  4,925,004  $0.13   8.24   - 

Granted

  -   -   -   - 

Exercised

  -   -   -   - 

Expired/Cancelled

  -   -   -   - 

Outstanding, June 30, 2019

  4,925,004  $0.13   7.74   - 
                 

Exercisable, June 30, 2019

  3,862,504  $0.13   7.48   - 

Stock option expense included in stock compensation expense for the six months ended June 30, 2019 and 2018 was $70,831 and $91,155, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of the Company’s common stock on The OTC Markets of $0.04 per share as of June 28, 2019.

Restricted Stock Units

On February 21, 2018, the Board of Directors of the Company approved grants of 10,750,000 Restricted Stock Units (as defined by the Company’s 2015 Equity Incentive Plan) to certain named officers and directors as well as a key employee of the Company. The total value of the grants was $4,515,000 and the shares have a thirty-six-month vesting period. 

On August 2, 2018, the Board of Directors of the Company approved a grant of 250,000 Restricted Stock Units (as defined by the Company’s 2015 Equity Incentive Plan) to a named officer of the Company. The total value of the grant was $17,500 and the shares have a thirty-six-month vesting period. 

Subject to each recipient continuing as an officer, director, or employee (as appropriate) of the Company, each of the RSU Grants shall vest as follows: beginning on the eighteenth month following the date of the grant, the RSU Grants shall vest ratably over the following eighteen months for a total vesting period of thirty-six months. The RSU Grants shall include a provision for acceleration upon a Corporate Transaction (as defined in the 2015 Equity Incentive Plan).  The RSU Grants to the officers and directors of the Company were approved by each of the non-employee members of the Board of Directors of the Company. Compensation expense will be recognized ratably over the total vesting schedule. The Company will periodically adjust the cumulative compensation expense for forfeited awards. Stock based compensation of $737,919 and $533,021 has been recorded for the six months ended June 30, 2019 and 2018, respectively.

The following table shows a summary of RSU activity for the year ended December 31, 2018 and the six months ended June 30, 2019:

      

Weighted

 
  

Number

  

average

 
  

of

  

Grant Date

 
  

Units

  

Fair Value

 

Awarded and unvested, January 1, 2018

  -  $- 

Granted

  11,000,000   0.41 

Vested

  -   - 

Forfeited/cancelled

  (250,000

)

  0.42 

Awarded and unvested, December 31, 2018

  10,750,000  $0.41 

Granted

  -   - 

Vested

  -   - 

Forfeited/cancelled

  -   - 

Awarded and unvested, June 30, 2019

  10,750,000  $0.41 

Under ASC 718, Compensation-Stock Compensation (“ASC 718”), the Company has measured the value of its February 2018 award as if it were vested and issued on the grant date with a value of $4,515,000 based on the closing price of the Company's stock at the grant date of the RSU Grant ($0.42 per share). The Company has measured the value of its August 2018 award as if it were vested and issued on the grant date with a value of $17,500 based on the closing price of the Company's stock at the grant date of the RSU Grant ($0.07 per share).


TAPINATOR, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Common stock warrants

In February 2017, in connection with a stock purchase agreement, the Company issued to the investor two warrants to purchase up to an additional 500,000 shares of common stock at an exercise price of $0.30 per share and $0.36 per share. Each of the warrants has a term of three years. In January 2018, the Company agreed to reduce the exercise price of the 1,000,000 warrants to $0.12 per share. These warrants were subsequently exercised in January 2018 totaling $120,000.

On February 15, 2018 and in connection with the three closings and pursuant to the terms of the Offering described above, the Company issued to the placement agent a Common Stock Purchase Warrants (the “Placement Agent Warrants”) to purchase up to 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.15. The Placement Agent Warrants will have a five-year term and willhave cashless exercise provisions at all times.

In connection with the three closings of the Offering described above, the Company issued Warrants to the Investors to purchase up to 25,000,002 shares of the Company’s Common Stock at a per share exercise price of $0.144. The warrant terms are 5 years expiring in January 2023 and February 2023.

On February 20, 2018 and as amended on March 1, 2018, the Company entered into an investment banking advisory agreement with Westpark Capital, Inc. with an initial term of six months. In connection with this agreement, Westpark Capital purchased a three-year common stock warrant to purchase up 1,400,000 share of the Company’s common stock at an exercise price of $.01 per share from the Company for a purchase price of $100. Stock based compensation of $416,006 was recorded during the six months ended June 30, 2018. For a total fair value of $416,106.

On March 26, 2018, in conjunction with the purchased 4% interest in Revolution Blockchain, LLC, the company issued three-year common stock warrants to purchase up to 300,000 shares of the Company’s common stock at an exercise price of $0.25. The fair value of the warrants of $35,385 has been eliminated in consolidation. The fair value of the warrants was determined using the Black Scholes option pricing model with the following assumptions: dividend yield: 0%, volatility: 209.65%, risk free rate: 1.90%, term: 3 years.

  

Number

  

Weighted

  

Weighted

  

Intrinsic

 
  

of

  

average

  

average

  

value

 
  

Common Stock

  

exercise

  

life

  

of

 
  

Warrants

  

price

  

(years)

  

Warrants

 

Outstanding, January 1, 2018

  3,500,000  $0.24   2.35   - 

Granted

  31,700,002  $0.14   4.89   - 

Exercised

  (1,000,000

)

 $0.12   2.01   - 

Canceled

  -   -   -   - 

Outstanding, December 31, 2018

  34,200,002  $0.14   3.90  $23,800 

Granted

  -   -   -   - 

Exercised

  -   -   -   - 

Canceled

  -   -   -   - 

Outstanding, June 30, 2019

  34,200,002  $0.14   3.41  $45,200 
                 

Exercisable, June 30, 2019

  34,200,002  $0.14   3.41  $45,200 

The aggregate intrinsic value in the preceding table is calculated as the difference between the exercise price of the underlying warrants and the quoted closing price of the Company's common stock on the OTC Markets of $0.04 per share as of June 28, 2019.

Note 15 – Subsequent Events

The Company has analyzed its operations subsequent to June 30, 2019 to the date these unaudited condensed consolidated financial statements were issued and has no transactions or events requiring disclosure.


                    Units Consisting of Shares

of Common Stock and Warrants

Tapinator, Inc.


ThinkEquity

a division of Fordham Financial Management, Inc.


, 2019


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the fees and expenses, other than underwriting discounts and commissions, payable by us in connection with the offering described in this registration statement. All amounts shown are estimates other than the registration fee, the FINRA filing fee and the listing fee.

SEC registration fee

 $3,696 

FINRA filing fee

  * 

Nasdaq listing fee

  * 

Printing fees and expenses

  * 

Legal fees and expenses

  * 

Registrar and transfer agent fees

  * 

Blue sky fees and expenses

  * 

Accounting fees and expenses

  * 

Miscellaneous expenses

  * 

Total

 $* 

* To be completed by amendment.

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Our restated certificate of incorporation and bylaws provide for indemnification by us of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law.

We are also permitted to apply for, and currently maintain, insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the General Corporation Law of the State of Delaware would permit indemnification.

The underwriter is obligated, under certain circumstances, pursuant to the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us, our officers and directors against liabilities under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

Transactions with Previous Senior Debt Holders

On June 19, 2015, we and Hillair entered into a Securities Purchase Agreement, dated June 19, 2015, pursuant to which we issued to Hillair the following (i) a $2,240,000 8% Original Issue Discount Senior Secured Convertible Debenture (the “Original Debenture”), which was convertible into shares of our common stock at a price per share of $0.205, (ii) Series A Common Stock purchase warrants (the “Series A Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $0.30 and (iii) Series B Common Stock purchase warrants (the “Series B Warrants”) to purchase up to 10,926,829 shares of common stock with an exercise price of $0.30 (collectively, the terms of which are referred to herein as the “Original Financing”). Immediately prior to the Exchange Agreement, we owed cash payments to Hillair of $560,000 on October 1, 2016 and $1,120,000 on January 1, 2017 under the Original Debenture.

On July 28, 2016, we and Hillair entered into an agreement to amend and refinance the terms of the $2.24 million 8% Original Issue Discount Senior Secured Convertible Debenture originally issued in June 2015. Pursuant to the Exchange Agreement, the following material terms of the Original Financing were amended, altered and/or ratified: (i) the Original Debenture was exchanged in its entirety for the issuance of the 2016 Debenture with an original principal amount of $2,394,000 and an increased conversion price of $0.25, (ii) we issued 420 shares of a new Series A Convertible Preferred Stock that were initially exercisable for up to 1,680,000 shares of our common stock, (iii) the maturity date of the Series A Warrants were extended from June 22, 2020 until July 28, 2021, (iv) the Series B Warrants were cancelled in their entirety, (v) the security agreement with respect to all of our assets (as required by the Original Debenture and related securities purchase agreement) was ratified as continued collateral for the 2016 Debenture, and the associated subsidiary guarantees and pledges were also ratified, and (vi) Hillair was granted the right to make a subsequent cash investment of $2,100,000 in our business in exchange for the issuance of an additional debenture in the original principal amount of $2,394,000 and the issuance of 420 shares of preferred stock.

In June 2017, we and Hillair entered into an amendment agreement (the “2017 Amended Agreement”) to amend and refinance the terms of the 2016 Debenture. Pursuant to the 2017 Amended Agreement, we prepaid to Hillair a portion of the outstanding principal on the 2016 Debenture in the amount of $234,000 and all of the accrued interest on the 2016 Debenture through June 30, 2017 in the amount of $191,520. Following such payments, the remaining principal amount of the amended 2016 Debenture was $2,160,000 (the “Amended 2016 Debenture”). In addition, we and Hillair agreed to reduce the conversion price of the 2016 Debenture from $0.25 to $0.20. The Amended 2016 Debenture was due on July 31, 2018, and interest accrued on the aggregate unconverted and outstanding principal amount of the Amended 2016 Debenture at the rate of 8% per annum, payable on each December 31, March 31, July 31, and October 31, beginning on December 31, 2017. In June 2017, we and Hillair also entered into an exchange agreement to exchange the existing 10,926,829 shares of Series A Warrants for 1,500 shares of Series A-1 Convertible Preferred Stock.

On September 7, 2017, Hillair assigned all of its rights under and relating to the Amended 2016 Debenture to HSPL, LLC (“HSPL”), including all of its rights and interests to the Series A-1 Convertible Preferred Stock.

II-1

On January 22, 2018, HSPL elected to convert all of the 1,500 shares of Series A-1 Stock into 6,000,000 shares of our common stock. The 6,000,000 shares of common stock converted under the Series A-1 Preferred Stock were issued without restrictive legend pursuant to Section 4(a)(1) of the Securities Act.

On February 23, 2018, we entered into a Series B Exchange Agreement (the “Series B Exchange Agreement”) with HSPL to amend the terms of the 2017 Amended Agreement. On February 23, 2018, we paid to HSPL $1,200,000 in cash for a net reduction of the principal amount of the Amended 2016 Debenture of $1,142,857, after giving effect to a 5% prepayment penalty, which resulted in a remaining principal balance of $1,017,143, plus all accrued but unpaid interest under the Amended 2016 Debenture (the “Remaining 2016 Debenture Balance”). Pursuant to the Series B Exchange Agreement, the Remaining 2016 Debenture Balance and the remaining unconverted Series A Preferred Stock were exchanged in their entirety (and thus cancelled) for the issuance of 1,854 shares of Series B Convertible Stock (the “Series B Preferred Stock”), which were initially exercisable for up to 15,450,000 shares of our common stock, subject to adjustment. As a result of the Series B Exchange Agreement, we eliminated all of our outstanding debt. Each share of the Series B Preferred Stock had a conversion price of $0.12 and a stated value of $1,000.

Except as otherwise stated, all of the securities described above were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. All of such securities were issued as “restricted securities” in accordance with Rule 144(a)(3) of the Securities Act.

2018 Private Placement

On January 30, 2018, we consummated the first closing of our private placement announced on September 7, 2017 (the “Offering”). Specifically, we entered into Subscription Agreements (the “Subscription Agreement”) with various investors for the purchase of 11,791,668 shares of our common stock for an aggregate purchase price of $1,415,000, or $0.12 per share. We received net proceeds of $1,162,804 from the first closing after payment of the placement agent’s 10% cash commission, as well as other expenses relating to the Offering and our other expenses. In connection with the first closing and pursuant to the terms of the Offering, we issued to the investors common stock purchase warrants (the “2018 Warrants”) to purchase up to 11,791,668 shares of our common stock at a per share exercise price of $0.144. The 2018 Warrants have five-year terms and do not allow for cashless exercise unless there is not an effective registration statement with the SEC regarding the shares underlying the 2018 Warrants, subject to certain conditions.

On February 7, 2018, we consummated the second closing of the Offering. Specifically, we entered into Subscription Agreements with investors for the purchase of 8,562,499 shares of our common stock for an aggregate purchase price of $1,027,500, or $0.12 per share. We received net proceeds of $920,680 from the second closing after payment of the placement agent’s 10% cash commission, as well as other expenses relating to the Offering. In connection with the second closing and pursuant to the terms of the Offering, we issued to the investors 2018 Warrants to purchase up to 8,562,499 shares of our common stock at a per share exercise price of $0.144.

On February 15, 2018, we consummated the third and final closing of the Offering. Specifically, we entered into Subscription Agreements investors for the purchase of 4,645,835 shares of our common stock for an aggregate purchase price of $557,500, or $0.12 per share. We received net proceeds of $498,303 from the third closing after payment of the placement agent’s 10% cash commission, as well as other expenses relating to the Offering. In connection with the third closing and pursuant to the terms of the Offering, we issued to the investors 2018 Warrants to purchase up to 4,645,835 shares of our common stock at a per share exercise price of $0.144.

Also on February 15, 2018 and in connection with the three closings and pursuant to the terms of the Offering, we issued to the placement agent common stock purchase warrants (the “Placement Agent Warrants”) to purchase up to 5,000,000 shares of our common stock at an exercise price of $0.15 per share. The Placement Agent Warrants have a five-year term and have cashless exercise provisions at all times.

 

The Offering concluded on February 15, 2018. In connection with the three closings of the Offering, the Companywe raised gross proceeds of $3,000,000, received net proceeds of $2,581,788, issued 25,000,002 shares of common stock to the Investors,investors, and issued 2018 Warrants to the Investorsinvestors to purchase up to 25,000,002 shares of the Company’s Common Stockour common stock at a per share exercise price of $0.144. The shares

All of common stock sold under the Subscription Agreement and the shares of common stock underlying the Warrants and the Placement Agent Warrantsecurities described above were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D under the Securities Act.promulgated thereunder. All of such sharessecurities were issued relating to the Offering will beas “restricted securities” in accordance with Rule 144(a)(3) of the Securities Act and all of the Investors areinvestors were “accredited investor”investors” as defined by Rule 501(a) of Regulation D under the Securities Act.

 

Other Offerings and Issuances

 

On March 26, 2018, the Companywe purchased thea 4% interest in its Revolution Blockchain,Mobile, LLC, a majority-owned subsidiary, that itwe did not otherwise own at that time for a purchase price equal to the following: (i) $100,000 in cash and (ii) the issuance of a three-year common stock warrant to purchase up 300,000 shares of the Company’sour common stock at an exercise price of $0.25. Following the transaction, Revolution Blockchain,Mobile, LLC will be abecame our wholly-owned subsidiary of the Company. The 300,000 shares of common stock issuable under this warrant will be “restricted securities” as such term is defined in the Securities Act.subsidiary.

 

In June 2017, the Companywe entered into a Stock Purchase Agreementstock purchase agreement with an individual investor for the purchase of 2,000,000 shares of the Company'sour common stock for an aggregate purchase price of $200,000, or $0.10 per share. In connection with this financing, the Companywe also issued to the investor a warrant, which has a term of three years and shall enable the investor to purchase up to an additional 2,500,000 shares of the Company'sour common stock at an exercise price of $.20$0.20 per share.

 

On February 24, 2017, the Companywe entered into a Stock Purchase Agreementstock purchase agreement with an individual investor for the purchase of 500,000 shares of the Company'sour common stock for an aggregate purchase price of $150,000, or $0.30 per share, which was paid in two tranches. In connection with the financing, the Companywe also issued to the investor two warrants. Each warrant has a term of three years and each warrant shall enable the investor to purchase up to an additional 500,000 shares of the Company's restrictedour common stock at an exercise priceprices of $.30$0.30 and $.36,$0.36, respectively. On January 18, 2018, the Companywe agreed to reduce the exercise price of both Warrantswarrants to $0.12. On the same day, the individual elected to exercise both Warrantswarrants for an aggregate cash payment to the Companyus of $120,000. The 500,000 shares issued pursuant to the Stock Purchase Agreement and 1,000,000 shares of common stock issued under the Warrants are “restricted securities” as such term is defined in the Securities Act.

On August 6, 2015, the Company issued 300,000 shares of Common Stock, valued at $57,000, pursuant to an investor relations consulting agreement. On March 14, 2016, the agreement was cancelled and 150,000 shares of the Company’s common stock valued at $28,500 were returned to the Company at which time the shares were cancelled.

On June 18, 2015, pursuant to note conversion agreements dated June 9, 2015, two convertible promissory notes, each with a principal balance of $75,000, were each converted into 300,000 shares of Common Stock (600,000 shares in total). These notes were originally issued in September 2014.

On June 18, 2015, the Company issued 117,981 shares of Common Stock pursuant to the conversion of two convertible promissory notes issued in March and June 2015 with a combined principal balance of $23,950.

On June 18, 2015, the Company issued 149,146 shares of Common Stock pursuant to the conversion of a convertible promissory note with a principal balance of $30,000, originating from the reclassification of a royalty agreement entered into with the Company in December 2014.

On June 18, 2015, the Company issued 246,815 shares of Common Stock pursuant to the conversion of a convertible promissory note issued in April 2015 with a principal balance of $50,000.

On June 18, 2015, pursuant to conversion agreements dated June 9, 2015 between the Company and the holders of promissory notes assumed by the Company as part of a private transaction which occurred in November 2014, such notes were converted into 423,893 shares of Common Stock.

On June 18, 2015, pursuant to exchange agreements dated June 9, 2015 between the Company and the shareholders of then outstanding preferred stock of Tapinator IAF LLC (a wholly-owned subsidiary at such time), such stock was exchanged for 257,833 shares of Common Stock.

On June 18, 2015, pursuant to a conversion agreement dated June 9, 2015 between the Company and the two holders of then outstanding preferred stock, such stock was converted into 36,764 shares of Common Stock.

  

All of the shares of Common Stock set forthsecurities described above were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D underpromulgated thereunder. All of such securities were issued as “restricted securities” in accordance with Rule 144(a)(3) of the Securities Act.

Contingent Rights to Shares Issued for Services

On March 1, 2018, we entered into an amendment to an investment banking advisory agreement with Westpark. In connection with this agreement, Westpark purchased a three-year common stock warrant to purchase up 1,400,000 share of our common stock at an exercise price of $0.01 per share from us for a purchase price of $100. The securities described above were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. Such securities were issued as “restricted securities” in accordance with Rule 144(a)(3) of the Securities Act.

 

II-3

Contingent Rights to Shares Issued for Services

Effective February 21, 2018, the Board of Directors of the Company approved grants of Restricted Stock Units (as defined by the Company’s 2015 Equity Incentive Plan) to the following officers, directors and employees of the Company as follows (the “RSU Grants”):

Name

No. of RSU’s

Robert Crates

250,000

Boris Dimembort

250,000

Teymour Farman-Farmaian

250,000

Andrew Merkatz

5,000,000

Ilya Nikolayev

5,000,000

Subject to each recipient continuing as an officer, director, or employee (as appropriate) of the Company, each of the RSU Grants shall vest as follows: beginning on the eighteenth month following the date of the grant, the RSU Grants shall vest ratably over the following eighteen months for a total vesting period of thirty-six months. The RSU Grants shall include a provision for acceleration upon a Corporate Transaction (as defined in the 2015 Equity Incentive Plan).

On March 1, 2018, the Company entered into an amendment investment banking advisory agreement with Westpark Capital, Inc. with an initial term of six months. In connection with this agreement, Westpark Capital purchased a three-year common stock warrant to purchase up 1,400,000 share of the Company’s common stock at an exercise price of $.01 per share from the Company for a purchase price of $100. All shares of common stock underlying this warrant shall be “restricted securities” as defined by the Securities Act.

Effective May 11, 2017, the Board of Directors of the Company approved options under the Company’s 2015 Equity Incentive Plan to purchase the number of shares of common stock at a per share exercise price of $0.11 to the following officers, directors and employees of the Company as follows (the “Option Grants”):

Name

Shares underlying Option

Brian Chan

500,000

Robert Crates

250,000

Boris Dimembort

500,000

Teymour Farman-Farmaian

250,000

Andrew Merkatz

1,500,000

Ilya Nikolayev

1,500,000

Subject to each recipient continuing as an officer, director, or employee (as appropriate) of the Company, each of the Option Grants shall vest as follows: begin vesting on June 30, 2017 and shall become exercisable ratably in quarterly installments over the next three years. The Option Grants shall include a provision for acceleration upon a Corporate Transaction (as defined in the 2015 Equity Incentive Plan).

In February 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted to Brian Chan, the Company’s Vice President of Finance, an option to purchase 250,000 shares of the Company’s common stock at an exercise price equal to $0.1925 per share. Such option shall vest ratably in twelve quarterly installments at the end of each quarterly anniversary of the grant date, contingent upon the continual service as an employee of the Company.

In January 2016 and pursuant to the 2015 Equity Incentive Plan, the Company granted to Teymour Farman-Farmaian, one of the Company’s independent Board of Directors an option to purchase 300,000 shares of the Company’s common stock at an exercise price equal to $0.33 per share. Such option shall vest ratably in eight quarterly installments at the end of each quarterly anniversary of the grant date, contingent upon the continual service as a member of the Board of Directors as of each vesting installment date.

II-4II-2

 

 

Item 16. Exhibits and Financial Statement Schedules.Schedules

 

(a)

Exhibits. The following exhibits are included herein or incorporated herein by reference:

ExhibitNo.

 

Description

3.1*1.1**

 

Form of Underwriting Agreement.

3.1

Amended and Restated Certificate of Incorporation of Tapinator, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

3.2**3.2

 

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Tapinator, Inc. (amendment no. 1) (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

3.3**3.3

 

Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

3.4**3.4

 

Bylaws of Tapinator, Inc. (incorporated by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

5.13.5

 

OpinionCertificate of Quick Law Group P.C. (filed herewith)Elimination of Series A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 333-22451), filed December 28, 2018 by the Company with the SEC)

10.1*3.6

Certificate of Elimination of Series A-1 Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 333-22451), filed December 28, 2018 by the Company with the SEC)

3.7

Certificate of Elimination of Series B Preferred Stock (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K (File No. 333-22451), filed December 28, 2018 by the Company with the SEC)

4.1

Form of Common Stock Purchase Warrant used in connection with January and February 2018 private placement (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

4.2

Common Stock Purchase Warrant, dated February 15, 2018, issued by Tapinator, Inc. to Westpark Capital, Inc. (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

4.3**

Form of Warrant Agent Agreement (including form of Common Warrant).

4.4**

Form of Underwriter’s Warrant.

5.1**

Opinion of Haynes and Boone, LLP.

10.1

 

Tapinator, Inc. 2015 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.2**10.2

 

Form of Stock Option Agreement under the 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.3**10.3

 

Form of Restricted Stock Unit Award Agreement under the 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.4**10.4

 

Game Engine and Game-Specific Development Agreement, dated June 14, 2014, by and between Tapinator, Inc. and Khurram Samad (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.5**10.5

 

Executive Employment Agreement, dated May 7, 2015, by and between Tapinator, Inc. and Ilya Nikolayev (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.6**10.6

 

Executive Employment Agreement, dated May 7, 2015, by and between Tapinator, Inc. and Andrew Merkatz (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.7**

 

Board of Directors Agreement, dated December 14, 2015, by and between Tapinator, Inc. and Robert Crates

10.8**10.7

 

Board of Directors Agreement, dated December 14, 2015, by and between Tapinator, Inc. and Teymour Farman-Farmaian (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.9**10.8

 

Amendment No. 1 to Executive Employment Agreement, dated August 25, 2016, by and between Tapinator, Inc. and Ilya Nikolayev (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.10**10.9

 

Amendment No. 1 to Executive Employment Agreement, dated August 25, 2016, by and between Tapinator, Inc. and Andrew Merkatz (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.11**10.10

 

Amendment No. 2 to Executive Employment Agreement, dated March 31, 2017, by and between Tapinator, Inc. and Ilya Nikolayev (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

II-3

10.12**10.11

 

Amendment No. 2 to Executive Employment Agreement, dated March 31, 2017, by and between Tapinator, Inc. and Andrew Merkatz (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.13**10.12

 

Games Development and Licensing Agreement, dated April 24, 2017, by and between Tapinator, Inc., Khurram Samad, Rizwan Yousuf and GenITeam Corporation (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.14**10.13

 

First Amendment to Games Development and Licensing Agreement, dated August 31, 2017, by and between Tapinator, Inc., Khurram Samad, Rizwan Yousuf and GenITeam Corporation (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.15**10.14

 

Form of Subscription Agreement used in connection with January and February 2018 private placement (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.16**

Form of Common Stock Purchase Warrant used in connection with January and February 2018 private placement

10.17**

Common Stock Purchase Warrant, dated February 15, 2018, issued by Tapinator, Inc. to Westpark Capital, Inc.

10.18**10.15

 

Series B Exchange Agreement, dated February 23, 2018, by and between Tapinator, Inc. and HSPL Holdings, LLC (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.19**10.16

 

Amendment No. 3 to Executive Employment Agreement, dated April 1, 2018, by and between Tapinator, Inc. and Ilya Nikolayev (incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.20**10.17

 

Amendment No. 3 to Executive Employment Agreement, dated April 1, 2018, by and between Tapinator, Inc. and Andrew Merkatz (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

10.21**

 

Amendment No. 1 to Board of Directors Agreement, dated April 1, 2018, by and between Tapinator, Inc. and Robert Crates

10.22**10.18

 

Amendment No. 1 to Board of Directors Agreement, dated April 1, 2018, by and between Tapinator, Inc. and Teymour Farman-Farmaian (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 (File No. 333-22451), filed April 30, 2018 by the Company with the SEC)

23.110.19

Games Revenue Share and Stock Repurchase Agreement dated December 28, 2018 between Tapinator, Inc., TapGames, Khurram Samad, Rizwan Yousuf and Tap2Play, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 333-22451), filed December 31, 2018 by the Company with the SEC)

21.1*

List of subsidiaries of the registrant

23.1*

 

Consent of Liggett & Webb, P.A. (filed herewith)

23.223.2**

Consent of Haynes and Boone, LLP (included in Exhibit 5.1)

24.1*

 

ConsentPower of Quick Law Group P.C. (includedAttorney (contained in Exhibit 5.1)the signature page to this registration statement)

101.INS++

XBRL Instance Document

101.SCH ++

XBRL Taxonomy Extension Schema Document

101.CAL ++

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF ++

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB ++

XBRL Taxonomy Extension Label Linkbase Document

101.PRE ++

XBRL Taxonomy Extension Presentation Linkbase Document

 


* Filed herewith.

** Filed on April 30, 2018 in connection withTo be filed by amendment.

++XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a report for purposes of sections 11 or 12 of the Registration on Form S-1.Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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Item 17. Undertakings.Undertakings

 

a.     The undersigned registrant hereby undertakes:

 

(1)    To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i)     To include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii)    To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

(iii)   To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

provided, however, that subparagraphs (i), (ii) and (iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement;

(2)   That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.

(3)   To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.

(4)   That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(5)   That, for the purpose of determining liability of the undersigned registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i)     Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii)    Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii)   The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

1.

To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(iv)i.

To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

ii.

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

iii.

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

2.

That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

3.

To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

4.

That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

i.

Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

ii.

Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

iii.

The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

iv.

Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

h.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

i.

The undersigned registrant hereby undertakes that:

1.

For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

2.

For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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(6)     That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-7

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on July 18, 2018.October 31, 2019.

 

TAPINATOR, INC.INC

By:

/s/ Ilya Nikolayev

Name:

Ilya Nikolayev

Title:

Chief Executive Officer and Chairman

 

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that we, theThe undersigned officersdirectors and directorsofficers of Tapinator, Inc., a Delaware corporation, do hereby constitute and appoint Ilya Nikolayev and Andrew Merkatz, and each of them, any of whom may act without joinder of the other, as his or herthe individual’s true and lawful attorney-in-factattorneys-in-fact and agent,agents, with full power of substitution and re-substitution,resubstitution, for himthe person and in his or her name, place and stead, in any and all capacities, to sign this registration statement and any andor all amendments, (includingincluding post-effective amendments exhibits thereto and other documents in connection therewith) to this Registration Statementthe registration statement, including a prospectus or an amended prospectus therein and any subsequent registration statement filed byfor the registrantsame offering that is to be effective upon filing pursuant to Rule 462(b) ofunder the Securities Act, of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith to be filed with the Securities and Exchange Commission,SEC, granting unto said attorney-in-factattorneys-in-fact and agentagents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith,and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent,attorneys-in-fact as agents or hisany of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

Title

Title

Date

   

/s/ Ilya Nikolayev

Chief Executive Officer Executiveand Chairman and

Director (principal executive officer)

July 18, 2018October 31, 2019

Ilya Nikolayev

(Principal Executive Officer)

 
   

/s/ Andrew Merkatz

President, Chief Financial Officer and Director

(principal financial officer)

July 18, 2018October 31, 2019

Andrew Merkatz

Director (Principal Financial Officer)

 
/s/ Brian Chan

Vice President of Finance and Accounting

(principal accounting officer)

July 18, 2018
Brian Chan
   

/s/ Robert CratesBrian Chan

Vice President of Finance and Accounting

Director

July 18, 2018October 31, 2019

Robert CratesBrian Chan

(Principal Accounting Officer)

 
   

/s/ Teymour Farman-Farmaian

Director

July 18, 2018October 31, 2019

Teymour Farman-Farmaian

  
  

 

II-8