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EX-5.1 - Freeze Tag, Inc. | v201749_ex5-1.htm |
EX-23.1 - Freeze Tag, Inc. | v201749_ex23-1.htm |
As
filed with the Securities and Exchange Commission on November 10,
2010
Registration
No. 333-168857
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 3 to
Form
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Freeze
Tag, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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3944
|
20-4532392
|
(State
or other jurisdiction of
incorporation
or organization
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
228
W. Main Street, 2nd Floor
Tustin,
California 92780
|
(714)
210-3850
|
(Address,
including zip code, of registrant’s
principal
executive offices)
|
(Telephone
number, including area code)
|
Craig
Holland, President
Freeze
Tag, Inc.
228 W.
Main Street, 2nd Floor
Tustin,
CA 92780
(714)
210-3850
(Name,
address, including zip code, and telephone
number,
including area code, of agent for service)
COPIES
TO:
Brian A.
Lebrecht, Esq.
The
Lebrecht Group, APLC
9900
Research Drive
Irvine,
CA 92618
(949)
635-1240
Approximate
date of commencement of proposed sale to the public:
From time
to time after this registration statement becomes 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. x
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, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer
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¨
|
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Non-accelerated
filer ¨
|
Smaller
reporting company
|
þ
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(Do not check if a smaller reporting company) |
CALCULATION
OF REGISTRATION FEE
Title of each
class of
securities to be
registered
|
Amount
to be
registered
|
Proposed
maximum
offering price
per share (2)
|
Proposed
maximum
aggregate
offering price
|
Amount of
registration
fee (3)
|
||||||||||||
Common
Stock of certain
selling
shareholders
|
13,338,320 | (1) | $ | 0.10 | $ | 1,333,832 | $ | 95.11 | ||||||||
Total
Registration Fee
|
$ | 95.11 |
(1)
|
Pursuant
to Rule 416 of the Securities Act, this registration statement shall be
deemed to cover additional securities (i) to be offered or issued in
connection with any provision of any securities purported to be registered
hereby to be offered pursuant to terms that provide for a change in the
amount of securities being offered or issued to prevent dilution resulting
from stock splits, stock dividends, or similar transactions and (ii) of
the same class as the securities covered by this registration statement
issued or issuable prior to completion of the distribution of the
securities covered by this registration statement as a result of a split
of, or a stock dividend paid with respect to, the registered
securities.
|
(2)
|
There
is currently no market for our common stock. The offering price
per share for the selling security holders was estimated solely for the
purpose of calculating the registration fee pursuant to Rule 457(a) and
(o) under the Securities Act of 1933, as amended. For purposes
of this calculation we used the last sale price at which the Company sold
shares, which was in a private
placement.
|
(3)
|
Previously
paid by registrant.
|
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 accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the
registration statement filed with the SEC is effective. This
prospectus is not an offer to sell and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
|
Subject
to Completion, Dated November 10, 2010
PROSPECTUS
Up to
13,338,320 shares of
common stock
FREEZE
TAG, INC.
We are hereby registering up
13,338,320 shares, representing approximately 34.17% of our current outstanding
common stock, for sale by 137 of our existing shareholders: This
offering will terminate when all 13,338,320 shares are sold or on _____________,
20__, unless we terminate it earlier.
Investing in the common stock involves
risks. Freeze Tag, Inc. is currently a casual online games publisher
that develops and markets games across the major digital distribution platforms
including PC/Mac downloadable (Web), mobile (iPhone and Smartphone platforms),
and emerging platforms like social networking sites (including Facebook) and
while it is not a development stage company it is a company with limited
operations, limited income, and limited assets, is in unsound financial
condition, and you should not invest unless you can afford to lose your entire
investment. The company’s independent auditors report on its
financial statements for the years ended December 31, 2009 and 2008 expresses
substantial doubt as to its ability to continue as a going
concern. See “Risk Factors” beginning on page 4. Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
All of the common stock registered by
this prospectus will be sold by the selling shareholders on their own behalf at
a price of $0.10 per share. The selling stockholders, and any participating
broker-dealers, may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933, as amended, or the “Securities Act,” and any commissions
or discounts given to any such broker-dealer may be regarded as underwriting
commissions or discounts under the Securities Act.
Our
common stock is not traded on any national securities exchange and is not quoted
on any over-the-counter market. If our shares become quoted on the
Over-The-Counter Bulletin Board, sales will be made at prevailing market prices
or privately negotiated prices. Freeze Tag, Inc. is not selling any of the
shares of common stock in this offering and therefore will not receive any
proceeds from this offering. The selling stockholders have informed
us that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute their common stock.
The
date of this prospectus is __________________, 2010
PROSPECTUS
SUMMARY
FREEZE
TAG, INC.
We are a
casual online games publisher that develops and markets games across the major
digital distribution platforms including PC/Mac downloadable (Web), mobile, and
emerging platforms like social networking sites (including Facebook). We focus
on casual games because of our belief that they appeal to a significant portion
of the population. Although the primary consumers of downloadable casual games
are women over the age of 35, downloadable casual games are enjoyed by people of
all ages – ex-gamer dads, pre-teen kids, teenagers, college students and
grandparents. Thus, we believe the potential market for our games is very
large.
According
to the Casual Games Association’s website (www.casualgameassociation.org),
“casual games” are defined as those games:
“[d]eveloped
for the general public and families, casual games are video games that are fun
and easy to learn and play. The games are platform agnostic, meaning they can be
played via the Internet, PC and Macintosh computers, Facebook, Xbox,
PlayStation, iPhone, Nintendo DS, Wii and even mobile phones and PDA. They’re
nonviolent, arcade-style games that involve puzzles, words, board and card
games, game show and trivia. Popular games are Mahjong, Tetris, Solitaire,
Bejeweled, Mystery Case Files, and Farmville.”
According
to the summary of the Newzoo Games Market Report
(2009), the worldwide market for games delivered through online game portals was
$4.27 billion, with the U.S. comprising 65% of that market ($2.78
billion). In addition, the summary of the Newzoo Games Market Report
(2009) states that the mobile games market in 2009 was $1.84 billion worldwide
with the U.S. comprising 60% of that total. In its Online Games Market Forecast
report, DFC Intelligence, “online game revenue for the PC is expected to exceed
$20 billion in 2015.” Starting with the base of $4.27 billion of
worldwide online game portal revenue (according to the summary of the Newzoo Games Market Report
2009), growth to $20 billion by 2015 indicates a compound average growth rate of
29.4%.
The
demographics of online game portals breaks down into two nearly equal segments
with males comprising 48% and females 52% of those over age 8 who have an
Internet connection and play games. However, according to the Casual Games
Association (Market Report
2007), when it comes to paying, females comprise 74% of those who pay to
play online games.
We have
been successful in developing games that appeal to the online game audience. We
have had a consistent track record of #1 hits:
·
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Can You See What I See?
Curluffle’s Collectibles hit #1 in 2008 (Realarcade.com and
Gamehouse.com) and was in the top 10 for over 8
weeks;
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·
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Mystery Masterpiece: The
Moonstone, hit #1 on August 5, 2009, and was in the top 10 for over
5 weeks (BigFishGames.com);
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·
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The Conjurer, hit #1 on
Gamehouse.com in October 2009;
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·
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Real Detectives, hit #1
on Gamehouse.com on April 21, 2010.
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·
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Unsolved Mystery Club: Amelia
Earhart was #1 on June 24, 2010 (WildGames.com), was #1 July 26,
2010 (Yahoo!® Games).
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Corporate
Information
Freeze
Tag, Inc. was formed in February 2006 in the State of Delaware. In March 2006,
Freeze Tag, LLC, our predecessor which was formed in October 2005, was merged
with and into Freeze Tag, Inc.
Our
corporate headquarters are located at 228 W. Main Street, 2nd Floor, Tustin,
California 92780, and our telephone number is (714) 210-3850. Our website is
http://www.freezetag.com/. Information contained on our website is not
incorporated into, and does not constitute any part of, this
prospectus.
2
The
Offering
Securities
Offered:
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Shares
Offered by
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||
Selling
Shareholders:
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We
are registering 13,338,320 shares for sale by 137 selling shareholders,
all of which are existing holders of our common stock (see list of Selling
Shareholders)
|
3
RISK
FACTORS
Any
investment in our common stock involves a high degree of risk. You
should consider carefully the following information, together with the other
information contained in this prospectus, before you decide to buy our common
stock. If any of the following events actually occurs, our business,
financial condition or results of operations would likely suffer. In
this case, the market price, if any, of our common stock could decline, and you
could lose all or part of your investment in our common stock.
We face
risks in developing our games and products and eventually bringing them to
market. The following risks are material risks that we face. If any
of these risks occur, our business, our ability to achieve revenues, our
operating results and our financial condition could be seriously
harmed.
Risk
Factors Related to the Business of the Company
We have a limited operating history and
limited historical financial information upon which you may evaluate our
performance.
You
should consider, among other factors, our prospects for success in light of the
risks and uncertainties encountered by companies that, like us, are in their
early stages of development. We may not successfully address these
risks and uncertainties or successfully implement our existing and new products
and services. If we fail to do so, it could materially harm our
business and impair the value of our common stock. Even if we
accomplish these objectives, we may not generate the positive cash flows or
profits we anticipate in the future. We were incorporated in Delaware
in February 2006. In March 2006 we merged with Freeze Tag, LLC, our
predecessor, which was formed in October 2005. Unanticipated
problems, expenses and delays are frequently encountered in establishing a new
business and developing new products and services. These include, but
are not limited to, inadequate funding, lack of consumer acceptance,
competition, product development, and inadequate sales and
marketing. The failure by us to meet any of these conditions would
have a materially adverse effect upon us and may force us to reduce or curtail
operations. No assurance can be given that we can or will ever
operate profitably.
If
we are unable to meet our future capital needs, we may be required to reduce or
curtail operations.
To date
we have relied on cash flow from operations, funding from our founders, and debt
financing to fund operations. We have extremely limited cash
liquidity and capital resources. Our cash on hand as of June 30,
2010, was approximately $72,662 (of which $60,791 was restricted and held in
escrow for use for specific purposes related to us being a public company), and
our monthly cash flow burn rate is approximately $55,000. For the six
months ended June 30, 2010, our revenue was $287,573.
Our
future capital requirements will depend on many factors, including our ability
to market our products successfully, cash flow from operations, and competing
market developments. Based on our current financial situation we may
have difficulty continuing our operations at their current level, or at all, if
we do not receive additional financing in the near
future. Consequently, although we currently have no specific plans or
arrangements for financing, we intend to raise funds through private placements,
public offerings or other financings. Any equity financings would
result in dilution to our then-existing stockholders. Sources of debt
financing may result in higher interest expense. Any financing, if
available, may be on unfavorable terms. If adequate funds are not
obtained, we may be required to reduce or curtail operations. We
anticipate that our existing capital resources will not be adequate to satisfy
our operating expenses and capital requirements for any length of
time. However, this estimate of expenses and capital requirements may
prove to be inaccurate.
4
Our
independent registered public accounting firm has expressed doubts about our
ability to continue as a going concern.
As a result of our financial condition,
we have received a report from our independent registered public accounting firm
for our financial statements for the year ended December 31, 2009 that includes
an explanatory paragraph describing the uncertainty as to our ability to
continue as a going concern. In order to continue as a going concern
we must effectively balance many factors and increase our revenues to a point
where we can fund our operations from our sales and revenues. If we
are not able to do this we may not be able to continue as an operating
company.
Because
we face intense competition, we may not be able to operate profitably in our
markets.
The market for casual games is highly
competitive and is becoming more so, which could hinder our ability to
successfully market our products. We may not have the resources,
expertise or other competitive factors to compete successfully in the
future. We expect to face additional competition from existing
competitors and new market entrants in the future. Many of our competitors have
greater name recognition and more established relationships in the industry than
we do. As a result, these competitors may be able to:
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·
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develop
and expand their product offerings more
rapidly;
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·
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adapt
to new or emerging changes in customer requirements more
quickly;
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·
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take
advantage of acquisition and other opportunities more readily;
and
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devote
greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than we can. See “The Company
– The Competition.”
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If
we are unable to maintain brand image or product quality, our business may
suffer.
Our
success depends on our ability to maintain and build brand image for our
existing products, new products and brand extensions. We have no
assurance that our advertising, marketing and promotional programs will have the
desired impact on our products’ brand image and on consumer
preferences.
If
we are unable to attract and retain key personnel, we may not be able to compete
effectively in our market.
Our
success will depend, in part, on our ability to attract and retain key
management, including primarily Craig Holland and Mick Donahoo, technical
experts, and sales and marketing personnel. We attempt to enhance our
management and technical expertise by recruiting qualified individuals who
possess desired skills and experience in certain targeted areas. Our
inability to retain employees and attract and retain sufficient additional
employees, and information technology, engineering and technical support
resources, could have a material adverse effect on our business, financial
condition, results of operations and cash flows. The loss of key
personnel could limit our ability to develop and market our
products.
5
Because
our officers and directors control a large percentage of our common stock, they
have the ability to influence matters affecting our shareholders.
Our
officers and directors beneficially own over 65% of our outstanding common
stock. As a result, they have the ability to influence matters
affecting our shareholders, including the election of our directors, the
acquisition or disposition of our assets, and the future issuance of our
shares. Because they control such shares, investors may find it
difficult to replace our management if they disagree with the way our business
is being operated. Because the influence by these insiders could
result in management making decisions that are in the best interest of those
insiders and not in the best interest of the investors, you may lose some or all
of the value of your investment in our common stock. See “Principal
Shareholders.”
Our
business may be negatively impacted by a slowing economy or by unfavorable
economic conditions or developments in the United States and/or in other
countries in which we operate.
A general
slowdown in the economy in the United States or unfavorable economic conditions
or other developments may result in decreased consumer demand, business
disruption, supply constraints, foreign currency devaluation, inflation or
deflation. A slowdown in the economy or unstable economic conditions
in the United States or in the countries in which we operate could have an
adverse impact on our business results or financial condition.
We may not be
able to effectively manage our growth and operations, which could materially and
adversely affect our business.
We may
experience rapid growth and development in a relatively short period of time by
aggressively marketing our casual games. The management of this
growth will require, among other things, continued development of our financial
and management controls and management information systems, stringent control of
costs, increased marketing activities, the ability to attract and retain
qualified management personnel and the training of new personnel. We
intend to hire additional personnel in order to manage our expected growth and
expansion. Failure to successfully manage our possible growth and
development could have a material adverse effect on our business and the value
of our common stock.
Failure
to renew our existing licenses or to obtain additional licenses could harm our
business.
Some of
our game products are or will be based on or incorporate intellectual properties
that we license from third parties. Our current licenses to use these
properties do not extend beyond terms of two to three years. We may
be unable to renew these licenses on terms favorable to us, or at all, and we
may be unable to secure alternatives in a timely manner. We expect
that licenses we obtain in the future may impose development, distribution and
marketing obligations on us. If we breach our obligations, our
licensors may have the right to terminate the license or change an exclusive
license to a non-exclusive license.
Competition
for licenses may also increase the advances, guarantees and royalties that we
must pay to the licensor, which could significantly increase our
costs. Failure to maintain our existing licenses or obtain additional
licenses with significant commercial value could impair our ability to introduce
new applications or continue our current game products and applications, which
could materially harm our business.
6
If
we fail to develop and introduce new casual games and other applications that
achieve market acceptance, our sales could suffer.
Our
business depends on providing casual games and applications that consumers want
to buy. We must invest significant resources in research and
development to enhance our offering of casual games and other applications and
introduce new games and other applications. Our operating results
would suffer if our games and other applications are not responsive to the
preferences of our customers or are not effectively brought to
market.
The
planned timing or introduction of new casual games is subject to risks and
uncertainties. Unexpected technical, operational, deployment,
distribution or other problems could delay or prevent the introduction of new
casual games, which could result in a loss of, or delay in, revenues or damage
to our reputation and brand. If any of our applications is introduced
with defects, errors or failures, we could experience decreased sales, loss of
customers and damage to our reputation and brand. In addition, new
applications may not achieve sufficient market acceptance to offset the costs of
development. Our success depends, in part, on unpredictable and
volatile factors beyond our control, including customer preferences, competing
applications and the availability of other entertainment
activities. A shift in Internet or mobile device usage or the
entertainment preferences of our customers could cause a decline in our
applications' popularity that could materially reduce our revenues and harm our
business.
We intend
to continuously develop and introduce new games and other applications for use
on next-generation Internet and mobile devices. We must make product
development decisions and commit significant resources well in advance of the
anticipated introduction of new mobile devices. New mobile devices
for which we will develop applications may be delayed, may not be commercially
successful, may have a shorter life cycle than anticipated or may not be
adequately promoted by wireless carriers or the manufacturer. If the
mobile devices for which we are developing games and other applications are not
released when expected or do not achieve broad market penetration, our potential
revenues will be limited and our business will suffer.
If
our independent, third-party developers cease development of new applications
for us and we are unable to find comparable replacements, our competitive
position may be adversely impacted.
We rely
on independent third-party developers to develop some of our game
products which subjects us to the following risks:
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·
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key
developers who work for us may choose to work for or be acquired by our
competitors;
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·
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developers
currently under contract may try to renegotiate our agreements with them
on terms less favorable to us; and
|
|
·
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our
developers may be unable or unwilling to allocate sufficient resources to
complete our applications on a timely or satisfactory basis or at
all.
|
If our
developers terminate their relationships with us or negotiate agreements with
terms less favorable to us, we may have to increase our internal development
staff, which would be a time consuming and potentially costly
process. If we are unable to increase our internal development staff
in a cost-effective manner or if our current internal development staff fails to
create successful applications, our earnings could be materially
diminished.
7
In
addition, although we require our third-party developers to sign agreements
acknowledging that all inventions, trade secrets, works of authorship,
development and other processes generated by them are our property and to assign
to us any ownership they may have in those works, it may still be possible for
third parties to obtain and use our intellectual properties without our
consent.
If
we are unable to reach agreements with third parties to distribute their casual
games through our Internet portal, or if other distributors attract more
significant Internet traffic and gaming, we may be unable to sell, or have only
limited sales, of third party games through our portal and our business may
suffer.
Our games
portal competes with other online distributors of downloadable PC games focused
on the non-core, or casual, segment of the games market. Some of
these distributors have high volume distribution channels and greater financial
resources than us, including Yahoo! Games, MSN Gamezone, Pogo.com and
Shockwave. We expect competition to intensify in this market from
these and other competitors and no assurance can be made that we will be able to
continue to grow our games distribution business or that we will be able to
remain competitive in the downloadable games category in the
future.
Our
industry is experiencing consolidation that may cause us to lose key
relationships and intensify competition.
The
Internet and media distribution industries are undergoing substantial change,
which has resulted in increasing consolidation and formation of strategic
relationships. We expect this consolidation and strategic partnering
to continue. Acquisitions or other consolidating transactions could
harm us in a number of ways, including:
|
•
|
we
could lose strategic relationships if our strategic partners are acquired
by or enter into relationships with a competitor (which could cause us to
lose access to distribution, content, technology and other
resources);
|
|
•
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we
could lose customers if competitors or users of competing technologies
consolidate with our current or potential customers;
and
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•
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our
current competitors could become stronger, or new competitors could form,
from consolidations.
|
Any of
these events could put us at a competitive disadvantage, which could cause us to
lose customers, revenue and market share. Consolidation could also
force us to expend greater resources to meet new or additional competitive
threats, which could also harm our operating results.
We
rely on the continued reliable operation of third parties’ systems and networks
and, if these systems and networks fail to operate or operate poorly, our
business and operating results will be harmed.
Our
operations are in part dependent upon the continued reliable operation of the
information systems and networks of third parties. If these third
parties do not provide reliable operation, our ability to service our customers
will be impaired and our business, reputation and operating results could be
harmed.
8
The
Internet and our network are subject to security risks that could harm our
business and reputation and expose us to litigation or liability.
Online
commerce and communications depend on the ability to transmit confidential
information and licensed intellectual property securely over private and public
networks. Any compromise of our ability to transmit and store such
information and data securely, and any costs associated with preventing or
eliminating such problems, could damage our business, hurt our ability to
distribute products and services and collect revenue, threaten the proprietary
or confidential nature of our technology, harm our reputation, and expose us to
litigation or liability. We also may be required to expend
significant capital or other resources to protect against the threat of security
breaches or hacker attacks or to alleviate problems caused by such breaches or
attacks. Any successful attack or breach of our security could hurt
consumer demand for our products and services, expose us to consumer class
action lawsuits and harm our business.
We
may be unable to adequately protect our proprietary rights.
Our
ability to compete partly depends on the superiority, uniqueness and value of
our intellectual property and technology, including both internally developed
technology and technology licensed from third parties. To the extent
we are able to do so, in order to protect our proprietary rights, we will rely
on a combination of trademark, copyright and trade secret laws, confidentiality
agreements with our employees and third parties, and protective contractual
provisions and licensing agreement. Despite these efforts, any of the
following occurrences may reduce the value of our intellectual
property:
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•
|
Our
applications for trademarks and copyrights relating to our business may
not be granted and, if granted, may be challenged or
invalidated;
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•
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Issued
trademarks and registered copyrights may not provide us with any
competitive advantages;
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•
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Our
efforts to protect our intellectual property rights may not be effective
in preventing misappropriation of our
technology;
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•
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Our
efforts may not prevent the development and design by others of products
or technologies similar to or competitive with, or superior to those we
develop; or
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|
•
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Another
party may obtain a blocking patent and we would need to either obtain a
license or design around the patent in order to continue to offer the
contested feature or service in our
products.
|
We
may be forced to litigate to defend our intellectual property rights, or to
defend against claims by third parties against us relating to intellectual
property rights.
We may be
forced to litigate to enforce or defend our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of other
parties’ proprietary rights. Any such litigation could be very costly
and could distract our management from focusing on operating our
business. The existence and/or outcome of any such litigation could
harm our business.
Interpretation
of existing laws that did not originally contemplate the Internet could harm our
business and operating results.
The
application of existing laws governing issues such as property ownership,
copyright and other intellectual property issues to the Internet is not
clear. Many of these laws were adopted before the advent of the
Internet and do not address the unique issues associated with the Internet and
related technologies. In many cases, the relationship of these laws
to the Internet has not yet been interpreted. New interpretations of
existing laws may increase our costs, require us to change business practices or
otherwise harm our business.
9
It
is not yet clear how laws designed to protect children that use the Internet may
be interpreted, and such laws may apply to our business in ways that may harm
our business.
The Child
Online Protection Act and the Child Online Privacy Protection Act impose civil
and criminal penalties on persons distributing material harmful to minors (e.g.,
obscene material) over the Internet to persons under the age of 17, or
collecting personal information from children under the age of 13. We
do not knowingly distribute harmful materials to minors or collect personal
information from children under the age of 13. The manner in which
these Acts may be interpreted and enforced cannot be fully determined, and
future legislation similar to these Acts could subject us to potential liability
if we were deemed to be non-compliant with such rules and regulations, which in
turn could harm our business.
We
may be subject to market risk and legal liability in connection with the data
collection capabilities of our products and services.
Many of
our products are interactive Internet applications that by their very nature
require communication between a client and server to operate. To
provide better consumer experiences and to operate effectively, our products
send information to our servers. Many of the services we provide also
require that a user provide certain information to us. We post an
extensive privacy policy concerning the collection, use and disclosure of user
data involved in interactions between our client and server
products.
Risks
Related To Our Common Stock
There is no
public trading market for our common stock, which may impede your ability to
sell our shares.
Currently,
there is no trading market for our common stock, and there can be no assurance
that such a market will commence in the future. There can be no
assurance that an investor will be able to liquidate his or her investment
without considerable delay, if at all. If a trading market does
commence, the price may be highly volatile. Factors discussed herein
may have a significant impact on the market price of our
shares. Moreover, due to the relatively low price of our securities,
many brokerage firms may not effect transactions in our common stock if a market
is established. Rules enacted by the SEC increase the likelihood that
most brokerage firms will not participate in a potential future market for our
common stock. Those rules require, as a condition to brokers
effecting transactions in certain defined securities (unless such transaction is
subject to one or more exemptions), that the broker obtain from its customer or
client a written representation concerning the customer’s financial situation,
investment experience and investment objectives. Compliance with
these procedures tends to discourage most brokerage firms from participating in
the market for certain low-priced securities.
10
We
intend to have a market maker apply to list our common stock for trading on the
"Over-the-Counter Bulletin Board," which may make it more difficult for
investors to resell their shares due to suitability requirements.
We intend
to have a market maker apply to list our common stock for trading on the Over
the Counter Bulletin Board (OTCBB). However, there can be no
assurance that we will find a market maker willing to submit an application, or
that such market maker’s application will be accepted. Broker-dealers
often decline to trade in OTCBB stocks given the market for such securities are
often limited, the stocks are more volatile, and the risk to investors is
greater. These factors may reduce the potential market for our common
stock by reducing the number of potential investors. This may make it
more difficult for investors in our common stock to sell shares to third parties
or to otherwise dispose of their shares. This could cause our stock
price to decline.
If
we are unable to pay the costs associated with being a public, reporting
company, we may not be able to commence and/or continue trading on the OTC
Bulletin Board and/or we may be forced to discontinue operations.
We intend
to apply to list our common stock for trading on the OTC Bulletin
Board. We expect to have significant costs associated with being a
public, reporting company, which may raise substantial doubt about our ability
to commence and/or continue trading on the OTC Bulletin Board and/or continue as
a going concern. These costs include compliance with the
Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of
our management, and we will have to rely on outside
consultants. Accounting controls, in particular, are difficult and
can be expensive to comply with.
Our
ability to commence and/or continue trading on the OTC Bulletin Board and/or
continue as a going concern will depend on positive cash flow, if any, from
future operations and on our ability to raise additional funds through equity or
debt financing. If we are unable to achieve the necessary product
sales or raise or obtain needed funding to cover the costs of operating as a
public, reporting company, our common stock may be deleted from the OTC Bulletin
Board and/or we may be forced to discontinue operations.
We
do not intend to pay dividends in the foreseeable future.
We do not
intend to pay any dividends in the foreseeable future. We do not plan
on making any cash distributions in the manner of a dividend or
otherwise. Our Board presently intends to follow a policy of
retaining earnings, if any.
We
have the right to issue additional common stock and preferred stock without
consent of stockholders. This would have the effect of diluting
investors’ ownership and could decrease the value of their
investment.
We have
additional authorized, but unissued shares of our common stock that may be
issued by us for any purpose without the consent or vote of our stockholders
that would dilute stockholders’ percentage ownership of our
company.
11
In
addition, our certificate of incorporation authorizes the issuance of shares of
preferred stock, the rights, preferences, designations and limitations of which
may be set by the Board of Directors. Our certificate of
incorporation has authorized issuance of up to 10,000,000 shares of preferred
stock in the discretion of our Board. The shares of authorized but
undesignated preferred stock may be issued upon filing of an amended certificate
of incorporation and the payment of required fees; no further stockholder action
is required. If issued, the rights, preferences, designations and
limitations of such preferred stock would be set by our Board and could operate
to the disadvantage of the outstanding common stock. Such terms could
include, among others, preferences as to dividends and distributions on
liquidation.
Our common stock
is governed under The Securities Enforcement and Penny Stock Reform Act of
1990.
The Securities Enforcement and Penny
Stock Reform Act of 1990 requires additional disclosure relating to the market
for penny stocks in connection with trades in any stock defined as a penny
stock. The Commission has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Such exceptions include any
equity security listed on NASDAQ and any equity security issued by an issuer
that has (i) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
12
We have
made forward-looking statements in this prospectus, including the sections
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business,” that are based on our management’s
beliefs and assumptions and on information currently available to our
management. Forward-looking statements include the information
concerning our possible or assumed future results of operations, business
strategies, financing plans, competitive position, industry environment,
potential growth opportunities, the effects of future regulation, and the
effects of competition. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate” or similar expressions. These statements
are only predictions and involve known and unknown risks and uncertainties,
including the risks outlined under “Risk Factors” and elsewhere in this
prospectus.
Although
we believe that the expectations reflected in our forward-looking statements are
reasonable, we cannot guarantee future results, events, levels of activity,
performance or achievement. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive
any proceeds from the sale of shares of common stock by the selling stockholders
in this offering.
DETERMINATION
OF OFFERING PRICE
We are
registering up to 13,338,320 shares for resale by existing holders of our common
stock. There is no established public market for the shares we are
registering. Our management has established the price of $0.10 per
share based upon the price at which recent transactions took place, their
estimates of the market value of Freeze Tag, Inc., and the price at which
potential investors might be willing to purchase the shares
offered. Most of the selling shareholders in this offering paid $0.10
per share, and thus will not realize a profit unless and until there is an
active trading market at a higher price. Until such time as a trading
market does develop, because of the uncertainty of our ability to continue as a
going concern, our management does not believe that the price of $0.10 per share
has changed.
13
The following table provides
information with respect to shares offered by the selling
stockholders:
Selling stockholder
|
Shares for
sale
|
Shares before
offering
|
Percent
before
offering
|
Shares
after
offering
|
Percent
after
offering (1)
|
|||||||||||||||
David
Daniels
|
1,327,500 | 1,327,500 | 3.40 | % | -0- | 0.0 | % | |||||||||||||
Bill
Killgallon
|
95,580 | 95,580 | <1 | % | -0- | 0.0 | % | |||||||||||||
Martin
Killgallon
|
95,580 | 95,580 | <1 | % | -0- | 0.0 | % | |||||||||||||
Larry
Killgallon
|
95,580 | 95,580 | <1 | % | -0- | 0.0 | % | |||||||||||||
Jessica
Tams
|
47,790 | 47,790 | <1 | % | -0- | 0.0 | % | |||||||||||||
Mary
Caldarone
|
286,740 | 286,740 | <1 | % | -0- | 0.0 | % | |||||||||||||
Mark
Brashear
|
23,895 | 23,895 | <1 | % | -0- | 0.0 | % | |||||||||||||
Anthony
and Mary L. Caldarone
|
1,155,667 | 1,155,667 | 2.96 | % | -0- | 0.0 | % | |||||||||||||
Klane
Hales
|
770,889 | 770,889 | 1.97 | % | -0- | 0.0 | % | |||||||||||||
Kendall
Hales
|
770,889 | 770,889 | 1.97 | % | -0- | 0.0 | % | |||||||||||||
Kaveh
Matin & Lorraine A. Kaelin (4)
|
385,000 | 385,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ohio
Art (6)
|
1,513,089 | 1,513,089 | 3.87 | % | -0- | 0.0 | % | |||||||||||||
The
Lebrecht Group, APLC (2)(3)
|
1,108,707 | 1,108,707 | 2.84 | % | -0- | 0.0 | % | |||||||||||||
Michael
Southworth (3)
|
1,108,707 | 1,108,707 | 2.84 | % | -0- | 0.0 | % | |||||||||||||
Cardiff
Partners, LLC (3)(5)
|
1,108,707 | 1,108,707 | 2.84 | % | -0- | 0.0 | % | |||||||||||||
Spencer
Coray
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Hays
Investments (7)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Eliseo
Garza, Jr.
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Robert
E McDonald, II
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Sidney
D. Clements
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Kelly
D. McMillan
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Sugar
Pine LLC (8)
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Richard
A & Cynthia Seeley
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Kenneth
J. Rolf
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Sun
West Tr Cust fbo Susan Rae IRA
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Steven
M.& Deborah M. Hall
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Kenneth
A. Bergenthal
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ikuko
Bergenthal
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Entrust
New Dir. Cust fbo Bruce Kalish IRA
|
60,000 | 60,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Hackett
Inv. LLC (9)
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ace
Wealth Mgmt (10)
|
10,000 | 10,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
CapQuest
LLC (11)
|
200,000 | 200,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Hubert,
Jr. Guinn
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % |
14
Selling stockholder
|
Shares for
sale
|
Shares before
offering
|
Percent
before
offering
|
Shares
after
offering
|
Percent
after
offering (1)
|
|||||||||||||||
Steven
R. and Tara L. Orrick
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Rick
Crane
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Marie
M. Moody
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
DKJB
Ltd. LLC (12)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Dennis
Crump
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Dennis
K. Taylor
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Terry
Dorton
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Leonard
& Susan L. Black
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Patrick
A. Judd
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Sherry
F. & Stephen M. Young
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Brad
Val Crawford
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
J.
T. Dodero
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Nicholas
A. Corr
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Daniel
Sternberg SEP-IRA ###-##-####
|
75,000 | 75,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
HS
UT Prop, LLC (13)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Susan
L. Frisbee
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Shamar
LLC (14)
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Bereck,
LP (15)
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Michael
R. Rosanbalm
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Brent
& Crissy McFarland
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
John
W. Duffy
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Jason
N. & Susan Crowther
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
John
A. Dallimore
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Eric Raynor
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Chris
Savittieri
|
120,000 | 120,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Greg
Dunford
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Joseph
Petrini
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ber
Cubs Investments (16)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
James
R. Vollett
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Barry
Guinn
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Todd
Schafer Revocable Trust dtd 06/23/98
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
David
& Susan Drury
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Journey
Research Inc. (17)
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Nobuco
LLC (18)
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Tolleson
Sisters LLC (19)
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
William
Tolleson
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Kenneth
J. Crump
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Brian
& Linda Horrocks
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % |
15
Selling stockholder
|
Shares for
sale
|
Shares before
offering
|
Percent
before
offering
|
Shares
after
offering
|
Percent
after
offering (1)
|
|||||||||||||||
David
Law
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Aaron
Merrill Music
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
RLS
Traditional LLC (20)
|
100,000 | 100,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
BioEnergy
Inv. LLC (21)
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Derek
Raynor
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
David
Christiansen
|
35,000 | 35,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Jason Snyder
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Griselda
Christiansen
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Michael
C. Jonas
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ryan
Bentley
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Shane
Orlando
|
60,000 | 60,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Thayne
D. Wilde
|
18,000 | 18,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
James
L. & Judy B. Clark
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Charles
K. Jr. & Suzie A. Fisher
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Carco
Mgmt Co. (22)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Linda
Buscemi
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Payne
Daniel
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Sunwest
Trust Ed P. Lowry
|
10,000 | 10,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Speechly
Properties (23)
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Gerry
& Bonnie Cruz
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Orlando
Investments (24)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Avn
Poder LLC (25)
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Richard
A & Cynthia Mettler
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Hope
Webber
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
South
& Pamela Smith
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
MJS
Traditional LLC (26)
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Rocky
& Marilyn Samber
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Milling
Machinery, Inc. (27)
|
16,000 | 16,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Clifton
Pinckard
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
DAC
Investments LLC (28)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
LGC
Investments LLC (28)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
JWC
Investments LLC (28)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Rebekah
& Thomas Dyckman
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % |
16
Selling stockholder
|
Shares for
sale
|
Shares before
offering
|
Percent
before
offering
|
Shares
after
offering
|
Percent
after
offering (1)
|
|||||||||||||||
Holly
& Carl Wheat
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Stephen
& Joy Gay
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Irma
& Jerry Fairbourn
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ernest
Valdez
|
75,000 | 75,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Leland
& Myra Rhodes
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Art
Lafeber
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Walter
& Barbara Iwaniec
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
T.
Gregg Talbert
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
John
M. Guynn
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Nathaniel
Loge
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Jo
Lyn Corr
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Cody
Wood
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Daniel
P. Sternberg, PhD. LLC
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Ann
Gregg
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
James
G Gemmell
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Mark
G. Calabrese
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Stacy
Pinckard
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
John
P. Nicholsol
|
120,000 | 120,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Eric
K. Raynor
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Peter
Morkel
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
CLB
Enterp. (29)
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Bryce
Pearson
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Douglas
Hardy
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
James
L. & Judy B. Clark
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Tatum
House, LLC (30)
|
30,000 | 30,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Tracy
Wood Durrant
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Hope
Webber
|
50,000 | 50,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Brian
L. Frandsen
|
25,000 | 25,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
James
f. Walsh
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
APS
IRA David W. Christiansen
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Randy
& Camie Gee
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Rabecca
Williamson
|
20,000 | 20,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Bonnie
M Cruz
|
15,000 | 15,000 | <1 | % | -0- | 0.0 | % | |||||||||||||
Total
|
13,338,320 | 13,338,320 | 34.17 | % | -0- | 0.0 | % |
|
(1)
|
Based
on 39,038,720 shares outstanding.
|
|
(2)
|
The
Lebrecht Group, APLC serves as our legal counsel in connection with this
offering. The
Lebrecht Group, APLC’s sole shareholder and officer is Mr. Brian A.
Lebrecht.
|
|
(3)
|
Shares
are subject to a one year lock-up period pursuant to that certain Lock-Up
Agreement dated November 10, 2009, by and between us and certain of our
shareholders. The one year period does not begin until we are
listed on the OTC Bulletin
Board.
|
17
|
(4)
|
Shares
are held in the name of Allied Anesthesia Medical Group, Inc. Retirement
Trust Dated 1/3/94, FBO Kaveh Matin and Allied Anesthesia Medical Group,
Inc. Retirement Trust Dated 1/3/94, FBO Lorraine A.
Kaelin.
|
|
(5)
|
The
natural persons with dispositive and voting power on behalf of this
selling stockholder are David Walters and Keith Moore. Messrs.
Walters and Moore also own Monarch Bay Associates, LLC, a registered
broker-dealer that assisted us with one of our securities
offerings. Cardiff
Partners received the stock in exchange for services and it does not have
any agreements or understandings, directly or indirectly, with any person
to distribute the
securities.
|
|
(6)
|
The
natural persons with dispositive and voting power on behalf of this
selling stockholder are Bill Killgallon and Larry
Killgallon.
|
|
(7)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is David Hays, Managing
Member.
|
|
(8)
|
The
natural persons with dispositive and voting power on behalf of this
selling stockholder are Alfred K. Roark and Dannalone Roark,
Managers.
|
|
(9)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Sean P. Hackett.
|
|
(10)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Ed P. Lowery.
|
|
(11)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Amy Kramer, Managing
Member.
|
|
(12)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Dennis Taylor,
Manager.
|
|
(13)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Hal P. Shearer,
Manager.
|
|
(14)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Sharon Nielson, Managing
Member.
|
|
(15)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Harvard P. Heaton,
G.P.
|
|
(16)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Scott Berensen.
|
|
(17)
|
The
natural persons with dispositive and voting power on behalf of this
selling stockholder are Harold Reynolds and Beverly
Reynolds.
|
|
(18)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Henrik Jensen.
|
|
(19)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Jeremy Tolleson.
|
|
(20)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Rocky L. Samber,
Manager.
|
|
(21)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Randall Mittelstet,
Manager.
|
|
(22)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Tanner Carver.
|
|
(23)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Craig L. Speechly.
|
|
(24)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Shane Orlando.
|
|
(25)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Tyler Jay Parrish.
|
|
(26)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Marilyn J. Samber.
|
|
(27)
|
Dustin
Pinckard.
|
|
(28)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is David W.
Christiansen.
|
|
(29)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Christina L. Boonzaayer,
Manager.
|
|
(30)
|
The
natural person with dispositive and voting power on behalf of this selling
stockholder is Linda Buscemi,
Member.
|
18
PLAN
OF DISTRIBUTION
We anticipate that a market maker will
apply to have our common stock traded on the over-the-counter bulletin board at
some point in the future, but there is no guarantee this will
occur. If successful, the selling stockholders will be able to sell
their shares referenced under “Selling Security Holders” from time to time on
the over-the-counter bulletin board in privately negotiated sales, or on other
markets, at prevailing market rates. If our common stock is not
listed on the over-the-counter bulletin board, the selling stockholders may sell
their shares in privately negotiated transactions. Any securities
sold in brokerage transactions will involve customary brokers’
commissions.
We will
pay all expenses in connection with the registration and sale of the common
stock by the selling security holders, who may be deemed to be underwriters in
connection with their offering of shares. The estimated expenses of
issuance and distribution are set forth below:
Registration
Fees
|
Approximately
|
$ | 96 | ||||
Transfer
Agent Fees
|
Approximately
|
500
|
|||||
Costs
of Printing and Engraving
|
Approximately
|
500 | |||||
Legal
Fees
|
Approximately
|
30,000 | |||||
Accounting
and Audit Fees
|
Approximately
|
28,000 | |||||
Total
|
$ | 59,096 |
Under the
securities laws of certain states, the shares of common stock may be sold in
such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any
underwriters, brokers, dealers or agents effecting transactions on behalf of the
selling stockholders are registered to sell securities in all fifty
states. In addition, in certain states the shares of common stock may
not be sold unless the shares have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and we
have complied with them. The selling stockholders and any brokers,
dealers or agents that participate in the distribution of common stock may be
considered underwriters, and any profit on the sale of common stock by them and
any discounts, concessions or commissions received by those underwriters,
brokers, dealers or agents may be considered underwriting discounts and
commissions under the Securities Act of 1933.
In
accordance with Regulation M under the Securities Exchange Act of 1934, neither
we nor the selling stockholders may bid for, purchase or attempt to induce any
person to bid for or purchase, any of our common stock while we or they are
selling stock in this offering. Neither we nor any of the selling
stockholders intends to engage in any passive market making or undertake any
stabilizing activity for our common stock. None of the selling
stockholders will engage in any short selling of our securities. We
have been advised that under the rules and regulations of the FINRA, any
broker-dealer may not receive discounts, concessions, or commissions in excess
of 8% in connection with the sale of any securities registered
hereunder.
19
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 100,000,000 shares of common stock, par
value $0.001, and 10,000,000 shares of preferred stock, par value
$0.001. As of the date of this Registration Statement, there are
39,038,720 shares of our common stock issued and outstanding, and no shares of
our preferred stock issued and outstanding.
Common Stock. Each
shareholder of our common stock is entitled to a pro rata share of cash
distributions made to shareholders, including dividend payments. The
holders of our common stock are entitled to one vote for each share of record on
all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of our directors or any other
matter. Therefore, the holders of more than 50% of the shares voted
for the election of those directors can elect all of the
directors. The holders of our common stock are entitled to receive
dividends when and if declared by our Board of Directors from funds legally
available therefore. Cash dividends are at the sole discretion of our
Board of Directors. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of our
liabilities and after provision has been made for each class of stock, if any,
having any preference in relation to our common stock. Holders of
shares of our common stock have no conversion, preemptive or other subscription
rights, and there are no redemption provisions applicable to our common
stock.
Preferred Stock. We
are authorized to issue 10,000,000 shares of preferred stock, par value $0.001
per share, of which no such shares are issued and outstanding. Our
Board of Directors can choose the rights, privileges, and preferences without
further shareholder approval. We have not designated the rights and
preferences of our preferred stock. The availability or issuance of
these shares could delay, defer, discourage or prevent a change in
control.
Dividend Policy. We
have not declared or paid a cash dividend on our capital stock in our last two
fiscal years and we do not expect to pay cash dividends on our common stock in
the foreseeable future. We currently intend to retain our earnings,
if any, for use in our business. Any dividends declared in the future
will be at the discretion of our Board of Directors and subject to any
restrictions that may be imposed by our lenders.
Options, Warrants and Convertible
Securities. As of the date of this Prospectus, we have
outstanding options to purchase 560,000 shares of our common stock issued under
our Freeze Tag 2006 Stock Plan. These options expire in ten (10)
years. Of those options, 45,000 were issued to non-affiliates with an
exercise price of $0.10 per share, and 115,000 were issued to Craig Holland, one
of our officers and directors, with an exercise price of $0.11 per
share. In addition, on May 5, 2010, we issued options to purchase
400,000 shares of our common stock at an exercise price of $0.10 to Jürgen
Goldner for advisory services. Subject to the terms of the advisory
agreement, and continued service to the company, the following vesting schedule
will exist: 100,000 options will vest on the following dates: August
5, 2010, November 5, 2010, February 5, 2011, and May 5, 2011. We also
have one (1) $100,000 principal amount convertible promissory note outstanding,
which is convertible at $0.10 per share. The holder of this note is
the Holland Family Trust, which is not controlled by any of our officers and
directors. Under the note we have received $75,000 of the purchase
price, with the remaining $25,000 to be paid at a later date. We do
not have any other outstanding options, warrants, or other convertible
securities.
20
INTEREST
OF NAMED EXPERTS AND COUNSEL
The
Lebrecht Group, APLC serves as our legal counsel in connection with this
offering. The Lebrecht Group, and/or its employees, own 1,108,707 shares, or
2.84%, of our common stock, and is a selling stockholder in this offering. These
shares are subject to a one year lock-up period pursuant to that certain Lock-Up
Agreement dated November 10, 2009, by and between us and certain of our
shareholders. The one year period does not begin until we are listed on the OTC
Bulletin Board.
21
DESCRIPTION
OF BUSINESS
We are in
the business of acquiring or developing and publishing casual games. We obtain
games through three main sources: licenses, creation of original games, and the
use of third-party developers. Most of the games with which we are involved are
published in one or more of three platforms, or methods of distribution. These
platforms are PC/Mac downloads, mobile, and other emerging platforms like social
gaming sites.
Developing
Casual Games
We acquire and develop games through
licensing arrangements, the creation of our own original games, and through the
use of third-party game developers.
Licensed
Games
We may develop a game around a well
known brand pursuant a license agreement from the owner of that brand. For
example, we have a license agreement with the Ohio Art Company that allowed us
to develop and distribute a game around their Etch A Sketch® brand. In exchange
for the license, we pay a royalty to the Ohio Art Company based on our revenues
from that product.
Our cost
to develop a “licensed game” is the same as our cost to develop Freeze Tag
original game plus royalty payments to the licensor, some of which may be paid
in the form of non-refundable up-front royalty advances. The costs
involved in developing original content games can range from $25,000 to $150,000
depending on the platform (iPhone vs. PC) and complexity of the game (simple
puzzle vs. complex adventure genre). The average cost to develop an iPhone game
is $50,000. The average cost to develop a PC/Mac game is
$100,000. For a “licensed game” in addition to these development
costs we usually have a royalty payment owed to the licensor of the intellectual
property, which is usually 10% to 20% of the revenue collected from the
game. At times we pay a portion of this royalty in the form of an
up-front, non-refundable royalty advance, which typically is in the range of
$5,000 to $20,000, but varies by game and is negotiated on a case-by-case basis
with the owner of the intellectual property. Our gross
profit margins may be lower on a licensed game compared to an original game
because of the royalty payment we pay to the licensor, which is usually 10% to
20% of the revenue from such game, but the sales can be much higher because of
the recognition of the licensed title or brand by the casual game
consumer. Brand names that are familiar to a casual game consumer
create a sense of trust and familiarity that often increases
sales.
In the past, our licensed games
included Etch a Sketch®, Concentration, Nertz, Can You See What I See?, and Can
You See What I See? Dream Machine. Going forward (2010), we have current
licensing agreements with Ohio Art Company (Etch A Sketch) and CMG Worldwide
(Amelia Earhart).
Freeze
Tag Original Content
We have
created, and will continue to create, original games to put in our
portfolio. We usually hire one or more contract engineers on a
“work-for-hire” basis to create the game for us, and we pay that engineer or
engineers a fixed fee for their work, known as a development
fee. This development fee can range from $15,000 to as much as
$75,000, depending on the amount and complexity of the work
involved. When we distribute the game, all of the revenues are ours
to keep, unless we have negotiated a revenue share (or royalty) with the
contract engineer(s). The costs involved in developing Freeze Tag original
content games can range from $25,000 to $150,000, depending on the development
platform (iPhone vs. PC) and complexity of the game (simple vs.
complex). The average cost to develop an iPhone game is $50,000. The
average cost to develop a PC/Mac game is $100,000. Generally, iPhone games are
less expensive to develop than PC/Mac games because less programming and artwork
are required.
Our gross profit margins are usually
highest when we distribute our own original content, but we also assume all of
the risk because we have paid to develop the game in advance, without knowing
whether it will be a success or not. In addition, because there is no existing
brand associated with an original game, we have to create the market for the
game ourselves.
Our original content games are Mystery Masterpiece ™: The
Moonstone, Unsolved
Mystery Club™: Amelia Earhart, The Conjurer (rights sold to
Real Networks, and Real
Detectives (rights sold to Real Networks). We are currently working on
the next games in the Mystery
Masterpiece (Woman in White) and Unsolved Mystery Club (Ancient
Astronauts™) series, and we anticipate launching both games in 2010.
22
Publishing
Third-Party Developer Titles
We often have a variety of independent
developers working with us to build licensed and original titles for us. During
the course of our working relationship, these developers sometimes bring a
concept or a partially finished game to us for consideration. If we believe the
title has merit and the potential to generate significant revenues, then we will
contract with the developer to finish the game to our specifications. We will
guide them through the development process and, most often, we will own certain
intellectual property rights to the finished game. If we don’t own the game
code, then we will at least own significant components of the intellectual
property such as the name or character likeness.
Third
party developers are attracted to working with us because we provide them
creative guidance to ensure their game is market-ready, development funds to
help them finish their game, and marketing expertise and distribution
relationships to get their game to market and create an ongoing revenue stream.
These developers often underestimate how much time and money is required in
order to complete development of a game. They approach us to help them fund the
completion of their game (usually an amount far less than the cost for Freeze
Tag to develop an original title), in exchange for a percentage of the revenue
generated by the game over a period of time and the transfer of certain
intellectual property rights to us.
The risks
are lower with third party games because the amount of upfront money required
tends to be less than if we were developing the entire game. On occasion, there
are games that are 90% finished when they come to us and they only require a
small amount of development money to complete. In these circumstances, we can
purchase rights in or ownership of a game or portion of the intellectual
property (such as the name of the game) in exchange for very little
out-of-pocket costs. However, the gross margin is lower than the margin
generated by original titles because the developer not only shares in the risk
(by having incurred a greater portion of the development costs themselves), but
also generally receives a royalty on the back end, usually 20% to 50% of net
sales.
Compared
to the costs incurred by in-house development projects, our development costs
involved in creating games by third party developers are generally low due to
the fact that typically when developers bring products to us for publishing
consideration, they have already completed or partially completed developing the
game. Therefore, we only incur partial development costs in order to acquire
distribution rights to publish the third party title. These costs are usually
associated with “finishing” final stages of development, which range anywhere
from $5,000 to $25,000 per title.
Our third-party developer titles are
Xango Tango (we own the
Intellectual Property (IP)), Paper Chase (we own the IP),
and Letter Lab (we own
the IP). Our 3rd Party Published Titles (games that we have published on behalf
of other developers) include High School Dreams, Secrets of Great
Art, Chameleon Gems, Pets Fun House, Secrets of Margrave Manor, Mevo and the
Grooveriders, Mystery Stories, Berlin Nights, Emoticons, and Fishing Craze.
Distributing
Casual Games
Once a game is developed, we distribute
it through one of three methods. The majority of our games are downloaded onto a
PC or Mac computer over the Internet. A smaller but growing percentage of our
games are distributed over the iPhone. We do not yet distribute our games
through a social networking platform, such as Facebook, however we are currently
developing a game for that type of distribution.
Try-before-you-buy
All of our games are available for a
limited period of time for free. This is the standard format in the industry,
and applies to all three of our methods of distribution. Once required to
purchase a game, the purchase price ranges from $2.99 to $19.99. On (industry)
average, 1% of the users purchase a game after they try it. Our games are
purchased by an average of 4% to 5% of the users who try it.
23
PC/Mac
Downloadable Distribution
All of our games are available for PC
or Mac download.
Most of the time, our customers find
our games through a game website, such as www.bigfishgames.com or some other
retail site such as www.amazon.com. Our distribution partners include, but are
not limited, the following: Yahoo!, MSN Games, Amazon.com, Big Fish Games,
SteamExent/Verizon, Apple, Game House, Shockwave, and Oberon.
Mobile
Distribution
At the current time, Apple is leading
the way in mobile gaming devices with its iPhone. There are thousands of
applications for the iPhone. Our Etch A Sketch® application was one of the first
500 applications introduced at the same time as the iPhone, so we have been
working with Apple since the launch of the iPhone. Unlike many of the companies
developing for iPhone, Apple has assigned us our own developer relations
manager, and they often contact us directly about developing new Etch A Sketch
iterations for new iPhone releases in different territories. We anticipate that
this market will undergo extreme growth in the near future.
Other
Emerging Methods of Distribution
We do not
currently have a game that is distributed on a social networking site, such as
Facebook or MySpace. However, we are currently working on game
designs, and are enabling our Etch A Sketch® iPhone App to be Facebook
connected, as well as our Mystery Masterpiece™:
Moonstone iPhone App. We are very encouraged by this market
because of its potential size; for example, Farmville, a game about
running a virtual farm, has amassed millions active players since it
was introduced in June 2009. We are also in the process of
integrating social networking marketing techniques into our iPhone/iPad games in
which players will be able to link to a page on a social networking site, such
as Facebook or MySpace, by clicking on a button within the game. This type of
integration is sometimes referred to as “connect” as in “Facebook Connect.” We
are still evaluating the prospect of developing games that will be launched and
distributed entirely through social networking sites by creating game design
concepts and exploring ideas. We do not have a launch date in mind
for any of these products which are in “pre-production” phase at this point in
time.
Business
Strategy
Our strategy is to first develop and
publish original casual game content on the high growth platforms and devices
such as PC/Mac digital downloads and flash HD, smartphone (iPhone and Android),
mobile internet devices (such as tablets) and social networking sites. According
to a recent NPD report, in 2009, for the first times games sold via digital
channels were close to equal the number of units sold through traditional retail
outlets. Based on this trend, digital distribution appears to be the wave of the
future for the games market. We have been riding that wave since our inception.
New, powerful mobile internet devices such as smartphones (Apple iPhone and
Android phones) and tablets (iPad) are new platforms that emerged as high
growth, legitimate digital distribution channels for games and entertainment. As
consumers continue to take up these mobile internet devices and consider them
essential tools, the corresponding markets for digital entertainment created
specifically for them are positioned to experience rapid adoption and
growth.
In addition to attacking the high
growth devices and digital distribution channels, we are creating original
intellectual property. Wherever possible, we own registered trademark protection
for properties we develop. As the digital markets evolve, there are and will
continue to be many competitors who will imitate successful game properties. We
are investing in trademark protection to create game brands and protect them.
For example, we have received preliminary approval from the United States Patent
and Trademark office to register Unsolved Mystery, Unsolved Mystery Club and
Ancient Astronauts for all gaming platforms. These marks will enable us to
defend against copycats who may try to incorporate these terms into their game
titles.
24
Our
Production Process – How Do We Make a Game?
We have
learned that establishing and following a rigid process is essential to
producing commercially successful products, regardless of the platform. The
process all begins with the creative development process. The chart below
describes the approach we use to filter ideas and make final decisions on which
games we will actually produce. After choosing the game that we will focus on,
we write a detailed design document. A thorough design document insures that all
of those involved in the creation of the game have a common reference source
throughout the production process. Also critical to producing high quality
games, a test plan accompanies every design document. Not only do we test for
bugs, but also we test the game for usability. Since most casual gamers do not
want to read instructions, it is critical that the finished game be easy to play
by just pointing and clicking at objects on the screen. This is the way most
casual gamers discover games.
As a
publisher and developer of games, we have developed expertise in three core
aspects of game production. These core competencies help to give us a
competitive advantage in the industry. They are listed below, with the resulting
benefit also identified.
1.
|
Create
High Quality Products (including art and sound assets). Benefit: Provides
high value to distribution partners and consumers, resulting in increased
downloads and purchases.
|
2.
|
Maintain
Flexible Engineering Tools and Processes. Benefit: Decreases
time-to-market delivery of
products.
|
3.
|
Minimize
Risk by doing the following: 1) selecting proven genres, 2) keeping
development costs low, and 3) modifying designs “on the fly” based on
consumer feedback. Benefit: Increases the number of games released per
year and decreases reliance on any one title’s success, ultimately
improving return on investment for each
game.
|
25
How
Long Does it Take to Develop a Casual Game?
We use a team of development
professionals located all over the world, including South America and
Europe. We use a development methodology referred to as agile
development, which focuses on short development and feedback cycles, leading to
shortened development times. Because of this, our costs are reduced,
and the availability of an almost unlimited number of engineers and programmers
makes our development time approximately 5 months. This is a big
competitive advantage.
The
Casual Games Market
The
Casual Games Association
The Casual Games Association is the
international trade association for casual games professionals. The association
has more than 4,000 paid members, including gaming executives, publishers, and
developers. The association hosts conferences and publishes research reports on
the industry. Craig Holland, our CEO, is currently serving as a Founding Advisor
to the CGA. This has been extremely beneficial to the company. Mr. Holland’s
close ties to the association provides access to information and partnerships,
and opportunities that might not otherwise be available. Their website is
(http://casualgamesassociation.org/).
The following statistics are published
by the Casual Games Association:
|
·
|
the
global market for casual games was $2.25 billion in 2007, and is expected
to grow 20% per year in established
markets;
|
|
·
|
an
estimated 200 million people are playing casual games over the Internet
each month in
2007;
|
26
|
·
|
in
2007, 49% of casual game players were men, and 51% were
women. However, in that year, women accounted for 74% of paying
casual game players.
|
|
·
|
in
2007, casual game players who paid for a subscription averaged 7 to 15
hours of playing per week. The heaviest times were right after
dinner from 7pm – 9pm, and during lunch hours from 11am –
2pm.
|
|
·
|
in
2007, the average play time was short, from five minutes to 20 minutes –
though it was common for people to play one game after another for many
hours.
|
The
Competition
Publishers
Casual
game industry publishers typically provide funding, development guidance and
distribution for casual games for online, retail and mobile
platforms. Some of the largest casual game publishers
are:
Zynga, San Francisco,
California
Playdom, Mountain View, CA
(recently acquired by Disney)
6waves, Hong Kong
Big Fish Games Seattle,
Washington
GameHouse Partners Seattle,
Washington
iWin San Francisco,
California
Chillingo, United
Kingdom
Ngmoco, San Francisco,
California
Iplay (Oberon Media) Seattle,
Washington & NYC
PlayFirst San Francisco,
California
PopCap Games Seattle,
Washington
Sandlot Games Bothell,
Washington
Distributors
Casual
game industry online, retail and mobile distributors typically provide
aggregation services for retail distributors. Some online distributors provide
tools and services for online retailers to assist them in interfacing with
consumers. According to the CGA's 2007 Market Report, some of the largest casual
game distributors and retailers of casual games are:
Online
Retailers (Portals)
Big Fish Games Seattle,
Washington
RealGames Seattle,
Washington
Oberon Media Seattle,
Washington & NYC
Amazon.com Seattle,
Washington
WildTangent Redmond,
Washington
Exent (Verizon Games on
Demand) Tel Aviv, Israel
Shockwave San Francisco,
California
Yahoo! Games Santa Monica,
California
Brick
and Mortar Distributors
Activision Santa Monica,
California
27
Encore USA Los Angeles,
California
Focus Multimedia England,
UK
Brick
and Mortar Retailers
Gamestop Grapevine,
Texas
Wal-Mart Bentonville,
Arkansas
Best Buy Minneapolis,
Minnesota
Target Minneapolis,
Minnesota
Our
Intellectual Property
Our
intellectual property is an essential element of our business. We use a
combination of trademark, patent, copyright, trade secret and other intellectual
property laws, confidentiality agreements and license agreements to protect our
intellectual property. We have also registered a number of domain names, which
we believe will be important to the branding and success of our games. Our
employees and independent contractors are required to sign agreements
acknowledging that all inventions, trade secrets, works of authorship,
developments and other processes generated by them on our behalf are our
property, and assigning to us any ownership that they may claim in those works.
Despite our precautions, it may be possible for third parties to obtain and use
without consent intellectual property that we own or license. Unauthorized use
of our intellectual property by third parties, and the expenses incurred in
protecting our intellectual property rights, may adversely affect our
business.
We intend
to register ownership of software copyrights in the United States as well as
seek registration of various trademarks associated with the Company’s name and
casual games that we will develop.
In
addition, many of our applications are based on or incorporate intellectual
properties that we license from third parties. We have both exclusive and
non-exclusive licenses to use these properties for terms of up to three years.
Our licensed brands include, among others, Etch A Sketch®, Amelia Earhart, and
Nertz. Our licensors include a number of well-established video game publishers
and major media companies, including The Ohio Art Company and Nertz
Company.
In addition to attacking the high
growth devices and digital distribution channels, we are creating original
intellectual property. Wherever possible, we own registered trademark protection
for properties we develop. As the digital markets evolve, there are and will
continue to be many competitors who will imitate successful game properties. We
are investing in trademark protection to create game brands and protect them.
For example, we have received preliminary approval from the United States Patent
and Trademark office to register Unsolved Mystery, Unsolved Mystery Club and
Ancient Astronauts for all gaming platforms. These marks will enable us to
defend against copycats who may try to incorporate these terms into their game
titles.
From time
to time, we may encounter disputes over rights and obligations concerning
intellectual property. While we believe that our product and service offerings
do not infringe the intellectual property rights of any third party, we cannot
assure you that we will prevail in any intellectual property dispute. If we do
not prevail in such disputes, we may lose some or all of our intellectual
property protection, be enjoined from further sales of the applications
determined to infringe the rights of others, and/or be forced to pay substantial
royalties to a third party.
28
Our
Employees
We have 10 employees and/or contractors
working in our office, 2 of which are our officers, 2 of which are engaged in
production, publishing and development, and 1 of which is engaged in
administrative functions. We have a team of over 40 engineers,
artists, and developers available to us on an independent contract basis around
the world.
ORGANIZATION
WITHIN LAST FIVE YEARS
Freeze
Tag, Inc. was formed in February 2006 in the State of Delaware. In
March 2006, Freeze Tag, LLC, our predecessor which was formed in October 2005,
was merged with and into Freeze Tag, Inc.
DESCRIPTION
OF PROPERTY
Our executive offices are located in
Tustin, California, at 228 W. Main Street, 2nd Floor, Tustin, CA
92780. Our office space is approximately 2,000 square feet and the
lease is month-to-month at a rate of $2,000 per month.
LEGAL
PROCEEDINGS
We are
not a party to or otherwise involved in any legal proceedings.
In the
ordinary course of business, we are from time to time involved in various
pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon our financial condition and/or results
of operations. However, in the opinion of our management, other than
as set forth herein, matters currently pending or threatened against us are not
expected to have a material adverse effect on our financial position or results
of operations.
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheet as of June 30, 2010 (Unaudited) and December 31, 2009 and
2008
|
F-2
|
|
Statements
of Operations of Freeze Tag, Inc., for the Six Months Ended June 30, 2010
and 2009 (Unaudited) and the Years Ended December 31, 2009 and
2008
|
F-3
|
|
Statement
of Shareholders’ Equity (Deficit) for the Six Months Ended June 30, 2010
(Unaudited) and the Years Ended December 31, 2009 and 2008
|
F-5
|
|
Statements
of Cash Flows of Freeze Tag, Inc., for the Six Months Ended June 30, 2010
and 2009 (Unaudited) and the Years Ended December 31, 2009 and
2008
|
F-4
|
|
Notes
to Financial Statements
|
F-6
|
29
SELECTED
FINANCIAL DATA
Freeze Tag, Inc.
|
For the Years Ended
December 31,
|
||||||||
2009
|
2008
|
||||||||
Statement of Operations
Data:
|
|||||||||
Total
revenues
|
$ | 865,429 | 583,372 | ||||||
Net
income (loss)
|
(233,933 | ) | (128,456 | ) | |||||
Balance Sheet Data:
|
|||||||||
Current
assets
|
$ |
350,966
|
389,030
|
||||||
Total
assets
|
527,252 | 520,088 | |||||||
Current
liabilities
|
723,502 | 948,556 | |||||||
Total
liabilities
|
723,502 | 948,556 | |||||||
Total
stockholders’ equity (deficit)
|
(196,250 | ) | (428,468 | ) | |||||
Total
dividends per common share
|
N/A | N/A |
30
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Disclaimer
Regarding Forward Looking Statements
You
should read the following discussion in conjunction with our financial
statements and the related notes and other financial information included in
this Form S-1. In addition to historical financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially. Factors that could
cause or contribute to these differences include those discussed below and
elsewhere in this Form S-1, particularly in the Section titled Risk
Factors.
Although
the forward-looking statements in this Registration Statement reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by them. Consequently, and because forward-looking
statements are inherently subject to risks and uncertainties, the actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, and results of operations and
prospects.
Summary
Overview
We are a casual online games publisher
that develops and markets games across the major digital distribution platforms
including PC/Mac downloadable (Web), mobile, and emerging platforms like social
networking sites (including Facebook). We focus on casual games because of our
belief that they appeal to a significant portion of the population.
During our most recent fiscal year
ended December 31, 2009, we generated revenues of $865,429 from the sales our
games. During our most recent ended six-month period, ended June 30,
2010, we generated revenues of $287,573 from the sales of our
games. During the year ended December 31, 2009, we launched three
games for various platforms, compared to two for the year ended December 31,
2008. During 2010, we anticipate we will publish up to eight games
for various platforms. In 2010 and going forward we plan to continue
the trend we started in 2009 of developing games based on intellectual property
we own or purchase from third parties, rather than license intellectual property
that belongs to certain third parties, for which we then have to pay royalties
to the owner of the intellectual property. We believe this will
further enable us to decrease the costs associated with developing and
publishing games.
Critical
Accounting Estimates
Unaudited Interim Financial
Information
The
accompanying balance sheet as of June 30, 2010, statements of operations for the
six months ended June 30, 2009 and 2010, statement of owners' equity for the six
months ended June 30, 2010 and statements of cash flows for the six months ended
June 30, 2009 and 2010 are unaudited. These unaudited interim
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the
opinion of our management, the unaudited interim consolidated financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments necessary for the fair presentation of
the company's statement of financial position at June 30, 2010 and its results
of operations and its cash flows for the six months ended June 30, 2009 and
2010. The results for the six months ended June 30, 2010 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
2010.
31
Revenue
Recognition
Our
revenues are derived primarily by licensing software products in the form of
online and downloadable games for PC, Mac and smartphone
platforms. We distribute our products primarily through online games
portals and smartphone device manufacturers (“distribution partners”), which
market the games to end users. The nature of our business is such
that we sell games basically through four distribution outlets – WEB portals,
brick and mortar retail distributors, mobile distributors and publishers, and
our own web portal, www.freezetag.com.
Product Sales (web and mobile
revenues)
We
recognize revenue from the sale of our products upon the transfer of title and
risk of loss to our customers, and once any performance obligations have been
completed. Revenue from product sales is recognized after deducting the
estimated allowance for returns and price protection.
Licensing Revenues (retail revenues-
royalties)
Third-party
licensees distribute games under license agreements with us. We receive
royalties from the licensees as a result. We recognize these royalties as
revenues upon receipt of the monthly or quarterly (varies per distribution
partner) revenue reports provided by the partner. Revenue from
licensing/royalties is recognized after deducting the estimated allowance for
returns and price protection.
Some
license agreements require a royalty advance from the licensee/distributor in
which case the original advance is recognized as a liability and royalty revenue
is deducted from the advance as earned.
Other
Revenues
Other
revenues primarily include Ad game revenue and work-for-hire game related
revenue. We derive our advertising game revenue from certain of our
partners that offer our games free of charge to consumers in exchange for the
consumers being exposed to advertising embedded in our games. In this way, we do
not receive revenue for the sale of our games, but rather a percentage of the
“advertising” revenue generated by these player views. This method of generating
revenue is essentially the same as traditional radio or television advertising
where consumers are allowed to enjoy content for “free” but are forced to watch
(or listen) to advertising before, in between and at the end of the programming
content.
Additionally,
we derive some revenue from “work-for-hire” projects. Some of our
partners occasionally ask us to render “work-for-hire” services for them such as
preparing packaging materials. For example, a retail game and DVD publisher
hired us to create several designs for printed packages that were used for games
published by the publisher but not developed by us. For this work, we
charge a one-time, fixed fee for each package design.
We
recognize this revenue once all performance obligations have been
completed. In addition, persuasive evidence of an arrangement must exist
and collection of the related receivable must be probable.
We
recognize revenue in accordance with current accounting standards when an
arrangement exists, delivery has occurred, the price is fixed and determinable,
and collectability is probable.
Cash and Cash
Equivalents
For
purposes of the Statement of Cash Flows, we consider liquid investments with an
original maturity of three months or less to be cash equivalents. We
place our cash and cash equivalents with large commercial banks. The
Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to
$250,000. All of our cash balances at June 30, 2010,
December 31, 2009 and 2008 are insured. At June 30, 2010,
December 31, 2009 and 2008 there were no cash equivalents.
32
Restricted
Cash
In
February of 2010, as a condition of the private equity offering of common shares
of the Company, we entered into an escrow agreement, which governed the receipt
and distribution of the funds. At the time of closing, $171,125
(50%) of the funds were placed in to an escrow account, and these funds are
being used to pay accounting, legal, and consulting fees associated with the
public offering of our common stock and the first 12 months of
accounting and legal expenses following the successful listing on the
OTCBB. As of June 30, 2010, the remaining balance was
$60,791.
Releasing
the funds requires the signatures of both the Company, and a representative from
Monarch Bay Management Company.
Because
of these restrictions on the use of funds, we have placed them on the balance
sheet in a “Restricted Cash” category.
Allowances for Returns,
Price Protection, and Doubtful Accounts
Because
the majority of our business is derived through online portals (such as Big Fish
Games) and wireless online app stores (such as Apple), there is no physical
product, other than the downloadable bits of our games that is involved in the
customer purchase. In the digital environment, the customer cannot
‘return’ a digital download product. Therefore, there are no
returns. The customer can ask for a refund of a digital product, and
if there are any, then they are reconciled or netted out by our distribution
partners before we receive the corresponding payments and royalty
statements. As such, we do not allow for returns, bad debts or price
protection of digital download products.
However,
we derive a small portion of our revenues from sales of physical packaged
software for personal computers through distribution partners who sell through
traditional retail channels. Product revenue is recognized net of
allowances for price protection and returns and various customer
discounts. Our distribution partners who sell to retailers may allow
returns for our packaged personal computer products; these partners may decide
to provide price protection or allow returns for personal computer products
after they analyze: (1) inventory remaining in the retail channel,
(2) the rate of inventory sell-through in the retail channel, and
(3) the remaining inventory on hand of our games. To allow for
these returns, price protection and various customer discounts, some of our
distribution partners who sell to retailers will hold back a percentage of our
revenue. These “hold-back” amounts, typically a percentage of
revenue, are then reconciled on a quarterly basis and detailed on the statements
we receive from our distribution partners.
Property
and Equipment
Property and equipment are recorded at
cost and are depreciated using the straight-line method over the estimated
useful lives of the related assets. All assets are currently
depreciated over 3 years. Maintenance and repairs are charged to
expense as incurred. Renewals and improvements of a major nature are
capitalized. At the time of retirement or other disposition of
property and equipment, the cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are reflected in the statement
of operations.
33
Concentrations of Credit
Risk, Major Customers and Major Vendors
Our
customers are the end-consumers that purchase our games from the websites where
we have our games listed for sale. Therefore, we do not have any
individual customers that represent any more than a fraction of our
revenue. However, we do have primary distribution partners, which are
the owners of the websites where we sell our games. Under our
distribution agreements we are not obligated to make, distribute or sell any
games. However, for any games we do make and wish to distribute we
can list them on one or more of these websites under a revenue sharing
arrangement where we share the revenue from any of our games that
sell. The sharing arrangement varies greatly depending on the
distributor with the company generally keeping between 35% and 70% of the
revenue and the distributor keeping the remainder of the revenue generated by
each sale. At times we enter into “exclusivity options” whereby if a
distributor wishes to have an exclusive period carrying our game (normally 30-90
days) we will agree to that in exchange for the distributor marketing our game
in their newsletter and other marketing programs. Due to
the fact we have a number of distribution partners and a variety of different
websites where we can sell our games, we are not substantially dependent on any
of our distribution partners or agreements. In addition to our
distribution agreements, we currently have licensing agreements with Ohio Art
Company and CMG Worldwide, which allow us to develop and distribute games around
third party intellectual property in exchange for paying royalty
payments. We are not substantially dependent on either of those
licensing agreements.
During
the period ended June 30, 2010, our primary distributors that represented 10% or
more of our revenues were: Real Networks – 24% of revenue, Big Fish
Games – 22% of revenue, and Superscape – 16%.
At June
30, 2010, our primary distributors that represented 10% or more of our accounts
receivable were: Big Fish Games - 27%, C1BPO – 30%, and Exent
Technologies – 22%.
During
the year ended December 31, 2009, our primary distributors that represented 10%
or more of our revenues were: Real Networks - 44% of revenue, and Big
Fish Games - 24% of revenue compared to the year ended December 31, 2008, when
the distributors that represented 10% or more of our revenues
were: Big Fish Games - 24% of net revenues, and Real Networks - 14%
of net revenues, and Apple - 13% of revenue.
At
December 31, 2009, our primary distributors representing 10% or more of our
accounts receivable were: Big Fish Games – 15%, Exent Technologies – 13%, and
Mumbo Jumbo – 26% compared to December 31, 2008, when our primary distributors
representing 10% or more of our accounts receivable were: Big Fish Games – 28%,
Exent Technologies – 12%, and Mumbo Jumbo – 33%.
Income
Taxes
We
account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740,
income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ASC Topic
740 includes accounting guidance which clarifies the accounting for the
uncertainty in recognizing income taxes in an organization by providing detailed
guidance for financial statement recognition, measurement and disclosure
involving uncertain tax positions. This guidance requires an uncertain tax
position to meet a more-likely-than-not recognition threshold at the effective
date to be recognized both upon the adoption of the related guidance and in
subsequent periods.
Foreign Currency
Translation
We derive
a portion of our revenue from foreign countries, which report to us in foreign
currency, but pay in U.S. Dollars. Because of the fluctuations
between the reporting time and the payment period (up to 60 days), it is
necessary to make adjustments to our accounting records. These
adjustments are recorded under a Foreign Currency Translation expense account,
and shown in the P&L statement as a General & Administrative
expense.
Accounting for Stock-Based
Compensation
We
account for stock-based compensation in accordance with ASC Topic 718-10,
Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments
to Non-Employees ("ASC stock-based compensation
guidance"). Stock-based compensation expense recognized during the
requisite services period is based on the value of share-based payment awards
after reduction for estimated forfeitures. Forfeitures are estimated
at the time of grant and are revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Stock-based compensation expense
recognized in our statement of operations for the period ended June 30, 2010 was
$0, and for the years ended December 31, 2009 and 2008 included compensation
expense of $7,447 and $2,665 respectively. As of December 31, 2009, we issued
930,000 warrants upon conversion of the notes payable and recognized expense of
$92,851.
34
Impairment of Long-Lived
Assets
We have
adopted Accounting Standards Codification subtopic 360-10, Property, Plant and
Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain
identifiable intangibles held and used by us be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. We evaluate our long-lived assets for impairment
annually or more often if events and circumstances warrant. Events relating to
recoverability may include significant unfavorable changes in business
conditions, recurring losses or a forecasted inability to achieve break-even
operating results over an extended period. We evaluate the recoverability of
long-lived assets based upon forecasted undiscounted cash flows. Should
impairment in value be indicated, the carrying value of long-lived assets will
be adjusted, based on estimates of future discounted cash flows resulting from
the use and ultimate disposition of the asset. ASC 360-10 also requires assets
to be disposed of be reported at the lower of the carrying amount or the fair
value less costs to sell.
Fair Value of Financial
Instruments
Effective
January 1, 2009, we adopted Accounting Standards Codification subtopic 820-10,
Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards
Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which
permits entities to choose to measure many financial instruments and certain
other items at fair value. Neither of these statements had an impact on our
financial position, results of operations or cash flows. The carrying value of
cash and cash equivalents, accounts payable, accrued expenses and notes payable,
as reflected in the balance sheets, approximate fair value because of the
short-term maturity of these instruments.
Inputs
used in the valuation to derive fair value are classified based on a fair value
hierarchy which distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
|
·
|
Level
one — Quoted market prices in active markets for identical assets or
liabilities;
|
|
·
|
Level
two — Inputs other than level one inputs that are either directly or
indirectly observable; and
|
|
·
|
Level
three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
Determining
the category in which an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
period.
35
Use of
Estimates
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles (“U.S. GAAP”) requires our
management to make judgments, assumptions and estimates that affect the amounts
reported in its consolidated financial statements and accompanying notes.
Management bases its estimates on historical experience and on various other
assumptions it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates and these
differences may be material.
Research and Development
Costs
We charge
costs related to research & development of products to general and
administrative expense as incurred. The types of costs included in research and
development expenses include research materials, salaries, contractor fees, and
support materials.
36
Software Development
Costs
Software
development costs include direct costs incurred for internally developed
products and payments made to independent software developers and/or contract
engineers and artists. We account for software development costs in accordance
with the FASB guidance for the costs of computer software to be sold, leased, or
otherwise marketed ("ASC Subtopic 985-20"). Software development costs are
capitalized once the technological feasibility of a product is established and
such costs are determined to be recoverable. Technological feasibility of a
product encompasses both technical design documentation and game design
documentation, or the completed and tested product design and working model.
Software development costs are capitalized once technological feasibility of a
product is established and such costs are determined to be recoverable against
future revenues. For products where proven game engine technology exists (as is
the case for most of our products), this may occur early in the development
cycle. Significant management judgments and estimates are utilized in the
assessment of when technological feasibility is established. For most of our
PC/Mac products, technological feasibility is established when a detailed game
design document containing sufficient technical specifications written for a
proven game engine or framework technology has been created and approved by
management. However, technological feasibility is evaluated on a
product-by-product basis. Amounts related to software development that are not
capitalized are charged immediately to the appropriate expense account. Amounts
that are considered ‘research and development’ that are not capitalized are
immediately charged to general and administrative expense.
Prior to
a product's release, we expense, as part of "Cost of Sales—Product Development",
capitalized costs when we believe such amounts are not recoverable. Capitalized
costs for those products that are cancelled or abandoned are charged to product
development expense in the period of cancellation.
Commencing
upon product release, capitalized software development costs are amortized to
"Cost of Sales—Product Development" based on the straight-line method over a
twenty four month period.
We
evaluate the future recoverability of capitalized software development costs and
intellectual property licenses on a quarterly basis. For products that have been
released in prior periods, the primary evaluation criterion is actual title
performance. For products that are scheduled to be released in future periods,
recoverability is evaluated based on the expected performance of the specific
products to which the costs relate or in which the licensed trademark or
copyright is to be used. Criteria used to evaluate expected product performance
include: historical performance of comparable products developed with comparable
technology; orders for the product prior to its release; and, for any sequel
product, estimated performance based on the performance of the product on which
the sequel is based.
Based on
current trends in our business, management has determined the expected shelf
life of the majority of a game’s revenue will be realized over a two year
period. Therefore, we have determined the appropriate amortization period for
expensing capitalized production costs to be two years or twenty four months
from date of the initial release, or first sale of the product for a specific
technology platform. It is possible that the same game developed on different
technology platforms (such as PC and Mac) will be launched on different release
dates because product development cycles may differ and distribution partner
release policies may differ.
At June
30, 2010, capitalized software development costs on the balance sheet were
$411,396. At December 31, 2009, and December 31, 2008, capitalized software
development costs were $369,125 and $263,412
respectively.
37
From time
to time, we engage in product development projects for third parties where we do
not retain the intellectual property rights to the games it develops. These
types of development projects are often referred to as “work-for-hire.” In these
instances, all costs associated with developing the games are expensed as they
are incurred. We do this because we receive revenue based on project
deliverables outlined as milestones in the development agreement executed by the
Company and the third party that has engaged us to perform development work.
These non-capitalized costs are represented as “Cost of Sales – Development
Services” expenses on our financial statements.
For the
reporting periods ending June 30, 2010, December 31, 2009, and December 31,
2008, we recorded “Cost of Sales – Development Services” charges of $115,685,
$330,477, and $2,413 respectively.
Intellectual Property
Licenses (Prepaid Royalties)
Intellectual
property license costs represent license fees paid to intellectual property
rights holders for use of their trademarks or copyrights in the development of
the Company's products. Intellectual property license costs represent license
fees paid to intellectual property rights holders for use of their trademarks,
copyrights, software, technology, music or other intellectual property or
proprietary rights in the development of our products. Depending upon the
agreement with the rights holder, we may obtain the rights to use acquired
intellectual property in multiple products over multiple years, or
alternatively, for a single product. Minimum guaranteed royalty payments for
intellectual property licenses are initially recorded as an asset (prepaid
royalties or prepaid licensing fees), and a current liability, (accrued
royalties payable) at the contractual amount upon execution of the contract when
no significant performance remains with the licensor. Commencing upon the
related product's release date, intellectual property licenses costs are
amortized to “Cost of Sales – Licensing” based upon the percentage of revenue
outlined in the contract with each specific licensor. Generally, our
intellectual property licensing contracts call for licensors to be paid a
percentage of revenue actually received by us, with allowances for minimum
guarantees. Sometimes, the terms of the specific licensing contracts allow for
us to re-capture expenses before licensing out royalties are
calculated.
Capitalized
intellectual property costs for those products that are cancelled or abandoned
are charged to product development expense in the period of
cancellation.
For the
reporting periods June 30, 2010, December 31, 2009 and December 31, 2008,
prepaid royalties (or prepaid licensing fees) were $48,852, $36,267, and
$154,158 respectively.
Recent Accounting
Pronouncements
In
January 2010, the FASB issued an update to Fair Value Measurements and
Disclosures. This update provides amendments to ASC Subtopic 820-10 requiring
new disclosures regarding (1) transfers in and out of Levels 1 and 2, in which
the Company should disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements and describe the reasons
for the transfers, and (2) the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), in which the Company should present
separately information about purchases, sales, issuances, and settlements (on a
gross basis rather than as one net number). In addition the update provides
clarification of existing disclosures regarding the level of disaggregation and
disclosures about inputs and valuation techniques. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchase, sales, issuances, and settlements in the roll forward activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those
fiscal years. We do not expect the adoption of this statement to have a material
impact on its consolidated financial statements.
38
In
October 2009, the FASB issued ASU 2009-14, which amends ASC 985-605,
"Software-Revenue Recognition", to exclude from its requirements (a)
non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products when
the software components and non-software components of the tangible product
function together to deliver the tangible product's essential functionality. ASU
2009-14 will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, and
early adoption will be permitted. We do not expect the adoption of this
statement to have a material impact on its consolidated financial
statements.
In June
2009, the FASB approved the FASB Accounting Standards Codification (the
“Codification”) ASC 105, "Generally Accepted Accounting Principles" (formerly
Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles-a replacement of FASB Statement No. 16" ("SFAS 168")) as
the single source of authoritative nongovernmental generally accepted accounting
principles (GAAP). All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification did not change GAAP,
but instead introduced a new structure that combines all authoritative standards
into a comprehensive, topically organized online database. We adopted the
Codification and as a result, all references to authoritative accounting
literature are now referenced in accordance with the Codification.
In April
2009, the FASB issued new accounting guidance ASC 825, "Financial Instruments"
(formerly FASB Staff Position (“SOP”) No. 107-1, "Interim Disclosures about Fair
Value of Financial Instruments" (“SOP 107-1”) ) related to interim disclosures
about the fair values of financial instruments. This guidance requires
disclosures about the fair value of financial instruments whenever a public
company issues financial information for interim reporting periods. We adopted
this guidance upon its issuance, and it had no material impact on our
consolidated financial statements.
39
Year
Ended December 31, 2009 compared to Year Ended December 31, 2008
Results
of Operations
Summary
of Results of Operations
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
%Change
|
||||||||||
Revenue
|
$ | 865,429 | $ | 583,372 | 48 | % | ||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales – product development
|
168,402 | 71,912 | 134 | % | ||||||||
Cost
of sales – development services
|
330,477 | 2,413 | 13,595 | % | ||||||||
Cost
of sales – licensing
|
244,031 | 257,544 | (5 | ) % | ||||||||
General
and administrative
|
315,510 | 327,602 | (4 | ) % | ||||||||
Sales
and marketing
|
6,417 | 3,287 | 95 | % | ||||||||
Amortization
and Depreciation
|
3,323 | 7,206 | (53 | ) % | ||||||||
Total
expenses
|
1,068,160 | 669,964 | 45 | % | ||||||||
Operating
loss
|
(202,732 | ) | (86,592 | ) | 134 | % | ||||||
Interest
income/expense, net
|
30,133 | 41,524 | 27 | % | ||||||||
Income
tax expense
|
1,068 | 340 | 214 | % | ||||||||
Net
loss
|
$ | (233,933 | ) | $ | (128,456 | ) | 9 | % |
Operating Loss; Net
Loss
Our increase in revenue to $865,429, or
48% over the prior year is primarily a result of three factors: an increase in
the number of games we published, and the fact we developed games based on third
parties’ intellectual property in 2009, which we did not do in 2008. Our total
expenses increased to $975,310, or 45% over the prior year due to the increase
in our product development costs and in our development services, directly
related to our increase in the number of games we published, as well as games we
published based on third parties’ intellectual property, which has a higher
production costs than games we created internally. The increase in our product
development costs primarily related to the fact we published more games in 2009
than in 2008, and our increase in development services costs related to the fact
we created games based on third parties’ intellectual property, which we did not
do in 2008. Primarily, as a result of the increase in our costs of product
development and development services, and a non-cash warrant expense related to
the issuance of warrants upon conversion of notes payable of $92,851, our
operating loss increased to ($202,732), or a 134% increase over the prior year.
However, due to our increase in revenue in 2009 compared to 2008 our net loss
increased to ($233,933), or 82%, over one year ago. This increase in revenues,
expenses and net loss are discussed in detail below.
Revenue. Our 2009
revenue increased by $282,057, or 48%, to $865,429 compared to $583,372 for the
year ended December 31, 2008, due to increased business, which is attributable
to an increase in both the number of games we published in 2009 versus 2008, as
well as the fact we published games based on third parties’ intellectual
property, which had not done previously.
Publishing games based on third
parties’ intellectual property led to an increase in revenues for 2009 because
we were paid for the games during the development process as opposed to waiting
until after the games are sold to the end user, which is when we typically begin
receiving revenue for games we develop and publish
ourselves. Specifically in 2009, we contracted with RealNetworks to
develop three games (The
Conjurer, Real
Detectives, Ghost
Girl) based on their intellectual property on a work-for-hire
basis. Prior to 2009, we had not performed work-for-hire development
services for other, larger game companies. Adding these games to our
production schedule significantly increased our short term revenue because we
were paid for each step in the production process (from approved game design
document to completed gold master build) instead of receiving royalties from
sales after the
product is live (which is when we normally begin receiving revenue for products
we develop and publish for ourselves). In this way, developing games for third
parties (RealNetworks) added short term revenue during
2009.
40
Cost of Sales – Product
Development. Our cost of sales for product development is comprised of
the direct costs we incur in creating and publishing a game based on our own or
licensed intellectual property. Our 2009 cost of sales for product development
increased by $96,490, or 134%, to $168,402, due to the fact we published more
games in 2009 than in 2008. We believe our product development costs will
continue to increase as we develop and publish more games.
Cost of Sales – Development
Services. Our cost of sales for development services is comprised of the
costs we incur to develop games based on third parties’ intellectual property,
such as The Conjurer
and Real Detectives.
Our 2009 cost of sales for product development increased by $328,064 to
$330,477. This significant increase in our cost sales for development services
was primarily due to the fact we did not produce games based on third parties’
intellectual property in 2008, like we did in 2009. We believe our development
services costs will also continue to increase as we continue to publish games
based on third parties’ intellectual property, but we believe it will not make
up the largest segment of our cost of sales in future years as we try and
develop games based on intellectual property we own as opposed to intellectual
property owned by third parties.
Cost of Sales
–Licensing. Our cost of sales for licensing is comprised of royalty
payments we make to third parties for the use of their intellectual property and
other related costs. Our 2009 cost of sales for licensing decreased by $13,513,
or 5%, to $244,031, due to the fact we did not publish as many games that
required us to pay royalties during 2009 compared to 2008. We believe these
costs will continue to decrease as we create our own intellectual property on
which our games are based, alleviating the need to pay a royalty payment to the
owner of the intellectual property.
General and Administrative
Expenses. General and administrative expenses decreased by $12,092, or
4%, to $315,510 for the year ended December 31, 2009, primarily due to our
payroll expenses decreasing from $202,092 in 2008 to $66,908 in 2009, which was
a result the fact we had “work-for-hire” projects in 2009, which is categorized
on our financial statements in our cost of sales, while in 2008 we did not have
any “work-for-hire” projects and all work was done on internal projects with
personnel on payroll, and the decrease was offset as the Company recognized
non-cash expense of $92,851 in warrant expense related to the issuance of
warrants upon conversion of notes payable; and in 2008 we forgave $48,966 in
salary due to our two officers and directors. For 2009 our general and
administrative expenses consisted primarily of $92,851 in warrant expense,
$39,707 in insurance payments, $22,000 in payroll taxes, and $22,055 in vacation
expenses.
Interest Income/Expense;
Net. Interest income/expense, net decreased by $11,391, or 27%, to
$30,133, and is primarily attributable to the interest expense on our loans from
noteholders and our loan from Sunwest Bank. In 2009 we paid $19,907 in interest
on our loans from private noteholders and $9,470 on our loan from Sunwest Bank,
compared to $24,801 and $11,040, respectively, in 2008.
Liquidity
and Capital Resources
Introduction
During
the years ended December 31, 2009 and 2008, because of our operating losses, we
did not generate positive operating cash flows. Our cash on hand as of July 31,
2010 was approximately $112,606 and our monthly cash flow burn rate is
approximately $55,000. As a result, we have significant short term cash needs.
These needs are being satisfied through cash flows from our operations, as well
as proceeds from the sales of our securities. If we are successful in becoming a
reporting company, we anticipate that our short term cash needs will increase by
approximately $30,000 per quarter, which we do not believe we will be able to
satisfy from our revenues for some time. We believe that once our common stock
is publicly traded that we will be able to source other as-yet unidentified
sources of capital, which will be necessary in order for us to continue our
operations.
41
Our cash,
current assets, total assets, current liabilities, and total liabilities as of
December 31, 2009 and 2008, respectively, are as follows:
December
31, 2009
|
December
31, 2008
|
Change
|
||||||||||
Cash
|
$ | 28,904 | $ | 7,006 | $ | 21,898 | ||||||
Total
Current Assets
|
350,966
|
389,030
|
(38,064
|
) | ||||||||
Total
Assets
|
527,252 | 520,088 | 7,164 | |||||||||
Total
Current Liabilities
|
723,502 | 948,556 | 225,054 | |||||||||
Total
Liabilities
|
$ | 723,502 | $ | 948,556 | $ | 225,054 |
Our
current assets decreased by ($38,064) as of December 31, 2009 as compared to
December 31, 2008. Our current assets for the two periods were
similar but the breakdown was different, with cash totaling $28,904, capitalized
production costs totaling $369,125, and prepaid royalties totaling $36,267 in
2009 versus cash totaling $7,006, capitalized production costs totaling
$263,412, and prepaid royalties totaling $154,158 in 2008.
Our current liabilities decreased by
$225,054, or over 23%, as of December 31, 2009 as compared to December 31,
2008. A large portion of this was a decrease due to a promissory note
we issued to a third party in 2008 for royalty payments on intellectual
property, which was converted to stock in 2009.
Our total liabilities decreased by
$225,054, or over 23%, as of December 31, 2009 as compared to December 31, 2008,
all due to the reduction in our current liabilities as described
above.
In 2009,
we developed and published more games than in 2008, including more games where
we own the intellectual property, as opposed to licensing it from others,
reducing the percentage of games on which we pay a royalty to a third
party. We have also undertaken measures to reduce overhead costs to
improve operating results.
In order
to repay our obligations in full or in part when due, we will be required to
raise significant capital from other sources. There is no assurance,
however, that we will be successful in these efforts.
Cash
Requirements
We had very little cash available as of
December 31, 2009, $28,904, or December 31, 2008, $7,006. Based on
our revenues, cash on hand and current monthly burn rate, around $55,000 per
month, we will need to continue borrowing from our shareholders and other
related parties to fund operations.
42
Sources and Uses of
Cash
Operations
We had net cash provided by operating
activities of $61,229 for the year ended December 31, 2009, as compared to
$74,860 for the year ended December 31, 2008. In 2009, the net cash used in
operating activities consisted primarily of our net income (loss) of ($141,082),
and capitalized production costs of ($105,713), offset by prepaid royalties of
$117,891, accounts payable of $88,324, accrued royalties of $61,728, accrued
compensation of $21,735, accrued interest of $9,900, and stock based
compensation of $100,298. For 2008, the net cash used in operating activities
consisted primarily of our net income (loss) of ($128,453), capitalized
production costs of ($134,546), accounts receivable of ($56,115), and accounts
payable of ($9,113), offset by accrued royalties of $179,530, accrued
compensation of $112,900, salary forgiveness of $48,966, prepaid royalties of
$26,824, and accrued interest of $16,784.
Investments
We did not have any cash flows from
investing activity in 2009 and had cash used of $656 in 2008.
Financing
Our net cash provided by financing
activities for the year ended December 31, 2009 was $39,331, compared to $83,411
for the year ended December 31, 2008. For 2009, our financing
activities consisted of ($30,494) in repayments of long term debt and ($8,837)
in payments for the preparation of a private placement memorandum.
Six
Months Ended June 30, 2010 (Unaudited) Compared to Six Months Ended June 30,
2009(Unaudited)
Results
of Operations (Unaudited)
Six
Months Ended
June
30,
|
||||||||||||
2010
|
2009
|
%Change
|
||||||||||
Revenue
|
$ | 287,573 | $ | 356,171 | (19 | )% | ||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales – product development
|
109,451 | 78,791 | 39 | % | ||||||||
Cost
of sales – development services
|
115,685 | 103,304 | 12 | % | ||||||||
Cost
of sales – licensing
|
28,212 | 85,107 | (67 | )% | ||||||||
General
and administrative
|
123,420 | 72,934 | 69 | % | ||||||||
Sales
and marketing
|
5,014 | 3,062 | 64 | % | ||||||||
Amortization
and Depreciation
|
108 | 3,095 | (97 | )% | ||||||||
Total expenses
|
381,890 | 346,293 | 10 | % | ||||||||
Operating
income/loss
|
(94,318 | ) | 9,878 | 1,054 | % | |||||||
Interest
income/expense, net
|
4,162 | (8,380 | ) | 149 | % | |||||||
Income
tax expense
|
925 | 800 | 15 | % | ||||||||
Net
loss
|
$ | (99,405 | ) | $ | (9,180 | ) | (982 | )% |
43
Operating Loss; Net
Loss
Our decrease in revenue to $287,573 or
(19%), over the six months ended June 30, 2010 is a primarily a result of a
decrease in web portal revenues due to the fact we released fewer games in the
six months ended June 30, 2010, than we did for the same period one year earlier
and the games we did release performed lower than expected. We also
experienced a decrease in our other game related revenue related to development
services to $101,970 in 2010 from $154,926 in 2009. However, we did
have an increase in mobile game revenue during this period, which grew more than
188% from $18,160 in the first six months of 2009 to $52,337 in the
first six months of 2010. We also had a 50% increase in retail
revenues from $21,700 in the first six months of 2009 to $32,525 in the first
six months of 2010. However, our additional revenue from mobile games
and retail sales were not enough to offset the decrease we
experienced in our web portal revenues. Our total expenses
increased to $381,890 or 10% over the prior year primarily due to the increase
in our product development costs, our development services costs, as well as our
increase in general and administrative expenses, partially offset by a decrease
in our licensing costs. The increase in our development services
costs primarily related to work-for-hire game projects and our increase in
general and administrative expenses primarily related to an increase in payroll
and vacation expenses. The decrease in our licensing costs resulted
from decreased sales of products based on licensed
properties. Primarily, as a result of the decrease in revenue and a
significant increase in our general and administrative expenses, partially
offset by the decrease in our licensing costs, our operating income/loss
increased from income of $9,878 for the six months ended June 30, 2009 to
operating loss of ($94,318) for the six months ended June 30,
2010. Primarily due to our decrease in revenue and a significant
increase in our general and administrative expenses, partially offset by the
decrease in our licensing costs for the six months ended June 30, 2010, compared
to the same period one year ago, our net loss for the six months ended June 30,
2010 was only ($99,405), compared to ($9,180) for the same period one year
ago. Our overall decrease in revenues, increase in expenses, and
increase in net loss for the six months ended June 30, 2010 compared to June 30,
2009, are discussed in detail below.
Revenue. Our
revenue for the six months ended June 30, 2010, decreased by $68,598, or 19%, to
$287,573 compared to $356,171 for the six months ended June 30, 2009, which
is primarily a result of a decrease in web portal revenues due to the
fact we released fewer games in the six months ended June 30, 2010, than we did
for the same period one year earlier, and the games we did release performed
lower than expected. We also experienced a decrease in our other game
related revenue related to development services to $101,970 in 2010 from
$154,926 in 2009. However, we did have an increase in mobile game
revenue during this period, which grew more than 188% from $18,160 in the first
six months of 2009 to $52,337 in the first six months of
2010. We also had a 50% increase in retail revenues from $21,700 in
the first six months of 2009 to $32,525 in the first six months of
2010. However, our additional revenue from mobile games and retail
sales were not enough to offset the decrease we experienced in our
web portal revenues.
Cost of Sales – Product
Development. Our cost of sales for product development is
comprised of employee and contract labor expenses for designers, producers,
artists, engineers, composers and other related costs. Our cost of
sales for product development for the six months ended June 30, 2010, increased
by $30,660, or 39%, to $109,451, compared to the six months ended June 30, 2009,
due to the hiring of additional staff and contractors. We
anticipate our product development costs will increase for future quarters as we
develop and publish more games based on our own intellectual
property.
Cost of Sales – Development
Services. Our cost of sales for development services is
comprised of employee and contract labor expenses for designers, producers,
artists, engineers, composers and other related costs. Our cost of
sales for product development for the six months ended June 30, 2010 increased
by $12,382 to $115,685, compared to the six months ended June 30,
2009. This increase in our cost sales for development services was
primarily due to the hiring of additional staff and contract labor. Despite this
increase for the six months ended June 30, 2010, we anticipate our development
services costs for future quarters will decrease as we decrease our
work-for-hire projects.
Cost of Sales
–Licensing. Our cost of sales for licensing is comprised of
royalties paid to owners of intellectual property for the rights to use that
properties in our games (such as the toy property Etch A Sketch licensed to
Freeze Tag by the Ohio Art Company) and other related costs. Our cost
of sales for licensing for the six months ended June 30, 2010 decreased by
$56,895, or 67%, to $28,212, compared to the same period one year ago due to
decreased sales of products built around licensed intellectual
property. We anticipate our cost of sales licensing expenses will
decrease over time as we develop more games based on our own intellectual
property.
44
General and Administrative
Expenses. General and administrative expenses increased by
$50,486, or 69%, to $123,420 for the six months ended June 30, 2010, primarily
due to increases in our vacation expenses, accounting fees, and insurance
costs. For six months ended June 30, 2010 our general and
administrative expenses consisted primarily of payroll expenses of $25,986,
insurance costs of $18,465, payroll taxes of $16,295, accounting fees of
$14,313, vacation expense of $14,589, and rent of $11,400.
Interest Income/Expense;
Net. Interest income/expense, net decreased by $14,096, or
77%, to $4,162, and is primarily attributable to the interest expense on our
line of credit of $4,011.
Liquidity and Capital
Resources
Introduction
During
the six months ended June 30, 2010 and June 30, 2009, because of our operating
losses, we did not generate positive operating cash flows. Our cash
on hand as of June 30, 2010 was approximately $72,662, and our monthly cash flow
burn rate is approximately $55,000. As a result, we have significant
short term cash needs. These needs are being satisfied through cash
flows from our operations, as well as proceeds from the sales of our
securities. If we are successful in becoming a reporting company, we
anticipate that our short term cash needs will increase by approximately $30,000
per quarter, which we do not believe we will be able to satisfy from our
revenues for some time. We believe that once our common stock is
publicly traded that we will be able to source other as-yet unidentified sources
of capital, which will be necessary in order for us to continue our
operations.
Our cash,
current assets, total assets, current liabilities, and total liabilities as of
June 30, 2010 and December 31, 2009, respectively, are as follows:
(Unaudited)
June
30, 2010
|
December
31,
2009
|
Change
|
||||||||||
Cash
|
$ | 72,662 | $ | 28,904 | $ | 43,722 | ||||||
Total
Current Assets
|
365,465 | 350,966 | 14,499 | |||||||||
Total
Assets
|
596,140 | 527,252 | 68,888 | |||||||||
Total
Current Liabilities
|
663,600 | 723,502 | 68,902 | |||||||||
Total
Liabilities
|
$ | 663,600 | $ | 723,502 | $ | 68,902 |
Our
current assets increased by $14,499 as of June 30, 2010 as compared to December
31, 2009, primarily as a result of an increase in our restricted cash, totaling
$60,791. This category of restricted cash on our balance sheet
relates to money we raised through a private placement of our common stock,
which is in escrow and may only be used to pay specified payees associated with
us becoming a public company. In order to utilize these funds a
representative of ours and one from Monarch Bay Management Company must approve
the distribution.
Our current liabilities decreased by
$59,902, as of June 30, 2010 as compared to December 31, 2009. A large portion
of the decrease was the recognition of unearned royalties totaling approximately
$22,881. In addition, there was a decrease in notes payable of
$28,295.
Our total liabilities decreased by the
same $59,902, as of June 30, 2010 as compared to December 31, 2009, all due to
the reduction in our current liabilities as described above.
45
So far in
2010, we are on track to develop and publish more games than in 2009, including
more games where we own the intellectual property, as opposed to licensing it
from others, reducing the percentage of games on which we pay a royalty to a
third party. We have also undertaken measures to reduce overhead costs to
improve operating results.
In order
to repay our obligations in full or in part when due, we will be required to
raise significant capital from other sources. There is no assurance, however,
that we will be successful in these efforts.
Cash
Requirements
Although we had $72,662 in cash as of
June 30, 2010, based on our revenues, cash on hand and current monthly burn
rate, around $55,000 per month, we will need to continue borrowing from our
shareholders and other related parties to fund operations.
Sources and Uses of
Cash
Operations
We had net cash provided by (used in)
operating activities of ($154,442) for the six months ended June 30, 2010, as
compared to $42,325 for the six months ended June 30, 2009. For the
six months ended June 30, 2010, the net cash used in operating activities
consisted primarily of our net income (loss) of ($99,405), capitalized
production costs of ($151,104), prepaid royalties of ($12,585), unearned
royalties of ($22,881) and accounts payable of ($14,261), offset by accounts
receivable of $30,831, accrued royalties of $6,283, accrued compensation of
$11,819 and prepaid expenses of $486. For 2009, the net cash provided
by operating activities consisted primarily of our net income(loss) of ($9,180),
capitalized production costs of ($134,431), and other assets of ($429), offset
by accounts receivable of $4,301, unearned royalties of $42,770, accounts
payable of $8,861, accrued royalties of $29,039, and accrued interest of
$12,360.
Investments
We did not have any cash flows from
investing activity for six-month periods ended June 30, 2010 or June 30,
2009.
Financing
Our net cash provided by (used in)
financing activities for the six months ended June 30, 2010 was $72,662,
compared to $39,331 for the six months ended June 30, 2009. For the
six months ended June 30, 2010, our financing activities consisted of $344,400
of stock issued in exchange for cash, ($116,206) in payments for private
placement memoranda, and ($29,994) in repayments of long-term
debt. In the same period one year ago, our net cash provided (used
in) financing activities was ($10,000) and was all the result of repayments for
long-term debt.
Debt Instruments,
Guarantees, and Related Covenants
We have no disclosure required by this
Item.
46
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
We have
no disclosure required by this Item.
47
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The
following table sets forth the names, ages, and biographical information of each
of our current directors and executive officers, and the positions with the
Company held by each person, and the date such person became a director or
executive officer of the Company. Our executive officers are elected
annually by the Board of Directors. The directors serve one-year
terms until their successors are elected. The executive officers
serve terms of one year or until their death, resignation or removal by the
Board of Directors. Family relationships among any of the directors
and officers are described below.
Name
|
Age
|
Position
|
||
Craig
Holland
|
50
|
President,
Chief Executive Officer, Chief Creative Officer, and
Director
|
||
Mick
Donahoo
|
41
|
Chief
Operating Officer, V.P. of Technology and Production, Secretary, Chief
Financial Officer, Treasurer, and
Director
|
Craig Holland co-founded
Freeze Tag in October 2005. Prior to founding Freeze Tag, Craig founded
Thumbworks, a publisher of mobile gaming applications, in January 2002 and
served as the CEO of Thumbworks from its formation until its acquisition by
In-Fusio, a mobile game publisher and mobile entertainment platform provider in
January 2005. As CEO of Thumbworks, Mr. Holland drove the organization's
strategic direction, overseeing carrier relations, business development and
licensing initiatives which led to partnerships with some of the world's leading
brands such as Etch A Sketch®, Nickelodeon, Suzuki, Paramount Pictures, and
Honda. Prior to founding Thumbworks, Mr. Holland founded Nine Dots, an
interactive marketing firm in North America whose clients included a number of
high profile consumer brands such as Nestle, Quaker Oats, Qualcomm and General
Motors, in 1992. Mr. Holland served as the CEO of Nine Dots from its formation
until its sale to CyberSight, a Canadian-based interactive marketing company, in
September 2000. Mr. Holland holds an MBA with an emphasis in Marketing from the
University of Southern California (USC) and a Bachelor of Arts in English
Literature from the University of California at Los Angeles (UCLA).
Mick Donahoo co-founded Freeze
Tag in October 2005 and in his role as Vice President of Technology and
Production, Mr. Donahoo oversees product planning, design, and software
development of all games and technology. With over 15 years of technology
experience, Mr. Donahoo has produced over 25 mobile games distributed via 20
worldwide wireless carriers. Prior to founding Freeze Tag, Mr. Donahoo led North
American development for Thumbworks and following its acquisition, In-Fusio, and
oversaw overseas engineering teams located in Taiwan, Thailand, India, Russia,
and Korea. Prior to In-Fusio, Mick was a consulting executive at Ernst &
Young, LLP in the Financial Services and Aerospace and Defense industries
architecting and developing large-scale, three-tiered client/server
applications. Mick holds a Bachelor of Science degree in Business and Management
Information Systems from Brigham Young University.
48
Family
Relationships
There are no family relationships among
any of our officers, directors, or shareholders.
EXECUTIVE
COMPENSATION
Executive
Compensation
The
following table sets forth information with respect to compensation earned by
our Chief Executive Officer and Chief Financial Officer for the fiscal year
ended December 31, 2009 and 2008.
Name and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Craig
Holland
|
2009
|
135,995 | -0- | -0- | -0- | -0- | -0- | -0- | 135,995 | |||||||||||||||||||||||||
President,
|
2008
|
125,241 | (1) | -0- | -0- | -0- | -0- | -0- | -0- | 125,241 | (1) | |||||||||||||||||||||||
CEO
|
2007
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
Mick
Donahoo
|
2009
|
135,995 | -0- | -0- | -0- | -0- | -0- | -0- | 135,995 | |||||||||||||||||||||||||
COO,
VP
|
2008
|
104,545 | (1) | -0- | -0- | -0- | -0- | -0- | -0- | 104,545 | (1) | |||||||||||||||||||||||
2007
|
-0- | -0- | -0- | 9,867 | (2) | -0- | -0- | -0- | 9,867 |
(1) Includes
$48,600 in accrued but not paid compensation, which is reflected in the attached
financial statements.
(2) On
May 1, 2007, Mr. Donahoo was issued options to purchase 100,000 shares of our
common stock with an exercise price of $0.01 per share,valued at
$9,867. These options were exercised by Mr. Donahoo into 477,900
shares of our common stock (after giving effect to the 5.31-to-1 stock split) on
October 15, 2009.
Director
Compensation
For the
year ended December 31, 2009, none of the members of our Board of Directors
received compensation for his or her service as a director. We do not
currently have an established policy to provide compensation to members of our
Board of Directors for their services in that capacity. We intend to
develop such a policy in the near future.
49
Outstanding Equity Awards at
Fiscal Year-End
On March
20, 2006, our Board of Directors and shareholders approved the Freeze Tag, Inc.
2006 Stock Plan. Pursuant to the Plan, we reserved 2,920,500 shares (post-split)
of our common stock to be issued to employees and consultants for services
rendered to the company. As of December 31, 2008, we had issued options to
acquire a total of 1,247,850 shares (post-split) of our common stock to seven of
our employees and/or consultants. Effective as of October 15, 2009, all seven of
the option holders converted their options into a total of 1,123,065 shares of
our common stock.
The
following table sets forth certain information concerning outstanding stock
awards held by the Named Executive Officers as of December 31,
2009:
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
|
|||||||||||||||||||||||||||
Craig
Holland
|
- 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | |||||||||||||||||||||||||||
Mick
Donahoo
|
- 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - | - 0 - |
50
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth, as of August 6, 2010, certain information with
respect to the Company’s equity securities owned of record or beneficially by
(i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 10% of each class of the Company’s outstanding equity
securities; and (iii) all Directors and Executive Officers as a
group.
Common
Stock
Title of Class
|
Name and Address
of Beneficial Owner (3)
|
Amount and Nature of
Beneficial Ownership
|
Percent
of Class (1)
|
|||||||
Common
Stock
|
Craig
Holland (2)
|
13,872,375 | 35.53 | % | ||||||
Common
Stock
|
Mick
Donahoo (2)
|
11,828,025 | 30.29 | % | ||||||
Common
Stock
|
All
Directors and Officers
As
a Group (2 persons)
|
25,700,400 | 65.82 | % |
|
(1)
|
Unless
otherwise indicated, based on 39,038,720 shares of common stock issued and
outstanding. Shares of common stock subject to options or
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage of the person holding
such options or warrants, but are not deemed outstanding for the purposes
of computing the percentage of any other
person.
|
|
(2)
|
Indicates
one of our officers or directors.
|
|
(3)
|
Unless
indicated otherwise, the address of the shareholder is Freeze Tag, Inc.,
228 W. Main Street, 2nd Floor, Tustin, California
92780.
|
The
issuer is not aware of any person who owns of record, or is known to own
beneficially, five percent or more of the outstanding securities of any class of
the issuer, other than as set forth above. The issuer is not aware of
any person who controls the issuer as specified in Section 2(a)(1) of the 1940
Act. There are no classes of stock other than common stock issued or
outstanding. The Company does not have an investment
advisor.
There are
no current arrangements which will result in a change in
control.
51
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On August
2, 2010, we granted Craig Holland, our President, Chief Executive Officer, and a
Director, options to purchase up to 115,000 shares of our common stock at an
exercise price of $0.11 per share. The options were granted under the Freeze
Tag, Inc. 2006 Stock Plan.
As of
July 1, 2010, there are notes payable to Craig Holland and Mick Donahoo for
$25,000 each (a total of $50,000 notes payable) for money that was loaned to the
company to secure the Sunwest Bank loan. The money was loaned to us
at a rate of 10% interest compounded annually. As of September 30,
2010, Mr. Holland and Mr. Donahoo were each owed interest of $635.45 (for a
total interest owed of $1,270.90) under these notes. This brings the
combined amount owed to Mr. Donahoo and Mr. Holland on these notes to a total
amount of $51,270.90, as of September 30, 2010. No principal or
interest has been paid back to Mr. Donahoo or Mr. Holland.
On
July 1, 2010, we entered into one (1) $100,000 principal amount convertible
promissory note, which is convertible any time at $0.10 per
share. The holder of this note is the Holland Family Trust, which is
not controlled by any of our officers and directors, but is controlled by
Franklina E. Holland, the mother of one of our officers and
directors. Under the note we have received $75,000 of the purchase
price, with the remaining $25,000 to be paid at a later date. The
note matures on July 1, 2011, at least to the first $50,000 installment, with
interest at 10% payable starting August 1, 2010. The additional $25,000 under
the note was received from the purchaser on October 11,
2010.
On March
30, 2006, pursuant to the terms of the merger of Freeze Tag, LLC with and into
Freeze Tag, Inc., Craig Holland and Mick Donahoo, each one of our officers and
directors, was issued 13,872,375 and 11,350,125 shares, respectively, of our
common stock, restricted in accordance with Rule 144 promulgated under the
Securities Act of 1933. In connection with the same transaction, a third member
of Freeze Tag, LLC was issued 1,327,500 shares of our restricted common
stock.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES
ACT LIABILITIES
Article VIII of our Articles of
Incorporation provides that, to the fullest extent permitted by law, no director
or officer shall be personally liable to the corporation or its shareholders for
damages for breach of any duty owed to the corporation or its shareholders. In
addition, the corporation shall have the power, in its bylaws or in any
resolution of its stockholders or directors, to indemnify the officers and
directors of the corporation against any liability as may be determined to be in
the best interests of this corporation, and in conjunction therewith, to buy, at
the corporation’s expense, policies of insurance.
Article 7 of our bylaws further
addresses indemnification in the same manner as our Articles of Incorporation.
There are no resolutions of our shareholders or directors which address
indemnification.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the “Act”) may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer 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.
AVAILABLE
INFORMATION
We are
not subject to the reporting requirements of the Securities Exchange Act of
1934. We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, together with all amendments and exhibits thereto, under
the Securities Act of 1933 with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
52
Copies of
all or any part of the registration statement may be inspected without charge or
obtained from the Public Reference Section of the Commission at 100 F Street,
NE, Washington, DC 20549. The registration statement is also
available through the Commission’s web site at the following
address: http://www.sec.gov.
EXPERTS
The
audited financial statements of Freeze Tag, Inc. as of December 31, 2009 and
2008 and for the years then ended appearing in this prospectus which is part of
a registration statement have been so included in reliance on the report of
M&K CPAS, PLLC, given on the authority of such firm as experts in accounting
and auditing.
53
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Shareholders
of Freeze Tag, Inc.
We have
audited the accompanying balance sheets of Freeze Tag, Inc. (“the “Company”) as
of December 31, 2009 and 2008 and the related statements of operations, cash
flows and shareholders’ equity for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has insufficient working capital and reoccurring losses
from operations, all of which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Freeze Tag, Inc. as of December 31,
2009 and 2008, and the results of its operations and its cash flows for the
years then ended in conformity with U.S. generally accepted accounting
principles.
/s/
M&K CPAS, PLLC
www.mkacpas.com
Houston,
Texas
August
13, 2010, except for note 13, as to which the
date is
October 22, 2010
F-1
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
BALANCE
SHEETS
(Unaudited)
|
||||||||||||
Period Ended June 30
|
Year ended December 31
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets
|
||||||||||||
Cash
|
$ | 11,871 | $ | 28,904 | $ | 7,006 | ||||||
Cash,
Restricted
|
60,791 | - | - | |||||||||
Accounts
Receivable, Net
|
59,533 | 90,364 | 91,995 | |||||||||
(Net
of Allowance of $2,084, $4,699 and $6,081 as of June 30, 2010, December
31, 2009 and 2008, respectively)
|
||||||||||||
Capitalized
Production Costs, Net
|
181,236 | 193,461 | 135,871 | |||||||||
Prepaid
Royalties
|
48,852 | 36,267 | 154,158 | |||||||||
Prepaid
Expenses
|
3,183 | 1,970 | - | |||||||||
Total
Current Assets
|
365,465 | 350,966 | 389,030 | |||||||||
Fixed
Assets, Net
|
194 | 302 | 998 | |||||||||
(Net
of depreciation of $ 3,520 as of June 30, 2010 and $ 3,412 and $ 2,716 as
of December 31, 2009 and 2008, respectively)
|
||||||||||||
Other
Long-term Assets, Net
|
320 | 320 | 2,518 | |||||||||
(Net
of amortization of $ 17,732 as of June 30, 2010 and $ 17,732 and $15,105
as of December 31, 2009 and 2008, respectively)
|
||||||||||||
Capitalized
Production Costs, Net
|
230,160 | 175,664 | 127,541 | |||||||||
TOTAL
ASSETS
|
$ | 596,140 | $ | 527,252 | $ | 520,088 | ||||||
LIABILITIES
& EQUITY
|
||||||||||||
Liabilities
|
||||||||||||
Current
Liabilities
|
||||||||||||
Accounts
Payable
|
101,584 | 115,845 | 27,521 | |||||||||
Accrued
Compensation
|
153,507 | 141,696 | 119,963 | |||||||||
Accrued
Royalties
|
239,835 | 246,111 | 184,383 | |||||||||
Accrued
Interest
|
- | - | 55,952 | |||||||||
Unearned
Royalties
|
87,697 | 110,578 | 112,135 | |||||||||
Notes
Payable
|
80,976 | 109,271 | 448,602 | |||||||||
Total
Current Liabilities
|
663,600 | 723,502 | 948,556 | |||||||||
Total
Liabilities
|
663,600 | 723,502 | 948,556 | |||||||||
Equity
(Deficit)
|
||||||||||||
Preferred
Stock
|
- | - | - | |||||||||
$.001
par value per share, 10,000,000 shares authorized, 0 shares issued and
outstanding as of June 30, 2010, December 31, 2009 and 2008,
respectively
|
||||||||||||
Common
Stock
|
39,039 | 32,269 | 26,550 | |||||||||
$.001
par value per share, 100,000,000 shares authorized, 39,038,720 shares
issued and outstanding as of June 30, 2010 and 32,268,599 and 26,550,000
shares as of December 31, 2009 and 2008, respectively
|
||||||||||||
Additional
Paid-In Capital
|
822,712 | 601,288 | 140,855 | |||||||||
Retained
Deficit
|
(929,211 | ) | (829,807 | ) | (595,873 | ) | ||||||
Total
Equity (Deficit)
|
(67,460 | ) | (196,250 | ) | (428,468 | ) | ||||||
TOTAL
LIABILITIES & EQUITY (DEFICIT)
|
$ | 596,140 | $ | 527,252 | $ | 520,088 |
The
accompanying notes are an integral part of the financial statements
F-2
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
STATEMENT
OF OPERATIONS
(Unaudited)
|
||||||||||||||||
Six Month Period Ended June 30
|
Year Ended December 31
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Revenues
|
$ | 287,573 | $ | 356,171 | $ | 865,429 | $ | 583,372 | ||||||||
Costs
and Expenses:
|
||||||||||||||||
Cost
of Sales - Product Development
|
109,451 | 78,791 | 168,402 | 71,912 | ||||||||||||
Cost
of Sales - Development Services
|
115,685 | 103,304 | 330,477 | 2,413 | ||||||||||||
Cost
of Sales - Licensing
|
28,212 | 85,107 | 244,031 | 257,544 | ||||||||||||
General
& Administrative
|
123,420 | 72,934 | 315,510 | 327,602 | ||||||||||||
Sales
& Marketing
|
5,014 | 3,062 | 6,417 | 3,287 | ||||||||||||
Amortization
& Depreciation
|
108 | 3,095 | 3,323 | 7,206 | ||||||||||||
Total
Expense
|
381,890 | 346,293 | 1,068,160 | 669,964 | ||||||||||||
Net
Ordinary Income/Loss
|
(94,318 | ) | 9,878 | (202,732 | ) | (86,592 | ) | |||||||||
Interest
Income/Expense, net
|
4,162 | 18,257 | 30,133 | 41,524 | ||||||||||||
Net
Income/Loss before taxes
|
(98,480 | ) | (8,380 | ) | (232,864 | ) | (128,116 | ) | ||||||||
Income
Tax Expense
|
925 | 800 | 1,068 | 340 | ||||||||||||
Net
Income/Loss
|
$ | (99,405 | ) | $ | (9,180 | ) | $ | (233,933 | ) | $ | (128,456 | ) | ||||
Weighted
number of common shares outstanding-basic and fully
diluted
|
37,664,806 | 26,550,000 | 27,756,389 | 26,550,000 | ||||||||||||
Loss
per share-basic and fully diluted
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) |
The
accompanying notes are an integral part of the financial statements
F-3
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
STATEMENTS
OF CASHFLOWS
(Unaudited)
|
||||||||||||||||
Six Month Period Ended June 30
|
Year Ended December 31
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||
Net
loss
|
$ | (99,405 | ) | $ | (9,180 | ) | $ | (233,933 | ) | $ | (128,456 | ) | ||||
Adjustments
to reconcile net loss to net cash provided (used) by operating
activities:
|
||||||||||||||||
Depreciation
and amortization
|
108 | 3,095 | 3,323 | 7,206 | ||||||||||||
Amortization
of debt issue costs
|
- | - | - | 4,527 | ||||||||||||
Amortization
of capitalized production costs
|
108,833 | 78,791 | 166,318 | 76,031 | ||||||||||||
Salary
Forgiveness
|
- | - | - | 48,966 | ||||||||||||
Stock
Based Compensation
|
- | 1,540 | 7,447 | 2,665 | ||||||||||||
Stock
Based Compensation-Warrants
|
- | - | 92,851 | - | ||||||||||||
Changes
in operating assets and liabilities:
|
||||||||||||||||
Accounts
receivable
|
30,831 | 4,301 | 1,631 | (56,115 | ) | |||||||||||
Capitalized
Production Costs
|
(151,104 | ) | (134,431 | ) | (272,031 | ) | (210,577 | ) | ||||||||
Prepaid
Royalties
|
(12,585 | ) | 5,741 | 117,891 | 26,824 | |||||||||||
Prepaid
Expenses
|
486 | - | (1,970 | ) | 5,564 | |||||||||||
Other
assets
|
- | (429 | ) | (429 | ) | 109 | ||||||||||
Accounts
Payable
|
(14,261 | ) | 8,861 | 88,324 | (9,113 | ) | ||||||||||
Accrued
Compensation
|
11,819 | (133 | ) | 21,735 | 112,900 | |||||||||||
Accrued
Royalties
|
(6,283 | ) | 29,039 | 61,728 | 179,350 | |||||||||||
Accrued
Interest
|
- | 12,360 | 9,900 | 16,787 | ||||||||||||
Unearned
royalties
|
(22,881 | ) | 42,770 | (1,556 | ) | (1,808 | ) | |||||||||
Net
cash provided (used) by operating activities
|
$ | (154,442 | ) | $ | 42,325 | $ | 61,229 | $ | 74,860 | |||||||
Cash
flows from investing activities:
|
||||||||||||||||
Purchases
of property and equipment
|
- | - | - | (656 | ) | |||||||||||
Net
cash provided (used) by investing activities
|
- | - | - | (656 | ) | |||||||||||
Cash
flows from financing activities:
|
||||||||||||||||
Payments
for PPM Costs
|
(116,206 | ) | - | (8,837 | ) | - | ||||||||||
Repayments
of long-term debt
|
(29,994 | ) | (10,000 | ) | (30,494 | ) | (83,411 | ) | ||||||||
Stock
issued in exchange for cash
|
344,400 | - | - | - | ||||||||||||
Accrued
interest on long-term debt
|
- | - | - | - | ||||||||||||
Net
cash provided (used) by financing activities
|
198,200 | (10,000 | ) | (39,331 | ) | (83,411 | ) | |||||||||
Net
increase (decrease) in cash
|
43,758 | 32,325 | 21,898 | (9,207 | ) | |||||||||||
Cash
at the beginning of the period
|
28,904 | 7,006 | 7,006 | 16,213 | ||||||||||||
Cash
at the end of the period
|
$ | 72,662 | $ | 39,331 | $ | 28,904 | $ | 7,006 | ||||||||
Non-cash
transactions
|
||||||||||||||||
Prepaid
Insurance - Financed
|
$ | 1,699 | $ | - | $ | - | $ | - | ||||||||
Stock
issued for PPM Costs
|
$ | 3,326 | $ | - | $ | - | $ | - | ||||||||
Stock
issued for Debt Conversion
|
$ | - | $ | - | $ | 375,854 | $ | - | ||||||||
Cashless
exercise of warrants
|
$ | - | $ | - | $ | 1,123 | $ | - |
The
accompanying notes are an integral part of the financial statements
F-4
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
Statement
of Shareholders Equity
(Unaudited)
Convertible Preferred Stock
|
Common Stock
|
Additional Paid In
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Accumulated Deficit
|
Total
|
||||||||||||||||||||||
Balances
as of December 31, 2007
|
- | $ | - | 26,550,000 | $ | 26,550 | $ | 89,224 | $ | (467,417 | ) | $ | (351,643 | ) | ||||||||||||||
Stock
based compensation
|
- | $ | - | - | $ | - | $ | 2,665 | $ | - | $ | 2,665 | ||||||||||||||||
Salary
forgiveness
|
- | $ | - | - | $ | - | $ | 48,966 | $ | - | $ | 48,966 | ||||||||||||||||
Net
loss
|
- | $ | - | - | $ | - | $ | - | $ | (128,456 | ) | $ | (128,456 | ) | ||||||||||||||
Balances
as of December 31, 2008
|
- | $ | - | 26,550,000 | $ | 26,550 | $ | 140,855 | $ | (595,873 | ) | $ | (428,468 | ) | ||||||||||||||
Shares
issued for debt conversion
|
- | $ | - | 4,595,534 | $ | 4,596 | $ | 371,258 | $ | - | $ | 375,854 | ||||||||||||||||
Stock
based compensation
|
- | $ | - | - | $ | - | $ | 7,447 | $ | - | $ | 7,447 | ||||||||||||||||
Stock
based compensation-warrants
|
- | $ | - | - | $ | - | $ | 92,851 | $ | 92,851 | ||||||||||||||||||
Cashless
exercise of options
|
- | $ | - | 1,123,065 | $ | 1,123 | $ | (1,123 | ) | $ | - | $ | - | |||||||||||||||
Capitalized
cost of equity offering
|
- | $ | - | - | $ | - | $ | (10,000 | ) | $ | - | $ | (10,000 | ) | ||||||||||||||
Net
loss
|
- | $ | - | - | $ | - | $ | - | $ | (233,933 | ) | $ | (233,933 | ) | ||||||||||||||
Balances
as of December 31, 2009
|
- | $ | - | 32,268,599 | $ | 32,269 | $ | 601,288 | $ | (829,807 | ) | $ | (196,250 | ) | ||||||||||||||
Shares
issued for cost of equity offering
|
- | $ | - | 3,326,121 | $ | 3,326 | $ | (3,326 | ) | $ | - | $ | - | |||||||||||||||
Stock
issued for cash
|
- | $ | - | 3,444,000 | $ | 3,444 | $ | 340,956 | $ | - | $ | 344,400 | ||||||||||||||||
Capitalized
cost of equity offering
|
- | $ | - | - | $ | - | $ | (116,206 | ) | $ | - | $ | (116,206 | ) | ||||||||||||||
Net
loss for the six month period
|
- | $ | - | - | $ | - | $ | - | $ | (99,405 | ) | $ | (99,405 | ) | ||||||||||||||
Balances
as of June 30, 2010
|
- | $ | - | 39,038,720 | $ | 39,039 | $ | 822,712 | $ | (929,211 | ) | $ | (67,460 | ) |
The
accompanying notes are an integral part of the financial statements
F-5
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
NOTE
1 —
|
THE
COMPANY
|
Nature
of Business
We are a
casual online games publisher that develops and markets games across the major
digital distribution platforms including PC/Mac downloadable (Web), mobile, and
emerging platforms like social networking sites (including
Facebook). We focus on casual games because of our belief that they
appeal to a significant portion of the population. Although the
primary consumers of downloadable casual games are women over the age of 35,
downloadable casual games are enjoyed by people of all ages – ex-gamer dads,
pre-teen kids, teenagers, college students and grandparents. Thus, we
believe the potential market for our games is very large.
NOTE
2 —
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Unaudited
Interim Financial Information
The
accompanying balance sheet as of June 30, 2010, statements of operations for the
six months ended June 30, 2009 and 2010, statement of shareholders’ equity for
the six months ended June 30, 2010 and statements of cash flows for the six
months ended June 30, 2009 and 2010 are unaudited. These unaudited interim
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
the Company's management, the unaudited interim financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments necessary for the fair presentation of the Company's financial
position at June 30, 2010 and its results of operations and its cash flows for
the six months ended June 30, 2009 and 2010. The results for the six months
ended June 30, 2010 are not necessarily indicative of the results to be expected
for the fiscal year ending December 31, 2010.
Revenue
Recognition
The
Company’s revenues are derived primarily by licensing software products in the
form of online and downloadable games for PC, Mac and smartphone platforms. The
Company distributes its products primarily through online games portals and
smartphone device manufacturers (“distribution partners”), which market the
games to end users. The nature of our business is such that we sell games
basically through four distribution outlets – WEB portals, brick and mortar
retail distributors, mobile distributors and publishers, and our own web portal,
www.freezetag.com.
Product
Sales (web and mobile revenues)
We
recognize revenue from the sale of our products upon the transfer of title and
risk of loss to our customers, and once any performance obligations have been
completed. Revenue from product sales is recognized after deducting the
estimated allowance for returns and price protection.
Licensing
Revenues (retail revenues- royalties)
Third-party
licensees distribute games under license agreements with the Company. We receive
royalties from the licensees as a result. We recognize these royalties as
revenues upon receipt of the monthly or quarterly (varies per distribution
partner) revenue reports provided by the partner. Revenue from
licensing/royalties is recognized after deducting the estimated allowance for
returns and price protection.
Some
license agreements require a royalty advance from the licensee/distributor in
which case the original advance is recognized as a liability and royalty revenue
is deducted from the advance as earned.
F-6
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
Other
Revenues
Other
revenues primarily include Ad game revenue and work-for-hire game related
revenue. We derive our advertising game revenue from certain of our
partners that offer our games free of charge to consumers in exchange for the
consumers being exposed to advertising embedded in our games. In this way, we do
not receive revenue for the sale of our games, but rather a percentage of the
“advertising” revenue generated by these player views. This method of generating
revenue is essentially the same as traditional radio or television advertising
where consumers are allowed to enjoy content for “free” but are forced to watch
(or listen) to advertising before, in between and at the end of the programming
content.
Additionally,
we derive some revenue from “work-for-hire” projects. Some of our
partners occasionally ask us to render “work-for-hire” services for them such as
preparing packaging materials. For example, a retail game and DVD publisher
hired us to create several designs for printed packages that were used for games
published by the publisher but not developed by us. For this work, we
charge a one-time, fixed fee for each package design.
We
recognize this revenue once all performance obligations have been
completed. In addition, persuasive evidence of an arrangement must exist
and collection of the related receivable must be probable.
We
recognize revenue in accordance with current accounting standards when an
arrangement exists, delivery has occurred, the price is fixed and determinable,
and collectability is probable.
Cash and Cash
Equivalents
For
purposes of the Statement of Cash Flows, the Company considers liquid
investments with an original maturity of three months or less to be cash
equivalents. The Company places its cash and cash equivalents with
large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”)
insures these balances, up to $250,000. All of the Company’s cash
balances at June 30, 2010, December 31, 2009 and 2008 are
insured. At June 30, 2010, December 31, 2009 and 2008 there were no
cash equivalents.
Restricted
Cash
In
February of 2010, as a condition of the private equity offering of common shares
of the Company, we entered into an escrow agreement, which governed the receipt
and distribution of the funds. At the time of closing, $171,125
(50%) of the funds were placed in to an escrow account, and these funds are
being used to pay accounting, legal, and consulting fees associated with the
public offering of common shares of the Company and the first 12
months of accounting and legal expenses following the successful listing on the
OTCBB. As of June 30, 2010, the remaining balance was
$60,791.
Releasing
the funds requires the signatures of both the Company, and a representative from
Monarch Bay Management Company.
Because
of these restrictions on the use of funds, we have placed them on the balance
sheet in a “Restricted Cash” category.
Allowances
for Returns, Price Protection, and Doubtful Accounts
Because
the majority of our business is derived through online portals (such as Big Fish
Games) and wireless online app stores (such as Apple), there is no physical
product, other than the downloadable bits of our games that is involved in the
customer purchase. In the digital environment, the customer cannot ‘return’ a
digital download product. Therefore, there are no returns. The customer can ask
for a refund of a digital product, and if there are any, then they are
reconciled or netted out by our distribution partners before we receive the
corresponding payments and royalty statements. As such, we do not allow for
returns, bad debts or price protection of digital download
products.
However,
we derive a small portion of our revenues from sales of physical packaged
software for personal computers through distribution partners who sell through
traditional retail channels. Product revenue is recognized net of allowances for
price protection and returns and various customer discounts. Our distribution
partners who sell to retailers may allow returns for our packaged personal
computer products; these partners may decide to provide price protection or
allow returns for personal computer products after they analyze:
(1) inventory remaining in the retail channel, (2) the rate of
inventory sell-through in the retail channel, and (3) the remaining
inventory on hand of our games. To allow for these returns, price protection and
various customer discounts, some of our distribution partners who sell to
retailers will hold back a percentage of our revenue. These “hold-back” amounts,
typically a percentage of revenue, are then reconciled on a quarterly basis and
detailed on the statements we receive from our distribution
partners.
F-7
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment are recorded at cost and are depreciated using the straight-line
method over the estimated useful lives of the related assets. All
assets are currently depreciated over 3 years. Maintenance and
repairs are charged to expense as incurred. Renewals and improvements
of a major nature are capitalized. At the time of retirement or other
disposition of property and equipment, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are reflected in
the statement of operations.
Concentrations
of Credit Risk, Major Customers and Major Vendors
The
Company’s customers are the end-consumers that purchase its games from the
websites where the Company has its games listed for sale. Therefore,
the Company does not have any individual customers that represent any more than
a fraction of its revenue. However, the Company does have primary
distribution partners, which are the owners of the websites where it sells its
games. Under the Company’s distribution agreements it is not
obligated to make, distribute or sell any games. However, for any
games the Company does make and wishes to distribute it can list them on one or
more of these websites under a revenue sharing arrangement where it shares the
revenue from any of its games that sell. The sharing arrangement
varies greatly depending on the distributor with the Company generally keeping
between 35% and 70% of the revenue and the distributor keeping the remainder of
the revenue generated by each sale. At times the Company enters into
“exclusivity options” whereby if a distributor wishes to have an exclusive
period carrying the Company’s games (normally 30-90 days) it will agree to that
in exchange for the distributor marketing the game in their newsletter and other
marketing programs. Due to
the fact the Company has a number of distribution partners and a variety of
different websites where it can sell its games, the Company is not substantially
dependent on any of its distribution partners or agreements. In
addition to the distribution agreements, the Company currently has licensing
agreements with Ohio Art Company and CMG Worldwide, which allow it to develop
and distribute games around third party intellectual property in exchange for
paying royalty payments. The Company is not substantially dependent
on either of those licensing agreements.
During
the period ended June 30, 2010, the Company’s primary distributors that
represented 10% or more of its revenues were: Real Networks – 24% of
revenue, Big Fish Games – 22% of revenue, and Superscape – 16%.
At June
30, 2010, the Company’s primary distributors that represented 10% or more of its
accounts receivable were: Big Fish Games - 27%, C1BPO – 30%, and
Exent Technologies – 22%.
During
the year ended December 31, 2009, the Company’s primary distributors that
represented 10% or more of its revenues were: Real Networks - 44% of
revenue, and Big Fish Games - 24% of revenue compared to the year ended December
31, 2008, when the distributors that represented 10% or more of the Company’s
revenues were: Big Fish Games - 24% of net revenues, and Real
Networks - 14% of net revenues, and Apple - 13% of revenue.
At
December 31, 2009, the Company’s primary distributors representing 10% or more
of its accounts receivable were: Big Fish Games – 15%, Exent Technologies – 13%,
and Mumbo Jumbo – 26% compared to December 31, 2008, when the Company’s primary
distributors representing 10% or more of its accounts receivable were: Big Fish
Games – 28%, Exent Technologies – 12%, and Mumbo Jumbo – 33%.
Income
Taxes
We
account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740,
income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
ASC Topic
740 includes accounting guidance which clarifies the accounting for the
uncertainty in recognizing income taxes in an organization by providing detailed
guidance for financial statement recognition, measurement and disclosure
involving uncertain tax positions. This guidance requires an uncertain tax
position to meet a more-likely-than-not recognition threshold at the effective
date to be recognized both upon the adoption of the related guidance and in
subsequent periods.
F-8
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
Foreign
Currency Translation
We derive
a portion of our revenue from foreign countries, which report to us in foreign
currency, but pay in U.S. Dollars. Because of the fluctuations
between the reporting time and the payment period (up to 60 days), it is
necessary to make adjustments to our accounting records. These
adjustments are recorded under a Foreign Currency Translation expense account,
and shown in the P&L statement as a General & Administrative
expense.
Accounting
for Stock-Based Compensation
We
account for stock-based compensation in accordance with ASC Topic 718-10,
Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments
to Non-Employees ("ASC stock-based compensation guidance"). Stock-based
compensation expense recognized during the requisite services period is based on
the value of share-based payment awards after reduction for estimated
forfeitures. Forfeitures are estimated at the time of grant and are revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Stock-based compensation expense recognized in our statement of
operations for the period ended June 30, 2010 was $0, and for the years ended
December 31, 2009 and 2008 included compensation expense of $7,447 and $2,665
respectively. As of December 31, 2009, the Company issued 930,000 warrants upon
conversion of the notes payable and recognized expense of $92,851.
Impairment
of Long-Lived Assets
The
Company has adopted Accounting Standards Codification subtopic 360-10, Property,
Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets
and certain identifiable intangibles held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company evaluates its
long-lived assets for impairment annually or more often if events and
circumstances warrant. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses or a forecasted
inability to achieve break-even operating results over an extended period. The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should impairment in value be indicated, the carrying
value of long-lived assets will be adjusted, based on estimates of future
discounted cash flows resulting from the use and ultimate disposition of the
asset. ASC 360-10 also requires assets to be disposed of be reported at the
lower of the carrying amount or the fair value less costs to sell.
Fair
Value of Financial Instruments
Effective
January 1, 2009, the Company adopted Accounting Standards Codification subtopic
820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”),
which permits entities to choose to measure many financial instruments and
certain other items at fair value. Neither of these statements had an
impact on the Company’s financial position, results of operations or cash flows.
The carrying value of cash and cash equivalents, accounts payable, accrued
expenses and notes payable, as reflected in the balance sheets, approximate fair
value because of the short-term maturity of these instruments.
Inputs
used in the valuation to derive fair value are classified based on a fair value
hierarchy which distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
F-9
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
|
·
|
Level
one — Quoted market prices in active markets for identical assets or
liabilities;
|
|
·
|
Level
two — Inputs other than level one inputs that are either directly or
indirectly observable; and
|
|
·
|
Level
three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions
that a market participant would
use.
|
Determining
the category in which an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
period.
Use
of Estimates
The
preparation of financial statements and related disclosures in conformity with
U.S. generally accepted accounting principles (“U.S. GAAP”) requires the
Company’s management to make judgments, assumptions and estimates that affect
the amounts reported in its financial statements and accompanying notes.
Management bases its estimates on historical experience and on various other
assumptions it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results may differ from these estimates and these
differences may be material.
Research
and Development Costs
The
Company charges costs related to research & development of products to
general and administrative expense as incurred. The types of costs
included in research and development expenses include research materials,
salaries, contractor fees, and support materials.
Software
Development Costs
Software
development costs include direct costs incurred for internally developed
products and payments made to independent software developers and/or contract
engineers and artists. We account for software development costs in accordance
with the FASB guidance for the costs of computer software to be sold, leased, or
otherwise marketed ("ASC Subtopic 985-20"). Software development costs are
capitalized once the technological feasibility of a product is established and
such costs are determined to be recoverable. Technological feasibility of a
product encompasses both technical design documentation and game design
documentation, or the completed and tested product design and working model.
Software development costs are capitalized once technological feasibility of a
product is established and such costs are determined to be recoverable against
future revenues. For products where proven game engine technology exists (as is
the case for most of our products), this may occur early in the development
cycle. Significant management judgments and estimates are utilized in the
assessment of when technological feasibility is established. For most of our
PC/Mac products, technological feasibility is established when a detailed game
design document containing sufficient technical specifications written for a
proven game engine or framework technology has been created and approved by
management. However, technological feasibility is evaluated on a
product-by-product basis. Amounts related to software development that are not
capitalized are charged immediately to the appropriate expense account. Amounts
that are considered ‘research and development’ that are not capitalized are
immediately charged to general and administrative expense.
Prior to
a product's release, we expense, as part of "Cost of Sales—Product Development",
capitalized costs when we believe such amounts are not recoverable. Capitalized
costs for those products that are cancelled or abandoned are charged to product
development expense in the period of cancellation.
Commencing
upon product release, capitalized software development costs are amortized to
"Cost of Sales—Product Development" based on the straight-line method over a
twenty four month period.
F-10
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
We
evaluate the future recoverability of capitalized software development costs and
intellectual property licenses on a quarterly basis. For products that have been
released in prior periods, the primary evaluation criterion is actual title
performance. For products that are scheduled to be released in future periods,
recoverability is evaluated based on the expected performance of the specific
products to which the costs relate or in which the licensed trademark or
copyright is to be used. Criteria used to evaluate expected product performance
include: historical performance of comparable products developed with comparable
technology; orders for the product prior to its release; and, for any sequel
product, estimated performance based on the performance of the product on which
the sequel is based.
Based on
current trends in our business, management has determined the expected shelf
life of the majority of a game’s revenue will be realized over a two year
period. Therefore, we have determined the appropriate amortization period for
expensing capitalized production costs to be two years or twenty four months
from date of the initial release, or first sale of the product for a specific
technology platform. It is possible that the same game developed on different
technology platforms (such as PC and Mac) will be launched on different release
dates because product development cycles may differ and distribution partner
release policies may differ.
At June
30, 2010, capitalized software development costs on the balance sheet were
$411,396. At December 31, 2009, and December 31, 2008, capitalized software
development costs were $369,125 and $263,412 respectively.
From time
to time, the Company engages in product development projects for third parties
where the company does not retain the intellectual property rights to the games
it develops. These types of development projects are often referred to as
“work-for-hire.” In these instances, all costs associated with developing the
games are expensed as they are incurred. We do this because the
Company receives revenue based on project deliverables outlined as milestones in
the development agreement executed by the Company and the third party that has
engaged us to perform development work. These non-capitalized costs are
represented as “Cost of Sales – Development Services” expenses on our financial
statements.
For the
reporting periods ending June 30, 2010, December 31, 2009, and December 31,
2008, the Company recorded “Cost of Sales – Development Services” charges of
$115,685, $330,477, and $2,413 respectively.
Intellectual
Property Licenses (Prepaid Royalties)
Intellectual
property license costs represent license fees paid to intellectual property
rights holders for use of their trademarks or copyrights in the development of
the Company's products. Intellectual property license costs represent license
fees paid to intellectual property rights holders for use of their trademarks,
copyrights, software, technology, music or other intellectual property or
proprietary rights in the development of our products. Depending upon the
agreement with the rights holder, we may obtain the rights to use acquired
intellectual property in multiple products over multiple years, or
alternatively, for a single product. Minimum guaranteed royalty payments for
intellectual property licenses are initially recorded as an asset (prepaid
royalties or prepaid licensing fees), and a current liability, (accrued
royalties payable) at the contractual amount upon execution of the contract when
no significant performance remains with the licensor. Commencing upon the
related product's release date, intellectual property licenses costs are
amortized to “Cost of Sales – Licensing” based upon the percentage of revenue
outlined in the contract with each specific licensor. Generally, the Company’s
intellectual property licensing contracts call for licensors to be paid a
percentage of revenue actually received by the Company, with allowances for
minimum guarantees. Sometimes, the terms of the specific licensing contracts
allow for the Company to re-capture expenses before licensing out royalties are
calculated.
F-11
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
Capitalized
intellectual property costs for those products that are cancelled or abandoned
are charged to product development expense in the period of
cancellation.
For the
reporting periods June 30, 2010, December 31, 2009 and December 31, 2008,
prepaid royalties (or prepaid licensing fees) were $48,852, $36,267, and
$154,158 respectively.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued an update to Fair Value Measurements and
Disclosures. This update provides amendments to ASC Subtopic 820-10 requiring
new disclosures regarding (1) transfers in and out of Levels 1 and 2, in which
the Company should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers, and (2) the
reconciliation for fair value measurements using significant
unobservable inputs (Level 3), in which the Company should present separately
information about purchases, sales, issuances, and settlements (on a
gross basis rather than as one net number). In addition the update provides
clarification of existing disclosures regarding the level of disaggregation and
disclosures about inputs and valuation techniques. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchase, sales, issuances, and settlements in the roll forward activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those
fiscal years. The Company does not expect the adoption of this statement to have
a material impact on its financial statements.
In
October 2009, the FASB issued ASU 2009-14, which amends ASC 985-605,
"Software-Revenue Recognition", to exclude from its requirements (a)
non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products when
the software components and non-software components of the tangible product
function together to deliver the tangible product's essential functionality. ASU
2009-14 will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, and
early adoption will be permitted. The Company does not expect the adoption of
this statement to have a material impact on its financial
statements.
In June
2009, the FASB approved the FASB Accounting Standards Codification (the
“Codification”) ASC 105, "Generally Accepted Accounting Principles" (formerly
Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles-a replacement of FASB Statement No. 16" ("SFAS 168")) as
the single source of authoritative nongovernmental generally accepted accounting
principles (GAAP). All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission (“SEC”), have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification did not change GAAP,
but instead introduced a new structure that combines all authoritative standards
into a comprehensive, topically organized online database. The Company adopted
the Codification and as a result, all references to authoritative
accounting literature are now referenced in accordance with the
Codification.
F-12
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
In April
2009, the FASB issued new accounting guidance ASC 825, "Financial Instruments"
(formerly FASB Staff Position (“SOP”) No. 107-1, "Interim Disclosures about Fair
Value of Financial Instruments" (“SOP 107-1”) ) related to interim disclosures
about the fair values of financial instruments. This guidance requires
disclosures about the fair value of financial instruments whenever a public
company issues financial information for interim reporting periods. The Company
adopted this guidance upon its issuance, and it had no material impact on the
Company’s financial statements.
NOTE
3 —
|
GOING
CONCERN
|
As shown
in the accompanying financial statements for the periods ending June 30, 2010,
December 31, 2009, and December 31, 2008, we have incurred net losses of
$99,405, $233,933 and $128,456, respectively. As of June 30, 2010 our
deficit is $929,211. During fiscal 2009, we continued to experience
close to neutral cash flows from operations largely due to our continued
investment spending for product development of game titles for the PC and other
popular gaming platforms that are expected to benefit future periods. Those
facts, along with our lack of access to a significant bank credit facility,
create an uncertainty about our ability to continue as a going concern.
Accordingly, we are currently evaluating our alternatives to secure financing
sufficient to support the operating requirements of our current business plan,
as well as continuing to execute our business strategy of distributing our game
titles to digital distribution outlets, including mobile gaming app stores,
online PC and Mac gaming portals, and opportunities for new devices such as
tablet (mobile internet device) applications, mobile gaming platforms and
international licensing opportunities.
Our
ability to continue as a going concern is dependent upon our success in securing
sufficient financing and to successfully execute our plans to return to positive
cash flows during fiscal 2010. Our financial statements do not include any
adjustments that might be necessary if we were unable to continue as a going
concern.
NOTE
4 —
|
CAPITALIZED
PRODUCTION COSTS
|
Capitalized
Production Costs, Net consists of the following at:
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
||||||||||
Capitalized
Production Costs
|
789,206 | 638,104 | 366,073 | |||||||||
Accumulated
Production Costs Amortization
|
(377,810 | ) | (268,979 | ) | (102,661 | ) | ||||||
Total
Capitalized Production Costs, Net
|
$ | 411,396 | $ | 369,125 | $ | 263,412 | ||||||
Current
|
181,236 | 193,461 | 135,871 | |||||||||
Long
Term
|
230,160 | 175,664 | 127,541 |
We
recognized amortization expense of $108,833 during the six months ended June 30,
2010, $166,318 and $76,031 at December 31, 2009 and 2008,
respectively.
F-13
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
NOTE
5 —
|
FIXED
ASSETS
|
Fixed
assets, Net, consists of the following at:
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
||||||||||
Computer
Equipment
|
2,885 | 2,885 | 2,885 | |||||||||
Communications
Equipment
|
830 | 830 | 830 | |||||||||
Accumulated
Depreciation
|
(3,520 | ) | (3,413 | ) | (2,717 | ) | ||||||
Total
Fixed Assets, Net
|
$ | 194 | $ | 302 | $ | 998 |
Property
and equipment are recorded at cost and are depreciated using the straight-line
method over the estimated useful lives of the related assets. All
assets are currently depreciated over 3 years. Depreciation expense
for the six months ended June 30, 2010 was $108. For the years ended
December 31, 2009 and December 31, 2008, depreciation expense was $234 and $846
respectively.
NOTE
6 —
|
ACCRUED
COMPENSATION
|
Accrued
Compensation Consists of the following at:
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
||||||||||
Employee
Reimbursements owed
|
842 | 2,304 | ||||||||||
Payroll
Liabilities
|
391 | 325 | 2,951 | |||||||||
Accrued
Vacation
|
58,674 | 45,467 | 23,412 | |||||||||
Accrued
Salary
|
93,600 | 93,600 | 93,600 | |||||||||
Total
Accrued Compensation
|
$ | 153,507 | $ | 141,696 | $ | 119,963 |
NOTE
7 —
|
ACCRUED
ROYALTIES AND UNEARNED ROYALTIES
|
Accrued
Royalties consists of money owed to other parties with whom we have
revenue-sharing agreements or from whom we license certain trademarks or copy
writes.
Unearned
Royalties consists of royalties received from licensees which have not yet been
earned.
F-14
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
Accrued
and Unearned Royalties consists of the following at:
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
||||||||||
Accrued
Royalties
|
239,835 | 246,111 | 184,383 | |||||||||
Unearned
Royalties
|
87,697 | 110,578 | 112,135 | |||||||||
Total
Accrued and Unearned Royalties
|
$ | 327,532 | $ | 356,689 | $ | 296,518 |
NOTE
8 —
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
We have
been residing in our current building at 228 W. Main Street, Tustin, California
since 2006. Since that time, we have paid our rent on a month-to-month basis. As
such, we are free to leave our current premises at any time with 30 days
courtesy notice but we do not have a lease agreement with the property owner.
This is our preference since it is our desire to be able to quickly expand to
alternative office space should our growth require additional square footage
than our current offices. The Company or Company employees or contractors own
all of the computer and office equipment that is used in the course of business.
We do not have any lease agreements for any office equipment.
We have
one year contracts in place with an Internet service provider (one year contract
that expires in September 2010) and a telephone service provider (one year
contract that expires in October 2010).
NOTE
9 —
|
SHORT
TERM DEBT
|
Short-term
debt consists of the following at:
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
||||||||||
Notes
payable, private placement investors
|
- | - | 310,000 | |||||||||
Sunwest
Bank
|
78,000 | 108,000 | 138,500 | |||||||||
Other
short-term debt
|
2,976 | 1,271 | 102 | |||||||||
Total
short-term debt
|
$ | 80,976 | $ | 109,271 | $ | 448,602 |
Convertible
Notes
In 2006,
we entered into a private placement offering with accredited investors pursuant
to which we sold Convertible Promissory Notes, together with Warrants to
Purchase Common Stock of the Company for an aggregate offering price of
$200,000. The convertible promissory notes bear interest at the rate of 8% per
annum and mature on June 30, 2008. The entire principal amount of and
(at the Company’s option) accrued and unpaid interest on the promissory notes
were to be converted into shares of the Company’s equity securities that were
issued and sold at the close of the Company’s next equity financing in a single
transaction or a series of related transactions yielding gross proceeds to the
Company of at least $1,000,000 in the aggregate, not including amounts converted
pursuant to the promissory notes. The conversion was contingent upon a future
funding and at the option of the Company. The notes were evaluated for a
beneficial conversion feature and embedded derivative and a conclusion was
reached that these features did not exist.
F-15
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
On May 1,
2007, a Convertible Promissory Note was issued for proceeds of $110,000. The
convertible promissory notes bear interest at the rate of 8% per annum and
mature on June 30, 2009. The entire principal amount of and (at the
Company’s option) accrued and unpaid interest on the promissory notes were to be
converted into shares of the Company’s equity securities that were issued and
sold at the close of the Company’s next equity financing in a single transaction
or a series of related transactions yielding gross proceeds to the Company of at
least $1,000,000 in the aggregate, not including amounts converted pursuant to
the promissory notes.
On
October 15, 2009, the 2010 PPM Offering (next equity financing) triggered the
conversion of the Convertible Promissory Notes issued in 2006 and
2007. The Company issued 3,758,533 shares of its common stock at a
conversion price of $0.10 per share for the conversion of $310,000 of principal
and $65,853 of interest.
Our
convertible note was contingently convertible only when we had an equity raise.
Until such a raise the note was not convertible and no warrants were issued, the
raise was completely within the control of the Company. In 2009, we began our
equity raise and converted the notes at the contractually agreed upon conversion
price which was equal to our price paid per unit and fair value and as such no
beneficial conversion feature existed. In accordance with the terms of the note,
930,000 warrants were also issued at an exercise price of $.01 per share which
represented a discount to the note when the warrants were issued upon the
triggering event that resulted in conversion. The warrants were valued at
$92,851 using a Black-Scholes model with an expected volatility of 171.66% and a
discount rate of 3.49%. Since the notes underlying the warrants were relieved
the discount resulting from these warrants of $92,851 was immediately expensed
in 2009. Each note holder elected to exercise the warrants on a
cashless basis. As a result, 837,000 shares of the Company’s common
stock were issued to note holders.
As of
June 30, 2010, the Company had a convertible note payable balance of $0 and $0
and $310,000 for the years ended December 31, 2009 and 2008, respectively. The
Company recorded interest expense of $0 for the six months ended June 30, 2010
and $19,907 and $25,896 for the years ended December 31, 2009 and 2008,
respectively.
Line
of Credit
In
October 2006, the Company obtained a $200,000 secured line of credit with
Sunwest Bank in Tustin, California. The line of credit is secured
with a $50,000 certificate of deposit and liens against the personal property of
Craig Holland, CEO, and Mick Donahoo, CFO. The line of credit matures
on December 31, 2009 and bears interest of 7% per annum. The line of credit is
renewed each year and terms are re-negotiated between the Company and Sunwest
Bank. The Company currently makes principal monthly payments of
$5,000 plus monthly interest.
As of
June 30, 2010, the outstanding line of credit balance was
$78,000. For the years ended December 31, 2009 and 2008, the balance
was $108,000 and $138,500, respectively. The Company recorded interest expense
of $4,011 for the six months ended June 30, 2010 and $9,470 and $11,040 for the
years ended December 31, 2009 and 2008, respectively. As of June 30,
2010, December 31, 2009, or December 31, 2008 all interest payments were current
therefore no accrued interest is recorded.
F-16
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
NOTE
10 —
|
STOCKHOLDERS’
EQUITY
|
Stock
Issuance
The
Company is authorized to issue up to 100,000,000 shares of its $.001 par value
common stock, and up to 10,000,000 shares of its $.001 par value preferred
stock.
On
January 31, 2010, the Private Placement Offering closed, and the Company entered
into and closed a stock purchase agreement with multiple accredited investors
for the sale of 3,444,000 shares of its common stock at a purchase price of
$0.10 per share totaling $344,400. See discussion of 2010 Private Placement
Offering below.
As of
June 30, 2010, the Company issued 3,326,121 shares of its common stock to
consultants in exchange for legal, financial, and marketing consulting related
to the 2010 Private Placement Offering.
During
2009, 1,407,150 warrants and options were exercised on a cashless basis under
the Company Stock Option Plan resulting in the issuance of 1,123,065
shares. See details of Exercising of Stock Warrants and Options
below.
On
October 15, 2009, the Company issued 3,758,533 shares of its common stock to
note holders for conversion of principal of $310,000 and accrued interest of
$65,854 at the conversion price of $.10 per share. The Company issued 837,000
shares of its common stock to note holders for the cashless exercise of 930,000
warrants. A total of 4,595,534 shares of common stock were issued in relation to
conversion of promissory notes and associated warrants.
On
October 15, 2009, the Company completed a 5.31-for-one forward stock split of
the Company’s common stock. All amounts present have been adjusted to reflect
the stock split.
During
2008, principles of the Company forgave $48,966 of salary compensation. The
Company recorded this amount to Additional Paid in Capital.
Capitalized
Private Placement Costs
In
October of 2009, the Company created a Private Placement Memorandum to raise
funds primarily for our upcoming public stock listing, working capital and
general corporate purposes. Through the Memorandum, we offered to qualified
accredited investors a maximum of 12,500,00 shares of our common stock. The
subscription price per Share was $0.10 and the minimum purchase was Fifteen
Thousand (15,000) Shares ($1,500). We reserved the right to accept subscriptions
for fewer Shares at our sole discretion.
We agreed
to pay Monarch Bay Associates, LLC, a licensed FINRA broker dealer (the
“placement agent”), a commission of 5% of the gross proceeds of the Offering. In
addition, we agreed to indemnify the Placement Agent against certain liabilities
under the Securities Act of 1933, as amended.
Each
Investor must qualify as an “Accredited Investor” under Regulation D of the
Securities Act of 1933, as amended.
F-17
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
The
Shares offered and sold pursuant hereto were not registered under the 1933 Act
or under the securities laws of any state and were offered and sold in reliance
upon exemptions from such registration requirements for non-public offerings
pursuant to Regulation D under the Securities Act and applicable state
securities laws, and therefore, are considered “restricted securities” as such
is defined in Rule 144 promulgated under the 1933 Act.
It was
and is our intent to undertake the filing of a registration statement with the
Commission for the resale of all Shares by the purchasers herein within one
month of completion of the audit of our financial statements for the years ended
December 31, 2008 and December 31, 2009.
The
private placement offering closed on January 31, 2010, and $344,400 in funds
were received and we issued 3,444,000 shares to those investors
($0.10/share). At this time, the Company issued 1,108,707 shares of
its common stock to each of the following for legal and consulting services: The
Lebrecht Group, Michael Southworth and Cardiff Partners. A total of $19,656 was
paid to Monarch Bay Associates for the placement agent
commission. For the period ended June 30, 2010 we capitalized
$116,206 and $10,000 and $0 for the years ended December 31, 2009 and 2008,
respectively, of costs associated with the offering as a charge to Additional
Paid in Capital.
Discussion
of 2006 Stock Option plan
The 2006
Stock Option Plan was adopted by our Board of Directors in March of 2006. A
total of 550,000 shares of Common Stock have been reserved for issuance to
employees, consultants and directors upon exercise of incentive and
non-statutory options and stock purchase rights which may be granted under the
Company’s 2006 Stock Plan (the “2006 Plan”). On October 15, 2009,
235,000 of those options were exercised, leaving 315,000 shares available for
issuance to employees. Because of the 5.31-for-one forward stock
split of the Company’s common stock on October 15, 2009, there are now 1,672,650
shares available for issuance as a part of this stock plan. As of the
period ended June 30, 2010, there were 400,000 options outstanding to purchase
shares of Common Stock, and no shares of Common Stock had been issued pursuant
to stock purchase rights under the 2006 Plan.
Under the
2006 Plan, options may be granted to employees, directors, and
consultants. Only employees may receive “incentive stock options,”
which are intended to qualify for certain tax treatment, and consultants and
directors may receive “non-statutory stock options,” which do not qualify for
such treatment. A holder of more than 10% of the outstanding voting shares may
only be granted options with an exercise price of at least 110% of the fair
market value of the underlying stock on the date of the grant, and if such
holder has incentive stock options, the term of the options must not exceed five
years.
Options
and stock purchase rights granted under the 2006 Plan generally vest ratably
over a four year period (typically ¼ or 25% of the shares vest after the 1st year
and 1/48 of the remaining shares vest each month thereafter); however,
alternative vesting schedules may be approved by the Board of Directors in its
sole discretion. Any unvested portion of an option or stock purchase
right will accelerate and become fully vested if a holder’s service with the
Company is terminated by the Company without cause within twelve months
following a Change in Control (as defined in the 2006 Plan).
All
options must be exercised within ten years after the date of
grant. Upon a holder’s termination of service for any reason prior to
a Change in Control, the Company may repurchase any shares issued to such holder
upon the exercise of options or stock purchase rights. The Board of
Directors may amend the 2006 Plan at any time. The 2006 Plan will
terminate in 2016, unless terminated sooner by the Board of
Directors.
F-18
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
The fair
value of each option grant during the year ended December 31, 2009 and 2008 was
estimated on the date of grant using the Black-Scholes option-pricing model with
an expected life of 5 to 10 years, volatility of 171.66% and a risk-free
interest rate of 4.64% to 4.54%. The weighted average fair value of
the options granted in 2009 and 2008 was $0.10 and $0.10,
respectively.
On
October 15, 2009, due to the planned Private Placement Offering (see this Note -
Note 10 above), the Board of Directors decided to authorize the vesting of all
outstanding shares. Subsequently, all options were exercised on a cashless
basis.
On May 5,
2010, 400,000 options were granted to Jürgen Goldner with an exercise price of
$0.10 per share for advisory services with a total fair value of
$39,987. The stock-based compensation expense will be recognized in
accordance with the vest terms. Subject to the terms of the advisory agreement,
and continued service to the company, the following vesting schedule will
exist: 100,000 options will vest on the following dates: August 5,
2010, November 5, 2010, February 5, 2011, and May 5, 2011.
The fair
value of each option grant during the period ended June 30, 2010 was estimated
on the date of grant using the Black-Scholes option-pricing model with an
expected life of 5 to 10 years, volatility of 319.65% and a risk-free interest
rate of 2.31%. The weighted average fair value of the options granted
in the period ending June 30, 2010 was $0.10.
Stock-based
compensation expense recognized in our statement of operations for the period
ended June 30, 2010 was $0, and for the years ended December 31, 2009 and 2008
included compensation expense of $7,447 and $2,665 respectively. For the year
ended December 31, 2009, the Company issued 930,000 warrants to note holders
upon conversion of such notes. The Company valued the warrants using the Black
Scholes Model and expensed $92,851 included in General and Administrative
expenses on the Statement of Operations.
Exercising
of Stock Warrants and Options
For the
six months ended June 30, 2010, no shares of common stock were issued on the
cashless exercise of warrants or options. During 2009, the company
issued 1,960,065 shares of common stock on the cashless exercise of warrants and
options. 1,123,065 shares of common stock were issued to employees and third
parties and the remaining 837,000 shares were issued to note holders upon
conversion. No shares of common stock were issued on the cashless exercise of
warrants in 2008.
A summary
of the status of the warrants and options issued by the Company as of June 30,
2010, December 31, 2009 and 2008 are as follows:
June 30, 2010
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||||||||||
Number of
Warrants
& Options
|
Weighted
Average
Exercise
Price
|
Number of
Warrants
& Options
|
Weighted
Average
Exercise
Price
|
Number of
Warrants
& Options
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
Outstanding
at beginning of year
|
- | - | 1,407,150 | $ | 0.01 | 1,407,150 | $ | 0.01 | ||||||||||||||||
Granted
|
400,000 | - | 930,000 | 0.01 | - | - | ||||||||||||||||||
Exercised
for cash
|
- | - | - | - | - | - | ||||||||||||||||||
Exercised
for cashless
|
- | - | (2,337,150 | ) | 0.01 | - | - | |||||||||||||||||
Expired
and cancelled
|
- | - | - | - | - | - | ||||||||||||||||||
Outstanding,
end of period
|
400,000 | - | - | $ | - | 1,407,150 | $ | 0.01 |
F-19
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
NOTE
11 —
|
INCOME
TAXES
|
The
Company accounts for income taxes in accordance with standards of disclosure
propounded by the FASB, and any related interpretations of those standards
sanctioned by the FASB. Accordingly, deferred tax assets and
liabilities are determined based on differences between the financial statement
and tax bases of assets and liabilities, as well as a consideration of net
operating loss and credit carry forwards, using enacted tax rates in effect for
the period in which the differences are expected to impact taxable
income. A valuation allowance is established, when necessary, to
reduce deferred tax assets to the amount that is more likely than not to be
realized. Due to the uncertainty as to the utilization of net
operating loss carry forwards, a valuation allowance has been made to the extent
of any tax benefit that net operating losses may generate.
Income
tax expense consists entirely of California minimum franchise taxes of $800 and
Delaware state taxes of $125. For Federal and California income tax
purposes, the Company has net operating loss carry forwards that expire through
2027. The net operating loss as of June 30, 2010 is approximately
$855,000. The net operating loss as of December 31, 2009 and 2008, respectively
is approximately $755,612 and $532,500. No tax benefit has been reported in the
financial statements because after evaluating our own potential tax
uncertainties, the Company has determined that there are no material uncertain
tax positions that have a greater than 50% likelihood of reversal if the Company
were to be audited.
Deferred
tax asset and the valuation account consists of the following at:
June 30, 2010
|
December 31,
2009
|
December 31,
2008
|
||||||||||
Deferred
Tax Asset
|
$ | 290,689 | $ | 256,928 | $ | 181,053 | ||||||
Valuation
Allowances
|
$ | (290,689 | ) | $ | (256,928 | ) | $ | (181,053 | ) | |||
Total:
|
- | - | - |
NOTE
12 —
|
EARNINGS
(LOSS) PER COMMON SHARE
|
Basic
loss per share is calculated based on the weighted-average number of outstanding
common shares. For the periods ended June 30, 2010, December 31, 2009
and December 31, 2008, the fully diluted weighted average number of shares is
the same as the basic weighted average number of shares as the conversion of
options and warrants would be anti-dilutive.
Net loss
per share for the period ending:
Unaudited
|
Audited
|
|||||||||||||||
June 30,
2010
|
June 30,
2009
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||
Net
Income/Loss
|
$ | (99,405 | ) | $ | (9,180 | ) | $ | (233,933 | ) | $ | (128,456 | ) | ||||
Weighted
number of common shares outstanding-basic and fully
diluted
|
37,664,806 | 26,550,000 | 27,756,389 | 26,550,000 | ||||||||||||
Loss
per share-basic and fully diluted
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) |
F-20
FREEZE
TAG, INC.
(A
DELAWARE CORPORATION)
NOTES
TO THE FINANCIAL STATEMENTS
NOTE
13 —
|
SUBSEQUENT
EVENTS
|
As of
July 1, 2010, there is a note payable to Craig Holland and Mick Donahoo for
$25,000 each (a total of $50,000 notes payable) for money that was loaned to the
company to secure the Sunwest Bank debt. The money was loaned to the
company at a rate of 10% interest compounded annually.
On
July 2, 2010, a convertible note loan from Holland Family Trust, (whose sole
trustee is Franklena Holland, mother of Company president Craig Holland), was
secured for $100,000. We have received $75,000 of the purchase price,
with the remaining $25,000 to be paid at a later date.
On August
2, 2010 the following Options were granted to employees:
|
·
|
115,000
options with an exercise price of $0.11 per share to Craig
Holland. Subject to the terms of the option grant, the options
will fully vest 6 months from August 2,
2010.
|
|
·
|
30,000
options with an exercise price of $0.10 per share to Mark
Brashear. Subject to the terms of the option grant, the options
will fully vest 6 months from August 2,
2010
|
|
·
|
15,000
options with an exercise price of $0.10 per share to Kyle
Christensen. Subject to the terms of the option grant, the
options will fully vest 6 months from August 2,
2010.
|
On August
3, 2010, the Company entered into a Change of Terms Agreement, which modified
the terms of its promissory note with Sunwest Bank dated October 20, 2006, as
amended. Under the Change of Terms Agreement:
·
|
The
facility changed from a “Commercial Non-Revolving Line-of-Credit” to a
“Commercial Term Loan” with the effect being that no further funds would
be advanced;
|
·
|
Sunwest
Bank released a deposit account which was being used to secure the
repayment of the amounts owed under promissory note in exchange for Mr.
Craig Holland (a guarantor of the promissory note and owner of the deposit
account) agreeing $50,000 of the funds in the deposit account would be
used to pay down the amount owed under the promissory
note;
|
·
|
As
a result of the $50,000 payment, beginning July 31, 2010, the monthly
principal payment was reduced from $5,000 to $1,900;
and
|
|
·
|
The
date on which the principal and any accrued interest were due under the
promissory note, as amended (the Maturity Date), was extended from
December 31, 2010 to September 31,
2011.
|
F-21
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
We will pay all expenses in connection
with the registration and sale of the common stock by the selling stockholder,
who may be deemed to be an underwriter in connection with their offering of
shares. The estimated expenses of issuance and distribution are set forth
below:
Registration
Fees
|
Approximately
|
$ | 96 | |||
Transfer
Agent Fees
|
Approximately
|
500 | ||||
Costs
of Printing and Engraving
|
Approximately
|
500 | ||||
Legal
Fees
|
Approximately
|
30,000 | ||||
Accounting
and Audit Fees
|
Approximately
|
28,000 | ||||
Total
|
$ | 59,096 |
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Article VIII of our Articles of
Incorporation provides that, to the fullest extent permitted by law, no director
or officer shall be personally liable to the Corporation or its shareholders for
damages for breach of any duty owed to the Corporation or its shareholders. In
addition, the Corporation shall have the power, in its Bylaws or in any
resolution of its stockholders or directors, to indemnify the officers and
directors of this Corporation against any liability as may be determined to be
in the best interests of this Corporation, and in conjunction therewith, to buy,
at this Corporation’s expense, policies of insurance.
Article 7 of our bylaws further
addresses indemnification in the same manner as our Articles of Incorporation.
There are no resolutions of our shareholders or directors which address
indemnification.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the “Act”) may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer 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.
RECENT
SALES OF UNREGISTERED SECURITIES
On
July 1, 2010, we issued one (1) 10% convertible promissory note in the principal
amount of $100,000 to the Holland Family Trust. Under the terms of the note,
interest payments are to begin on August 1, 2010, the note matures on July 1,
2011, the note is convertible into our common stock at a conversion price of
$0.10 per share, and $75,000 of the purchase price has been paid with the other
$25,000 due in the future. The issuance of this note was exempt from
registration pursuant to Section 4(2) of the Securities Act, and the holder was
sophisticated and familiar with our operations.
Effective
January 31, 2010, we issued an aggregate of 3,454,000 shares of our common
stock, restricted in accordance with Rule 144 promulgated under the Securities
Act of 1933, to 120 non-affiliate investors in exchange for
$345,400. These shares were sold for a price of $0.10 per
share. The total offering was for $1,250,000, was limited to
accredited investors only, and did not utilize any general solicitation or
advertising. All offerees invested pursuant to the terms of Private
Placement Memorandum dated November 2, 2009, as amended. As such, the
stock issuances were exempt from registration pursuant to Rule 506 under
Regulation D promulgated under the Securities Act of 1933, as
amended.
II-1
Effective
on October 15, 2009, we issued an aggregate of 1,123,065 shares of our common
stock, restricted in accordance with Rule 144 promulgated under the Securities
Act of 1933, to seven current and former employees and/or consultants, including
Mick Donahoo, one of our officers and directors, upon the conversion of their
outstanding option agreements. The issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act, and each of the shareholders was
sophisticated and familiar with our operations.
Effective on October 15, 2009, we
issued an aggregate of 4,595,534 shares of our common stock, restricted in
accordance with Rule 144 promulgated under the Securities Act of 1933, to five
of our creditors upon the conversion of their outstanding notes and warrants.
The issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act, and each of the shareholders was sophisticated and familiar with
our operations.
On
October 12, 2009, we issued 2,198,593 shares of our common stock, restricted in
accordance with Rule 144 promulgated under the Securities Act of 1933, to each
of The Lebrecht Group, APLC, Rising Market Group, LLC, and Cardiff Partners,
LLC, as consideration under a consulting or services agreement with each. The
issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act, and each of the consultants was an accredited
investor.
On March
30, 2006, pursuant to the terms of the merger of Freeze Tag, LLC with and into
Freeze Tag, Inc., Craig Holland and Mick Donahoo, each one of our officers and
directors, was issued 13,872,375 and 11,350,125 shares, respectively, of our
common stock, restricted in accordance with Rule 144 promulgated under the
Securities Act of 1933. In connection with the same transaction, a third member
of Freeze Tag, LLC was issued 1,327,500 shares of our restricted common stock.
The issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act, and the shareholders were accredited.
All share numbers above have been
adjusted to reflect our 5.31-to-1 forward stock split effective October 20,
2009.
EXHIBITS
3.1
(1)
|
Articles
of Incorporation of Freeze Tag, Inc.
|
|
3.2
(1)
|
Articles
of Amendment to Articles of Incorporation
|
|
3.3
(1)
|
Bylaws
of Freeze Tag, Inc.
|
|
4.1
(1)
|
Freeze
Tag, Inc. 2006 Stock Plan
|
|
5.1*
|
Legal
Opinion of The Lebrecht Group, APLC
|
|
10.1
(1)
|
10%
Convertible Promissory Note dated July 1, 2010 with The Holland Family
Trust
|
|
10.2
(1)
|
Support
Services Agreement with Cardiff Partners, LLC dated October 12,
2009
|
II-2
10.3
(1)
|
Amendment
No. 1 to Support Services Agreement with Cardiff Partners, LLC dated March
2, 2010
|
|
10.4
(1)
|
Amendment
No. 2 to Support Services Agreement with Cardiff Partners, LLC dated March
3, 2010
|
|
10.5
(1)
|
Form
of Conversion Agreement for October 2009 Conversions
|
|
10.6
(1)
|
Form
of Option Conversion Agreement for October 2009
Conversions
|
|
10.7
(1)
|
Placement
Agent and Advisory Services Agreement with Monarch Bay Associates, LLC
dated October 12, 2009
|
|
10.8
(1)
|
Corporate
Communications Consulting Agreement Michael Southworth dated September 25,
2009
|
|
10.9
(1)
|
Lock-Up
Agreement dated November 10, 2009
|
|
10.10
(2)
|
Loan
Agreement with Sunwest Bank dated October 20, 2006, as
amended
|
|
23.1
|
Consent
of M&K CPAS, PLLC
|
|
23.2*
|
Consent
of The Lebrecht Group, APLC (included in Exhibit
5.1)
|
*Filed
herewith
(1) Incorporated
by reference from our Registration Statement on Form S-1, filed with the
Commission on August 16, 2010.
(2) Incorporated
by reference from Amendment No. 2 to our Registration Statement on Form S-1/A2,
filed with the Commission on October 25, 2010.
Undertakings
A. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have 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 us of expenses incurred or paid by our
director, officer or controlling person 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, we will, unless in the
opinion of our 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 Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
B. 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:
|
|
(a)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
II-3
|
(b)
|
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) (Section 230.424(b) of Regulation S-K) 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; and
|
|
(c)
|
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 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 which 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:
|
(i) If
the registrant is relying on Rule 430B (§230.430B of this chapter):
(A) Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) (§230.424(b)(3) of
this chapter) shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the registration
statement; and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7)
(§230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration
statement in reliance on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) (§230.415(a)(1)(i), (vii), or (x) of this chapter)
for the purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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 effective date, 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 effective date;
or
(ii) If
the registrant is subject to Rule 430C (§230.430C of this chapter), 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.
II-4
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of Tustin,
State of California.
Freeze
Tag, Inc.
|
|
Dated: November
9, 2010
|
/s/ Craig Holland
|
By: Craig
Holland
|
|
Its: President
|
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the dates stated.
Dated: November
9, 2010
|
/s/ Mick Donahoo
|
By: Mick
Donahoo, Director and Chief
Financial
Officer, Chief
Accounting Officer, Chief Operating Officer
|
|
Dated: November
9, 2010
|
/s/ Craig Holland
|
By: Craig
Holland, Director and
|
|
President, Chief Executive
Officer
|
II-5
YOU MAY
RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK MEANS THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF
CONTENTS
Page
|
|
Prospectus
Summary
|
2
|
Corporate
Information
|
2
|
Risk
Factors
|
4
|
Use
of Proceeds
|
13
|
Determination
of Offering Price
|
13
|
Selling
Security Holders
|
14
|
Plan
of Distribution
|
19
|
Description
of Securities
|
20
|
Interests
of Experts and Counsel
|
21
|
Description
of Business
|
22
|
Description
of Property
|
29
|
Legal
Proceedings
|
29
|
Index
to Financial Statements
|
29
|
Management’s
Discussion and Analysis or Plan of
Operation
|
31
|
Changes
in Accountants
|
47
|
Directors,
Executive Officers
|
48
|
Executive
Compensation
|
49
|
Security
Ownership
|
51
|
Certain
Transactions
|
52
|
Available
Information
|
52
|
Experts
|
53
|
Dealer
Prospectus Delivery Obligation. Until ___________________, 2010; all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
13,338,320 SHARES
FREEZE
TAG, INC.
PROSPECTUS
_______________,
2010