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, 2012 and 2011 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.
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, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
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.
/s/ M&K CPAS, PLLC
|
|
|
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www.mkacpas.com
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|
Houston, Texas
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|
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|
April 1, 2013
|
|
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
|
32,744
|
|
|
$
|
26,588
|
|
Accounts Receivable, Net
|
|
|
40,812
|
|
|
|
92,042
|
|
(Net of Allowance of $5,600 and $9,934 as of December 31, 2012 and 2011, respectively)
|
|
|
|
|
|
|
|
|
Capitalized Production Costs, Net
|
|
|
332,508
|
|
|
|
171,450
|
|
Prepaid Royalties
|
|
|
7,252
|
|
|
|
12,046
|
|
Prepaid Expenses
|
|
|
1,668
|
|
|
|
3,461
|
|
Total Current Assets
|
|
|
414,984
|
|
|
|
305,587
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
|
2,849
|
|
|
|
4,870
|
|
(Net of depreciation of $6,928 and $4,907 as of December 31, 2012 and 2011, respectively)
|
|
|
|
|
|
|
|
|
Other Long-term Assets, Net
|
|
|
37,255
|
|
|
|
58,320
|
|
(Net of amortization of $52,532 and $29,332 as of December 31, 2012 and 2011, respectively)
|
|
|
|
|
|
|
|
|
Capitalized Production Costs, Net
|
|
|
499,472
|
|
|
|
614,881
|
|
TOTAL ASSETS
|
|
$
|
954,560
|
|
|
$
|
983,658
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
107,811
|
|
|
|
72,171
|
|
Accrued Compensation
|
|
|
168,621
|
|
|
|
157,263
|
|
Accrued Royalties
|
|
|
388,323
|
|
|
|
354,736
|
|
Accrued Interest
|
|
|
41,805
|
|
|
|
11,603
|
|
Accrued Expenses
|
|
|
614
|
|
|
|
2,878
|
|
Current Technology Payable
|
|
|
17,787
|
|
|
|
18,000
|
|
Unearned Royalties
|
|
|
270,061
|
|
|
|
275,849
|
|
Current Convertible Note Payable, Net
|
|
|
-
|
|
|
|
69,898
|
|
(Net of debt discount of $0 and $90,827 as of December 31, 2012 and 2011, respectively)
|
|
|
|
|
|
|
|
|
Current Convertible Note Payable, In Default
|
|
|
50,000
|
|
|
|
-
|
|
Current Convertible Note Payable, Related Party
|
|
|
100,000
|
|
|
|
75,000
|
|
Current Note Payable - Related Party
|
|
|
595,000
|
|
|
|
55,000
|
|
Total Current Liabilities
|
|
|
1,740,022
|
|
|
|
1,092,398
|
|
|
|
|
|
|
|
|
|
|
Long Term Technology Payable,net
|
|
|
-
|
|
|
|
7,299
|
|
Total Liabilities
|
|
|
1,740,022
|
|
|
|
1,099,697
|
|
|
|
|
|
|
|
|
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
$0.001 par value per share, 10,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
70,302
|
|
|
|
39,276
|
|
$0.001 par value per share, 100,000,000 shares authorized, 70,301,915 and 39,275,720 shares issued and outstanding as of December 31, 2012 and 2011, respectively
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital
|
|
|
1,369,407
|
|
|
|
1,037,469
|
|
Common Stock Payable
|
|
|
16,800
|
|
|
|
29,400
|
|
Retained Deficit
|
|
|
(2,241,971
|
)
|
|
|
(1,222,184
|
)
|
Total Equity (Deficit)
|
|
|
(785,462
|
)
|
|
|
(116,039
|
)
|
TOTAL LIABILITIES & EQUITY (DEFICIT)
|
|
$
|
954,560
|
|
|
$
|
983,658
|
|
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS
|
|
Twelve months ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
448,924
|
|
|
$
|
732,591
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of Sales - Product Development
|
|
|
399,984
|
|
|
|
276,320
|
|
Cost of Sales - Licensing
|
|
|
39,631
|
|
|
|
96,344
|
|
General & Administrative
|
|
|
829,979
|
|
|
|
505,775
|
|
Sales & Marketing
|
|
|
12,343
|
|
|
|
11,930
|
|
Amortization & Depreciation
|
|
|
92,848
|
|
|
|
50,928
|
|
Total Expense
|
|
|
1,374,785
|
|
|
|
941,297
|
|
Net Ordinary Income/Loss
|
|
|
(925,861
|
)
|
|
|
(208,706
|
)
|
Loss on Debt Extinguishment
|
|
|
(34,577
|
)
|
|
|
-
|
|
Interest Income/(Expense), net
|
|
|
(58,006
|
)
|
|
|
(18,551
|
)
|
Net Income/Loss before taxes
|
|
|
(1,018,444
|
)
|
|
|
(227,257
|
)
|
Income Tax Expense
|
|
|
1,343
|
|
|
|
2,926
|
|
Net Income/Loss
|
|
$
|
(1,019,787
|
)
|
|
$
|
(230,183
|
)
|
|
|
|
|
|
|
|
|
|
Weighted number of common shares outstanding-basic and fully diluted
|
|
|
51,204,951
|
|
|
|
39,082,041
|
|
Income/ (Loss) per share-basic and fully diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
Statement of Shareholders' Equity (Deficit)
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Payable
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010
|
|
|
39,038,720
|
|
|
$
|
-
|
|
|
|
39,038,720
|
|
|
$
|
39,039
|
|
|
|
|
|
$
|
832,989
|
|
|
$
|
(992,001
|
)
|
|
$
|
(119,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized cost of equity offering
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(6,364
|
)
|
|
$
|
-
|
|
|
$
|
(6,364
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,003
|
|
|
|
-
|
|
|
|
16,003
|
|
Stock issued for Marishco Technology
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
|
|
12
|
|
|
|
29,400
|
|
|
|
4,188
|
|
|
|
-
|
|
|
|
33,600
|
|
Discount on Technology Payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,834
|
|
|
|
-
|
|
|
|
2,834
|
|
Stock issued for Services
|
|
|
-
|
|
|
|
-
|
|
|
|
225,000
|
|
|
|
225
|
|
|
|
-
|
|
|
|
47,275
|
|
|
|
-
|
|
|
|
47,500
|
|
BCF on Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,544
|
|
|
|
-
|
|
|
|
140,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(230,183
|
)
|
|
|
(230,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2011
|
|
|
39,038,720
|
|
|
$
|
-
|
|
|
|
39,275,720
|
|
|
|
39,276
|
|
|
|
29,400
|
|
|
|
1,037,469
|
|
|
|
(1,222,184
|
)
|
|
|
(116,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for Marishco Technology
|
|
|
-
|
|
|
$
|
-
|
|
|
|
36,000
|
|
|
$
|
36
|
|
|
$
|
(12,600
|
)
|
|
$
|
12,564
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock issued for Services
|
|
|
-
|
|
|
|
-
|
|
|
|
3,849,871
|
|
|
|
3,850
|
|
|
|
-
|
|
|
|
140,646
|
|
|
|
-
|
|
|
|
144,496
|
|
Stock issued for Conversion of Accounts Payable
|
|
|
-
|
|
|
|
-
|
|
|
|
230,375
|
|
|
|
230
|
|
|
|
-
|
|
|
|
11,288
|
|
|
|
-
|
|
|
|
11,518
|
|
Stock issued for Conversion of Related Party Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
5,577,356
|
|
|
|
5,577
|
|
|
|
-
|
|
|
|
69,423
|
|
|
|
-
|
|
|
|
75,000
|
|
Stock issued for Conversion of Related Party Accrued Interest
|
|
|
|
|
|
|
|
|
|
|
5,103,000
|
|
|
|
5,103
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
5,103
|
|
Stock issued for Conversion of Third Party Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
13,729,593
|
|
|
|
13,730
|
|
|
|
-
|
|
|
|
61,995
|
|
|
|
-
|
|
|
|
75,725
|
|
Stock issued for Conversion of Third Party Accrued Interest
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
2,500
|
|
|
|
-
|
|
|
|
1,445
|
|
|
|
-
|
|
|
|
3,945
|
|
Loss on Related Party Debt Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,577
|
|
|
|
-
|
|
|
|
34,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,019,787
|
)
|
|
|
(1,019,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2012
|
|
|
39,038,720
|
|
|
$
|
-
|
|
|
|
70,301,915
|
|
|
$
|
70,302
|
|
|
$
|
16,800
|
|
|
$
|
1,369,407
|
|
|
$
|
(2,241,971
|
)
|
|
$
|
(785,462
|
)
|
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF CASHFLOWS
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December 31,
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
$
|
(1,019,787
|
)
|
|
$
|
(230,183
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,021
|
|
|
|
1,211
|
|
Amortization expense
|
|
|
24,688
|
|
|
|
12,732
|
|
Amortization of capitalized production costs
|
|
|
376,784
|
|
|
|
264,721
|
|
Amortization on debt discount
|
|
|
90,827
|
|
|
|
49,717
|
|
Impairment of production costs
|
|
|
68,628
|
|
|
|
-
|
|
Loss on debt modification - related party
|
|
|
34,577
|
|
|
|
-
|
|
Stock based compensation
|
|
|
-
|
|
|
|
16,003
|
|
Stock issued for services
|
|
|
144,496
|
|
|
|
47,500
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
51,230
|
|
|
|
41,385
|
|
Capitalized Production Costs
|
|
|
(491,061
|
)
|
|
|
(571,809
|
)
|
Prepaid Royalties
|
|
|
4,794
|
|
|
|
9,042
|
|
Prepaid Expenses
|
|
|
1,793
|
|
|
|
(1,008
|
)
|
Accounts Payable
|
|
|
45,658
|
|
|
|
(21,796
|
)
|
Accrued Expenses
|
|
|
81,931
|
|
|
|
98,407
|
|
Unearned royalties
|
|
|
(5,788
|
)
|
|
|
45,997
|
|
Net cash used in operating activities
|
|
$
|
(589,209
|
)
|
|
$
|
(238,081
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing activities:
|
|
|
|
|
|
|
|
|
Cash used for purchasing other assets
|
|
|
(7,500
|
)
|
|
|
(12,600
|
)
|
Net cash used in investing activities
|
|
$
|
(7,500
|
)
|
|
$
|
(12,600
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments for PPM costs
|
|
|
-
|
|
|
|
(6,364
|
)
|
Borrowings of debt - third party
|
|
|
50,000
|
|
|
|
160,725
|
|
Borrowings of debt - related party
|
|
|
637,865
|
|
|
|
5,000
|
|
Repayments of debt - third party
|
|
|
(85,000
|
)
|
|
|
(18,300
|
)
|
Net cash provided by financing activities
|
|
$
|
602,865
|
|
|
$
|
141,061
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
6,156
|
|
|
|
(109,620
|
)
|
Cash at the beginning of the period
|
|
|
26,588
|
|
|
|
136,208
|
|
Cash at the end of the period
|
|
$
|
32,744
|
|
|
$
|
26,588
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Debt discount on convertible notes payable - third party
|
|
$
|
-
|
|
|
$
|
140,544
|
|
Conversion of accrued interest into common stock - third party
|
|
$
|
3,945
|
|
|
$
|
-
|
|
Conversion of accrued interest into common stock - related party
|
|
$
|
5,103
|
|
|
$
|
-
|
|
Conversion of debt into common stock - related party
|
|
$
|
75,000
|
|
|
$
|
-
|
|
Conversion of debt into common stock - third party
|
|
$
|
75,725
|
|
|
$
|
-
|
|
Conversion of accounts payable into common stock - third party
|
|
$
|
11,518
|
|
|
$
|
-
|
|
Intangible assets purchased
|
|
$
|
-
|
|
|
$
|
69,600
|
|
Debt issued for intangible asset purchase,net
|
|
$
|
-
|
|
|
$
|
33,166
|
|
Stock issued for subscription payable
|
|
$
|
12,600
|
|
|
$
|
33,600
|
|
The accompanying notes are an integral part of the financial statements
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 — THE COMPANY
Nature of Business
The Company develops family-friendly casual games for tablets and smartphones. The Company’s core belief is that games should be enjoyed as a family activity, and not limited to any one demographic. The Company focuses on casual games because it believes that these games have a wider appeal to the majority of the population, which means that the Company’s revenue potential is large. The Company targets mobile devices, such as tablets and smartphones, because research shows that more games are being played on mobile devices than ever before. The release of more free games, the portability/convenience of mobile devices, and the introduction of lower priced models have resulted in high demand for
tablets and smartphones, dramatically increasing the addressable market for the Company’s games. The Company’s management believes Freeze Tag is well positioned to take advantage of these important trends.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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)
The Company recognizes revenue from the sale of our products upon the transfer of title and risk of loss to its 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.
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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
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.
The Company recognizes 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.
The Company recognizes 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 December 31, 2012 and December 31, 2011 were insured.
At December 31, 2012 and December 31, 2011 there were no cash equivalents.
Allowances for Returns, Price Protection, and Doubtful Accounts
Because the majority of the Company’s 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, the Company derives 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. As of December 31, 2012 and December 31, 2011; the allowance for doubtful accounts was $5,600 and $9,934, respectively.
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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
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.
At December 31, 2012, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 36.89% and Exent – 10.02%. At December 31, 2011, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 37.54% and Exent – 13.07%.
At December 31, 2012, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 30.01%, Big Fish Games – 20.62%. At December 31, 2011, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 25.17%, Big Fish Games – 18.26%, and Avanquest – 11.06%.
Income Taxes
We account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
ASC Topic 740 includes accounting guidance which clarifies the accounting for the uncertainty in recognizing income taxes in an organization by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions. This guidance requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized both upon the adoption of the related guidance and in subsequent periods.
The Company has no uncertain tax positions at any of the dates presented.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
Foreign Currency Translation
The Company derives a portion of its revenue from foreign countries, which report to the Company 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 the Company’s accounting records. These adjustments are recorded under a Foreign Currency Translation expense account, and shown in the Statement of Operations as a General& Administrative expense.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees ("ASC stock-based compensation guidance"). Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense recognized in the Company’s statements of operations for the years ended December 31, 2012 and 2011 were $144,496 and $63,503, respectively.
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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
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.
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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
Software Development Costs
Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers and artists. The Company accounts for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). 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 the Company’s 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 the PC/Mac and iOS/Android 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, the Company expense, as part of “Cost of Sales—Product Development”, capitalized costs when the Company believes such amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Commencing upon product release, capitalized software development costs are amortized to “Cost of Sales—Product Development” based on the straight-line method over either a twenty-four month period for traditional pay-to-play apps, or a thirty-six month period for free-to-play apps.
The Company evaluates the future recoverability of capitalized software development costs and intellectual property licenses on an annual basis. For products that have been released in prior years, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future years, recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel
product, estimated performance based on the performance of the product on which the sequel is based.
Impairment expense, related to capitalized software development costs, recognized in the Company’s statements of operations for the years ended December 31, 2012 and 2011 were $68,628 and $0, respectively.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
Based on current trends in the Company’s business, management has determined the expected shelf life of the majority of a game’s revenue will be realized over a three year period for free-to-play apps. Therefore, the Company has determined the appropriate amortization period for expensing capitalized production costs to be three years or thirty-six 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, or iOS and Android) will be launched on different release dates because product development cycles may differ and distribution partner release
policies may differ.
At December 31, 2012 and 2011, current and long-term capitalized software development costs on the balance sheet were $831,980 and $786,331 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 the Company’s products. Depending upon the agreement with the rights holder, the Company 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.
Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
As of December 31, 2012 and 2011, prepaid royalties (or prepaid licensing fees) were $7,252 and $12,046, respectively.
Recent Accounting Pronouncements
In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results
of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other - General Intangibles Other than
Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
In December 2011, FASB issued ASU No. 2011-11, “Balance Sheet – Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11) to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures,
as such, we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other” (ASU 2011-08). ASU 2011-08 allows a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test would be performed. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted.
In May 2011, the FASB issuedASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for the Company is January 1, 2012.
NOTE 3 — GOING CONCERN
As shown in the accompanying financial statements for the years ending December 31, 2012 and December 31, 2011, we have incurred net losses of $1,019,787 and $230,183, respectively. As of December 31, 2012 our retained deficit is $2,241,971. During fiscal 2012, 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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
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 2013. 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:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Capitalized Production Costs
|
|
|
2,042,257
|
|
|
|
1,551,196
|
|
Accumulated Production Costs Amortization
|
|
|
(1,141,649
|
)
|
|
|
(764,865
|
)
|
Impairment of Production Costs
|
|
|
(68,628
|
)
|
|
|
-
|
|
Total Capitalized Production Costs, Net
|
|
|
831,980
|
|
|
$
|
786,331
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
332,508
|
|
|
|
171,450
|
|
Long Term
|
|
|
499,472
|
|
|
|
614,881
|
|
The Company recognized amortization expense of $376,784 and $264,721 for the years ended December 31, 2012 and 2011, respectively.
The Company evaluates the future recoverability of capitalized software development costs and intellectual property licenses on an annual basis. For products that have been released in prior years, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future years, recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel
product, estimated performance based on the performance of the product on which the sequel is based.
Impairment expense, related to capitalized software development costs, recognized in the Company’s statements of operations for the years ended December 31, 2012 and 2011 were $68,628 and $0, respectively.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 — OTHER ASSETS
On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment. The common stock is payable in eight quarterly installments of 12,000 shares per installment. During the years ended December 31, 2012 and 2011, the Company paid cash of $7,500 and $12,600, respectively. During the years ended December 31, 2012 and 2011, the Company issued common shares of 36,000 and 12,000, respectively, to the unaffiliated third party
and reduced common stock payable accordingly.
The game engine will be amortized on a straight-line basis over the useful life of three years. For the years ended December 31, 2012 and 2011 amortization expense was $23,200 and $11,600, respectively.
NOTE 6 — FIXED ASSETS
Fixed assets, Net, consists of the following at:
|
|
December 31
,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Computer Equipment
|
|
|
5,347
|
|
|
|
5,347
|
|
Communications Equipment
|
|
|
830
|
|
|
|
830
|
|
Software
|
|
|
3,600
|
|
|
|
3,600
|
|
Accumulated Depreciation
|
|
|
(6,928
|
)
|
|
|
(4,907
|
)
|
Total Fixed Assets, Net
|
|
$
|
2,849
|
|
|
$
|
4,870
|
|
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 three years. For the years ended December 31, 2012 and 2011, depreciation expense was $2,021 and $1,211, respectively.
NOTE 7 — ACCRUED COMPENSATION
Accrued Compensation Consists of the following at:
|
|
December 31
,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Accrued Vacation
|
|
$
|
75,021
|
|
|
$
|
63,663
|
|
Accrued Salary
|
|
|
93,600
|
|
|
|
93,600
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Compensation
|
|
$
|
168,621
|
|
|
$
|
157,263
|
|
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8 — 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.
Accrued and Unearned Royalties consists of the following at:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Accrued Royalties
|
|
$
|
388,323
|
|
|
$
|
354,736
|
|
Unearned Royalties
|
|
|
270,061
|
|
|
|
275,849
|
|
|
|
|
|
|
|
|
|
|
Total Accrued and Unearned Royalties
|
|
$
|
658,384
|
|
|
$
|
630,585
|
|
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Leases
The Company has been residing in its current building at 228 W. Main Street, Tustin, California since 2006. Since that time, the Company has paid rent on a month-to-month basis. As such, the Company is free to leave the current premises at any time with 30 days courtesy notice but the Company does not have a lease agreement with the property owner. This is the Company’s preference since it is the Company’s desire to be able to quickly expand to alternative office space should the Company’s growth require additional square footage than the 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. The
Company does not have any lease agreements for any office equipment.
Technology Payable
On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party which included a liability in the amount of $36,000 and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment and there is no stated interest rate. Therefore the balance of $36,000 was recorded as a liability, net of a discount of $2,834 with the discount to be amortized over the life of the liability using the effective interest method.
As of December 31, 2012 and 2011, the Company recognized a current liability of $17,787 and $18,000, respectively, and a long-term liability of $0 and $7,299. During the years ended December 31, 2012 and 2011, the Company recorded amortization of the debt discount of $1,488 and $1,133, respectively. As of December 31, 2012 and 2011, the remaining debt discounts were $213 and $1,701, respectively.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 — DEBT
Debt consists of the following at:
|
|
|
|
December 31
,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Notes Payable *
|
|
$
|
595,000
|
|
|
$
|
55,000
|
|
Notes Payable – Convertible *
|
|
|
100,000
|
|
|
|
75,000
|
|
Notes Payable – Convertible, in default
|
|
|
50,000
|
|
|
|
-
|
|
Notes Payable – Convertible
|
|
|
-
|
|
|
|
160,725
|
|
Discounts on Convertible Notes Payable
|
|
|
-
|
|
|
|
(90,827
|
)
|
Total Debt, Net of Discounts
|
|
|
745,000
|
|
|
|
199,898
|
|
Less: Current, Net of Discounts
|
|
|
745,000
|
|
|
|
199,898
|
|
Long Term, Net of Discounts
|
|
$
|
-
|
|
|
$
|
-
|
|
* Related Party
Convertible Note Payable
On July 21, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $62,500 (the “First Asher Note”). The First Asher Note has a maturity date of April 25, 2012, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10)
Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the First Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the First Asher Note closed on August 1, 2011, the date that the purchase price was delivered to the Company. The issuance of the First Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated there under. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
The Company evaluated the First Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.1375 below the market price on July 21, 2011 of $0.25 provided a value of $51,136. During the years ended December 31, 2012 and 2011, $21,261 and $29,875, respectively, of the debt
discount was amortized.
During the twelve months ended December 31, 2012, eight conversions of the First Asher Note, totaling 15,665,363 shares, occurred between prices of $0.0083 to $0.0110 per share, in order to convert $62,500 in principal and $2,500 in accrued interest all in accordance with the Variance Conversion Price. As a result of these transactions, the note was considered paid off during October 2012. Accrued interest remaining after the conversions of $2,984 was paid in cash during November 2012.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
On September 16, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $40,000 (the “Second Asher Note”). The Second Asher Note has a maturity date of June 20, 2012, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10)
Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the Second Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Second Asher Note closed on September 22, 2011, the date that the purchase price was delivered to the Company.
The Company evaluated the Second Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.11917 below the market price on September 16, 2011 of $0.30 provided a value of $40,000. During the years ended December 31, 2012 and 2011, $24,748 and $15,252, respectively, of the
debt discount was amortized. During November 2012, principal of $40,000 and accrued interest of $3,157 was paid in cash thus retiring the Second Asher Note.
On November 17, 2011, for value received, the Company gave a convertible promissory note to The Lebrecht Group, APLC, in the original principal amount of $13,225 (the “Lebrecht Note”). The Lebrecht Note has a maturity date of November 18, 2012, and principle and accrued interest at the rate of ten percent (10%) are due at that time. The note holder has an option to convert the note into Common Stock to be issued upon each conversion of the Lebrecht Note and shall be determined by dividing the Conversion Amount by the Conversion Price, which shall be equal to the greater of (i) the Fixed Conversion Price, which is $0.001 per share, and (ii) the Variable Conversion Price, which is seventy five
percent (75%) of the closing bid price for the Common Stock on the trading day immediately preceding the conversion, (the Fixed Conversion Price and the Variable Conversion Price, as applicable, shall be referred to as the “Conversion Price”).
The Company evaluated the Lebrecht Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.10125 below the market price on November 17, 2011 of $0.135 provided a value of $4,408. During the years ended December 31, 2012 and 2011, $3,279 and $529, respectively, of the debt
discount was amortized. On December 20, 2012, 564,230 shares were issued, in accordance with the conversion terms, in order to convert $13,225 of principal and $1,445 of accrued interest into common shares, thus retiring the Lebrecht Note.
On December 6, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $45,000 (the “Third Asher Note”). The Third Asher Note has a maturity date of September 8, 2012, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10)
Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the Third Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Third Asher Note closed on December 8, 2011, the date that the purchase price was delivered to the Company.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
The Company evaluated the Third Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.0605 below the market price on December 6, 2011 of $0.14 provided a value of $45,000. During the years ended December 31, 2012 and 2011, $40,939 and $4,061, respectively, of the debt
discount was amortized. During November 2012, principal of $45,000 and accrued interest of $2,661 was paid in cash thus retiring the Third Asher Note.
The remaining cash paid towards the extinguishment of the First, Second and Third Asher notes was $34,577 which was recorded in the statement of operations as a loss on debt extinguishment.
On April 2, 2012, a convertible note loan from Robert Cowdell was secured for $50,000 in cash. The promissory note is convertible into the Company’s common stock at a rate of $0.04 per share. The convertible promissory note bears interest at the rate of 12% per annum and matures 6 months from the date the purchase installment was received. Accrued interest as of December 31, 2012 was $4,251. As of December 31, 2012, the note was in default.
The Company evaluated this convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.04 per share, and the principal value of $50,000, this would result in 1,250,000 additional shares which is approximately 2.5% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.04 which was exactly the same as the market price of $0.04 on the date of issuance; therefore, no beneficial conversion feature was created during
issuance of this note.
In summary, the First, Second and Third Asher Notes and the Lebrecht Note resulted in beneficial conversion feature amortization during the years ended December 31, 2012 and 2011, of $90,827 and $49,717, respectively.
Total Accrued interest at December 31, 2012 and 2011, for the above convertible notes is $4,251 and $3,436, respectively.
Convertible Note Payable – Related Party
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. The Company has received $75,000 of the purchase price, with the remaining $25,000 to be paid at a later date. The promissory note is convertible into the Company’s common stock at a rate of $0.10 per share. The convertible promissory note bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received. Interest on the notes is paid each month at the first of the month as such there was no accrued interest as of December 31, 2011. On November 6, 2012, the Company modified
the note, such that its conversion rate was $0.0038 instead of $0.1000; which resulted in an increase to additional paid in capital and interest expense of 34,577. Also on November 6, 2012, the Company converted $75,000 in principal and $5,103 in accrued interest into 10,680,356 common shares (5,577,356 for related party principal and 5,103,000 for related party accrued interest) in accordance with the modified convertible note.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.10 per share, and the principal value of $75,000, this would result in 750,000 additional shares which is less than 1% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.10 which was exactly the same as the market price of $0.10 during the 2009-2010 fiscal years when the common shares were being sold to private
purchasers consistently at this price; therefore, no beneficial conversion feature was created during issuance of this note.
On January 26, 2012, 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. The promissory note is convertible into the Company’s common stock at a rate of $0.05 per share. The convertible promissory note bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received. On April 19, 2012, Franklena E. Holland passed away. The terms of the Holland Family Trust indicate that Craig B. Holland becomes the Successor Trustee after Franklena's passing. As of April 19, 2012, Mr. Holland is now acting as the Trustee of the Holland Family Trust. As of
December 31, 2012 and 2011, accrued interest was $8,333 and $0, respectively.
The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.05 per share, and the principal value of $100,000, this would result in 2,000,000 additional shares which is approximately 2% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.05 which was exactly the same as the market price of $0.05 on the date of issuance; therefore, no beneficial conversion feature was created
during issuance of this note.
Note Payable - Related Party
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 and matures on June 20, 2013. As of December 31, 2012 and 2011, accrued interest was $13,024 and $7,954, respectively.
As of October 19, 2011, there is a note payable to Mick Donahoo for $5,000 for money that was loaned to the Company to secure equipment. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 19, 2013. As of December 31, 2012 and 2011, accrued interest was $600 and $82, respectively.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
As of April 11, 2012, there is a note payable to Mick Donahoo for $15,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 11, 2013. As of December 31, 2012 and 2011, accrued interest was $1,205 and $0, respectively.
As of April 25, 2012, there is a note payable to Craig Holland and Mick Donahoo for $10,000 each (a total of $20,000 notes payable) for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 25, 2013. As of December 31, 2012 and 2011, accrued interest was $1,398 and $0, respectively.
As of June 21, 2012, there is a note payable to the Holland Family Trust for $40,000 for money that was loaned to the Company. The money was loaned to the company at a rate of 10% interest compounded annually and matures on July 24, 2013. As of December 31, 2012 and 2011, accrued interest was $2,115 and $0, respectively.
As of August 13, 2012, there is a note payable to the Holland Family Trust for $70,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on August 13, 2013. As of December 31, 2012 and 2011, accrued interest was $2,685 and $0, respectively.
As of September 12, 2012, there is a note payable to the Holland Family Trust for $65,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on September 12, 2013. As of December 31, 2012 and 2011, accrued interest was $1,959 and $0, respectively.
As of October 11, 2012, there is a note payable to the Holland Family Trust for $50,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on April 11, 2013. As of December 31, 2012 and 2011, accrued interest was $1,107 and $0, respectively.
On November 1, 2012, there was a note payable issued to the Holland Family Trust for $130,000. The money was loaned to the Company to pay off the debt associated with the two remaining Asher Enterprises, Inc. convertible promissory notes, and was loaned to the Company at a rate of 10% interest compounded annually and matures on May 1, 2013. As of December 31, 2012 and 2011, accrued interest was $2,137 and $0, respectively.
As of November 13, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on May 13, 2013. As of December 31, 2012 and 2011, accrued interest was $986 and $0, respectively.
As of December 10, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on June 10, 2013. As of December 31, 2012 and 2011, accrued interest was $432 and $0, respectively.
For the years ended December 31, 2012 and 2011, the Company recorded interest expense of $37,295 and $13,030, respectively related to the related party notes payable and related party convertible notes above.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
The Company recorded total interest expense, including beneficial conversion feature amortization, for all debt of $147,345 and $67,135 for the year ended December 31, 2012, and 2011, respectively. However, the beneficial conversion feature amortization of $90,827 and $49,717 recorded during the years ended December 31, 2012 and 2011, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.
NOTE 11 — STOCKHOLDERS’ EQUITY
Stock Issuance
The Company is authorized to issue up to 100,000,000 shares of its $0.001 par value common stock, and up to 10,000,000 shares of its $0.001 par value preferred stock.
On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock. The liability of $36,000 was recorded net of a debt discount of $2,834 which was included in additional paid in capital at June 30, 2011. The common stock is payable in eight quarterly installments of 12,000 shares per installment. The first installment was delivered effective September 16, 2011. As the third party has no future performance obligation, the Company valued the 96,000 shares at $33,600 based on the closing price of $0.35 per share on the measurement date. The amount is recorded in common stock payable
as of June 30, 2011. As of December 31, 2012 and 2011, stock payables were $16,800 and $29,400, respectively, due to the issuance of 36,000 and 12,000 shares during the years ended December 31, 2012 and 2011, respectively. The Company considered ASC 718-10-25-20 concluding that June 22, 2011 is the appropriate measurement date as the Company has received the goods, there is no significant disincentive to perform, and there is no future performance/service obligation on the part of the third party.
On September 21, 2011, the Company issued 100,000 shares of Company common stock, restricted in accordance with Rule 144, to Empire Relations Group, Inc. as consideration under a consulting agreement dated September 16, 2011 for public and financial relations services. The fair value was $30,000 based on the closing stock price of $0.30 per share on the measurement date as the shares are non-refundable and no future performance obligation exists. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant was an accredited and sophisticated investor, familiar with our operations, and there was no
solicitation.
On September 21, 2011, the Company issued 12,000 shares of Company common stock, restricted in accordance with Rule 144, to an unaffiliated thirty party as consideration under the Technology Transfer Agreement entered into on June 22, 2011. This is the first of eight identical quarterly installments of shares to be issued. The fair value of $4,200 based on the closing price of $0.35 per share on the measurement date was deducted from common stock payable. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The shareholder was a sophisticated investor, familiar with our operations, and there was no solicitation.
On November 29, 2011, the Company issued 125,000 shares of Company common stock, restricted in accordance with Rule 144, to Michael Southworth as additional consideration under a consulting agreement dated November 29, 2011 for public and financial relations services. The fair value was $17,500 based on the closing stock price of $0.14 per share on the measurement date of November 29, 2011. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
During the twelve months ended December 31, 2012, eight conversions of the First Asher Note, totaling 15,665,363 shares, occurred between prices of $0.0083 to $0.0110 per share, in order to convert $62,500 in principal and $2,500 in accrued interest all in accordance with the Variance Conversion Price. As a result of these transactions, the note was considered paid off during October 2012. Accrued interest remaining after the conversions of $2,984 was paid in cash during November 2012.
On March 2, 2012, the Company issued 3,000,000 shares of Company common stock, restricted in accordance with Rule 144, to Crucible Capital Group, Inc. in lieu of a cash retainer for services pursuant to a letter agreement dated February 29, 2012; as the agreement did not allow for return of shares, the amount of $102,000 was expensed upon the date granted. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was accredited and sophisticated, familiar with our operations, and there was no solicitation. The shares were valued at $102,000 based on the closing stock price of $0.34 for the date of the letter agreement dated February 29,
2012.
On December 20, 2012, 564,231 shares were issued, in accordance with the conversion terms, in order to convert $13,225 of principal and $1,445 of accrued interest into common shares, thus retiring the Lebrecht Note.
Also on November 6, 2012, the Company converted $75,000 in principal and $5,103 in accrued interest into 10,680,356 common shares in accordance with the modified convertible note due to Craig Holland.
During the year ended December 31, 2012, the Company issued 36,000 shares of Company common stock, restricted in accordance with Rule 144, to an unaffiliated thirty party as consideration under the Technology Transfer Agreement entered into on June 22, 2011. This is the second, third and fourth of eight identical quarterly installments of shares to be issued. The fair value of $12,600 based on the closing price of $0.35 per share on the measurement date was deducted from common stock payable. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The shareholder was a sophisticated investor, familiar with our operations, and
there was no solicitation.
On May 29, 2012, the Company issued 1,080,246 shares of Company common stock, restricted in accordance with Rule 144, to various employees and contractors for services rendered. The shares were valued based on the closing stock price for the date of the grant dated May 29, 2012. 230,375 of these shares were issued as a conversion of accounts payable; the fair value on the date of grant of May 29, 2012, was compared with the fair value of the amounts payable, noting the difference was zero; therefore, no gain or loss was booked as a result of this conversion. The amounts were properly classified as non-cash reconciling items to net income due to the fact that the accounts payable amounts were expensed during
the six-months ended June 30, 2012.
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 1,512,650 shares available for issuance as a part of this stock plan. As of the periods ended December 31,
2012 and 2011, there were 560,000 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.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
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 1⁄4 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.
The Company granted 560,000 stock options during the year ended December 31, 2010. As of December 31, 2011, the stock options became fully vested and expensed accordingly. The Company did not grant any stock options for the periods ended December 31, 2012 and 2011. The weighted average assumptions used in the model are outlined in the following table:
|
|
December 31,
2010
|
|
Risk-free rate of interest
|
|
|
1.81
|
%
|
Dividend yield
|
|
|
0
|
%
|
Volatility of common stock
|
|
|
321.74
|
%
|
Expected term
|
|
5.3125 years
|
|
Stock-based compensation expense recognized in our statement of operations for the year ended December 31, 2012 and 2011, were $144,496 and $63,503, respectively.
The Company did not grant any warrants during years ended December 31, 2012 and 2011.
Exercising of Stock Warrants and Options
For the years ended December 31, 2012 and 2011, no shares of common stock were issued on the cashless exercise of warrants or options.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
A summary of the status of the warrants and options issued by the Company as of December 31, 2012 and 2011 are as follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Number of Warrants & Options
|
|
|
Weighted Average Exercise Price
|
|
|
Number of Warrants & Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at beginning of year
|
|
|
560,000
|
|
|
$
|
0.10
|
|
|
|
560,000
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised for cashless
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of period
|
|
|
560,000
|
|
|
$
|
0.10
|
|
|
|
560,000
|
|
|
$
|
0.10
|
|
NOTE 12 — 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 of California minimum franchise taxes of $1,600, Delaware state taxes of $489, and back taxes owed of $837. 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 December 31, 2012 and 2011 were $427,295 and $149,529, respectively. 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:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
|
|
$
|
145,280
|
|
|
$
|
50,840
|
|
Valuation Allowances
|
|
|
(145,280
|
)
|
|
|
(50,840
|
)
|
Total:
|
|
|
-
|
|
|
|
-
|
|
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 — EARNINGS (LOSS) PER COMMON SHARE
Basic loss per share is calculated based on the weighted-average number of outstanding common shares. Diluted loss per share is calculated based on the weighted-average number of outstanding common shares plus the effect of dilutive potential common shares.
Net loss per share for the year ending:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Net Income/Loss
|
|
$
|
(
1,019,787
|
)
|
|
$
|
(
230,183
|
)
|
|
|
|
|
|
|
|
|
|
Weighted number of common shares outstanding - basic
|
|
|
51,204,951
|
|
|
|
39,082,041
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted number of common shares outstanding - fully diluted
|
|
|
74,111,915
|
|
|
|
43,009,541
|
|
|
|
|
|
|
|
|
|
|
Loss per share - fully diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
NOTE 14 — RELATED PARTY TRANSACTIONS
On August 2, 2010, the Company granted Craig Holland, its President, Chief Executive Officer, and a Director, options to purchase up to 115,000 shares of Company 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 December 31, 2012, the stock options are fully expensed and included in stock based compensation of $16,003.
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 and matures on June 20, 2013. As of December 31, 2012 and 2011, accrued interest was $13,024 and $7,954, respectively.
As of October 19, 2011, there is a note payable to Mick Donahoo for $5,000 for money that was loaned to the Company to secure equipment. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 19, 2013. As of December 31, 2012 and 2011, accrued interest was $600 and $82, respectively.
As of April 11, 2012, there is a note payable to Mick Donahoo for $15,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures
on July 11, 2013. As of December 31, 2012 and 2011, accrued interest was $1,205 and $0, respectively.
As of April 25, 2012, there is a note payable to Craig Holland and Mick Donahoo for $10,000 each (a total of $20,000 notes payable) for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 25, 2013. As of December 31, 2012 and 2011, accrued interest was $1,398 and $0, respectively.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
As of June 21, 2012, there is a note payable to the Holland Family Trust for $40,000 for money that was loaned to the Company. The money was loaned to the company at a rate of 10% interest compounded annually and matures on July 24, 2013. As of December 31, 2012 and 2011, accrued interest was $2,115 and $0, respectively.
As of August 13, 2012, there is a note payable to the Holland Family Trust for $70,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on August 13, 2013. As of December 31, 2012 and 2011, accrued interest was $2,685 and $0, respectively.
As of September 12, 2012, there is a note payable to the Holland Family Trust for $65,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on September 12, 2013. As of December 31, 2012 and 2011, accrued interest was $1,959 and $0, respectively.
As of October 11, 2012, there is a note payable to the Holland Family Trust for $50,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on April 11, 2013. As of December 31, 2012 and 2011, accrued interest was $1,107 and $0, respectively.
On November 1, 2012, there was a note payable issued to the Holland Family Trust for $130,000. The money was loaned to the Company to pay off the debt associated with the two remaining Asher Enterprises, Inc. convertible promissory notes, and was loaned to the Company at a rate of 10% interest compounded annually and matures on May 1, 2013. As of December 31, 2012 and 2011, accrued interest was $2,137 and $0, respectively.
As of November 13, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on May 13, 2013. As of December 31, 2012 and 2011, accrued interest was $986 and $0, respectively.
As of December 10, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on June 10, 2013. As of December 31, 2012 and 2011, accrued interest was $432 and $0, respectively.
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. The Company has received $75,000 of the purchase price, with the remaining $25,000 to be paid at a later date. The promissory note is convertible into the Company’s common stock at a rate of $0.10 per share. The convertible promissory note bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received. Interest on the notes is paid each month at the first of the month as such there was no accrued interest as of December 31, 2011. On November 6, 2012, the Company modified the note, such that its conversion rate was $0.0038 instead of $0.1000; which resulted in an increase to
additional paid in capital and interest expense of 34,577. Also on November 6, 2012, the Company converted $75,000 in principal and $5,103 in accrued interest into 10,680,356 common shares in accordance with the modified convertible note.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.10 per share, and the principal value of $75,000, this would result in 750,000 additional shares which is less than 1% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.10 which was exactly the same as the market price of $0.10 during the 2009-2010 fiscal years when the common shares were being sold to private
purchasers consistently at this price; therefore, no beneficial conversion feature was created during issuance of this note.
On January 26, 2012, 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. The promissory note is convertible into the Company’s common stock at a rate of $0.05 per share. The convertible promissory note bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received. On April 19, 2012, Franklena E. Holland passed away. The terms of the Holland Family Trust indicate that Craig B. Holland becomes the Successor Trustee after Franklena's passing. As of April 19, 2012, Mr. Holland is now acting as the Trustee of the Holland Family Trust. As of
December 31, 2012 and 2011, accrued interest was $8,333 and $0, respectively.
The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.05 per share, and the principal value of $100,000, this would result in 2,000,000 additional shares which is approximately 2% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.05 which was exactly the same as the market price of $0.05 on the date of issuance; therefore, no beneficial conversion feature was created
during issuance of this note.
NOTE 15 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has various financial instruments that must be measured under the new fair value standard including: cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company’s cash is based on quoted prices and therefore classified as Level 1.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
Cash, accounts receivable, capitalized production costs, prepaid royalties, prepaid expenses, accounts payable, accrued compensation, accrued royalties, accrued interest, accrued expenses, unearned royalties, notes payable – related party and technology payables reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.
The following tables provide a summary of the fair values of assets and liabilities measured on a non-recurring basis:
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
December 31
, 2012
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
, 2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, in default
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Convertible notes payable *
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
62,625
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
62,625
|
|
Convertible notes payable *
|
|
$
|
75,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
75,000
|
|
* - Related Party
The Company believes that the market rate of interest as of December 31, 2012 and December 31, 2011 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at December 31, 2012 and December 31, 2011.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16 — SUBSEQUENT EVENTS
On January 10, 2013, there was a note payable issued to the Holland Family Trust for $25,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 10, 2013.
On January 29, 2013, there was a note payable issued to the Holland Family Trust for $17,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 29, 2013.
On January 29, 2013, the Company entered into a 12% Convertible Promissory Note in the principal amount of $50,000 with Magna (the “Magna Note”). The Magna Note matures on January 29, 2014 and bears interest at a rate of 12% per annum. Magna is entitled, at its option and at any time, to convert all or any portion of the outstanding principal amount and accrued interest into the Company’s common stock, subject to a 4.99% conversion limitation, at a conversion price for each share equal to a price which is a 45% discount from the lowest trading price in the five (5) trading days prior to the day that Magna requests conversion, however, in no event shall the conversion price be lower than
$0.00005 per share.
On January 29, 2013, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Hanover Holdings, LLC (“Hanover”) pursuant to which the Company sold a Convertible Promissory Note in the principal amount of $21,500 (the “Hanover Note”). The Hanover Note matures on September 29, 2013 and bears interest at a rate of 12% per annum. Hanover is entitled, at its option and at any time, to convert all or any portion of the outstanding principal amount and accrued interest into our common stock, subject to a 4.99% conversion limitation, at a conversion price for each share equal to a price which is a 45% discount from the lowest trading price for the
Company’s common stock during the five (5) trading days prior to the day that Hanover requests conversion, however, in no event will the conversion price be less than $0.00005 per share.
On February 4, 2013, a convertible note (in default) from Robert Cowdell was converted into a convertible promissory note with principal of $55,429 ($50,000 in cash and $5,429 in converted interest from the previous convertible note). The promissory note is convertible into the Company’s common stock at a rate of the closing market price on February 4, 2013 ($0.03 per share). The convertible promissory note bears interest at the rate of 12% per annum and matures on August 4, 2013.