FREEZE TAG, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Revenues
|
|
$
|
13,102
|
|
|
$
|
47,596
|
|
|
$
|
27,944
|
|
|
$
|
99,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales - Product Development
|
|
|
25,392
|
|
|
|
102,836
|
|
|
|
46,467
|
|
|
|
204,873
|
|
Cost of Sales - Licensing
|
|
|
1,728
|
|
|
|
5,444
|
|
|
|
4,193
|
|
|
|
7,196
|
|
General & Administrative
|
|
|
134,017
|
|
|
|
116,142
|
|
|
|
272,895
|
|
|
|
283,094
|
|
Sales & Marketing
|
|
|
19,063
|
|
|
|
1,577
|
|
|
|
20,809
|
|
|
|
6,233
|
|
Amortization & Depreciation
|
|
|
159,236
|
|
|
|
8,557
|
|
|
|
288,699
|
|
|
|
14,459
|
|
Total Costs and Expenses
|
|
|
339,436
|
|
|
|
234,556
|
|
|
|
633,063
|
|
|
|
515,855
|
|
Operating Income/(Loss)
|
|
|
(326,334
|
)
|
|
|
(186,960
|
)
|
|
|
(605,119
|
)
|
|
|
(416,599
|
)
|
Interest Income/(Expense), net
|
|
|
(44,279
|
)
|
|
|
(24,210
|
)
|
|
|
(84,614
|
)
|
|
|
(45,384
|
)
|
Loss on Debt Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(64,608
|
)
|
Derivative Expense
|
|
|
(18,702
|
)
|
|
|
-
|
|
|
|
(155,592
|
)
|
|
|
-
|
|
Income/Loss before taxes
|
|
|
(389,315
|
)
|
|
|
(211,170
|
)
|
|
|
(845,325
|
)
|
|
|
(526,591
|
)
|
Income Tax Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,267
|
|
|
|
1,276
|
|
Net Income/(Loss)
|
|
$
|
(389,315
|
)
|
|
$
|
(211,170
|
)
|
|
$
|
(846,592
|
)
|
|
$
|
(527,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted number of common shares outstanding-basic and fully diluted
|
|
|
99,938,817
|
|
|
|
77,724,404
|
|
|
|
99,938,817
|
|
|
|
75,083,738
|
|
Income/ (Loss) per share-basic and fully diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
The accompanying notes are an integral part of the financial statements.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2014 and 2013
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(846,592
|
)
|
|
$
|
(527,867
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
600
|
|
|
|
1,011
|
|
Amortization expense
|
|
|
11,600
|
|
|
|
11,815
|
|
Loss on debt modification
|
|
|
-
|
|
|
|
64,608
|
|
Amortization of capitalized production costs
|
|
|
-
|
|
|
|
193,273
|
|
Fair value of derivatives adjustments
|
|
|
155,592
|
|
|
|
-
|
|
Amortization on debt discount
|
|
|
276,499
|
|
|
|
13,449
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
943
|
|
|
|
16,734
|
|
Prepaid Royalties
|
|
|
(365
|
)
|
|
|
669
|
|
Prepaid Expenses
|
|
|
1,632
|
|
|
|
1,344
|
|
Capitalized Production Costs
|
|
|
-
|
|
|
|
(199,377
|
)
|
Accounts Payable
|
|
|
(3,529
|
)
|
|
|
(2,457
|
)
|
Accrued interest - third party
|
|
|
12,498
|
|
|
|
2,475
|
|
Accrued interest - related party
|
|
|
72,110
|
|
|
|
37,903
|
|
Accrued Expenses
|
|
|
5,437
|
|
|
|
149,722
|
|
Unearned royalties
|
|
|
(4,682
|
)
|
|
|
(24,477
|
)
|
Net cash used by operating activities
|
|
|
(318,257
|
)
|
|
|
(261,175
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing activities:
|
|
|
|
|
|
|
|
|
Cash used for purchasing fixed assets
|
|
|
-
|
|
|
|
-
|
|
Net cash used by investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings of debt - third party
|
|
|
300,000
|
|
|
|
71,500
|
|
Borrowings of debt - related party
|
|
|
-
|
|
|
|
168,670
|
|
Net cash provided by financing activities
|
|
|
300,000
|
|
|
|
240,170
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(18,257
|
)
|
|
|
(21,005
|
)
|
Cash at the beginning of the period
|
|
|
39,847
|
|
|
|
32,744
|
|
Cash at the end of the period
|
|
$
|
21,590
|
|
|
$
|
11,739
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Conversion of debt to common shares - third party
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Conversion of accrued interest to common shares - third party
|
|
$
|
-
|
|
|
$
|
250
|
|
Conversion of accrued interest to debt - related party
|
|
$
|
-
|
|
|
$
|
5,429
|
|
Debt discount due to derivative
|
|
$
|
289,049
|
|
|
$
|
-
|
|
Issuance of preferred shares for preferred stock payable
|
|
$
|
30,700
|
|
|
$
|
-
|
|
Beneficial conversion feature
|
|
$
|
-
|
|
|
$
|
21,500
|
|
The accompanying notes are an integral part of the financial statements.
FREEZE TAG, INC.
(A DELAWARE CORPORATION)
Statement of Shareholders' Equity (Deficit)
For the Year Ended December 31, 2013 (Audited) and the Six Months Ended June 30, 2014 (Unaudited)
|
|
Convertible Preferred Stock
|
|
Common Stock
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional Paid In
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Payable
|
|
Payable
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balances as of December 31, 2012
|
|
|
-
|
|
$
|
-
|
|
|
70,301,915
|
|
$
|
70,302
|
|
$
|
16,800
|
|
$
|
-
|
|
$
|
1,369,407
|
|
$
|
(2,212,111
|
)
|
$
|
(755,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for Conversion of Third Party Debt
|
|
|
-
|
|
|
-
|
|
|
27,605,014
|
|
|
27,605
|
|
|
-
|
|
|
-
|
|
|
43,895
|
|
|
-
|
|
|
71,500
|
|
Stock issued for Conversion of Third Party Accrued Interest
|
|
|
-
|
|
|
-
|
|
|
2,031,888
|
|
|
2,031
|
|
|
-
|
|
|
-
|
|
|
(291
|
)
|
|
-
|
|
|
1,740
|
|
Beneficial Conversion Feature
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
444,400
|
|
|
-
|
|
|
444,400
|
|
Preferred Stock Payable to Related Party
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30,700
|
|
|
-
|
|
|
-
|
|
|
30,700
|
|
Loss on Debt Modification
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,877,152
|
|
|
-
|
|
|
1,877,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Net Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,546,692
|
)
|
|
(3,546,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2013
|
|
|
-
|
|
$
|
-
|
|
|
99,938,817
|
|
$
|
99,938
|
|
$
|
16,800
|
|
$
|
30,700
|
|
$
|
3,734,563
|
|
$
|
(5,758,803
|
)
|
$
|
(1,876,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred shares for preferred stock payable
|
|
|
1,000
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(30,700
|
)
|
|
30,699
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Conversion Feature
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(50,000
|
)
|
|
-
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(846,592
|
)
|
|
(846,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of June 30, 2014
|
|
|
1,000
|
|
$
|
1
|
|
|
99,938,817
|
|
$
|
99,938
|
|
$
|
16,800
|
|
$
|
-
|
|
$
|
3,715,262
|
|
$
|
(6,605,395
|
)
|
$
|
(2,773,394
|
)
|
The accompanying notes are an integral part of the financial statements.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
NOTE 1 — THE COMPANY
Nature of Business
Freeze Tag, Inc. is a leading creator of mobile social games that are fun and engaging for all ages. Based on a free-to-play business model that has propelled games like Candy Crush Saga to worldwide success, we employ state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy our games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. Our games encourage players to compete and engage with their friends on major social networks such as Facebook and Twitter. Founded by gaming industry veterans, Freeze Tag has launched several successful mobile games including the number one hit series Victorian Mysteries® and Unsolved Mystery Club®, as well as digital entertainment like Etch A Sketch®. Freeze Tag games have been downloaded millions of times on the Apple, Amazon and Google app stores.
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.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
Other Revenues
Other revenues primarily include Ad game revenue and work-for-hire game related revenue. We derive our advertising game revenue from certain of our partners that offer our games free of charge to consumers in exchange for the consumers being exposed to advertising embedded in our games. In this way, we do not receive revenue for the sale of our games, but rather a percentage of the “advertising” revenue generated by these player views. This method of generating revenue is essentially the same as traditional radio or television advertising where consumers are allowed to enjoy content for “free” but are forced to watch (or listen) to advertising before, in between and at the end of the programming content.
Additionally, we derive some revenue from “work-for-hire” projects. Some of our partners occasionally ask us to render “work-for-hire” services for them such as preparing packaging materials. For example, a retail game and DVD publisher hired us to create several designs for printed packages that were used for games published by the publisher but not developed by us. For this work, we charge a one-time, fixed fee for each package design.
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 June 30, 2014 and December 31, 2013 were insured. At June 30, 2014 and December 31, 2013, there were no cash equivalents.
Allowances for Returns, Price Protection, and Doubtful Accounts
Because the majority of our business is derived through online portals (such as Big Fish Games) and wireless online app stores (such as Apple), there is no physical product, other than the downloadable bits of our games that is involved in the customer purchase. In the digital environment, the customer cannot ‘return’ a digital download product. Therefore, there are no returns. The customer can ask for a refund of a digital product, and if there are any, then they are reconciled or netted out by our distribution partners before we receive the corresponding payments and royalty statements. As such, we do not allow for returns, bad debts or price protection of digital download products.
However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $5,600 and $5,600, respectively.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets. All assets are currently depreciated over 3 years. Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are reflected in the statement of operations.
Concentrations of Credit Risk, Major Customers and Major Vendors
The Company’s customers are the end-consumers that purchase its games from the websites where the Company has its games listed for sale. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue. However, the Company does have primary distribution partners, which are the owners of the websites or app stores 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 or app stores 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 and app stores 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 a licensing agreement with Ohio Art Company, which allows it to develop and distribute games around third party intellectual property in exchange for paying royalty payments. The Company is not substantially dependent on this licensing agreement.
During the period ended June 30, 2014, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 28.27%, Apple– 19.48% and Exent – 13.57% each respectively. During the period ended June 30, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 74.94%, and Exent – 12.58% each respectively.
At June 30, 2014, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 73.98%, Boonty – 13.73%, Denda – 11.02% and Apple – 10.21%. At December 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were:
Exent - 50.4%, Big Fish Games – 10.7%
.
Income Taxes
The company accounts 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
June 30, 2014
(Unaudited)
Foreign Currency Translation
We derive a portion of our revenue from foreign countries, which report to us in foreign currency, but pay in U.S. Dollars. Because of the fluctuations between the reporting time and the payment period (up to 60 days), it is necessary to make adjustments to our accounting records. These adjustments are recorded under a Foreign Currency Translation expense account, and shown in the 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 periods ended June 30, 2014, and 2013, were $0 and $0, 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
June 30, 2014
(Unaudited)
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.
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. As of December 31, 2013, the Company changed its business plan as the Company’s focus is on producing free-to-play games; therefore the Company will immediately expense of internally developed products into cost of sales in the period they are incurred; instead of capitalizing the production costs. Prior to December 31, 2013, the Company accounted 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.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
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.
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 June 30, 2014, and December 31, 2013, current and long-term capitalized software development costs on the balance sheet were $0 and $0, respectively.
We recognized amortization expense of $0 and $193,273 for the periods ended June 30, 2014 and 2013, respectively.
Intellectual Property Licenses (Prepaid Royalties)
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the Company’s products. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid royalties or prepaid licensing fees), and a current liability, (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Commencing upon the related product’s release date, intellectual property licenses costs are amortized to “Cost of Sales – Licensing” based upon the percentage of revenue outlined in the contract with each specific licensor. Generally, the Company’s intellectual property licensing contracts call for licensors to be paid a percentage of revenue actually received by the Company, with allowances for minimum guarantees. Sometimes, the terms of the specific licensing contracts allow for the Company to re-capture expenses before licensing out royalties are calculated.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
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 June 30, 2014 and December 31, 2013, prepaid royalties (or prepaid licensing fees) were $5,446, and $5,964, respectively.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
The fair value of the derivatives is estimated using a multinomial lattice model. The model is based on a probability weighted discounted cash flow model of future projections of the various potential outcomes. Some of the key assumptions include the likelihood of future financing, stock price volatility, and discount rates.
See Note 15 for detailed information on the Company’s derivative liabilities.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carry-forwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
In February 2013, FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
- Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
- Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
NOTE 3 — GOING CONCERN
As shown in the accompanying financial statements for the six month periods ending June 30, 2014 and June 30, 2013, we have incurred net losses of $846,592 and $527,867, respectively. As of June 30, 2014 our retained deficit is $6,605,395. During the period ended June 30, 2014 and the year ended December 3l, 2013, we experienced negative cash flows from operations largely due to our continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about our ability to continue as a going concern. Accordingly, we are currently evaluating our alternatives to secure financing sufficient to support the operating requirements of our current business plan, as well as continuing to execute our business strategy of distributing our game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.
Our ability to continue as a going concern is dependent upon our success in securing sufficient financing and to successfully execute our plans to return to positive cash flows during fiscal 2014. Our financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.
NOTE 4 — 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. As of June 30, 2014, the Company has issued a total of 48,000 shares to the unaffiliated third party and reduced common stock payable accordingly.
The game engine was amortized on a straight-line basis over the useful life of three years. For the periods ended June 30, 2014 and June 30, 2013 amortization expense was $11,600 and $11,600 respectively.
NOTE 5 — FIXED ASSETS
Fixed Assets, Net, consists of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Computer Equipment
|
|
$
|
5,347
|
|
|
$
|
5,347
|
|
Communications Equipment
|
|
|
830
|
|
|
|
830
|
|
Software
|
|
|
3,600
|
|
|
|
3,600
|
|
Accumulated Depreciation
|
|
|
(9,549
|
)
|
|
|
(8,949
|
)
|
Total Fixed Assets, Net
|
|
$
|
228
|
|
|
$
|
828
|
|
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
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 six month periods ended June 30, 2014, and 2013, depreciation expense was $600 and $1,011, respectively.
NOTE 6 — ACCRUED COMPENSATION
Accrued Compensation Consists of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Accrued Vacation
|
|
$
|
75,187
|
|
|
$
|
73,109
|
|
Total
|
|
$
|
75,187
|
|
|
$
|
73,109
|
|
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
The Company evaluated the Accrued Salary Note to Craig Holland 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 $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
The
Company evaluated the Accrued Salary Note to Mick Donahoo 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 $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.
NOTE
7 — ACCRUED ROYALTIES AND UNEARNED ROYALTIES
Accrued
Royalties consists of money owed to other parties with whom we have revenue-sharing agreements or from whom we license certain trademarks or copyrights.
Unearned
Royalties consists of royalties received from licensees, which have not yet been earned.
Accrued
and Unearned Royalties consists of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Accrued Royalties
|
|
$
|
403,511
|
|
|
$
|
399
,838
|
|
Unearned Royalties
|
|
|
207,264
|
|
|
|
211
,946
|
|
Total
|
|
$
|
610,775
|
|
|
$
|
611,784
|
|
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Leases
During 2013 we moved office locations to 18062 Irvine Blvd, Suite 103, Tustin, California, and entered into a three month lease. At the end of the three months (November 2013), the lease became a month-to-month lease with either party having the option to terminate with 30 days of notice. The Company or Company employees or contractors own all of the computer and office equipment that is used in the course of business. We do not have any lease agreements for any office equipment.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
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 June 30, 2014 and December 31, 2013, the Company recognized a current liability of $18,000 and $18,000, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded amortization of the debt discount of $0 and $215, respectively.
NOTE 9 — DEBT
Debt consists of the following at:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
Notes Payable-Convertible *
|
|
$
|
1,454,147
|
|
|
$
|
1,454,147
|
|
Notes Payable-Convertible-Third Party
|
|
|
411,444
|
|
|
|
111,443
|
|
Discounts on Convertible Notes Payable *
|
|
|
(186,450
|
)
|
|
|
(372,900
|
)
|
Discounts on Convertible Notes Payable
|
|
|
(247,494
|
)
|
|
|
(48,493
|
)
|
Total Debt, Net of Discounts
|
|
|
1,431,647
|
|
|
|
1,144,197
|
|
Less: Current, Net of Discounts
|
|
|
1,431,647
|
|
|
|
1,144,197
|
|
Long Term, Net of Discounts
|
|
$
|
-
|
|
|
$
|
-
|
|
* - Related Party
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
Convertible Note Payable
On April 2, 2012, a convertible note loan from Robert Cowdell was secured for $50,000 in cash (the “First Hanover Note”). 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. The note was sold to Magna Group, LLC (“Hanover”) on January 29, 2013 by Robert Cowdell for approximately $50,000. In addition, the accrued interest of $5,429 on January 29, 2013, due to Robert Cowdell, was transferred to the new note issued to Robert Cowdell on February 4, 2013.
On January 29, 2013 an agreement was signed between Hanover and the Company concerning the $50,000 note purchased from Robert Cowdell. Company amended the note with Hanover to be a 12% Convertible Promissory Note in the original principal amount of $50,000. The First Hanover Note has a maturity date of January 29, 2014, 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 lowest trading price for the Common Stock during the five (5) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the First Hanover Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The modification of the First Hanover Note closed on January 29, 2013, the date that the amendment was signed by the Company.
The agreement modified the debt to make it convertible into common stock of the Company at 55 percent times the lowest trading price of the five trading days preceding the conversion date. The Company compared the value of the debt modified of $50,000 before and after modification to calculate the loss on modification of $64,608. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $114,608 which after deducting the face value of the note of $50,000 resulted in the loss on modification of $64,608. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Hanover. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.
During the three months ended March 31, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.00440 to $0.01287 per share, in order to convert $50,000 in principal and $250 in accrued interest all in accordance with the agreement. No gains or losses were recognized as a result of these conversions as they occurred within the terms of the agreement. As a result of these transactions, the principal was considered paid off during March 2013.
The Company evaluated the First Hanover 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. In addition, the Company evaluated this convertible note for a beneficial conversion feature noting that as the loss on debt modification of $64,608 was recognized, no further beneficial conversion feature was created during the issuance of this note.
On January 29, 2013, the Company entered into a Securities Purchase Agreement with Hanover pursuant to which the Company sold to Hanover a 12% Convertible Promissory Note in the original principal amount of $21,500 (the “Second Hanover Note”). The Second Hanover Note has a maturity date of September 29, 2013, 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 lowest trading price for the Common Stock during the five (5) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Second Hanover Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Second Hanover Note closed on January 29, 2013, the date that the purchase price was delivered to the Company.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
During the three months ended September 30, 2013, four conversions of the Second Hanover Note, totaling 22,214,413 shares, occurred between prices of $0.0008 to $0.0014 per share, in order to convert $21,500 in principal and $1,490 in accrued interest all in accordance with the agreement. No gains or losses were recognized as a result of these conversions as they occurred within the terms of the agreement. As a result of these transactions, the principal was considered paid off during September 2013.
The Company evaluated the Second Hanover 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 $0.01287 below the market price on December 6, 2011 of $0.02950 provided a value of $21,500. During the nine months ended September 30, 2013, $21,500 and $0, respectively, of the debt discount was amortized. As of September 30, 2013, the remaining debt discount outstanding was $0.
On February 4, 2013, the accrued interest, noted in the First Hanover Note above, of $5,429 was transferred into a new convertible note to Robert Cowdell (the “Cowdell Note”) along with $50,000 in cash; totaling $55,429 in principal. The promissory note is convertible into the Company’s common stock at a rate of the closing market price on February 4, 2013 of $0.03 per share. The convertible promissory note bears interest at the rate of 12% per annum and matures on August 4, 2013.
The Company evaluated the Cowdell 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. There was no beneficial conversion feature noted due to the fact that the conversion price and market price on the issuance date were equal.
On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the “Convertible Cowdell Note”) into a convertible note. The Convertible Cowdell Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The Convertible Cowdell Note had accrued interest of $3,047 as of June 30, 2014 and $0 as of December 31, 2013.
The Company evaluated the Convertible Cowdell 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 agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $61,443 before and after modification to calculate the loss on modification of $97,461. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $158,904 which after deducting the face value of the note of $61,443 resulted in the loss on modification of $97,461. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Robert Cowdell. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
On December 20, 2013, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 1). The Accredited Investor Note 1 has a maturity date of December 20, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued at $50,453, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $24,247 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $25,753. The Accredited Investor Note 1 had accrued interest of $2,630 as of June 30, 2014 and $151 as of December 31, 2013.
On January 6, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 2). The Accredited Investor Note 2 has a maturity date of January 6, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. During the period ended June 30, 2014, $21,332 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $23,161. The Accredited Investor Note 2 had accrued interest of $2,342 as of June 30, 2014.
On February 18, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 3). The Accredited Investor Note 3 has a maturity date of February 18, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued as of February 18, 2014 at $44,556, of which all was recorded as a debt discount. During the period ended June 30, 2014, $16,113 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $28,443. The Accredited Investor Note 3 had accrued interest of $1,808 as of June 30, 2014.
On March 26, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 4). The Accredited Investor Note 4 has a maturity date of March 26, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
The derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $13,151 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $36,849. The Accredited Investor Note 4 had accrued interest of $1,315 as of June 30, 2014.
On April 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 5). The Accredited Investor Note 5 has a maturity date of April 25, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $9,041 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $40,959. The Accredited Investor Note 5 had accrued interest of $904 as of June 30, 2014.
On May 21, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 6). The Accredited Investor Note 6 has a maturity date of May 21, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $5,479 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $44,521. The Accredited Investor Note 6 had accrued interest of $548 as of June 30, 2014.
On June 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for consideration of $50,000 (Accredited Investor #2 Note 1). The Accredited Investor #2 Note 1 has a maturity date of June 25, 2015, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.
The derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $685 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $49,315. The Accredited Investor Note 6 had accrued interest of $55 as of June 30, 2014.
Total Accrued interest for the above third party convertible notes is $12,347 and $151 as of June 30, 2014 and December 31, 2013, respectively.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
Convertible Note Payable – Related Party
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.
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.
On December 31, 2013, the Company converted the Holland Family Trust notes of $100,000 of convertible related party notes, $18,333 of accrued interest from convertible related party notes, $769,620 of related party notes and $76,114 of accrued interest from related party notes into a new convertible related party note in the amount of $964,067 (the “Holland Family Trust Convertible Note”). The Holland Family Trust Convertible Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
The Company evaluated the Holland Family Trust Convertible 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 agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $47,807 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
The Company evaluated the Accrued Salary Note to Craig Holland 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 $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
The Company evaluated the Accrued Salary Note to Mick Donahoo 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 $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.
On December 31, 2013, the Company converted the Mick Donahoo related party notes of $55,250 and accrued interest of $15,399 into a new convertible related party note in the amount of $70,649 (the “Mick Donahoo Convertible Note”). The Mick Donahoo Convertible Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
The Company evaluated the Mick Donahoo Convertible 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 agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $3,503 and $0, respectively, of accrued interest related to this Note.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
On December 31, 2013, the Company converted the Craig Holland related party notes of $35,100 and accrued interest of $11,432 into a new convertible related party note in the amount of $46,532 (the “Craig Holland Convertible Note”). The Craig Holland Convertible Note has a maturity date of December 31, 2014, 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 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.
The Company evaluated the Craig Holland Convertible 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 agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $2,307 and $0, respectively, of accrued interest related to this Note.
The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $361,112 and $58,833 for the periods ended June 30, 2014, and 2013, respectively. However, the beneficial conversion feature amortization of $276,498 and $13,449 recorded during the periods ended June 30, 2014 and 2013, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.
NOTE 10 — STOCKHOLDERS’ EQUITY
Stock Issuance
The Company is authorized to issue up to 500,000,000 shares of its $.001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.
On 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 June 30, 2014 and December 31, 2013, stock payables were $16,800 and $16,800, 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.
FREEZE TAG, INC.
(a Delaware corporation)
Notes to the Financial Statements
June 30, 2014
(Unaudited)
On January 29, 2013, in conjunction with the First Hanover Note, the updated agreement modified the debt to make it convertible into common stock of the Company at 55 percent times the lowest trading price of the five trading days preceding the conversion date. The Company compared the value of the debt modified of $50,000 before and after modification to calculate the loss on modification of $64,608. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $114,608, which after deducting the face value of the note of $50,000 resulted in the loss on modification of $64,608. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Hanover. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.
During the period ended June 30, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.0044 to $0.01287 per share, in order to convert $50,000 (7,371,984 shares) in principal and $250 (50,505 shares) in accrued interest all in accordance with the Variable Conversion Price. As a result of these transactions, the note was considered paid off during March 2013. There was no accrued interest remaining after the conversions.
On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland. During the six months ended June 30, 2014, the preferred shares were issued, eliminating the preferred stock payable.