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EX-23.1 - Freeze Tag, Inc.v196264_ex23-1.htm
 
As filed with the Securities and Exchange Commission on September 10, 2010
 
Registration No. 333-____________ 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


Amendment No. 1 to
Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
  

 
Freeze Tag, Inc.
(Exact name of registrant as specified in its charter)
 

 
Delaware
3944
20-4532392
(State or other jurisdiction of
incorporation or organization
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
 

 
228 W. Main Street, 2nd Floor
Tustin, California 92780
 
(714) 210-3850
(Address, including zip code, of registrant’s
principal executive offices)
(Telephone number, including area code)
 

 
Craig Holland, President
Freeze Tag, Inc.
228 W. Main Street, 2nd Floor
Tustin, CA  92780
(714) 210-3850

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

COPIES TO:

Brian A. Lebrecht, Esq.
The Lebrecht Group, APLC
9900 Research Drive
Irvine, CA  92618
(949) 635-1240
 

 
Approximate date of commencement of proposed sale to the public:
From time to time after this registration statement becomes effective.

 
 

 

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

   
Large accelerated filer ¨
 
Accelerated filer
¨
   
Non-accelerated filer ¨
 
Smaller reporting company
þ
  (Do not check if a smaller reporting company)      
 

 
CALCULATION OF REGISTRATION FEE
 

Title of each
class of
securities to be
registered
 
Amount
to be
registered
   
Proposed
maximum
offering price
per share (2)
   
Proposed
maximum
aggregate
offering price
   
Amount of
registration
fee (3)
 
                         
Common Stock of certain
selling shareholders
    13,338,320 (1)   $ 0.10     $ 1,333,832     $ 95.11  
                                 
Total Registration Fee
                          $ 95.11  

(1)
Pursuant to Rule 416 of the Securities Act, this registration statement shall be deemed to cover additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms that provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend paid with respect to, the registered securities.
(2)
There is currently no market for our common stock.  The offering price per share for the selling security holders was estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) and (o) under the Securities Act of 1933, as amended.  For purposes of this calculation we used the last sale price at which the Company sold shares, which was in a private placement.
(3) 
Previously paid by registrant .
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 
 

 

The information in this prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the SEC is effective.  This prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated September 10, 2010

PROSPECTUS

Up to 13,338,320 shares of common stock

FREEZE TAG, INC.

We are hereby registering up 13,338,320 shares, representing approximately 34.17% of our current outstanding common stock, for sale by 137 of our existing shareholders:  This offering will terminate when all 13,338,320 shares are sold or on _____________, 20__, unless we terminate it earlier.

Investing in the common stock involves risks.  Freeze Tag, Inc. is currently a casual online games publisher that develops and markets games across the major digital distribution platforms including PC/Mac downloadable (Web), mobile (iPhone and Smartphone platforms), and emerging platforms like social networking sites (including Facebook) and while it is not a development stage company it is a company with limited operations, limited income, and limited assets, is in unsound financial condition, and you should not invest unless you can afford to lose your entire investment.  The company’s independent auditors report on its financial statements for the years ended December 31, 2009 and 2008 expresses substantial doubt as to its ability to continue as a going concern.  See “Risk Factors” beginning on page 4.  Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

All of the common stock registered by this prospectus will be sold by the selling shareholders on their own behalf at a price of $0.10 per share. The selling stockholders, and any participating broker-dealers, may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, or the “Securities Act,” and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act.

Our common stock is not traded on any national securities exchange and is not quoted on any over-the-counter market.  If our shares become quoted on the Over-The-Counter Bulletin Board, sales will be made at prevailing market prices or privately negotiated prices. Freeze Tag, Inc. is not selling any of the shares of common stock in this offering and therefore will not receive any proceeds from this offering.  The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock.

The date of this prospectus is __________________, 2010

 
 

 

PROSPECTUS SUMMARY

FREEZE TAG, INC.

We are a casual online games publisher that develops and markets games across the major digital distribution platforms including PC/Mac downloadable (Web), mobile, and emerging platforms like social networking sites (including Facebook). We focus on casual games because of our belief that they appeal to a significant portion of the population. Although the primary consumers of downloadable casual games are women over the age of 35, downloadable casual games are enjoyed by people of all ages – ex-gamer dads, pre-teen kids, teenagers, college students and grandparents. Thus, we believe the potential market for our games is very large.
 
According to the Newzoo Games Market Report (2009), the worldwide market for games delivered through online game portals was $4.27 billion, with the U.S. comprising 65% of that market ($2.78 billion). In addition, the Newzoo Games Market Report (2009) states that the mobile games market in 2009 was $1.84 billion worldwide with the U.S. comprising 60% of that total. In its Online Games Market Forecast report, DFC Intelligence, “online game revenue for the PC is expected to exceed $20 billion in 2015.” Starting with the base of $4.27 billion of worldwide online game portal revenue (according to Newzoo Games Market Report 2009), growth to $20 billion by 2015 indicates a compound average growth rate of 29.4%.
 
The demographics of online game portals breaks down into two nearly equal segments with males comprising 48% and females 52% of those over age 8 who have an Internet connection and play games. However, according to the Casual Games Association (Market Report 2007), when it comes to paying, females comprise 74% of those who pay to play online games.
 
We have been successful in developing games that appeal to the online game audience. We have had a consistent track record of #1 hits:
 
·
Can You See What I See? Curluffle’s Collectibles hit #1 in 2008 (Realarcade.com and Gamehouse.com) and was in the top 10 for over 8 weeks;
·
Mystery Masterpiece: The Moonstone, hit #1 on August 5, 2009, and was in the top 10 for over 5 weeks (BigFishGames.com);
·
The Conjurer, hit #1 on Gamehouse.com in October 2009;
·
Real Detectives, hit #1 on Gamehouse.com on April 21, 2010.
·
Unsolved Mystery Club: Amelia Earhart was #1 on June 24, 2010 (WildGames.com), was #1 July 26, 2010 (Yahoo!® Games).
 
Corporate Information
 
Freeze Tag, Inc. was formed in February 2006 in the State of Delaware. In March 2006, Freeze Tag, LLC, our predecessor which was formed in October 2005, was merged with and into Freeze Tag, Inc.
 
Our corporate headquarters are located at 228 W. Main Street, 2nd Floor, Tustin, California 92780, and our telephone number is (714) 210-3850. Our website is http://www.freezetag.com/. Information contained on our website is not incorporated into, and does not constitute any part of, this prospectus.

 
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The Offering

Securities Offered:
   
     
Shares Offered by
   
Selling Shareholders:
 
We are registering 13,338,320 shares for sale by 137 selling shareholders, all of which are existing holders of our common stock (see list of Selling Shareholders)

 
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RISK FACTORS

Any investment in our common stock involves a high degree of risk.  You should consider carefully the following information, together with the other information contained in this prospectus, before you decide to buy our common stock.  If any of the following events actually occurs, our business, financial condition or results of operations would likely suffer.  In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.

We face risks in developing our games and products and eventually bringing them to market. The following risks are material risks that we face.  If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.

Risk Factors Related to the Business of the Company

We have a limited operating history and limited historical financial information upon which you may evaluate our performance.

You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development.  We may not successfully address these risks and uncertainties or successfully implement our existing and new products and services.  If we fail to do so, it could materially harm our business and impair the value of our common stock.  Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future.  We were incorporated in Delaware in February 2006.  In March 2006 we merged with Freeze Tag, LLC, our predecessor, which was formed in October 2005.  Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services.  These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing.  The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations.  No assurance can be given that we can or will ever operate profitably.

If we are unable to meet our future capital needs, we may be required to reduce or curtail operations.
 
To date we have relied on cash flow from operations, funding from our founders, and debt financing to fund operations.  We have extremely limited cash liquidity and capital resources.  Our cash on hand as of June 30, 2010, was approximately $72,662 (of which $60,791 was restricted and held in escrow for use for specific purposes related to us being a public company), and our monthly cash flow burn rate is approximately $55,000.  For the six months ended June 30, 2010, our revenue was $287,573.
 
Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, and competing market developments.  Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not receive additional financing in the near future.  Consequently, although we currently have no specific plans or arrangements for financing, we intend to raise funds through private placements, public offerings or other financings.  Any equity financings would result in dilution to our then-existing stockholders.  Sources of debt financing may result in higher interest expense.  Any financing, if available, may be on unfavorable terms.  If adequate funds are not obtained, we may be required to reduce or curtail operations.  We anticipate that our existing capital resources will not be adequate to satisfy our operating expenses and capital requirements for any length of time.  However, this estimate of expenses and capital requirements may prove to be inaccurate.

 
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Our independent registered public accounting firm has expressed doubts about our ability to continue as a going concern.

As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the year ended December 31, 2009 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.  In order to continue as a going concern we must effectively balance many factors and increase our revenues to a point where we can fund our operations from our sales and revenues.  If we are not able to do this we may not be able to continue as an operating company.

Because we face intense competition, we may not be able to operate profitably in our markets.

The market for casual games is highly competitive and is becoming more so, which could hinder our ability to successfully market our products.  We may not have the resources, expertise or other competitive factors to compete successfully in the future.  We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do.  As a result, these competitors may be able to:

 
·
develop and expand their product offerings more rapidly;
 
·
adapt to new or emerging changes in customer requirements more quickly;
 
·
take advantage of acquisition and other opportunities more readily; and
 
·
devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can.  See “The Company – The Competition.”

If we are unable to maintain brand image or product quality, our business may suffer.

Our success depends on our ability to maintain and build brand image for our existing products, new products and brand extensions.  We have no assurance that our advertising, marketing and promotional programs will have the desired impact on our products’ brand image and on consumer preferences.

If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.

Our success will depend, in part, on our ability to attract and retain key management, including primarily Craig Holland and Mick Donahoo, technical experts, and sales and marketing personnel.  We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas.  Our inability to retain employees and attract and retain sufficient additional employees, and information technology, engineering and technical support resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The loss of key personnel could limit our ability to develop and market our products.

 
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Because our officers and directors control a large percentage of our common stock, they have the ability to influence matters affecting our shareholders.

Our officers and directors beneficially own over 65% of our outstanding common stock.  As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares.  Because they control such shares, investors may find it difficult to replace our management if they disagree with the way our business is being operated.  Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.  See “Principal Shareholders.”

Our business may be negatively impacted by a slowing economy or by unfavorable economic conditions or developments in the United States and/or in other countries in which we operate.

A general slowdown in the economy in the United States or unfavorable economic conditions or other developments may result in decreased consumer demand, business disruption, supply constraints, foreign currency devaluation, inflation or deflation.  A slowdown in the economy or unstable economic conditions in the United States or in the countries in which we operate could have an adverse impact on our business results or financial condition.

We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.

We may experience rapid growth and development in a relatively short period of time by aggressively marketing our casual games.  The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel.  We intend to hire additional personnel in order to manage our expected growth and expansion.  Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.

Failure to renew our existing licenses or to obtain additional licenses could harm our business.

Some of our game products are or will be based on or incorporate intellectual properties that we license from third parties.  Our current licenses to use these properties do not extend beyond terms of two to three years.  We may be unable to renew these licenses on terms favorable to us, or at all, and we may be unable to secure alternatives in a timely manner.  We expect that licenses we obtain in the future may impose development, distribution and marketing obligations on us.  If we breach our obligations, our licensors may have the right to terminate the license or change an exclusive license to a non-exclusive license.

Competition for licenses may also increase the advances, guarantees and royalties that we must pay to the licensor, which could significantly increase our costs.  Failure to maintain our existing licenses or obtain additional licenses with significant commercial value could impair our ability to introduce new applications or continue our current game products and applications, which could materially harm our business.

 
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If we fail to develop and introduce new casual games and other applications that achieve market acceptance, our sales could suffer.

Our business depends on providing casual games and applications that consumers want to buy.  We must invest significant resources in research and development to enhance our offering of casual games and other applications and introduce new games and other applications.  Our operating results would suffer if our games and other applications are not responsive to the preferences of our customers or are not effectively brought to market.

The planned timing or introduction of new casual games is subject to risks and uncertainties.  Unexpected technical, operational, deployment, distribution or other problems could delay or prevent the introduction of new casual games, which could result in a loss of, or delay in, revenues or damage to our reputation and brand.  If any of our applications is introduced with defects, errors or failures, we could experience decreased sales, loss of customers and damage to our reputation and brand.  In addition, new applications may not achieve sufficient market acceptance to offset the costs of development.  Our success depends, in part, on unpredictable and volatile factors beyond our control, including customer preferences, competing applications and the availability of other entertainment activities.  A shift in Internet or mobile device usage or the entertainment preferences of our customers could cause a decline in our applications' popularity that could materially reduce our revenues and harm our business.

We intend to continuously develop and introduce new games and other applications for use on next-generation Internet and mobile devices.  We must make product development decisions and commit significant resources well in advance of the anticipated introduction of new mobile devices.  New mobile devices for which we will develop applications may be delayed, may not be commercially successful, may have a shorter life cycle than anticipated or may not be adequately promoted by wireless carriers or the manufacturer.  If the mobile devices for which we are developing games and other applications are not released when expected or do not achieve broad market penetration, our potential revenues will be limited and our business will suffer.

If our independent, third-party developers cease development of new applications for us and we are unable to find comparable replacements, our competitive position may be adversely impacted.

We rely on independent third-party developers to develop some  of our game products which subjects us to the following risks:

 
·
key developers who work for us may choose to work for or be acquired by our competitors;
 
·
developers currently under contract may try to renegotiate our agreements with them on terms less favorable to us; and
 
·
our developers may be unable or unwilling to allocate sufficient resources to complete our applications on a timely or satisfactory basis or at all.

If our developers terminate their relationships with us or negotiate agreements with terms less favorable to us, we may have to increase our internal development staff, which would be a time consuming and potentially costly process.  If we are unable to increase our internal development staff in a cost-effective manner or if our current internal development staff fails to create successful applications, our earnings could be materially diminished.

 
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In addition, although we require our third-party developers to sign agreements acknowledging that all inventions, trade secrets, works of authorship, development and other processes generated by them are our property and to assign to us any ownership they may have in those works, it may still be possible for third parties to obtain and use our intellectual properties without our consent.

If we are unable to reach agreements with third parties to distribute their casual games through our Internet portal, or if other distributors attract more significant Internet traffic and gaming, we may be unable to sell, or have only limited sales, of third party games through our portal and our business may suffer.

Our games portal competes with other online distributors of downloadable PC games focused on the non-core, or casual, segment of the games market.  Some of these distributors have high volume distribution channels and greater financial resources than us, including Yahoo! Games, MSN Gamezone, Pogo.com and Shockwave.  We expect competition to intensify in this market from these and other competitors and no assurance can be made that we will be able to continue to grow our games distribution business or that we will be able to remain competitive in the downloadable games category in the future.

Our industry is experiencing consolidation that may cause us to lose key relationships and intensify competition.

The Internet and media distribution industries are undergoing substantial change, which has resulted in increasing consolidation and formation of strategic relationships.  We expect this consolidation and strategic partnering to continue.  Acquisitions or other consolidating transactions could harm us in a number of ways, including:

 
we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
 
we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
 
our current competitors could become stronger, or new competitors could form, from consolidations.

Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share.  Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.

We rely on the continued reliable operation of third parties’ systems and networks and, if these systems and networks fail to operate or operate poorly, our business and operating results will be harmed.

Our operations are in part dependent upon the continued reliable operation of the information systems and networks of third parties.  If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.

 
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The Internet and our network are subject to security risks that could harm our business and reputation and expose us to litigation or liability.

Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks.  Any compromise of our ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability.  We also may be required to expend significant capital or other resources to protect against the threat of security breaches or hacker attacks or to alleviate problems caused by such breaches or attacks.  Any successful attack or breach of our security could hurt consumer demand for our products and services, expose us to consumer class action lawsuits and harm our business.

We may be unable to adequately protect our proprietary rights.

Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties.  To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions and licensing agreement.  Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:

 
Our applications for trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated;
 
Issued trademarks and registered copyrights may not provide us with any competitive advantages;
 
Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
 
Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or
 
Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products.

We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.

We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights.  Any such litigation could be very costly and could distract our management from focusing on operating our business.  The existence and/or outcome of any such litigation could harm our business.

Interpretation of existing laws that did not originally contemplate the Internet could harm our business and operating results.

The application of existing laws governing issues such as property ownership, copyright and other intellectual property issues to the Internet is not clear.  Many of these laws were adopted before the advent of the Internet and do not address the unique issues associated with the Internet and related technologies.  In many cases, the relationship of these laws to the Internet has not yet been interpreted.  New interpretations of existing laws may increase our costs, require us to change business practices or otherwise harm our business.

 
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It is not yet clear how laws designed to protect children that use the Internet may be interpreted, and such laws may apply to our business in ways that may harm our business.

The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13.  We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13.  The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.

We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate.  To provide better consumer experiences and to operate effectively, our products send information to our servers.  Many of the services we provide also require that a user provide certain information to us.  We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products.

Risks Related To Our Common Stock

There is no public trading market for our common stock, which may impede your ability to sell our shares.

Currently, there is no trading market for our common stock, and there can be no assurance that such a market will commence in the future.  There can be no assurance that an investor will be able to liquidate his or her investment without considerable delay, if at all.  If a trading market does commence, the price may be highly volatile.  Factors discussed herein may have a significant impact on the market price of our shares.  Moreover, due to the relatively low price of our securities, many brokerage firms may not effect transactions in our common stock if a market is established.  Rules enacted by the SEC increase the likelihood that most brokerage firms will not participate in a potential future market for our common stock.  Those rules require, as a condition to brokers effecting transactions in certain defined securities (unless such transaction is subject to one or more exemptions), that the broker obtain from its customer or client a written representation concerning the customer’s financial situation, investment experience and investment objectives.  Compliance with these procedures tends to discourage most brokerage firms from participating in the market for certain low-priced securities.

 
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We intend to have a market maker apply to list our common stock for trading on the "Over-the-Counter Bulletin Board," which may make it more difficult for investors to resell their shares due to suitability requirements.

We intend to have a market maker apply to list our common stock for trading on the Over the Counter Bulletin Board (OTCBB).  However, there can be no assurance that we will find a market maker willing to submit an application, or that such market maker’s application will be accepted.  Broker-dealers often decline to trade in OTCBB stocks given the market for such securities are often limited, the stocks are more volatile, and the risk to investors is greater.  These factors may reduce the potential market for our common stock by reducing the number of potential investors.  This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares.  This could cause our stock price to decline.

If we are unable to pay the costs associated with being a public, reporting company, we may not be able to commence and/or continue trading on the OTC Bulletin Board and/or we may be forced to discontinue operations.

We intend to apply to list our common stock for trading on the OTC Bulletin Board.  We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to commence and/or continue trading on the OTC Bulletin Board and/or continue as a going concern.  These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants.  Accounting controls, in particular, are difficult and can be expensive to comply with.

Our ability to commence and/or continue trading on the OTC Bulletin Board and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing.  If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTC Bulletin Board and/or we may be forced to discontinue operations.

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

We do not intend to pay any dividends in the foreseeable future.  We do not plan on making any cash distributions in the manner of a dividend or otherwise.  Our Board presently intends to follow a policy of retaining earnings, if any.

We have the right to issue additional common stock and preferred stock without consent of stockholders.  This would have the effect of diluting investors’ ownership and could decrease the value of their investment.

We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute stockholders’ percentage ownership of our company.

 
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In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors.  Our certificate of incorporation has authorized issuance of up to 10,000,000 shares of preferred stock in the discretion of our Board.  The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required.  If issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock.  Such terms could include, among others, preferences as to dividends and distributions on liquidation.

Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.  The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.  Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

 
12

 


We have made forward-looking statements in this prospectus, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management.  Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition.  Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions.  These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this prospectus.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement.  We are not under any duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results, unless required by law.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders.  We will not receive any proceeds from the sale of shares of common stock by the selling stockholders in this offering.

DETERMINATION OF OFFERING PRICE

We are registering up to 13,338,320 shares for resale by existing holders of our common stock.  There is no established public market for the shares we are registering.  Our management has established the price of $0.10 per share based upon the price at which recent transactions took place, their estimates of the market value of Freeze Tag, Inc., and the price at which potential investors might be willing to purchase the shares offered.  Most of the selling shareholders in this offering paid $0.10 per share, and thus will not realize a profit unless and until there is an active trading market at a higher price.  Until such time as a trading market does develop, because of the uncertainty of our ability to continue as a going concern, our management does not believe that the price of $0.10 per share has changed.

 
13

 


The following table provides information with respect to shares offered by the selling stockholders:

Selling stockholder
 
Shares for
sale
   
Shares before
offering
   
Percent
before
offering
   
Shares
after
offering
   
Percent
after
offering (1)
 
David Daniels
    1,327,500       1,327,500       3.40 %     -0-       0.0 %
Bill Killgallon
    95,580       95,580       <1 %     -0-       0.0 %
Martin Killgallon
    95,580       95,580       <1 %     -0-       0.0 %
Larry Killgallon
    95,580       95,580       <1 %     -0-       0.0 %
Jessica Tams
    47,790       47,790       <1 %     -0-       0.0 %
Mary Caldarone
    286,740       286,740       <1 %     -0-       0.0 %
Mark Brashear
    23,895       23,895       <1 %     -0-       0.0 %
Anthony and Mary L. Caldarone
    1,155,667       1,155,667       2.96 %     -0-       0.0 %
Klane Hales
    770,889       770,889       1.97 %     -0-       0.0 %
Kendall Hales
    770,889       770,889       1.97 %     -0-       0.0 %
Kaveh Matin & Lorraine A. Kaelin (4)
    385,000       385,000       <1 %     -0-       0.0 %
Ohio Art
    1,513,089       1,513,089       3.87 %     -0-       0.0 %
The Lebrecht Group, APLC (2)(3)
    1,108,707       1,108,707       2.84 %     -0-       0.0 %
Michael Southworth (3)
    1,108,707       1,108,707       2.84 %     -0-       0.0 %
Cardiff Partners, LLC (3)
    1,108,707       1,108,707       2.84 %     -0-       0.0 %
Spencer Coray
    30,000       30,000       <1 %     -0-       0.0 %
Hays Investments
    15,000       15,000       <1 %     -0-       0.0 %
Eliseo Garza, Jr.
    15,000       15,000       <1 %     -0-       0.0 %
Robert E McDonald, II
    15,000       15,000       <1 %     -0-       0.0 %
Sidney D. Clements
    20,000       20,000       <1 %     -0-       0.0 %
Kelly D. McMillan
    50,000       50,000       <1 %     -0-       0.0 %
Sugar Pine LLC
    25,000       25,000       <1 %     -0-       0.0 %
Richard A & Cynthia Seeley
    15,000       15,000       <1 %     -0-       0.0 %
Kenneth J. Rolf
    15,000       15,000       <1 %     -0-       0.0 %
Sun West Tr Cust fbo  Susan Rae IRA
    15,000       15,000       <1 %     -0-       0.0 %
Steven M.& Deborah M. Hall
    15,000       15,000       <1 %     -0-       0.0 %
Kenneth A. Bergenthal
    25,000       25,000       <1 %     -0-       0.0 %
Ikuko Bergenthal
    15,000       15,000       <1 %     -0-       0.0 %
Entrust New Dir. Cust fbo Bruce Kalish IRA
    60,000       60,000       <1 %     -0-       0.0 %
Hackett Inv. LLC
    30,000       30,000       <1 %     -0-       0.0 %
Ace Wealth Mgmt
    10,000       10,000       <1 %     -0-       0.0 %
CapQuest LLC
    200,000       200,000       <1 %     -0-       0.0 %
Hubert, Jr. Guinn
    25,000       25,000       <1 %     -0-       0.0 %

 
14

 

Selling stockholder
 
Shares for
sale
   
Shares before
offering
   
Percent
before
offering
   
Shares
after
offering
   
Percent
after
offering (1)
 
Steven R. and Tara L. Orrick
    50,000       50,000       <1 %     -0-       0.0 %
Rick Crane
    15,000       15,000       <1 %     -0-       0.0 %
Marie M. Moody
    30,000       30,000       <1 %     -0-       0.0 %
DKJB Ltd. LLC
    15,000       15,000       <1 %     -0-       0.0 %
Dennis Crump
    20,000       20,000       <1 %     -0-       0.0 %
Dennis K. Taylor
    30,000       30,000       <1 %     -0-       0.0 %
Terry Dorton
    15,000       15,000       <1 %     -0-       0.0 %
Leonard & Susan L. Black
    30,000       30,000       <1 %     -0-       0.0 %
Patrick A.  Judd
    25,000       25,000       <1 %     -0-       0.0 %
Sherry F. & Stephen M. Young
    15,000       15,000       <1 %     -0-       0.0 %
Brad Val Crawford
    25,000       25,000       <1 %     -0-       0.0 %
J. T.  Dodero
    50,000       50,000       <1 %     -0-       0.0 %
Nicholas A. Corr
    25,000       25,000       <1 %     -0-       0.0 %
Daniel Sternberg SEP-IRA ###-##-####
    75,000       75,000       <1 %     -0-       0.0 %
HS UT Prop, LLC
    15,000       15,000       <1 %     -0-       0.0 %
Susan L.  Frisbee
    15,000       15,000       <1 %     -0-       0.0 %
Shamar LLC
    50,000       50,000       <1 %     -0-       0.0 %
Bereck, LP
    50,000       50,000       <1 %     -0-       0.0 %
Michael R. Rosanbalm
    15,000       15,000       <1 %     -0-       0.0 %
Brent & Crissy McFarland
    15,000       15,000       <1 %     -0-       0.0 %
John W.  Duffy
    15,000       15,000       <1 %     -0-       0.0 %
Jason N. & Susan Crowther
    15,000       15,000       <1 %     -0-       0.0 %
John A. Dallimore
    25,000       25,000       <1 %     -0-       0.0 %
Eric  Raynor
    15,000       15,000       <1 %     -0-       0.0 %
Chris Savittieri
    120,000       120,000       <1 %     -0-       0.0 %
Greg Dunford
    15,000       15,000       <1 %     -0-       0.0 %
Joseph Petrini
    15,000       15,000       <1 %     -0-       0.0 %
Ber Cubs Investments
    15,000       15,000       <1 %     -0-       0.0 %
James R. Vollett
    15,000       15,000       <1 %     -0-       0.0 %
Barry Guinn
    15,000       15,000       <1 %     -0-       0.0 %
Todd Schafer Revocable Trust dtd 06/23/98
    20,000       20,000       <1 %     -0-       0.0 %
David & Susan Drury
    15,000       15,000       <1 %     -0-       0.0 %
Journey Research Inc.
    20,000       20,000       <1 %     -0-       0.0 %
Nobuco LLC
    50,000       50,000       <1 %     -0-       0.0 %
Tolleson Sisters LLC
    25,000       25,000       <1 %     -0-       0.0 %
William Tolleson
    25,000       25,000       <1 %     -0-       0.0 %
Kenneth J. Crump
    15,000       15,000       <1 %     -0-       0.0 %
Brian & Linda Horrocks
    15,000       15,000       <1 %     -0-       0.0 %

 
15

 

Selling stockholder
 
Shares for
sale
   
Shares before
offering
   
Percent
before
offering
   
Shares
after
offering
   
Percent
after
offering (1)
 
David Law
    20,000       20,000       <1 %     -0-       0.0 %
Aaron Merrill Music
    15,000       15,000       <1 %     -0-       0.0 %
RLS Traditional LLC
    100,000       100,000       <1 %     -0-       0.0 %
BioEnergy Inv. LLC
    25,000       25,000       <1 %     -0-       0.0 %
Derek Raynor
    15,000       15,000       <1 %     -0-       0.0 %
David Christiansen
    35,000       35,000       <1 %     -0-       0.0 %
Jason  Snyder
    30,000       30,000       <1 %     -0-       0.0 %
Griselda Christiansen
    15,000       15,000       <1 %     -0-       0.0 %
Michael C. Jonas
    15,000       15,000       <1 %     -0-       0.0 %
Ryan Bentley
    20,000       20,000       <1 %     -0-       0.0 %
Shane Orlando
    60,000       60,000       <1 %     -0-       0.0 %
Thayne D. Wilde
    18,000       18,000       <1 %     -0-       0.0 %
James L. & Judy B. Clark
    30,000       30,000       <1 %     -0-       0.0 %
Charles K. Jr. & Suzie A. Fisher
    50,000       50,000       <1 %     -0-       0.0 %
Carco Mgmt Co.
    15,000       15,000       <1 %     -0-       0.0 %
Linda Buscemi
    50,000       50,000       <1 %     -0-       0.0 %
Payne Daniel
    50,000       50,000       <1 %     -0-       0.0 %
Sunwest Trust Ed P. Lowry
    10,000       10,000       <1 %     -0-       0.0 %
Speechly Properties
    20,000       20,000       <1 %     -0-       0.0 %
Gerry & Bonnie Cruz
    15,000       15,000       <1 %     -0-       0.0 %
Orlando Investments
    15,000       15,000       <1 %     -0-       0.0 %
Avn Poder LLC
    20,000       20,000       <1 %     -0-       0.0 %
Richard A & Cynthia Mettler
    15,000       15,000       <1 %     -0-       0.0 %
Hope Webber
    50,000       50,000       <1 %     -0-       0.0 %
South & Pamela Smith
    20,000       20,000       <1 %     -0-       0.0 %
MJS Traditional LLC
    50,000       50,000       <1 %     -0-       0.0 %
Rocky & Marilyn Samber
    50,000       50,000       <1 %     -0-       0.0 %
Milling Machinery, Inc
    16,000       16,000       <1 %     -0-       0.0 %
Clifton Pinckard
    15,000       15,000       <1 %     -0-       0.0 %
DAC Investments LLC
    15,000       15,000       <1 %     -0-       0.0 %
LGC Investments LL
    15,000       15,000       <1 %     -0-       0.0 %
JWC Investments LLC
    15,000       15,000       <1 %     -0-       0.0 %
Rebekah & Thomas Dyckman
    20,000       20,000       <1 %     -0-       0.0 %

 
16

 

Selling stockholder
 
Shares for
sale
   
Shares before
offering
   
Percent
before
offering
   
Shares
after
offering
   
Percent
after
offering (1)
 
Holly & Carl Wheat
    15,000       15,000       <1 %     -0-       0.0 %
Stephen & Joy Gay
    50,000       50,000       <1 %     -0-       0.0 %
Irma & Jerry Fairbourn
    15,000       15,000       <1 %     -0-       0.0 %
Ernest Valdez
    75,000       75,000       <1 %     -0-       0.0 %
Leland & Myra Rhodes
    30,000       30,000       <1 %     -0-       0.0 %
Art Lafeber
    15,000       15,000       <1 %     -0-       0.0 %
Walter & Barbara Iwaniec
    15,000       15,000       <1 %     -0-       0.0 %
T. Gregg Talbert
    30,000       30,000       <1 %     -0-       0.0 %
John M. Guynn
    15,000       15,000       <1 %     -0-       0.0 %
Nathaniel Loge
    15,000       15,000       <1 %     -0-       0.0 %
Jo Lyn Corr
    20,000       20,000       <1 %     -0-       0.0 %
Cody Wood
    20,000       20,000       <1 %     -0-       0.0 %
Daniel P. Sternberg, PhD. LLC
    25,000       25,000       <1 %     -0-       0.0 %
Ann Gregg
    15,000       15,000       <1 %     -0-       0.0 %
James G Gemmell
    15,000       15,000       <1 %     -0-       0.0 %
Mark G. Calabrese
    25,000       25,000       <1 %     -0-       0.0 %
Stacy Pinckard
    50,000       50,000       <1 %     -0-       0.0 %
John P. Nicholsol
    120,000       120,000       <1 %     -0-       0.0 %
Eric K. Raynor
    15,000       15,000       <1 %     -0-       0.0 %
Peter Morkel
    15,000       15,000       <1 %     -0-       0.0 %
CLB Enterp.
    15,000       15,000       <1 %     -0-       0.0 %
Bryce Pearson
    20,000       20,000       <1 %     -0-       0.0 %
Douglas Hardy
    30,000       30,000       <1 %     -0-       0.0 %
James L. & Judy B. Clark
    20,000       20,000       <1 %     -0-       0.0 %
Tatum House, LLC
    30,000       30,000       <1 %     -0-       0.0 %
Tracy Wood Durrant
    15,000       15,000       <1 %     -0-       0.0 %
Hope Webber
    50,000       50,000       <1 %     -0-       0.0 %
Brian L. Frandsen
    25,000       25,000       <1 %     -0-       0.0 %
James f. Walsh
    20,000       20,000       <1 %     -0-       0.0 %
APS IRA David W. Christiansen
    20,000       20,000       <1 %     -0-       0.0 %
Randy & Camie Gee
    20,000       20,000       <1 %     -0-       0.0 %
Rabecca Williamson
    20,000       20,000       <1 %     -0-       0.0 %
Bonnie M Cruz
    15,000       15,000       <1 %     -0-       0.0 %
                                         
Total
    13,338,320       13,338,320       34.17 %     -0-       0.0 %
         
 
(1)
Based on 39,038,720 shares outstanding.
 
(2)
The Lebrecht Group, APLC serves as our legal counsel in connection with this offering.
 
(3)
Shares are subject to a one year lock-up period pursuant to that certain Lock-Up Agreement dated November 10, 2009, by and between us and certain of our shareholders.  The one year period does not begin until we are listed on the OTC Bulletin Board.

 
17

 

 
(4)
Shares are held in the name of Allied Anesthesia Medical Group, Inc. Retirement Trust Dated 1/3/94, FBO Kaveh Matin and Allied Anesthesia Medical Group, Inc. Retirement Trust Dated 1/3/94, FBO Lorraine A. Kaelin

 
18

 

PLAN OF DISTRIBUTION

We anticipate that a market maker will apply to have our common stock traded on the over-the-counter bulletin board at some point in the future, but there is no guarantee this will occur.  If successful, the selling stockholders will be able to sell their shares referenced under “Selling Security Holders” from time to time on the over-the-counter bulletin board in privately negotiated sales, or on other markets, at prevailing market rates.  If our common stock is not listed on the over-the-counter bulletin board, the selling stockholders may sell their shares in privately negotiated transactions.  Any securities sold in brokerage transactions will involve customary brokers’ commissions.

We will pay all expenses in connection with the registration and sale of the common stock by the selling security holders, who may be deemed to be underwriters in connection with their offering of shares.  The estimated expenses of issuance and distribution are set forth below:

Registration Fees
 
Approximately
    $ 96  
Transfer Agent Fees
 
Approximately
   
500
 
Costs of Printing and Engraving
 
Approximately
      500  
Legal Fees
 
Approximately
      30,000  
Accounting and Audit Fees
 
Approximately
      28,000  
Total
        $ 59,096  

Under the securities laws of certain states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states.  In addition, in certain states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and we have complied with them.  The selling stockholders and any brokers, dealers or agents that participate in the distribution of common stock may be considered underwriters, and any profit on the sale of common stock by them and any discounts, concessions or commissions received by those underwriters, brokers, dealers or agents may be considered underwriting discounts and commissions under the Securities Act of 1933.

In accordance with Regulation M under the Securities Exchange Act of 1934, neither we nor the selling stockholders may bid for, purchase or attempt to induce any person to bid for or purchase, any of our common stock while we or they are selling stock in this offering.  Neither we nor any of the selling stockholders intends to engage in any passive market making or undertake any stabilizing activity for our common stock.  None of the selling stockholders will engage in any short selling of our securities.  We have been advised that under the rules and regulations of the FINRA, any broker-dealer may not receive discounts, concessions, or commissions in excess of 8% in connection with the sale of any securities registered hereunder.

 
19

 

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001, and 10,000,000 shares of preferred stock, par value $0.001.  As of the date of this Registration Statement, there are 39,038,720 shares of our common stock issued and outstanding, and no shares of our preferred stock issued and outstanding.

Common Stock.  Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments.  The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders.  There is no cumulative voting with respect to the election of our directors or any other matter.  Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors.  The holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors from funds legally available therefore.  Cash dividends are at the sole discretion of our Board of Directors.  In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock.  Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.

Preferred Stock.  We are authorized to issue 10,000,000 shares of preferred stock, par value $0.001 per share, of which no such shares are issued and outstanding.  Our Board of Directors can choose the rights, privileges, and preferences without further shareholder approval.  We have not designated the rights and preferences of our preferred stock.  The availability or issuance of these shares could delay, defer, discourage or prevent a change in control.

Dividend Policy.  We have not declared or paid a cash dividend on our capital stock in our last two fiscal years and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We currently intend to retain our earnings, if any, for use in our business.  Any dividends declared in the future will be at the discretion of our Board of Directors and subject to any restrictions that may be imposed by our lenders.

Options, Warrants and Convertible Securities.  As of the date of this Prospectus, we have outstanding options to purchase 560,000 shares of our common stock issued under our Freeze Tag 2006 Stock Plan.  These options expire in ten (10) years.  Of those options, 45,000 were issued to non-affiliates with an exercise price of $0.10 per share, and 115,000 were issued to Craig Holland, one of our officers and directors, with an exercise price of $0.11 per share.  In addition, on May 5, 2010, we issued options to purchase 400,000 shares of our common stock at an exercise price of $0.10 to Jürgen Goldner for advisory services.  Subject to the terms of the advisory agreement, and continued service to the company, the following vesting schedule will exist:  100,000 options will vest on the following dates: August 5, 2010, November 5, 2010, February 5, 2011, and May 5, 2011.  We also have one (1) $100,000 principal amount convertible promissory note outstanding, which is convertible at $0.10 per share.  The holder of this note is the Holland Family Trust, which is not controlled by any of our officers and directors.  Under the note we have received $50,000 of the purchase price, with the remaining $50,000 to be paid at a later date.  We do not have any other outstanding options, warrants, or other convertible securities.

 
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INTEREST OF NAMED EXPERTS AND COUNSEL

The Lebrecht Group, APLC serves as our legal counsel in connection with this offering. The Lebrecht Group, and/or its employees, own 1,108,707 shares, or 2.84%, of our common stock, and is a selling stockholder in this offering. These shares are subject to a one year lock-up period pursuant to that certain Lock-Up Agreement dated November 10, 2009, by and between us and certain of our shareholders. The one year period does not begin until we are listed on the OTC Bulletin Board.

 
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DESCRIPTION OF BUSINESS

We are in the business of acquiring or developing and publishing casual games. We obtain games through three main sources: licenses, creation of original games, and the use of third-party developers. Most of the games with which we are involved are published in one or more of three platforms, or methods of distribution. These platforms are PC/Mac downloads, mobile, and other emerging platforms like social gaming sites.
 
Developing Casual Games
 
We acquire and develop games through licensing arrangements, the creation of our own original games, and through the use of third-party game developers.
 
Licensed Games
 
We may develop a game around a well known brand pursuant a license agreement from the owner of that brand. For example, we have a license agreement with the Ohio Art Company that allowed us to develop and distribute a game around their Etch A Sketch® brand. In exchange for the license, we pay a royalty to the Ohio Art Company based on our revenues from that product.
 
In a licensed game relationship, we usually pay the expenses associated with developing the game, and this is addressed in the license agreement. Our gross profit margins may be lower on a licensed game compared to an original game because of the royalty payment we pay to the licensor, which is usually 10% to 20% of the revenue from such game, but the sales can be much higher because of the recognition of the licensed title or brand by the casual game consumer. Brand names that are familiar to a casual game consumer create a sense of trust and familiarity that often increases sales.
 
In the past, our licensed games included Etch a Sketch®, Concentration, Nertz, Can You See What I See?, and Can You See What I See? Dream Machine. Going forward (2010), we have current licensing agreements with Ohio Art Company (Etch A Sketch) and CMG Worldwide (Amelia Earhart).
 
Freeze Tag Original Content
 
We have created, and will continue to create, original games to put in our portfolio. We usually hire one or more contract engineers on a “work-for-hire” basis to create the game for us, and we pay that engineer or engineers a fixed fee for their work, known as a development fee. This development fee can range from $15,000 to as much as $75,000, depending on the amount and complexity of the work involved. When we distribute the game, all of the revenues are ours to keep, unless we have negotiated a revenue share (or royalty) with the contract engineer(s).
 
Our gross profit margins are usually highest when we distribute our own original content, but we also assume all of the risk because we have paid to develop the game in advance, without knowing whether it will be a success or not. In addition, because there is no existing brand associated with an original game, we have to create the market for the game ourselves.
 
Our original content games are Mystery Masterpiece ™: The Moonstone, Unsolved Mystery Club™: Amelia Earhart, The Conjurer (rights sold to Real Networks, and Real Detectives (rights sold to Real Networks). We are currently working on the next games in the Mystery Masterpiece (Woman in White) and Unsolved Mystery Club (Ancient Astronauts™) series, and we anticipate launching both games in 2010.

 
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Publishing Third-Party Developer Titles

We often have a variety of independent developers working with us to build licensed and original titles for us. During the course of our working relationship, these developers sometimes bring a concept or a partially finished game to us for consideration. If we believe the title has merit and the potential to generate significant revenues, then we will contract with the developer to finish the game to our specifications. We will guide them through the development process and, most often, we will own certain intellectual property rights to the finished game. If we don’t own the game code, then we will at least own significant components of the intellectual property such as the name or character likeness.
 
Third party developers are attracted to working with us because we provide them creative guidance to ensure their game is market-ready, development funds to help them finish their game, and marketing expertise and distribution relationships to get their game to market and create an ongoing revenue stream. These developers often underestimate how much time and money is required in order to complete development of a game. They approach us to help them fund the completion of their game (usually an amount far less than the cost for Freeze Tag to develop an original title), in exchange for a percentage of the revenue generated by the game over a period of time and the transfer of certain intellectual property rights to us.
 
The risks are lower with third party games because the amount of upfront money required tends to be less than if we were developing the entire game. On occasion, there are games that are 90% finished when they come to us and they only require a small amount of development money to complete. In these circumstances, we can purchase rights in or ownership of a game or portion of the intellectual property (such as the name of the game) in exchange for very little out-of-pocket costs. However, the gross margin is lower than the margin generated by original titles because the developer not only shares in the risk (by having incurred a greater portion of the development costs themselves), but also generally receives a royalty on the back end, usually 20% to 50% of net sales.
 
Our third-party developer titles are Xango Tango (we own the Intellectual Property (IP)), Paper Chase (we own the IP), and Letter Lab (we own the IP). Our 3rd Party Published Titles (games that we have published on behalf of other developers) include High School Dreams, Secrets of Great Art, Chameleon Gems, Pets Fun House, Secrets of Margrave Manor, Mevo and the Grooveriders, Mystery Stories, Berlin Nights, Emoticons, and Fishing Craze.
 
Distributing Casual Games
 
Once a game is developed, we distribute it through one of three methods. The majority of our games are downloaded onto a PC or Mac computer over the Internet. A smaller but growing percentage of our games are distributed over the iPhone. We do not yet distribute our games through a social networking platform, such as Facebook, however we are currently developing a game for that type of distribution.
 
Try-before-you-buy
 
All of our games are available for a limited period of time for free. This is the standard format in the industry, and applies to all three of our methods of distribution. Once required to purchase a game, the purchase price ranges from $2.99 to $19.99. On (industry) average, 1% of the users purchase a game after they try it. Our games are purchased by an average of 4% to 5% of the users who try it.

 
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PC/Mac Downloadable Distribution

All of our games are available for PC or Mac download.
 
Most of the time, our customers find our games through a game website, such as www.bigfishgames.com or some other retail site such as www.amazon.com. Our distribution partners include, but are not limited, the following: Yahoo!, MSN Games, Amazon.com, Big Fish Games, SteamExent/Verizon, Apple, Game House, Shockwave, and Oberon.
 
Mobile Distribution
 
At the current time, Apple is leading the way in mobile gaming devices with its iPhone. There are thousands of applications for the iPhone. Our Etch A Sketch® application was one of the first 500 applications introduced at the same time as the iPhone, so we have been working with Apple since the launch of the iPhone. Unlike many of the companies developing for iPhone, Apple has assigned us our own developer relations manager, and they often contact us directly about developing new Etch A Sketch iterations for new iPhone releases in different territories. We anticipate that this market will undergo extreme growth in the near future.
 
Other Emerging Methods of Distribution
 
We do not currently have a game that is distributed on a social networking site, such as Facebook or MySpace. However, we are currently working on game designs, and are enabling our Etch A Sketch® iPhone App to be Facebook connected, as well as our Mystery Masterpiece™: Moonstone iPhone App. We are very encouraged by this market because of its potential size; for example, Farmville, a game about running a virtual farm, has amassed millions active players since it was introduced in June 2009.
 
Business Strategy
 
Our strategy is to first develop and publish original casual game content on the high growth platforms and devices such as PC/Mac digital downloads and flash HD, smartphone (iPhone and Android), mobile internet devices (such as tablets) and social networking sites. According to a recent NPD report, in 2009, for the first times games sold via digital channels were close to equal the number of units sold through traditional retail outlets. Based on this trend, digital distribution appears to be the wave of the future for the games market. We have been riding that wave since our inception. New, powerful mobile internet devices such as smartphones (Apple iPhone and Android phones) and tablets (iPad) are new platforms that emerged as high growth, legitimate digital distribution channels for games and entertainment. As consumers continue to take up these mobile internet devices and consider them essential tools, the corresponding markets for digital entertainment created specifically for them are positioned to experience rapid adoption and growth.
 
In addition to attacking the high growth devices and digital distribution channels, we are creating original intellectual property. Wherever possible, we own registered trademark protection for properties we develop. As the digital markets evolve, there are and will continue to be many competitors who will imitate successful game properties. We are investing in trademark protection to create game brands and protect them. For example, we have received preliminary approval from the United States Patent and Trademark office to register Unsolved Mystery, Unsolved Mystery Club and Ancient Astronauts for all gaming platforms. These marks will enable us to defend against copycats who may try to incorporate these terms into their game titles.

 
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Our Production Process – How Do We Make a Game?
 
We have learned that establishing and following a rigid process is essential to producing commercially successful products, regardless of the platform. The process all begins with the creative development process. The chart below describes the approach we use to filter ideas and make final decisions on which games we will actually produce. After choosing the game that we will focus on, we write a detailed design document. A thorough design document insures that all of those involved in the creation of the game have a common reference source throughout the production process. Also critical to producing high quality games, a test plan accompanies every design document. Not only do we test for bugs, but also we test the game for usability. Since most casual gamers do not want to read instructions, it is critical that the finished game be easy to play by just pointing and clicking at objects on the screen. This is the way most casual gamers discover games.
 
As a publisher and developer of games, we have developed expertise in three core aspects of game production. These core competencies help to give us a competitive advantage in the industry. They are listed below, with the resulting benefit also identified.
 
1.
Create High Quality Products (including art and sound assets). Benefit: Provides high value to distribution partners and consumers, resulting in increased downloads and purchases.
 
2.
Maintain Flexible Engineering Tools and Processes. Benefit: Decreases time-to-market delivery of products.
 
3.
Minimize Risk by doing the following: 1) selecting proven genres, 2) keeping development costs low, and 3) modifying designs “on the fly” based on consumer feedback. Benefit: Increases the number of games released per year and decreases reliance on any one title’s success, ultimately improving return on investment for each game.


 
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How Long Does it Take to Develop a Casual Game?

We use a team of development professionals located all over the world, including South America and Europe.  We use a development methodology referred to as agile development, which focuses on short development and feedback cycles, leading to shortened development times.  Because of this, our costs are reduced, and the availability of an almost unlimited number of engineers and programmers makes our development time approximately 5 months.  This is a big competitive advantage.


The Casual Games Market

The Casual Games Association

The Casual Games Association is the international trade association for casual games professionals. The association has more than 4,000 paid members, including gaming executives, publishers, and developers. The association hosts conferences and publishes research reports on the industry. Craig Holland, our CEO, is currently serving as a Founding Advisor to the CGA. This has been extremely beneficial to the company. Mr. Holland’s close ties to the association provides access to information and partnerships, and opportunities that might not otherwise be available. Their website is (http://casualgamesassociation.org/).

The following statistics are published by the Casual Games Association:

 
·
the global market for all games was $41.9 billion in 2007, and is expected to grow to more than $69 billion by 2012;

 
·
an estimated 200 million people are playing casual games over the Internet each month;

 
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·
48% of casual game players are men, and 52% are women.  However, women account for 74% of paying casual game players.

 
·
casual game players who pay for a subscription average 7 to 15 hours of playing per week.  The heaviest times are right after dinner from 7pm – 9pm, and during lunch from 11am – 2pm.

 
·
the average play time is short, from five minutes to 20 minutes – though its common for people to play one game after another for many hours.

The Competition

Publishers

Casual game industry publishers typically provide funding, development guidance and distribution for casual games for online, retail and mobile platforms.  Some of the largest casual game publishers are:

Zynga, San Francisco, California
Playdom, Mountain View, CA (recently acquired by Disney)
6waves, Hong Kong
Big Fish Games Seattle, Washington
GameHouse Partners Seattle, Washington 
iWin San Francisco, California 
Chillingo, United Kingdom
Ngmoco, San Francisco, California
Iplay (Oberon Media) Seattle, Washington & NYC 
PlayFirst San Francisco, California 
PopCap Games Seattle, Washington 
Sandlot Games Bothell, Washington 

Distributors

Casual game industry online, retail and mobile distributors typically provide aggregation services for retail distributors. Some online distributors provide tools and services for online retailers to assist them in interfacing with consumers. According to the CGA's 2007 Market Report, some of the largest casual game distributors and retailers of casual games are:

Online Retailers (Portals)
Big Fish Games Seattle, Washington
RealGames Seattle, Washington
Oberon Media Seattle, Washington & NYC 
Amazon.com Seattle, Washington
WildTangent Redmond, Washington
Exent (Verizon Games on Demand) Tel Aviv, Israel
Shockwave San Francisco, California 
Yahoo! Games Santa Monica, California 

Brick and Mortar Distributors
Activision Santa Monica, California 

 
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Encore USA Los Angeles, California
Focus Multimedia England, UK

Brick and Mortar Retailers
Gamestop Grapevine, Texas
Wal-Mart Bentonville, Arkansas 
Best Buy Minneapolis, Minnesota 
Target Minneapolis, Minnesota 

Our Intellectual Property

Our intellectual property is an essential element of our business. We use a combination of trademark, patent, copyright, trade secret and other intellectual property laws, confidentiality agreements and license agreements to protect our intellectual property. We have also registered a number of domain names, which we believe will be important to the branding and success of our games. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own or license. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
 
We intend to register ownership of software copyrights in the United States as well as seek registration of various trademarks associated with the Company’s name and casual games that we will develop.
 
In addition, many of our applications are based on or incorporate intellectual properties that we license from third parties. We have both exclusive and non-exclusive licenses to use these properties for terms of up to three years. Our licensed brands include, among others, Etch A Sketch®, Amelia Earhart, and Nertz. Our licensors include a number of well-established video game publishers and major media companies, including The Ohio Art Company and Nertz Company.
 
In addition to attacking the high growth devices and digital distribution channels, we are creating original intellectual property. Wherever possible, we own registered trademark protection for properties we develop. As the digital markets evolve, there are and will continue to be many competitors who will imitate successful game properties. We are investing in trademark protection to create game brands and protect them. For example, we have received preliminary approval from the United States Patent and Trademark office to register Unsolved Mystery, Unsolved Mystery Club and Ancient Astronauts for all gaming platforms. These marks will enable us to defend against copycats who may try to incorporate these terms into their game titles.
 
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.

 
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Our Employees

We have 10 employees and/or contractors working in our office, 2 of which are our officers, 2 of which are engaged in production, publishing and development, and 1 of which is engaged in administrative functions.  We have a team of over 40 engineers, artists, and developers available to us on an independent contract basis around the world.

ORGANIZATION WITHIN LAST FIVE YEARS

Freeze Tag, Inc. was formed in February 2006 in the State of Delaware.  In March 2006, Freeze Tag, LLC, our predecessor which was formed in October 2005, was merged with and into Freeze Tag, Inc.

DESCRIPTION OF PROPERTY

Our executive offices are located in Tustin, California, at 228 W. Main Street, 2nd Floor, Tustin, CA 92780.  Our office space is approximately 2,000 square feet and the lease is month-to-month at a rate of $2,000 per month.

LEGAL PROCEEDINGS

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.  However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
 
F-1
Balance Sheet as of June 30, 2010 (Unaudited) and December 31, 2009 and 2008
 
F-2
Statements of Operations of Freeze Tag, Inc., for the Six Months Ended June 30, 2010 and 2009 (Unaudited) and the Years Ended December 31, 2009 and 2008
 
F-3
Statement of Shareholders’ Equity (Deficit) for the Six Months Ended June 30, 2010 (Unaudited) and the Years Ended December 31, 2009 and 2008
 
F-5
Statements of Cash Flows of Freeze Tag, Inc., for the Six Months Ended June 30, 2010 and 2009 (Unaudited) and the Years Ended December 31, 2009 and 2008
 
F-4
Notes to Financial Statements
 
F-6

 
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SELECTED FINANCIAL DATA

Freeze Tag, Inc.
   
For the Years Ended
December 31,
 
     
2009
   
2008
 
               
Statement of Operations Data:
             
               
Total revenues
    865,429       583,372  
                   
Net income (loss)
      (233,933 )     (128,456 )
                   
Balance Sheet Data:
                 
                   
Current assets
    $
350,966
     
389,030
 
Total assets
      527,252       520,088  
                   
Current liabilities
      723,502       948,556  
Total liabilities
      723,502       948,556  
Total stockholders’ equity (deficit)
      (196,250 )     (428,468 )
                   
Total dividends per common share
      N/A       N/A  

 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Disclaimer Regarding Forward Looking Statements

You should read the following discussion in conjunction with our financial statements and the related notes and other financial information included in this Form S-1. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form S-1, particularly in the Section titled Risk Factors.
 
Although the forward-looking statements in this Registration Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
 
Summary Overview
 
We are a casual online games publisher that develops and markets games across the major digital distribution platforms including PC/Mac downloadable (Web), mobile, and emerging platforms like social networking sites (including Facebook). We focus on casual games because of our belief that they appeal to a significant portion of the population.
 
During our most recent fiscal year ended December 31, 2009, we generated revenues of $865,429 from the sales our games.  During our most recent ended six-month period, ended June 30, 2010, we generated revenues of $287,573 from the sales of our games.  During the year ended December 31, 2009, we launched three games for various platforms, compared to two for the year ended December 31, 2008.  During 2010, we anticipate we will publish up to eight games for various platforms.  In 2010 and going forward we plan to continue the trend we started in 2009 of developing games based on intellectual property we own or purchase from third parties, rather than license intellectual property that belongs to certain third parties, for which we then have to pay royalties to the owner of the intellectual property.  We believe this will further enable us to decrease the costs associated with developing and publishing games.

Critical Accounting Estimates

Unaudited Interim Financial Information

The accompanying balance sheet as of June 30, 2010, statements of operations for the six months ended June 30, 2009 and 2010, statement of owners' equity for the six months ended June 30, 2010 and statements of cash flows for the six months ended June 30, 2009 and 2010 are unaudited.  These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").  In the opinion of our management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of the company's statement of financial position at June 30, 2010 and its results of operations and its cash flows for the six months ended June 30, 2009 and 2010. The results for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2010.

 
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Revenue Recognition

Our revenues are derived primarily by licensing software products in the form of online and downloadable games for PC, Mac and smartphone platforms.  We distribute our products primarily through online games portals and smartphone device manufacturers (“distribution partners”), which market the games to end users.  The nature of our business is such that we sell games basically through four distribution outlets – WEB portals, brick and mortar retail distributors, mobile distributors and publishers, and our own web portal, www.freezetag.com.

Product Sales (web and mobile revenues)

We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers, and once any performance obligations have been completed.  Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.

Licensing Revenues (retail revenues- royalties)

Third-party licensees distribute games under license agreements with us. We receive royalties from the licensees as a result. We recognize these royalties as revenues upon receipt of the monthly or quarterly (varies per distribution partner) revenue reports provided by the partner.  Revenue from licensing/royalties is recognized after deducting the estimated allowance for returns and price protection.

Some license agreements require a royalty advance from the licensee/distributor in which case the original advance is recognized as a liability and royalty revenue is deducted from the advance as earned.

Other Revenues

Other revenues primarily include Ad game revenue and work-for-hire game related revenue. We recognize this revenue once all performance obligations have been completed.  In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

We recognize revenue in accordance with current accounting standards when an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable.

Cash and Cash Equivalents
 
For purposes of the Statement of Cash Flows, we consider liquid investments with an original maturity of three months or less to be cash equivalents.  We place our cash and cash equivalents with large commercial banks.  The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000.  All of our cash balances at June 30, 2010, December 31, 2009 and 2008 are insured.  At June 30, 2010, December 31, 2009 and 2008 there were no cash equivalents.

 
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Restricted Cash

 
In February of 2010, as a condition of the private equity offering of common shares of the Company, we entered into an escrow agreement, which governed the receipt and distribution of the funds.   At the time of closing, $171,125 (50%) of the funds were placed in to an escrow account, and these funds are being used to pay accounting, legal, and consulting fees associated with the public offering of  our common stock and the first 12 months of accounting and legal expenses following the successful listing on the OTCBB.  As of June 30, 2010, the remaining balance was $60,791.
 
Releasing the funds requires the signatures of both the Company, and a representative from Monarch Bay Management Company.

Because of these restrictions on the use of funds, we have placed them on the balance sheet in a “Restricted Cash” category.

Allowances for Returns, Price Protection, and Doubtful Accounts

Because the majority of our business is derived through online portals (such as Big Fish Games) and wireless online app stores (such as Apple), there is no physical product, other than the downloadable bits of our games that is involved in the customer purchase.  In the digital environment, the customer cannot ‘return’ a digital download product.  Therefore, there are no returns.  The customer can ask for a refund of a digital product, and if there are any, then they are reconciled or netted out by our distribution partners before we receive the corresponding payments and royalty statements.  As such, we do not allow for returns, bad debts or price protection of digital download products.

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels.  Product revenue is recognized net of allowances for price protection and returns and various customer discounts.  Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games.  To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue.  These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets.  All assets are currently depreciated over 3 years.  Maintenance and repairs are charged to expense as incurred.  Renewals and improvements of a major nature are capitalized.  At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are reflected in the statement of operations.

 
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Concentrations of Credit Risk, Major Customers and Major Vendors

 
During the period ended June 30, 2010, customers representing 10% or more of our revenues were:  Real Networks – 24% of revenue, Big Fish Games – 22% of revenue, and Superscape – 16%.

During the period ended June 30, 2010, customers representing 10% or more of our accounts receivable were:  Big Fish Games - 27%, C1BPO – 30%, and Extent Technologies – 22%.

During the year ended December 31, 2009, customers representing 10% or more of our revenues were:  Real Networks - 44% of Revenue, and Big Fish Games - 24% of Revenue compared to the year ended December 31, 2008, when customers representing 10% or more of our Revenue were:  Big Fish Games - 24% of Net Revenues, and Real Networks - 14% of Net Revenues, and Apple - $73,982, or 13% of Revenue.

During the year ended December 31, 2009, customers representing 10% or more of our accounts receivable were: Big Fish Games – 15%, Extent Technologies – 13%, and Mumbo Jumbo – 26% compared to the year ended December 31, 2008, when customers representing 10% or more of our accounts receivable were: Big Fish Games – 28%, Extent Technologies – 12%, and Mumbo Jumbo – 33%.

 
Income Taxes

We account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740, income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC Topic 740 includes accounting guidance which clarifies the accounting for the uncertainty in recognizing income taxes in an organization by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions. This guidance requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized both upon the adoption of the related guidance and in subsequent periods.

Foreign Currency Translation

We derive a portion of our revenue from foreign countries, which report to us in foreign currency, but pay in U.S. Dollars.  Because of the fluctuations between the reporting time and the payment period (up to 60 days), it is necessary to make adjustments to our accounting records.  These adjustments are recorded under a Foreign Currency Translation expense account, and shown in the P&L statement as a General & Administrative expense.

Accounting for Stock-Based Compensation
 
We account for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees ("ASC stock-based compensation guidance").  Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures.  Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in our statement of operations for the period ended June 30, 2010 was $0, and for the years ended December 31, 2009 and 2008 included compensation expense of $7,447 and $2,665 respectively. As of December 31, 2009, we issued 930,000 warrants upon conversion of the notes payable and recognized expense of $92,851.
 
 
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Impairment of Long-Lived Assets

We have adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate our long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
 
Fair Value of Financial Instruments
 
Effective January 1, 2009, we adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on our financial position, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts payable, accrued expenses and notes payable, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
 
Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 
·
Level one — Quoted market prices in active markets for identical assets or liabilities;
 
 
·
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
 
 
·
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
 
Determining the category in which an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each period.

 
35

 

 
Use of Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and these differences may be material.
 
Research and Development Costs
 
We charge costs related to research & development of products to general and administrative expense as incurred. The types of costs included in research and development expenses include research materials, salaries, contractor fees, and support materials.

 
36

 

Software Development Costs

Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers and artists. We account for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed ("ASC Subtopic 985-20"). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation, or the completed and tested product design and working model. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against future revenues. For products where proven game engine technology exists (as is the case for most of our products), this may occur early in the development cycle. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For most of our PC/Mac products, technological feasibility is established when a detailed game design document containing sufficient technical specifications written for a proven game engine or framework technology has been created and approved by management. However, technological feasibility is evaluated on a product-by-product basis. Amounts related to software development that are not capitalized are charged immediately to the appropriate expense account. Amounts that are considered ‘research and development’ that are not capitalized are immediately charged to general and administrative expense.
 
Prior to a product's release, we expense, as part of "Cost of Sales—Product Development", capitalized costs when we believe such amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
 
Commencing upon product release, capitalized software development costs are amortized to "Cost of Sales—Product Development" based on the straight-line method over a twenty four month period.
 
We evaluate the future recoverability of capitalized software development costs and intellectual property licenses on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel product, estimated performance based on the performance of the product on which the sequel is based.
 
Based on current trends in our business, management has determined the expected shelf life of the majority of a game’s revenue will be realized over a two year period. Therefore, we have determined the appropriate amortization period for expensing capitalized production costs to be two years or twenty four months from date of the initial release, or first sale of the product for a specific technology platform. It is possible that the same game developed on different technology platforms (such as PC and Mac) will be launched on different release dates because product development cycles may differ and distribution partner release policies may differ.
 
At June 30, 2010, capitalized software development costs on the balance sheet were $411,396. At December 31, 2009, and December 31, 2008, capitalized software development costs were $369,125 and $263,412 respectively.
 
 
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From time to time, we engage in product development projects for third parties where we do not retain the intellectual property rights to the games it develops. These types of development projects are often referred to as “work-for-hire.” In these instances, all costs associated with developing the games are expensed as they are incurred. We do this because we receive revenue based on project deliverables outlined as milestones in the development agreement executed by the Company and the third party that has engaged us to perform development work. These non-capitalized costs are represented as “Cost of Sales – Development Services” expenses on our financial statements.
 
For the reporting periods ending June 30, 2010, December 31, 2009, and December 31, 2008, we recorded “Cost of Sales – Development Services” charges of $115,685, $330,477, and $2,413 respectively.
 
Intellectual Property Licenses (Prepaid Royalties)
 
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the Company's products. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid royalties or prepaid licensing fees), and a current liability, (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Commencing upon the related product's release date, intellectual property licenses costs are amortized to “Cost of Sales – Licensing” based upon the percentage of revenue outlined in the contract with each specific licensor. Generally, our intellectual property licensing contracts call for licensors to be paid a percentage of revenue actually received by us, with allowances for minimum guarantees. Sometimes, the terms of the specific licensing contracts allow for us to re-capture expenses before licensing out royalties are calculated.
 
Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
 
For the reporting periods June 30, 2010, December 31, 2009 and December 31, 2008, prepaid royalties (or prepaid licensing fees) were $48,852, $36,267, and $154,158 respectively.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued an update to Fair Value Measurements and Disclosures. This update provides amendments to ASC Subtopic 820-10 requiring new disclosures regarding (1) transfers in and out of Levels 1 and 2, in which the Company should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and (2) the reconciliation for fair value measurements using significant unobservable inputs (Level 3), in which the Company should present separately information about purchases, sales, issuances, and settlements (on a gross basis rather than as one net number). In addition the update provides clarification of existing disclosures regarding the level of disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchase, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do not expect the adoption of this statement to have a material impact on its consolidated financial statements.

 
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In October 2009, the FASB issued ASU 2009-14, which amends ASC 985-605, "Software-Revenue Recognition", to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionality. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption will be permitted. We do not expect the adoption of this statement to have a material impact on its consolidated financial statements.
 
In June 2009, the FASB approved the FASB Accounting Standards Codification (the “Codification”) ASC 105, "Generally Accepted Accounting Principles" (formerly Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 16" ("SFAS 168")) as the single source of authoritative nongovernmental generally accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. We adopted the Codification and as a result, all references to authoritative accounting literature are now referenced in accordance with the Codification.
 
In April 2009, the FASB issued new accounting guidance ASC 825, "Financial Instruments" (formerly FASB Staff Position (“SOP”) No. 107-1, "Interim Disclosures about Fair Value of Financial Instruments" (“SOP 107-1”) ) related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments whenever a public company issues financial information for interim reporting periods. We adopted this guidance upon its issuance, and it had no material impact on our consolidated financial statements.

 
39

 

Year Ended December 31, 2009 compared to Year Ended December 31, 2008

Results of Operations

Summary of Results of Operations

   
Year Ended December 31,
       
   
2009
   
2008
   
%Change
 
Revenue
  $ 865,429     $ 583,372       48 %
                         
Costs and expenses:
                       
                         
Cost of sales – product development
    168,402       71,912       134 %
Cost of sales – development services
    330,477       2,413       13,595 %
Cost of sales – licensing
    244,031       257,544       (5 ) %
General and administrative
    315,510       327,602       (4 ) %
Sales and marketing
    6,417       3,287       95 %
Amortization and Depreciation
    3,323       7,206       (53 ) %
Total expenses
    1,068,160       669,964       45 %
                         
Operating loss
    (202,732 )     (86,592 )     134 %
                         
Interest income/expense, net
    30,133       41,524       27 %
Income tax expense
    1,068       340       214 %
                         
Net loss
  $ (233,933 )   $ (128,456 )     9 %

Operating Loss; Net Loss

Our increase in revenue to $865,429, or 48% over the prior year is primarily a result of three factors: an increase in the number of games we published, and the fact we developed games based on third parties’ intellectual property in 2009, which we did not do in 2008. Our total expenses increased to $975,310, or 45% over the prior year due to the increase in our product development costs and in our development services, directly related to our increase in the number of games we published, as well as games we published based on third parties’ intellectual property, which has a higher production costs than games we created internally. The increase in our product development costs primarily related to the fact we published more games in 2009 than in 2008, and our increase in development services costs related to the fact we created games based on third parties’ intellectual property, which we did not do in 2008. Primarily, as a result of the increase in our costs of product development and development services, and a non-cash warrant expense related to the issuance of warrants upon conversion of notes payable of $92,851, our operating loss increased to ($202,732), or a 134% increase over the prior year. However, due to our increase in revenue in 2009 compared to 2008 our net loss increased to ($233,933), or 82%, over one year ago. This increase in revenues, expenses and net loss are discussed in detail below.
 
Revenue. Our 2009 revenue increased by $282,057, or 48%, to $865,429 compared to $583,372 for the year ended December 31, 2008, due to increased business, which is attributable to an increase in both the number of games we published in 2009 versus 2008, as well as the fact we published games based on third parties’ intellectual property, which had not done previously.

 
40

 

Cost of Sales – Product Development. Our cost of sales for product development is comprised of the direct costs we incur in creating and publishing a game based on our own or licensed intellectual property. Our 2009 cost of sales for product development increased by $96,490, or 134%, to $168,402, due to the fact we published more games in 2009 than in 2008. We believe our product development costs will continue to increase as we develop and publish more games.
 
Cost of Sales – Development Services. Our cost of sales for development services is comprised of the costs we incur to develop games based on third parties’ intellectual property, such as The Conjurer and Real Detectives. Our 2009 cost of sales for product development increased by $328,064 to $330,477. This significant increase in our cost sales for development services was primarily due to the fact we did not produce games based on third parties’ intellectual property in 2008, like we did in 2009. We believe our development services costs will also continue to increase as we continue to publish games based on third parties’ intellectual property, but we believe it will not make up the largest segment of our cost of sales in future years as we try and develop games based on intellectual property we own as opposed to intellectual property owned by third parties.
 
Cost of Sales –Licensing. Our cost of sales for licensing is comprised of royalty payments we make to third parties for the use of their intellectual property and other related costs. Our 2009 cost of sales for licensing decreased by $13,513, or 5%, to $244,031, due to the fact we did not publish as many games that required us to pay royalties during 2009 compared to 2008. We believe these costs will continue to decrease as we create our own intellectual property on which our games are based, alleviating the need to pay a royalty payment to the owner of the intellectual property.
 
General and Administrative Expenses. General and administrative expenses decreased by $12,092, or 4%, to $315,510 for the year ended December 31, 2009, primarily due to our payroll expenses decreasing from $202,092 in 2008 to $66,908 in 2009, which was a result the fact we had “work-for-hire” projects in 2009, which is categorized on our financial statements in our cost of sales, while in 2008 we did not have any “work-for-hire” projects and all work was done on internal projects with personnel on payroll, and the decrease was offset as the Company recognized non-cash expense of $92,851 in warrant expense related to the issuance of warrants upon conversion of notes payable; and in 2008 we forgave $48,966 in salary due to our two officers and directors. For 2009 our general and administrative expenses consisted primarily of $92,851 in warrant expense, $39,707 in insurance payments, $22,000 in payroll taxes, and $22,055 in vacation expenses.
 
Interest Income/Expense; Net. Interest income/expense, net decreased by $11,391, or 27%, to $30,133, and is primarily attributable to the interest expense on our loans from noteholders and our loan from Sunwest Bank. In 2009 we paid $19,907 in interest on our loans from private noteholders and $9,470 on our loan from Sunwest Bank, compared to $24,801 and $11,040, respectively, in 2008.
 
Liquidity and Capital Resources
 
Introduction
 
During the years ended December 31, 2009 and 2008, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of July 31, 2010 was approximately $112,606 and our monthly cash flow burn rate is approximately $55,000. As a result, we have significant short term cash needs. These needs are being satisfied through cash flows from our operations, as well as proceeds from the sales of our securities. If we are successful in becoming a reporting company, we anticipate that our short term cash needs will increase by approximately $30,000 per quarter, which we do not believe we will be able to satisfy from our revenues for some time. We believe that once our common stock is publicly traded that we will be able to source other as-yet unidentified sources of capital, which will be necessary in order for us to continue our operations.

 
41

 
 
Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2009 and 2008, respectively, are as follows:

   
December
31, 2009
   
December
31, 2008
   
Change
 
                   
Cash
  $ 28,904     $ 7,006     $ 21,898  
Total Current Assets
   
350,966
     
389,030
     
(38,064
)
Total Assets
    527,252       520,088       7,164  
Total Current Liabilities
    723,502       948,556       225,054  
Total Liabilities
  $ 723,502     $ 948,556     $ 225,054  

Our current assets decreased by ($38,064) as of December 31, 2009 as compared to December 31, 2008.  Our current assets for the two periods were similar but the breakdown was different, with cash totaling $28,904, capitalized production costs totaling $369,125, and prepaid royalties totaling $36,267 in 2009 versus cash totaling $7,006, capitalized production costs totaling $263,412, and prepaid royalties totaling $154,158 in 2008.

Our current liabilities decreased by $225,054, or over 23%, as of December 31, 2009 as compared to December 31, 2008.  A large portion of this was a decrease due to a promissory note we issued to a third party in 2008 for royalty payments on intellectual property, which was converted to stock in 2009.

Our total liabilities decreased by $225,054, or over 23%, as of December 31, 2009 as compared to December 31, 2008, all due to the reduction in our current liabilities as described above.

In 2009, we developed and published more games than in 2008, including more games where we own the intellectual property, as opposed to licensing it from others, reducing the percentage of games on which we pay a royalty to a third party.  We have also undertaken measures to reduce overhead costs to improve operating results.

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources.  There is no assurance, however, that we will be successful in these efforts.

Cash Requirements

We had very little cash available as of December 31, 2009, $28,904, or December 31, 2008, $7,006.  Based on our revenues, cash on hand and current monthly burn rate, around $55,000 per month, we will need to continue borrowing from our shareholders and other related parties to fund operations.

 
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Sources and Uses of Cash

Operations

We had net cash provided by operating activities of $61,229 for the year ended December 31, 2009, as compared to $74,860 for the year ended December 31, 2008. In 2009, the net cash used in operating activities consisted primarily of our net income (loss) of ($141,082), and capitalized production costs of ($105,713), offset by prepaid royalties of $117,891, accounts payable of $88,324, accrued royalties of $61,728, accrued compensation of $21,735, accrued interest of $9,900, and stock based compensation of $100,298. For 2008, the net cash used in operating activities consisted primarily of our net income (loss) of ($128,453), capitalized production costs of ($134,546), accounts receivable of ($56,115), and accounts payable of ($9,113), offset by accrued royalties of $179,530, accrued compensation of $112,900, salary forgiveness of $48,966, prepaid royalties of $26,824, and accrued interest of $16,784.

Investments

We did not have any cash flows from investing activity in 2009 and had cash used of $656 in 2008.

Financing

Our net cash provided by financing activities for the year ended December 31, 2009 was $39,331, compared to $83,411 for the year ended December 31, 2008.  For 2009, our financing activities consisted of ($30,494) in repayments of long term debt and ($8,837) in payments for the preparation of a private placement memorandum.

Six Months Ended June 30, 2010 (Unaudited) Compared to Six Months Ended June 30, 2009(Unaudited)
 
Results of Operations (Unaudited)
 
   
Six Months Ended
June 30,
       
   
2010
   
2009
   
%Change
 
Revenue
  $ 287,573     $ 356,171       (19 )%
                         
Costs and expenses:
                       
                         
Cost of sales – product development
    109,451       78,791       39 %
Cost of sales – development services
    115,685       103,304       12 %
Cost of sales – licensing
    28,212       85,107       (67 )%
General and administrative
    123,420       72,934       69 %
Sales and marketing
    5,014       3,062       64 %
Amortization and Depreciation
    108       3,095       (97 )%
Total expenses
    381,890       346,293       10 %
                         
Operating income/loss
    (94,318 )     9,878       1,054 %
                         
Interest income/expense, net
    4,162       (8,380 )     149 %
Income tax expense
    925       800       15 %
                         
Net loss
  $ (99,405 )   $ (9,180 )     (982 )%

 
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Operating Loss; Net Loss
 
Our decrease in revenue to $287,573 or (19%), over the six months ended June 30, 2010 is a primarily a result of a decrease in web portal revenues due to the fact we released fewer games in the six months ended June 30, 2010, than we did for the same period one year earlier and the games we did release performed lower than expected.  We also experienced a decrease in our other game related revenue related to development services to $101,970 in 2010 from $154,926 in 2009.  However, we did have an increase in mobile game revenue during this period, which grew more than 188% from $18,160 in the first six months of  2009 to $52,337 in the first six months of 2010.  We also had a 50% increase in retail revenues from $21,700 in the first six months of 2009 to $32,525 in the first six months of 2010.  However, our additional revenue from mobile games and retail sales were not enough to offset the decrease we experienced  in our web portal revenues.  Our total expenses increased to $381,890 or 10% over the prior year primarily due to the increase in our product development costs, our development services costs, as well as our increase in general and administrative expenses, partially offset by a decrease in our licensing costs.  The increase in our development services costs primarily related to work-for-hire game projects and our increase in general and administrative expenses primarily related to an increase in payroll and vacation expenses.  The decrease in our licensing costs resulted from decreased sales of products based on licensed properties.  Primarily, as a result of the decrease in revenue and a significant increase in our general and administrative expenses, partially offset by the decrease in our licensing costs, our operating income/loss increased from income of $9,878 for the six months ended June 30, 2009 to operating loss of ($94,318) for the six months ended June 30, 2010.  Primarily due to our decrease in revenue and a significant increase in our general and administrative expenses, partially offset by the decrease in our licensing costs for the six months ended June 30, 2010, compared to the same period one year ago, our net loss for the six months ended June 30, 2010 was only ($99,405), compared to ($9,180) for the same period one year ago.  Our overall decrease in revenues, increase in expenses, and increase in net loss for the six months ended June 30, 2010 compared to June 30, 2009, are discussed in detail below.

Revenue.  Our revenue for the six months ended June 30, 2010, decreased by $68,598, or 19%, to $287,573 compared to $356,171 for the six months ended June 30, 2009, which is  primarily a result of a decrease in web portal revenues due to the fact we released fewer games in the six months ended June 30, 2010, than we did for the same period one year earlier, and the games we did release performed lower than expected.  We also experienced a decrease in our other game related revenue related to development services to $101,970 in 2010 from $154,926 in 2009.  However, we did have an increase in mobile game revenue during this period, which grew more than 188% from $18,160 in the first six months of  2009 to $52,337 in the first six months of 2010.  We also had a 50% increase in retail revenues from $21,700 in the first six months of 2009 to $32,525 in the first six months of 2010.  However, our additional revenue from mobile games and retail sales were not enough to offset the decrease we experienced  in our web portal revenues.

Cost of Sales – Product Development.  Our cost of sales for product development is comprised of employee and contract labor expenses for designers, producers, artists, engineers, composers and other related costs.  Our cost of sales for product development for the six months ended June 30, 2010, increased by $30,660, or 39%, to $109,451, compared to the six months ended June 30, 2009, due to the hiring of additional staff and contractors.   We anticipate our product development costs will increase for future quarters as we develop and publish more games based on our own intellectual property.

Cost of Sales – Development Services.  Our cost of sales for development services is comprised of employee and contract labor expenses for designers, producers, artists, engineers, composers and other related costs.  Our cost of sales for product development for the six months ended June 30, 2010 increased by $12,382 to $115,685, compared to the six months ended June 30, 2009.  This increase in our cost sales for development services was primarily due to the hiring of additional staff and contract labor. Despite this increase for the six months ended June 30, 2010, we anticipate our development services costs for future quarters will decrease as we decrease our work-for-hire projects.

Cost of Sales –Licensing.  Our cost of sales for licensing is comprised of royalties paid to owners of intellectual property for the rights to use that properties in our games (such as the toy property Etch A Sketch licensed to Freeze Tag by the Ohio Art Company) and other related costs.  Our cost of sales for licensing for the six months ended June 30, 2010 decreased by $56,895, or 67%, to $28,212, compared to the same period one year ago due to decreased sales of products built around licensed intellectual property.  We anticipate our cost of sales licensing expenses will decrease over time as we develop more games based on our own intellectual property.

 
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General and Administrative Expenses.  General and administrative expenses increased by $50,486, or 69%, to $123,420 for the six months ended June 30, 2010, primarily due to increases in our vacation expenses, accounting fees, and insurance costs.  For six months ended June 30, 2010 our general and administrative expenses consisted primarily of payroll expenses of $25,986, insurance costs of $18,465, payroll taxes of $16,295, accounting fees of $14,313, vacation expense of $14,589, and rent of $11,400.

Interest Income/Expense; Net.  Interest income/expense, net decreased by $14,096, or 77%, to $4,162, and is primarily attributable to the interest expense on our line of credit of $4,011.

Liquidity and Capital Resources

Introduction
 
During the six months ended June 30, 2010 and June 30, 2009, because of our operating losses, we did not generate positive operating cash flows.  Our cash on hand as of June 30, 2010 was approximately $72,662, and our monthly cash flow burn rate is approximately $55,000.  As a result, we have significant short term cash needs.  These needs are being satisfied through cash flows from our operations, as well as proceeds from the sales of our securities.  If we are successful in becoming a reporting company, we anticipate that our short term cash needs will increase by approximately $30,000 per quarter, which we do not believe we will be able to satisfy from our revenues for some time.  We believe that once our common stock is publicly traded that we will be able to source other as-yet unidentified sources of capital, which will be necessary in order for us to continue our operations.
 
Our cash, current assets, total assets, current liabilities, and total liabilities as of June 30, 2010 and December 31, 2009, respectively, are as follows:

   
(Unaudited)
June 30, 2010
   
December
31, 2009
   
 
Change
 
                   
Cash
  $ 72,662     $ 28,904     $ 43,722  
Total Current