Freeze Tag, Inc. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Freeze Tag, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATION - Freeze Tag, Inc.	frzt_ex321.htm
EX-31.1 - CERTIFICATION - Freeze Tag, Inc.	frzt_ex311.htm
EX-31.2 - CERTIFICATION - Freeze Tag, Inc.	frzt_ex312.htm
EX-32.2 - CERTIFICATION - Freeze Tag, Inc.	frzt_ex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.

Commission file number: 000-54267

FREEZE TAG, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-4532392
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

18062 Irvine Blvd, Suite 103 Tustin, California		92780
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (714) 210-3850

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 5, 2014, there were 99,938,817 shares of common stock, $0.001 par value, issued and outstanding.

FREEZE TAG, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		3

ITEM 1	Financial Statements	4
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	37
ITEM 4	Controls and Procedures	38

PART II – OTHER INFORMATION		40

ITEM 1	Legal Proceedings	40
ITEM 1A	Risk Factors	40
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	40
ITEM 3	Defaults Upon Senior Securities	40
ITEM 4	Mine Safety Disclosures	40
ITEM 5	Other Information	40
ITEM 6	Exhibits	41

PART I – FINANCIAL INFORMATION

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, the financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

The results for the period ended March 31, 2014 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2013.

ITEM 1 Financial Statements

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

BALANCE SHEETS

	(Unaudited)			(Audited)
	March 31, 2014			December 31, 2013
ASSETS
Current Assets
Cash	$	42,841		$	39,847
Accounts Receivable, Net		15,397			17,709
(Net of Allowance of $5,600 and $5,600 as of March 31, 2014 and December 31, 2013, respectively)
Deferred Financing Costs		948			1,285
Prepaid Royalties		5,670			5,964
Prepaid Expenses		484			935
Total Current Assets		65,340			65,740

Fixed Assets, Net		528			828
(Net of depreciation of $9,249 and $8,949 as of March 31, 2014 and December 31, 2013, respectively)
Other Long-term Assets, Net		6,120			11,920
(Net of amortization of $40,580 and $34,780 as of March 31, 2014 and December 31, 2013 respectively)
TOTAL ASSETS	$	71,988		$	78,488

LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable	$	103,411		$	107,301
Accrued Compensation		77,638			73,109
Accrued Royalties		402,011			399,838
Accrued Interest		40,480			151
Accrued Expenses		556			748
Technology Payable		18,000			18,000
Unearned Royalties		209,521			211,946
Convertible Note Payable, Related Party, Net		1,174,473			1,081,247
(Net of debt discount of $279,674 and $372,900 as of March 31, 2014 and December 31, 2013, respectively)
Convertible Note Payable		93,087			62,950
(Net of debt discount of $168,356 and $48,493 as of March 31, 2014 and December 31, 2013, respectively)
Total Current Liabilities		2,119,177			1,955,290
Total Liabilities		2,119,177			1,955,290

Equity (Deficit)
Preferred Stock		-			-
$0.001 par value per share, 10,000,000 shares authorized, 1000 shares issued and outstanding as of March 31, 2014 and December 31, 2013
Common Stock		99,938			99,938
$0.001 par value per share, 100,000,000 shares authorized, 99,938,817 and 99,938,817 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
Additional Paid-In Capital		3,884,563			3,734,563
Preferred Stock Payable		30,700			30,700
Common Stock Payable		16,800			16,800
Retained Deficit		(6,079,190	)		(5,758,803	)
Total Equity (Deficit)		(2,047,189	)		(1,876,802	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	71,988		$	78,488

The accompanying notes are an integral part of the financial statements.

FREEZE TAG, INC.
(A DELAWARE CORPORATION)
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)

	March 31, 2014			March 31, 2013
Revenues	$	14,842		$	51,660

Costs and Expenses:
Cost of Sales - Product Development		21,075			102,037
Cost of Sales - Licensing		2,465			1,752
General & Administrative		138,878			231,560
Sales & Marketing		1,746			4,656
Amortization & Depreciation		129,463			5,902
Total Expense		293,627			345,907
Net Ordinary Income/Loss		(278,785	)		(294,247	)
Interest Income/(Expense), net		(40,335	)		(21,174	)
Net Income/Loss before taxes		(319,120	)		(315,421	)
Income Tax Expense		1,267			1,276
Net Income/Loss	$	(320,387	)	$	(316,697	)

Weighted number of common shares outstanding-basic and fully diluted		99,938,817			72,413,732
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.00	)

The accompanying notes are an integral part of the financial statements.

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2014 and 2013

(Unaudited)

	March 31, 2014			March 31, 2013
Cash flows from operating activities:
Net Loss	$	(320,387	)	$	(316,697	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense		300			505
Amortization expense		5,800			5,953
Loss on debt modification		-			64,608
Amortization of capitalized production costs		-			96,234
Amortization on debt discount		123,363			5,397
Changes in operating assets and liabilities:
Accounts receivable		2,312			(2,472	)
Prepaid Royalties		294			411
Prepaid Expenses		788			792
Capitalized Production Costs		-			(107,639	)
Accounts Payable		(3,890	)		(5,619	)
Accrued interest - third party		4,529			2,772
Accrued interest - related party		35,800			18,248
Accrued Expenses		6,510			63,025
Unearned royalties		(2,425	)		(6,084	)
Net cash used by operating activities		(147,006	)		(180,566	)

Cash flows from Investing activities:
Cash used for purchasing fixed assets		-			-
Net cash used by investing activities		-			-

Cash flows from financing activities:
Borrowings of debt - third party		150,000			71,500
Borrowings of debt - related party		-			77,770
Net cash provided (used) by financing activities		150,000			149,270

Net decrease in cash		2,994			(31,296	)
Cash at the beginning of the period		39,847			32,744
Cash at the end of the period	$	42,841		$	1,448

Non-cash transactions
Conversion of debt to common shares - third party	$	-		$	50,000
Conversion of accrued interest to common shares - third party	$	-		$	250
Conversion of accrued interest to debt - related party	$	-		$	5,429
Beneficial conversion feature	$	150,000		$	21,500

The accompanying notes are an integral part of the financial statements.

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

Statement of Shareholders' Equity (Deficit)

For the Year Ended December 31, 2013 (Audited) and the Three Months Ended March 31, 2014 (Unaudited)

	Convertible Preferred Stock				Common Stock				Common Stock		Preferred Stock		Additional Paid In			Accumulated
	Shares		Amount		Shares		Amount		Payable		Payable		Capital			Deficit			Total
Balances as of December 31, 2012		39,038,720	$	-		70,301,915	$	70,302	$	16,800	$	-	$	1,369,407		$	(2,212,111	)	$	(755,602	)

Stock issued for Conversion of Third Party Debt		-		-		27,605,014		27,605		-		-		43,895			-			71,500
Stock issued for Conversion of Third Party Accrued Interest		-		-		2,031,888		2,031		-		-		(291	)		-			1,740
Beneficial Conversion Feature		-		-		-		-		-		-		444,400			-			444,400
Preferred Stock Payable to Related Party		-		-		-		-		-		30,700		-			-			30,700
Loss on Debt Modification		-		-		-		-		-		-		1,877,152			-			1,877,152
																				-
Net Loss		-		-		-		-		-		-		-			(3,546,692	)		(3,546,692	)

Balances as of December 31, 2013		39,038,720	$	-		99,938,817	$	99,938	$	16,800	$	30,700	$	3,734,563		$	(5,758,803	)	$	(1,876,802	)

Beneficial Conversion Feature		-		-		-		-		-		-		150,000			-			150,000

Net loss		-		-		-		-		-		-		-			(320,387	)		(320,387	)

Balances as of March 31, 2014		39,038,720	$	-		99,938,817	$	99,938	$	16,800	$	30,700	$	3,884,563		$	(6,079,190	)	$	(2,047,189	)

The accompanying notes are an integral part of the financial statements.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 1 — THE COMPANY

Nature of Business

Freeze Tag, Inc. is a leading creator of mobile social games that are fun and engaging for all ages. Based on a free-to-play business model that has propelled games like Candy Crush Saga to worldwide success, we employ state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy our games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. Our games encourage players to compete and engage with their friends on major social networks such as Facebook and Twitter. Founded by gaming industry veterans, Freeze Tag has launched several successful mobile games including the number one hit series Victorian Mysteries® and Unsolved Mystery Club®, as well as digital entertainment like Etch A Sketch®. Freeze Tag games have been downloaded millions of times on the Apple, Amazon and Google app stores.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

Product Sales (web and mobile revenues)

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

Licensing Revenues (retail revenues- royalties)

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

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

Other Revenues

Other revenues primarily include Ad game revenue and work-for-hire game related revenue. We derive our advertising game revenue from certain of our partners that offer our games free of charge to consumers in exchange for the consumers being exposed to advertising embedded in our games. In this way, we do not receive revenue for the sale of our games, but rather a percentage of the “advertising” revenue generated by these player views. This method of generating revenue is essentially the same as traditional radio or television advertising where consumers are allowed to enjoy content for “free” but are forced to watch (or listen) to advertising before, in between and at the end of the programming content.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Additionally, we derive some revenue from “work-for-hire” projects. Some of our partners occasionally ask us to render “work-for-hire” services for them such as preparing packaging materials. For example, a retail game and DVD publisher hired us to create several designs for printed packages that were used for games published by the publisher but not developed by us. For this work, we charge a one-time, fixed fee for each package design.

The Company recognizes this revenue once all performance obligations have been completed. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

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

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at March 31, 2014 and December 31, 2013 were insured. At March 31, 2014 and December 31, 2013, there were no cash equivalents.

Allowances for Returns, Price Protection, and Doubtful Accounts

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

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of March 31, 2014 and December 31, 2013, the allowance for doubtful accounts was $5,600 and $5,600, respectively.

Property and Equipment

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Concentrations of Credit Risk, Major Customers and Major Vendors

The Company’s customers are the end-consumers that purchase its games from the websites where the Company has its games listed for sale. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue. However, the Company does have primary distribution partners, which are the owners of the websites or app stores where it sells its games. Under the Company’s distribution agreements it is not obligated to make, distribute or sell any games. However, for any games the Company does make and wishes to distribute it can list them on one or more of these websites or app stores under a revenue sharing arrangement where it shares the revenue from any of its games that sell. The sharing arrangement varies greatly depending on the distributor with the Company generally keeping between 35% and 70% of the revenue and the distributor keeping the remainder of the revenue generated by each sale. At times the Company enters into “exclusivity options” whereby if a distributor wishes to have an exclusive period carrying the Company’s games (normally 30-90 days) it will agree to that in exchange for the distributor marketing the game in their newsletter and other marketing programs. Due to the fact the Company has a number of distribution partners and a variety of different websites and app stores where it can sell its games, the Company is not substantially dependent on any of its distribution partners or agreements. In addition to the distribution agreements, the Company currently has a licensing agreement with Ohio Art Company, which allows it to develop and distribute games around third party intellectual property in exchange for paying royalty payments. The Company is not substantially dependent on this licensing agreement.

During the period ended March 31, 2014, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 29.3%, Exent – 15.9% and Apple – 11.4%. During the period ended March 31, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 24.91%, Wild Tangent – 20.77%, and Real Networks – 11.72% each respectively.

At March 31, 2014, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 50.6%, and Big Fish Games – 10.1%. At December 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 50.4%, Big Fish Games – 10.7%.

Income Taxes

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

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

The Company has no uncertain tax positions at any of the dates presented.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Foreign Currency Translation

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

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees ("ASC stock-based compensation guidance"). Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based compensation expense recognized in the Company’s statements of operations for the periods ended March 31, 2014, and 2013, were $0 and $0, respectively.

Impairment of Long-Lived Assets

The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Fair Value of Financial Instruments

Effective January 1, 2009, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820- 10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s financial position, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts payable, accrued expenses and notes payable, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.

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.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Use of Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and these differences may be material.

Research and Development Costs

The Company charges costs related to research & development of products to general and administrative expense as incurred. The types of costs included in research and development expenses include research materials, salaries, contractor fees, and support materials.

Software Development Costs

Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers and artists. As of December 31, 2013, the Company changed its business plan as the Company’s focus is on producing free-to-play games; therefore the Company will immediately expense of internally developed products into cost of sales in the period they are incurred; instead of capitalizing the production costs. Prior to December 31, 2013, the Company accounted for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation, or the completed and tested product design and working model. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against future revenues. For products where proven game engine technology exists (as is the case for most of the Company’s products), this may occur early in the development cycle. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For most of the PC/Mac and iOS/Android products, technological feasibility is established when a detailed game design document containing sufficient technical specifications written for a proven game engine or framework technology has been created and approved by management. However, technological feasibility is evaluated on a product-by-product basis. Amounts related to software development that are not capitalized are charged immediately to the appropriate expense account. Amounts that are considered ‘research and development’ that are not capitalized are immediately charged to general and administrative expense.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Prior to a product’s release, the Company expense, as part of “Cost of Sales—Product Development”, capitalized costs when the Company believes such amounts are not recoverable. Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Commencing upon product release, capitalized software development costs are amortized to “Cost of Sales—Product Development” based on the straight-line method over either a twenty-four month period for traditional pay-to-play apps, or a thirty-six month period for free-to-play apps.

The Company evaluates the future recoverability of capitalized software development costs and intellectual property licenses on an annual basis. For products that have been released in prior years, the primary evaluation criterion is actual title performance. For products that are scheduled to be released in future years, recoverability is evaluated based on the expected performance of the specific products to which the costs relate or in which the licensed trademark or copyright is to be used. Criteria used to evaluate expected product performance include: historical performance of comparable products developed with comparable technology; orders for the product prior to its release; and, for any sequel product, estimated performance based on the performance of the product on which the sequel is based.

Based on current trends in the Company’s business, management has determined the expected shelf life of the majority of a game’s revenue will be realized over a three year period for free-to-play apps. Therefore, the Company has determined the appropriate amortization period for expensing capitalized production costs to be three years or thirty-six months from date of the initial release, or first sale of the product for a specific technology platform. It is possible that the same game developed on different technology platforms (such as PC and Mac, or iOS and Android) will be launched on different release dates because product development cycles may differ and distribution partner release policies may differ.

At March 31, 2014, and December 31, 2013, current and long-term capitalized software development costs on the balance sheet were $0 and $0, respectively.

We recognized amortization expense of $0 and $96,234 for the periods ended March 31, 2014 and 2013, respectively.

Intellectual Property Licenses (Prepaid Royalties)

Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the Company’s products. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid royalties or prepaid licensing fees), and a current liability, (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Commencing upon the related product’s release date, intellectual property licenses costs are amortized to “Cost of Sales – Licensing” based upon the percentage of revenue outlined in the contract with each specific licensor. Generally, the Company’s intellectual property licensing contracts call for licensors to be paid a percentage of revenue actually received by the Company, with allowances for minimum guarantees. Sometimes, the terms of the specific licensing contracts allow for the Company to re-capture expenses before licensing out royalties are calculated.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.

As of March 31, 2014 and December 31, 2013, prepaid royalties (or prepaid licensing fees) were $5,670, and $5,964, respectively.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carry-forwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

In February 2013, FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:

- Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and

- Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our financial position or results of operations.

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on our financial position or results of operations.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 3 — GOING CONCERN

As shown in the accompanying financial statements for the periods ending March 31, 2014 and March 31, 2013, we have incurred net losses of $320,387 and $316,397, respectively. As of March 31, 2014 our deficit is $2,047,189. During the period ended March 31, 2014 and the year ended December 3l, 2013, we continued to experience close to neutral cash flows from operations largely due to our continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about our ability to continue as a going concern. Accordingly, we are currently evaluating our alternatives to secure financing sufficient to support the operating requirements of our current business plan, as well as continuing to execute our business strategy of distributing our game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.

Our ability to continue as a going concern is dependent upon our success in securing sufficient financing and to successfully execute our plans to return to positive cash flows during fiscal 2014. Our financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.

NOTE 4 — OTHER ASSETS

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment. The common stock is payable in eight quarterly installments of 12,000 shares per installment. As of March 31, 2014, the Company has issued a total of 48,000 shares to the unaffiliated third party and reduced common stock payable accordingly.

The game engine will be amortized on a straight-line basis over the useful life of three years. For the periods ended March 31, 2014 and March 31, 2013 amortization expense was $5,800 and $5,800 respectively.

NOTE 5 — FIXED ASSETS

Fixed assets, Net, consists of the following at:

	March 31, 2014			December 31, 2013

Computer Equipment	$	5,347		$	5,347
Communications Equipment		830			830
Software		3,600			3,600
Accumulated Depreciation		(9,249	)		(8,949	)
Total Fixed Assets, Net	$	528		$	828

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 6 — ACCRUED COMPENSATION

Accrued Compensation Consists of the following at:

	March 31, 2014		December 31, 2013

Accrued Vacation	$	77,638	$	73,109
Accrued Salary		-		-
Total Accrued Compensation	$	77,638	$	73,109

On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the period ended March 31, 2014, $46,613 of the debt discount was amortized; the remaining balance of the debt discount at March 31, 2014 was $139,837. For the periods ended March 31, 2014 and March 31, 2013 accrued interest expense was $4,597 and $0 respectively.

On December 31, 2013, the Company converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note. The Accrued Salary Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the period ended March 31, 2014, $46,613 of the debt discount was amortized; the remaining balance of the debt discount at March 31, 2014 was $139,837. For the periods ended March 31, 2014 and March 31, 2013 accrued interest expense was $4,597and $0 respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 7 — ACCRUED ROYALTIES AND UNEARNED ROYALTIES

Accrued Royalties consists of money owed to other parties with whom we have revenue-sharing agreements or from whom we license certain trademarks or copyrights.

Unearned Royalties consists of royalties received from licensees, which have not yet been earned.

Accrued and Unearned Royalties consists of the following at:

	March 31, 2014		December 31, 2013

Accrued Royalties	$	402,011	$	399,838
Unearned Royalties		209,521		211,946
Total Accrued and Unearned Royalties	$	611,532	$	611,784

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Leases

We recently moved office locations to 18062 Irvine Blvd, Suite 103, Tustin, California, and entered into a three month lease. At the end of the three months (November 2013), the lease became a month-to-month lease with either party having the option to terminate with 30 days of notice. The Company or Company employees or contractors own all of the computer and office equipment that is used in the course of business. We do not have any lease agreements for any office equipment.

Technology Payable

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party which included a liability in the amount of $36,000 and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment and there is no stated interest rate. Therefore the balance of $36,000 was recorded as a liability, net of a discount of $2,834 with the discount to be amortized over the life of the liability using the effective interest method.

As of March 31, 2014 and December 31, 2013, the Company recognized a current liability of $18,000 and $18,000, respectively. During the three months ended March 31, 2014 and 2013, the Company recorded amortization of the debt discount of $0 and $153, respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 9 — DEBT

Debt consists of the following at:

	March 31, 2014			December 31, 2013

Notes Payable-Convertible *	$	1,454,147		$	1,454,147
Notes Payable-Convertible-Third Party		162,443			111,443
Discounts on Convertible Notes Payable *		(279,674	)		(372,900	)
Discounts on Convertible Notes Payable		(168,356	)		(48,493	)
Total Debt, Net of Discounts		1,267,560			1,144,197
Less: Current, Net of Discounts		1,267,560			1,144,197
Long Term, Net of Discounts	$	-		$	-

* - Related Party

Convertible Note Payable

On April 2, 2012, a convertible note loan from Robert Cowdell was secured for $50,000 in cash (the “First Hanover Note”). The promissory note is convertible into the Company’s common stock at a rate of $0.04 per share. The convertible promissory note bears interest at the rate of 12% per annum and matures 6 months from the date the purchase installment was received. The note was sold to Magna Group, LLC (“Hanover”) on January 29, 2013 by Robert Cowdell for approximately $50,000. In addition, the accrued interest of $5,429 on January 29, 2013, due to Robert Cowdell, was transferred to the new note issued to Robert Cowdell on February 4, 2013.

On January 29, 2013 an agreement was signed between Hanover and the Company concerning the $50,000 note purchased from Robert Cowdell. Company amended the note with Hanover to be a 12% Convertible Promissory Note in the original principal amount of $50,000. The First Hanover Note has a maturity date of January 29, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the lowest trading price for the Common Stock during the five (5) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the First Hanover Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The modification of the First Hanover Note closed on January 29, 2013, the date that the amendment was signed by the Company.

The agreement modified the debt to make it convertible into common stock of the Company at 55 percent times the lowest trading price of the five trading days preceding the conversion date. The Company compared the value of the debt modified of $50,000 before and after modification to calculate the loss on modification of $64,608. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $114,608 which after deducting the face value of the note of $50,000 resulted in the loss on modification of $64,608. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Hanover. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

During the three months ended March 31, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.00440 to $0.01287 per share, in order to convert $50,000 in principal and $250 in accrued interest all in accordance with the agreement. No gains or losses were recognized as a result of these conversions as they occurred within the terms of the agreement. As a result of these transactions, the principal was considered paid off during March 2013.

The Company evaluated the First Hanover Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. In addition, the Company evaluated this convertible note for a beneficial conversion feature noting that as the loss on debt modification of $64,608 was recognized, no further beneficial conversion feature was created during the issuance of this note.

On January 29, 2013, the Company entered into a Securities Purchase Agreement with Hanover pursuant to which the Company sold to Hanover a 12% Convertible Promissory Note in the original principal amount of $21,500 (the “Second Hanover Note”). The Second Hanover Note has a maturity date of September 29, 2013, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 55% multiplied by the Market Price (representing a discount rate of 45%). “Market Price” means the lowest trading price for the Common Stock during the five (5) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Second Hanover Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Second Hanover Note closed on January 29, 2013, the date that the purchase price was delivered to the Company.

During the three months ended September 30, 2013, four conversions of the Second Hanover Note, totaling 22,214,413 shares, occurred between prices of $0.0008 to $0.0014 per share, in order to convert $21,500 in principal and $1,490 in accrued interest all in accordance with the agreement. No gains or losses were recognized as a result of these conversions as they occurred within the terms of the agreement. As a result of these transactions, the principal was considered paid off during September 2013.

The Company evaluated the Second Hanover Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.01287 below the market price on December 6, 2011 of $0.02950 provided a value of $21,500. During the nine months ended September 30, 2013, $21,500 and $0, respectively, of the debt discount was amortized. As of September 30, 2013, the remaining debt discount outstanding was $0.

On February 4, 2013, the accrued interest, noted in the First Hanover Note above, of $5,429 was transferred into a new convertible note to Robert Cowdell (the “Cowdell Note”) along with $50,000 in cash; totaling $55,429 in principal. The promissory note is convertible into the Company’s common stock at a rate of the closing market price on February 4, 2013 of $0.03 per share. The convertible promissory note bears interest at the rate of 12% per annum and matures on August 4, 2013. As of September 30, 2013, accrued interest was $4,480.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company evaluated the Cowdell Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. There was no beneficial conversion feature noted due to the fact that the conversion price and market price on the issuance date were equal.

On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the “Convertible Cowdell Note”) into a convertible note. The Convertible Cowdell Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The Convertible Cowdell Note had accrued interest of $1,515 as of March 31, 2014 and $0 as of December 31, 2013.

The Company evaluated the Convertible Cowdell Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $61,443 before and after modification to calculate the loss on modification of $97,461. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $158,904 which after deducting the face value of the note of $61,443 resulted in the loss on modification of $97,461. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Robert Cowdell. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.

On December 20, 2013, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 1). The Accredited Investor Note 1 has a maturity date of December 20, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Accredited Investor Note 1 and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 20, 2013 of $0.0017 provided a value of $50,000. During the periods ended March 31, 2014 and March 31, 2013, $12,329 and $0 were amortized from the debt discount. The debt discount had a balance at March 31, 2014 and December 31, 2013 of $36,164 and $48,493, respectively. The Accredited Investor Note 1 had accrued interest of $1,384 as of March 31, 2014 and $151 as of December 31, 2013.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

On January 6, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 2). The Accredited Investor Note 2 has a maturity date of January 6, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Accredited Investor Note 2 and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00093 below the market price on January 6, 2014 of $0.0015 provided a value of $50,000. During the periods ended March 31, 2014 and March 31, 2013, $11,507 and $0 were amortized from the debt discount. The debt discount had a balance at March 31, 2014 of $38,493. The Accredited Investor Note 2 had accrued interest of $1,096 as of March 31, 2014.

On February 18, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 3). The Accredited Investor Note 3 has a maturity date of February 18, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Accredited Investor Note 3 and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00052 below the market price on February 18, 2014 of $0.0014 provided a value of $50,000. During the periods ended March 31, 2014 and March 31, 2013, $5,616 and $0 were amortized from the debt discount. The debt discount had a balance at March 31, 2014 of $44,384. The Accredited Investor Note 3 had accrued interest of $562 as of March 31, 2014.

On March 26, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 4). The Accredited Investor Note 4 has a maturity date of March 26, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company evaluated the Accredited Investor Note 4 and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00085 below the market price on March 26, 2014 of $0.0049 provided a value of $50,000. During the periods ended March 31, 2014 and March 31, 2013, $685 and $0 were amortized from the debt discount. The debt discount had a balance at March 31, 2014 of $49,315. The Accredited Investor Note 4 had accrued interest of $68 as of March 31, 2014.

Total Accrued interest for the above third party convertible notes is $4,680 and $151 as of March 31, 2014 and December 31, 2013, respectively.

Convertible Note Payable – Related Party

On January 26, 2012, a convertible note loan from Holland Family Trust, (whose sole trustee is Franklena Holland, mother of Company president Craig Holland), was secured for $100,000. The promissory note is convertible into the Company’s common stock at a rate of $0.05 per share. The convertible promissory note bears interest at the rate of 10% per annum and matures 12 months from the date each purchase installment was received. On April 19, 2012, Franklena E. Holland passed away. The terms of the Holland Family Trust indicate that Craig B. Holland becomes the Successor Trustee after Franklena's passing. As of April 19, 2012, Mr. Holland is now acting as the Trustee of the Holland Family Trust.

The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.05 per share, and the principal value of $100,000, this would result in 2,000,000 additional shares which is approximately 2% of the authorized share count; therefore, the number of shares is determinate and in conclusion, the note is not considered a derivative liability. In addition, the Company evaluated this related party convertible note for a beneficial conversion feature noting that the conversion price of $0.05 which was exactly the same as the market price of $0.05 on the date of issuance; therefore, no beneficial conversion feature was created during issuance of this note.

On December 31, 2013, the Company converted the Holland Family Trust notes of $100,000 of convertible related party notes, $18,333 of accrued interest from convertible related party notes, $769,620 of related party notes and $76,114 of accrued interest from related party notes into a new convertible related party note in the amount of $964,067 (the “Holland Family Trust Convertible Note”). The Holland Family Trust Convertible Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of March 31, 2014 and December 31, 2013, there was $23,772 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the three month period ended March 31, 2014, $46,613 of the discount was amortized; at March 31, 2014 and December 31, 2013, the remaining debt discount was $139,837 and $186,450, respectively. As of March 31, 2014 and December 31, 2013, there was $4,597 and $0, respectively, of accrued interest related to this Note.

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the three month period ended March 31, 2014, $46,613 of the discount was amortized; at March 31, 2014 and December 31, 2013, the remaining debt discount was $139,837 and $186,450, respectively. As of March 31, 2014 and December 31, 2013, there was $4,597 and $0, respectively, of accrued interest related to this Note.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

On December 31, 2013, the Company converted the Mick Donahoo related party notes of $55,250 and accrued interest of $15,399 into a new convertible related party note in the amount of $70,649 (the “Mick Donahoo Convertible Note”). The Mick Donahoo Convertible Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Mick Donahoo Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of March 31, 2014 and December 31, 2013, there was $1,742 and $0, respectively, of accrued interest related to this Note.

On December 31, 2013, the Company converted the Craig Holland related party notes of $35,100 and accrued interest of $11,432 into a new convertible related party note in the amount of $46,532 (the “Craig Holland Convertible Note”). The Craig Holland Convertible Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

The Company evaluated the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of March 31, 2014 and December 31, 2013, there was $1,147 and $0, respectively, of accrued interest related to this Note.

The Company recorded total interest expense, including beneficial conversion feature amortization, for all debt of $163,698 and $26,571 for the periods ended March 31, 2014, and 2013, respectively. However, the beneficial conversion feature amortization of $123,363 and $5,397 recorded during the periods ended March 31, 2014 and 2013, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 10 — STOCKHOLDERS’ EQUITY

Stock Issuance

The Company is authorized to issue up to 100,000,000 shares of its $.001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock. The liability of $36,000 was recorded net of a debt discount of $2,834 which was included in additional paid in capital at June 30, 2011. The common stock is payable in eight quarterly installments of 12,000 shares per installment. The first installment was delivered effective September 16, 2011. As the third party has no future performance obligation, the Company valued the 96,000 shares at $33,600 based on the closing price of $0.35 per share on the measurement date. The amount is recorded in common stock payable as of June 30, 2011. As of March 31, 2014 and December 31, 2013, stock payables were $16,800 and $16,800, respectively. The Company considered ASC 718-10-25-20 concluding that June 22, 2011 is the appropriate measurement date as the Company has received the goods, there is no significant disincentive to perform, and there is no future performance/service obligation on the part of the third party.

On January 29, 2013, in conjunction with the First Hanover Note, the updated agreement modified the debt to make it convertible into common stock of the Company at 55 percent times the lowest trading price of the five trading days preceding the conversion date. The Company compared the value of the debt modified of $50,000 before and after modification to calculate the loss on modification of $64,608. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $114,608 which after deducting the face value of the note of $50,000 resulted in the loss on modification of $64,608. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of Hanover. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.

During the period ended March 31, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.0044 to $0.01287 per share, in order to convert $50,000 (7,371,984 shares) in principal and $250 (50,505 shares) in accrued interest all in accordance with the Variable Conversion Price. As a result of these transactions, the note was considered paid off during March 2013. There was no accrued interest remaining after the conversions.

On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Discussion of 2006 Stock Option plan

The 2006 Stock Option Plan was adopted by our Board of Directors in March of 2006. A total of 550,000 shares of Common Stock have been reserved for issuance to employees, consultants and directors upon exercise of incentive and non-statutory options and stock purchase rights which may be granted under the Company’s 2006 Stock Plan (the “2006 Plan”). On October 15, 2009, 235,000 of those options were exercised, leaving 315,000 shares available for issuance to employees. Because of the 5.31-for-one forward stock split of the Company’s common stock on October 15, 2009, there are now 1,512,650 shares available for issuance as a part of this stock plan. As of the period ended March 31, 2012, there were 560,000 options outstanding to purchase shares of Common Stock, and no shares of Common Stock had been issued pursuant to stock purchase rights under the 2006 Plan.

Under the 2006 Plan, options may be granted to employees, directors, and consultants. Only employees may receive “incentive stock options,” which are intended to qualify for certain tax treatment, and consultants and directors may receive “non-statutory stock options,” which do not qualify for such treatment. A holder of more than 10% of the outstanding voting shares may only be granted options with an exercise price of at least 110% of the fair market value of the underlying stock on the date of the grant, and if such holder has incentive stock options, the term of the options must not exceed five years.

Options and stock purchase rights granted under the 2006 Plan generally vest ratably over a four year period (typically 1⁄4 or 25% of the shares vest after the 1st year and 1/48 of the remaining shares vest each month thereafter); however, alternative vesting schedules may be approved by the Board of Directors in its sole discretion. Any unvested portion of an option or stock purchase right will accelerate and become fully vested if a holder’s service with the Company is terminated by the Company without cause within twelve months following a Change in Control (as defined in the 2006 Plan).

All options must be exercised within ten years after the date of grant. Upon a holder’s termination of service for any reason prior to a Change in Control, the Company may repurchase any shares issued to such holder upon the exercise of options or stock purchase rights. The Board of Directors may amend the 2006 Plan at any time. The 2006 Plan will terminate in 2016, unless terminated sooner by the Board of Directors.

The Company granted 560,000 stock options during the year ended December 31, 2010. As of December 31, 2011, the stock options became fully vested and expensed accordingly. The Company did not grant any stock options for the three months ended March 31, 2014 or the year ended December 31, 2013. The weighted average assumptions used in the model are outlined in the following table:

	December 31, 2010
Risk-free rate of interest		1.81	%
Dividend yield		0	%
Volatility of common stock		321.74	%
Expected term	5.3125 years

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Stock-based compensation expense recognized in our statement of operations for the period ended March 31, 2014 and 2013, was $0 and $0, respectively.

The Company did not grant any warrants during the period ended March 31, 2014 or the year ended December 31, 2013.

Exercising of Stock Warrants and Options

For the period ended March 31, 2014 and the year ended December 31, 2013, no shares of common stock were issued on the cashless exercise of warrants or options.

A summary of the status of the warrants and options issued by the Company as of March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014				December 31, 2013
	Number of Warrants & Options		Weighted Average Exercise Price		Number of Warrants & Options		Weighted Average Exercise Price
Outstanding at beginning of year		560,000	$	0.10		560,000	$	0.10
Granted		-		-		-		-
Exercised for cash		-		-		-		-
Exercised for cashless		-		-		-		-
Expired and cancelled		-		-		-		-
Outstanding, end of period		560,000	$	0.10		560,000	$	0.10

NOTE 11 — INCOME TAXES

The Company accounts for income taxes in accordance with standards of disclosure propounded by the FASB, and any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Due to the uncertainty as to the utilization of net operating loss carry forwards, a valuation allowance has been made to the extent of any tax benefit that net operating losses may generate.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Income tax expense consists of California minimum franchise taxes of $800, Delaware state taxes of $489, and back taxes owed of $837. For Federal and California income tax purposes, the Company has net operating loss carry forwards that expire through 2027. The accumulated net operating loss as of March 31, 2014 is approximately $1,024,428. The net operating loss as of December 31, 2013 was approximately $833,504. No tax benefit has been reported in the financial statements because after evaluating our own potential tax uncertainties, the Company has determined that there are no material uncertain tax positions that have a greater than 50% likelihood of reversal if the Company were to be audited.

Deferred tax asset and the valuation account consists of the following at:

	March 31, 2014			December 31, 2013

Deferred Tax Asset	$	348,306		$	283,391
Valuation Allowances		(348,306	)		(283,391	)
Total:	$	-		$	-

NOTE 12 — EARNINGS (LOSS) PER COMMON SHARE

Basic loss per share is calculated based on the weighted-average number of outstanding common shares. For the period ended March 31, 2014 and March 31, 2013, the fully diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of debt, options and warrants would be anti-dilutive.

Net loss per share for the period ending:

	March 31, 2014			March 31, 2013
Net Income/Loss	$	(320,387	)	$	(316,697	)

Weighted number of common shares outstanding – basic and fully diluted		99,938,817			72,413,732

Loss per share – basic and fully diluted	$	(0.00	)	$	(0.00	)

NOTE 13 — RELATED PARTY TRANSACTIONS

Convertible Note Payable – Related Party

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the three month period ended March 31, 2014, 46,613 of the discount was amortized; at March 31, 2014 and December 31, 2013, the remaining debt discount was $139,837 and 186,450, respectively. As of March 31, 2014 and December 31, 2013, there was $4,597 and $0, respectively, of accrued interest related to this Note.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the three month period ended March 31, 2014, 46,613 of the discount was amortized; at March 31, 2014 and December 31, 2013, the remaining debt discount was $139,837 and 186,450, respectively. As of March 31, 2014 and December 31, 2013, there was $4,597 and $0, respectively, of accrued interest related to this Note.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

Preferred Stock Payable – Related Party

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

NOTE 14 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

The Company has various financial instruments that must be measured under the new fair value standard including: cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company’s cash is based on quoted prices and therefore classified as Level 1.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

Cash, accounts receivable, capitalized production costs, prepaid royalties, prepaid expenses, accounts payable, accrued compensation, accrued royalties, accrued interest, accrued expenses, unearned royalties, notes payable – related party and technology payables reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.

The following tables provide a summary of the fair values of assets and liabilities measured on a non-recurring basis:

	Carrying Value March 31,		Fair Value Measurements at March 31, 2014
	2014		Level 1		Level 2		Level 3
Liabilities:
Convertible notes payable *	$	1,174,473	$	-	$	-	$	1,174,473
Convertible notes payable	$	93,087	$	-	$	-	$	93,087

	Carrying Value December 31,		Fair Value Measurements at December 31, 2013
	2013		Level 1		Level 2		Level 3
Liabilities:
Convertible notes payable *	$	1,081,247	$	-	$	-	$	1,081,247
Convertible notes payable	$	62,950	$	-	$	-	$	62,950

* - Related Party

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2014

(Unaudited)

The Company believes that the market rate of interest as of March 31, 2014 and December 31, 2013 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at March 31, 2014 and December 31, 2013.

NOTE 15 — SUBSEQUENT EVENTS

On April 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for additional consideration of $50,000 (Accredited Investor Note). The Accredited Investor Note has a maturity date of April 25, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

* * * * * *

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly 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.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Summary Overview

During our most recent fiscal quarter ended March 31, 2014, we generated revenues of $14,842 from the sales our games compared to $51,660 for the quarter ended March 31, 2013.

Our business strategy is now focused on free-to-play games that require constant updates and new content to keep players engaged. Therefore, we no longer measure our success based upon the quantity of titles we launch, but rather on the data analytics reports we receive from monitoring our games during live production. During 2014, we anticipate continuing to release updates to Party Animals: Dance Battle and begin development and testing on one other free-to-play title.

During the quarter ended March 31, 2014, we generated a net loss of ($320,387). The net loss was primarily attributable to an increase in amortization and depreciations expenses as well as interest expenses, as described below.

Results of Operations for the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Introduction

Our revenues for the three months ended March 31, 2014 were $14,842, compared to $51,660, for the three months ended March 31, 2013. We are continuing development on Party Animals, and released a major update in the first 3 months of 2014, and are continuing to obtain successful results from our initial testing.

Revenues and Income (Loss) from Operations

Our revenues, costs and expenses, and net ordinary income (loss) from operations for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, are as follows:

	3 Months Ended March 31, 2014			3 Months Ended March 31, 2013

Revenue	$	14,842		$	51,660
Costs and Expenses:
Cost of Sales – Product Development		21,075			102,037
Cost of Sales – Licensing		2,465			1,752
General & Administrative		138,878			231,560
Sales & Marketing		1,746			4,656
Amortization & Depreciation		129,463			5,902
Total Expense		293,627			345,907
Net Ordinary Income (Loss)		(278,785	)		(294,247	)
Interest Expense		(40,335	)		(21,174	)
Net Income before taxes		(319,120	)		(315,421	)
Income Tax Expense		1,267			1,276
Net Income (Loss)	$	(320,387	)	$	(316,697	)

Our revenues for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, decreased due to our focused efforts on building games in the free-to-play game genre, which has led to a decrease in revenue from our previously released game titles. Our revenue can typically fluctuate based on when we release our games and the popularity of the games we release.

Our operating expenses for the three months ended March 31, 2014, compared to the three months ended March 31, 2013, decreased by $52,280. Our decreases in general and administrative expenses were primarily due to cost cutting measures affecting operating expenses, namely payroll. The increase in the amortization and depreciation expense for the three months ended March 31, 2014, compared to the three months ended March 31, 2013 of $123,561 was due to certain promissory notes we issued in 2013 and 2014 which included debt discounts that were amortized during the three months ended March 31, 2014.

As a result of the above, our net loss increased from $316,697 for the three months ended March 31, 2013 to $320,387 for the three months ended March 31, 2014. We attribute this increase in our net loss to the increase in our operating expenses outlined above.

Liquidity and Capital Resources

Introduction

During the three months ended March 31, 2014, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of March 31, 2014 was approximately $42,841, and our monthly cash flow burn rate is approximately $60,000. 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. We intend to raise additional capital through the sale of our securities or borrowing from third parties and other related parties until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2014 and December 31, 2013, respectively, are as follows:

	(Unaudited) March 31, 2014		December 31, 2013		Change

Cash	$	42,841	$	39,847	$	2,994
Total Current Assets		65,340		65,740		(400	)
Total Assets		71,988		78,488		(6,500	)
Total Current Liabilities		2,119,177		1,955,290		163,887
Total Liabilities	$	2,119,177	$	1,955,290	$	163,887

Our current assets decreased by $400 as of March 31, 2014 as compared to December 31, 2013, primarily because of a decrease in accounts receivable, net of $2,312, offset by the increase in Cash on hand of $2,994.

Our current liabilities increased by $163,887 as of March 31, 2014 as compared to December 31, 2013 primarily because of an increase in Accrued Interest of $40,329, or 26708%, and an increase in Convertible Note Payable, Related party, net of $93,226, or 9% and an increase in Convertible Note Payable of $30,137 or 48%.

Our total liabilities are stated as current as of March 31, 2014 as compared to December 31, 2013, and increased by $163,887 due to the increases in current liabilities described above.

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 only had $42,841 in cash as of March 31, 2014. Therefore, based on our revenues, cash on hand and current monthly burn rate, around $60,000 per month, we will need to continue borrowing from our shareholders and other related parties to fund operations.

Sources and Uses of Cash

Operations

We had net cash used by operating activities of $147,006 for the three months ended March 31, 2014, as compared to $180,566 for the three months ended March 31, 2013. For the three months ended March 31, 2014, the net cash used in operating activities consisted primarily of our net loss of $320,387 offset in part by amortization on debt discount of $123,363, and accrued interest – related party expenses of $35,800. For the three months ended March 31, 2013, the net cash used in operating activities consisted primarily of our net loss of $316,697 and capitalized production costs of $107,639, offset in part by loss on debt modification of $64,608, amortization of capitalized productions costs of $96,234 and accrued expenses of $63,025.

Investments

We had cash used by investing activities of $0 for the three months ended March 31, 2014, compared to $0 for the three months ended March 31, 2013.

Financing

Our net cash provided by financing activities for the three months ended March 31, 2014 was $150,000, compared to $149,270 for the three months ended March 31, 2013. For the three months ended March 31, 2014, our financing activities consisted of borrowings of debt – third party of $150,000. For the three months ended March 31, 2013, our financing activities consisted of borrowings of debt – third party of $71,500 and borrowings of debt with a related party of $77,770.

Debt Instruments, Guarantees, and Related Covenants

We have no disclosure required by this Item.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4 Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officers, respectively, concluded that, as of the end of the three month period ended March 31, 2014, our disclosure controls and procedures were not effective (1) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to us, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. The conclusion reached by our Chief Executive Office and Chief Financial Officer was a result of the continued material weaknesses and described below and previously reported in our form 10K for the year ended December 31, 2013.

(b) Management’s Quarterly Report on Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following four material weaknesses that have caused management to conclude that, as of March 31, 2014, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2. We have not documented our internal controls. We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls could lead to a delay in our reporting obligations. We were required to provide written documentation of key internal controls over financial reporting beginning with our three-month period ending March 31, 2014. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

3. Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

4. Effective controls over transactions were not maintained. Specifically, controls were not designed and in place to ensure that contingencies were properly reflected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

As previously stated in our Annual Report on Form 10-K, to remediate the material weakness in our documentation, evaluation and testing of internal controls we hope to engage a third-party firm to assist us in remedying this material weakness. Because of financial restraints, while we have interviewed several such firms, we have not started our remediation as of the date hereof.

(d) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 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.

ITEM 1A Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

Common Stock

There have been no events which are required to be reported under this Item.

ITEM 3 Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4 Mine Safety Disclosures

There is no information required to be disclosed by this Item.

ITEM 5 Other Information

None.

ITEM 6 Exhibits

3.1 (1)		Articles of Incorporation of Freeze Tag, Inc.

3.2 (1)		Articles of Amendment to Articles of Incorporation

3.3 (1)		Bylaws of Freeze Tag, Inc.

3.4 (10)		Articles of Amendment to Certificate of Incorporation February 4, 2014

4.1 (1)		Freeze Tag, Inc. 2006 Stock Plan

10.1 (1)		10% Convertible Promissory Note dated July 1, 2010 with The Holland Family Trust

10.2 (1)		Support Services Agreement with Cardiff Partners, LLC dated October 12, 2009

10.3 (1)		Amendment No. 1 to Support Services Agreement with Cardiff Partners, LLC dated March 2, 2010

10.4 (1)		Amendment No. 2 to Support Services Agreement with Cardiff Partners, LLC dated March 3, 2010

10.5 (1)		Form of Conversion Agreement for October 2009 Conversions

10.6 (1)		Form of Option Conversion Agreement for October 2009 Conversions

10.7 (1)		Placement Agent and Advisory Services Agreement with Monarch Bay Associates, LLC dated October 12, 2009

10.8 (1)		Corporate Communications Consulting Agreement Michael Southworth dated September 25, 2009

10.9 (1)		Lock-Up Agreement dated November 10, 2009

10.10 (2)		Loan Agreement with Sunwest Bank dated October 20, 2006, as amended

10.11 (3)		Securities Purchase Agreement with Asher Enterprises, Inc. dated July 21, 2011

10.12 (3)		Convertible Promissory Note with Asher Enterprises, Inc. dated July 21, 2011

10.13 (4)		Technology Transfer Agreement dated June 22, 2011

10.14 (5)		Securities Purchase Agreement with Asher Enterprises, Inc. dated September 16, 2011

10.15 (5)		Convertible Promissory Note with Asher Enterprises, Inc. dated September 16, 2011

10.16 (6)		Securities Purchase Agreement with Asher Enterprises, Inc. dated December 6, 2011

10.16 (6)		Convertible Promissory Note with Asher Enterprises, Inc. dated December 6, 2011

10.17 (7)		Letter Agreement with Crucible Capital, Inc. dated February 29, 2012

10.18 (8)		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated July 21, 2011

10.19 (8)		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated September 16, 2011

10.20 (8)		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated December 6, 2011

10.21 (8)		Amendment No. 1 to Promissory Note with The Lebrecht Group, APLC dated November 17, 2011

10.22 (9)		Convertible Promissory Note (10%) dated December 20, 2013 – Accredited Investor

10.23 (9)		Convertible Promissory Note (10%) dated December 31, 2013 - Holland Family Trust

10.24 (9)		Convertible Promissory Note (10%) dated December 31, 2013 – Craig Holland Debt

10.25 (9)		Convertible Promissory Note (10%) dated December 31, 2013 – Craig Holland Salary

10.26 (9)		Convertible Promissory Note (10%) dated December 31, 2013 – Mick Donahoo Salary

10.27 (9)		Convertible Promissory Note (10%) dated December 31, 2013 – Mick Donahoo Debt

10.28 (9)		Convertible Promissory Note (10%) dated December 31, 2013 – Robert Cowdell

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1*		Section 1350 Certification of Chief Executive Officer

32.2*		Section 1350 Certification of Chief Financial Officer.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

_________

* Filed herewith.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

(1) Incorporated by reference from our Registration Statement on Form S-1, filed with the Commission on August 16, 2010.

(2) Incorporated by reference from Amendment No. 2 to our Registration Statement on Form S-1/A2, filed with the Commission on October 25, 2010.

(3) Incorporated by reference from Current Report on Form 8-K filed with the Commission on August 3, 2011.

(4) Incorporated by reference from Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed with the Commission on August 15, 2011.

(5) Incorporated by reference from Current Report on Form 8-K filed with the Commission on September 21, 2011.

(6) Incorporated by reference from Current Report on Form 8-K filed with the Commission on December 23, 2011.

(7) Incorporated by reference from Current Report on Form 8-K filed with the Commission on March 8, 2012.

(8) Incorporated by reference from Annual Report on Form 10-K filed with the Commission on March 30, 2012.

(9) Incorporated by reference from Current Report on Form 8-K filed with the Commission on October 4, 2013.

(10) Incorporated by reference from Annual Report on Form 10-K filed with the Commission on March 31, 2014.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Freeze Tag, Inc.

Dated: May 15, 2014	By:	/s/ Craig Holland
	Its:	Craig Holland
		President and Chief Executive Officer

Freeze Tag, Inc. - FORM 10-Q - May 15, 2014

Attached files

Freeze Tag, Inc. Reports