10-Q

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 June 30, 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 August 10, 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
ITEM 1	Financial Statements	4
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	39
ITEM 4	Controls and Procedures	39
PART II – OTHER INFORMATION
ITEM 1	Legal Proceedings	41
ITEM 1A	Risk Factors	41
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	41
ITEM 3	Defaults Upon Senior Securities	41
ITEM 4	Mine Safety Disclosures	41
ITEM 5	Other Information	41
ITEM 6	Exhibits	42

2

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 notes 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 June 30, 2014 are not necessarily indicative of the results of operations for the full year. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2013.

3

ITEM 1 Financial Statements

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

BALANCE SHEETS

	(Unaudited)			(Audited)
	June 30, 2014			December 31, 2013
ASSETS
Current Assets
Cash	$	21,590		$	39,847
Accounts Receivable, Net		16,766			17,709
(Net of Allowance of $5,600 and $5,600 as of June 30, 2014 and December 31, 2013, respectively)
Deferred Financing Costs		884			1,285
Prepaid Royalties		5,446			5,964
Prepaid Expenses		588			935
Total Current Assets		45,274			65,740
Fixed Assets, Net		228			828
(Net of depreciation of $9,549 and $8,949 as of June 30, 2014 and December 31, 2013, respectively)
Other Long-term Assets, Net		319			11,920
(Net of amortization of $87,332 and $75,732 as of June 30, 2014 and December 31, 2013 respectively)
TOTAL ASSETS	$	45,821		$	78,488
LIABILITIES & EQUITY (DEFICIT)
Liabilities
Current Liabilities
Accounts Payable	$	103,772		$	107,301
Accrued Compensation		75,187			73,109
Accrued Royalties		403,511			399,838
Accrued Interest		84,759			151
Accrued Expenses		434			748
Technology Payable		18,000			18,000
Unearned Royalties		207,264			211,946
Convertible Note Payable, Related Party, Net		1,267,698			1,081,247
(Net of debt discount of $186,450 and $372,900 as of June 30, 2014 and December 31, 2013, respectively)
Convertible Note Payable		163,949			62,950
(Net of debt discount of $247,494 and $48,493 as of June 30, 2014 and December 31, 2013, respectively)
Derivative Liabilities		494,641			-
Total Current Liabilities		2,819,215			1,955,290
Total Liabilities		2,819,215			1,955,290
Equity (Deficit)
Preferred Stock		1			-
$0.001 par value per share, 10,000,000 shares authorized, 1,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
Common Stock		99,938			99,938
$0.001 par value per share, 500,000,000 shares authorized, 99,938,817 and 99,938,817 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)
Additional Paid-In Capital		3,715,262			3,734,563
Preferred Stock Payable		-			30,700
Common Stock Payable		16,800			16,800
Retained Deficit		(6,605,395	)		(5,758,803	)
Total Equity (Deficit)		(2,773,394	)		(1,876,802	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	45,821		$	78,488

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

4

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Revenues	$	13,102		$	47,596		$	27,944		$	99,256
Costs and Expenses:
Cost of Sales - Product Development		25,392			102,836			46,467			204,873
Cost of Sales - Licensing		1,728			5,444			4,193			7,196
General & Administrative		134,017			116,142			272,895			283,094
Sales & Marketing		19,063			1,577			20,809			6,233
Amortization & Depreciation		159,236			8,557			288,699			14,459
Total Costs and Expenses		339,436			234,556			633,063			515,855
Operating Income/(Loss)		(326,334	)		(186,960	)		(605,119	)		(416,599	)
Interest Income/(Expense), net		(44,279	)		(24,210	)		(84,614	)		(45,384	)
Loss on Debt Modification		-			-			-			(64,608	)
Derivative Expense		(18,702	)		-			(155,592	)		-
Income/Loss before taxes		(389,315	)		(211,170	)		(845,325	)		(526,591	)
Income Tax Expense		-			-			1,267			1,276
Net Income/(Loss)	$	(389,315	)	$	(211,170	)	$	(846,592	)	$	(527,867	)
Weighted number of common shares outstanding-basic and fully diluted		99,938,817			77,724,404			99,938,817			75,083,738
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

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

5

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2014 and 2013

	June 30, 2014			June 30, 2013
Cash flows from operating activities:
Net Loss	$	(846,592	)	$	(527,867	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense		600			1,011
Amortization expense		11,600			11,815
Loss on debt modification		-			64,608
Amortization of capitalized production costs		-			193,273
Fair value of derivatives adjustments		155,592			-
Amortization on debt discount		276,499			13,449
Changes in operating assets and liabilities:
Accounts receivable		943			16,734
Prepaid Royalties		(365	)		669
Prepaid Expenses		1,632			1,344
Capitalized Production Costs		-			(199,377	)
Accounts Payable		(3,529	)		(2,457	)
Accrued interest - third party		12,498			2,475
Accrued interest - related party		72,110			37,903
Accrued Expenses		5,437			149,722
Unearned royalties		(4,682	)		(24,477	)
Net cash used by operating activities		(318,257	)		(261,175	)
Cash flows from Investing activities:
Cash used for purchasing fixed assets		-			-
Net cash used by investing activities		-			-
Cash flows from financing activities:
Borrowings of debt - third party		300,000			71,500
Borrowings of debt - related party		-			168,670
Net cash provided by financing activities		300,000			240,170
Net decrease in cash		(18,257	)		(21,005	)
Cash at the beginning of the period		39,847			32,744
Cash at the end of the period	$	21,590		$	11,739
Non-cash transactions
Conversion of debt to common shares - third party	$	-		$	50,000
Conversion of accrued interest to common shares - third party	$	-		$	250
Conversion of accrued interest to debt - related party	$	-		$	5,429
Debt discount due to derivative	$	289,049		$	-
Issuance of preferred shares for preferred stock payable	$	30,700		$	-
Beneficial conversion feature	$	-		$	21,500

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

6

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

Statement of Shareholders' Equity (Deficit)

For the Year Ended December 31, 2013 (Audited) and the Six Months Ended June 30, 2014 (Unaudited)

	Convertible Preferred Stock				Common Stock				Common Stock		Preferred Stock			Additional Paid In			Accumulated
	Shares		Amount		Shares		Amount		Payable		Payable			Capital			Deficit			Total
Balances as of December 31, 2012		-	$	-		70,301,915	$	70,302	$	16,800	$	-		$	1,369,407		$	(2,212,111	)	$	(755,602	)
Stock issued for Conversion of Third Party Debt		-		-		27,605,014		27,605		-		-			43,895			-			71,500
Stock issued for Conversion of Third Party Accrued Interest		-		-		2,031,888		2,031		-		-			(291	)		-			1,740
Beneficial Conversion Feature		-		-		-		-		-		-			444,400			-			444,400
Preferred Stock Payable to Related Party		-		-		-		-		-		30,700			-			-			30,700
Loss on Debt Modification		-		-		-		-		-		-			1,877,152			-			1,877,152
																					-
Net Loss		-		-		-		-		-		-			-			(3,546,692	)		(3,546,692	)
Balances as of December 31, 2013		-	$	-		99,938,817	$	99,938	$	16,800	$	30,700		$	3,734,563		$	(5,758,803	)	$	(1,876,802	)
Issuance of preferred shares for preferred stock payable		1,000		1		-		-		-		(30,700	)		30,699			-			-
Beneficial Conversion Feature						-		-		-					(50,000	)		-			(50,000	)
Net loss		-		-		-		-		-		-			-			(846,592	)		(846,592	)
Balances as of June 30, 2014		1,000	$	1		99,938,817	$	99,938	$	16,800	$	-		$	3,715,262		$	(6,605,395	)	$	(2,773,394	)

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

7

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

NOTE 1 — THE COMPANY

Nature of Business

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

NOTE 2 —  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

Product Sales (web and mobile revenues)

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

Licensing Revenues (retail revenues- royalties)

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

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

8

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Other Revenues

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

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

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

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

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at June 30, 2014 and December 31, 2013 were insured. At June 30, 2014 and December 31, 2013, there were no cash equivalents.

Allowances for Returns, Price Protection, and Doubtful Accounts

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

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $5,600 and $5,600, respectively.

9

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Property and Equipment

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

Concentrations of Credit Risk, Major Customers and Major Vendors

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

During the period ended June 30, 2014, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 28.27%, Apple– 19.48% and Exent – 13.57% each respectively. During the period ended June 30, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 74.94%, and Exent – 12.58% each respectively.

At June 30, 2014, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 73.98%, Boonty – 13.73%, Denda – 11.02% and Apple – 10.21%. At December 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 50.4%, Big Fish Games – 10.7%.

Income Taxes

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

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

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

10

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Foreign Currency Translation

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

Accounting for Stock-Based Compensation

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

Stock-based compensation expense recognized in the Company’s statements of operations for the periods ended June 30, 2014, and 2013, were $0 and $0, respectively.

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments

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

11

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

· Level one — Quoted market prices in active markets for identical assets or liabilities;

· Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

· Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining the category in which an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each period.

Use of Estimates

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

Research and Development Costs

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

Software Development Costs

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

12

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

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

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

At June 30, 2014, and December 31, 2013, current and long-term capitalized software development costs on the balance sheet were $0 and $0, respectively.

We recognized amortization expense of $0 and $193,273 for the periods ended June 30, 2014 and 2013, respectively.

Intellectual Property Licenses (Prepaid Royalties)

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

13

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

As of June 30, 2014 and December 31, 2013, prepaid royalties (or prepaid licensing fees) were $5,446, and $5,964, respectively.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

The fair value of the derivatives is estimated using a multinomial lattice model. The model is based on a probability weighted discounted cash flow model of future projections of the various potential outcomes. Some of the key assumptions include the likelihood of future financing, stock price volatility, and discount rates.

See Note 15 for detailed information on the Company’s derivative liabilities.

Recent Accounting Pronouncements

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

14

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

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

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

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

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

15

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

NOTE 3 — GOING CONCERN

As shown in the accompanying financial statements for the six month periods ending June 30, 2014 and June 30, 2013, we have incurred net losses of $846,592 and $527,867, respectively. As of June 30, 2014 our retained deficit is $6,605,395. During the period ended June 30, 2014 and the year ended December 3l, 2013, we experienced negative cash flows from operations largely due to our continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about our ability to continue as a going concern. Accordingly, we are currently evaluating our alternatives to secure financing sufficient to support the operating requirements of our current business plan, as well as continuing to execute our business strategy of distributing our game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.

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

NOTE 4 — OTHER ASSETS

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment. The common stock is payable in eight quarterly installments of 12,000 shares per installment. As of June 30, 2014, the Company has issued a total of 48,000 shares to the unaffiliated third party and reduced common stock payable accordingly.

The game engine was amortized on a straight-line basis over the useful life of three years. For the periods ended June 30, 2014 and June 30, 2013 amortization expense was $11,600 and $11,600 respectively.

NOTE 5 — FIXED ASSETS

Fixed Assets, Net, consists of the following at:

	June 30, 2014			December 31, 2013
Computer Equipment	$	5,347		$	5,347
Communications Equipment		830			830
Software		3,600			3,600
Accumulated Depreciation		(9,549	)		(8,949	)
Total Fixed Assets, Net	$	228		$	828

16

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets. All assets are currently depreciated over three years. For the six month periods ended June 30, 2014, and 2013, depreciation expense was $600 and $1,011, respectively.

NOTE 6 — ACCRUED COMPENSATION

Accrued Compensation Consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Vacation	$	75,187	$	73,109
Total	$	75,187	$	73,109

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

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.

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

17

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

TheCompany evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.

NOTE 7 — ACCRUED ROYALTIES AND UNEARNED ROYALTIES

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

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

Accrued and Unearned Royalties consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Royalties	$	403,511	$	399,838
Unearned Royalties		207,264		211,946
Total	$	610,775	$	611,784

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Leases

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

18

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Technology Payable

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

As of June 30, 2014 and December 31, 2013, the Company recognized a current liability of $18,000 and $18,000, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded amortization of the debt discount of $0 and $215, respectively.
 

NOTE 9 — DEBT

Debt consists of the following at:

	June 30, 2014			December 31, 2013
Notes Payable-Convertible *	$	1,454,147		$	1,454,147
Notes Payable-Convertible-Third Party		411,444			111,443
Discounts on Convertible Notes Payable *		(186,450	)		(372,900	)
Discounts on Convertible Notes Payable		(247,494	)		(48,493	)
Total Debt, Net of Discounts		1,431,647			1,144,197
Less: Current, Net of Discounts		1,431,647			1,144,197
Long Term, Net of Discounts	$	-		$	-

* - Related Party

19

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Convertible Note Payable

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

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

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

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

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

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

20

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

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

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

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

On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the “Convertible Cowdell Note”) into a convertible note. The Convertible Cowdell Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The Convertible Cowdell Note had accrued interest of $3,047 as of June 30, 2014 and $0 as of December 31, 2013.

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

21

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

On December 20, 2013, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 1). The Accredited Investor Note 1 has a maturity date of December 20, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued at $50,453, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $24,247 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $25,753. The Accredited Investor Note 1 had accrued interest of $2,630 as of June 30, 2014 and $151 as of December 31, 2013.

On January 6, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 2). The Accredited Investor Note 2 has a maturity date of January 6, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. During the period ended June 30, 2014, $21,332 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $23,161. The Accredited Investor Note 2 had accrued interest of $2,342 as of June 30, 2014.

On February 18, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 3). The Accredited Investor Note 3 has a maturity date of February 18, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of February 18, 2014 at $44,556, of which all was recorded as a debt discount. During the period ended June 30, 2014, $16,113 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $28,443. The Accredited Investor Note 3 had accrued interest of $1,808 as of June 30, 2014.

On March 26, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 4). The Accredited Investor Note 4 has a maturity date of March 26, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

22

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

The derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $13,151 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $36,849. The Accredited Investor Note 4 had accrued interest of $1,315 as of June 30, 2014.

On April 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 5). The Accredited Investor Note 5 has a maturity date of April 25, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $9,041 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $40,959. The Accredited Investor Note 5 had accrued interest of $904 as of June 30, 2014.

On May 21, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 6). The Accredited Investor Note 6 has a maturity date of May 21, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $5,479 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $44,521. The Accredited Investor Note 6 had accrued interest of $548 as of June 30, 2014.

On June 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for consideration of $50,000 (Accredited Investor #2 Note 1). The Accredited Investor #2 Note 1 has a maturity date of June 25, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $685 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $49,315. The Accredited Investor Note 6 had accrued interest of $55 as of June 30, 2014.

Total Accrued interest for the above third party convertible notes is $12,347 and $151 as of June 30, 2014 and December 31, 2013, respectively.

23

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

Convertible Note Payable – Related Party

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

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

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

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $47,807 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.

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

24

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Mick Donahoo Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $3,503 and $0, respectively, of accrued interest related to this Note.

25

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

The Company evaluated the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $2,307 and $0, respectively, of accrued interest related to this Note.

The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $361,112 and $58,833 for the periods ended June 30, 2014, and 2013, respectively. However, the beneficial conversion feature amortization of $276,498 and $13,449 recorded during the periods ended June 30, 2014 and 2013, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.

NOTE 10 — STOCKHOLDERS’ EQUITY

Stock Issuance

The Company is authorized to issue up to 500,000,000 shares of its $.001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.

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

26

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

During the period ended June 30, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.0044 to $0.01287 per share, in order to convert $50,000 (7,371,984 shares) in principal and $250 (50,505 shares) in accrued interest all in accordance with the Variable Conversion Price. As a result of these transactions, the note was considered paid off during March 2013. There was no accrued interest remaining after the conversions.

On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland. During the six months ended June 30, 2014, the preferred shares were issued, eliminating the preferred stock payable.

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).

27

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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 June 30, 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

Stock-based compensation expense recognized in our statement of operations for the period ended June 30, 2014 and June 30, 2013, was $0 and $0, respectively.

The Company did not grant any warrants during the period ended June 30, 2014 or the year ended December 31, 2013.

Exercising of Stock Warrants and Options

For the period ended June 30, 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 June 30, 2014 and December 31, 2013 are as follows:

	June 30, 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

28

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

NOTE 11 — INCOME TAXES

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

Income tax expense consists 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 June 30, 2014 is approximately $1,230,341. 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:

	June 30, 2014			December 31, 2013
Deferred Tax Asset	$	418,316		$	283,391
Valuation Allowances		(418,316	)		(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 June 30, 2014 and June 30, 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:

	June 30, 2014			June 30, 2013
Net Income/Loss	$	(846,592	)	$	(527,867	)
Weighted number of common shares outstanding – basic and fully diluted		99,938,817			75,083,738
Loss per share – basic and fully diluted	$	(0.01	)	$	(0.01	)

29

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

NOTE 13 — RELATED PARTY TRANSACTIONS

Convertible Note Payable – Related Party

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

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

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

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $47,807 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.

30

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

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

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and 186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and 186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,256 and $0, respectively, of accrued interest related to this Note.

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

31

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

The Company evaluated the Mick Donahoo Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $3,503 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $2,307 and $0, respectively, of accrued interest related to this Note.

Preferred Stock Payable – Related Party

On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland. During the six months ended June 30, 2014, the preferred shares were issued, eliminating the preferred stock payable.

32

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 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		Fair Value Measurements at June 30, 2014
	June 30, 2014		Level 1		Level 2		Level 3		Losses (Gains)
Liabilities:
Derivatives	$	494,641	$	-	$	-	$	494,641	$	8,437

		Fair Value Measurements at
Carrying Value		December 31, 2013
December, 31, 2013		Level 1		Level 2		Level 3		Losses (Gains)
$	-	$	-	$	-	$	-	$	-

The Company believes that the market rate of interest as of June 30, 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 June 30, 2014 and December 31, 2013.

33

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

NOTE 15 — DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 9 under Debt, the Company issued convertible notes payable that contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity’s Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions.

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At June 30, 2014 and December 31, 2013, the Company recorded current derivative liabilities of $494,641 and $0. The net change in fair value of the derivative liabilities for the six months ended June 30, 2014 and June 30, 2014 was a loss $8,437 and $0, respectively, which were reported as other income/(expense) in the statements of operations.

The following table presents details of the Company’s derivative liabilities as of June 30, 2014 and December 31, 2013:

	Total
Balance December 31, 2013	$	-
Issuances in derivative value due to new security issuances of notes		486,204
Change in fair market value of derivative liabilities		8,437
Balance June 30, 2014	$	494,641

The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.

Key inputs and assumptions used in valuing the Company’s derivative liabilities are as follows for issuances of notes:

● Stock prices on all measurement dates were based on the fair market value

● Down round protection is based on the subsequent issuance of common stock at prices less than the conversion feature

● The probability of future financing was estimated at 100%

● Computed volatility ranging from 335% to 357%

See Note 14 for a discussion of fair value measurements.

NOTE 16 — RESTATEMENT OF FINANCIAL STATEMENTS

On or about August 11, 2014, management and the Company concluded that the Company should restate derivative related charges in connection with convertible debt issued during the first quarter of 2014. The Company’s method of valuing the convertible debt did not include recognition of derivative liabilities associated with the issuance of the convertible debt.

The cumulative effect of this change through March 31, 2014 is a $10,951 increase in convertible debts payable, a $325,939 increase in derivatives, a $336,890 increase in current and total liabilities, a decrease of $200,000 in additional paid-in capital, and a $136,890 increase in the Company’s net loss. The change had no effect on the Company's reported cash flows. Unaudited Tables detailing the effect of the error on the Company’s previously filed financial statements for the quarter ended March 31, 2014 are included below.

34

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

MARCH 31, 2014 BALANCE SHEET

	As filed			Adjustments			Restated
ASSETS
Current Assets
Cash	$	42,841		$	-		$	42,841
Accounts Receivable, Net		15,397			-			15,397
(Net of Allowance of $5,600)
Deferred Financing Costs		948			-			948
Prepaid Royalties		5,670			-			5,670
Prepaid Expenses		484			-			484
Total Current Assets		65,340			-			65,340
Fixed Assets, Net		528			-			528
(Net of depreciation of $9,249)
Other Long-term Assets, Net		6,120			-			6,120
(Net of amortization of $40,580)
TOTAL ASSETS	$	71,988		$	-		$	71,988
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable	$	103,411		$	-			103,411
Accrued Compensation		77,638			-			77,638
Accrued Royalties		402,011			-			402,011
Accrued Interest		40,480			-			40,480
Accrued Expenses		556			-			556
Technology Payable		18,000			-			18,000
Unearned Royalties		209,521			-			209,521
Convertible Note Payable, Related Party, Net		1,174,473			-			1,174,473
(Net of debt discount of $279,674)
Convertible Note Payable		93,087			10,951			93,087
(Net of debt discount of $168,356)
Derivatives		-			325,939			325,939
Total Current Liabilities		2,119,177			336,890			2,456,067
Total Liabilities		2,119,177			336,890			2,456,067
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, 500,000,000 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			(200,000	)		3,684,563
Preferred Stock Payable		30,700			-			30,700
Common Stock Payable		16,800			-			16,800
Retained Deficit		(6,079,190	)		(136,890	)		(6,216,080	)
Total Equity (Deficit)		(2,047,189	)		(336,890	)		(2,384,079	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	71,988		$	-		$	71,988

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

35

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Financial Statements

June 30, 2014

(Unaudited)

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2014

(Unaudited)

	As Filed			Adjustments			Restated
Revenues	$	14,842		$	-		$	14,842
Costs and Expenses:
Cost of Sales - Product Development		21,075			-			21,075
Cost of Sales - Licensing		2,465			-			2,465
General & Administrative		138,878			-			138,878
Sales & Marketing		1,746			-			1,746
Amortization & Depreciation		129,463			136,890			266,353
Total Expense		293,627			136,890			430,517
Net Ordinary Income/Loss		(278,785	)		(136,890	)		(415,675	)
Interest Income/(Expense), net		(40,335	)		-			(40,335	)
Net Income/Loss before taxes		(319,120	)		(136,890	)		(456,010	)
Income Tax Expense		1,267			-			1,267
Net Income/Loss	$	(320,387	)		(136,890	)	$	(457,277	)
Weighted number of common shares outstanding-basic and fully diluted		99,938,817			99,938,817			99,938,817
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)

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

NOTE 17 — SUBSEQUENT EVENTS

On July 15, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for additional consideration of $50,000 (Accredited Investor #2 Note 2). The Accredited Investor #2 Note 2 has a maturity date of July 15, 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.

* * * * * *

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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

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.

During our most recent fiscal quarter ended June 30, 2014, we generated revenues of $13,102 from the sales our games compared to $47,596 for the quarter ended June 30, 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 June 30, 2014, we generated a net loss of ($389,315). The net loss was primarily attributable to an increase in amortization and depreciations expenses as well as interest expenses, as described below.

37

Results of Operations for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Introduction

Our revenues for the three months ended June 30, 2014 were $13,102, compared to $47,596, for the three months ended June 30, 2013. We are continuing development on Party Animals, and released two additional updates in the 2nd quarter of 2014, and have an additional update in submission with Apple as of the writing of this document. We anticipate that we will launch the game worldwide before the end of the year.

Revenues and Income (Loss) from Operations

Our revenues, costs and expenses, and net ordinary income (loss) from operations for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, are as follows:

	3 Months Ended June 30, 2014			3 Months Ended June 30, 2013
Revenue	$	13,102		$	47,596
Costs and Expenses:
Cost of Sales – Product Development		25,392			102,836
Cost of Sales – Licensing		1,728			5,444
General & Administrative		134,017			116,142
Sales & Marketing		19,063			1,577
Amortization & Depreciation		159,236			8,557
Total Expense		339,436			234,556
Net Ordinary Income (Loss)		(326,334	)		(186,960	)
Interest Expense		(44,279	)		(24,210	)
Derivative Expense		(18,702	)		-
Net Loss before taxes		(389,315	)		(211,170	)
Income Tax Expense		0			0
Net Income (Loss)	$	(389,315	)	$	(211,170	)

38

Our revenues for the three months ended June 30, 2014, compared to the three months ended June 30, 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 general and administrative expenses for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, increased by $17,875. Our increases in general and administrative expenses were primarily due to an increase in PR services and Payroll Expense. Sales and marketing expenses for the three months ended June 30, 2014 compared to the three months ended June 30. 2013 increased by $17,486 due to promotional and research efforts related to acquiring users and game testing Party Animals: Dance Battle. The increase in the amortization and depreciation expense for the three months ended June 30, 2014, compared to the three months ended June 30, 2013 of $150,679 was due to certain promissory notes we issued in 2013 and 2014 which included debt discounts that were amortized during the three months ended June 30, 2014.

As a result of the above, our net loss increased from $211,170 for the three months ended June 30, 2013 to $389,315 for the three months ended June 30, 2014. We attribute this increase in our net loss to the increase in our expenses outlined above.

Liquidity and Capital Resources

Introduction

During the three months ended June 30, 2014, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of June 30, 2014 was $21,590, and our monthly cash flow burn rate is approximately $53,000. 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 June 30, 2014 and December 31, 2013, respectively, are as follows:

	(Unaudited) June 30, 2014		December 31, 2013		Change
Cash	$	21,590	$	39,847	$	(18,257	)
Total Current Assets		45,274		65,740		23,466	)
Total Assets		45,821		78,488		(32,667	)
Total Current Liabilities		2,819,215		1,955,290		863,925
Total Liabilities	$	2,819,215	$	1,955,290	$	863,925

Our current assets decreased by $23,466 as of June 30, 2014 as compared to December 31, 2013, primarily because of a decrease in cash of $18,257.

39

Our current liabilities increased by $863,925 as of June 30, 2014 as compared to December 31, 2013 primarily because of an increase in Accrued Interest of $84,608, an increase in Convertible Note Payable, Related party, net of $186,451, an increase in Convertible Note Payable of $100,999 and an increase in Derivative Liabilities by $494,641.

Our total liabilities are stated as current as of June 30, 2014 as compared to December 31, 2013, and increased by $863,925 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 $21,590 in cash as of June 30, 2014. Therefore, based on our revenues, cash on hand and current monthly burn rate, around $53,000 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 $318,257 for the six months ended June 30, 2014, as compared to $261,175 for the six months ended June 30, 2013. For the six months ended June 30, 2014, the net cash used in operating activities consisted primarily of our net loss of $852,056 offset in part by fair value of derivative adjustments of $161,056, amortization on debt discount of $276,499, and accrued interest – related party of $72,110. For the six months ended June 30, 2013, the net cash used in operating activities consisted primarily of our net loss of $527,867 and capitalized production costs of $199,377, offset in part by loss on debt modification of $64,608, amortization of capitalized productions costs of $193,273 and accrued expenses of $149,722.

Investments

We had cash used by investing activities of $0 for the six months ended June 30, 2014, compared to $0 for the six months ended June 30, 2013.

Financing

Our net cash provided by financing activities for the six months ended June 30, 2014 was $300,000, compared to $240,170 for the six months ended June 30, 2013. For the six months ended June 30, 2014, our financing activities consisted of borrowings of debt – third party of $300,000. For the six months ended June 30, 2013, our financing activities consisted of borrowings of debt – third party of $71,500 and borrowings of debt with a related party of $168,670.

40

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 June 30, 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 June 30, 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 June 30, 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.

41

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 June 30, 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.

(c) Remediation of Material Weaknesses

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.

42

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.

43

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

44

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

45

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.

46

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: August 14, 2014	By:	/s/ Craig Holland
		Craig Holland
	Its:	President and Chief Executive Officer

47

EX-31.1

EXHIBIT 31.1

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

I, Craig Holland, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Freeze Tag, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and  

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 14, 2014	By:	/s/ Craig Holland
		Craig Holland
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

I, Mick Donahoo, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Freeze Tag, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhibit Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 14, 2014	By:	/s/ Mick Donahoo
		Mick Donahoo
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 USC, SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Freeze Tag, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Craig Holland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2014	By:	/s/ Craig Holland
		Craig Holland
		Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Freeze Tag, Inc. and will be retained by Freeze Tag, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 USC, SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Freeze Tag, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2014, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Mick Donahoo, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 14, 2014	By:	/s/ Mick Donahoo
		Mick Donahoo
		Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Freeze Tag, Inc. and will be retained by Freeze Tag, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

FIXED ASSETS (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Fixed Assets Details Narrative
Depreciation expense	$ 600	$ 1,011

XML

DERIVATIVE FINANCIAL INSTRUMENTS (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Derivative Financial Instruments Details
Balance December 31, 2013
Issuances in derivative value due to new security issuances of notes	486,204
Change in fair market value of derivative liabilities	8,437	0
Balance June 30, 2014	$ 494,641

XML

STOCKHOLDERS' EQUITY (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Stock payables	$ 16,800		$ 16,800
Stock-based compensation expense recognized	0	0
Preferred stock, par value	$ 0.001		$ 0.001
Preferred stock, authorized shares	10,000,000		10,000,000
Common stock, par value	$ 0.001		$ 0.001
Common stock, authorized shares	500,000,000		500,000,000
First Hanover [Member]
Number of conversions		Four
Number of shares for conversions		7,422,489
Excercise price minimum		$ 0.0044
Excercise price maximum		$ 0.01287
Converted into principal amount		50,000
Accrued interest for Conversions		$ 250
Number of shares for conversion of principal amount		7,371,984
Number of shares for conversion of accrued interest		50,505

XML

DERIVATIVE FINANCIAL INSTRUMENTS (Details Narrative) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Derivative Financial Instruments Details Narrative
Current derivative liabilities	$ 494,641
Net change in fair value of the derivative liabilities	$ 8,437	$ 0

XML

STOCKHOLDERS' EQUITY (Details)	12 Months Ended
	Dec. 31, 2010
Stockholders Equity Details
Risk-free rate of interest	1.81%
Dividend yield	0.00%
Volatility of common stock	321.74%
Expected term	5 years 3 months 23 days

XML

DERIVATIVE FINANCIAL INSTRUMENTS (Tables)

6 Months Ended

Jun. 30, 2014

Derivative Financial Instruments Tables

Summary of Company’s derivative liabilities

The following table presents details of the Company’s derivative liabilities as of June 30, 2014 and December 31, 2013:

	Total
Balance December 31, 2013	$	-
Issuances in derivative value due to new security issuances of notes		486,204
Change in fair market value of derivative liabilities		8,437
Balance June 30, 2014	$	494,641

XML

RESTATEMENT OF FINANCIAL STATEMENTS (Details 1) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended	3 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Mar. 31, 2014 As filed [Member]	Mar. 31, 2014 Adjustments [Member]	Mar. 31, 2014 Restated [Member]
Revenues	$ 13,102	$ 47,596	$ 27,944	$ 99,256		$ 14,842		$ 14,842
Costs and Expenses:
Cost of Sales - Product Development	25,392	102,836	46,467	204,873		21,075		21,075
Cost of Sales - Licensing	1,728	5,444	4,193	7,196		2,465		2,465
General & Administrative	134,017	116,142	272,895	283,094		138,878		138,878
Sales & Marketing	19,063	1,577	20,809	6,233		1,746		1,746
Amortization & Depreciation	159,236	8,557	288,699	14,459		129,463	136,890	266,353
Total Expense	339,436	234,556	633,063	515,855		293,627	136,890	430,517
Net Ordinary Income/Loss						(278,785)	(136,890)	(415,675)
Interest Income/(Expense), net	44,279	24,210	84,614	45,384		(40,335)		(40,335)
Net Income/Loss before taxes						(319,120)	(136,890)	(456,010)
Income Tax Expense			1,267	1,276		1,267		1,267
Net Income/Loss	$ (389,315)	$ (211,170)	$ (846,592)	$ (527,867)	$ (3,546,692)	$ (320,387)	$ (136,890)	$ (457,277)
Weighted number of common shares outstanding-basic and fully diluted	99,938,817	77,724,404	99,938,817	75,083,738		99,938,817	99,938,817	99,938,817
Income/ (Loss) per share-basic and fully diluted	$ 0.00	$ 0.00	$ (0.01)	$ (0.01)		$ 0.00	$ 0.00	$ 0.00

XML

FIXED ASSETS (Tables)

6 Months Ended

Jun. 30, 2014

Fixed Assets Tables

Fixed assets, Net

Fixed Assets, Net, consists of the following at:

	June 30, 2014			December 31, 2013
Computer Equipment	$	5,347		$	5,347
Communications Equipment		830			830
Software		3,600			3,600
Accumulated Depreciation		(9,549	)		(8,949	)
Total Fixed Assets, Net	$	228		$	828

XML

INCOME TAXES (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Income Taxes Details Narrative
Net Operating Loss carryforward	$ 1,230,341	$ 833,504
Net operating loss carry forwards expire	through 2027

XML

ACCRUED ROYALTIES AND UNEARNED ROYALTIES (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Accrued Royalties And Unearned Royalties Details
Accrued Royalties	$ 403,511	$ 399,838
Unearned Royalties	207,264	211,946
Total Accrued and Unearned Royalties	$ 610,775	$ 611,784

XML

OTHER ASSETS (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Other Assets Details Narrative
Shares issued to unaffiliated third party	48,000
Amortization expense	$ 11,600	$ 11,600

XML

RELATED PARTY TRANSACTIONS (Details Narrative) (USD $)	6 Months Ended				6 Months Ended	12 Months Ended				12 Months Ended				12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 Craig Holland [Member]	Dec. 31, 2013 Craig Holland [Member]	Jun. 30, 2014 Mick Donahoo [Member]	Dec. 31, 2013 Mick Donahoo [Member]	Dec. 31, 2013 Holland Family Trust [Member]	Dec. 31, 2013 Holland Family Trust Convertible Note [Member]	Jun. 30, 2014 Holland Family Trust Convertible Note [Member]	Dec. 31, 2013 Craig Holland [Member]	Dec. 31, 2013 Mick Donahoo related party notes [Member]	Jun. 30, 2014 Mick Donahoo Convertible Note [Member]	Dec. 31, 2013 Mick Donahoo Convertible Note [Member]	Dec. 31, 2013 Craig Holland Convertible Note [Member]	Jun. 30, 2014 Craig Holland Convertible Note [Member]
Converted into principal amount							$ 100,000	$ 769,620			$ 55,250			$ 35,100
Accrued interest for Conversions						186,450	18,333	76,114		186,450	15,399			11,432
Convertible Note Payable - Related Party								964,067					70,649	46,532
Accrued interest			9,246	0	9,256	0		0	47,807			3,503	0	0	2,307
Excercise price minimum						$ 0.00092				$ 0.00092
Excercise price maximum						$ 0.0015				$ 0.0015
Amortized Debt discount	276,499	13,449	93,225		93,225
Remaining debt discount on convertible notes payable			$ 93,225	$ 186,450	$ 93,225	$ 186,450

XML

STOCKHOLDERS' EQUITY (Details 1) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Stockholders Equity Details 1
Number of Option and warrants, Outstanding at beginning of year	560,000	560,000
Number of Option and Warrants, Granted
Number of Option and Warrants, Exercised for cash
Number of Option and Warrants, Exercised for cashless
Number of Option and Warrants, Expired and cancelled
Number of Option and Warrants, Outstanding, end of period	560,000	560,000
Weighted Average Exercise Price, Outstanding at beginning of year	$ 0.10	$ 0.10
Weighted Average Exercise Price, Granted
Weighted Average Exercise Price, Exercised for cash
Weighted Average Exercise Price, Exercised for cashless
Weighted Average Exercise Price, Expired and cancelled
Weighted Average Exercise Price, Outstanding, end of period	$ 0.10	$ 0.10

XML

GOING CONCERN

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 3 - GOING CONCERN

As shown in the accompanying financial statements for the six month periods ending June 30, 2014 and June 30, 2013, we have incurred net losses of $846,592 and $527,867, respectively. As of June 30, 2014 our retained deficit is $6,605,395. During the period ended June 30, 2014 and the year ended December 3l, 2013, we experienced negative cash flows from operations largely due to our continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about our ability to continue as a going concern. Accordingly, we are currently evaluating our alternatives to secure financing sufficient to support the operating requirements of our current business plan, as well as continuing to execute our business strategy of distributing our game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.

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

XML

COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Commitments And Contingencies Details Narrative
Recognized a current liability related to technology transfer agreement	$ 18,000		$ 18,000
Amortized of debt discount	$ 0	$ 215

XML

STOCKHOLDERS' EQUITY (Tables)

6 Months Ended

Jun. 30, 2014

Stockholders Equity Tables

Weighted average stock option assumptions

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

Schedule of status of warrants and options issued

A summary of the status of the warrants and options issued by the Company as of June 30, 2014 and December 31, 2013 are as follows:

	June 30, 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

XML

DEBT (Tables)

6 Months Ended

Jun. 30, 2014

Debt Tables

Summary of debt

Debt consists of the following at:

	June 30, 2014			December 31, 2013
Notes Payable-Convertible *	$	1,454,147		$	1,454,147
Notes Payable-Convertible-Third Party		411,444			111,443
Discounts on Convertible Notes Payable *		(186,450	)		(372,900	)
Discounts on Convertible Notes Payable		(247,494	)		(48,493	)
Total Debt, Net of Discounts		1,431,647			1,144,197
Less: Current, Net of Discounts		1,431,647			1,144,197
Long Term, Net of Discounts	$	-		$	-

* - Related Party

XML

RESTATEMENT OF FINANCIAL STATEMENTS (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Dec. 31, 2012	Mar. 31, 2014 As filed [Member]	Mar. 31, 2014 Adjustments [Member]	Mar. 31, 2014 Restated [Member]
Current Assets
Cash	$ 21,590	$ 39,847	$ 11,739	$ 32,744	$ 42,841		$ 42,841
Accounts Receivable, Net (Net of Allowance of $5,600)	16,766	17,709			15,397		15,397
Deferred Financing Costs	884	1,285			948		948
Prepaid Royalties	5,446	5,964			5,670		5,670
Prepaid Expenses	588	935			484		484
Total Current Assets	45,274	65,740			65,340		65,340
Fixed Assets, Net (Net of depreciation of $9,249)	228	828			528		528
Other Long-term Assets, Net (Net of amortization of $40,580)	319	11,920			6,120		6,120
TOTAL ASSETS	45,821	78,488			71,988		71,988
Current Liabilities
Accounts Payable	103,772	107,301			103,411		103,411
Accrued Compensation	75,187	73,109			77,638		77,638
Accrued Royalties	403,511	399,838			402,011		402,011
Accrued Interest	84,759	151			40,480		40,480
Accrued Expenses	434	748			556		556
Technology Payable	18,000	18,000			18,000		18,000
Unearned Royalties	207,264	211,946			209,521		209,521
Convertible Note Payable, Related Party, Net (Net of debt discount of $279,674)	1,267,698	1,081,247			1,174,473		1,174,473
Convertible Note Payable (Net of debt discount of $168,356)	163,949	62,950			93,087	10,951	93,087
Derivative Liabilities	494,641					325,939	325,939
Total Current Liabilities	2,819,215	1,955,290			2,119,177	336,890	2,456,067
Total Liabilities	2,819,215	1,955,290			2,119,177	336,890	2,456,067
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	1
Common Stock $0.001 par value per share, 500,000,000 shares authorized, 99,938,817 and 99,938,817 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively	99,938	99,938			99,938		99,938
Additional Paid-In Capital	3,715,262	3,734,563			3,884,563	(200,000)	3,684,563
Preferred Stock Payable		30,700			30,700		30,700
Common Stock Payable	16,800	16,800			16,800		16,800
Retained Deficit	(6,605,395)	(5,758,803)			(6,079,190)	(136,890)	(6,216,080)
Total Equity (Deficit)	(2,773,394)	(1,876,802)		(755,602)	(2,047,189)	(336,890)	(2,384,079)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$ 45,821	$ 78,488			$ 71,988		$ 71,988

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DEBT (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Debt Details
Notes Payable-Convertible-related party	$ 1,454,147	$ 1,454,147
Notes Payable-Convertible-Third Party	411,444	111,443
Discounts on Convertible Notes Payable-related party	(186,450)	(372,900)
Discounts on Convertible Notes Payable	(247,494)	(48,493)
Total Debt, Net of Discounts	1,431,647	1,144,197
Less: Current, Net of Discounts	1,431,647	1,144,197
Long Term, Net of Discounts

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INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2014

Income Taxes Tables

Deferred tax asset

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

	June 30, 2014		December 31, 2013
Deferred Tax Asset	$	418,316	$	283,391
Valuation Allowances		(418,316)		(283,391)
Total:	$	-	$	-

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EARNINGS (LOSS) PER COMMON SHARE (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Loss Per Common Share Tables

Summary of earning loss per common share

Net loss per share for the period ending:

	June 30, 2014			June 30, 2013
Net Income/Loss	$	(846,592	)	$	(527,867	)
Weighted number of common shares outstanding – basic and fully diluted		99,938,817			75,083,738
Loss per share – basic and fully diluted	$	(0.01	)	$	(0.01	)

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

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.

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

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

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

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at June 30, 2014 and December 31, 2013 were insured. At June 30, 2014 and December 31, 2013, there were no cash equivalents.

Allowances for Returns, Price Protection, and Doubtful Accounts

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

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $5,600 and $5,600, respectively.

 
Property and Equipment

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

Concentrations of Credit Risk, Major Customers and Major Vendors

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

During the period ended June 30, 2014, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 28.27%, Apple– 19.48% and Exent – 13.57% each respectively. During the period ended June 30, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 74.94%, and Exent – 12.58% each respectively.

At June 30, 2014, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 73.98%, Boonty – 13.73%, Denda – 11.02% and Apple – 10.21%. At December 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 50.4%, Big Fish Games – 10.7%.

Income Taxes

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

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

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

Foreign Currency Translation

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

Accounting for Stock-Based Compensation

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

Stock-based compensation expense recognized in the Company’s statements of operations for the periods ended June 30, 2014, and 2013, were $0 and $0, respectively.

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments

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

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

· Level one — Quoted market prices in active markets for identical assets or liabilities;

· Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

· Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining the category in which an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each period.

Use of Estimates

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

Research and Development Costs

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

Software Development Costs

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

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

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

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

At June 30, 2014, and December 31, 2013, current and long-term capitalized software development costs on the balance sheet were $0 and $0, respectively.

We recognized amortization expense of $0 and $193,273 for the periods ended June 30, 2014 and 2013, respectively.

Intellectual Property Licenses (Prepaid Royalties)

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

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

As of June 30, 2014 and December 31, 2013, prepaid royalties (or prepaid licensing fees) were $5,446, and $5,964, respectively.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

The fair value of the derivatives is estimated using a multinomial lattice model. The model is based on a probability weighted discounted cash flow model of future projections of the various potential outcomes. Some of the key assumptions include the likelihood of future financing, stock price volatility, and discount rates.

See Note 15 for detailed information on the Company’s derivative liabilities.

Recent Accounting Pronouncements

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

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.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Of Financial Instruments Tables

Fair values of assets and liabilities measured on a non-recurring basis

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

	Carrying Value		Fair Value Measurements at June 30, 2014
	June 30, 2014		Level 1		Level 2		Level 3		Losses (Gains)
Liabilities:
Derivatives	$	494,641	$	-	$	-	$	494,641	$	8,437

		Fair Value Measurements at December 31, 2013
Carrying Value December, 31, 2013		Level 1		Level 2		Level 3		Losses (Gains)
$	-	$	-	$	-	$	-	$	-

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ACCRUED COMPENSATION (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Accrued Compensation Details
Accrued Vacation	$ 75,187	$ 73,109
Total Accrued Compensation	$ 75,187	$ 73,109

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $)	Jun. 30, 2014
Level 1 [Member]
Derivatives
Level 2 [Member]
Derivatives
Level 3 [Member]
Derivatives	494,641
Carrying Value [Member]
Derivatives	494,641
Derivatives Losses (Gains)	$ 8,437

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BALANCE SHEETS (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013	Dec. 31, 2012
Current Assets
Cash	$ 21,590	$ 39,847	$ 11,739	$ 32,744
Accounts Receivable, Net (Net of Allowance of $5,600 and $5,600 as of June 30, 2014 and December 31, 2013, respectively)	16,766	17,709
Deferred Financing Costs	884	1,285
Prepaid Royalties	5,446	5,964
Prepaid Expenses	588	935
Total Current Assets	45,274	65,740
Fixed Assets, Net (Net of depreciation of $9,549 and $8,949 as of June 30, 2014 and December 31, 2013, respectively)	228	828
Other Long-term Assets, Net (Net of amortization of $8732 and $75732 as of June 30, 2014 and December 31, 2013 respectively)	319	11,920
TOTAL ASSETS	45,821	78,488
Current Liabilities
Accounts Payable	103,772	107,301
Accrued Compensation	75,187	73,109
Accrued Royalties	403,511	399,838
Accrued Interest	84,759	151
Accrued Expenses	434	748
Technology Payable	18,000	18,000
Unearned Royalties	207,264	211,946
Convertible Note Payable, Related Party, Net (Net of debt discount of $186,450 and $372,900 as of June 30, 2014 and December 31, 2013, respectively)	1,267,698	1,081,247
Convertible Note Payable (Net of debt discount of $247,494 and $48,493 as of June 30, 2014 and December 31, 2013, respectively)	163,949	62,950
Derivative Liabilities	494,641
Total Current Liabilities	2,819,215	1,955,290
Total Liabilities	2,819,215	1,955,290
Equity (Deficit)
Preferred Stock $0.001 par value per share, 10,000,000 shares authorized, 1,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively	1
Common Stock $0.001 par value per share, 500,000,000 shares authorized, 99,938,817 and 99,938,817 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)	99,938	99,938
Additional Paid-In Capital	3,715,262	3,734,563
Preferred Stock Payable		30,700
Common Stock Payable	16,800	16,800
Retained Deficit	(6,605,395)	(5,758,803)
Total Equity (Deficit)	(2,773,394)	(1,876,802)		(755,602)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$ 45,821	$ 78,488

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DEBT (Details Narrative) (USD $)	6 Months Ended				6 Months Ended	12 Months Ended			6 Months Ended		6 Months Ended									12 Months Ended			12 Months Ended				12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 Craig Holland [Member]	Dec. 31, 2013 Craig Holland [Member]	Jun. 30, 2014 Mick Donahoo [Member]	Dec. 31, 2013 Mick Donahoo [Member]	Dec. 31, 2013 Robert Cowdell [Member]	Jun. 30, 2014 Robert Cowdell [Member]	Jun. 30, 2014 Accredited Investor Note [Member]	Dec. 31, 2013 Accredited Investor Note [Member]	Jun. 30, 2014 Accredited Investor Note 2 [Member]	Jun. 30, 2013 Accredited Investor Note 2 [Member]	Jun. 30, 2014 Accredited Investor Note 3 [Member]	Jun. 30, 2014 Accredited Investor Note 4 [Member]	Jun. 30, 2014 Accredited Investor Note 5 [Member]	Jun. 30, 2014 Accredited Investor Note 6 [Member]	Jun. 30, 2014 Accredited Investor Note 7 [Member]	Jun. 30, 2014 Third Party Convertible Notes [Member]	Dec. 31, 2013 Third Party Convertible Notes [Member]	Dec. 31, 2013 Holland Family Trust [Member]	Dec. 31, 2013 Holland Family Trust Convertible Note [Member]	Jun. 30, 2014 Holland Family Trust Convertible Note [Member]	Dec. 31, 2013 Craig Holland [Member]	Dec. 31, 2013 Mick Donahoo related party notes [Member]	Jun. 30, 2014 Mick Donahoo Convertible Note [Member]	Dec. 31, 2013 Mick Donahoo Convertible Note [Member]	Dec. 31, 2013 Craig Holland Convertible Note [Member]	Jun. 30, 2014 Craig Holland Convertible Note [Member]
Amortized Debt discount	$ 276,499	$ 13,449	$ 93,225		$ 93,225				$ 24,247		$ 21,332	$ 0	$ 16,113	$ 13,151	$ 9,041	$ 5,479	$ 685
Total discounts on convertible notes payable			93,225	186,450	93,225	186,450			25,753		23,161		28,443	36,849	40,959	44,521	49,315
Accrued interest			9,246	0	9,256	0	0	3,047	2,630	151	2,342		1,808	1,315	904	548	55	12,347	151		0	47,807			3,503	0	0	2,307
Interest expense	84,707
Total interest expense, including beneficial conversion feature amortization	163,698	26,571
Beneficial conversion feature amortization	123,363	5,397
Excercise price minimum						$ 0.00092																	$ 0.00092
Excercise price maximum						$ 0.0015																	$ 0.0015
Converted into principal amount							55,429													100,000	769,620			55,250			35,100
Accrued interest for Conversions						186,450	6,014													18,333	76,114		186,450	15,399			11,432
Convertible Note Payable - Related Party																					$ 964,067					$ 70,649	$ 46,532

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Condensed Statement of Shareholders' Equity (Deficit) (USD $)	Convertible Preferred Stock	Common Stock	Common Stock Payable	Preferred Stock Payable	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, Amount at Dec. 31, 2012		$ 70,302	$ 16,800		$ 1,369,407	$ (2,212,111)	$ (755,602)
Beginning Balance, Shares at Dec. 31, 2012		70,301,915
Stock issued for Conversion of Third Party Debt, Amount		27,605			43,895		71,500
Stock issued for Conversion of Third Party Debt, Shares		27,605,014
Stock issued for Conversion of Third Party Accrued Interest, Amount		2,031			(291)		1,740
Stock issued for Conversion of Third Party Accrued Interest, Shares		2,031,888
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)
Ending Balance, Amount at Dec. 31, 2013		99,938	16,800	30,700	3,684,563	(5,753,339)	(1,876,802)
Ending Balance, Shares at Dec. 31, 2013		99,938,817
Beneficial Conversion Feature					(50,000)		(50,000)
Issuance of preferred shares for preferred stock payable,Amount	1			(30,700)	30,699
Issuance of preferred shares for preferred stock payable,Shares	1,000
Net Loss						(846,592)	(846,592)
Ending Balance, Amount at Jun. 30, 2014	$ 1	$ 99,938	$ 16,800		$ 3,715,262	$ (6,605,395)	$ (2,773,394)
Ending Balance, Shares at Jun. 30, 2014	1,000	99,938,817

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $)	6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Insures Cash balance with Federal Deposit Insurance Corporation	$ 250,000		$ 250,000
Cash equivalents	0		0
Allowance for doubtful accounts	5,600		5,600
Stock-based compensation expense	0	0
Capitalized software development costs	0		0
Amortization expense	0	193,273
Prepaid royalties	$ 5,446		$ 5,964
Big Fish Games [Member]
Revenue from major primary distributors, percentage	28.27%	74.94%
Account receivable from major primary distributors and partners, percentage			10.70%
Apple [Member]
Revenue from major primary distributors, percentage	19.48%
Account receivable from major primary distributors and partners, percentage	10.21%
Exent [Member]
Revenue from major primary distributors, percentage	13.57%	12.58%
Account receivable from major primary distributors and partners, percentage	73.98%		50.40%
Boonty [Member]
Account receivable from major primary distributors and partners, percentage	13.73%
Denda [Member]
Account receivable from major primary distributors and partners, percentage	11.02%

XML

RESTATEMENT OF FINANCIAL STATEMENTS

6 Months Ended

Jun. 30, 2014

Restatement Of Financial Statements

NOTE 16 - RESTATEMENT OF FINANCIAL STATEMENTS

On or about August 11, 2014, management and the Company concluded that the Company should restate derivative related charges in connection with convertible debt issued during the first quarter of 2014. The Company’s method of valuing the convertible debt did not include recognition of derivative liabilities associated with the issuance of the convertible debt.

The cumulative effect of this change through March 31, 2014 is a $10,951 increase in convertible debts payable, a $325,939 increase in derivatives, a $336,890 increase in current and total liabilities, a decrease of $200,000 in additional paid-in capital, and a $136,890 increase in the Company’s net loss. The change had no effect on the Company's reported cash flows. Unaudited Tables detailing the effect of the error on the Company’s previously filed financial statements for the quarter ended March 31, 2014 are included below.

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

MARCH 31, 2014 BALANCE SHEET

	As filed			Adjustments			Restated
ASSETS
Current Assets
Cash	$	42,841		$	-		$	42,841
Accounts Receivable, Net		15,397			-			15,397
(Net of Allowance of $5,600)
Deferred Financing Costs		948			-			948
Prepaid Royalties		5,670			-			5,670
Prepaid Expenses		484			-			484
Total Current Assets		65,340			-			65,340
Fixed Assets, Net		528			-			528
(Net of depreciation of $9,249)
Other Long-term Assets, Net		6,120			-			6,120
(Net of amortization of $40,580)
TOTAL ASSETS	$	71,988		$	-		$	71,988
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable	$	103,411		$	-			103,411
Accrued Compensation		77,638			-			77,638
Accrued Royalties		402,011			-			402,011
Accrued Interest		40,480			-			40,480
Accrued Expenses		556			-			556
Technology Payable		18,000			-			18,000
Unearned Royalties		209,521			-			209,521
Convertible Note Payable, Related Party, Net		1,174,473			-			1,174,473
(Net of debt discount of $279,674)
Convertible Note Payable		93,087			10,951			93,087
(Net of debt discount of $168,356)
Derivatives		-			325,939			325,939
Total Current Liabilities		2,119,177			336,890			2,456,067
Total Liabilities		2,119,177			336,890			2,456,067
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, 500,000,000 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			(200,000	)		3,684,563
Preferred Stock Payable		30,700			-			30,700
Common Stock Payable		16,800			-			16,800
Retained Deficit		(6,079,190	)		(136,890	)		(6,216,080	)
Total Equity (Deficit)		(2,047,189	)		(336,890	)		(2,384,079	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	71,988		$	-		$	71,988

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2014

(Unaudited)

	As Filed			Adjustments			Restated
Revenues	$	14,842		$	-		$	14,842
Costs and Expenses:
Cost of Sales - Product Development		21,075			-			21,075
Cost of Sales - Licensing		2,465			-			2,465
General & Administrative		138,878			-			138,878
Sales & Marketing		1,746			-			1,746
Amortization & Depreciation		129,463			136,890			266,353
Total Expense		293,627			136,890			430,517
Net Ordinary Income/Loss		(278,785	)		(136,890	)		(415,675	)
Interest Income/(Expense), net		(40,335	)		-			(40,335	)
Net Income/Loss before taxes		(319,120	)		(136,890	)		(456,010	)
Income Tax Expense		1,267			-			1,267
Net Income/Loss	$	(320,387	)		(136,890	)	$	(457,277	)
Weighted number of common shares outstanding-basic and fully diluted		99,938,817			99,938,817			99,938,817
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)

XML

GOING CONCERN (Details Narrative) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Going Concern Details Narrative
Incurred net losses	$ 389,315	$ 211,170	$ 846,592	$ 527,867	$ 3,546,692
Retained deficit	$ 6,605,395		$ 6,605,395

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2014

Summary Of Significant Accounting Policies 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.

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

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

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

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at June 30, 2014 and December 31, 2013 were insured. At June 30, 2014 and December 31, 2013, there were no cash equivalents.

Allowances for Returns, Price Protection, and Doubtful Accounts

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

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $5,600 and $5,600, respectively.

Property and Equipment

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

Concentrations of Credit Risk, Major Customers and Major Vendors

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

During the period ended June 30, 2014, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 28.27%, Apple– 19.48% and Exent – 13.57% each respectively. During the period ended June 30, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 74.94%, and Exent – 12.58% each respectively.

At June 30, 2014, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 73.98%, Boonty – 13.73%, Denda – 11.02% and Apple – 10.21%. At December 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 50.4%, Big Fish Games – 10.7%.

Income Taxes

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

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

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

Foreign Currency Translation

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

Accounting for Stock-Based Compensation

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

Stock-based compensation expense recognized in the Company’s statements of operations for the periods ended June 30, 2014, and 2013, were $0 and $0, respectively.

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments

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

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

· Level one — Quoted market prices in active markets for identical assets or liabilities;

· Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

· Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining the category in which an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each period.

Use of Estimates

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

Research and Development Costs

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

Software Development Costs

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

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

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

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

At June 30, 2014, and December 31, 2013, current and long-term capitalized software development costs on the balance sheet were $0 and $0, respectively.

We recognized amortization expense of $0 and $193,273 for the periods ended June 30, 2014 and 2013, respectively.

Intellectual Property Licenses (Prepaid Royalties)

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

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

As of June 30, 2014 and December 31, 2013, prepaid royalties (or prepaid licensing fees) were $5,446, and $5,964, respectively.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

The fair value of the derivatives is estimated using a multinomial lattice model. The model is based on a probability weighted discounted cash flow model of future projections of the various potential outcomes. Some of the key assumptions include the likelihood of future financing, stock price volatility, and discount rates.

See Note 15 for detailed information on the Company’s derivative liabilities.

Recent Accounting Pronouncements

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

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.

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THE COMPANY

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

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.

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BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Current Assets
Accounts Receivable, net of allowance	$ 5,600	$ 5,600
Fixed Assets, net of depreciation	9,549	8,949
Other Long-term Assets, net of amortization	87,332	75,732
Current Liabilities
Convertible Note Payable, Related Party, net of debt discount	186,450	372,900
Convertible Note Payable, net of debt discount	$ 247,494	$ 48,493
Equity (Deficit)
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	10,000,000	10,000,000
Preferred stock, issued shares	1,000	1,000
Preferred stock, outstanding shares	1,000	1,000
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized shares	500,000,000	500,000,000
Common stock, issued shares	99,938,817	99,938,817
Common stock, outstanding shares	99,938,817	99,938,817

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INCOME TAXES

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 11 - INCOME TAXES

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

Income tax expense consists 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 June 30, 2014 is approximately $1,230,341. 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:

	June 30, 2014		December 31, 2013
Deferred Tax Asset	$	418,316	$	283,391
Valuation Allowances		(418,316)		(283,391)
Total:	$	-	$	-

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 10, 2014
Document And Entity Information
Entity Registrant Name	FREEZE TAG, INC.
Entity Central Index Key	0001485074
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		99,938,817
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014

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EARNINGS (LOSS) PER COMMON SHARE

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

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 June 30, 2014 and June 30, 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:

	June 30, 2014			June 30, 2013
Net Income/Loss	$	(846,592	)	$	(527,867	)
Weighted number of common shares outstanding – basic and fully diluted		99,938,817			75,083,738
Loss per share – basic and fully diluted	$	(0.01	)	$	(0.01	)

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STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statements Of Operations
Revenues	$ 13,102	$ 47,596	$ 27,944	$ 99,256
Costs and Expenses:
Cost of Sales - Product Development	25,392	102,836	46,467	204,873
Cost of Sales - Licensing	1,728	5,444	4,193	7,196
General & Administrative	134,017	116,142	272,895	283,094
Sales & Marketing	19,063	1,577	20,809	6,233
Amortization & Depreciation	159,236	8,557	288,699	14,459
Total Costs and Expenses	339,436	234,556	633,063	515,855
Operating Income/(Loss)	(326,334)	(186,960)	(605,119)	(416,599)
Interest Income/(Expense), net	(44,279)	(24,210)	(84,614)	(45,384)
Loss on Debt Modification				(64,608)
Derivative Expense	(18,702)		(155,592)
Income/Loss before taxes	(389,315)	(211,170)	(845,325)	(526,591)
Income Tax Expense			1,267	1,276
Net Income/Loss	$ (389,315)	$ (211,170)	$ (846,592)	$ (527,867)
Weighted number of common shares outstanding-basic and fully diluted	99,938,817	77,724,404	99,938,817	75,083,738
Income/ (Loss) per share-basic and fully diluted	$ 0.00	$ 0.00	$ (0.01)	$ (0.01)

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ACCRUED COMPENSATION

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 6 - ACCRUED COMPENSATION

Accrued Compensation Consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Vacation	$	75,187	$	73,109
Total	$	75,187	$	73,109

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

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.

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

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the debt discount was amortized; the remaining balance of the debt discount at June 30, 2014 was $93,225. For the periods ended June 30, 2014 and June 30, 2013 accrued interest expense was $9,246 and $0 respectively.

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FIXED ASSETS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 5 - FIXED ASSETS

Fixed Assets, Net, consists of the following at:

	June 30, 2014			December 31, 2013
Computer Equipment	$	5,347		$	5,347
Communications Equipment		830			830
Software		3,600			3,600
Accumulated Depreciation		(9,549	)		(8,949	)
Total Fixed Assets, Net	$	228		$	828

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets. All assets are currently depreciated over three years. For the six month periods ended June 30, 2014, and 2013, depreciation expense was $600 and $1,011, respectively.

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SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 17 - SUBSEQUENT EVENTS

On July 15, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for additional consideration of $50,000 (Accredited Investor #2 Note 2). The Accredited Investor #2 Note 2 has a maturity date of July 15, 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.

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RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 13 - RELATED PARTY TRANSACTIONS

Convertible Note Payable – Related Party

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

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

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

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $47,807 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.

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

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and 186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and 186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,256 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Mick Donahoo Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $3,503 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $2,307 and $0, respectively, of accrued interest related to this Note.

Preferred Stock Payable – Related Party

On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland. During the six months ended June 30, 2014, the preferred shares were issued, eliminating the preferred stock payable.

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DEBT

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 9 - DEBT

Debt consists of the following at:

	June 30, 2014			December 31, 2013
Notes Payable-Convertible *	$	1,454,147		$	1,454,147
Notes Payable-Convertible-Third Party		411,444			111,443
Discounts on Convertible Notes Payable *		(186,450	)		(372,900	)
Discounts on Convertible Notes Payable		(247,494	)		(48,493	)
Total Debt, Net of Discounts		1,431,647			1,144,197
Less: Current, Net of Discounts		1,431,647			1,144,197
Long Term, Net of Discounts	$	-		$	-

* - Related Party

Convertible Note Payable

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

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

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

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

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

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

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

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

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

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

On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the “Convertible Cowdell Note”) into a convertible note. The Convertible Cowdell Note has a maturity date of December 31, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The Convertible Cowdell Note had accrued interest of $3,047 as of June 30, 2014 and $0 as of December 31, 2013.

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

On December 20, 2013, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 1). The Accredited Investor Note 1 has a maturity date of December 20, 2014, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued at $50,453, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $24,247 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $25,753. The Accredited Investor Note 1 had accrued interest of $2,630 as of June 30, 2014 and $151 as of December 31, 2013.

On January 6, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 2). The Accredited Investor Note 2 has a maturity date of January 6, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. During the period ended June 30, 2014, $21,332 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $23,161. The Accredited Investor Note 2 had accrued interest of $2,342 as of June 30, 2014.

On February 18, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 3). The Accredited Investor Note 3 has a maturity date of February 18, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of February 18, 2014 at $44,556, of which all was recorded as a debt discount. During the period ended June 30, 2014, $16,113 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $28,443. The Accredited Investor Note 3 had accrued interest of $1,808 as of June 30, 2014.

On March 26, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 4). The Accredited Investor Note 4 has a maturity date of March 26, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $13,151 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $36,849. The Accredited Investor Note 4 had accrued interest of $1,315 as of June 30, 2014.

On April 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 5). The Accredited Investor Note 5 has a maturity date of April 25, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $9,041 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $40,959. The Accredited Investor Note 5 had accrued interest of $904 as of June 30, 2014.

On May 21, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor”) for consideration of $50,000 (Accredited Investor Note 6). The Accredited Investor Note 6 has a maturity date of May 21, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $5,479 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $44,521. The Accredited Investor Note 6 had accrued interest of $548 as of June 30, 2014.

On June 25, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for consideration of $50,000 (Accredited Investor #2 Note 1). The Accredited Investor #2 Note 1 has a maturity date of June 25, 2015, and is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year. The note also includes conversion price reset features which are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability.

The derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the period ended June 30, 2014, $685 was amortized from the debt discount. The debt discount had a balance at June 30, 2014 of $49,315. The Accredited Investor Note 6 had accrued interest of $55 as of June 30, 2014.

Total Accrued interest for the above third party convertible notes is $12,347 and $151 as of June 30, 2014 and December 31, 2013, respectively.

Convertible Note Payable – Related Party

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

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

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

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $964,067 before and after modification to calculate the loss on modification of $1,529,210. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $2,493,277 which after deducting the face value of the note of $964,067 resulted in the loss on modification of $1,529,210. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $47,807 and $0, respectively, of accrued interest related to the Holland Family Trust Convertible Note.

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

The Company evaluated the Accrued Salary Note to Craig Holland and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Accrued Salary Note to Mick Donahoo and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00092 below the market price on December 31, 2013 of $0.0015 provided a value of $186,450. During the six month period ended June 30, 2014, $93,225 of the discount was amortized; at June 30, 2014 and December 31, 2013, the remaining debt discount was $93,225 and $186,450, respectively. As of June 30, 2014 and December 31, 2013, there was $9,246 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Mick Donahoo Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $70,649 before and after modification to calculate the loss on modification of $112,064. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $182,713 which after deducting the face value of the note of $70,649 resulted in the loss on modification of $112,064. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $3,503 and $0, respectively, of accrued interest related to this Note.

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

The Company evaluated the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company. The Company compared the value of the debt modified of $46,532 before and after modification to calculate the loss on modification of $73,809. This value was calculated by comparing the value of the shares if the note was converted on the modification date to the face value of the note. The value of the shares was $120,341 which after deducting the face value of the note of $46,532 resulted in the loss on modification of $73,809. The value of the shares the note was convertible into was calculated by using the formula above on the modification date as if it was the final conversion date. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash. As of June 30, 2014 and December 31, 2013, there was $2,307 and $0, respectively, of accrued interest related to this Note.

The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $361,112 and $58,833 for the periods ended June 30, 2014, and 2013, respectively. However, the beneficial conversion feature amortization of $276,498 and $13,449 recorded during the periods ended June 30, 2014 and 2013, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.

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ACCRUED ROYALTIES AND UNEARNED ROYALTIES

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 7 - ACCRUED ROYALTIES AND UNEARNED ROYALTIES

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

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

Accrued and Unearned Royalties consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Royalties	$	403,511	$	399,838
Unearned Royalties		207,264		211,946
Total	$	610,775	$	611,784

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Leases

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

Technology Payable

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

As of June 30, 2014 and December 31, 2013, the Company recognized a current liability of $18,000 and $18,000, respectively. During the six months ended June 30, 2014 and 2013, the Company recorded amortization of the debt discount of $0 and $215, respectively.
 

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STOCKHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 10 - STOCKHOLDERS' EQUITY

Stock Issuance

The Company is authorized to issue up to 500,000,000 shares of its $.001 par value common stock, and up to 10,000,000 shares of its $.001 par value preferred stock.

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

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

During the period ended June 30, 2013, four conversions of the First Hanover Note, totaling 7,422,489 shares, occurred between prices of $0.0044 to $0.01287 per share, in order to convert $50,000 (7,371,984 shares) in principal and $250 (50,505 shares) in accrued interest all in accordance with the Variable Conversion Price. As a result of these transactions, the note was considered paid off during March 2013. There was no accrued interest remaining after the conversions.

On December 18, 2013, the Company authorized 1,000 shares of Series A Preferred Stock to be granted to Craig Holland as additional stock based compensation. The 1,000 shares grant the holder to have the right to vote on all shareholder matters equal to fifty-one percent of the total vote. The Series A shares were valued according to the additional voting rights assigned. The value assigned to the voting rights was derived from a model generated by a valuation expert that specializes in valuing equity instruments with no quoted markets. The value assigned to the Series A shares was $30,700 and was recorded on the grant date as a preferred stock payable to Craig Holland. During the six months ended June 30, 2014, the preferred shares were issued, eliminating the preferred stock payable.

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 June 30, 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

Stock-based compensation expense recognized in our statement of operations for the period ended June 30, 2014 and June 30, 2013, was $0 and $0, respectively.

The Company did not grant any warrants during the period ended June 30, 2014 or the year ended December 31, 2013.

Exercising of Stock Warrants and Options

For the period ended June 30, 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 June 30, 2014 and December 31, 2013 are as follows:

	June 30, 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

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RESTATEMENT OF FINANCIAL STATEMENTS (Tables)

6 Months Ended

Jun. 30, 2014

Restatement Of Financial Statements

Financial statements

Unaudited Tables detailing the effect of the error on the Company’s previously filed financial statements for the quarter ended March 31, 2014 are included below.

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

MARCH 31, 2014 BALANCE SHEET

	As filed			Adjustments			Restated
ASSETS
Current Assets
Cash	$	42,841		$	-		$	42,841
Accounts Receivable, Net		15,397			-			15,397
(Net of Allowance of $5,600)
Deferred Financing Costs		948			-			948
Prepaid Royalties		5,670			-			5,670
Prepaid Expenses		484			-			484
Total Current Assets		65,340			-			65,340
Fixed Assets, Net		528			-			528
(Net of depreciation of $9,249)
Other Long-term Assets, Net		6,120			-			6,120
(Net of amortization of $40,580)
TOTAL ASSETS	$	71,988		$	-		$	71,988
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable	$	103,411		$	-			103,411
Accrued Compensation		77,638			-			77,638
Accrued Royalties		402,011			-			402,011
Accrued Interest		40,480			-			40,480
Accrued Expenses		556			-			556
Technology Payable		18,000			-			18,000
Unearned Royalties		209,521			-			209,521
Convertible Note Payable, Related Party, Net		1,174,473			-			1,174,473
(Net of debt discount of $279,674)
Convertible Note Payable		93,087			10,951			93,087
(Net of debt discount of $168,356)
Derivatives		-			325,939			325,939
Total Current Liabilities		2,119,177			336,890			2,456,067
Total Liabilities		2,119,177			336,890			2,456,067
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, 500,000,000 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			(200,000	)		3,684,563
Preferred Stock Payable		30,700			-			30,700
Common Stock Payable		16,800			-			16,800
Retained Deficit		(6,079,190	)		(136,890	)		(6,216,080	)
Total Equity (Deficit)		(2,047,189	)		(336,890	)		(2,384,079	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	71,988		$	-		$	71,988

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2014

(Unaudited)

	As Filed			Adjustments			Restated
Revenues	$	14,842		$	-		$	14,842
Costs and Expenses:
Cost of Sales - Product Development		21,075			-			21,075
Cost of Sales - Licensing		2,465			-			2,465
General & Administrative		138,878			-			138,878
Sales & Marketing		1,746			-			1,746
Amortization & Depreciation		129,463			136,890			266,353
Total Expense		293,627			136,890			430,517
Net Ordinary Income/Loss		(278,785	)		(136,890	)		(415,675	)
Interest Income/(Expense), net		(40,335	)		-			(40,335	)
Net Income/Loss before taxes		(319,120	)		(136,890	)		(456,010	)
Income Tax Expense		1,267			-			1,267
Net Income/Loss	$	(320,387	)		(136,890	)	$	(457,277	)
Weighted number of common shares outstanding-basic and fully diluted		99,938,817			99,938,817			99,938,817
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)

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EARNINGS (LOSS) PER COMMON SHARE (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Earnings Loss Per Common Share Details
Net Income/Loss	$ (389,315)	$ (211,170)	$ (846,592)	$ (527,867)	$ (3,546,692)
Weighted number of common shares outstanding - basic and fully diluted	99,938,817	77,724,404	99,938,817	75,083,738
Loss per share - basic and fully diluted	$ 0.00	$ 0.00	$ (0.01)	$ (0.01)

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DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 9 under Debt, the Company issued convertible notes payable that contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity’s Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions.

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At June 30, 2014 and December 31, 2013, the Company recorded current derivative liabilities of $494,641 and $0. The net change in fair value of the derivative liabilities for the six months ended June 30, 2014 and June 30, 2014 was a loss $8,437 and $0, respectively, which were reported as other income/(expense) in the statements of operations.

The following table presents details of the Company’s derivative liabilities as of June 30, 2014 and December 31, 2013:

	Total
Balance December 31, 2013	$	-
Issuances in derivative value due to new security issuances of notes		486,204
Change in fair market value of derivative liabilities		8,437
Balance June 30, 2014	$	494,641

The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.

Key inputs and assumptions used in valuing the Company’s derivative liabilities are as follows for issuances of notes:

● Stock prices on all measurement dates were based on the fair market value

● Down round protection is based on the subsequent issuance of common stock at prices less than the conversion feature

● The probability of future financing was estimated at 100%

● Computed volatility ranging from 335% to 357%

See Note 14 for a discussion of fair value measurements.

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ACCRUED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2014

Accrued Compensation Tables

Accrued Compensation

Accrued Compensation Consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Vacation	$	75,187	$	73,109
Total	$	75,187	$	73,109

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INCOME TAXES (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Income Taxes Details
Deferred Tax Asset	$ 418,316	$ 283,391
Valuation Allowances	(418,316)	(283,391)
Total:

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ACCRUED COMPENSATION (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Craig Holland [Member]
Accrued salaries converted into convertible note		$ 186,450
Conversion price		$ 0.00092
Market price		$ 0.0015
Debt discount amortized	93,225
Remaining balance of debt discount	93,225
Accrued interest expense	9,246		0
Mick Donahoo [Member]
Accrued salaries converted into convertible note		186,450
Conversion price		$ 0.00092
Market price		$ 0.0015
Debt discount amortized	93,225
Remaining balance of debt discount	93,225
Accrued interest expense	$ 9,246		$ 0

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STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net Loss	$ (846,592)	$ (527,867)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense	600	1,011
Amortization expense	11,600	11,815
Loss on debt modification		64,608
Amortization of capitalized production costs		193,273
Fair value of derivatives adjustments	155,592
Amortization on debt discount	276,499	13,449
Changes in operating assets and liabilities:
Accounts receivable	943	16,734
Prepaid Royalties	(365)	669
Prepaid Expenses	1,632	1,344
Capitalized Production Costs		(199,377)
Accounts Payable	(3,529)	(2,457)
Accrued interest - third party	12,498	2,475
Accrued interest - related party	72,110	37,903
Accrued Expenses	5,437	149,722
Unearned royalties	(4,682)	(24,477)
Net cash used by operating activities	(318,257)	(261,175)
Cash flows from Investing activities:
Cash used for purchasing fixed assets
Net cash used by investing activities
Cash flows from financing activities:
Borrowings of debt - third party	300,000	71,500
Borrowings of debt - related party		168,670
Net cash provided (used) by financing activities	300,000	240,170
Net decrease in cash	(18,257)	(21,005)
Cash at the beginning of the period	39,847	32,744
Cash at the end of the period	21,590	11,739
Non-cash transactions
Conversion of debt to common shares - third party		50,000
Conversion of accrued interest to common shares - third party		250
Conversion of accrued interst to debt - related party		5,429
Debt discount due to derivative	289,049
Issuance of preferred shares for preferred stock payable	30,700
Beneficial conversion feature		$ 21,500

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OTHER ASSETS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 4 - OTHER ASSETS

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment. The common stock is payable in eight quarterly installments of 12,000 shares per installment. As of June 30, 2014, the Company has issued a total of 48,000 shares to the unaffiliated third party and reduced common stock payable accordingly.

The game engine was amortized on a straight-line basis over the useful life of three years. For the periods ended June 30, 2014 and June 30, 2013 amortization expense was $11,600 and $11,600 respectively.

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ACCRUED ROYALTIES AND UNEARNED ROYALTIES (Tables)

6 Months Ended

Jun. 30, 2014

Accrued Royalties And Unearned Royalties Tables

Accrued and Unearned Royalties

Accrued and Unearned Royalties consists of the following at:

	June 30, 2014		December 31, 2013
Accrued Royalties	$	403,511	$	399,838
Unearned Royalties		207,264		211,946
Total	$	610,775	$	611,784

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FIXED ASSETS (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Fixed Assets Details
Computer Equipment	$ 5,347	$ 5,347
Communications Equipment	830	830
Software	3,600	3,600
Accumulated Depreciation	(9,549)	(8,949)
Total Fixed Assets, Net	$ 228	$ 828

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FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

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		Fair Value Measurements at June 30, 2014
	June 30, 2014		Level 1		Level 2		Level 3		Losses (Gains)
Liabilities:
Derivatives	$	494,641	$	-	$	-	$	494,641	$	8,437

		Fair Value Measurements at December 31, 2013
Carrying Value December, 31, 2013		Level 1		Level 2		Level 3		Losses (Gains)
$	-	$	-	$	-	$	-	$	-

The Company believes that the market rate of interest as of June 30, 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 June 30, 2014 and December 31, 2013.