Freeze Tag, Inc. - Quarter Report: 2014 September (Form 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 September 30, 2014

¨ 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

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 ¨

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 ¨

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.

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

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 November 10, 2014, there were 184,518,250 shares of common stock, $0.001 par value, issued and outstanding.

FREEZE TAG, INC.

TABLE OF CONTENTS 

QUARTER ENDED SEPTEMBER 30, 2014

PART I – FINANCIAL INFORMATION

The accompanying condensed 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 condensed 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 September 30, 2014 are not necessarily indicative of the results of operations for the full year. These condensed 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.

FREEZE TAG, INC. 

(A DELAWARE CORPORATION) 

CONDENSED BALANCE SHEETS

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

FREEZE TAG, INC. 

(A DELAWARE CORPORATION) 

CONDENSED STATEMENTS OF OPERATIONS 

(Unaudited)

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

FREEZE TAG, INC. 

(A DELAWARE CORPORATION) 

CONDENSED STATEMENTS OF CASH FLOWS 

(Unaudited)

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

FREEZE TAG, INC. 

(A DELAWARE CORPORATION) 

Notes to Condensed Financial Statements

Nine Months Ended September 30, 2014 

(Unaudited)

NOTE 1 – THE COMPANY

Freeze Tag, Inc. (the “Company”) 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, the Company employs state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy the Company’s games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. The Company’s 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 from the Apple, Amazon and Google app stores.

NOTE 2 – GOING CONCERN

As shown in the accompanying financial statements for the nine-month periods ended September 30, 2014 and 2013, the Company incurred net losses of $1,091,735 and $697,726, respectively. As of September 30, 2014, the Company’s accumulated deficit is $6,850,538. During the period ended September 30, 2014 and the year ended December 3l, 2013, the Company experienced negative cash flows from operations largely due to its 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 the Company’s ability to continue as a going concern. Accordingly, the Company is currently evaluating its alternatives to secure financing sufficient to support the operating requirements of its current business plan, as well as continuing to execute its business strategy of distributing 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.

The Company’s ability to continue as a going concern is dependent upon its success in securing sufficient financing and in successfully executing its plans to return to positive cash flows during fiscal 2015. The Company’s financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.

NOTE 3 – ACCRUED EXPENSES

Accrued liabilities consisted of the following at:

Accrued royalties consist of amounts owed to other parties with whom the Company has revenue-sharing agreements or from whom it licenses certain trademarks or copyrights.

Unearned royalties consist of royalties received from licensees, which have not yet been earned. Unearned royalties were $205,282 and $211,946 at September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014 and December 31, 2013, the Company had technology payable of $18,000 resulting from a technology transfer agreement with an unrelated party entered into in June 2011, payable in 24 installments of $1,500 without interest.

NOTE 4 – CONVERTIBLE NOTES PAYABLE

Related Party

Convertible notes payable, related party consisted of the following at:

The “Holland Family Trust Convertible Note” 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 Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the date of conversion. “Fixed Conversion Price” shall mean $0.00005.

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 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 September 30, 2014, $72,107 of accrued interest was added to the note principal and $813,602 of the note was transferred to Craig Holland. A new convertible note for $222,572 was issued to the Holland Family Trust with the same terms as the previous note, with the exception of the maturity date, which has been extended to September 30, 2015. As of September 30, 2014 and December 31, 2013, there was no accrued interest related to the Holland Family Trust Convertible Note.

On September 30, 2014, $813,602 principal balance (including interest) of the Holland Family Trust Convertible Note was transferred to Craig Holland (the “Holland Transferred Convertible Note”). The Holland Transferred Convertible Note retains the same terms as the original Holland Family Trust Convertible Note with the exception of the maturity date, which has been extended to September 30, 2015.

On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note (the “Holland Accrued Salary Note”) and converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note (the “Donahoo Accrued Salary Note”). The Holland Accrued Salary Note and the Donahoo Accrued Salary Note are 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 Company’s 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 Company evaluated the Holland Accrued Salary Note and the Donahoo Accrued Salary Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, the conversion feature 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 for each note. During the nine month period ended September 30, 2014, a total of $139,838 of the discount was amortized for each note; at September 30, 2014 and December 31, 2013, the remaining debt discount for each note was $46,612 and $186,450, respectively. As of September 30, 2014 and December 31, 2013, there was $13,945 and $0, respectively, of accrued interest related to each of the notes.

On December 31, 2013, the Company converted a note payable to Mick Donahoo 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”).

On December 31, 2013, the Company converted a note payable to Craig Holland 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 Mick Donahoo Convertible Note and the Craig Holland Convertible Note are 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 Company’s 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 Company evaluated the Mick Donahoo Convertible Note and 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 agreements modified the debt to make it convertible into common stock of the Company. As of September 30, 2014 and December 31, 2013, there was a total of $8,764 and $0, respectively, of accrued interest payable related to these notes.

Total accrued interest payable for the above related party convertible notes was $36,655 and $0 as of September 30, 2014 and December 31, 2013, respectively.

Non-Related Party

Convertible notes payable consisted of the following at:

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 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 Company’s 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 Convertible Cowdell Note had accrued interest of $4,596 as of September 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 convertible notes to an accredited investor (the “Accredited Investor”) were issued in $50,000 tranches in December 2013 and January, February, March, April, May, June, July and August 2014. Each note 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 Company’s 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 notes also include conversion price reset features that 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 December 2013 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 nine months ended September 30, 2014, $36,370 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $12,123. The December 2013 note had accrued interest of $3,890 as of September 30, 2014 and $151 as of December 31, 2013.

The January 2014 derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. During the nine months ended September 30, 2014, $27,344 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $11,946. The January 2014 note had accrued interest of $3,603 as of September 30, 2014.

The February 2014 derivative was valued as of February 18, 2014 at $44,556, of which all was recorded as a debt discount. During the nine months ended September 30, 2014, $27,344 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $17,212. The February 2014 note had accrued interest of $3,069 as of September 30, 2014.

The March 2014 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 nine months ended September 30, 2014, $25,753 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $24,247. The March 2014 note had accrued interest of $2,575 as of September 30, 2014.

The April 2014 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 nine months ended September 30, 2014, $21,644 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $28,356. The April 2014 note had accrued interest of $2,165 as of September 30, 2014.

The May 2014 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 nine months ended September 30, 2014, $18,082 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $31,918. The May 2014 note had accrued interest of $1,808 as of September 30, 2014.

The June 2014 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 nine months ended September 30, 2014, $13,288 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $36,712. The June 2014 note had accrued interest of $1,315 as of September 30, 2014.

The July 2014 derivative was valued as of July 15, 2014 at $73,999, 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 nine months ended September 30, 2014, $10,548 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $39,452. The July 2014 note had accrued interest of $1,041 as of September 30, 2014.

The August 2014 derivative was valued as of August 19, 2014 at $64,104, 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 nine months ended September 30, 2014, $5,753 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $44,247. The August 2014 note had accrued interest of $562 as of September 30, 2014.

The September 2014 derivative was valued as of September 17, 2014 at $62,915, 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 nine months ended September 30, 2014, $1,781 was amortized from the debt discount. The debt discount had a balance at September 30, 2014 of $48,219. The September 2014 note had accrued interest of $178 as of September 30, 2014.

Total accrued interest payable for the above non-related party convertible notes was $20,206 and $151 as of September 30, 2014 and December 31, 2013, respectively.

The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $606,204 and $91,520 for the nine months ended September 30, 2014, and 2013, respectively.

NOTE 5 – 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 at September 30, 2014:

We had no assets or liabilities measured at fair value at December 31, 2013.

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

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 4, Convertible Notes Payable, the Company issued convertible notes payable to non-related parties 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 September 30, 2014 and December 31, 2013, the Company recorded current derivative liabilities of $495,809 and $0. The net change in fair value of the derivative liabilities for the nine months ended September 30, 2014 and 2013 was a loss $6,760 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 for the nine months ended September 30, 2014:

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:

See Note 6 for a discussion of fair value measurements. 

NOTE 7 – STOCKHOLDERS’ DEFICIT

Stock Issuances

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.

As of September 30, 2014 and December 31, 2013, the Company had common stock payable of $16,800 resulting from a technology transfer agreement with an unrelated party that obligated the Company to issue a total of 96,000 shares of its common stock, payable in 8 quarterly installments of 12,000 shares.

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 Mr. Holland. During the nine months ended September 30, 2014, the preferred shares were issued, eliminating the preferred stock payable. Subsequently on September 30, 2014, Mr. Holland tendered the 1,000 shares of preferred stock and they were cancelled by the Company.

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 September 30, 2014, 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 did not grant any stock options or warrants during the nine months ended September 30, 2014 and did not record any stock-based compensation expense during the nine months ended September 30, 2014 and 2013.

A summary of the status of the options and warrants issued by the Company as of September 30, 2014, and changes during the nine months then ended is presented below:

NOTE 8 – LOSS PER COMMON SHARE

The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.

For the three months and nine months ended September 30, 2014 and 2013, the 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.

NOTE 9 – RELATED PARTY TRANSACTIONS

The Company had convertible notes payable to related parties, net of discount, totaling $1,433,030 and $1,081,247 as of September 30, 2014 and December 31, 2013, respectively. See Note 4 for a detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms. Accrued interest payable to related parties was $36,655 and $0 as of September 30, 2014 and December 31, 2013, respectively.

As of December 31, 2013, the Company had a preferred stock payable to a related party of $30,700. The preferred stock payable was eliminated during the nine months ended September 30, 2014 when the shares were issued to the related party. The shares were subsequently returned to the Company and cancelled. See Note 7 for further discussion of this related party transaction.

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 310-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this Update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company has not determined the impact of the future adoption of the provisions of ASU No. 2014-15 on its financial statements.

The Company does not believe that any of the other recent accounting pronouncements are applicable or material to the Company’s financial statements.

NOTE 11 – 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.

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

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

NOTE 12 – SUBSEQUENT EVENTS

On October 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 5). The Accredited Investor #2 Note 5 has a maturity date of October 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 Company’s 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.

On October 14, 2014, an accredited investor (the “Accredited Investor #1”) converted $4,700 principal and $384 accrued interest into 4,919,735 shares of our common stock.

On October 23, 2014, Craig Holland converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of our common stock.

On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of our common stock.

On November 10, 2014, the Company issued a convertible note to an accredited investor (the “Accredited Investor #2”) for additional consideration of $100,000 (Accredited Investor #2 Note 6). The Accredited Investor #2 Note 6 has a maturity date of November 10, 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 Company’s Common Stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also bears interest at the rate of 10% per year.

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

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking. 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 our financial condition and results of operations is based upon, and should be read in conjunction with, its unaudited condensed financial statements and related notes located elsewhere in this Quarterly Report on 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 September 30, 2014, we generated revenues of $10,506 from the sales our games compared to $29,862 for the quarter ended September 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 metrics we receive as we monitor and try to improve upon our games in the market. On November 6, 2014, we released our most recent update to Party Animals: Dance Battle and began a worldwide (English only) promotion and press campaign of the game. During the remainder of 2014 and into 2015, 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 September 30, 2014, we generated a net loss of $245,143, primarily attributable to increases in depreciation and amortization expense and interest expense, as described below.

Going Concern Uncertainty

As shown in the accompanying financial statements for the nine-month periods ended September 30, 2014 and 2013, we have incurred net losses of $1,091,735 and $697,726, respectively. As of September 30, 2014 our accumulated deficit is $6,850,538. During the period ended September 30, 2014 and the year ended December 3l, 2013, we experienced negative cash flows from operations largely due to our continued investment in the development of games for smartphones and tablets, which we expect 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 2015. At this time we do not believe we will be able to completely fund our operations from our sales during fiscal 2015. Our financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.

Results of Operations for the Three and Nine Months Ended September 30, 2014 Compared to the Three and Nine Months Ended September 30, 2013

Revenues

Our revenues decreased $19,356 to $10,506 for the three months ended September 30, 2014 from $29,862 for the three months ended September 30, 2013 and decreased $90,668 to $38,450 for the nine months ended September 30, 2014 from $129,118 for the nine months ended September 30, 2013. Our revenues decreased due to our focused efforts on building games in the free-to-play game genre. Previously, the majority of our released game titles were “pay-per-download”, where the consumer paid to download the game onto their device, leading to revenue per download. Now our games are free to download and play, but have built-in features that require the consumer to pay if they want to access the feature, which means our revenue is tied to when the consumer pays to access the features, if they do. Our revenue can typically fluctuate based on when we release our games and the popularity of the games we release.

We are continuing development on Party Animals (one of our free-to-play games). We released an update in the third quarter of 2014, and have released the game for Worldwide (English language only) distribution as of November 6, 2014.

Operating Costs and Expenses

Our cost of sales decreased $38,002 to $38,928 for the three months ended September 30, 2014 from $76,930 for the three months ended September 30, 2013 and decreased $199,411 to $89,588 for the nine months ended September 30, 2014 from $288,999 for the nine months ended September 30, 2013. Our cost of sales includes royalties, subcontractors and internal costs of programming, analytics, and design. The decrease in cost of sales is due primarily to the decrease in sales and our change in game development focus discussed above.

Our selling, general and administrative expenses increased $30,636 to $120,234 for the three months ended September 30, 2014 from $89,598 for the three months ended September 30, 2013 and increased $35,013 to $413,938 for the nine months ended September 30, 2014 from $378,925 for the nine months ended September 30, 2013. The increase in selling, general and administrative expenses was primarily due to an increase in public relations services and payroll expense. Our sales and marketing also increased due to promotional and research efforts related to acquiring users and game testing Party Animals: Dance Battle.

Our depreciation and amortization expense decreased $278 to $228 for the three months ended September 30, 2014 from $506 for the three months ended September 30, 2013 and increased $10,912 to $12,428 for the nine months ended September 30, 2014 from $1,516 for the nine months ended September 30, 2013. The increase in depreciation and amortization on a year-to-date basis was due to amortization of certain technology in the current year.

Other Income (Expense)

Our interest expense increased $212,404 to $245,091 for the three months ended September 30, 2014 from $32,687 for the three months ended September 30, 2013 and increased $514,684 to $606,204 for the nine months ended September 30, 2014 from $91,520 for the nine months ended September 30, 2013. The increase in interest expense is due to the increase in our debt in the current year and the related debt discounts that are amortized to interest expense.

Our estimate of the fair value of the derivative liability for the conversion feature of our convertible notes payable is based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, and variable conversion prices based on market prices as defined in the respective loan agreements. These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material. We reported a gain on change in derivative liability of $148,832 for the three months ended September 30, 2014 and a loss on change in derivative liability of $6,760 for the nine months ended September 30, 2014. We reported no gain or loss on change in derivative liability for the three months and nine months ended September 30, 2013.

Net Loss

As a result of the above, our net loss increased to $245,143 for the three months ended September 30, 2014 from $169,859 for the three months ended September 30, 2013 and increased to $1,091,735 for the nine months ended September 30, 2014 from $697,726 for the nine months ended September 30, 2013.

Liquidity and Capital Resources

Introduction

As of September 30, 2014, we had current assets of $35,799 and current liabilities of $3,054,655, resulting in a working capital deficit of $3,018,856. In addition, we had an accumulated deficit of $6,850,538 and a total stockholders’ deficit of $3,018,537 at September 30, 2014.

During the three months ended September 30, 2014, because of our operating losses, we did not generate positive operating cash flows. Our cash balance as of September 30, 2014 was $14,069, and our monthly cash flow burn rate is approximately $56,000. As a result, we have significant short-term cash needs. These needs are currently being satisfied primarily from the proceeds from short-term convertible debt. We intend to raise additional capital through the issuance of debt from third parties and other related parties until such time as our cash flows from operations will satisfy our cash flow needs. There can be no assurance that we will be successful in these efforts.

Sources and Uses of Cash

We used cash of $475,778 in operating activities for the nine months ended September 30, 2014 as a result of our net loss of $1,091,735 and decreases in accounts payable of $2,369, accrued expenses of $4,559 and unearned royalties of $6,664, partially offset by non-cash expenses totaling $491,974, decreases in accounts receivable, net of $2,052 and prepaid expenses and other current assets of $2,111, and an increase in accrued interest payable of $133,412. 

By comparison, we used cash of $326,978 in operating activities for the nine months ended September 30, 2013 as a result of our net loss of $697,726, increase in other assets of $278,965 and decreases in accounts payable of $430 and unearned royalties of $27,964, partially offset by non-cash expenses totaling $367,731, decreases in accounts receivable, net of $21,534 and prepaid expenses and other current assets of $3,249, and increases in accrued expenses of $217,287 and accrued interest payable of $68,306.

We had no cash provided by or used by investing activities for the nine months ended September 30, 2014 and 2013.

We had net cash provided by financing activities of $450,000 for the nine months ended September 30, 2014 comprised of borrowings of debt – proceeds from the issuance of short-term convertible notes payable to non-related parties.

By comparison, we had net cash provided by financing activities of $300,770 for the nine months ended September 30, 2013 comprised of borrowings of debt from non-related parties of $71,500 and borrowings of debt from related parties of $229,270.

Debt Instruments, Guarantees, and Related Covenants

We have no disclosures 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 September 30, 2014, our disclosure controls and procedures were 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.

(b) Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2014, we engaged an outside financial consultant to address the material weaknesses in internal controls over financial reporting that we have previously reported related to insufficient segregation of duties and the documentation, evaluation and testing of internal controls. The financial consultant now allows us to further segregate the preparation and review of key account analyses and reconciliations, more timely close our quarterly accounting records and prepare our quarterly financial statements, and improve our documentation of material transactions.

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

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

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

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

ITEM 1A Risk Factors

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

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

On September 30, 2014, we cancelled a $964,069 principal amount convertible promissory note we previously issued to the Holland Family Trust for amounts loaned to us. As of September 30, 2014 we owed $72,107 in interest under the promissory note. In exchange, on September 30, 2014, we issued two convertible promissory notes, one to the Holland Family Trust, an entity which Craig Holland is the successor trustee, in the principal amount of $222,572, and one to Craig Holland, our Chief Executive Officer, in the principal amount of $813,602. Both promissory notes mature on September 30, 2015. Under the terms of both promissory notes, the amounts due are convertible into our 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 our common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the date of conversion. “Fixed Conversion Price” shall mean $0.00005. The issuance of both promissory notes was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The investors were accredited and sophisticated, familiar with our operations, and there was no solicitation.

ITEM 3 Defaults Upon Senior Securities

There have been no events that 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

On July 8, 2014, we entered into two agreements with Think Gaming, Inc., one a User Acquisition Services Agreement (the “User Agreement”) and the other a Mobile Advertising User Sharing Agreement (the “Data Agreement”). Under the agreements Think Gaming will assist us in acquiring and managing user acquisition. Under the Data Agreement, Think Gaming will analyze user data to help us determine the profile of the type of user most likely to purchase our games and then help us find out those users’ online profile. Under the User Agreement, Think Gaming will assist us in creating a user acquisition plan in terms of advertising and media. Under the agreements we are required to pay Think Gaming fifteen percent (15%) of the amount we spend to acquire users under the plan they develop. If they do not develop a plan and/or we do not spend money to advertise for user acquisition we will not owe Think Gaming any money under the agreements, other than potentially expenses.

ITEM 6 Exhibits

 ______________

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

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

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

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

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

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

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

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

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

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

SIGNATURES

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

28