FRZT 10-Q Quarterly Report March 31, 2013

FREEZE TAG, INC.

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10-Q 1 frzt_10q.htm FORM 10-Q frzt_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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.)

228 W. Main Street, 2nd Floor Tustin, California		92780
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

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

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 9, 2013, there were 77,724,404 shares of common stock, $0.001 par value, issued and outstanding.

FREEZE TAG, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		3

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

PART II – OTHER INFORMATION		40

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

PART I – FINANCIAL INFORMATION

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

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

The results for the period ended March 31, 2013 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2012.

ITEM 1

Financial Statements

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

BALANCE SHEETS

	(Unaudited)			(Audited)
	March 31, 2013			December 31, 2012
ASSETS
Current Assets
Cash	$	1,448		$	32,744
Accounts Receivable, Net		43,284			40,812
(Net of Allowance of $5,600 and $9,934 as of March 31, 2013 and December 31, 2012, respectively)

Capitalized Production Costs, Net		189,192			332,508
Prepaid Royalties		6,841			7,252
Prepaid Expenses		3,011			3,803
Total Current Assets		243,776			417,119

Fixed Assets, Net		2,344			2,849
(Net of depreciation of $7,433 and $6,928 as of March 31, 2013 and December 31, 2012, respectively)

Other Long-term Assets, Net		29,320			35,120
(Net of amortization of $40,580 and $34,780 as of March 31, 2013 and December 31, 2012 respectively)

Capitalized Production Costs, Net		654,191			499,472

TOTAL ASSETS	$	929,631		$	954,560

LIABILITIES & EQUITY
Liabilities
Current Liabilities
Accounts Payable	$	102,190		$	107,811
Accrued Compensation		231,100			168,621
Accrued Royalties		389,411			388,323
Accrued Interest - Third Party		1,614			37,284
Accrued Interest - Related Party		55,532			4,521
Accrued Expenses		72			614
Current Technology Payable		17,940			17,787
Unearned Royalties		263,977			270,061
Current Convertible Note Payable, Net		60,826			-
(Net of debt discount of $16,103 and $0 as of March 31, 2013 and December 31, 2012, respectively)
Current Convertible Note Payable, In Default		-			50,000
Current Convertible Note Payable, Related Party		100,000			100,000
Current Note Payable - Related Party		672,770			595,000
Total Current Liabilities		1,895,432			1,740,022

Total Liabilities		1,895,432			1,740,022

Equity (Deficit)
Preferred Stock		-			-
$0.001 par value per share, 10,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2013 and December 31, 2012
Common Stock		77,724			70,302
$0.001 par value per share, 100,000,000 shares authorized, 77,724,404 and 70,301,915 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively)
Additional Paid-In Capital		1,498,343			1,369,407
Common Stock Payable		16,800			16,800
Retained Deficit		(2,558,668	)		(2,241,971	)
Total Equity (Deficit)		(965,801	)		(785,462	)
TOTAL LIABILITIES & EQUITY (DEFICIT)	$	929,631		$	954,560

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

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2013 and 2012

(Unaudited)

	March 31, 2013			March 31, 2012

Revenues	$	51,660		$	103,280

Costs and Expenses:
Cost of Sales - Product Development		102,037			94,445
Cost of Sales - Licensing		1,752			12,429
General & Administrative		231,560			296,510
Sales & Marketing		4,656			5,678
Amortization & Depreciation		5,902			46,264
Total Expense		345,907			455,326

Net Ordinary Income/Loss		(294,247	)		(352,046	)
Interest Income/(Expense), net		(21,174	)		(8,073	)

Net Income/Loss before taxes		(315,421	)		(360,119	)
Income Tax Expense		1,276			1,237

Net Income/Loss	$	(316,697	)	$	(361,356	)

Weighted number of common shares outstanding-basic and fully diluted		72,413,732			41,449,822
Income/ (Loss) per share-basic and fully diluted	$	(0.00	)	$	(0.01	)

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

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2013 and 2012

(Unaudited)

	March 31, 2013			March 31, 2012
Cash flows from operating activities:
Net Loss	$	(316,697	)	$	(361,356	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		505			506
Amortization expense		5,953			6,300
Loss on debt modification		64,608			-
Amortization of capitalized production costs		96,234			88,708
Amortization on debt discount		5,397			45,759
Write-off of capitalized production costs		-			39,377
Stock issued for services		-			102,000
Changes in operating assets and liabilities:
Accounts receivable		(2,472	)		29,619
Prepaid Royalties		411			887
Prepaid Expenses		792			2,291
Capitalized Production Costs		(107,639	)		(137,286	)
Accounts Payable		(5,619	)		26,358
Accrued interest - third party		2,772			3,263
Accrued interest - related party		18,248			1,567
Accrued Expenses		63,025			18,069
Unearned royalties		(6,084	)		(12,065	)
Net cash used by operating activities	$	(180,566	)	$	(146,003	)

Cash flows from Investing activities:
Cash used for purchasing fixed assets		-			(4,500	)
Net cash used by investing activities	$	-		$	(4,500	)

Cash flows from financing activities:
Borrowings of debt - third party		71,500			50,000
Borrowings of debt - related party		77,770			100,000
Net cash provided (used) by financing activities	$	149,270		$	150,000

Net decrease in cash		(31,296	)		(503	)
Cash at the beginning of the period		32,744			26,588
Cash at the end of the period	$	1,448		$	26,085

Non-cash transactions
Conversion of debt to common shares - third party	$	50,000		$	-
Conversion of accrued interest to common shares - third party	$	250		$	-
Conversion of accrued interest to debt - related party	$	5,429		$	-
Beneficial conversion feature	$	21,500		$	-
Conversion of Asher Note	$	-		$	1,500
Stock issued for Marishco Technology	$	-		$	8,400

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

FREEZE TAG, INC.

(A DELAWARE CORPORATION)

Statement of Shareholders' Equity (Deficit)

For the Year Ended December 31, 2012 (Audited) and the Three Months Ended March 31, 2013 (Unaudited)

	Convertible Preferred Stock				Common Stock				Common Stock			Additional Paid		Accumulated
	Shares		Amount		Shares		Amount		Payable			In Capital		Deficit			Total

Balances as of December 31, 2011		39,038,720	$	-		39,275,720	$	39,276	$	29,400		$	1,037,469	$	(1,222,184	)	$	(116,039	)

Stock issued for Marishco Technology		-	$	-		36,000	$	36	$	(12,600	)	$	12,564	$	-		$	-
Stock issued for Services		-		-		3,849,871		3,850		-			140,646		-			144,496
Stock issued for Conversion of Accounts Payable		-		-		230,375		230		-			11,288		-			11,518
Stock issued for Conversion of Related Party Debt		-		-		5,577,356		5,577		-			69,423		-			75,000
Stock issued for Conversion of Related Party Accrued Interest		-		-		5,103,000		5,103					-					5,103
Stock issued for Conversion of Third Party Debt		-		-		13,729,593		13,730		-			61,995		-			75,725
Stock issued for Conversion of Third Party Accrued Interest		-		-		2,500,000		2,500		-			1,445		-			3,945
Loss on Related Party Debt Modification		-		-		-		-		-			34,577		-			34,577

Net Loss		-		-		-		-		-			-		(1,019,787	)		(1,019,787	)

Balances as of December 31, 2012		39,038,720	$	-		70,301,915	$	70,302	$	16,800		$	1,369,407	$	(2,241,971	)	$	(785,462	)

Stock issued for Conversion of Third Party Debt		-	$	-		7,371,984	$	7,372	$	-		$	42,628	$	-		$	50,000
Stock issued for Conversion of Third Party Accrued Interest		-		-		50,505		50		-			200		-			250

Beneficial Conversion Feature		-		-		-		-		-			21,500		-			21,500

Loss on Debt Modification		-		-		-		-		-			64,608		-			64,608

Net loss		-		-		-		-		-			-		(316,697	)		(316,697	)

Balances as of March 31, 2013		39,038,720	$	-		77,724,404	$	77,724	$	16,800		$	1,498,343	$	(2,558,668	)	$	(965,801	)

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 1 — THE COMPANY

Nature of Business

The Company develops family-friendly casual games for tablets and smartphones. The Company’s core belief is that games should be enjoyed as a family activity, and not limited to any one demographic. The Company focuses on casual games because it believes that these games have a wider appeal to the majority of the population, which means that the Company’s revenue potential is large. The Company targets mobile devices, such as tablets and smartphones, because research shows that more games are being played on mobile devices than ever before. The release of more free games, the portability/convenience of mobile devices, and the introduction of lower priced models have resulted in high demand for tablets and smartphones, dramatically increasing the addressable market for the Company’s games. The Company’s management believes Freeze Tag is well positioned to take advantage of these important trends.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

Product Sales (web and mobile revenues)

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

Licensing Revenues (retail revenues- royalties)

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

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

Other Revenues

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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

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

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

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at March 31, 2013 and December 31, 2012 were insured. At March 31, 2013 and December 31, 2012, there were no cash equivalents.

Allowances for Returns, Price Protection, and Doubtful Accounts

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

However, we derive a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These “hold-back” amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of March 31, 2013 and December 31, 2012; the allowance for doubtful accounts was $5,600 and $9,934, respectively.

Property and Equipment

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

Concentrations of Credit Risk, Major Customers and Major Vendors

The Company’s customers are the end-consumers that purchase its games from the websites where the Company has its games listed for sale. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue. However, the Company does have primary distribution partners, which are the owners of the websites 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 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 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 licensing agreements with Ohio Art Company and CMG Worldwide, which allow it to develop and distribute games around third party intellectual property in exchange for paying royalty payments. The Company is not substantially dependent on either of those licensing agreements.

During the period ended March 31, 2013, the Company’s primary distributors that represented 10% or more of its revenues were: Big Fish Games – 24.91%, Wild Tangent – 20.77%, and Real Networks – 11.72%. During the period ended March 31, 2012, the Company’s primary distributors that represented 10% or more of its revenues were: Exent – 19.32%, Big Fish Games – 14.85% and Avanquest – 10.39% each respectively.

At March 31, 2013, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 26.79%, Wild Tangent – 22.00% and Big Fish Games – 15.89%. At March 31, 2012, the Company’s primary distributors and partners that represented 10% or more of its accounts receivable were: Exent - 31.97%, RealNetworks – 14.03%, Oberon – 13.09%, Big Fish Games – 11.53%, and Apple – 10.26%.

Income Taxes

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

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

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

Foreign Currency Translation

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

Accounting for Stock-Based Compensation

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

Stock-based compensation expense recognized in the Company’s statements of operations for the periods ended March 31, 2013, and 2012, were $0 and $0, respectively.

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments

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

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(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. The Company accounts for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation, or the completed and tested product design and working model. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against future revenues. For products where proven game engine technology exists (as is the case for most of the Company’s products), this may occur early in the development cycle. Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established. For most of the PC/Mac and iOS/Android products, technological feasibility is established when a detailed game design document containing sufficient technical specifications written for a proven game engine or framework technology has been created and approved by management. However, technological feasibility is evaluated on a product-by-product basis. Amounts related to software development that are not capitalized are charged immediately to the appropriate expense account. Amounts that are considered ‘research and development’ that are not capitalized are immediately charged to general and administrative expense.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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

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

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

At March 31, 2013, and December 31, 2012, current and long-term capitalized software development costs on the balance sheet were $843,383 and $831,980, 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 March 31, 2013 and December 31, 2012, prepaid royalties (or prepaid licensing fees) were $6,840, and $7,252, respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

Recent Accounting Pronouncements

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.

In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.

In December 2011, FASB issued ASU No. 2011-11, “Balance Sheet – Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11) to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other” (ASU 2011-08). ASU 2011-08 allows a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test would be performed. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for the Company is January 1, 2012.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 3 — GOING CONCERN

As shown in the accompanying financial statements for the periods ending March 31, 2013 and March 31, 2012, we have incurred net losses of $316,697 and $361,356, respectively. As of March 31, 2013 our deficit is $2,558,668. During the period ended March 31, 2013 and the year ended December 3l, 2012, we continued to experience close to neutral cash flows from operations largely due to our continued investment spending for product development of game titles for the PC and other popular gaming platforms 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 2013. Our financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern.

NOTE 4 — CAPITALIZED PRODUCTION COSTS

Capitalized Production Costs, Net consists of the following at:

	March 31, 2013			December 31, 2012

Capitalized Production Costs		2,081,266			2,042,257
Accumulated Production Costs Amortization		(1,237,883	)		(1,141,649	)
Impairment of Production Costs		-			(68,628	)
Total Capitalized Production Costs, Net	$	843,383		$	831,980

Current		189,192			332,508
Long Term		654,191			499,472

We recognized amortization expense of $96,234 and $88,708 for the periods ended March 31, 2013 and 2012, respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 5 — OTHER ASSETS

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party, which included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock (Note 11) in exchange for the right, title, and interest in the Marishco Game Engine. The liability is payable in 24 installments of $1,500 per installment. The common stock is payable in eight quarterly installments of 12,000 shares per installment. As of March 31, 2013, the Company has issued a total of 48,000 shares to the unaffiliated third party and reduced common stock payable accordingly.

The game engine will be amortized on a straight-line basis over the useful life of three years. For the periods ended March 31, 2013 and March 31, 2012 amortization expense was $5,800 and $5,800 respectively.

NOTE 6 — FIXED ASSETS

Fixed assets, Net, consists of the following at:

	March 31 , 2013			December 31, 2012

Computer Equipment		5,347			5,347
Communications Equipment		830			830
Software		3,600			3,600
Accumulated Depreciation		(7,433	)		(6,928	)
Total Fixed Assets, Net	$	2,344		$	2,849

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 7 — ACCRUED COMPENSATION

Accrued Compensation Consists of the following at:

	March 31 , 2013		December 31, 2012

Employee Reimbursements owed		1,507		-
Accrued Vacation		82,793		75,021
Accrued Salary		146,800		93,600
Total Accrued Compensation	$	231,100	$	168,621

NOTE 8 — ACCRUED ROYALTIES AND UNEARNED ROYALTIES

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

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

Accrued and Unearned Royalties consists of the following at:

	March 31, 2013		December 31, 2012

Accrued Royalties		389,411		388,323
Unearned Royalties		263,977		270,061
Total Accrued and Unearned Royalties	$	653,388	$	658,384

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Leases

We have been residing in our current building at 228 W. Main Street, Tustin, California since 2006. Since that time, we have paid our rent on a month-to-month basis. As such, we are free to leave our current premises at any time with 30 days courtesy notice but we do not have a lease agreement with the property owner. This is our preference since it is our desire to be able to quickly expand to alternative office space should our growth require additional square footage than our current offices. The Company or Company employees or contractors own all of the computer and office equipment that is used in the course of business. We do not have any lease agreements for any office equipment.

Technology Payable

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

As of March 31, 2013 and December 31, 2012, the Company recognized a current liability of $17,940 and $17,787, respectively. During the three months ended March 31, 2013 and 2012, the Company recorded amortization of the debt discount of $153 and $500, respectively.

NOTE 10 — DEBT

Debt consists of the following at:

	March 31 , 2013			December 31, 2012

Notes Payable-Related Party	$	672,770		$	595,000
Notes Payable-Convertible-Related Party		100,000			100,000
Notes Payable-Convertible-Third Party		76,929			-
Discounts on Convertible Notes Payable		(16,103	)		-
Total Debt, Net of Discounts		833,596			745,000
Less: Current, Net of Discounts		833,596			745,000
Long Term, Net of Discounts	$	-		$	-

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

Convertible Note Payable

On July 21, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $62,500 (the “First Asher Note”). The First Asher Note has a maturity date of April 25, 2012, 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 average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the First Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the First Asher Note closed on August 1, 2011, the date that the purchase price was delivered to the Company. The issuance of the First Asher Note was exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated there under. The purchaser was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

The Company evaluated the First Asher 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 $0.1375 below the market price on July 21, 2011 of $0.25 provided a value of $51,136. During the three months ended March 31, 2013 and 2012, $0 and $16,789, respectively, of the debt discount was amortized.

During the twelve months ended December 31, 2012, eight conversions of the First Asher Note, totaling 15,665,363 shares, occurred between prices of $0.0083 to $0.0110 per share, in order to convert $62,500 in principal and $2,500 in accrued interest all in accordance with the Variance Conversion Price. As a result of these transactions, the note was considered paid off during October 2012. Accrued interest remaining after the conversions of $2,984 was paid in cash during November 2012.

On September 16, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $40,000 (the “Second Asher Note”). The Second Asher Note has a maturity date of June 20, 2012, 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 average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the Second Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Second Asher Note closed on September 22, 2011, the date that the purchase price was delivered to the Company.

The Company evaluated the Second Asher 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 $0.11917 below the market price on September 16, 2011 of $0.30 provided a value of $40,000. During the three months ended March 31, 2013 and 2012, $0 and $13,094, respectively, of the debt discount was amortized. During November 2012, principal of $40,000 and accrued interest of $3,157 was paid in cash thus retiring the Second Asher Note.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

On November 17, 2011, for value received, the Company gave a convertible promissory note to The Lebrecht Group, APLC, in the original principal amount of $13,225 (the “Lebrecht Note”). The Lebrecht Note has a maturity date of November 18, 2012, and principle and accrued interest at the rate of ten percent (10%) are due at that time. The note holder has an option to convert the note into Common Stock to be issued upon each conversion of the Lebrecht Note and shall be determined by dividing the Conversion Amount by the Conversion Price, which shall be equal to the greater of (i) the Fixed Conversion Price, which is $0.001 per share, and (ii) the Variable Conversion Price, which is seventy five percent (75%) of the closing bid price for the Common Stock on the trading day immediately preceding the conversion, (the Fixed Conversion Price and the Variable Conversion Price, as applicable, shall be referred to as the “Conversion Price”).

The Company evaluated the Lebrecht 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 $0.10125 below the market price on November 17, 2011 of $0.135 provided a value of $4,408. During the three months ended March 31, 2013 and 2012, $0 and $1,093, respectively, of the debt discount was amortized. On December 20, 2012, 564,230 shares were issued, in accordance with the conversion terms, in order to convert $13,225 of principal and $1,445 of accrued interest into common shares, thus retiring the Lebrecht Note.

On December 6, 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which the Company sold to Asher an 8% Convertible Promissory Note in the original principal amount of $45,000 (the “Third Asher Note”). The Third Asher Note has a maturity date of September 8, 2012, 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 average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009. The shares of common stock issuable upon conversion of the Third Asher Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The purchase and sale of the Third Asher Note closed on December 8, 2011, the date that the purchase price was delivered to the Company.

The Company evaluated the Third Asher 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 $0.0605 below the market price on December 6, 2011 of $0.14 provided a value of $45,000. During the three months ended March 31, 2013 and 2012, $0 and $14,783, respectively, of the debt discount was amortized. During November 2012, principal of $45,000 and accrued interest of $2,661 was paid in cash thus retiring the Third Asher Note.

The remaining cash paid towards the extinguishment of the First, Second and Third Asher notes was $34,577 which was recorded in the statement of operations as a loss on debt extinguishment during the fourth quarter of 2012.

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.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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.

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 three months ended March 31, 2013 and 2012, $5,397 and $0, respectively, of the debt discount was amortized. As of March 31, 2013, the remaining debt discount outstanding was $16,103. As of March 31, 2013, the accrued interest outstanding was $424.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

On February 4, 2013, the accrued interest, noted in the First Hanover Note above, of $5,429 was transferred into a new convertible note to Robert Cowdell (the “Cowdell Note”) along with $50,000 in cash; totaling $55,429 in principal. The promissory note is convertible into the Company’s common stock at a rate of the closing market price on February 4, 2013 of $0.03 per share. The convertible promissory note bears interest at the rate of 12% per annum and matures on August 4, 2013. As of March 31, 2013, accrued interest was $1,440.

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.

In summary, the First, Second and Third Asher Notes, the Lebrecht Note, the First and Second Hanover Notes resulted in beneficial conversion feature amortization during the three months ended March 31, 2013 and 2012 of $5,397 and $45,759, respectively.

Total Accrued interest for the above third party convertible notes is $1,614 and $4,251 as of March 31, 2013 and December 31, 2012, respectively.

Convertible Note Payable – Related Party

On July 2, 2010, 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 Company has received $75,000 of the purchase price, with the remaining $25,000 to be paid at a later date. The promissory note is convertible into the Company’s common stock at a rate of $0.10 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. Interest on the notes is paid each month at the first of the month as such there was no accrued interest as of December 31, 2011. On November 6, 2012, the Company modified the note, such that its conversion rate was $0.0038 instead of $0.1000; which resulted in an increase to additional paid in capital and interest expense of 34,577. Also on November 6, 2012, the Company converted $75,000 in principal and $5,103 in accrued interest into 10,680,356 common shares (5,577,356 for related party principal and 5,103,000 for related party accrued interest) in accordance with the modified convertible note.

The Company evaluated this related party convertible note for derivative liability treatment noting that if the shares were converted at a fixed price of $0.10 per share, and the principal value of $75,000, this would result in 750,000 additional shares which is less than 1% 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 $0.10 which was exactly the same as the market price of $0.10 during the 2009-2010 fiscal years when the common shares were being sold to private purchasers consistently at this price; therefore, no beneficial conversion feature was created during issuance of this note.

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. As of March 31, 2013 and 2012, accrued interest was $10,833 and $8,333, respectively. On January 26, 2013, this note was amended for its maturity date which was updated to be January 26, 2014.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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.

Note Payable- Related Party

As of July 1, 2010, there is a note payable to Craig Holland and Mick Donahoo for $25,000 each (a total of $50,000 notes payable) for money that was loaned to the Company to secure the Sunwest Bank debt. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on June 20, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $14,501 and $13,024, respectively.

As of October 19, 2011, there is a note payable to Mick Donahoo for $5,000 for money that was loaned to the Company to secure equipment. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 19, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $725 and $600, respectively.

As of April 11, 2012, there is a note payable to Mick Donahoo for $15,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 11, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $1,580 and $1,205, respectively.

As of April 25, 2012, there is a note payable to Craig Holland and Mick Donahoo for $10,000 each (a total of $20,000 notes payable) for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 25, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $1,902 and $1,398, respectively.

As of June 21, 2012, there is a note payable to the Holland Family Trust for $40,000 for money that was loaned to the Company. The money was loaned to the company at a rate of 10% interest compounded annually and matures on July 24, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $3,083 and $2,083, respectively.

As of August 13, 2012, there is a note payable to the Holland Family Trust for $70,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on August 13, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $4,422 and $2,672, respectively.

As of September 12, 2012, there is a note payable to the Holland Family Trust for $65,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on September 12, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $3,584 and $1,959, respectively.

As of October 11, 2012, there is a note payable to the Holland Family Trust for $50,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 11, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $2,357 and $1,107, respectively.

On November 1, 2012, there was a note payable issued to the Holland Family Trust for $130,000. The money was loaned to the Company to pay off the debt associated with the two remaining Asher Enterprises, Inc. convertible promissory notes, and was loaned to the Company at a rate of 10% interest compounded annually and matures on November 1, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $5,417 and $2,167, respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

As of November 13, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on November 13, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $2,875 and $1,000, respectively.

As of December 10, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on June 10, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $2,307 and $432, respectively.

As of January 10, 2013, there is a note payable to the Holland Family Trust for $25,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 10, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $556 and $0, respectively.

As of January 29, 2013, there is a note payable to the Holland Family Trust for $17,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on July 29, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $285 and $0, respectively.

As of April 11, 2013, there is a note payable to the Holland Family Trust for $30,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 11, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $41 and $0, respectively.

For the periods ended March 31, 2013 and 2012, the Company recorded interest expense of $18,248 and $1,567, respectively related to the related party notes payable and related party convertible notes above.

The Company recorded total interest expense, including beneficial conversion feature amortization, for all debt of $26,571 and $7,574 for the period ended March 31, 2013, and 2012, respectively. However, the beneficial conversion feature amortization of $5,397 and $45,759 recorded during the period ended March 31, 2013 and 2012, respectively, were not recorded in interest expense; rather, they were recorded in depreciation and amortization expense.

NOTE 11 — STOCKHOLDERS’ EQUITY

Stock Issuance

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

On June 22, 2011, the Company entered into a technology transfer agreement with an unaffiliated third party included a liability in the amount of $36,000 (Note 9) and 96,000 shares of common stock. The liability of $36,000 was recorded net of a debt discount of $2,834 which was included in additional paid in capital at June 30, 2011. The common stock is payable in eight quarterly installments of 12,000 shares per installment. The first installment was delivered effective September 16, 2011. As the third party has no future performance obligation, the Company valued the 96,000 shares at $33,600 based on the closing price of $0.35 per share on the measurement date. The amount is recorded in common stock payable as of June 30, 2011. As of March 31, 2013 and December 31, 2012, stock payables were $16,800 and $16,800, respectively. The Company considered ASC 718-10-25-20 concluding that June 22, 2011 is the appropriate measurement date as the Company has received the goods, there is no significant disincentive to perform, and there is no future performance/service obligation on the part of the third party.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

On September 21, 2011, the Company issued 100,000 shares of Company common stock, restricted in accordance with Rule 144, to Empire Relations Group, Inc. as consideration under a consulting agreement dated September 16, 2011 for public and financial relations services. The fair value was $30,000 based on the closing stock price of $0.30 per share on the measurement date as the shares are non-refundable and no future performance obligation exists. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

On September 21, 2011, the Company issued 12,000 shares of Company common stock, restricted in accordance with Rule 144, to an unaffiliated thirty party as consideration under the Technology Transfer Agreement entered into on June 22, 2011. This is the first of eight identical quarterly installments of shares to be issued. The fair value of $4,200 based on the closing price of $0.35 per share on the measurement date was deducted from common stock payable. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The shareholder was a sophisticated investor, familiar with our operations, and there was no solicitation.

On November 29, 2011, the Company issued 125,000 shares of Company common stock, restricted in accordance with Rule 144, to Michael Southworth as additional consideration under a consulting agreement dated November 29, 2011 for public and financial relations services. The fair value was $17,500 based on the closing stock price of $0.14 per share on the measurement date of November 29, 2011. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

On March 2, 2012, the Company issued 3,000,000 shares of Company common stock, restricted in accordance with Rule 144, to Crucible Capital Group, Inc. in lieu of a cash retainer for services pursuant to a letter agreement dated February 29, 2012; as the agreement did not allow for return of shares, the amount of $102,000 was expensed upon the date granted. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was accredited and sophisticated, familiar with our operations, and there was no solicitation. The shares were valued at $102,000 based on the closing stock price of $0.34 for the date of the letter agreement dated February 29, 2012.

On May 29, 2012, the Company issued 1,080,246 shares of Company common stock, restricted in accordance with Rule 144, to various employees and contractors for services rendered. The shares were valued based on the closing stock price for the date of the grant dated May 29, 2012. 230,375 of these shares were issued as a conversion of accounts payable; the fair value on the date of grant of May 29, 2012, was compared with the fair value of the amounts payable, noting the difference was zero; therefore, no gain or loss was booked as a result of this conversion. The amounts were properly classified as non-cash reconciling items to net income due to the fact that the accounts payable amounts were expensed during the six-months ended June 30, 2012.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

Also on November 6, 2012, the Company converted $75,000 in principal and $5,103 in accrued interest into 10,680,356 common shares in accordance with the modified convertible note due to Craig Holland.

On December 20, 2012, 564,231 shares were issued, in accordance with the conversion terms, in order to convert $13,225 of principal and $1,445 of accrued interest into common shares, thus retiring the Lebrecht Note.

During the year ended December 31, 2012, the Company issued 36,000 shares of Company common stock, restricted in accordance with Rule 144, to an unaffiliated thirty party as consideration under the Technology Transfer Agreement entered into on June 22, 2011. This is the second, third and fourth of eight identical quarterly installments of shares to be issued. The fair value of $12,600 based on the closing price of $0.35 per share on the measurement date was deducted from common stock payable. The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The shareholder was a sophisticated investor, familiar with our operations, and there was no solicitation.

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

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

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.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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

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

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

The Company granted 560,000 stock options during the year ended December 31, 2010. As of December 31, 2011, the stock options became fully vested and expensed accordingly. The Company did not grant any stock options for the three months ended March 31, 2013 or twelve months ended December 31, 2012. 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 March 31, 2013 and 2012, was $0 and $0, respectively.

The Company did not grant any warrants during the period ended March 31, 2013 or the year ended December 31, 2012.

Exercising of Stock Warrants and Options

For the period ended March 31, 2013 and the year ended December 31, 2012, no shares of common stock were issued on the cashless exercise of warrants or options.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

A summary of the status of the warrants and options issued by the Company as of March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013				December 31, 2012
	Number of Warrants & Options		Weighted Average Exercise Price		Number of Warrants & Options		Weighted Average Exercise Price

Outstanding at beginning of year		560,000	$	0.10		560,000	$	0.10
Granted		-		-		-		-
Exercised for cash		-		-		-		-
Exercised for cashless		-		-		-		-
Expired and cancelled		-		-		-		-
Outstanding, end of period		560,000	$	0.10		560,000	$	0.10

NOTE 12 — 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 $1,600, Delaware state taxes of $489, and back taxes owed of $837. For Federal and California income tax purposes, the Company has net operating loss carry forwards that expire through 2027. The accumulated net operating loss as of March 31, 2013 is approximately $571,295. The net operating loss as of December 31, 2012 was approximately $427,295. No tax benefit has been reported in the financial statements because after evaluating our own potential tax uncertainties, the Company has determined that there are no material uncertain tax positions that have a greater than 50% likelihood of reversal if the Company were to be audited.

Deferred tax asset and the valuation account consists of the following at:
	March 31, 2013			December 31, 2012

Deferred Tax Asset	$	194,240		$	145,280
Valuation Allowances		(194,240	)		(145,280	)
Total:		-			-

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 13 — EARNINGS (LOSS) PER COMMON SHARE

Basic loss per share is calculated based on the weighted-average number of outstanding common shares. For the period ended March 31, 2013 and March 31, 2012, the fully diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of debt, options and warrants would be anti-dilutive.

Net loss per share for the period ending:

	March 31, 2013			March 31, 2012

Net Income/Loss	$	( 316,697	)	$	( 361,356	)

Weighted number of common shares outstanding – basic and fully diluted		72,413,732			41,449,822

Loss per share – basic and fully diluted	$	(0.01	)	$	(0.01	)

NOTE 14 — RELATED PARTY TRANSACTIONS

As of July 1, 2010, there are notes payable to Craig Holland and Mick Donahoo for $25,000 each (a total of $50,000 notes payable) for money that was loaned to the company to secure the Sunwest Bank loan. The money was loaned to us at a rate of 10% interest compounded annually. The Company had a note payable balance of $50,000 for the periods ended March 31, 2013 and December 31, 2012. For the period ended March 31, 2013 and the period ended December 31, 2012, the Company recorded accrued interest of $14,501 and $13,024, respectively.

On August 2, 2010, the Company granted Craig Holland, its President, Chief Executive Officer, and a Director, options to purchase up to 115,000 shares of Company common stock at an exercise price of $0.11 per share. The options were granted under the Freeze Tag, Inc. 2006 Stock Plan. As of March 31, 2012, the stock options are fully expensed and included in stock based compensation of $16,003.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

As of April 25, 2012, there is a note payable to Craig Holland and Mick Donahoo for $10,000 each (a total of $20,000 notes payable) for money that was loaned to the Company. As of March 31, 2013 and December 31, 2012, accrued interest was $1,902 and $1,398, respectively.

As of November 13, 2012, there is a note payable to the Holland Family Trust for $75,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on May 13, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $2,875 and $1,000, respectively.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

As of March 26, 2013, there is a note payable to the Holland Family Trust for $30,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on September 26, 2013. As of March 31, 2013 and December 31, 2012, accrued interest was $41 and $0, respectively.

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. As of March 31, 2013 and December 31, 2012, accrued interest was $10,833 and $8,333, respectively. On January 26, 2013, this note was amended for its maturity date which was updated to be January 26, 2014.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

NOTE 15 — 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.

FREEZE TAG, INC.

(a Delaware corporation)

Notes to the Condensed Consolidated Financial Statements

March 31, 2013

(Unaudited)

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

	Carrying Value March 31, 2013		Fair Value Measurements at
			March 31, 2013
			Level 1		Level 2		Level 3
Liabilities:
Convertible notes payable *	$	100,000	$	-	$	-	$	100,000
Convertible notes payable	$	60,826	$	-	$	-	$	60,826

	Carrying Value December 31, 2012		Fair Value Measurements at December 31, 2012
	Carrying Value December 31, 2012		Level 1		Level 2		Level 3
Liabilities:
Convertible notes payable, in default	$	50,000	$	-	$	-	$	50,000
Convertible notes payable *	$	100,000	$	-	$	-	$	100,000

* - Related Party

The Company believes that the market rate of interest as of March 31, 2013 and December 31, 2012 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at March 31, 2013 and December 31, 2012.

NOTE 16 — SUBSEQUENT EVENTS

On April 11, 2013, there was a note payable issued to the Holland Family Trust for $30,000 for money that was loaned to the Company. The money was loaned to the Company at a rate of 10% interest compounded annually and matures on October 11, 2013.

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

We are a casual online games publisher that develops and markets games across the major digital distribution platforms including PC/Mac downloadable (Web), and mobile (including smartphones and tablets). We focus on casual games because of our belief that they appeal to a significant portion of the population.

During our most recent fiscal quarter ended March 31, 2013, we generated revenues of $51,660 from the sales our games compared to $103,280 for the quarter ended March 31, 2012.

During the quarter ended March 31, 2013, we launched or updated 2 titles including Victorian Mysteries®: The Yellow Room on iPad and iPhone, Grimm Reaper®: Hidden Tales on iPad. In 2013 and going forward we plan to continue the trend we started in 2009 of developing games based on intellectual property we own or purchase from third parties, rather than license intellectual property that belongs to certain third parties, for which we then have to pay royalties to the owner of the intellectual property. We believe this will further enable us to decrease the costs associated with developing and publishing games and increase our gross margins over time.

During the quarter ended March 31, 2013, we generated a net loss of ($316,697). The net loss was primarily attributable to our increase in general and administrative expenses, as described below.

Results of Operations for the Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Introduction

Our revenues for the three months ended March 31, 2013 were $51,660, compared to $103,280, for the three months ended March 31, 2012. For the three months ended March 31, 2013 we released or updated 2 games. We are continuing development on Party Animals. At this time we are working on a major update to Grimm Reaper, which unfortunately necessitated a temporary removal from the App Store. A new build with new content is in the works and should be coming soon.

Revenues and Income (Loss) from Operations

Our revenues, costs and expenses, and net ordinary income (loss) from operations for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, are as follows:

	3 Months Ended March 31, 2013			3 Months Ended March 31, 2012

Revenue	$	51,660		$	103,280

Costs and Expenses:
Cost of Sales – Product Development		102,037			94,445
Cost of Sales – Licensing		1,752			12,429
General & Administrative		231,560			296,510
Sales & Marketing		4,656			5,678
Amortization & Depreciation		5,902			46,264
Total Expense	$	345,907		$	455,326

Net Ordinary Income (Loss)	$	(294,247	)	$	(352,046	)

Net Income (Loss)	$	(316,697	)	$	(361,356	)

Our revenues for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, decreased due to the delay of games to be released. Anticipated revenue from Grimm Reaper and Party Animals projects was not realized in the 1 st quarter, and this contributed to the decrease in revenue. Our revenue can typically fluctuate based on when we release our games and the popularity of the games we release.

Our operating expenses for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, decreased by $109,419, primarily due to decreases of, $64,950 in our general and administrative expenses, and $40,362 in depreciation and amortization. Our decreases in general and administrative expenses were primarily due to cost cutting measures affecting operating expenses, namely payroll. The decrease in the amortization and depreciation was due to stock grants, depreciating assets and the certain promissory notes we issued in 2012 versus 2013.

As a result of the above, our net loss decreased from $361,356 for the three months ended March 31, 2012 to $316,697 for the three months ended March 31, 2013. We attribute this decrease in our net loss to the decrease in our operating expenses outlined above.

Liquidity and Capital Resources

Introduction

During the three months ended March 31, 2013, because of our operating losses, we did not generate positive operating cash flows. Our cash on hand as of March 31, 2013 was approximately $1,448, and our monthly cash flow burn rate is approximately $55,000, which is decreased from prior periods due to staff reductions and the CEO and CFO deferring salaries. 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 3 rd parties and other related parties until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2013 and December 31, 2012, respectively, are as follows:

	(Unaudited) March 31, 2013		December 31, 2012		Change

Cash	$	1,448	$	32,744	$	(31,296	)
Total Current Assets		243,776		417,119		(173,343	)
Total Assets		929,631		954,560		(24,929	)
Total Current Liabilities		1,895,432		1,740,022		155,410
Total Liabilities	$	1,895,432	$	1,740,022	$	155,410

Our current assets decreased by $173,343 as of March 31, 2013 as compared to December 31, 2012, primarily because of a decrease in capitalized production costs of $143,316, or 82.68%.

Our current liabilities increased by $155,410 as of March 31, 2013 as compared to December 31, 2012 primarily because of an increase in Accrued Compensation of $62,479, or 40%, and an increase in current note payable, net of $27,770, or 18% and an increase in accrued interest net of $15,341 or 10%.

Our total liabilities are stated as current as of March 31, 2013 as compared to December 31, 2012, and increased by $155,410 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 $1,448 in cash as of March 31, 2013. Therefore, based on our revenues, cash on hand and current monthly burn rate, around $55,000 per month, we will need to continue borrowing from our shareholders and other related parties to fund operations.

Sources and Uses of Cash

Operations

We had net cash provided (used) by operating activities of ($180,566) for the three months ended March 31, 2013, as compared to ($146,003) for the three months ended March 31, 2012. For the three months ended March 31, 2013, the net cash used in operating activities consisted primarily of our net loss of ($316,697) and capitalized production costs of ($107,639) offset in part by loss on debt modification of $64,608, amortization of capitalized productions costs of $96,234 and accrued expenses of $63,025. For the three months ended March 31, 2012, the net cash used in operating activities consisted primarily of our net loss of ($361,356) and capitalized production costs of ($137,286), offset in part by amortization of capitalized production costs of $88,708, stock issued for services of $102,000, amortization of debt discount of $45,759, and a write-off of capitalized production costs of $39,377.

Investments

We had cash flows from investing activity of $0 for the three months ended March 31, 2013, compared to ($4,500) for the three months ended March 31, 2012 related to cash used for purchasing fixed assets.

Financing

Our net cash provided (used) by financing activities for the three months ended March 31, 2013 was $149,270, compared to $150,000 for the three months ended March 31, 2012. For the three months ended March 31, 2013, our financing activities consisted of borrowings of debt of $71,500 and borrowings of debt with a related party of $77,770. For the three months ended March 31, 2012, our financing activities consisted of borrowings of debt of $50,000 and borrowings of debt with a related party of $100,000.

Debt Instruments, Guarantees, and Related Covenants

We have no disclosure required by this Item.

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 4

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined) in Exchange Act Rules 13a – 15(c) and 15d – 15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officers, respectively, concluded that, as of the end of the three month period ended March 31, 2013, 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, 2012.

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

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management has identified the following four material weaknesses that have caused management to conclude that, as of March 31, 2013, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

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

2. We have not documented our internal controls. We have limited policies and procedures that cover the recording and reporting of financial transactions and accounting provisions. As a result we may be delayed in our ability to calculate certain accounting provisions. While we believe these provisions are accounted for correctly in the attached audited financial statements our lack of internal controls could lead to a delay in our reporting obligations. We were required to provide written documentation of key internal controls over financial reporting beginning with our three-month period ending March 31, 2012. 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. E ffective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

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

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

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

(d) Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1

Legal Proceedings

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

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

ITEM 1A

Risk Factors

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

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Common Stock

During the period ended March 31, 2013, four conversions of stock were issued to Hanover Holdings (on the convertible note), totaling 7,422,489 shares, and 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 Variance 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.

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

None.

ITEM 5

Other Information

None.

ITEM 6

Exhibits

Form S-1		August 16, 2010
3.1		Articles of Incorporation of Freeze Tag, Inc.
3.2		Articles of Amendment to Articles of Incorporation
3.3		Bylaws of Freeze Tag, Inc.
4.1		Freeze Tag, Inc. 2006 Stock Plan
10.1		10% Convertible Promissory Note dated July 1, 2010 with The Holland Family Trust
10.2		Support Services Agreement with Cardiff Partners, LLC dated October 12, 2009
10.3		Amendment No. 1 to Support Services Agreement with Cardiff Partners, LLC dated March 2, 2010
10.4		Amendment No. 2 to Support Services Agreement with Cardiff Partners, LLC dated March 3, 2010
10.5		Form of Conversion Agreement for October 2009 Conversions
10.6		Form of Option Conversion Agreement for October 2009 Conversions
10.7		Placement Agent and Advisory Services Agreement with Monarch Bay Associates, LLC dated October 12, 2009
10.8		Corporate Communications Consulting Agreement Michael Southworth dated September 25, 2009
10.9		Lock-Up Agreement dated November 10, 2009

Form S-1/A		October 25, 2010
10.10		Loan Agreement with Sunwest Bank dated October 20, 2006, as amended

Form 8-K		August 3, 2011
10.11		Securities Purchase Agreement with Asher Enterprises, Inc. dated July 21, 2011
10.12		Convertible Promissory Note with Asher Enterprises, Inc. dated July 21, 2011

Form 10-Q		August 15, 2011
10.13		Technology Transfer Agreement dated June 22, 2011

Form 8-K		September 21, 2011
10.14		Securities Purchase Agreement with Asher Enterprises, Inc. dated September 16, 2011
10.15		Convertible Promissory Note with Asher Enterprises, Inc. dated September 16, 2011

Form 8-K		December 23, 2011
10.16		Securities Purchase Agreement with Asher Enterprises, Inc. dated December 6, 2011
10.16		Convertible Promissory Note with Asher Enterprises, Inc. dated December 6, 2011

Form 8-K		March 8, 2012
10.17		Letter Agreement with Crucible Capital, Inc. dated February 29, 2012

Form 10-K		April 1, 2012
10.18		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated July 21, 2011
10.19		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated September 16, 2011
10.2		Amendment No. 1 to Securities Purchase Agreement with Asher Enterprises, Inc. dated December 6, 2011
10.21		Amendment No. 1 to Promissory Note with The Lebrecht Group, APLC dated November 17, 2011

This Form 10-Q
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document*
101.PRE.		XBRL Taxonomy Extension Presentation Linkbase*
101.LAB		XBRL Taxonomy Extension Label Linkbase*
101.DEF		XBRL Taxonomy Extension Definition Linkbase*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase*
101.SCH		XBRL Taxonomy Extension Schema*

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

SIGNATURES

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

	Freeze Tag, Inc .

Dated: May 15, 2013		/s/ Craig Holland
	By:	Craig Holland
	Its:	President and Chief Executive Officer

TABLE OF CONTENTS

Part I Financial Information Item 1 Financial Statements Note 1 The Company Note 2 Summary Of Significant Accounting Policies Note 3 Going Concern Note 4 Capitalized Production Costs Note 5 Other Assets Note 6 Fixed Assets Note 7 Accrued Compensation Note 8 Accrued Royalties and Unearned Royalties Note 9 Commitments and Contingencies Note 10 Debt Note 11 Stockholders Equity Note 12 Income Taxes Note 13 Earnings (loss) Per Common Share Note 14 Related Party Transactions Note 15 Fair Value Of Financial Instruments Note 16 Subsequent Events Item 2 Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk Item 4 Controls and Procedures Part II Other Information Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Mine Safety Disclosures Item 5 Other Information Item 6 Exhibits

FRZT 10-Q Quarter ended March 31, 2013