Amendment to Current Report — Form 8-K Filing Table of Contents
Document/ExhibitDescriptionPagesSize
1: 8-K/A Amended 8-K/A HTML 289K
2: EX-3.2 Exhibit 3.2 Certificate of Incorporation of Left HTML 22K
Behind Games, Inc.
3: EX-3.2.1 Exhibit 3.2.1 Amendment to Certificate of HTML 12K
Incorporation of Left Behind Games, Inc.
4: EX-10.1 Exhibit 10.1 Share Exchange Agreement HTML 193K
13: EX-10.10 Exhibit 10.10 Addendum Dated February 1, 2005; HTML 15K
Employment Agreement for Thomas H.
Axelson
5: EX-10.2 Exhibit 10.2 Troy A. Lyndon Employment Agreement HTML 75K
6: EX-10.3 Exhibit 10.3 Addendum Dated June 2, 2004; HTML 14K
Employment Agreement for Troy A. Lyndon
7: EX-10.4 Exhibit 10.4 Addendum Dated February 1, 2005; HTML 15K
Employment Agreement for Troy A. Lyndon
8: EX-10.5 Exhibit 10.5 Jefferey S. Frichner Employment HTML 73K
Agreement
9: EX-10.6 Exhibit 10.6 Addendum Dated June 2, 2004; HTML 15K
Employment Agreement for Jefferey S.
Frichner
10: EX-10.7 Exhibit 10.7 Addendum Dated February 1, 2005; HTML 15K
Employment Agreement for Jefferey S.
Frichner
11: EX-10.8 Exhibit 10.8 Thomas H. Axelson Employment HTML 72K
Agreement
12: EX-10.9 Exhibit 10.9 Addendum Dated June 2, 2004; HTML 15K
Employment Agreement for Thomas H.
Axelson
14: EX-99.1 Miscellaneous Exhibit HTML 651K
1.ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.
Organization
Left
Behind Games Inc. (the “Company”) is a development stage company that was
incorporated on August 27, 2002 under the laws of the State of Delaware
for the
purpose of engaging in the business of producing, distributing and selling
video
games and associated products. The Company is currently developing a video
game
and other associated products based upon the popular “LEFT BEHIND SERIES” of
novels published by Tyndale House Publishers (“Tyndale”).
The
Company’s largest shareholder is White Beacon Inc., a Delaware Corporation
(“White Beacon”), an entity beneficially owned and controlled by the Company’s
chief executive officer and its president. White Beacon holds an exclusive
worldwide license (the “License”) from Tyndale to develop, manufacture and
distribute video games and related products based on the “LEFT BEHIND SERIES” of
novels published by Tyndale. White Beacon has granted the Company a sublicense
(the “Sublicense”) to exploit the rights and fulfill the obligations of White
Beacon under the License (see Note 3).
period
ended September 30, 2005, were prepared by the Company without audit pursuant
to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the
United
States
of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, all necessary adjustments, which consist
primarily
of
normal
recurring adjustments, to the financial statements have been made to present
fairly the interim financial position and results of operations and cash
flows.
The results
of
operations for the respective periods presented are not necessarily indicative
of the results for the respective complete years. It is suggested that
the
financial statements
contained
in this filing be read in conjunction with the audited statements and notes
thereto contained in the Company’s 8-K filing.
The
Company has not generated any revenue and has incurred net losses of $5,507,591
and had negative cash flows from operations of $895,678 since its inception
through
September30, 2005. In addition, the Company has negative working capital of $395,603
and
a stockholders’ deficit of $253,380 as of September 30, 2005. The Company’s
ability to continue as a going concern is dependent upon its ability to
generate
profitable operations in the future and/or to obtain the necessary financing
to
meet its obligations and repay its liabilities arising from normal business
operations when they come due. Management plans to continue to provide
for its
capital requirements by issuing additional equity securities and is currently
in
the process of soliciting additional capital. The Company has been successful
in
raising $1,009,500 in gross proceeds from April 1, 2005 through February1,2006. These matters amongst others raise substantial doubt about the Company’s
ability to continue as a going concern.
C.
Development Stage Enterprise
The
Company’s planned principal operations have not yet commenced. Accordingly, the
Company’s activities have been accounted for as those of a development stage
enterprise as defined in Statement of Financial Accounting Standards (“SFAS”)
No. 7, Accounting
and Reporting by Development Stage Enterprises.
All
losses since inception have been considered as part of the Company’s development
stage activities.
1.ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
D.
Principles
of Consolidation
(continued)
The
accompanying consolidated financial statements include the accounts of Left
Behind Games Inc. and, effective July 2005, include the accounts of LB Games
Ukraine LLC, a variable interest entity in which the Company is the primary
beneficiary (see Note 2). All intercompany accounts and transactions have
been
eliminated in the consolidated financial statements.
E.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
Company’s significant estimates include recoverability of prepaid royalties and
other long-lived assets and the realizability of deferred tax
assets.
F.
Software Development Costs
Research
and development costs, which consist of software development costs, are expensed
as incurred. Software development costs primarily include payments made to
independent software developers under development agreements. SFAS No. 86,
Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed,
provides for the capitalization of certain software development costs incurred
after technological feasibility of the software is established or for the
development costs that have alternative future uses. The Company believes
that
the technological feasibility of the underlying software is not established
until substantially all product development is complete, which generally
includes the development of a working model. No software development costs
have
been capitalized to date.
G.
Property and Equipment
Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 5 years. Repairs and maintenance are charged to expense
as
incurred while improvements are capitalized. Upon the sale or retirement
of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, with any resulting gain or loss included in the
statement of operations.
H.
Intangible Assets
Sublicense
Agreement
The
cost
of the Sublicense agreement is amortized on a straight-line basis over the
initial term of the Sublicense agreement, which is four years (see Note
3).
Trademarks
The
cost
of trademarks includes funds expended for trademark applications that are
in
various stages of the filing approval process. The cost of trademarks will
be
amortized on a straight-line basis over their estimated useful lives, once
the
trademark applications have been accepted.
1.ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
I.
Royalties
The
Company’s Sublicense agreement requires payments of royalties to the licensor.
The sublicense agreement provides for royalties to be calculated as a specified
percentage of sales and provides for guaranteed minimum royalty payments.
Royalties payable calculated using the agreement percentage rates will be
recognized as cost of sales when the related sales are recognized. Guarantees
advanced under the Sublicense agreement are recorded as prepaid royalties
until
earned by the licensor, or considered to be unrecoverable. The Company evaluates
prepaid royalties regularly and expenses prepaid royalties to cost of sales
to
the extent projected to be unrecoverable through sales. At September 30,2005,
the Company has recorded $250,000 in prepaid royalties in connection with
its
Sublicense agreement with a related party (see Note 3).
J.
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount exceeds the present value of estimated future cash flows.
At
September 30, 2005, the Company’s management believes there is no impairment of
its long-lived assets. There can be no assurance, however, that market
conditions will not change or that there will be demand for the Company’s
products, which could result in impairment of long-lived assets in the
future.
K.
Foreign Currency
Geographic
Concentrations
The
Company conducts business in the United States and the Ukraine (see Note
1, item
O). At September 30, 2005, 6 percent of the Company’s cash and was derived from
the Ukraine.
Foreign
Currency
Management
has determined that the functional currency of its subsidiary is the local
currency. Assets and liabilities of the Ukraine subsidiary are translated
into
U.S. dollars at the year end exchange rates. Income and expenses are translated
at an average exchange rate for the period and the resulting translation
gain
(loss) adjustments are accumulated as a separate component of stockholders'
equity, which did not have a material impact on the Company’s stockholders’
equity at September 30, 2005.
Foreign
currency gains and losses from transactions denominated in other than respective
local currencies are included in income. There were no foreign currency
transactions included in income for the six month periods ended September30,2004 and 2005, respectively, and cumulatively from August 27, 2002 (inception)
to September 30, 2005.
Comprehensive
Income
Comprehensive
income includes all changes in equity (net assets) during a period from
non-owner sources. For the six month period ended September 30, 2005, the
components of comprehensive income were not materially impacted by foreign
currency translation gains (losses).
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
L.
Income Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting
for Income Taxes.
Under
SFAS No. 109, deferred tax assets and liabilities are recognized for future
tax
benefits or consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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.
A
valuation allowance is provided for significant deferred tax assets when it
is
more likely than not that such assets will not be realized through future
operations.
M.
Stock-Based Compensation
Stock-based
awards to non-employees are accounted for using the fair value method in
accordance with SFAS No. 123, Accounting
for Stock-Based Compensation,
and
Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services.
All
transactions in which goods or services are the consideration received for
the
issuance of equity instruments are accounted for based on the fair value of
the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date on
which the third-party performance is complete or the date on which it is
probable that performance will occur.
N.
Net Loss Per Common Share
Net
loss
per common share is computed based on the weighted-average number of common
shares and, as appropriate, dilutive common stock equivalents outstanding during
the period. Stock options and warrants are considered to be common stock
equivalents.
Basic
net
loss per common share is the amount of net loss for the period available to
each
share of common stock outstanding during the reporting period. Diluted net
loss
per common share is the amount of net loss for the period available to each
share of common stock outstanding during the reporting period and to each share
that would have been outstanding assuming the issuance of common shares for
all
dilutive potential common shares outstanding during the period. During the
six
months ended September 30, 2005 and 2004 the basic and diluted net loss per
common share is the same since potentially dilutive common shares would have
been anti-dilutive due to the Company’s net loss.
At
September 30, 2005, the Company had $593,678 in deferred salaries. Of this
amount, $522,527 may be converted into common stock at the payee’s option, which
option exists indefinitely until exercised. Accordingly, the conversion rate
is
the rate existent at the time the payee’s salary is earned, as indicated in the
applicable private placement offering documents. At September 30, 2005 and
2004
if such conversion of deferred salaries into common stock had occurred at the
respective prices per share, the incremental increase in shares outstanding
would have totaled 9,846,235 and 9,172,500, respectively. As of
September30, 2005, deferred salary totaling $488,376 and $34,151 is convertible into
common stock at conversion rates of $.05 and $.50, respectively.
O.
Recent Accounting Pronouncements
In
May
2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150,
Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity.
SFAS
No. 150 establishes standards for how certain financial instruments with
characteristics of both liabilities and equity are classified and measured.
It
requires that a financial instrument
that is within its scope be classified as a liability (or an asset in some
circumstances). The adoption of SFAS No. 150 has not materially affected the
Company’s reported earnings, financial condition or cash flows
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
O.
Recent Accounting Pronouncements (continued)
In
December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46(R) ("FIN 46(R)"), which further clarified and amended
FIN
46, Consolidation
of Variable Interest Entities,
which
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or is the primary beneficiary, as a result of ownership,
contractual or other financial interests in the entity. At September 30,2005,
the Company has an interest in a limited liability company in which it is
considered to be the primary beneficiary. As a result, the Company has
consolidated the limited liability company under FIN 46(R) (see Note
2).
In
December 2004, the FASB issued SFAS No. 153, Exchanges
of Non-Monetary Assets, an amendment of APB Opinion 29, Accounting for
Non-Monetary Transactions.
The
amendments made by SFAS No. 153 are based on the principle that exchanges
of
non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader
exception for exchanges of non-monetary assets that do not have "commercial
substance." The provisions in SFAS No. 153 are effective for non-monetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Early
application is permitted and companies must apply the standard prospectively.
The adoption of the statement should not cause a significant change in the
current manner in which the Company accounts for its exchanges of non-monetary
assets.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.
This
statement changes the requirements for the accounting for and reporting of
a
change in accounting principle. Previously, Opinion 20 required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of change the cumulative effect of changing to a new
principle. This statement requires retrospective application to prior periods’
financial statements of changes in accounting principle, when practicable.
The
replacement of SFAS No. 154 did not have a material impact on the Company’s
interim financial condition or results of operations.
2.
CONSOLIDATION OF VARIABLE INTEREST ENTITY
Effective
July 2005, the Company adopted FIN 46(R). This resulted in the consolidation
of
LB Games Ukraine LLC (“LB Games Ukraine”), a variable interest entity in which
the Company is considered the primary beneficiary. LB Games Ukraine was
established to provide software development and consulting services and is
currently providing these services only to the Company. LB Games Ukraine
is 85%
owned by the Company’s Chief Executive Officer. Pursuant to the LB Games Ukraine
operating agreement, the Company’s Chief Executive Officer is required to fund
operations as needed in relation to his ownership interest LB Games Ukraine.
During the six month period ended September 30, 2005, the Company contributed
approximately $5,600 to LB Games Ukraine on behalf of the Company’s Chief
Executive Officer to provide working capital to LB Games Ukraine. This
transaction has been eliminated in consolidation.
As
LB
Games Ukraine is currently providing software development services only to
the
Company and due to the Company’s history of providing on-going financial support
to this entity, through consolidation the Company absorbs all net losses
of this
variable interest entity in excess of the equity. The variable interest entity’s
sole asset is approximately $2,000 in cash. During the six months ended
September 30, 2005, the Company paid approximately $25,000 for software
development services provided by LB Games Ukraine, all of which has been
eliminated in consolidation.
3.
COMMON STOCK
In
April,
May, June, August and September 2005, the Company issued 762,000 shares of
common stock valued at $.50 and $1.00 per share for cash resulting in gross
proceeds to the Company totaling $462,000.
In
May,
June, August and September 2005, the Company issued 85,000 shares of common
stock valued at $.50 and $1.00 per share to three employees and one consultant
as bonuses, resulting in salary and consulting expenses of $57,500.
In
May
2005, the Company issued 51,262 shares of common stock valued at $1.00 per
share
for consulting services to be rendered over a seven month period of time,
resulting in prepaid consulting expense of $51,262 included in prepaid expenses
to be amortized over the term of the consulting agreement.
Values
attributable to the respective shares of common stock are computed based
on the
cash prices per share existent at the time of issuance.
In
May
2005, the Company issued 1,000,000 shares of common stock valued at $.50
per
share under a one-year consulting agreement for prepaid consulting expense
of
$500,000 included in prepaid expenses and to be amortized over the term of
the
consulting agreement.
In
May
2005, the Company issued 10,000 shares of common stock valued at $0.50 per
share
to a third party for the acquisition of the “LBgames.com” web address. The
amount has been capitalized as an amortizable intangible asset and will be
amortized at $1,250, $1,667, $1,667 and $416 over the fiscal years ending
2006,
2007, 2008 and 2009, respectively.
In
May
2005, the Company issued 100,000 shares of common stock pursuant to a previous
agreement between the Company and the consultant, wherein the Company has
agreed
to provide the consultant a one percent non-dilutable company ownership
interest.
In
July
2005, the Company received $60,000 in contributed capital pursuant to two
consulting agreements wherein the Company will receive $80,000 per month
in any
month the Company’s cash flow is less than $100,000.
In
May
and August 2005, the Company amended and extended the above consulting
agreements until November 18, 2007. The amended consulting agreements required
the consultants to provide the Company with $80,000 per month in funding
under
the terms described above. The amended consulting agreements also provided
for
the issuance of an additional 3,500,000 non-forfeitable shares (500,000 valued
at $0.50 and 3,000,000 at $1.00) of the Company’s common stock for services to
be performed over the extended term of the agreements. The agreements resulted
in additional prepaid consulting expense of $3,250,000 in addition to amounts
already included in prepaid expenses. On September 30, 2005, the agreements
were
effectively terminated resulting in the expensing of all remaining prepaid
consulting expense under these agreements resulting in an additional charge
to
consulting expense included in general and administrative expenses in the
Company’s operating expenses of $3,434,466 for the six months ended September30, 2005. Additional prepaid consulting expense amortized under other agreements
amounted to $208,652 for the six months ended September 30, 2005. In connection
with the termination of the agreements, the consultants have agreed to provide
an additional $90,000 subsequent to September 30, 2005 according to an agreed
upon payment plan through February 2006. Subsequent to September 30, 2005,
the
entire $90,000 has been collected.
In
August
2005, the Company issued 20,000 shares of the Company’s common stock valued at
$1.00 for services performed resulting in consulting expense of $20,000 being
included in general and administrative expenses in the Company’s operating
expenses.
4.
RELATED PARTIES
On
October 11, 2002, Tyndale granted White Beacon, a related party to the Company
(see Note 1), an exclusive worldwide license, as amended, to use the copyrights
and trademarks relating to the storyline and content of the books in the
“LEFT
BEHIND
SERIES” of novels for the manufacture and distribution of video game products
for personal computers, CD-ROM, DVD, game consoles, and the Internet.
Pursuant
to the License agreement with Tyndale, White Beacon is required to guarantee
a
minimum royalty of $250,000 during the initial term, and is required to pay
$100,000 as a nonrefundable advance against future royalties payable to Tyndale.
On
November 14, 2002, White Beacon granted the Company a Sublicense of all of
its
rights and obligations under its License with Tyndale, with the written approval
of Tyndale. In consideration for receiving the Sublicense, the Company issued
to
White Beacon 5,850,000 shares of its common stock valued at $5,850, which
is the
estimated fair value of the common stock on the date of issuance. In addition,
as of September 30, 2005, and in accordance with the License agreement, the
Company had paid the $100,000, non-refundable advance against the guaranteed
minimum royalty of $250,000 payable to Tyndale during the initial term. The
remaining guaranteed minimum royalty of $150,000 has been accrued by the
Company
and is included in long-term liabilities in the accompanying balance
sheet.
On
February 28, 2005, the Company entered into a promissory note with EQL, an
existing shareholder and consultant to the Company. In accordance with the
note,
the Company is required to provide EQL a minimum of $6,000 in advances on
a
monthly basis for one year for marketing and consulting services. The note
bears
an annual interest rate of 5 percent and no payments are required by EQL
until
February 28, 2006. For the six month period ended September 30, 2005, the
Company had provided $36,000 to EQL. Effective September 30, 2005, this amount
has been expensed and included in general and administrative costs as management
does not expect to collect this note pursuant to the termination of the
consulting agreements in Note 2.
5.
SUBSEQUENT EVENTS
A.
Merger and acquisition
In
January 2006, the Company entered into an Agreement and Plan of Merger (the
“Agreement”) with Bonanza Gold, Inc., a Washington corporation (“Bonanza”),
wherein Bonanza acquired the Company through the purchase of the Company’s
outstanding common stock on a “1 for 1” exchange basis. Prior to the execution
of the Agreement, on January 25, 2006, the Company performed a 2.988538 for
5
reverse stock split of both its common and preferred stock outstanding,
resulting in 12,456,538 and 3,586,246 shares of common and preferred stock,
respectively. On January 27, 2006, and also prior to the execution of the
Agreement, Bonanza performed a 1 for 4 reverse stock split, resulting in
1,882,204 shares of common stock outstanding.
Effective
February 1, 2006, Bonanza exchanged 12,456,538 and 3,586,246 shares of its
common and preferred stock, respectively, for an equal number of common and
preferred shares of the Company. The acquisition was accounted for as a reverse
acquisition whereby the assets and liabilities of the Company will be reported
at their historical cost and the historical results of operations of the
Company
will be presented. Bonanza had nominal amounts of assets and no significant
operations at the date of the acquisition (see Pro Forma Financial
Data).
In
October, November and December 2005, and January 2006, the Company issued
637,500 shares of common stock valued at $.50 and $1.00 per share for cash
resulting in gross proceeds to the Company totaling $637,500.
In
October 2005, the Company issued 2,400,000 non-forfeitable shares of series
A
preferred stock at $1.00 per share under a ten-year consulting agreement
for
total prepaid consulting expense of $2,400,000 included in prepaid expenses
to
be amortized over the term of the consulting agreement.
In
November 2005, the Company issued 50,000 non-forfeitable shares of common
stock
valued at $1.00 per share under a one-year consulting agreement for total
prepaid consulting expense of $50,000 included in prepaid expenses to be
amortized over the term of the consulting agreement.
In
November 2005, the Company issued 1,900,000 non-forfeitable shares of common
stock valued at $1.00 per share under a twenty-year consulting agreement
to a
consultant related to an employee for total prepaid consulting expense of
$1,900,000 included in prepaid expenses to be amortized over the term of
the
consulting agreement.
In
November 2005, the Company issued 130,000 shares of common stock pursuant
to an
agreement between the Company and the consultant, wherein the Company has
agreed
to provide the consultant a one percent non-dilutable ownership
interest.
In
December 2005, the Company issued 100,000 shares of common stock valued at
$1.00
per share in exchange for a note payable to the Company in the same amount,
plus
any interest due upon note repayment.
In
December 2005, the Company issued 18,000 shares of common stock valued at
$1.00
per share for consulting services pursuant to the applicable independent
contractor stock agreement.
In
December 2005, the Company issued 185,000 non-forfeitable shares of common
stock
valued at $1.00 per share under a ten-year consulting agreement for total
prepaid consulting expense of $185,000 included in prepaid expenses to be
amortized over the term of the consulting agreement.
In
January 2006, the Company issued 500,000 non-forfeitable shares of common
stock
valued at $1.00 per share under a two-year consulting agreement for total
prepaid consulting expense of $500,000 included in prepaid expenses to be
amortized over the term of the consulting agreement.
In
January 2006, the Company issued 4,080 non-forfeitable shares of common stock
valued at $1.00 per share under a two-year consulting agreement, resulting
in
consulting expense of $4,080.
In
January 2006, the Company issued 10,000 non-forfeitable shares of common
stock
valued at $1.00 per share under a two-year consulting agreement for total
prepaid consulting expense of $10,000 included in prepaid expenses to be
amortized over the term of the consulting agreement.
In
January 2006, the Company issued 250,000 non-forfeitable shares of common
stock
valued at $1.00 per share under an employee agreement for total prepaid
compensation expense of $250,000 included in prepaid expenses to be amortized
over the term of the applicable agreement.
In
January 2006, the Company issued 85,000 non-forfeitable shares of common
stock
valued at $1.00 per share under a consulting agreement for total prepaid
consulting expense of $85,000 included in prepaid expenses to be amortized
over
the term of the consulting agreement.
At
February 1, 2006, the Company had $648,710 in deferred salaries outstanding,
of
which amount $530,527 is convertible into common stock at the payee’s option.
The option to convert exists indefinitely until exercised. The conversion
rate
is the rate existent at the time the payee’s salary is earned. To date, no payee
has exercised its option to convert. At February 1, 2006, and prior to the
merger and acquisition (see Note 5, item A), if such conversion of deferred
salaries into common stock had occurred at the respective prices per share,
the
incremental increase in shares outstanding would have totaled 9,854,235.
As of
February 1, 2006, deferred salaries totaling $488,376 are convertible into
common stock at a conversion rate of $.05, and deferred salaries totaling
$42,151 are convertible into common stock at conversion rates of $.50 and
$1.00,
respectively.
13
Unaudited
Pro Forma Financial Data
In
January 2006, LBG entered into an Agreement and Plan of Merger (the “Agreement”)
with Bonanza Gold, Inc., a Washington corporation (“Bonanza”), wherein Bonanza
acquired LBG through the purchase LBG’s outstanding common stock on a “1 for 1”
exchange basis. Prior to the execution of the Agreement, on January 25, 2006,
LBG performed a 2.988538 for 5 reverse stock split of both its common and
preferred stock outstanding, resulting in 12,456,538 and 3,586,246 shares
of
common and preferred stock, respectively. On January 27, 2006, and also prior
to
the execution of the Agreement, Bonanza performed a 1 for 4 reverse stock
split,
resulting in 1,882,204 shares of common stock outstanding.
Effective
February 1, 2006, Bonanza exchanged 12,456,538 and 3,586,246 shares of its
common and preferred stock, respectively, for an equal number of common and
preferred shares of LBG. The acquisition was accounted for as a reverse
acquisition whereby the assets and liabilities of LBG will be reported at
their
historical cost and the historical results of operations of LBG will be
presented. Bonanza had nominal amounts of assets and no significant operations
at the date of the acquisition.
The
pro
forma financial statements of the combined entity as if the merger had taken
place on September 30, 2005 are as follows:
The
accumulated deficit and additional paid-in capital of Bonanza were
eliminated as a result of reverse acquisition accounting, as was
the
capital stock of the common shares outstanding of the Company at
September30, 2005. The net difference of these amounts was recorded against
paid-in
capital as part of the
recapitalization.
(b)
The
effects of the 2.988538 for 5 and 1 for 4 reverse splits for LBG
and
Bonanza, respectively, were incorporated into the common and preferred
capital stock amounts, resulting in combined par values for common
and
preferred shares outstanding of $2,151 and $15,725, respectively.
(c)
The
following is a reconciliation of the Company’s weighted average shares
outstanding from a historical basis to a pro forma basis as of
September30, 2005:
15
Weighted
average shares outstanding - historical
Bonanza
7,528,815
Left
Behind Games Inc.
17,048,262
Subtotal
24,577,077
Effect
of 1 for 4 reverse split on Bonanza’s common shares
The
following is a reconciliation of the Company’s weighted average shares
outstanding from a historical basis to a pro forma basis as of March31,2005:
Weighted
average shares outstanding - historical
Bonanza
7,528,815
Left
Behind Games Inc.
17,048,262
Subtotal
24,577,077
Effect
of 1 for 4 reverse split on Bonanza’s common shares
Certified
Public Accountants and Business Consultants
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Left
Behind Games Inc.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting
as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Left Behind Games Inc. as of
March31, 2005 and the results of its operations and its cash flows for the years
then
ended and for the period August 27, 2002 (date of inception) through March31,2005 in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company is in the development stage,
has
negative working capital of $387,956 and a stockholders’ deficit of $269,645 as
of March 31, 2005. In addition, the Company
has not
generated any revenues or positive cash flows from operations since inception.
These
conditions raise substantial doubt about its ability to continue as a going
concern. Management’s plans regarding these matters are described in Note
1.
As
discussed in Note 1
to the
financial statements, successful completion of the Company’s development program
and ultimately the attainment of profitable operations is dependent on future
events, including maintaining adequate financing to complete development
activities and achieving a level of sales adequate to support the Company’s cost
structure. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Left
Behind Games Inc. (the “Company”) is a development stage company that was
incorporated on August 27, 2002 under the laws of the State of Delaware for
the
purpose of engaging in the business of producing, distributing and selling
video
games and associated products. The Company is currently developing a video
game
and other associated products based upon the popular “LEFT BEHIND SERIES” of
novels published by Tyndale House Publishers (“Tyndale”).
The
Company’s majority shareholder is White Beacon, Inc., a Delaware Corporation
(“White Beacon”), an entity beneficially owned and controlled by the Company’s
chief executive officer and its president. White Beacon holds an exclusive
worldwide license (the “License”) from Tyndale to develop, manufacture and
distribute video games and related products based on the “LEFT BEHIND SERIES” of
novels published by Tyndale. White Beacon has granted the Company a sublicense
(the “Sublicense”) to exploit the rights and fulfill the obligations of White
Beacon under the License (see Note 4).
Basis
of Presentation and Going Concern
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which
contemplate continuation of the Company as a going concern. The Company has
not
generated any revenue and has incurred net losses of $938,627 and had negative
cash flows from operations of $219,218 since its inception through March31,2005. In addition, the Company has negative working capital of $203,489 and
a
stockholders’ deficit of $85,178 as of March 31, 2005. The Company’s ability to
continue as a going concern is dependent upon its ability to generate profitable
operations in the future and/or to obtain the necessary financing to meet
its
obligations and repay its liabilities arising from normal business operations
when they come due. Management plans to continue to provide for its capital
requirements by issuing additional equity securities and is currently in
the
process of soliciting additional capital. In August 2005, the Company received
commitments from three stockholders/consultants to provide the Company with
an
aggregate of $80,000 per month in funding for each month that the Company’s cash
balance falls below $100,000. No assurance can be given that additional capital
will be available when required or on terms acceptable to the Company. The
outcome of these matters cannot be predicted at this time and there are no
assurances that if achieved, the Company will have sufficient funds to execute
its business plan or generate positive operating
results.
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
These
matters, among others, raise substantial doubt about the ability of the Company
to continue as a going concern. These financial statements do not include
any
adjustments to the amounts and classification of assets and liabilities that
may
be necessary should the Company be unable to continue as a going
concern.
Development
Stage Enterprise
The
Company’s planned principal operations have not yet commenced. Accordingly, the
Company’s activities have been accounted for as those of a development stage
enterprise as defined in Statement of Financial Accounting Standards (“SFAS”)
No. 7, Accounting
and Reporting by Development Stage Enterprises.
All
losses since inception have been considered as part of the Company’s development
stage activities.
Risks
and Uncertainties
The
Company maintains its cash accounts with a single financial institution.
Accounts at this financial institution are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to $100,000. At March 31, 2005, the Company
had balances of approximately $127,000 in excess of the FDIC insurance
limit.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date
of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
Company’s significant estimates include recoverability of prepaid royalties and
other long-lived assets and the realizability of deferred tax
assets.
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts payable and accrued
expenses. The carrying values for all such instruments approximate fair value
at
March 31, 2005 due to the short maturities of such financial
instruments.
Software
Development Costs
Research
and development costs, which consist of software development costs, are expensed
as incurred. Software development costs primarily include payments made to
independent software developers under development agreements. SFAS No. 86,
Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed,
provides for the capitalization of certain software development costs incurred
after technological feasibility of the software is established or for the
development costs that have alternative future uses. The Company believes that
the technological feasibility of the underlying software is not established
until substantially all product development is complete, which generally
includes the development of a working model. No software development costs
have
been capitalized to date.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 5 years. Repairs and maintenance are charged to expense
as
incurred while improvements are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, with any resulting gain or loss included in the
statement of operations.
Intangible
Assets
Sublicense
Agreement
The
cost
of the Sublicense agreement is amortized on a straight-line basis over the
initial term of the Sublicense agreement, which is four years (see Note
4).
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
Trademarks
The
cost
of trademarks includes funds expended for trademark applications that are
in
various stages of the filing approval process. The cost of trademarks will
be
amortized on a straight-line basis over their estimated useful lives, once
the
trademark applications have been accepted.
Royalties
The
Company’s Sublicense agreement requires payments of royalties to the licensor.
The sublicense agreement provides for royalties to be calculated as a specified
percentage of sales and provides for guaranteed minimum royalty payments.
Royalties payable calculated using the agreement percentage rates will be
recognized as cost of sales when the related sales are recognized. Guarantees
advanced under the Sublicense agreement are recorded as prepaid royalties
until
earned by the licensor, or considered to be unrecoverable. The Company evaluates
prepaid royalties regularly and expenses prepaid royalties to cost of sales
to
the extent projected to be unrecoverable through sales. At March 31, 2005,
the
Company has recorded $250,000 in prepaid royalties in connection with its
Sublicense agreement (see Note 4).
Long-Lived
Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount exceeds the present value of estimated future cash flows.
At
March 31, 2005, the Company’s management believes there is no impairment of its
long-lived assets. There can be no assurance however, that market conditions
will not change or that there will be demand for the Company’s products, which
could result in impairment of long-lived assets in the
future.
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting
for Income Taxes.
Under
SFAS No. 109, deferred tax assets and liabilities are recognized for future
tax
benefits or consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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.
A
valuation allowance is provided for significant deferred tax assets when it
is
more likely than not that such assets will not be realized through future
operations.
Stock-Based
Compensation
Stock-based
awards to non-employees are accounted for using the fair value method in
accordance with SFAS No. 123, Accounting
for Stock-Based Compensation,
and
Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services.
All
transactions in which goods or services are the consideration received for
the
issuance of equity instruments are accounted for based on the fair value of
the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date on
which the third-party performance is complete or the date on which it is
probable that performance will occur.
In
accordance to EITF Issue No. 00-18, Accounting
Recognition for Certain Accounting Transactions Involving Equity Instruments
Granted to Other Than Employees,
an
asset acquired in exchange for the issuance of fully vested, non-forfeitable
equity instruments should not be presented or classified as an offset to equity
on the grantor's balance sheet once the equity instrument is granted for
accounting purposes. Accordingly, the Company recorded the fair value of the
common stock issued for certain consulting services as prepaid expenses in
its
consolidated balance sheet.
Basic
loss per common share is computed based on the weighted average number of
shares
outstanding for the period. Diluted loss per share is computed by dividing
net
loss by the weighted average shares outstanding assuming all potential dilutive
common shares were issued. Basic and diluted loss per share are the same
as the
effect of stock options and warrants on loss per share are anti-dilutive
and
thus not included in the diluted loss per share calculation. The impact under
the as-if converted method for dilutive convertible deferred salaries would
have
resulted in incremental shares of 9,767,520 and 0 for the years ended March31,2005 and 2004, respectively.
Recent
Accounting Pronouncements
In
December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. (“FIN”) 46R, Consolidation
of Variable Interest Entities. This
statement requires that the assets, liabilities and results of the activities
of
variable interest entities be consolidated into the financial statements
of the
company that has a controlling financial interest. It also provides the
framework for determining whether an entity should be consolidated based
on
voting interest or significant financial support provided to it. In general,
for
all entities that were previously considered special purpose entities, FIN
46R
should be applied in periods ending after December 15, 2003. The Company
adopted
FIN 46R during its fiscal year ended March 31, 2004. The adoption of FIN
46R did
not have a material impact on the Company’s financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 153, Exchanges
of Non-Monetary Assets, an amendment of APB Opinion 29, Accounting for
Non-Monetary Transactions.
The
amendments made by SFAS No. 153 are based on the principle that exchanges
of
non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after
June15, 2005. Early application is permitted and companies must apply the standard
prospectively. The adoption of the statement should not cause a significant
change in the current manner in which the Company accounts for its exchanges
of
non-monetary assets.
NOTE
2 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at March 31, 2005:
Office
furniture and equipment
$
4,921
Computer
equipment
9,054
13,975
Less
accumulated depreciation and amortization
(1,401
)
$
12,574
Depreciation
expense for the year ended March 31, 2005 and the period from inception through
March 31, 2005 was $1,401 and $1,401, respectively. There was no depreciation
expense for the year ended March 31, 2004.
Intangible
assets consist of the following at March 31, 2005:
Carrying
Amount
Accumulated
Amortization
Sublicense
$
5,850
$
3,393
Trademarks
3,280
-
Total
$
9,130
$
3,393
Amortization
expense related to the Sublicense agreement was $1,404, $1,404 and $3,393 for
the years ended March 31, 2005 and 2004 and the period from inception through
March 31, 2005, respectively. The estimated future amortization expense of
the
Sublicense agreement is $1,404 and $1,053 for the years ending March 31, 2006
and 2007, respectively.
NOTE
4 - SUBLICENSE AGREEMENT
On
October 11, 2002, Tyndale granted White Beacon an exclusive worldwide license,
as amended, to use the copyrights and trademarks relating to the storyline
and
content of the books in the “LEFT BEHIND SERIES” of novels for the manufacture
and distribution of video game products for personal computers, CD-ROM, DVD,
game consoles, and the Internet. The License expires on December 31, 2006,
subject to automatic renewal for three additional three-year terms so long
as
Tyndale is paid royalties in an aggregate amount equal to or in excess of
$1,000,000 during the initial term and $250,000 during each renewal
term.
The
License requires White Beacon to pay the following royalties: (i) 4% of the
gross receipts on console game platform systems and (ii) 10% of the gross
receipts on all non-electronic products and for electronic products produced
for
use on personal computer systems. White Beacon is required to guarantee a
minimum royalty of $250,000 during the initial four-year term of the License.
White Beacon was also required to pay $100,000 to Tyndale as an advance against
future royalties payable to Tyndale under the License agreement, all of which
was paid by the Company in fiscal 2003 (see below).
On
November 14, 2002, White Beacon granted the Company a Sublicense of all of
its
rights and obligations under its License with Tyndale, with the written approval
of Tyndale. In consideration for receiving the Sublicense, the Company issued
to
White Beacon 5,850,000 shares of its common stock valued at $5,850, which
is the
estimated fair value of the common stock on the date of issuance.
During
the year ended March 31, 2003, the Company paid $100,000 to Tyndale as a
non-refundable advance against the guaranteed minimum royalty of $250,000
payable to Tyndale during the initial four-year term. The remaining guaranteed
minimum royalty of $150,000 has been accrued by the Company and is included
in
long-term liabilities in the accompanying balance sheets.
NOTE
5 - CONVERTIBLE DEFERRED SALARIES
As
of
March 31, 2005, the Company had $518,209 of deferred salaries due to officers
of
the Company (See Note 9). The deferred salary, at the option of the respective
officer, can be converted into shares of the Company’s common stock at the value
of the Company’s common stock in effect at the time the salary was earned.
Deferred salary and the respective conversion rates are as
follows:
In
fiscal
2005, the Company entered into a $15,000 note payable agreement which was
subsequently converted to common stock (see Note 8).
In
May
and June 2003, the Company issued notes payable in the aggregate amount of
$150,000. The notes payable bore interest at 12% per annum and were due in
May
2005. The proceeds were used to pay the advance royalty payment of $100,000
due
to Tyndale in connection with the Sublicense (see Note 4). Proceeds of $34,000
were paid directly to Tyndale by one of the note holders. In connection with
the
issuance of the notes payable, the Company issued 1,000,000 shares of its
common
stock to each note holder. The shares were valued at $3,000, which was the
estimated fair value of the common stock on the date of issuance. The estimated
fair value of the shares was recorded as interest expense in the accompanying
statement of operations for the year ended March 31, 2004.
In
June
2004, the note holders converted the outstanding principal of $150,000, accrued
interest of $17,500 and the 3,000,000 shares of common stock held by them
into
3,600,000 shares of the Company’s Series A preferred stock (see Note
8).
NOTE
7 - INCOME TAXES
The
provision for income taxes consists of the following for the years ended
March
31:
2005
2004
Current:
Federal
$
-
$
-
State
800
800
800
800
Deferred:
Federal
151,000
99,000
State
43,000
28,000
194,000
127,000
Less
change in valuation allowance
(194,000
)
(127,000
)
-
-
$
800
$
800
No
current provision for federal income tax is required for the years ended
March31, 2005 and 2004, since the Company incurred net operating losses through
March31, 2005.
The
tax
effect of temporary differences that give rise to significant portions of
the
deferred tax asset at March 31, 2005 and 2004 are presented below:
2005
2004
Deferred
tax assets:
Net
operating loss carryforwards
$
167,000
$
45,000
Deferred
salaries
208,000
136,000
375,000
181,000
Less
valuation allowance
(375,000
)
(181,000
)
Net
deferred tax assets
$
-
$
-
The
provision for income taxes for fiscal 2005 and 2004 was $800 and differs
from
the amount computed by applying the U.S. federal income tax rate of 34% to
loss
before income taxes as a result of the following:
2005
2004
Computed
tax benefit at federal statutory rate
$
(166,000
)
$
(108,000
)
State
income tax benefit, net of federal effect
(29,000
)
(19,000
)
Increase
in valuation allowance
194,000
127,000
Other
1,800
800
$
800
$
800
As
of
March 31, 2005, the Company had net operating loss carryforwards of
approximately $420,000 available to offset future taxable Federal and state
income, respectively. The Federal and state net operating loss carryforwards
expire at various dates through 2025 and 2015, respectively.
Section
382 of the Internal Revenue Code may limit utilization of the Company’s federal
and California net operating loss carryforwards upon any change in control
of
the Company.
The
Company is authorized to issue 20,000,000 shares of common stock, $0.001 par
value per share. The holders of the Company’s common stock are entitled to one
vote per share of common stock held and have equal rights to receive dividends
when, and if, declared by the Board of Directors, out of funds legally available
therefore, subject to the preference of any holders of preferred stock. In
the
event of liquidation, holders of common stock are entitled to share ratably
in
the net assets available for distribution to stockholders, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares
of
common stock are not redeemable and have no preemptive or similar
rights.
In
November 2002, the Company issued 5,850,000 shares of its common stock to White
Beacon in connection with the Sublicense agreement valued at $5,850 (based
on
the fair value of the common stock at the date of issuance) (see Note 4).
In
November 2002, the Company issued 325,000 shares of its common stock to an
officer of the Company for services rendered on behalf of the Company valued
at
$325 (based on the fair value of the common stock at the date of issuance).
The
Company recorded this amount as compensation expense during the year ended
March31, 2003.
In
November 2002 and March 2003, the Company issued 16,000 shares of its common
stock to members of the Company’s advisory board valued at $16 (based on the
fair value of the common stock at the date of issuance). The Company recorded
this amount as consulting expense during the year ended March 31, 2003.
In
November 2002, the Company issued 100,000 shares of its common stock to a
consultant for services rendered to the Company valued at $100 (based on the
fair value of the common stock at the date of issuance). The Company recorded
this amount as consulting expense during the year ended March 31, 2003. The
Company has agreed to issue the consultant a 1% non-dilutable ownership interest
in the Company whereby the consultant will maintain a 1% ownership interest
in
the Company. As of March 31, 2005, the Company was in violation of the
antidilution provision by 14,200 shares. Subsequent to year-end, however, the
Company cured the violation by issuing an additional 100,000 shares to the
consultant.
In
May
and June 2003, the Company issued 3,000,000 shares of its common stock in
connection with the issuance of notes payable of $150,000 (see Note 5). The
shares were valued at $3,000 based on the fair value of the common stock at
the
date of issuance.
In
June
2003, the Company issued 325,000 shares of its common stock to a consultant
for
services rendered to the Company valued at $325 (based on the fair value of
the
common stock at the date of issuance). The Company recorded $325 of consulting
expense in connection with this transaction, which is included in general and
administrative expenses in the accompanying statement of operations for the
year
ended March 31, 2004.
In
September 2003, the Company issued 48,000 shares of its common stock to an
employee for services rendered to the Company valued at $2,400. The shares
were
valued at $0.05 per share at the date of issuance based on values determined
by
management due to a pending private placement offering. The Company recorded
$2,400 of compensation expense in connection with this transaction, which is
included in general and administrative expenses in the accompanying statement
of
operations for the year ended March 31, 2004.
In
December 2003, the Company issued 233,800 shares of its common stock to a
consultant for services rendered to the Company valued at $11,690. The shares
were valued at $0.05 per share at the date of issuance based on values
determined by management due to a pending private placement offering. The
Company recorded $11,690 of consulting expense in connection with this
transaction, which is included in general and administrative expenses in the
accompanying statement of operations for the year ended March 31,2004.
In
June
2004 and March 2005, the Company issued 349,455 shares of its common stock
to
consultants for services rendered to the Company valued at $17,473 (based on
the
fair value of the common stock at the date of issuance). The Company recorded
consulting expense of $17,473 in connection with these transactions, which
is
included in general and administrative expenses in the accompanying statement
of
operations for the year ended March 31, 2005.
In
October 2004 and January 2005, the Company issued 425,000 shares of its common
stock to employees for services rendered to the Company valued at $21,250 (based
on the fair value of the common stock at the date of issuance). The Company
recorded compensation expense of $21,250 in connection with these transactions,
which is included in general and administrative expenses in the accompanying
statement of operations for the year ended March 31, 2005.
In
November 2004, the Company issued 1,784,000 non-forfeitable shares of its common
stock to consultants in connection with a one-year consulting agreement for
strategic investment services valued at $89,200 (based on the fair value of
the
common stock at the date of issuance). The Company has recorded the amount
as
prepaid consulting included in prepaid expenses and is amortizing the amount
over the one-year term of the agreement. In connection with this agreement,
the
Company amortized $29,733 and recorded such amount as consulting expense, which
is included in general and administrative expenses in the accompanying statement
of operations for the year ended March 31, 2005. In August 2005, the Company
extended the
consulting
agreement until November 18, 2007. The amended consulting agreement requires
the
consultant to provide the Company with $60,000 per month in funding in each
month that the Company’s cash balance falls below $100,000. The amended
consulting agreement also provides for the issuance of an additional 2,000,000
non-forfeitable shares of the Company’s common stock for services to be
performed over the extended term of the Agreement.
In
November 2004, the Company issued 1,000,000 shares of its common stock to
investors for $50,000 in cash, or $0.05 per share.
In
February and March 2005, the Company issued 770,000 shares of its common
stock
to investors for gross proceeds of $385,000, or $0.50 per share. In connection
with this offering, the Company incurred offering costs of $47,553, which
have
been netted against the gross proceeds in the accompanying statement of
stockholders’ deficit.
In
February and March 2005, the Company issued 263,475 non-forfeitable shares
of
its common stock to consultants for services rendered or to be rendered to
the
Company valued at $131,873 (based on the fair value of the common stock at
the
date of issuance). Of the shares issued, 13,745 shares related to services
already rendered to the Company, and accordingly, the Company recorded
compensation expense of $6,873 during the year ended March 31, 2005. The
remaining 250,000 shares were issued in connection with a one-year consulting
agreement for strategic investment services. The Company has recorded the
remaining $125,000 as prepaid compensation and included in prepaid expense
and
is amortizing the amount over the one-year term of the agreement. No prepaid
compensation was recognized during the year ended March 31, 2005 in connection
with this agreement as the agreement was signed at year end. In August 2005,
the
Company extended the consulting agreement until November 18, 2007. The amended
consulting agreement requires the consultant to provide the Company with
$20,000
per month in funding in each month that the Company’s cash balance falls below
$100,000. The amended consulting agreement also provides for the issuance
of an
additional 1,500,000 non-forfeitable shares of the Company’s common stock for
services to be performed over the extended term of the Agreement.
In
March
2005, the Company entered into a $15,000 note agreement with a third party
which
was immediately converted into common stock at $0.50 per share resulting
in an
issuance of 30,000 shares of common stock. No accrued interest was earned
or
converted in this transaction.
Preferred
Stock
The
Company is authorized to issue 5,000,000 shares of preferred stock, $0.001
par
value per share, of which all have been designated Series A preferred stock.
The
holders of the Company’s Series A preferred stock are entitled to one vote per
share on all matters subject to
stockholder
vote. The holder of the Series A preferred stock have equal rights to receive
dividends when, and if, declared by the Board of Directors, out of funds
legally
available therefore. In the event of liquidation, holders of preferred stock
are
entitled to share ratably in the net assets available for distribution to
stockholders.
In
June
2004, holders of $150,000 in notes payable converted the outstanding principal
of $150,000, accrued interest of $17,500 and the 3,000,000 shares of common
stock held by them into 3,600,000 shares of the Company’s Series A preferred
stock. The holders of Series A preferred stock have a liquidation preference
equal to the sum of the converted principal, accrued interest and value of
converted common stock, aggregating $170,500 at March 31, 2005.
NOTE
9 - COMMITMENTS AND CONTINGENCIES
Guaranties
and Indemnities
The
Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party in relation
to
certain actions or transactions. The Company indemnifies its directors,
officers, employees and agents, as permitted under the laws of the State
of
Delaware. The Company has also indemnified its consultants and sublicensor
against any liability arising from the performance of their services and
license
commitment, respectively, pursuant to their agreements. In connection with
its
facility lease entered into in August 2005 (see Note 10), the Company has
indemnified its lessor for certain claims arising from the use of the facility.
The duration of the guarantees and indemnities varies, and is generally tied
to
the life of the agreement. These guarantees and indemnities do not provide
for
any limitation of the maximum potential future payments the Company could
be
obligated to make. Historically, the Company has not been obligated nor incurred
any payments for these obligations and, therefore, no liabilities have been
recorded for these indemnities and guarantees in the accompanying balance
sheets.
Employment
Agreements
The
Company has entered into employment agreements with certain of its key
employees. Such contracts provide for minimum annual salaries and are renewable
annually. In the event of termination of certain employment agreements by
the
Company without cause, the Company would be required to pay continuing salary
payments for specified periods in accordance with the employment contracts.
In
connection with these agreements, the Company has recorded deferred salaries
of
$518,209 and $339,833 at March 31, 2005 and 2004, respectively.
See
Note
10 for discussion of non-cancelable operating lease entered into by the Company
in August 2005.
NOTE
10 - SUBSEQUENT EVENTS
In
August
2005, the Company entered into a three-month non-cancelable operating lease
for
its corporate facility in Temecula, California commencing on September 1,2005.
The terms of the lease provide for monthly rental payments of $3,723. The
lease
will continue on a month-to-month basis after the three-month initial
term.
In
addition to the issuances subsequent to year end as discussed in Note 8,
the
following share issuances occurred subsequent to March 31, 2005:
In
April
through June 2005, the Company issued 600,000 shares of common stock valued
at
$0.50 per share for cash resulting in gross proceeds to the Company totaling
$300,000.
In
May
2005, the Company issued 1,000,000 shares of common stock valued at $0.50
to two
consultants under a one-year consulting agreement for total deferred consulting
expense of $500,000 to be amortized over the term of the consulting agreement.
In
May
2005, the Company issued 10,000 shares of common stock valued at $0.50 per
share
to a third party for the acquisition of the “LBgames.com” web address. The
amount has been capitalized as an amortizable intangible asset and will be
amortized at $1,250, $1,667, $1,667 and $416 over the fiscal years ending
2006,
2007, 2008 and 2009, respectively.
In
May
2005, the Company issued 51,262 shares of common stock valued at $1.00 per
share
for consulting services to be rendered over seven months, resulting in prepaid
consulting expense to be amortized over the term of the consulting
agreement.
In
May
and June 2005, the Company issued 75,000 shares of common stock valued at
$0.50
per share to three employees for services rendered, resulting in compensation
expense of $37,500.
In
August
2005, the Company issued 100,000 shares of common stock at $1.00 per share
for
cash resulting in gross proceeds to the Company totaling $100,000.
In
August
2005, the Company issued 20,000 shares of common stock valued at $1.00 per
share
for consulting services rendered resulting in $20,000 of consulting
expense.
F23
Dates Referenced Herein and Documents Incorporated by Reference
