Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
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 filing
requirements for the past 90
days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
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
The
aggregate market value of the common stock held by non-affiliates of the
Registrant as of July 12, 2007, computed by reference to the closing sale price
of the common stock on the Over the Counter Bulletin Board on July 12, 2007,
was
approximately $10.3 million. Shares of common stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The
number of outstanding shares of the registrant’s Common Stock, $0.001 par value,
as of July 12, 2007 was 46,814,847 shares of common stock.
Securities
registered under Section 12 (b) of the Exchange Act: None
Securities
registered under Section 12 (g) of the Exchange Act: Common Stock, $0.001 par
value.
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act: o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. o
State
issuer’s revenues for its most recent fiscal year: $768,237
Transitional
Small Business Disclosure Format: Yes o No x
TABLE
OF CONTENTS
Page
PART
I
Item
1.
Description
of Business
4
Item
2.
Description
of Property
15
Item
3.
Legal
Proceedings
15
Item
4.
Submission
of Matters to a Vote of Security Holders
15
PART
II
Item
5.
Market
for Common Equity and Related Stockholder Matters
15
Item
6.
Management’s
Discussion and Analysis or Plan of Operation
18
Item
7.
Financial
Statements
23
Item
8.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
23
Item
8A.
Controls
and Procedures.
24
PART
III
Item
9.
Directors,
Executive Officers, Promoters, Control Persons and Corporate
Governance;
Compliance with Section 16(a) of the Exchange Act
24
Item
10.
Executive
Compensation
25
Item
11.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
28
Item
12.
Certain
Relationships and Related Transactions and
Director Independence.
29
Item
13.
Exhibits
30
Item
14
Principal
Accountant Fees and Services
31
SIGNATURES
32
Index
to Consolidated Financial Statements
F-1
2
CAUTIONARY
STATEMENT REGARDING
FORWARD-LOOKING
STATEMENTS
This
annual report on Form 10-KSB and other reports that we file with the SEC contain
statements that are considered forward-looking statements. Forward-looking
statements give our current expectations, plans, objectives, assumptions or
forecasts of future events. All statements other than statements of current
or
historical fact contained in this annual report, including statements regarding
our future financial position, business strategy, budgets, projected costs
and
plans and objectives of management for future operations, are forward-looking
statements. In some cases, you can identify forward -looking statements by
terminology such as “anticipate,”“estimate,”“plans,”“potential,”“projects,”“ongoing,”“expects,”“management believes,”“we believe,”“we intend,” and
similar expressions. These statements are based on our current plans and are
subject to risks and uncertainties, and as such our actual future activities
and
results of operations may be materially different from those set forth in the
forward looking statements. Any or all of the forward-looking statements in
this
annual report may turn out to be inaccurate and as such, you should not place
undue reliance on these forward-looking statements. We have based these
forward-looking statements largely on its current expectations and projections
about future events and financial trends that it believes may affect its
financial condition, results of operations, business strategy and financial
needs. The forward-looking statements can be affected by inaccurate assumptions
or by known or unknown risks, uncertainties and assumptions due to a number
of
factors, including:
·
continued
development of our technology;
·
dependence
on key personnel;
·
competitive
factors;
·
the
operation of our business; and
·
general
economic conditions.
These
forward-looking statements speak only as of the date on which they are made,
and
except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. In addition, we cannot assess the impact
of
each factor on our business or the extent to which any factor, or combination
of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained in this
annual report.
3
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
General
Left
Behind Games Inc., a Washington corporation, formerly known as Bonanza Gold,
Inc., doing business through its subsidiary Left Behind Games Inc., a Delaware
corporation is in the business of developing and publishing video game products
based upon the popular Left
Behind
series
of novels. Pursuant to a share exchange agreement closed on February 7, 2006,
we
became a subsidiary of Left Behind Games Inc. Washington. As a result of the
share exchange agreement, our shareholders took majority control of Left Behind
Games Inc. Washington and our management became the management of Left Behind
Games Inc. Washington (collectively, “we”, “our” or “LBG”)..
We
are an
early stage company founded to develop and publish video game products based
upon the popular Left
Behind
series
of novels. We have the exclusive world-wide rights to the Left
Behind
book
series and brand, for the purpose of making any form of electronic games, which
includes video games. Left
Behind
novels
and products are based upon fictional storylines focused on events at the end
of
the world, including the ultimate battles of good against evil, which are very
action oriented and supremely suitable for an engaging series of electronic
games. According to the book publisher, Tyndale House Publishers, Left
Behind’s
series
of books has sold more than 63 million copies. As a result, Left
Behind
branded
products have generated more than $500 million at retail for the Left
Behind
book
series. According to a Barna Research study, Left
Behind
has also
become a recognized brand name by more than 1/3 of Americans. Our management
believes that Left
Behind
products
have experienced financial success, including the novels, children's books,
graphic novels (comic books), movies, and music. Our interest in the
Left
Behind
brand is
limited to our sublicense to make video games. We have no interest in, nor
do we
profit from any other Left
Behind
branded
products.
Our
rights to use the Left
Behind
brand to
make electronic games is based solely on our sublicense with White Beacon which
entitles us to all of its rights and obligations under its license with the
publisher of the Left
Behind
book
series. White Beacon’s exclusive worldwide license from the publisher of the
Left
Behind
book
series grants it, and us through our sublicense, the rights to develop,
manufacture, market and distribute video game products based on the Left
Behind
series.
We
have
assembled a team of individuals experienced in the video game industry to
develop and market video games based upon the Left
Behind
series
that offers a challenging and positive oriented alternative to video games
with
gratuitous sex and violence currently marketed. Our game(s) feature spiritual
weapons such as “prayer” and “worship” which can overcome the fighting power of
“guns”.
Anticipated
Name Change. As
aresult
our continuing growth as a potential distributor of other published products
into the Christian Booksellers Association (“CBA”) and inspirational
marketplaces, we anticipate that we will change our name, subject to shareholder
vote at a future shareholder meeting.
Recent
Developments
Background
In
November of 2006, we released our first product; LEFT BEHIND: Eternal Forces.
We
successfully gained entry into more than 10,000 retail locations, including
Target, Best Buy, GameStop, EB Games, select Wal-Marts, Circuit City, Comp
USA
and numerous others.
Because
our distribution channel failed to efficiently deliver our product to the
Christian and inspirational marketplace last year, our product was not available
until the week of Christmas, which we believe significantly reduced our
Christmas sales in this market. Due to this experience, we made the decision
to
build our own direct-to-store distribution channel for the Christian and
inspirational marketplaces. In a short time, we already have direct-to-store
account relationships with more than 400 stores; over 1000 if large chains
are
included in the total. Additionally, Hallmark store owners have expressed
interest in carrying our product. At our current pace of growth, we believe
that
our company will have a significant direct-to-store distribution channel
by
Christmas of 2007.
4
As
a
result of last year’s public relations experiences where the media
misrepresented the content of our game, we are in the process of developing
marketing strategies to inform the public about the content or our games.
This
includes providing information about the game’s promotion of values of
fellowship and reconciliation.
Although
we started as a one product company, we’ve anticipated our need to expand our
product line to include products for everyone in the family. Our recent
publishing agreement for the Charlie Church Mouse line of products now includes
something for those in pre-school, kindergarten and elementary school. And
we
are actively seeking to acquire small inspirational game businesses to enhance
our product offerings.
We
believe that successfully marketing products that are inspirational in nature
must include development of a grass-roots campaign supported by Churches
and
Ministries worldwide. As such, we have held five church sponsored outreach
events called “Eternal Forces Mondays.” These events represent opportunities for
churches to send their youth to local LAN Centers and for youth pastors to
invite the unchurched to an event outside of church. As a result of the success
of these events, we are launching a nationwide campaign to allow churches
to
utilize our games for their fund-raising purposes.
Current
Retail Environment and Emerging Distribution Methods
Increasingly,
retailers have limited shelf space and promotional resources, and competition
is
intense among an increasing number of newly introduced entertainment software
titles and hardware for adequate levels of shelf space and promotional support.
Competition for retail shelf space is expected to increase, which may require
us
to increase our marketing expenditures to maintain current sales levels of
our
titles. Competitors with more extensive product lines and popular titles
may
have greater bargaining power with retailers. Accordingly, we may not be
able to
achieve the levels of support and shelf space that such competitors receive.
We
are
actively investigating emerging distribution platforms, including online
digital
and wireless downloads that may represent sources of additional revenue for
us
beyond the traditional retail outlets and the CBA (inspirational)
marketplace.
In
addition, we derive revenue from in-game advertising consisting primarily
of
fixed product placement. We are developing and expanding on dynamic ad serving
technology and will continue to focus on attracting third parties to advertise
in our video games. Ideally, organizations already selling ad space for those
interested in the demographic make-up of LEFT
BEHIND
readers
and gamers, will be engaged to sell ad space which will be implemented by
Double
Fusion, our in-game advertising technology partner.
5
Pursue
Growing Trends of Digital Content Creation and
Distribution
As
the
interactive entertainment industry continues to evolve, new revenue streams
are
emerging from the growing trends of digital content creation and distribution.
While still nascent, these revenue opportunities are expected to increase
significantly in future years. We are currently focused on generating revenue
from in-game advertising. Our current game and upcoming sequel game have
hundreds of potential placements for in-game advertising, which can be updated
weekly, either dynamically or via our automatic update-game feature. To date,
Jeep, GameStop and Dell Computers have placed ads in our current
game.
In
future
years, we plan to consider adding other new revenue opportunities, including
downloadable content/micro-transactions, mobile content and massively
multiplayer online gaming. We also believe that online delivery of episodic
content will continue to become more prevalent as broadband connectivity
gains
popularity and digital delivery platforms such as Xbox Live, PlayStation
Network
and Valve’s Steam gain additional customers.
Market
Industry Overview
The
Computer and Video Game Industry.
According to the Entertainment Software Association (“ESA”), the modern-day
video game industry took form in 1985 with the release of the 8-bit Nintendo
System ("NES"). Following upon the heels of Nintendo’s introduction of the NES,
Sega Enterprises Ltd. released its 16-bit “Genesis” system, which, in turn, was
followed by Nintendo’s introduction of the “Super NES.” The early 1990s led to a
rise in the PC game business with the introduction of CD-ROMs, with decreases
in
prices for multimedia PCs, and the introduction of high-level 3D graphics cards.
In 1995-1996, consumers reacted positively to the release of the Sony
PlayStation and Nintendo 64 and ushered in a new generation of video game
consoles. Since 1996, computer and video game sales have seen a steady
increase.
According
to ESA, in 1999 and 2000, the computer and video game industry reached new
heights with the introduction of new video game consoles that allowed users
to
play games, as well as watch DVDs and listen to audio CDs. According to ESA,
the
video game business experienced strong growth, in spite of the economic
recession after the turn of the century.
According
to the NPD Group, a provider of consumer and retail information based in Port
Washington New York 2006 U.S. retail sales of video games and PC games, which
includes console and portable hardware, software and accessories, were
approximately $13.5 billion, which exceeded the previous record set in 2002
by
over $1.7 billion.
Sales
growth in the game software industry is more than double the growth rate of
the
U.S. economy as a whole, according to a study of the U.S. Government Census
and
other economic data, as reported in an ESA report. Analysts predict that more
money will be spent again this year on interactive software than at the box
office.
6
Internet,
Online and Wireless Video Games.
The
Internet has spawned the phenomenon of multiplayer on-line gaming, which we
believe will increase with the emergence of broadband capabilities, in addition
to new wireless mobile phone platforms. With advances in broadband technology
and the ever increasing use of the Internet, the computer and video game
industry has witnessed substantial growth in the development of games that
can
be played over the Internet, thereby opening up another market as well as other
revenue models. Organizations have been placing their games on the Internet
for
consumer consumption either for the purpose of expanding their markets or as
a
way for companies not in the traditional video game industry to gain entrance.
It is our intent to expand into these new markets, once we establish revenue
streams from publishing the initial products..
At
our
request, in June 2004, the publisher of the Left
Behind
book
series distributed a 20 question survey for the purpose of helping us to
understand the demographic link between Left
Behind
readership and potential purchasers of such branded video games. More than
3,500
responses were received. Of those responding, 72% classified themselves as
players of video games, and 92% said they would consider buying a Left
Behind
video
game for themselves or a family member.
In
early
2007, we also launched a survey of our own to fans of our new game, which was
released in November 2006. The survey was responded to by approximately 1-2%
of
those requested. Remarkably, more than 2/3 of all those responding intend to
buy
the next product to be released by Left Behind Games.
Sales
and
usage of video games, although targeted to predominately younger markets, are
not exclusive to this marketplace. As technology evolves and game quality
improves, the sale of hardware is shifting to middle-aged and older audiences.
The demographics of the interactive industry continue to change as players
who
have grown up with games are now buying them as adults, as well as for their
children.
According
to a Peter D. Hart Research Associates study, 75% of American heads-of-household
play computer & video games, 39% of computer gamers are over the age of 35
and the average game player is 30 years old, 19% are age 50 or older, and 43%
are women.
The
study
also found the typical game purchaser is 37 years old, and adult gamers have
been playing for an average of 12 years. Further data shows just 35% of gamers
are under the age of 18, while 43% are 18-49. Interestingly, women age 18+
constitute a greater portion of the game playing population (28%) than boys
6-17
(21%).
The
same
survey illustrated an average adult male plays games 7.6 hours per week, with
the average adult female closing the historical gender gap at 7.4 hours per
week.
ESA
indicates that the popularity of computer and video games rivals baseball and
amusement parks. According to ESA, three times as many Americans (approximately
145 million) played computer and video games as went to the top five U.S.
amusement parks and twice as many as attended major league baseball games.
A
poll by ESA of 1,600 households ranked computer and video games number one
as
their most enjoyable activity.
Consistent
with past years' numbers, announced by the ESA and annually compiled by the
NPD
Group, the majority of games that sold were rated "E" for "Everyone" (53%),
followed by "Teen" (T) rated games (30%) and by "Mature" (M) rated games (16%).
In 2002 E-rated games accounted for 55.7% of games sold, T-rated games 27.6%
and
M-rated games made up 13.2% of games sold.
According
to ESA, all interactive games are rated by the Entertainment Software Rating
Board ("ESRB"), a self-regulatory unit of ESA. The ESRB rating system is the
benchmark rating system for software for all interactive platforms. The ESRB
uses the following key elements to evaluate and rate software products:
violence, sexual content, language, and early childhood development skills.
Over
70% of games are rated "E" for everyone (appropriate for ages 6 and
up).
Although
our first product is rated “T” for Teens, the rating system is not perfect. For
example, a recent release of a product rated “T” for Teens released by a
competing publishing company, did include taking the Lord’s name in vain with
the phrase “God Da!^$#%”…and the ESRB rating system referred to this expletive
as “Mild Language”.
The
first
step in creating a successful video game product launch is to create a good
game
concept, ideally based upon a brand name with consumer awareness. Confirmation
of the quality of the game is often provided by industry trade publications.
As
in comparable industries, previews and reviews can provide significant
information regarding marketing viability prior to the completion of development
and commercial release, enabling companies to more effectively manage
development, marketing expenses and potential inventory risks.
7
Based
on
the popularity and success of the Left
Behind
Series
with all ages, we believe that the Left
Behind
Brand is
uniquely positioned for success in the interactive video game marketplace.
Recent interactive game market studies reveal a rapidly growing market comprised
of people from all ages and cultures. Based on statements by the president
of
the ESA, we believe that the last few years and the next several years are
watershed years for interactive products. “Leading analysts forecast that the
next generation of video game consoles may achieve household penetration rates
approaching 70%, making them nearly as commonplace in American homes as video
cassette recorders."
Sales
continue to grow - a record 12 games sold more than one million units in 2004,
with 9 of these 12 being rated “E” or “T”, and 52 console games sold more than
500,000 units. Additionally, 55% of the 2004 Top 20 selling computer games
by
units sold were Teen (11/20) with 25% Mature (5) and 20% rated Everyone (4).
The
Top 20 selling console games were rated 55% as Everyone (11) followed by 25%
Mature (5) and 20% Teen (4). The NPD Group has announced it will be updating
how
PC Games in particular will be reported, to more accurately assess the impact
of
subscription-based online games (MMOs) as well as the industry impact from
digital distribution.
NPD’s
2005 study found 42% of most frequent gamers play online, with 56% being male
and 44% being female. A full 34% of heads of households play games on a wireless
device such as a cell phone or PDA reflecting a substantial increase from 20%
in
2002.
Video
Game Software And Hardware Industries. According
to Michael Pachter, Interactive Entertainment Research Analyst for Wedbush
Morgan, "The most successful publishers are those who build diverse
libraries of branded games that produce sequels and recurring revenue
streams. With a base-load of steady, sequel-driven revenues, publishers
have better visibility into their future performance, which leads to better
planning and investment. A less-volatile revenue and earnings model also
leads to more confidence from Wall Street and higher public
valuations".
In
his
2005 E3 commencement speech, Doug Lowenstein said, “The (video game) industry
needs to continue broadening its audience and creating more games with
mass-market appeal. Though videogames have been around for 30 years, their
penetration remains below that of film and television, he pointed out, asking,
“What do they have that we don’t?” That missing element, he said, is content
with mass-market appeal at mass-market prices. “There is powerful
market-expanding potential for making games for audiences that we are less
accustomed to,” Lowenstein said. As an example, he said that the film The
Passion of the Christ had a record-breaking $612 million in box-office revenue,
thus revealing something Hollywood was missing—the religious content was of
interest to a big audience that doesn’t normally go to movies.
According
to 2004 NPD study data, console game players most often purchased action 30.1%,
sports 17.8%, and shooters 9.6%, followed by children/family 9.5%, racing 9.4%,
role-playing 9.0% and fighting games at 5.4%.
Computer
gamers, however, most often purchase strategy 26.9%, family & children
20.3%, and shooter games 16.3%, followed by role-playing games 10%, adventure
5.9%, sports 5.4% and action games with 3.9%. Our games target both the strategy
and family markets. Based upon Wedbush Morgan Securities’ research, every game
in the top ten of 2002 independently generated more than a hundred million
dollars ($100,000,000).
Products
Left
Behind Video Games.
Our
mission is to become the world’s leading independent developer and publisher of
quality interactive entertainment products that perpetuate positive values
and
appeal to mainstream and faith-based audiences. We intend to develop products
to
include the same types of compelling elements that have made interactive games
popular for years, and yet offer a less graphic experience to the sexual themes
and gratuitous violence currently found in many titles. We plan to make all
games visually and kinetically appealing. We anticipate our titles will be
classified as both action, strategy and adventure genres, and will likely
receive either an "E" rating (appropriate for ages 6 and up) or a "T" rating
(appropriate for ages 13 and up).
In
order
to accomplish these goals, our staff and advisory board have extensive
experience and relationships with professionals from the video game industry,
including producers, directors, artists, programmers, musicians and others.
Collectively, our management is experienced in the techniques that are essential
to today's interactive games, including video, photography, motion capture,
3D
face and body rendering, programming technologies, computer graphics, stereo
sound effects and music production.
Our
initial product is Left Behind: Eternal Forces, the PC game (“EF”). EF is a real
time strategy game played by one person or online by up to eight players on
PCs.
The game was launched in November 2006 and we have made nine free updates to
EF
since the launch. EF has a “T” rating. The game is loosely based on the
Left
Behind
series
but is not specific to any one of the Left
Behind
novels.
8
We
intend
to launch a follow-up product to EF in the Fall of 2007, titled “LEFT BEHIND II:
Tribulation Forces”. This follow-up product will also be a real time strategy
game. It will include all of the improvements that we made to EF and will
include additional game levels and numerous other features.
Social
Networking Site.
We have
developed a social networking website named DreamWebSpace.com. DreamWebSpace
is
designed to be a family friendly alternative to some of the popular social
networking sites such as Fox’s Myspace.com. DreamWebSpace has more security,
language filtering and more monitoring than many of the popular social
networking sites. We hope to eventually derive advertising revenue from
DreamWebSpace.
Marketing
We
used a
variety of avenues for promoting and marketing the launch of EF in November
and
December 2006, including television, radio, print advertising, trade shows,
as
well as the Internet. We anticipate that the Internet will become a cost
effective method for developing brand awareness and promoting our
products.
Interactive
software publishers use various strategies to differentiate themselves and
build competitive advantages within the industry such as Platform Focus,
internal vs. external development, third party distribution, International
Sales
and Game Genre Focus. According to Michael Pachter of Wedbush Morgan, "Deciding
which platforms to publish games for is one of the most important decisions
a
publisher faces. Different game platforms require varying development
costs, time to market, gross margins, and marketing budgets.” Accordingly, we
initially focused on the PC/Multi-player version of the game. This strategy
allowed us to focus on the development of our first game, without the required
processes posed by licensors Sony, Microsoft and Nintendo on their various
consoles. We intend to release console and portable games into the marketplace
in the future years with the intent to partner with larger publishing companies
to limit the effective risk in releasing new titles.
The
game
is designed to support two game modes, Storyline and Game World Modes. In
Storyline mode, gamers will have the opportunity to interact within events
from
the novels. In Game World mode, gamers will compete and fight for territory
in
an effort to defeat all opponents. The gamers' goal will be to fight against
the
Global Community (commanded by the Anti-Christ) with Tribulation Forces. In
One
Player game mode, all opponents will be computer generated. However, in
Multi-player mode, gamers online will compete against each other. Although
we
are not focused on the development of an MMOG (Massive Multi-player Online
Game), at some point in the future, our game could migrate to the MMOG platform
without tremendous changes in design, game play, storylines and
structure.
Proprietary
Rights
Our
future success and ability to compete are dependent, in part, upon our
proprietary technology. We rely on trade secret, trademark and copyright law
to
protect our intellectual property. In addition, we cannot be sure that others
will not develop technologies that are similar or superior to our technology.
Furthermore, our management believes that factors such as the technological
and
creative skills of our personnel, new product developments, product enhancements
and marketing activities are just as essential as the legal protection of
proprietary rights to establishing and maintaining a competitive
position.
We
rely
on trade secrets and know-how and proprietary technological innovation and
expertise, all of which are protected in part by confidentiality and invention
assignment agreements with our employees and consultants, and, whenever
possible, our suppliers. We cannot make any assurances that these agreements
will not be breached, that we will have adequate remedies for any breach, or
that our unpatented proprietary intellectual property will not otherwise become
known or independently discovered by competitors. We also cannot make any
assurances that persons not bound by an invention assignment agreement will
not
develop relevant inventions.
Many
participants in the computer software and game market have a significant number
of patents and have frequently demonstrated a readiness to commence litigation
based on allegations of patent and other intellectual property infringement.
We
cannot be sure that future claims will be resolved on favorable terms, and
failure to resolve such claims on favorable terms could result in a material
adverse effect on our business, financial condition and results of operations.
We expect that companies will increasingly be subject to infringement claims
as
the number of products and competitors in this industry segment grows and the
functionality of products in different industry segments overlaps. Responding
to
such claims, regardless of merit, could cause product shipment delays or require
us to enter into royalty or licensing arrangements to settle such claims. Any
such claims could also lead to time-consuming, protracted and costly litigation,
which would require significant expenditures of time, capital and other
resources by our management. Moreover, we cannot be sure that any necessary
royalty or licensing agreement will be available or that, if available, such
agreement could be obtained on commercially reasonable terms.
9
The
Left Behind License.
On
October 11, 2002, the publisher of the Left
Behind
book
series granted White Beacon an exclusive worldwide license 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. White Beacon
is owned by Troy A. Lyndon, our chief executive officer and Jeffrey S. Frichner,
our former president. Messrs. Lyndon and Frichner are members of our board
of
directors. White Beacon has sublicensed its Left
Behind
book
series license in its entirety to us, with the written approval of the publisher
of the Left
Behind
books.
The
license requires us to pay royalties based on the gross receipts on all
non-electronic products and for electronic products produced for use on personal
computer systems, and a smaller percentage of the gross receipts on other
console game platform systems. According to the license agreement, we are
required to guarantee a minimum royalty during the initial four-year term of
the
license, of which we have already paid a portion. This advance will be set
off
as a credit against all monies owed subsequently under the license.
The
Left Behind Games Sublicense.
White
Beacon has granted us a sublicense of all of its rights and obligations under
its license with the publisher of the Left
Behind
book
series. In consideration for receiving the sublicense, we issued to White Beacon
5,850,000 shares of our common stock (which shares were reduced to 3,496,589
pursuant to our reverse split in February 2006), which have consequently been
transferred equally among White Beacon’s two partners, Messrs. Lyndon and
Frichner.
Pursuant
to the terms and conditions of the sublicense, we are required to comply with
all terms, conditions and obligations of the original license with the publisher
of the Left
Behind
book
series. This sublicense is a pass-through to us of the identical, original
license with no attachments.
Distribution
North
American Market. We
achieved significant distribution for EF through a Distribution Agreement with
COKeM International Ltd. We sold directly to GameStop and COKeM resold EF to
a
number of large retailers, including Sam’s Club, selected Wal-Mart stores,
Target, Best Buy and Circuit City. We believe that EF was distributed
at
the
traditional locations where many North American video gamers go to purchase
and/or rent their video games.
International
Market. We
sold
EF internationally through distributors. Those distributors sold EF into a
number of countries, including Australia, Canada, Singapore and South Africa.
We
intend to continue this strategy of selling through international distributors
with an emphasis on Europe and East Asia.
The
Inspirational Bookseller Market. We
anticipate that the CBA and related sales channels represent significant
sell-through opportunities for the Left
Behind
Series
brand. Left
Behind
books
were originally sold exclusively through CBA retailers, until gaining mainstream
acceptance and tremendous financial success in other distribution venues. Veggie
Tales by Big Idea Productions, which has sold millions of videos, also released
products to the CBA market before gaining mainstream acceptance. This
distribution channel includes thousands of retail outlets. We are developing
direct-to-store relationships in the inspirational bookseller market to broaden
our reach, to increase our potential and to pursue building a profitable
distribution center for other published products into this
marketplace.
Competition
Our
competitors include established media development companies. Many of our current
and potential competitors have longer operating histories and financial, sales,
marketing and other resources substantially greater than those that we possess.
As a result, our competitors may be able to adapt more quickly to changes in
the
media market or to devote greater resources than we can to the sales of our
media projects.
The
video
game industry is intensely competitive and new video game products and platforms
are regularly introduced. We will compete primarily with other creators of
video
games for personal computers and game consoles. We will also compete with other
forms of entertainment and leisure activities. Significant third party software
competitors currently include, among others: Activision, Atari, Capcom,
Electronic Arts, Konami, Namco, Midway, Take-Two, THQ, and Vivendi.
In
addition, integrated video game console hardware and software companies such
as
Sony Computer Entertainment, Nintendo Co. Ltd. and Microsoft Corporation will
compete directly with us in the development of software titles for their
respective platforms.
10
Our
competitors vary in size from small companies to very large corporations, with
far longer operating histories, and significantly greater financial, marketing
and product development resources than we have. Due to these greater resources,
certain of our competitors will be able to undertake more extensive marketing
and promotional campaigns, adopt more aggressive pricing policies, pay higher
fees to licensors for desirable products, and devote substantially more money
to
game development than we can. We believe that the main competitive factors
in
the interactive entertainment software industry include product features and
quality, compatibility of products with popular platforms, brand name
recognition, access to distribution channels, marketing support, ease of use,
price, and quality of customer service. There can be no assurance that we will
be able to compete successfully with larger, more established video game
publishers or distributors.
Our
competitors could also attempt to increase their presence in our target markets
by forming strategic alliances with other competitors. Such competition could
adversely affect our gross profits, margins and results of operations. There
can
be no assurance that we will be able to compete successfully with existing
or
new competitors. Most of our competitors have substantially greater financial
resources than us, and they have much larger staffs allowing them to create
more
games.
RISK
FACTORS RELATING TO OUR BUSINESS AND OUR INDUSTRY
In
addition to the other information set forth in this report, you should carefully
consider the following factors that could materially affect our business,
financial condition or future results. The risks described below are not the
only risks facing us. Additional risk and uncertainties not currently known
to
us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.
Our
independent registered public accounting firm has issued a “going concern”
opinion.
Our
ability to continue as a going concern is dependent upon our ability to generate
profitable operations in the future and/or to obtain the necessary financing
to
meet our obligations and repay our liabilities arising from normal business
operations when they come due. We plan to continue to provide for our capital
requirements by issuing additional equity. No assurance can be given that
additional capital will be available when required or on terms acceptable to
us.
We also cannot give assurance that we will achieve sufficient revenues in the
future to achieve profitability and cash flow positive operations. The outcome
of these matters cannot be predicted at this time and there are no assurances
that, if achieved, we will have sufficient funds to execute our business plan
or
to generate positive operating results. Our independent registered public
accounting firm has indicated that these matters, among others, raise
substantial doubt about our ability to continue as a going concern.
Need
for substantial additional funds.
We
currently need additional funds to finance our operations and the development
of
our sequel product. Our overall cash requirements for the next 12 months are
expected to be in excess of $3,000,000. Our cash requirements may vary or
increase materially from those now planned because of unexpected costs or delays
in connection with creation of video games, changes in the direction of our
business strategy, competition, and other factors. Adequate funds for these
purposes may not be available when needed or on acceptable terms.
Our
board of directors is experiencing difficulty in developing a consensus
regarding a number of difficult issues that currently confront our company
and
this lack of consensus may make it difficult for our board to take action on
behalf of our company.
Our
directors hold different points of view on a number of the difficult issues
that
confront our Company and their inability to develop a consensus may make it
difficult for them to take action of behalf of our company.
It
is difficult to assess the likelihood of success for an early stage company
without a long operating history like ours.
Since
our
organization, we have been engaged in start-up and development activities.
There
is limited operating history upon which investors may base an evaluation of
our
likely future performance.
There
is no assurance that we will enjoy successful business development.
There
can
be no assurance that our business strategies will lead to any profits. We face
risks and uncertainties relating to our ability to successfully implement our
strategies of creating and marketing video and PC games, and selling the games
at a profit. Despite the popularity of Left
Behind
books
and other media materials, we do not know whether we can produce video and
PC
games for which there will be a demand, or whether Left
Behind’s
brand
success will cross over to video games. You must consider the risks, expenses
and uncertainties of a company like this, with an unproven business model,
and a
competitive and somewhat evolving market. In particular, you must consider
that
our business model is based on an expectation that we will be able to create
games and that demand for video games will sustain itself or increase.
11
We
expect the average price of current generation software titles to continue
to
decline.
Consumer
demand for software for current generation platforms has declined as newer
and
more advanced hardware platforms achieve market acceptance. As the gaming
software industry transitions to next-generation platforms, we expect few,
if
any, current generation titles will be able to command premium price points
and
we expect that these titles will be subject to price reductions earlier in
their
product life cycles than we have seen in prior years. As a result, we have
reduced prices for our current generation software titles and we expect to
continue to reduce prices for our current generation software titles which
will
have a negative impact on our operating results.
We
must pay expenses on behalf of the officers and directors to indemnify them
for
wrongdoing.
Our
officers and directors are required to exercise good faith and high integrity
in
the management of their affairs. The bylaws specifically limit the liability
of
such persons to the fullest extent permitted by law. As a result, aggrieved
parties may have a more limited right to action than they would have had if
such
provisions were not present. The bylaws also provide for indemnification of
the
officers and directors from any losses or liabilities that may incur as a result
of the manner in which they operated the business or conducted internal affairs,
provided that in connection with these activities they acted in good faith
and
in a manner which they reasonably believed to be in, or not opposed to, our
best
interest. Use of the capital or assets for such indemnification would reduce
amounts available for the operations or for distribution to the investors.
Holders
of shares of our common stock have a greater risk than holders of our preferred
stock because shares of preferred stock have liquidation preferences over shares
of our common stock.
Holders
of our preferred stock have liquidation preferences over our shares of common
stock. The result is that in the event of any liquidation, dissolution or
winding up of our affairs, whether voluntary or involuntary, the holders of
record of our preferred stock will be entitled to recover their investment
prior
and in preference to any distribution of any of our remaining assets or surplus
funds, if any remain, to the holders of our shares of common stock.
Our
revenues will be dependent on the popularity of the Left
Behind
series of novels. If the popularity of this series declines, it may have a
material adverse effect on our revenues and operating results.
Since
1995, the popularity of the Left
Behind
series
of books has grown. However, there can be no assurance that the series will
sustain its popularity and continue to grow. A decline in the popularity of
the
Left
Behind
series
could adversely affect the popularity of any product based upon the series,
including the products that we intend to develop and distribute, and that,
in
turn, would have a material adverse effect on our revenues and operating
results. Despite the popularity of the Left
Behind
series,
there can be no guarantee that any video game product based upon the series
will
enjoy the same popularity or achieve commercial success.
Governmental
regulations could adversely affect the video game industry, including the
distribution of interactive products over the Internet.
Changes
in domestic and foreign laws could affect our business and the development
of
our planned video game products, and, more specifically, could adversely affect
the marketing, acceptance and profitability of our products. There can be no
assurance that current laws and regulations (or the interpretation of existing
regulations) will not become more stringent in the future, or that we will
not
incur substantial costs in the future to comply with such requirements, or
that
we will not be subjected to previously unknown laws and regulations that may
adversely impact the development and distribution of our intended products
or
the operation of our business in general. As Internet commerce continues to
evolve, we expect that federal, state and foreign governments will adopt laws
and regulations covering issues such as user privacy, taxation of goods and
services provided over the Internet, pricing, content and quality of products
and services. It is possible that legislation could expose companies involved
in
electronic commerce to liability, taxation or other increased costs, any of
which could limit the growth of electronic commerce generally. Legislation
could
dampen the growth in Internet usage and decrease its acceptance as a
communications and commercial medium. If enacted, these laws and regulations
could limit the market for our products to the extent we sell them over the
Internet, and have a material adverse effect on our revenues and operating
results.
If
we do not respond to rapid technological change, our products may become
obsolete.
The
market for video game products and services is characterized by rapid
technological change and evolving industry standards. We cannot assure you
that
we will be successful in responding rapidly or in a cost effective manner to
such developments.
12
We
may not be able to achieve our distribution plans.
Although
we believe that our plans for marketing and distributing our products are
achievable, there can be no assurance that we will be successful in our efforts
to secure distribution agreements with national or regional wholesale or retail
outlets, or to negotiate international distribution or sublicensing agreements
regarding the distribution of Left
Behind
series
video games in countries and territories outside of the United States, or that
we will be able to gain access to CBA wholesale or retail channels of
distribution. Even if we achieve our desired level of distribution, there can
be
no assurance that our games will sell sufficient quantities to generate
profitable operations.
Our
products may have short life cycles and may become quickly obsolete.
Consumer
preferences in the video game industry are continuously changing and are
difficult to predict. Few products achieve market acceptance, and even when
they
do achieve commercial success, products typically have short life cycles. We
cannot be certain that the products we introduce will achieve any significant
degree of market acceptance, or that if our products are accepted, the
acceptance will be sustained for any significant amount of time, or that the
life cycles of any of our products will be sufficient to permit us to recover
development, manufacturing, marketing and other costs associated with them.
In
addition, sales of our games are expected to decline over time unless they
are
enhanced or new products are introduced. If the products we create fail to
achieve or sustain market acceptance, it could result in excess inventory,
require reductions in the average selling prices of the affected products,
or
require us to provide retailers with financial incentives, any one or all of
which would have a material adverse effect on our operating results and
financial condition.
If
we are unable to maintain our license to Left
Behind
or other intellectual property, our operating results will be adversely
impacted.
All
of
our planned products are based on or incorporate intellectual property owned
by
others. All of our current video game products are based on Left
Behind
names
and themes. We expect that some of the products we publish in the future may
also be based on intellectual property owned by others. The rights we enjoy
to
licensed intellectual property may vary based on the agreement we have with
the
licensor. Competition for these licenses is intense and many of our competitors
have greater resources to take advantage of opportunities for such licenses.
If
we are unable to maintain our current licenses and obtain additional licenses
with significant commercial value, we believe our sales will decline. In
addition, obtaining licenses for popular franchises owned by others could
require us to expend significant resources and the licenses may require us
to
pay relatively high royalty rates. If these titles are ultimately unpopular,
we
may not recoup our investment made to obtain such licenses. Furthermore, in
many
instances we do not have exclusive licenses for intellectual property owned
by
others. In these cases, we may face direct competition from other publishers
holding a similar license.
The
video game industry is very competitive, and we may not be able to compete
successfully with larger, more established video game publishers.
The
interactive entertainment software industry is intensely competitive and new
interactive entertainment software products and platforms are regularly
introduced. We will compete primarily with other publishers of interactive
entertainment software for personal computers and video game consoles. We will
also compete with other forms of entertainment and leisure activities.
Our
ability to develop and market our video game products depends entirely upon
our
license from the publisher of the Left
Behind
series.
On
October 11, 2002, White Beacon secured the license from the publisher of the
Left
Behind
series
to use the copyrights and trademarks relating to the Left
Behind
series
to develop video game products. This license has been sublicensed to Left Behind
Games in entirety. The license requires Left Behind Games to pay royalties
and
other fees on an ongoing basis to the publisher of the Left
Behind
series
and to meet certain product development, manufacturing and distribution
milestones. The license also grants the publisher of the Left
Behind
series
significant control over the development of products under the license. In
the
event we are unable to perform all of the obligations to the publisher of the
Left
Behind
series
under the license, the publisher of the Left
Behind
series
may terminate the license leaving us without the ability to develop, manufacture
and distribute our video game products. The publisher of the Left
Behind
series
rights to review and approve our products may cause delays in shipping those
products. Our success and our business plan is heavily dependent upon our
ability to comply with the terms and conditions of the license and the
sublicense and yet there can be no assurance that we will be able to comply
with
all terms and conditions of the license from the publisher of the Left
Behind
series
and sublicense from White Beacon. In the event the license or sublicense is
terminated for any reason, we would likely be unable to continue to develop,
sell or otherwise distribute video games based on the Left
Behind
series.
13
Platform
manufacturers are primary competitors and have approval rights and are expected
to control the manufacturing of our video game products.
The
vast
majority of commercial video game products are designed to play on a specific
platform. The platform is the system that runs the game. Within the video game
industry, there are currently many platforms, including Microsoft Xbox 360,
Sony
Playstation 2, Sony PSP, Sony Playstation 3, Nintendo DS, Nintendo GameCube
and
Gameboy Advance, Microsoft Windows, and Mac OS. The majority of PC games are
designed to play on computers running the Microsoft Windows or the MAC OS
platform. In order to develop a game that will run on a particular console
platform, it is necessary to enter into a platform licensing agreement with
a
console or portable platform manufacturer. The platform manufacturers, Sony,
Nintendo, and Microsoft, also publish their own video game products and are
therefore competitors of ours. If we are successful in securing a platform
licensing arrangement with one or more of these companies, we will most likely
be required to give them significant control over the approval and manufacturing
of our products. This could leave us unable to get our products approved,
manufactured and shipped to customers. Control of the approval and manufacturing
process by the platform licensors could also increase both our manufacturing
and
shipping lead times and related costs. Such delays could harm our business
and
adversely affect our financial performance. Additionally, while we are not
aware
of any reason that would prevent us from obtaining any desired development
and/or publishing agreements with any of the hardware platform licensors, we
have not yet signed any such agreement with any platform manufacturer, and
we
cannot guarantee that we will be able to conclude agreements with these third
parties, or that if we do, the provisions of the agreements will be favorable
or
even as good as the comparable agreements executed by any of our competitors.
If
we are unable to secure development and/or publishing agreements with the major
platform manufacturers, we would not be able to bring our products to market
on
any such affected platform.
We
may not be able to regularly pay dividends to our stockholders or redeem shares
of preferred stock.
Our
ability to pay dividends or redeem shares of preferred stock in the future
depends on our ability to operate profitably and to generate cash from our
operations in excess of our operating expenses and debt service obligations.
The
payment of dividends or redemption of shares of preferred stock is in the sole
discretion of our board of directors.
Future
terrorist attacks in the United States may result in declining economic
activity, which could reduce the demand for our products.
Future
terrorist attacks in the United States, such as the attacks that occurred in
New
York and Washington, D.C. on September 11, 2001, and other acts of terrorism
or
war, may result in declining economic activity and reduced demand for our
products. A decrease in demand would make it difficult for us to renew or
release our products. Terrorist activities also could directly impact the value
of our products through damage, destruction or loss.
These
types of events also may adversely affect the markets in which our securities
are sold. These acts may cause further erosion of business and consumer
confidence and spending and may result in increased volatility in national
and
international financial markets and economies. Any one of these events may
cause
a decline in the demand for video games, delay the time in which our video
games
can be created and sold and limit our access to capital or increase our cost
of
raising capital.
General
economic conditions may adversely affect our financial condition and results
of
operations.
Periods
of economic slowdown or recession in the United States and in other countries,
rising interest rates or declining demand for video games, or the public
perception that any of these events may occur, could result in a general decline
economic activities, which would adversely affect our financial position,
results of operations, and cash flow.
The
success of our company depends on the continuing contributions of our key
personnel.
We
have a
skilled management team to seek out developers for our video games. However,
members of our management team are required to devote only as much time to
our
operations as they, in their sole discretion, deem necessary in carrying out
our
operations effectively. Any or all of the members of our management team,
including Troy A. Lyndon, may fail to divide their time efficiency in operating
our business given their outside obligations. In addition, we do not have
agreements with any of our management team that hinder their ability to work
elsewhere or to resign at will and, thus, any executive officer or key employee
may terminate his or her relationship with us at any time without advanced
notice.
14
Significant
Employees
We
employ
16 full-time workers in the United States. Our Director of Product Development
and Senior Producer is Kevin Hoekman, age 38. He is a significant employee
with
a decade of experience managing a variety of development efforts prior to
joining us in mid-2006. The Executive Director of Outreach and Sales is Jerome
Mikulich, age 42, and he is a significant employee. Mr. Mikulich has years
of
experience in sales and ministry outreach related activities. The Vice President
of administration, human resources and corporate events, Robilyn Lyndon, age
52,
is a significant employee. Mrs. Lyndon has more than 20 years experience in
business, finance and administration, and has held numerous positions with
both
marketing and consumer products organizations.
ITEM
2. DESCRIPTION OF PROPERTY
Our
corporate offices consist of a 3,500 square foot facility on 29995 Technology
Drive in Murrieta, California under a lease agreement through May 2010. Its
cost
is $7,545 per month, with annual increases of 4%.
We
also
have a 3,500 square foot sales and distribution facility on 38340 Innovation
Court in Murrieta, California under a lease agreement through October 2009.
Its
cost is $3,920 per month, with annual increases of 3.4%.
ITEM
3. LEGAL PROCEEDINGS
We
are
subject to litigation from time to time in the ordinary course of our business.
We
have
received a letter from our former President, and current director, Jeffrey
Frichner, demanding payment of $36,000 allegedly owed to him by us. Except
for
this, there are
currently no material actions
pending
or threatened against us.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a)
Equity and Related Stockholder Matters
Our
common stock is traded in the over-the-counter market on the NASD Bulletin
Board
under the symbol “LFBG”. The following table shows the high ask and low bid
prices for the common stock for each quarter during the last two fiscal years
ended March 31. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
All
quotations through the quarter ended 12/31/05 reflect prices prior to our 1
for
4 reverse split effectuated on February 7, 2006. The quotations for the quarters
ended 03/31/06 and thereafter reflect prices post 1 for 4 reverse split.
High
Ask
Low
Bid
Year
ended 3/31/06
Quarter
ended 6/30/05
$
0.16
$
0.12
Quarter
ended 9/30/05
0.23
0.14
Quarter
ended 12/31/05
0.35
0.20
Quarter
ended 03/31/06
4.75
0.80
Year
ended 3/31/07
Quarter
ended 6/30/06
$
3.92
$
2.10
Quarter
ended 9/30/06
5.88
2.36
Quarter
ended 12/31/06
7.44
2.17
Quarter
ended 03/31/07
2.45
0.18
15
Dividends
We
have
not declared or paid cash dividends or made distributions in the past, and
we do
not anticipate that we will pay cash dividends or make distributions in the
foreseeable future. We currently intend to retain any future earnings to finance
our operations.
Description
of Securities
At
July12, 2007, our shares of common and preferred voting stock issued and outstanding
were held by approximately 1,330 shareholders of record. There are no other
outstanding options or rights to acquire shares.
Common
Stock
We
are
authorized to issue two hundred million (200,000,000) shares of $0.001 par
value
common stock of which 46,814,847 shares are currently outstanding as of July12,2007. Holders of common stock are entitled to one vote per share on each matter
submitted to a vote at any meeting of stockholders. Shares of common stock
do
not carry cumulative voting rights and, therefore, holders of a majority of
the
outstanding shares of common stock will be able to elect the entire board of
directors, and, if they do so, minority stockholders would not be able to elect
any members to the board of directors. Our board of directors has authority,
without action by the stockholders, to issue all or any portion of the
authorized but unissued shares of common stock, which would reduce the
percentage ownership of the stockholders and which may dilute the book value
of
the common stock.
Stockholders
have no pre-emptive rights to acquire additional shares of common stock. The
common stock is not subject to redemption and carries no subscription or
conversion rights. In the event of liquidation, the shares of common stock
are
entitled to share equally in corporate assets after satisfaction of all
liabilities. The shares of common stock, when issued, will be fully paid and
non-assessable.
Holders
of common stock are entitled to receive dividends as the board of directors
may
from time to time declare out of funds legally available for the payment of
dividends. We have not paid dividends on common stock and do not anticipate
that
it will pay dividends in the foreseeable future.
We
entered into an agreement with Charter Financial Holdings, LLC in connection
with consulting services. The compensation section of the agreement requires
that we issue shares of our common stock to Charter sufficient to ensure that
its ownership in us, does not fall below 1% of our outstanding common stock.
The
result is that for each time we issue or sell stock, we must issue that amount
of stock to Charter Financial Holdings, LLC to maintain their ownership
percentage. Charter Financial Holdings, LLC is not required to pay additional
consideration for those shares.
There
are
no conversions, preemptive, or other subscription rights or privileges with
respect to any shares. Our stock does not have cumulative voting rights which
mean that the holders of more than fifty percent (50%) of the shares voting
in
an election of directors may elect all of the directors if they choose to do
so.
In such event, the holders of the remaining shares aggregating less than fifty
percent (50%) would not be able to elect any directors.
Preferred
Stock
We
are
authorized to issue ten million (10,000,000) shares of $0.001 par value
preferred stock of which 3,586,245 preferred A shares are issued and outstanding
as of July 12, 2006. Preferred A shares are convertible on a one for one basis
with our common stock at the sole discretion of the holder. Our preferred A
shares enjoy one for one common stock voting rights. The preferred stock is
entitled to preference over the common stock with respect to the distribution
of
our assets in the event of our liquidation, dissolution, or winding-up, whether
voluntarily or involuntarily, or in the event of any other distribution of
our
assets of among the shareholders for the purpose of winding-up our affairs.
The
authorized but unissued shares of preferred stock may be divided into and issued
in designated series from time to time by one or more resolutions adopted by
the
Board of Directors. The Directors in their sole discretion shall have the power
to determine the relative powers, preferences, and rights of each series of
preferred stock.
16
We
consider it desirable to have one or more classes of preferred stock to provide
us with greater flexibility in the future in the event that we elect to
undertake an additional financing and in meeting corporate needs that may arise.
If opportunities arise that would make it desirable to issue preferred stock
through either public offerings or private placements, the provision for these
classes of stock in our certificate of incorporation would avoid the possible
delay and expense of a stockholders’ meeting, except as may be required by law
or regulatory authorities. Issuance of the preferred stock would result,
however, in a series of securities outstanding that may have certain preferences
with respect to dividends, liquidation, redemption, and other matters over
the
common stock which would result in dilution of the income per share and net
book
value of the common stock. Issuance of additional common stock pursuant to
any
conversion right that may be attached to the preferred stock may also result
in
the dilution of the net income per share and net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. As a result, it is not possible at
this time to determine the respects in which a particular series of preferred
stock will be superior to the common stock. Other than one for one exchanges
of
preferred stock held by shareholders of our subsidiary, the board of directors
does not have any specific plan for the issuance of preferred stock at the
present time and does not intend to issue any such stock on terms which it
deems
are not in our best interest or the best interests of our
stockholders.
(b)
Recent Sales of Unregistered Securities
During
the fiscal year ended March 31, 2007, we received $5,266,117 in net proceeds
from the sale of 4,917,009 shares of common stock.
During
the period, we also issued to independent third parties 8,389,887 shares of
common stock for services provided, valued at $13,813,804 (based on closing
price on the respective grant date). We also issued 576,666 shares of common
stock, valued at $1,865,381 (based on the closing price on the respective grant
date), to certain employees as additional compensation.
During
the fiscal year ended March 31, 2007, we issued 224,738 warrants to purchase
shares of common stock with exercise prices ranging between $0.50 and $2.25.
We
have estimated the value of these warrants to be approximately $642,930.
Also
during the fiscal year ended March 31, 2007, we issued 880,000 shares valued
at
$403,000 to accredited investors in association with our Bridge Loan borrowings.
Three
of
our officers or former officers previously deferred a portion of their
compensation, which they have the right to convert to the Company’s Common Stock
at prices ranging from $0.084 to $1.68 per share. As of March 31, 2007, all
three of those officers or former officers elected to convert that deferred
compensation into our common stock at the agreed conversion rates as follows:
·
Mr.
Lyndon converted $188,542 of deferred compensation into 2,242,441
shares
of our common stock.
·
Mr.
Frichner converted $266,128 of deferred compensation into 2,721,463
shares
of our common stock.
·
Mr.
Axelson converted $126,043 of deferred compensation into 938,534
shares of
our common stock.
During
the period April 1, 2007 through July 12, 2007, we entered into a number of
sales of unregistered securities to accredited investors to finance our
business. We sold 9,388,000 shares of our common stock at an average price
of
$0.10 per share to raise $913,800 plus a note for $25,000. Most of the shares
sold were at ten cents per share to our existing investors.
Subsequent
to March 31, 2007, we issued 1,196,949 shares
of our common stock to independent third parties for services performed, valued
at $291,442 (based on the closing price of our common stock on the respective
grant dates).
We
also received $130,000 in further gross proceeds
under the Bridge Loan. We issued 260,000 shares of common stock to the investors
and 66,000 shares of common stock to the Broker-Dealer as part of that bridge
financing.
We
believe the transactions to be exempt under Section 4(2) of the Securities
Act
of 1933, as amended, or Regulation D, Rule 506 because they do not involve
a
public offering. We believe that this sale of securities did not involve a
public offering on the basis that each investor is an accredited investor as
defined in Rule 501 of Regulation D and because we provided each of our
investors with a private placement memorandum or a stock purchase agreement
disclosing items set out in Rule 501 and 506 of Regulation D. The shares
sold were restricted securities as defined in Rule 144(a)(3). Further, each
common stock certificate issued in connection with this private offering bears
a
legend providing, in substance, that the securities have been acquired for
investment only and may not be sold, transferred or assigned in the absence
of
an effective registration statement or opinion of legal counsel that
registration is not required under the Securities Act of 1933.
17
Issuance
of Preferred Stock
In
June
2004, holders of $150,000 in notes payable converted the outstanding principal
of $150,000, accrued interest of $17,500 and the 1,793,123 shares of common
stock held by them into 2,151,747 shares of our 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 $188,500 at March 31, 2007. In issuing these securities,
we
relied on the exemption from registration provided for by Section 4(2) of the
Securities Act of 1933. Ray
Dixon, one of our directors, purchased 717,249 shares through Southpointe
Financial, and along with another investor, received a lien on the home of
our
chief executive officer, Troy Lyndon. The status of this lien is currently
in
dispute between the parties.
In
November 2005, we issued 1,434,498 shares of series A preferred stock valued
at
$1.67 per share under a consulting agreement for total deferred consulting
expense of $2,400,000 to be amortized over the term of the consulting agreement.
$800,000 was recorded as consulting expense during the year ended March 31,2006
and the remaining $1.6 million was recorded as consulting expense during the
year ended March 31, 2007. In issuing these securities, we relied on the
exemption from registration provided for by Rule 701 of the Securities Act
of
1933.
We
believe that each transaction where securities were issued to consultants in
the
twelve month period ended March 31, 2007 did not require registration under
the
Securities Act of 1933, because they were exempt under Rule 701 of the
Securities Act of 1933. Moreover, issuances of securities to consultants,
including those issued after we became a reporting company where the Rule 701
exemption was no longer available, did not involve any public offering and
were
therefore exempt transactions pursuant to Section 4(2) of the Securities Act
of
1933. Our basis for this is the fact that the securities were offered and sold
to a limited number of persons, in a limited number of offers, with a limited
number of shares offered. In addition, as our consultants and employees, our
management believes that each of the service providers were sophisticated and
able to fend for themselves and obtain the information they needed to make
the
decision to accept stock in lieu of cash. This is based on the fact that the
service providers had access to our officers and operations and were in a
position that enabled them to command access to information that would otherwise
be contained in a registration statement. An appropriate legend was placed
on
the common stock issued to each shareholder.
All the above securities issued pursuant to Rule 506 promulgated as part of
Regulation D under section 4(2) of the Securities Act of 1933 were offered
and
sold to a select group of investors who at the time of investment represented
themselves to us to be “accredited investors” as defined in Regulation D under
the Securities Act of 1933, and knowledgeable and sophisticated investors.
In
addition, each investor was believed to have had such knowledge and experience
in financial and business matters that such investor was capable of evaluating
the merits and risks of their investment into us, and able at the time of
investment to bear the economic risks of an investment in us. We believe the
investors to be accredited because we received written confirmation from the
investor in our subscription agreements and we have no reason to doubt the
validity of the subscription documents. An appropriate legend was placed on
the
common stock issued to each shareholder.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Forward
Looking Statements
This
document contains statements that are considered forward-looking statements.
Forward-looking statements give our current expectations, plans, objectives,
assumptions or forecasts of future events. All statements other than statements
of current or historical fact contained in this annual report, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. In some cases, you can identify forward -looking
statements by terminology such as “anticipate,”“estimate,”“plans,”“potential,”“projects,”“ongoing,”“expects,”“management believes,”“we
believe,”“we intend,” and similar expressions. These statements are based on
our current plans and are subject to risks and uncertainties, and as such our
actual future activities and results of operations may be materially different
from those set forth in the forward looking statements. Any or all of the
forward-looking statements in this quarterly report may turn out to be
inaccurate and as such, you should not place undue reliance on these
forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results
of
operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions due to a number of factors,
including:
·
continued
development of our technology;
·
consumer
acceptance of our current and future products
·
dependence
on key personnel;
·
competitive
factors;
·
the
operation of our business; and
·
general
economic conditions.
18
These
forward-looking statements speak only as of the date on which they are made,
and
except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events. In addition, we cannot assess the impact
of
each factor on our business or the extent to which any factor, or combination
of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained in this
quarterly report.
Overview
Left
Behind Games Inc., a Washington corporation, formerly known as Bonanza Gold,
Inc., doing business through its subsidiary Left Behind Games Inc., a Delaware
corporation is in the business of developing and publishing video game products
based upon the popular Left Behind series of novels. Pursuant to a share
exchange agreement closed on February 7, 2006, we became a subsidiary of Left
Behind Games Inc. Washington. As a result of the share exchange agreement,
our
shareholders took majority control of Left Behind Games Inc. Washington and
our
management became the management of Left Behind Games Inc. Washington
(collectively, “we”, “our” or “LBG”).
We
are an
early stage company founded to develop and publish video game products based
upon the popular Left
Behind
series
of novels. We have the exclusive world-wide rights to the Left
Behind
book
series and brand, for the purpose of making any form of electronic games, which
includes video games. Left
Behind
novels
and products are based upon fictional storylines focused on events at the end
of
the world, including the ultimate battles of good against evil, which are very
action oriented and supremely suitable for an engaging series of electronic
games. According to the book publisher, Tyndale House Publishers, Left
Behind’s
series
of books has sold more than 63 million copies. Accordingly, Left
Behind
branded
products have generated more than $500 million at retail for the Left
Behind
book
series. According to a Barna Research study, Left
Behind
has also
become a recognized brand name by more than 1/3 of Americans. Our management
believes that Left
Behind
products
have experienced financial success, including the novels, children's books,
graphic novels (comic books), movies, and music. Our interest in the
Left
Behind
brand is
limited to our sublicense to make video games. We have no interest in, nor
do we
profit from any other Left
Behind
branded
products.
Our
rights to use the Left
Behind
brand to
make electronic games is based solely on our sublicense with White Beacon which
entitles us to all of its rights and obligations under its license with the
publisher of the Left
Behind
book
series. White Beacon’s exclusive worldwide license from the publisher of the
Left
Behind
book
series grants it, and us through our sublicense, the rights to develop,
manufacture, market and distribute video game products based on the Left
Behind
series.
We
have
assembled a team of individuals experienced in the video game industry to
develop and market video games based upon the Left
Behind
series.
Our game(s) feature spiritual weapons such as “prayer” and “worship” which can
overcome the fighting power of “guns”.
We
have
developed our first high quality video game and other associated products based
upon the Left
Behind
trademark. We released our first game in November 2006.
To
date,
we have financed our operations primarily through the sale of shares of our
common stock. During the fiscal year ended March 31, 2007, we borrowed $320,000
under a Bridge Loan and raised net proceeds of $5,266,117 from the sale of
4,917,009 shares of our common stock. We continue to generate operating
losses and have only just begun to generate revenues. Furthermore, the report
by
our Independent Registered Public Accounting Firm on our financial statements
includes a “going concern” modification.
We
recorded net revenues of $768,237 for the fiscal year ended March 31, 2007.
Since these were our first revenues, there was no corresponding revenue in
the
fiscal year ended March 31, 2006. Almost all of these revenues were from the
sale of our initial product, a video game named Left
Behind: Eternal Forces.
The
majority of the sales were to major retail chains either directly or through
distributors. We also sold our game to the CBA and Inspirational bookstores
and
over the internet. The net revenue figure is net of a reserve that we have
accrued to cover any potential markdowns or returns of the game.
19
Cost
of Sales - Product Costs
We
recorded cost of sales - product costs of $598,530 for the fiscal year ended
March 31, 2007. As discussed above, there was no corresponding cost of sales
-
product costs in the fiscal year ended March 31, 2006. Cost of sales - product
costs consists of product costs and inventory-related operational expenses.
Cost
of sales - product costs also includes an inventory reserve of
$25,834.
Cost
of Sales - Intellectual Property Licenses
We
recorded cost of sales - intellectual property licenses of $552,326 for the
fiscal year ended March 31, 2007. As discussed above, there was no corresponding
cost of sales - intellectual property licenses in the fiscal year ended March31, 2006. Cost of sales - intellectual property licenses consists of certain
royalty expenses, amortization of prepaid royalty costs and amortization of
certain intangible assets. In particular, cost of sales - intellectual property
licenses included $500,000 of guaranteed minimum royalty expenses to the
licensor of the Left
Behind
brand,
$42,326 of music royalties and $10,000 related to a technology
license.
General
and Administrative Expenses
General
and administrative expenses were $24,416,356 for the fiscal year ended March31,2007, compared to $8,042,694 for the fiscal year ended March 31, 2006, an
increase of $16,373,662 or 204%.
Many
of
these general and administrative expenses were non-cash charges since we paid
many of our consultants in shares of our common stock rather than in cash.
During the fiscal years ended March 31, 2007 and 2006, we recorded expenses
relating to these non-cash payments to consultants, including amortization
of
prepaid consulting expenses, of $17,435,004 and $6,358,420, respectively. This
represented a $10,970,384 increase. During the fiscal years ended March 31,2007
and 2006, we also issued shares of common stock to our employees, valued at
approximately $1,865,381 and $307,500, respectively, an increase of $1,557,881.
The overall increase in non-cash charges attributable to consultants and
employees was $12,560,265.
Other
significant factors in the increase in general and administrative expenses
were
advertising expenditures and public relations expenditures associated with
the
launch of our initial product. Our advertising and marketing expenses for the
fiscal year ended March 31, 2007 was $1,217,962, a $1,117,238 increase over
the
$100,724 in advertising and marketing expenses that we recorded for the fiscal
year ended March 31, 2006.
The
remainder of the increase was due to a variety of factors, including increases
in wages and salaries due to the hiring of additional employees, increased
travel expenses, and professional fees.
Product Development
Expenses
Product
development expenses were $1,209,154 for the fiscal year ended March 31, 2007,
compared to $568,001 for the fiscal year ended March 31, 2006, an increase
of
$641,153 or 113%. These increases are directly attributable to the growth of
our
development team and in consulting fees from outside contractors involved in
game development and testing.
Net
Loss
We
reported a net loss of $26,084,107 for the fiscal year ended March 31, 2007,
compared to a net loss of $8,608,526
for the
fiscal year ended March 31, 2006, resulting in an increased loss of $17,475,581.
In addition, our accumulated deficit at March 31, 2007 totaled $35,631,260.
These increases are attributable primarily to the factors discussed above.
As
noted above, $19,226,185, or 73.7%, of the net loss for the fiscal year ended
March 31, 2007 arose from the issuance of our common stock to consultants and
employees, which were non-cash charges.
CASH
REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES
At
March31, 2007 we had $14,965 of cash compared to $393,433 at March 31, 2006, a
decrease of $378,468. At March 31, 2007, we had a working capital deficit of
$1,562,273 compared to a working capital position of $3,019,786 at March 31,2006.
20
Operating
Activities
For
the
fiscal years ended March 31, 2007 and 2006, net cash used in operating
activities was $5,115,073 and$1,552,572,
respectively. The $3,562,501 increase in cash used in our operating
activities was primarily due to the increase in our general and administrative
expenses and research and development expenses as we neared the market launch
of
our first product. The net losses for the fiscal years ended March 31, 2007
and
2006 were $26,084,107 and $8,608,526,
respectively, an increase of $17,475,581.
Investing
Activities
For
the
fiscal years ended March 31, 2007 and 2006, net cash used in investing
activities was $846,618 and $69,469, respectively. The increase
was attributable to purchases of property and equipment and payments for
trademarks and royalties.
Financing
Activities
For
the
fiscal years ended March 31, 2007 and 2006, net cash provided by financing
activities was $5,583,223 and $1,799,500, respectively. The primary element
of
cash provided by financing activities in the fiscal year ended March 31, 2007
was $5,266,117 from the sale of common stock, net of issuance costs compared
to
$1,649,500 in the fiscal year ended March 31, 2006.
Future
Financing Needs
Since
our
inception in August 2002 through March 31, 2007, we have raised
approximately $7.3 million through funds provided by private placement
offerings. This was sufficient to enable us to development our first product
and
to make some improvements to that product. Although we expect this trend of
financing our business through private placement offerings to continue, we
can
make no guarantee that we will be adequately financed going forward. However,
it
is also anticipated that in the event we are able to continue raising funds
at a
pace that exceeds our minimum capital requirements, we may elect to spend cash
to expand operations or take advantage of business and marketing opportunities
for our long-term benefit. Additionally, we intend to continue to use equity
whenever possible to finance marketing, public relations and development
services that we may not otherwise be able to obtain without cash.
We
have
reduced our staff in order to preserve cash. This personnel reduction does
not
negatively impact our game development because of our use of outsourcing.
This
structure allows us to expand the size of the development team on a
product-by-product basis without substantially increasing our long-term monthly
burn-rate of cash.
Going
Concern
As
of the
fiscal year ended March 31, 2007, we have started to generate revenue, and
through March 31, 2007 have incurred net losses of $35,631,260 and have had
negative cash flows from operations of $6,886,863 from our inception through
March 31, 2007. Following the launch of our product, we significantly downsized
both our domestic and contracted international workers in order to reduce our
ongoing cash expenditures. We also built up a significant level of accounts
payable due to the expenses associated with our product launch.
Our
ability to continue as a going concern is dependent upon our ability to generate
profitable operations in the future and/or to obtain the necessary financing
to
meet our obligations and repay our liabilities arising from normal business
operations when they come due. We plan to continue to provide for our capital
requirements by issuing additional equity. No assurance can be given that
additional capital will be available when required or on terms acceptable to
us.
We also cannot give assurance that we will achieve sufficient revenues in the
future to achieve profitability and cash flow positive operations. The outcome
of these matters cannot be predicted at this time and there are no assurances
that, if achieved, we will have sufficient funds to execute our business plan
or
to generate positive operating results.
Our
independent registered public accounting firm has indicated that these matters,
among others, raise substantial doubt about our ability to continue as a going
concern.
Critical
Accounting Policies
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that are believed
to
be reasonable under the circumstances, the results of which form the basis
of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, however, in the past the
estimates and assumptions have been materially accurate and have not required
any significant changes. Specific sensitivity of each of the estimates and
assumptions to change based on other outcomes that are reasonably likely to
occur and would have a material effect is identified individually in each of
the
discussions of the critical accounting policies described below. Should we
experience significant changes in the estimates or assumptions which would
cause
a material change to the amounts used in the preparation of our financial
statements, material quantitative information will be made available to
investors as soon as it is reasonably available.
21
We
believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
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. We believe 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.
Impairment
of Long-Lived Assets. We
review
our 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, 2007, our 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 our products, which could result in impairment of long-lived assets
in the future.
Stock-Based
Compensation.
Effective April 1, 2006, on the first day of our fiscal year 2006, we adopted
the fair value recognition provisions of SFAS No. 123(R), Share-BasedPayments,
using
the modified-prospective transition method. Under this transition method,
compensation cost recognized in the fiscal year ended March 31, 2007 includes:
(a) compensation cost for all share-based payments granted and not yet vested
prior to April 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting
for Stock-Based Compensation,
and (b)
compensation cost for all share-based payments granted subsequent to March31,2006 based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. As of March 31, 2007, we
had
no options outstanding and therefore believe the adoption of SFAS No. 123(R)
to
have an immaterial effect on the accompanying consolidated financial
statements.
We
calculate stock-based compensation by estimating the fair value of each option
using the Black-Scholes option pricing model. Our determination of the fair
value of share-based payment awards are made as of their respective dates of
grant using the option pricing model and that determination is affected by
our
stock price as well as assumptions regarding a number of subjective variables.
These variables include, but are not limited to, our expected stock price
volatility over the term of the awards, and actual and projected employee stock
option exercise behavior. The Black-Scholes option pricing model was developed
for use in estimating the value of traded options that have no vesting or
hedging restrictions and are fully transferable. Because our employee stock
options have certain characteristics that are significantly different from
traded options, the existing valuation models may not provide an accurate
measure of the fair value of our employee stock options. Although the fair
value
of employee stock options is determined in accordance with SFAS No. 123(R)
using
an option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction. The calculated
compensation cost, net of estimated forfeitures, is recognized on a
straight-line basis over the vesting period of the option.
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
forAcquiring,
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. We account for stock-based awards to
non-employees by using the fair value method.
In
accordance with 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, we have recorded the fair value of the common stock
issued for certain future consulting services as prepaid expenses in its
consolidated balance sheet.
22
Revenue
Recognition. We
evaluate the recognition of revenue based on the criteria set forth in
SOP 97-2, “Software
Revenue Recognition”,
as
amended by SOP 98-9, “Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions”and
Staff
Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements”,
as
revised by SAB No. 104, “Revenue
Recognition”.
We
evaluate revenue recognition using the following basic criteria and recognize
revenue when all four of the following criteria are met:
•
Evidence
of an arrangement: Evidence of an agreement with the customer that
reflects the terms and conditions to deliver products must be present
in
order to recognize revenue.
•
Delivery:
Delivery is considered to occur when the products are shipped and
risk of
loss and reward have been transferred to the customer.
•
Fixed
or determinable fee: If a portion of the arrangement fee is not fixed
or
determinable, we recognize that amount as revenue when the amount
becomes
fixed or determinable.
•
Collection
is deemed probable: At the time of the transaction, we conduct a
credit
review of each customer involved in a significant transaction to
determine
the creditworthiness of the customer. Collection is deemed probable
if we
expect the customer to be able to pay amounts under the arrangement
as
those amounts become due. If we determine that collection is not
probable,
we recognize revenue when collection becomes probable (generally
upon cash
collection).
Determining
whether and when some of these criteria have been satisfied often involves
assumptions and judgments that can have a significant impact on the timing
and
amount of revenue we report. For example, for multiple element arrangements,
we
must make assumptions and judgments in order to: (1) determine whether and
when each element has been delivered; (2) determine whether undelivered
products or services are essential to the functionality of the delivered
products and services; (3) determine whether vendor-specific objective
evidence of fair value (“VSOE”) exists for each undelivered element; and
(4) allocate the total price among the various elements we must deliver.
Changes to any of these assumptions or judgments, or changes to the elements
in
a software arrangement, could cause a material increase or decrease in the
amount of revenue that we report in a particular period.
Product
Revenue:
Product
revenue, including sales to resellers and distributors (“channel partners”), is
recognized when the above criteria are met. We reduce product revenue for
estimated future returns, price protection, and other offerings, which may
occur
with our customers and channel partners.
Shipping
and Handling:
In
accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10,
“Accounting
for Shipping and Handling Fees and Costs”,
we
recognize amounts billed to customers for shipping and handling as revenue.
Additionally, shipping and handling costs incurred by us are included in cost
of
goods sold.
The
Company promotes its products with advertising, consumer incentive and trade
promotions. Such programs include, but are not limited to, cooperative
advertising, promotional discounts, coupons, rebates, in-store display
incentives, volume based incentives and product introductory payments (i.e.
slotting fees). In accordance with EITF No. 01-09 "Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendors Products" certain
payments made to customers by the Company, including promotional sales
allowances, cooperative advertising and product introductory expenditures have
been deducted from revenue. During the fiscal year ended March 31, 2007, we
recorded a total of $89,112 under such types of arrangements.
ITEM
7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
See
“Index to Consolidated Financial Statements” on page F-1 for a listing of the
Consolidated Financial Statements and Schedule filed with this
report.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Our
chief
executive officer and chief financial officer carried out an evaluation of
the
effectiveness and operation of our disclosure controls and procedures. They
have
concluded after evaluating the effectiveness of our disclosure controls and
procedures as of March 31, 2007, that as of such date, our disclosure controls
and procedures were effective and designed to ensure that material information
relating to us was made known to them by others.
Changes
in Internal Controls
There
have been no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the evaluation
date.
ITEM
8B. OTHER INFORMATION.
Not
applicable
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Our
directors and executive officers as of July 12, 2007, include the following
persons:
Name
Age
Position
Troy
A. Lyndon
42
Chairman
& Chief Executive Officer
James
B. Frakes
50
Chief
Financial Officer
Jeffrey
S. Frichner
49
Director
Thomas
H. Axelson
63
Director
Ray
Dixon
54
Director
Troy
A. Lyndon, chief executive officer and chairman of the board of
directors,
age 42,
is the chief executive officer of Left Behind Games Inc. As the former chief
executive officer of Studio Arts Multimedia, Inc., he managed and worked to
develop six multi-million dollar video game projects for Corel Corporation.
Previously, Mr. Lyndon served as president of Park Place Productions where
he
managed operations, including the publication and/or development for over 50
video game projects. Park Place Productions under Mr. Lyndon’s leadership,
became North America’s largest independent video game development company. Mr.
Lyndon has over 20 years experience in the management and development of
software projects, including computer and video game products such as Madden
Football, Batman Returns, Defender of the Crown, and Street Fighter. Mr. Lyndon
is also a recipient of the Entrepreneur of the Year award from Inc. Magazine,
Merrill Lynch and Ernst & Young. Mr. Lyndon has also served many ministries
and Christian publishers, including the Billy Graham Evangelistic Association,
Campus Crusade for Christ International, the Bright Media Foundation, the
publisher of the Left
Behind
book
series and Biblesoft.
James
B. Frakes, chief financial officer,
age 50,
was appointed chief financial officer of Left Behind Games Inc. in November
2006. Prior to joining us, Mr. Frakes was the chief financial officer of NTN
Communications, Inc. from April 2001 through June 2005. Mr. Frakes serves on
the
Board of Youth Tennis San Diego, a nonprofit organization. He holds an MBA
from
the University of Southern California and a BA from Stanford
University.
24
Jeffrey
S. Frichner, member of the board of directors,
age 49,
formerly was the president and secretary of Left Behind Games Inc. Currently,
he
is managing director of Good News Capital, LLC, a financial relations and
consulting firm. Previously, he was national accounts manager for Raindance
Communications, Inc. Prior to that, Mr. Frichner was the director of business
development for Enable Incorporated. Previous to that, he was Vice President
of
Corporate Finance and Investments for Janda, Phillips and Garrington, LLC.
Prior, Mr. Frichner was a registered representative with Dean Witter Reynolds.
He holds a BA in business and marketing from National University and is a former
United States Marine.
Thomas
H. Axelson, member of the board of directors,
age 63,
formerly was the chief financial officer of Left Behind Games Inc. He also
currently serves as the Foundations Relations Manager for the largest ministry
of Campus Crusade for Christ International. For more than 35 years, Mr. Axelson
has devoted his life to ministry. During the past 15 years, he has managed
allocations of more than $350 million to support Campus Crusade for Christ
operations worldwide. Mr. Axelson received his B.S. in Chemistry and Biology
from Bemidji State University and holds an M.A. in Management from Claremont
Graduate School.
Ray
Dixon, member of the board of directors,
age 53,
is a vice president of Southpointe Financial Group and has been with Southpointe
for 21 years. Mr. Dixon has decades of experience in operations management
of
publishing and lending institutions. Further, Mr. Dixon has 23 years experience
in real estate finance and investments.
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
requires our executive officers and directors and persons who own more than
ten
percent of our common stock to file reports of ownership and changes in
ownership with the SEC. Such executive officers, directors and greater than
ten
percent stockholders are also required by SEC rules to furnish us with copies
of
all Section 16(a) forms they file. Based on information supplied to us and
filings made with the SEC, we believe that, during the fiscal year ended March31, 2007, Section 16(a) filing requirements applicable to its directors,
officers, and greater than ten percent beneficial owners were not complied
with.
Messrs. Lyndon and Frichner filed Form 3s on April 21, 2006. Mr. Axelson
filed
a
late Form 3 on July 12, 2007. Mr. Frakes and Mr. Dixon filed late Form 4s on
July 10, 2007.
The
board
has not yet appointed a Compensation Committee, so the full board is responsible
for establishing the company’s overall compensation strategy, with support from
management and consultants. To date, however, the board has not approved the
compensation of management. The board also oversees the company’s current stock
option plan, and is responsible for administering the plan.
Our
compensation arrangements reflect the individual circumstances surrounding
the
applicable executive officer’s hiring or appointment.
Principal
Components of Compensation of Our Executive Officers
The
principal components of the compensation we have historically paid to our
executive officers have consisted of equity
compensation, generally in the form of grants of our common stock.
Our
board
and management have not yet established a consensus on policies or guidelines
with respect to the mix of base salary, bonus, cash incentive compensation
and
equity awards to be paid or awarded to our executive officers. In general,
the
board believes that a greater percentage of the compensation of the most senior
members of our management should be performance-based. In future fiscal years,
the board anticipates adopting more formal and structured compensation policies
and programs, including the formation of a compensation committee. At such
time,
the board will endeavor to implement policies designed to attract, retain and
motivate individuals with the skills and experience necessary for us to achieve
our business objectives. These policies will also serve to link pay with
measurable performance, which, in turn, should help to align the interests
of
our executive officers with our shareholders.
25
The
board
meets in-person at least fivetimes
per
year. It also meets as necessary, either in person or via telephone to discuss
compensation and other issues. It met tentimes
during the past fiscal year. The
Board
works with our management in carrying out its responsibilities.
Base
Salary
Our
Chief Executive Officer
We
hired
Troy A. Lyndon as our Chief Executive Officer in 2002. Mr. Lyndon’s employment
agreement with us provides for an annual base salary of $150,000. In
the
future, based upon revenue benchmarks, this amount can increase
commensurate with our increased revenues, to a maximum salary of $300,000 per
year. The terms of Mr. Lyndon's employment agreement include certain incentive
bonuses. Under the agreement, Mr. Lyndon may achieve increases in his annual
salary and varying levels of bonuses once we acheive certain revenue benchmarks.
The initial benchmark to receive an increase in his salary over the current
level of $150,000 and to receive a bonus is $4 million for a fiscal year.
Mr. Lyndon has not earned a bonus under an agreement because we have not reached
the revenue target of $4 million.
Our
Chief Financial Officer
We
hired
James B. Frakes as our as our chief financial officer in November 2006. Our
employment agreement with Mr. Frakes provides for an initial annual salary
of
$140,000 with $10,000 payments upon the filing of each 10-KSB. Subsequently,
his
annual salary was increased to $180,000.
Our
President
We
hired
Jeffrey S. Frichner as our President in 2002. Our employment agreement with
Mr.
Frichner provided for an annual salary of $150,000. Mr. Frichner resigned as
our
President on June 8, 2007.
Bonus
Compensation
We
have
not historically paid any automatic or guaranteed bonuses to our executive
officers. However, certain officers have bonus components in connection with
their performance.
Equity
Compensation
Our
board
of directors’ plans
to
begin granting
equity-based awards
to
attract, retain, motivate and reward our employees, particularly our executive
officers, and to encourage their ownership of an equity interest in our company.
We implemented the 2006
Stock Incentive
Plan in
January
2007.
We did
not grant any options to our executive officers or employees in the fiscal
year
ended March 31, 2007.
We
may
make future awards of stock options to our executive officers under the Plan.
We
reserve the discretion to
pay
compensation to our executive officers that may not be deductible.
We
do not
have any program, plan or practice that requires us to grant equity-based awards
on specified dates. Authority to make equity-based awards to executive officers
rests with the board, which considers the recommendations of our chief executive
officer and other executive officers.
Deferred
Compensation
Three
of
our officers or former officers previously deferred a portion of their
compensation, which they have the right to convert to the company’s Common Stock
at prices ranging from $0.084 to $1.68 per share. All three of those officers
or
former officers elected to convert that deferred compensation into our common
stock at the agreed conversion rates as follows:
·
Mr.
Lyndon converted $188,542 of deferred compensation into 2,242,441
shares
of our common stock.
·
Mr.
Frichner converted $266,128 of deferred compensation into 2,721,463
shares
of our common stock.
·
Mr.
Axelson converted $126,043 of deferred compensation into 938,534
shares of
our common stock.
26
Severance
and Change of Control Payments
Our
board
of directors believes that companies should provide reasonable severance
benefits to employees, recognizing that it may be difficult for them to find
comparable employment within a short period of time.
Our
employment agreement with Mr. Lyndon provides that, if Mr. Lyndon is terminated
without cause, he
is
entitled to receive an amount equal to six (6) months' base
compensation. We believe that the termination provisions of Mr. Lyndon’s
employment agreement are comparable to those in effect for chief executive
officers of companies comparable to us, in terms of size, revenue, profitability
and/or nature of business.
Perquisites
Each
of
our executive officers receives similar perquisites. We have agreed to reimburse
each executive officer for all reasonable travel, entertainment and other
expenses incurred by them in connection with the performance of their duties
and
obligations. Certain of our executive officers receive an automobile allowance
and payment of other automobile expenses. Pursuant to his employment agreement,
Mr. Lyndon receives a monthly car allowance of up to $1,000, plus actual
maintenance, repair and insurance costs. Mr. Frichner also received a car
allowance of up to $1,000, plus actual maintenance, repair and insurance
costs.
We
also
provide health insurance for Messrs. Lyndon and Frakes and has agreed to provide
for Mr. Frichner’s individual health insurance for a period of six months
following his resignation in early June 2007.
Compensation
Committee Interlocks and Insider Participation
We
have
not yet designated a Compensation Committee. All compensation matters are
approved by the full board. Mr. Lyndon and Mr. Frichner were our employees
or
former employees during the past fiscal year. None of our executive officers
served on the compensation committee (or equivalent), or the board, of another
entity whose executive officer(s) served on our board.
Summary
Compensation Table
The
cash
and non-cash compensation that we have paid during the fiscal year ended March31, 2007, March 31, 2006 and March 31, 2005 or that was earned by our chief
executive officer and our other executive officers is detailed in the following
table.
Name
and Principal Position
Year
Salary
Stock
Awards
(3)
All
Other
Compensation
Total
Troy
A. Lyndon
Chairman
and Chief Executive Officer
2007
2006
2005
$150,000
120,973
71,944
$
--
41,739(1)
$191,739
Jeffrey
S. Frichner
Former
President
2007
2006
2005
$143,800
126,878
110,792
--
49,729(2)
$193,529
James
B. Frakes
Chief
Financial Officer
2007
$
71,564
*
$131,475
--
$203,039
Kevin
Hoekman
Senior
Producer
2007
$108,992 *
$554,000
--
$662,992
David
Klein
Former
Senior Vice President
2007
$ 88,846 *
$355,500
--
$444,346
______________________
(1)
Includes
$31,000 paid as board attendance fees and $10,739 as automobile related
compensation.
(2)
Includes $31,000
paid as board attendance fees and $18,729 as automobile related
compensation.
Frichner
resigned as President in June 2007.
(3) Stock grants are valued as of the grant date.
*
Frakes, Hoekman and Klein were all for partial years. Klein resigned on April
2007.
27
Compensation
of Our Independent Directors
Currently,
our directors do not receive compensation. It is anticipated, however, that
each
of our directors may receive compensation at some point in the
future.
In
connection with his previous service as our chief financial officer, Mr. Axelson
had the right to convert certain deferred compensation of $126,043 into an
additional 938,534 shares of our common stock at post reverse split rate ranging
from $0.084 to $1.68 per share.
He has
elected to fully convert his deferred compensation.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table presents information about the beneficial ownership of our
voting securities as of July 12, 2007 by:
·
each
person or entity who is known by us to own beneficially more than
5% of
the outstanding shares of our voting
securities;
·
each
of our directors and named executive
officers;
·
all
directors and executive officers as a group.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to community property laws, where applicable.
The
percentage of beneficial ownership of our shares of voting securities subject
to
this SEC filing is based on a total of 50,401,092 combined shares of voting
preferred and common stock outstanding as of July 12, 2007.
Calculates
outstanding securities plus securities that the group may acquire
within
the next 60 days pursuant to privileges to convert preferred shares.
(2)
Ray
Dixon has significant control of Southpointe Financial. Ray Dixon
is a
member of our Board of Directors and is the owner of 1,434,498 shares
of
our series A preferred stock.
(3)
Our
series A preferred stock is convertible into common stock on a 1
for 1
basis at the sole discretion of the
holder.
28
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Transactions
with Third Party Companies Owned by Executive Officers
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
was initially set to expire on December 31, 2006, subject to automatic renewal
for three additional three-year terms so long as Tyndale was 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 was 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 LBG 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, we issued to White
Beacon 3,496,589 shares of our common stock valued at $5,850, which was the
estimated fair value of the common stock on the date of issuance.
During
the year ended March 31, 2003, we 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. We accrued the remaining guaranteed minimum
royalty of $150,000 which was included in current liabilities in the
accompanying consolidated balance sheet at March 31, 2006 and was paid in
October 2006.
In
September 2006, the license was amended and extended to December 31, 2009 after
which it is subject to automatic renewals for additional three year terms if
we
have paid and/or prepaid royalties of $250,000 during each renewal period.
As
part of this amendment, we must pay Tyndale the remaining $750,000 of the agreed
original minimum royalty payment on or before March 31, 2007.
The
license was further amended on May 14, 2007. Under this amendment the remaining
amount of the minimum royalty payment was reduced from $750,000 to $250,000
and
the date of that payment was extended from March 31, 2007 to December 31, 2007.
We have charged the minimum royalty payment amount to our cost of goods sold
on
our March 31, 2007 financial statements.
As
LB
Games Ukraine is currently providing software development services only to
us
and due to our history of providing on-going financial support to that entity,
through consolidation we absorb all net losses of this variable interest entity
in excess of the equity. LB Games Ukraine’s sole asset is cash which has an
approximate balance of $2,600 at March 31, 2007. During the year ended March31,2007, we paid approximately $180,000 for software development services provided
by LB Games Ukraine, which has been recorded as research and development cost
during the period.
Our
Directors’ Other Business Activities
Our
directors are involved in a variety of business and professional activities
outside of managing our operations. These other activities may result in a
conflict with respect to the allocation of management resources away from our
operations and to other activities.
Our
Management devotes only such time to our operations as they, in their sole
discretion deem necessary to carry out our operations effectively. Our officers
and directors may work on non-profit projects in accordance with their
respective employment agreements. Conflicts of interest may arise in allocating
management time, services or functions among such affiliates.
29
Limitation
of Rights
Our
Bylaws provide that our management will not be liable for actions taken by
them
in good faith in furtherance of our business, and will be entitled to be
indemnified by us in such cases. Therefore, our stockholders may have a more
limited right against the management, their affiliates and their respective
related parties than they would have absent such limitations in the Bylaws.
In
addition, indemnification of the management, their affiliates and their
respective related parties could deplete our assets possibly resulting in loss
by the stockholders of a portion or all of their investment.
Certification of principal executive
officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
Certification of principal financial
officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
KMJ
Corbin & Company LLP billed us $73,239 for audit-related services during the
year ended March 31, 2006. KMJ Corbin & Company LLP billed us $102,350 for
audit-related services during the year ended March 31, 2007.
Audit
Fees. The aggregate fees billed for the years ended March 31, 2007 and 2006
were for the audits of our financial statements and reviews of our interim
financial statements included in our annual and quarterly reports.
Audit
Related Fees. There were no fees billed for the years ended March 31, 2007
and 2006 for the audit or review of our financial statements that are not
reported under Audit Fees.
All
Other
Fees. The aggregate fees billed above for the years ended March 31, 2007
and 2006 included services other than the services described above. These
services include attendance and preparation for shareholder and audit committee
meetings, consultation on accounting, on internal control matters and review
of
and consultation on our registration statements and issuance of related
consents.
Financial
Policies and Procedures. Our management has implemented pre-approval policies
and procedures related to the provision of audit and non-audit services. Under
these procedures, management pre-approves both the type of services to be
provided by KMJ Corbin & Company, LLP and the estimated fees related to
these services.
31
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
(Duly
Authorized Officer, Principal Accounting Officer
and
Principal Financial
Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Consolidated
Statements of Operations for the years ended March 31, 2007 and
2006
F-4
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended March 31,2007 and 2006
F-5
Consolidated
Statements of Cash Flows for the years ended March 31, 2007 and
2006
F-6
Notes
to Consolidated Financial Statements
F-8
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Board of Directors
Left
Behind Games Inc.
We
have
audited the accompanying consolidated balance sheets of Left Behind Games Inc.
(the “Company’) as of March 31, 2007 and 2006, and the related statements
of operations, stockholders’ equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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
consolidated financial statements are free of material misstatement. 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
examining, on a test basis, evidence supporting the amounts and disclosures
in
the consolidated financial statements. 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 consolidated financial position of Left Behind Games
Inc.
as of March 31, 2007 and 2006, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As more fully described in Note 3
to
the consolidated financial statements, the Company has incurred significant
operating losses and negative cash flows from operations through March 31,2007,
and has an accumulated deficit at March 31, 2007. These items, among other
matters, raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are also described
in Note 3. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amount and classification of liabilities that may result from
the outcome of this uncertainty.
In
January 2006, Left Behind Games Inc. (collectively, “we”, “our,” the “Company”
or “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 of our outstanding common stock on a “1 for 1”
exchange basis. Prior to the execution of the Agreement, on January 25, 2006,
we
effected a 2.988538 for 5 reverse stock split of both our common stock and
preferred stock outstanding, resulting in 12,456,538 and 3,586,246 shares
of
common and preferred stock, respectively. Also prior to the execution of
the
Agreement, Bonanza effected 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 our common
and
preferred shares. The acquisition was accounted for as a reverse acquisition
whereby the assets and liabilities of LBG were reported at their historical
cost. Bonanza had nominal amounts of assets and no significant operations
at the
date of the acquisition.
We
were
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. We recently completed the development of a
video
game based upon the popular LEFT
BEHIND series
of novels published by Tyndale House Publishers (“Tyndale”) and as of November
2006 began commercially selling the video game to retail outlets nationwide.
White
Beacon, Inc., a Delaware Corporation (“White Beacon”), an entity beneficially
owned and controlled by Troy Lyndon, our chief executive officer and Jeffrey
Frichner, our former president, 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 us a sublicense
(the
“Sublicense”) to exploit the rights and fulfill the obligations of White Beacon
under the License (see Note 7).
BASIS
OF PRESENTATION
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 (“LB Games Ukraine”), a variable interest entity of which we are the
primary beneficiary. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Effective
July 2005, we adopted FIN 46(R), Consolidation
of Variable Interest Entities,
which
resulted in the consolidation of LB Games Ukraine. LB Games Ukraine was
established to provide software development and consulting services and is
currently providing these services only to us. LB Games Ukraine is 85% owned
by
the Company’s Chief Executive Officer. Pursuant to the LB Games Ukraine
operating agreement, our Chief Executive Officer is required to fund operations
as needed in relation to his ownership interest in LB Games Ukraine. During
the
period ended March 31, 2006, we contributed approximately $5,600 to LB Games
Ukraine on behalf of our Chief Executive Officer to provide working capital
to
LB Games Ukraine. This transaction was eliminated in consolidation.
As
LB
Games Ukraine is currently providing software development services only to
us
and due to our history of providing on-going financial support to this entity,
through consolidation we absorb all net losses of this variable interest
entity
in excess of the equity. LB Games Ukraine’s sole asset is cash which has an
approximate balance of $2,600 at March 31, 2007. During the years ended March31, 2007 and 2006, we paid approximately $180,000 and $119,000, respectively,
for software development services provided by LB Games Ukraine, all of which
has
been eliminated in consolidation.
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of LBG
and,
effective July 2005, include the accounts of LB Games Ukraine LLC (“LB Games
Ukraine”), a variable interest entity in which LBG is the primary beneficiary.
LB Games Ukraine is a related party created to improve control over software
development with independent contractors internationally. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Reverse
Stock Split
Effective
January 25, 2006, we effected a 2.988538 for 5 reverse stock split of our
common and preferred stock outstanding. All share and per share amounts
have been retroactively restated for all periods presented to reflect the
reverse stock split.
Risks
and Uncertainties
We
maintain our 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, 2007 and 2006, we had balances
of approximately $0 and $284,000, respectively, in excess of the FDIC insurance
limit.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us
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.
Our significant estimates include recoverability of prepaid
royalties and long-lived assets, and the realizability of accounts
receivable, inventories and deferred tax assets.
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. Statement of
Financial Accounting Standards ("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. We believe 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.
Cost
of Sales
Cost
of sales consists of product costs, royalty expenses, license costs
and inventory-related operational expenses.
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
consolidated statement of operations.
Intangible
Assets
License
and Sublicense Agreements
The
cost
of the License and Sublicense agreements are amortized on a straight-line
basis
over their related terms (see Notes 6 and 7). In the year ended March 31,2007,
we determined that $60,000 paid under a technology license was impaired since
we
concluded that we were not going to license that technology (see Note 16).
As a
result, we wrote off $60,000 related to the technology license which is included
in research and development expense for the year ended March 31, 2007.
Trademarks
The
cost
of trademarks includes funds expended for trademark applications that are
in
various stages of the filing approval process. The trademark costs are being
amortized on a straight-line basis over their estimated useful lives. During
the
year ended March 31, 2007, the Company recorded $2,766 of amortization expense
related to its capitalized trademark costs.
Royalties
Royalty-based
obligations with content licensors are either paid in advance and
capitalized as prepaid royalties or are accrued as incurred and subsequently
paid. These royalty-based obligations are generally expensed to cost of goods
sold at the greater of the contractual rate or an effective royalty rate
based
on expected net product sales.
Our
contracts with some licensors include minimum guaranteed royalty payments
which
are recorded to expense and as a liability at the contractual amount when
no
significant performance remains with the licensor. Minimum royalty payment
obligations are classified as current liabilities to the extent such royalty
payments are contractually due within the next twelve months.
Significant
judgment is required to estimate the effective royalty rate for a particular
contract. Because the computation of effective royalty rates requires us
to
project future revenue, it is inherently subjective as our future revenue
projections must anticipate, for example, (1) the total number of titles
subject to the contract, (2) the timing of the release of these titles,
(3) the number of software units we expect to sell, and (4) future
pricing.
Our
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 are
being recognized as cost of sales as the related sales are recognized.
Guarantees advanced under the Sublicense agreement are recorded as a
component of cost of sales during the period in which the Company is
contractually obligated to make minimum guaranteed royalty payments.
During
the year ended March 31, 2007, we recorded expense of $500,000 related to
our minimum guarantee.
We
review
our 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. As of
March 31, 2007, we believe there is no impairment of our long-lived assets.
There can be no assurance, however, that market conditions will not change
or that there will be demand for our products, which could result in impairment
of long-lived assets in the future.
Income
Taxes
We
account 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
Effective
April 1, 2006, the first day of our fiscal year 2007, we adopted the fair
value
recognition provisions of SFAS No. 123(R), Share-BasedPayment,
using
the modified-prospective transition method. Under this transition method,
compensation cost recognized in the year ended March 31, 2007 includes: (a)
compensation cost for all share-based payments granted and not yet vested
prior
to April 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, Accounting
for Stock-Based Compensation,
and (b)
compensation cost for all share-based payments granted subsequent to March31,2006 based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Currently, no stock
options have been granted to employees. Therefore, we believe the adoption
of SFAS No. 123(R) had an immaterial effect on the accompanying
consolidated financial statements.
We
calculate stock-based compensation by estimating the fair value of each option
using the Black-Scholes option pricing model. Our determination of the fair
value of share-based payment awards is made as of the respective dates of
grant
using the option pricing model and that determination is affected by our
stock
price as well as assumptions regarding the number of subjective variables.
These
variables include, but are not limited to, our expected stock price volatility
over the term of the awards and actual and projected employee stock option
exercise behavior. The Black-Scholes option pricing model was developed for
use
in estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because employee stock options have
certain characteristics that are significantly different from traded options,
the existing valuation models may not provide an accurate measure of the
fair
value of our employee stock options. Although the fair value of employee
stock
options is determined in accordance with SFAS No. 123(R) using an option-pricing
model, that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. The calculated compensation cost,
net
of estimated forfeitures, is recognized on a straight-line basis over the
vesting period of the option.
Stock-based
awards to non-employees are accounted for using the fair value method in
accordance with SFAS No. 123, and Emerging Issues Task Force (“EITF”) Issue
No. 96-18, Accounting
for Equity Instruments that are issued to Other Than Employees
forAcquiring,
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 with 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, we record the fair value of the common
stock
issued for certain future consulting services as prepaid expenses in our
consolidated balance sheet.
Basic
and Diluted Loss per share
Basic
loss per common share is computed by dividing net loss by 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 for the periods presented as the effect
of
warrants and convertible deferred salaries on loss per share are anti-dilutive
and thus not included in the diluted loss per share calculation. If such
amounts
were included in diluted loss per share, they would have resulted in weighted
average common shares of 21,244,535 and 10,136,250 for the years ended
March 31, 2007 and 2006, respectively.
Foreign
Currency and Comprehensive Income
We
have
determined that the functional currency of LB Games Ukraine is the local
currency of that company. Assets and liabilities of the Ukrainian subsidiary
are
translated into U.S. dollars at the period end exchange rates. Income and
expenses, including payroll expenses, are translated at an average exchange
rate
for the period and the translation gain or loss is accumulated as a separate
component of stockholders’ equity. We determined that the translation gain or
loss did not have a material impact on our stockholders’ equity as of March 31,2007 and 2006. As a result, we have not presented a separate accumulated
other
comprehensive income (loss) on our consolidated balance sheets.
Foreign
currency gains and losses from transactions denominated in other than the
respective local currencies are included in income. There were no foreign
currency transactions included in income during the years ended March 31,2007
and 2006.
Comprehensive
income includes all changes in equity (net assets) during a period from
non-owner sources. The components of comprehensive income were not materially
impacted by foreign currency gains or losses during the years ended March31,2007 and 2006.
Fair
Value of Financial Instruments
Our
financial instruments consist of cash, accounts receivable, accounts payable,
related party advances, notes payable and accrued expenses. The carrying
amounts of these financial instruments approximate their fair value due to
their
short maturities or based on rates currently available to the Company for
notes
payable.
We
evaluate the recognition of revenue based on the criteria set forth in Statement
of Position ("SOP") 97-2, Software
Revenue Recognition,
as
amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions and
Staff
Accounting Bulletin (“SAB”) No. 101, Revenue
Recognition in Financial Statements,
as
revised by SAB No. 104, Revenue
Recognition.
We
evaluate revenue recognition using the following basic criteria and recognize
revenue when all four of the following criteria are met:
•
Evidence
of an arrangement: Evidence of an agreement with the customer that
reflects the terms and conditions to deliver products must be present
in
order to recognize revenue.
•
Delivery:
Delivery is considered to occur when the products are shipped and
risk of
loss and reward have been transferred to the customer.
•
Fixed
or determinable fee: If a portion of the arrangement fee is not
fixed or
determinable, we recognize that amount as revenue when the amount
becomes
fixed or determinable.
•
Collection
is deemed probable: At the time of the transaction, we conduct
a credit
review of each customer involved in a significant transaction to
determine
the creditworthiness of the customer. Collection is deemed probable
if we
expect the customer to be able to pay amounts under the arrangement
as
those amounts become due. If we determine that collection is not
probable,
we recognize revenue when collection becomes probable (generally
upon cash
collection).
Determining
whether and when some of these criteria have been satisfied often involves
assumptions and judgments that can have a significant impact on the timing
and
amount of revenue we report. For example, for multiple element arrangements,
we
must make assumptions and judgments in order to: (1) determine whether and
when each element has been delivered; (2) determine whether undelivered
products or services are essential to the functionality of the delivered
products and services; (3) determine whether vendor-specific objective
evidence of fair value (“VSOE”) exists for each undelivered element; and
(4) allocate the total price among the various elements we must deliver.
Changes to any of these assumptions or judgments, or changes to the elements
in
a software arrangement, could cause a material increase or decrease in the
amount of revenue that we report in a particular period.
Product
Revenue:
Product
revenue, including sales to resellers and distributors (“channel partners”), is
recognized when the above criteria are met. We reduce product revenue for
estimated future returns, price protection, and other offerings, which may
occur
with our customers and channel partners.
Revenue
from Sales of Consignment Inventory.
We have
placed consignment inventory with certain customers. We receive payment from
those customers only when they sell our product to the final consumers. We
recognize revenue from the sale of consignment inventory only when we receive
payment from those customers.
Shipping
and Handling:
In
accordance with EITF Issue No. 00-10, Accounting
for Shipping and Handling Fees and Costs,
we
recognize amounts billed to customers for shipping and handling as revenue.
Additionally, shipping and handling costs incurred by us are included in
cost of
goods sold.
We
promote our products with advertising, consumer incentive and trade promotions.
Such programs include, but are not limited to, cooperative advertising,
promotional discounts, coupons, rebates, in-store display incentives, volume
based incentives and product introductory payments (i.e. slotting fees).
In
accordance with EITF No. 01-09, Accounting
for Consideration Given by a Vendor to a Customer or Reseller of the Vendors
Products,
certain
payments made to customers by the Company, including promotional sales
allowances, cooperative advertising and product introductory expenditures
have
been deducted from revenue. During the year ended March 31, 2007, we recorded
a
total of $89,112 under such types of arrangements.
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 154, Accounting
Changes and Error Corrections,
which
replaces APB Opinion No. 20, Accounting
Changes,
and
SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 applies to all voluntary changes in accounting principle
and requires retrospective application (a term defined by the statement)
to
prior periods’ financial statements, unless it is impracticable to determine the
effect of a change. It also applies to changes required by an accounting
pronouncement that does not include specific transition provisions.
SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company
adopted SFAS No. 154 as of the beginning of fiscal 2007 and the
adoption of SFAS No. 154 did not have a material impact on its consolidated
financial condition or results of operations.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109.
This
interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in
the
interim periods, disclosure and transition. The interpretation is effective
for
fiscal years beginning after December 15, 2006. We have not yet analyzed
the
impact this interpretation will have on our consolidated financial condition,
results of operations, cash flows or disclosures.
In
September 2006, the FASB adopted SFAS No. 157, Fair
Value Measurements.
SFAS
No. 157 establishes a framework for measuring fair value and expands disclosure
about fair value measurements. Specifically, this standard establishes that
fair
value is a market-based measurement, not an entity specific measurement.
As
such, the value measurement should be determined based on assumptions the
market
participants would use in pricing an asset or liability, including, but not
limited to assumptions about risk, restrictions on the sale or use of an
asset
and the risk of non-performance for a liability. The expanded disclosures
include disclosure of the inputs used to measure fair value and the effect
of
certain of the measurements on earnings for the period. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
has
not yet determined the effect adoption of SFAS No. 157 will have on its
financial position or results of operations.
In
September 2006, the SEC staff issued SAB No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB No.
108 requires that registrants quantify errors using both a balance sheet
and
income statement approach and evaluate whether either approach results in
a
misstated amount that, when all relevant quantitative and quantitative factors
are considered, is material. The adoption of this statement is not expected
to
have a material impact on our consolidated financial condition or results
of
operations.
During
the year ended March 31, 2007, one customer accounted for 46% of net
sales.
NOTE
3 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of LBG as a going concern. We have started
generating revenue but have incurred net losses of $26,084,107 and $8,608,526
during the years ended March 31, 2007 and 2006, respectively, and had an
accumulated deficit of $35,631,260 at March 31, 2007. In addition, we used
cash
in our operations of $5,115,073 and $1,552,572 during the years ended March31,2007 and 2006, respectively.
Our
ability to continue as a going concern is dependent upon our ability to generate
profitable operations in the future and/or to obtain the necessary financing
to
meet our obligations and to repay the liabilities arising from normal business
operations when they come due. We plan to continue to provide for our capital
requirements by issuing additional equity securities. No assurance can be
given
that additional capital will be available when required or on terms acceptable
to us. We also cannot give assurance that we will achieve significant revenues
in the future. The outcome of these matters cannot be predicted at this time
and
there are no assurances that if achieved, we will have sufficient funds to
execute our business plan or generate positive operating results.
These
matters, among others, raise substantial doubt about the ability of LBG to
continue as a going concern. These consolidated financial statements do
not include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should we be unable to continue as a going
concern.
NOTE
4 - INVENTORIES
Inventories
consisted of the following at March 31, 2007:
Property
and equipment consisted of the following at March 31, 2007 and
2006:
2007
2006
Office
furniture and equipment
$
66,985
$
6,304
Leasehold
improvements
187,413
2,071
Computer
equipment
205,756
43,073
460,154
51,448
Less
accumulated depreciation
(91,841
)
(9,363
)
$
368,313
$
42,085
Depreciation
expense for the year ended March 31, 2007 and 2006 was $83,332 and $7,962,
respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consisted of the following at March 31, 2007 and 2006:
2007
2006
Sublicense
$
5,850
$
5,850
Trademarks
46,207
35,276
52,057
41,126
Less
accumulated amortization
(8,616
)
(4,797
)
$
43,441
$
36,329
Amortization
expense related to the Sublicense agreement was $3,819 and $1,404 for the
years
ended March 31, 2007 and 2006, respectively. Sublicense agreement is fully
amortized at March 31, 2007. Trademarks are amortized on a straight-line
basis
over their lives. The estimated amortization expense of the trademarks is
as
follows:
Fiscal
Year Eding March
31,
Amount
2007
$
2,766
2008
2,766
2009
2,766
2010
2,766
2011
$
2,766
NOTE
7 - RELATED PARTY TRANSACTIONS
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
was initially set to expire on December 31, 2006, subject to automatic renewal
for three additional three-year terms so long as Tyndale was 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 was 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 LBG 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, we issued to White
Beacon 3,496,589 shares of our common stock valued at $5,850, which was the
estimated fair value of the common stock on the date of issuance.
During
the year ended March 31, 2003, we 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. We accrued the remaining guaranteed
minimum royalty of $150,000 which was included in current liabilities in
the accompanying consolidated balance sheet at March 31, 2006 and was paid
in October 2006.
In
September 2006, the License was amended and extended to December 31, 2009
after
which it is subject to automatic renewals for additional three year terms
if we
have paid and/or prepaid royalties of $250,000 during each renewal period.
As
part of this amendment, we were required to pay Tyndale the remaining $750,000
of the agreed original minimum royalty payment on or before March 31,2007.
The
license was further amended on May 14, 2007. Under this amendment the remaining
amount of the minimum royalty payment was reduced from $750,000 to $250,000
and
the date of that payment was extended from March 31, 2007 to December 31,2007.
We have recorded the financial impact of this amendment on the March 31,2007
financial statements.
As
LB
Games Ukraine is currently providing software development services only to
us
and due to our history of providing on-going financial support to that
entity, through consolidation we absorb all net losses of this variable interest
entity in excess of the equity. LB Games Ukraine’s sole asset is cash which
has a balance of $2,559 at March 31, 2007. During the year ended March 31,2007, we paid $138,971 for software development services provided by LB
Games Ukraine, which has been recorded as research and development
cost during the period.
At
various times between December 2006 and March 2007, several of our executives
advanced us funds to help us with our working capital requirements. These
advances were non-interest bearing and have been classified as a current
liability in the accompanying consolidated balance sheet as of March 31,2007.
At March 31, 2007, $23,000 was owed to one of our former officers.
During
2007, the Company determined it owed its chief executive officer a total
of
$50,000 as part of a capital transaction that was entered into during a prior
period. As of March 31, 2007, the balance was $50,000 and is included in
advances from related party in the accompanying consolidated balance
sheet.
As
of
March 31, 2007 and 2006, we had $0 and $696,836, respectively, of deferred
salaries due to our officers. The deferred salaries, at the option of the
respective officers, were convertible into shares of our common stock at
the
value of the common stock in effect at the time the salary was earned.
During the year ended March 31, 2007, $16,169 of deferred salaries were paid
out
to an officer while $18,096 of deferred salaries, convertible at $1.50
per share, accrued to other officers. Also, under a separation agreement,
deferred salaries relating to a former employee were cancelled, which resulted
in a gain on forfeiture of deferred compensation of $118,050. That gain was
booked into general and administrative expenses.
During
the year ended March 31, 2007, the holders of the deferred compensation elected
to convert all of their deferred salaries into 5,902,438 common shares.
NOTE
9 - INCOME TAXES
The
provision for income taxes consists of the following for the years ended
March
31:
2007
2006
Current:
Federal
$
-
$
-
State
800
800
800
800
Deferred:
Federal
1,956,000
623,000
State
486,000
106,000
2,442,000
729,000
Less
change in valuation allowance
(2,442,000
)
(729,000
)
-
-
$
800
$
800
No
current provision for federal income tax is required for the years ended
March31, 2007 and 2006, since the Company incurred net operating losses through
March31, 2007.
The
tax
effect of temporary differences that give rise to significant portions of
the
deferred tax asset at March 31, 2007 and 2006 are presented below:
2007
2006
Deferred
tax assets:
Net
operating loss carryforwards
$
3,031,000
$
826,000
Deferred
salaries
17,000
277,000
Allowance
for doubtful accounts
452,000
--
Deferred
rent
2,000
--
Depreciable
and amortizable assets
3,000
--
Deferred
tax liability:
Unearned revenue
40,000
--
3,545,000
1,103,000
Less
valuation allowance
(3,545,000
)
(1,103,000
)
Net
deferred tax assets
$
--
$
--
The
provision for income taxes for both fiscal 2007 and 2006 was $800, respectively,
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:
2007
2006
Computed
tax benefit at federal statutory rate
$
(8,746,000
)
$
(2,927,000
)
State
income tax benefit, net of federal effect
500
(495,000
)
Increase
in valuation allowance
2,442,000
729,000
Non-deductible
stock compensation
6,526,000
2,690,900
Other
(221,700
)
2,900
$
800
$
800
As
of
March 31, 2007, the Company had net operating loss carryforwards of
approximately $14,970,000 available to offset future taxable Federal and
state
income. The Federal and state net operating loss carryforwards expire at
various
dates through 2027 and 2017, 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.
NOTE
10 - STOCKHOLDERS’ EQUITY
Common
Stock
We
are
authorized to issue 200,000,000 shares of common stock, $0.001 par value
per
share. The holders of our 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 our 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.
During
the fiscal year ended March 31, 2006, we issued 1,276,975 shares of common
stock
for net proceeds of $1,649,500. We also issued 59,771 shares of our common
stock
in exchange for a $100,000 note receivable, which was cancelled in fiscal
2007
and the related shares were returned.
During
the fiscal year ended March 31, 2006, we issued 4,987,908 shares of common
stock
and warrants for services provided by independent third parties, valued at
$7,438,343 based on the closing price of our common stock on the respective
grant dates.
During
the fiscal year ended March 31, 2006, we issued 206,219 shares of common
stock,
valued at $307,500 to certain employees as additional compensation based
on the
closing price of our common stock on the respective grant dates.
In
January 2006, we 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, we effected a 2.988538 for 5 reverse stock split of both
its
common stock and preferred stock outstanding, resulting in 12,456,538 and
3,586,246 shares of common and preferred stock, respectively. Also prior
to the
execution of the Agreement, Bonanza effected a 1 for 4 reverse stock split,
resulting in 1,882,204 shares of common stock outstanding.
In
January 2007, we instituted the Left Behind Games Inc. 2006 Stock Incentive
Plan
(the “Plan”). The purpose of the Plan is to encourage and enable officers,
directors, and employees of Left Behind Games Inc. (the "Company") and its
Subsidiaries and other persons to acquire a proprietary interest in the Company.
It is anticipated that providing such persons with a direct stake in the
Company's welfare will assure a closer identification of their interests
with
those of the Company and its shareholders, thereby stimulating their efforts
on
the Company's behalf and strengthening their desire to remain with the Company.
The Plan is for 2,500,000 shares, which can be issued in a number of forms
including direct stock issuances and stock options. We registered the Plan
under
an S-8 registration statement in January 2007.
During
the fiscal year ended March 31, 2007, we issued 4,917,009 shares of common
stock
for net proceeds of $5,266,117. Related to the proceeds we incurred offering
costs of cash commissions of $426,686, shares of common stock valued at $94,200;
and 174,738 warrants valued at $287,296 (See Note 11).
During
the fiscal year ended March 31, 2007, we issued 8,389,887 shares of common
stock
and warrants for services provided by independent third parties, valued at
$13,813,804 (based on the closing price of our common stock on the respective
grant dates).
During
the fiscal year ended March 31, 2007, we issued 576,666 shares of common
stock,
valued at $1,865,381 (based on the closing price of our common stock on the
respective issuance date), to certain employees and directors as additional
compensation.
In
prior
periods, we issued shares of common stock to consultants for service
contracts. During the fiscal years ended March 31, 2007 and 2006, we amortized
a
total of $3,515,000 and $4,755,727, respectively, to consulting expense
related to these service contracts.
During
the year ended March 31, 2007, we issued 5,902,438 shares of common stock
valued
at $580,713 to officers upon conversion of deferred salaries liabilities
(See
Note 8).
During
the year ended March 31, 2007, we issued 880,000 shares of common stock valued
at $403,000 to investors and investment bankers in a bridge financing.
We
are
authorized to issue 10,000,000 shares of preferred stock, $0.001 par value
per
share, of which all have been designated Series A preferred stock. The holders
of the Series A preferred stock are entitled to one vote per share on all
matters subject to stockholder vote. The Series A preferred stock is convertible
on a one for one basis into our common stock at the sole discretion of the
holder. The holders of the Series A preferred stock have equal rights to
receive dividends when, and if, declared by our 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
November 2005, we issued 1,434,498 shares of series A preferred stock valued
at
$1.67 per share under a consulting agreement for total deferred consulting
expense of $2,400,000 to be amortized over the term of the consulting agreement,
of which $1,600,000 and $800,000 were recorded as consulting expense during
the
fiscal years ended March 31, 2007 and 2006, respectively. The amounts under
the
consulting agreements were fully amortized as of March 31, 2007.
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 $188,500 at March 31, 2007.
NOTE
11 - STOCK WARRANTS
From
time
to time, we issue warrants pursuant to equity financing
arrangements.
The
fair
value of each warrant granted during the year ended March 31, 2007 to
consultants and other service providers is estimated using the Black-Scholes
option-pricing model on the date of grant using the following assumptions:
(i)
no dividend yield, (ii) volatility of 83% to 165%, (iii) weighted-average
risk-free interest rates of 4.50% to 4.74%, and (iv) expected lives of three
years.
The
following table represents a summary of the warrants outstanding at March31,2007 and 2006 and changes during the years then ended:
The
following table summarizes information about warrants outstanding at March31,2007:
Exercise
Price
Number
of
Warrant
Shares
Weighted
Average
Remaining
Contractual
Life (Years)
$2.25
172,592
2.17
$0.50
2,146
2.76
174,738
The
outstanding warrants at March 31, 2007 are immediately exercisable.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
Guarantees
and Indemnities
We
have
made certain indemnities and guarantees, under which we may be required to
make
payments to a guaranteed or indemnified party in relation to certain actions
or
transactions. We indemnify our directors, officers, employees and agents,
as permitted under the laws of the State of Delaware. We have also
indemnified our consultants, investment bankers, sublicensor and
distributors against any liability arising from the performance of their
services or license commitment, pursuant to their agreements. In
connection with our facility leases, we have indemnified our lessors 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 we could be obligated to make.
Historically, we have 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 consolidated balance
sheets.
Employment
Agreements
We
have
entered into employment agreements with certain of our key employees. Such
contracts provide for minimum annual salaries and are renewable annually.
In the event of termination of certain employment agreements by LBG
without cause, we would be required to pay continuing salary payments for
specified periods in accordance with the employment contracts.
Leases
In
June
2006, the Company entered into a non-cancelable operating lease for its
corporate facility in Murrieta, California which expires on May 31, 2010.
The
terms of the lease require initial monthly rents of $7,545 and escalate at
4%
annually through lease expiration. In October 2006, we entered into a
three year lease to rent 3,500 square feet of additional space in Murrieta,
California at $3,920 per month. This additional space is being used for both
administrative, sales and warehouse purposes. For the fiscal years ended
March31, 2007 and 2006, we recorded approximately $109,000 and $50,000, respectively,
of rent expense.
Future
minimum monthly payments due under these leases are as follows:
In
order
to help us secure retail distribution of our initial product, we entered
into
consulting arrangements with several independent representatives. The payment
arrangements to these independent representatives are based upon the ultimate
amount paid to us by the retail customers. The commission rates for these
independent representatives typically vary from three percent to five percent
of
the net amount we collect from the retail customer. We have accrued commissions
payable of approximately $2,300 based on funds collected.
Music
Licenses
In
April
2006, we entered into a license agreement with a record company for the use
of
certain music recordings to be used in connection with our game production.
The
license agreement requires us to pay royalties to the record company at a
rate
of $0.10 per unit ($0.05 per unit for the master license and an additional
$.05
per unit for the performance license) and also requires the payment of other
fees. The agreement remains in effect for two years. We have
calculated and accrued the amount due to this licensor as of March 31, 2007
and
recorded that provision for licensing fees to cost of goods sold. In May
2007,
this arrangement was subsequently modified to $0.025 for the master license
and
$0.025 for the performance license (see Note 16 - Subsequent Events). We
have
accrued license fees relating to this arrangement of approximately $47,000,
of
which $25,000 has been paid, and charged that expense to our cost of sales
during the year ended March 31, 2007.
In
November 2006, we also entered into an agreement with a second record company
for the use of certain music recordings to be used in connection with our
game
production. That license agreement also requires us to pay royalties to the
record company at a rate of $0.10 per unit ($0.05 per unit for the master
license and an additional $.05 per unit for the performance license) and
remains
in effect for three years. We have accrued license fees relating to this
arrangement of approximately $10,000, of which $5,000 has been paid, and
charged
that expense to our cost of sales during the year ended March 31, 2007.
Investment
Banking Services Agreements
In
December 2005, we entered into a selling agreement with Great Eastern Securities
(“Great Eastern”), a NASD registered broker dealer, whereby Great Eastern became
the Company’s investment banker for the purpose of raising a minimum investment
of $500,000, up to a maximum of $5,000,000. The agreement was originally
set to
expire on October 31, 2006. We issued Great Eastern 50,000 shares of common
stock for their services during fiscal year ended March 31, 2007. The value
of
the shares, totaling $75,000, was recorded as consulting expense and was
included in selling, general and administrative expenses during the fiscal
year
ended March 31, 2007. Effective July 31, 2006, the agreement with Great Eastern
was extended through October 31, 2006. In addition to extending the original
engagement agreement term, we also agreed to issue an additional 200,000
shares of common stock to Great Eastern as additional consideration, valued
at
$699,000, which has been recorded as consulting expense and included in selling,
general and administrative expense during the fiscal year ended March 31,2007.
The
responsibilities of Great Eastern were limited to introducing potential
investors to us and they did not have the authority to offer to sell or sell
any
of our securities or debt instruments. Under the agreement with Great Eastern,
we paid them a fee of $50,000, a commission of 10% of proceeds
received under the arrangement and a non-accountable expense allowance that
is equal to 3% of the gross funds that we received from equity investments
that
arose out of introductions made by Great Eastern. During the fiscal year
ended
March 31, 2007, we recorded total cash commissions to Great Eastern of $410,566,
which have been netted against the proceeds received under that
arrangement.
Also,
under the terms of the agreement, we issued to Great Eastern warrants to
purchase shares of our common stock equal to 10% of the gross proceeds divided
by the closing price of our common stock on the date on which the transaction
is
consummated. The exercise price is equal to 150% of the average per share
price
of the corresponding equity transaction. As of March 31, 2007, we have issued
169,245 warrants to Great Eastern. Using the Black-Sholes option pricing
model,
using the assumptions noted below, the Company has determined the estimated
fair
value of those warrants to be $270,928, which has been recorded as offering
costs in additional paid-in capital for the fiscal year ended March 31, 2007.
Additionally,
during the fiscal year ended March 31, 2007, we entered into agreements
with three NASD registered broker dealers, Barron Moore, Inc. (“Barron Moore”),
Dinosaur Securities, LLC (“Dinosaur”) and Bathgate Capital Partners
(“Bathgate”). The terms of these agreements were similar to the agreement with
Great Eastern. The warrants issued to Barron Moore and Bathgate have the
same exercise price as the Great Eastern warrants while Dinosaur received
warrants with a $1.50 exercise price but they paid us a nominal upfront cash
payment for their warrants which was recorded as additional paid-in capital.
On
March 26, 2007, we agreed with Dinosaur to cancel their arrangement of 50,000
previously issued warrants with an exercise price of $1.50 per share. As
part of
that cancellation, we agreed to issue Dinosaur 60,000 shares of our stock
valued
at $19,200, which has been included in consulting expense during fiscal 2007,
and Dinosaur agreed to cancel their warrant.
As
of
March 31, 2007, 5,493 warrants were outstanding with Barron Moore and Bathgate.
Using the Black-Sholes option pricing model, assuming an expected exercise
term
of 3 years, a risk-free rate of 4.62-4.74% and estimated volatility of 151-165%,
we have determined the estimated fair value of those warrants to be $16,368
which has been recorded as offering costs.
The
following table is a recap of capital that we raised, commissions paid and
warrants issued to Barron Moore, Bathgate and Great Eastern:
Gross
Capital
Raised
Cash
Commissions
Earned
Warrants
Issued
Barron
Moore
$
70,000
$
9,100
1,893
Bathgate
54,000
7,020
3,600
Great
Eastern
3,165,891
410,566
169,245
Total
$
3,289,891
$
426,686
174,738
The
$3,289,891 of gross capital shown in the above table was raised through the
sale
of approximately 1.9 million shares of our common stock to accredited investors
from the efforts of our management and pursuant to the selling agreements
with
the investment banking firms.
On
October 9, 2006, we terminated the private placement offering to accredited
investors of shares for sale at $1.50 per share. In November 2006, we
offered to three investors the right to rescind their investment under the
previous private placement offering because their investments caused the
offering to be oversubscribed. One of the three investors elected to rescind
his
investment of $35,000, which amount we returned in December 2006. We accounted
for this rescission by reducing common stock and additional paid-in-capital
by
the amount recorded for his investment.
During
the fiscal year ended March 31, 2007 we entered into several borrowing
arrangements. The amounts borrowed under those arrangements are included
in notes payable in the accompanying consolidated balance sheet.
The
following table is a recap of our notes payable outstanding as of March 31,2007:
Financing
of insurance premiums
$
21,333
Loan
from factor
3,723
Bridge
loan (see Note 15)
320,000
Short
term loan
50,000
Total
notes payable
$
395,056
We
entered into an insurance financing arrangement in November 2006. The insurance
financing arrangement is unsecured, expires in November 2007, requires monthly
principal payments of $5,333 and accrues interest at a rate of 9.3
percent.
In
December 2006, we entered into an arrangement to factor our receivables.
The
arrangement with the factor is secured by certain accounts receivable that
they
have lent against and is intended to self liquidate as the factor collects
those
specific accounts receivable. The factoring arrangement carries a factoring
fee
of 7.0 percent of the funds advanced under the arrangement. During the year
ended March 31, 2007, we factored a total of $38,284 under the arrangement.
During the year ended March 31, 2007, we incurred $3,658 of interest expense
under this arrangement.
In
March
2007, we borrowed $50,000 under a short term loan arrangement from an investor
through Southpointe Financial, an affilitate, a mortgage broker that is
partially owned by one of our directors. We repaid the loan plus an agreed
$10,000 in financing charges on April 5, 2007. We also issued 100,000 shares
of
our common stock to the director who arranged and personally guaranteed the
short term loan. These shares were valued at $32,500 based on the closing
price
of our stock on that date and that amount was charged to expense.
NOTE
14 - DEFERRED REVENUES
In
July
2006, we entered into a revenue share agreement with Double Fusion, an in-game
advertising technology and service provider, under which Double Fusion will
provide in-game advertising and product placement to go into our first video
game product. Under this agreement, Double Fusion advanced $100,000 to us
as an
upfront deposit, which we received during the fiscal year ended March 31,2007.
Under the agreement, Double Fusion will pay us 65% of net advertising revenues
as our part of the revenue share related to in-game advertising placements
that
they sell. Once they have recouped $100,000 from our 65% revenue share, we
will
recognize this $100,000 upfront deposit as revenue. Until that time, we have
classified this amount as deferred revenue in the current liabilities section
of
the accompanying balance sheet as of March 31, 2007.
In
January 2007, we entered into a Bridge Loan arrangement with Meyers Associates
L.P. (“Meyers”), a broker-dealer. Under this unsecured Bridge Loan arrangement
we agreed to issue two shares of our common stock for every $1 lent to us
by
accredited investors (the “Bridge Units”). We also agreed to pay to the
investors 10% simple interest on the funds lent to us and to pay Meyers a
commission of 10% of proceeds received under the arrangement and a
non-accountable expense allowance that is equal to 3% of the gross funds
that we
received. Meyers also received 25% shares coverage. We agreed to repay the
Bridge Loan at the earlier of (i): twelve months after the date of
issuance; (ii) the consummation of any $1.5 million financing; and
(iii) the date on which the outstanding principal amount is prepaid in full
The initial completion date of the Bridge Loan was March 31, 2007, which
was
subsequently extended to May 31, 2007 at which time it terminated.
We
agreed
to provide the investors in this Bridge Offering the same registration rights
provided to investors in our next private placement. In the event that a
private
placement is not completed at our election within 90 days from the completion
of
this Bridge Offering, we agreed to file with the SEC within 120 days from
the
final completion of this Bridge Offering a registration statement under the
Securities Act of 1933, as amended concerning the resale of the shares of
our
Common Stock included in the Bridge Units.
As
of
March 31, 2007, we received $273,500 in net proceeds (net of commissions
and
legal fees) under the Bridge Loan and the gross amount at that date that
we will
need to repay to the investors is $320,000. During the year ended March 31,2007, we recorded $2,904 of interest expense related to the agreed ten percent
interest rate under the Bridge Loan. We paid Meyers cash commissions of $41,000
on the amount funded.
As
of
March 31, 2007, we issued 720,000 shares to the investors as part of the
Bridge
Units and 160,000 shares to Meyers as part of their compensation. We valued
the
720,000 shares issued to the investors at $296,800 based on the closing market
price of our stock on the days in which the funding events occurred. We charged
$38,467 of that amount to interest expense in the fiscal year ended March31,2007 and we will charge the remaining amount of $258,333 to interest expense
over the remainder of the one year life of the Bridge Loan. The $258,333
that
will be charged to interest over the one year life of the loan is presented
as
capitalized financing costs on our March 31, 2007 consolidated balance sheet.
The shares issued to Meyers were valued at $74,200 based on the closing market
price of our stock and are being charged to interest expense over the term
of
the loan.
In
addition to the above, we issued 80,000 common shares
to two investors in connection with a temporary advance before the first
closing
under the Bridge Loan. These shares were valued at $32,000.
NOTE
16 - SUBSEQUENT EVENTS
Subsequent
to March 31, 2007 and through July 12, 2007, we raised additional equity
through
the sale of our common stock to accredited investors. We raised $913,800
in cash
and a note for $25,000 from the sale of 9,388,000 shares of our common stock.
Subsequent
to March 31, 2007, we issued 1,196,949 shares of our common stock to independent
third parties for services performed, valued at $291,442 (based on the closing
price of our common stock on the respective grant dates).
We
also
received approximately $130,000 in further gross proceeds under the Bridge
Loan
with Meyers (see Note 15). We issued 260,000 shares of common stock to the
investors and 66,000 shares of common stock to Meyers as part of that bridge
financing. We also paid Meyers cash commissions of $16,900 on this incremental
financing amount.
We
paid
off $21,000 that we owed to a former executive which we borrowed under an
informal, non-interest bearing arrangement.
On
April30, 2007, we entered into a promissory note with our factor to payoff the
remaining balance of $3,771 that was outstanding as of March 31, 2007 under
the
loan from factor. This amount was subsequently repaid.
On
June8, 2007, we entered into a separation agreement with Jeffrey S. Frichner
under
which he resigned as our president. Mr. Frichner remains a director.
In
May
2007, we amended our In-Game Advertising Agreement with Double Fusion Inc.
This
amendment modified the revenue sharing arrangement between the parties so
that
the parties will share equally in any in-game advertising received until
Double
Fusion recoups the $100,000 that they advanced to us. Following Double Fusion
recouping their $100,000 payment, we will then receive 85% of in-game
advertising sales.
In
May
2007, we agreed with the licensor of songs available on our game that the
royalty on those songs would decline from ten cents per song to five cents
per
song. This adjustment was considered when calculating our cost of goods sold
for
the fiscal year ended March 31, 2007.
Certification of principal executive
officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
Certification of principal financial
officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002
