LEFT
BEHIND GAMES INC.
Consolidated
Statements of Cash Flows (Continued)
|
|
For
the Nine Months Ended
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
503
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
800 |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment
to pay royalties under a license agreement
|
|
$ |
750,000
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
Cancellation
of stockholder note and related shares
|
|
$ |
100,000 |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for notes receivable
|
|
$ |
480,000 |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
Issuance
of note payable for financing of insurance policy
|
|
$ |
60,000 |
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated
financial statements
|
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
In
January 2006, Left Behind Games Inc. (collectively, “we”, “our” 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
performed 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 performed a 1 for 4 reverse stock split, resulting in
1,882,204 shares of common stock outstanding.
Effective
February 1, 2006, Bonanza exchanged 12,456,538 and 3,586,246 shares of
its
common and preferred stock, respectively, for an equal number of our common
and
preferred shares. The acquisition was accounted for as a reverse acquisition
whereby the assets and liabilities of LBG will be 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. As such, we are no longer
reporting
as a development stage company.
White
Beacon, Inc., a Delaware Corporation (“White Beacon”), an entity beneficially
owned and controlled by our chief executive officer and our 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 4).
BASIS
OF PRESENTATION
We
have
prepared the accompanying unaudited consolidated financial statements in
accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”) including the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Such rules and regulations allow us to condense and omit
certain
information and footnote disclosures normally included in audited financial
statements prepared in accordance with accounting principles generally
accepted
in the United States of America. We believe these condensed consolidated
financial statements reflect all adjustments (consisting of normal, recurring
adjustments) that are necessary for a fair presentation of our consolidated
financial position and consolidated results of operations for the periods
presented. The information included in this Form 10-QSB should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Form 10-KSB for the year ended March 31, 2006. The interim
unaudited consolidated financial information contained in this filing is
not
necessarily indicative of the results to be expected for any other interim
period or for the full year ending March 31, 2007.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying unaudited 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 26, 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.
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.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cost
of Goods Sold
Cost
of
goods sold consists of product costs, royalty expenses, license costs and
inventory-related operational expenses.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 5 years. Repairs and maintenance are charged to expense
as
incurred while improvements are capitalized. Upon the sale or retirement
of property and equipment, the accounts are relieved of the cost and the
related
accumulated depreciation, with any resulting gain or loss included in the
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 terms.
Trademarks
The
cost
of trademarks includes funds expended for trademark applications that are
in
various stages of the filing approval process. The cost of trademarks will
be
amortized on a straight-line basis over their estimated useful lives, once
the
trademark applications have been accepted.
Royalties
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 initially recorded as an asset 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 prepaid
royalties until earned by the licensor, or considered to be unrecoverable.
We evaluate prepaid royalties regularly and we plan to expense prepaid
royalties to cost of sales to the extent projected to be unrecoverable
through
sales.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2006 and March 31, 2006, we are carrying a balance of $944,444
and
$250,000, respectively, in prepaid royalties in connection with our Sublicense
agreement. During the three months ended December 31, 2006, we recorded
amortization expense of $80,556 on a straight-line basis related to
our prepaid royalties.
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. As of
December 31, 2006, 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, on the first day of the Company’s fiscal year 2007, we adopted
the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment,
using
the modified-prospective transition method. Under this transition method,
compensation cost recognized in the three and nine month periods ended
December
31, 2006 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 March
31,
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.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based
Compensation, continued
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
for Acquiring,
or in Conjunction with Selling Goods or Services.
All
transactions in which goods or services are the consideration received
for the
issuance of equity instruments are accounted for based on the fair value
of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date
on
which the third-party performance is complete or the date on which it is
probable that performance will occur.
In
accordance 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 31,617,387 and 19,764,183 for the three
month periods ended December 31, 2006 and 2005, respectively.
For the nine month periods ended December 31, 2006 and 2005, they would
have
resulted in weighted average common shares of 28,355,247 and 18,399,442,
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 are accumulated as a separate
component of stockholders’ equity. We determined that translation gain or loss
did not have a material impact on our stockholders’ equity as of December 31,
2006 and March 31, 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 three and nine month
periods
ended December 31, 2006 and 2005.
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 three and nine
month
periods ended December 31, 2006 and 2005.
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.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition
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.
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 three months ended
December 31, 2006, we recorded a total of $62,220 under such types of
arrangements.
Customer
Concentrations
During the three and nine months ended December 31, 2006, one customer
accounted
for 59% 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 $21,574,866 for the
nine
months ended December 31, 2006. 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.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These
matters, among others, raise substantial doubt about the ability of LBG
to
continue as a going concern. These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities
that may
be necessary should we be unable to continue as a going concern.
NOTE
4 - RELATED PARTIES
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 which has
been
included in royalty payable and prepaid royalties as of December 31, 2006
in the
accompanying consolidated balance sheet.
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 $4,934 at December 31, 2006. During the nine months ended
December 31, 2006, 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.
In
December 2006, one of our executives advanced us $3,000 to help us with
our
working capital requirements. The advance is non-interest bearing and has
been
classified as a current liability in the accompanying consolidated balance
sheet
as of December 31, 2006.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - CONVERTIBLE DEFERRED SALARIES
As
of
December 31, 2006 and March 31, 2006, we had $698,763 and $696,836,
respectively, of deferred salaries due to our officers. The deferred
salaries, at the option of the respective officer, can be converted into
shares
of our common stock at the value of the common stock in effect at the time
the
salary was earned. During the three months ended December 31, 2006,
$8,331 of deferred salaries were paid to an officer while $2,000 of
deferred salaries, convertible at $1.50 per share, accrued to another
officer. Deferred salaries and the respective conversion rates as of December
31, 2006 are as follows:
|
Deferred
Salary
|
|
|
Conversion
Rate
|
|
$ |
488,376
|
|
$
|
0.084 |
|
|
84,167
|
|
$ |
0.84 |
|
|
98,289
|
|
$ |
1.67 |
|
|
27,931
|
|
$ |
1.50 |
|
$ |
698,763
|
|
|
|
|
The
total
number of shares of our common stock that may be issued under the conversion
provisions was 5,991,676 as of December 31, 2006. In January 2007, 2,500,000
shares were issued under the conversion provisions (see Note 10).
NOTE
6 - 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 nine months ended December 31, 2006, we issued 3,469,888 shares of
common
stock for net proceeds of $5,069,117. Related to the proceeds we incurred
offering costs of cash commissions of $420,186, shares of common stock
valued at
$75,000; and warrants valued at $282,596 (See Note 7).
During
the nine months ended December 31, 2006, we issued 2,904,940 shares of
common
stock and warrants for services provided by independent third parties,
valued at
$11,219,147 (based on the closing price of our common stock on the respective
grant dates).
During
the nine months ended December 31, 2006, we issued 431,666 shares of common
stock, valued at $1,768,481 (based on the closing price of our common stock
on
the respective grant 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 three and nine month periods ended December 31, 2006
the
Company amortized a total of $489,167 and $1,115,000, respectively, to
consulting expense related to these service contracts.
Preferred
Stock
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 holder 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.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 December 30, 2006.
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 $400,000 and $2,400,000 were recorded as consulting expense during
the
three and nine month periods ended December 31, 2006, respectively. The
amounts
under the consulting agreements were fully amortized as of December 31,
2006.
NOTE
7 - 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. In
connection with these agreements, we have recorded deferred salaries of
$698,763
and $696,836 at December 31, 2006 and March 31, 2006, respectively (see
Note
5).
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 nine months ended
December
31, 2006 and 2005, we recorded approximately $70,000 and $27,000, respectively,
of rent expense.
Independent
Sales Representatives
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. Since we have not yet
received payment for the bulk of our sales to those retail customers, we
cannot
estimate the amount owed to those independent representatives on those
unpaid
receivables until we receive those payments. The final amounts paid may
vary due
to markdowns and/or sales returns, if any.
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 $.10 per unit ($.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 December
31, 2006
and recorded that provision for licensing fees to cost of goods sold.
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 $.10 per unit ($.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 calculated and accrued the amount due
to this
licensor as of December 31, 2006 and recorded that provision for licensing
fees
to cost of goods sold.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 the nine months ended December 30, 2006.
The
value of the shares, totaling $75,000, was recorded as consulting expense
and
was included in selling, general and administrative expenses during the
nine
months ended December 31, 2006. 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
nine
months ended December 31, 2006.
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 nine months
ended
December 31, 2006, the Company recorded total cash commissions to Great
Eastern
of $404,066, 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 December 31, 2006, we have
issued
94,936 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 $266,228, which has been recorded as offering
costs in additional paid-in capital for the nine months ended December
31, 2006.
Additionally,
during the nine months ended December 31, 2006, 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.
As
of December 31, 2006, we issued 55,493 warrants to those firms. Using the
Black-Sholes option pricing model, using the assumptions noted below, we
have
determined the estimated fair value of those warrants to be $243,368 of
which
$16,368 has been recorded as offering costs and $227,000 has been recorded
as
consulting expense during the nine months ended December 31,
2006.
For
the
three months ended December 31, 2006, the Black-Scholes option pricing
model
used the following assumptions: expected exercise term of 3 years, a risk-free
rate of 4.74% and estimated volatility of 165%.
LEFT
BEHIND GAMES INC.
NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following table is a recap of capital that we raised, commissions paid
and
warrants issued to the four investment banking firms:
|
|
Gross
Capital
Raised
|
|
Cash
Commissions
Earned
|
|
Warrants
Issued
|
|
Barron
Moore
|
|
$
|
70,000
|
|
$
|
9,100
|
|
|
1,893
|
|
Bathgate
|
|
|
54,000
|
|
|
7,020
|
|
|
3,600
|
|
Dinosaur
|
|
|
--
|
|
|
--
|
|
|
50,000
|
|
Great
Eastern
|
|
|
3,115,891
|
|
|
404,066
|
|
|
94,936
|
|
Total
|
|
$
|
3,239,891
|
|
$
|
420,186
|
|
|
150,429
|
|
The
$3,239,891 of gross capital shown in the above table was raised through
the sale
of approximately 1.7 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.
NOTE
8 - NOTES PAYABLE
During
the three months ended December 31, 2006 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 December
31,
2006:
|
|
|
|
Financing
of insurance premiums
|
|
$
|
37,333
|
|
Loan
from factor
|
|
|
36,049
|
|
Total
notes payable
|
|
$
|
73,382
|
|
We
entered into the 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.
During
the three months ended December 31, 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 three months ended December
31, 2006,
we factored a total of $38,284 under the arrangement. For the three months
ended
December 31, 2006, we incurred $3,273 of interest expense under this
arrangement.
NOTE
9 - 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 three months ended September
30,
2006. 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 December
31, 2006.
NOTE
10 - SUBSEQUENT EVENTS
Subsequent
to December 31, 2006, we raised additional equity through the sale of our stock
to accredited investors. We raised $127,500 in gross proceeds from the
sale of
613,000 shares of our common stock. We also received approximately $101,000
under an unsecured bridge loan from a broker/dealer. This bridge loan
bears
interest at ten percent and is intended to be repaid as part of the use
of
proceeds of another proposed financing with the same broker/dealer. We
issued
200,000 shares to the broker/dealer as part of that bridge financing,
which will
be recorded to interest expense in the three month period endng March
31,2007.
We
also
issued 200,000 shares valued at $466,000 to a financial consulting firm
in
January 2007 for assistance with various financial matters and will be
recorded
to general and administrative expense in the three month period ending
March 31,
2007.
Also
subsequent to the end of December 2006, one of our executives lent us an
additional $20,000 on an informal, non-interest bearing arrangement.
In January
2007, 2,500,000 shares were issued to two of our executives as partial
conversion of their convertible deferred salaries from prior years (See
Note
5).
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:
|
o
|
continued
development of our technology;
|
|
o
|
dependence
on key personnel;
|
|
o
|
competitive
factors;
|
|
o
|
the
operation of our business; and
|
|
o
|
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 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 a
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 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 video games. Left Behind’s series of books has sold more than 63
million copies. Left Behind branded products have generated more than $500
million at retail for the Left Behind book series. 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
brand.
Our
rights to use the Left Behind brand to make video 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
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 through the sale of shares of our common
stock.
Although we have received net proceeds of $4,589,117 from the sale of 3,469,888
shares of our common stock during the nine months ended December 31, 2006,
we
continue to generate operating losses and, as of the three months ended
December 31, 2006, are only just beginning to generate revenues. Furthermore,
the report by our Independent Registered Public Accounting Firm on our
financial
statements in our Form 10-KSB filed in June 2006 included a “going concern”
modification.
RESULTS
OF OPERATIONS
Revenues
We
recorded net revenues of $1,006,321 for the three
months ended December 31, 2006. Since these were our first revenues, there
was
no corresponding revenue in the three months ended December 31, 2005. 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 Christian 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.
Cost
of Goods Sold
We
recorded cost of goods sold of $856,734 for the three
months ended December 31, 2006. As discussed above, there was no corresponding
cost of goods sold in the three months ended December 31, 2005. Cost
of
goods sold consists of product costs, certain royalty expenses, amortization
of
prepaid royalty costs, amortization of certain intangible assets and
inventory-related operational expenses.
General
and Administrative Expenses
General
and administrative expenses were $3,788,543 for the three months ended
December
31, 2006, compared to $781,249 for the three months ended December 31,
2005, an
increase of $3,007,294 or 385%.
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 three months ended December 31, 2006 and 2005, we recorded
expenses
relating to these non-cash payments to consultants, including amortization
of
prepaid consulting expenses, of $889,167 and $472,008, respectively.
This
represented a $417,159 increase. During the three months ended December
31,
2006, we also issued 140,000 shares of common stock, valued at approximately
$487,250 to certain employees as additional compensation while we did
not have
any such non-cash employee-related expense in the three months ended
December
31, 2005. The overall increase in non-cash charges attributable to consultants
and employees was $1,209,889.
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
three months ended December 31, 2006 was $824,525, a $791,362 increase
over the
$33,163 in advertising and marketing expenses that we recorded for the
three
months ended December 31, 2005.
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.
Research
and Development Expenses
Research
and development expenses were $494,212 for the three months ended December
31,
2006, compared to $140,131 for the three months ended December 31, 2005,
an
increase of $354,081 or 253%. 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. These costs increased in particular
in
the final month before the commercial release of initial product in November
2006.
Net
Loss
We
reported a net loss of $4,125,891 for the three months ended December
31, 2006,
compared to a net loss of $933,989 for the three months ended December
31, 2005,
resulting in an increased loss of $3,191,902. In addition, our accumulated
deficit at December 31, 2006 totaled $31,157,019. These increases are
attributable primarily to the factors discussed above.
Revenues
We
recorded net revenues of $1,006,321 for the nine
months
ended December 31, 2006. Since these were our first revenues, there was
no
corresponding revenue in the nine months ended December 31, 2005. All of
these
revenues were from the sale of our initial product, 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 Christian 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.
Cost
of Goods Sold
We
recorded cost of goods sold of $856,734 for the nine
months
ended December 31, 2006. As discussed above, there was no corresponding
cost of
goods sold in the nine months ended December 31, 2005. Cost
of
goods sold consists of product costs, certain royalty expenses, amortization
of
prepaid royalty costs, amortization of certain intangible assets and
inventory-related operational expenses.
General
and Administrative Expenses
General
and administrative expenses were $20,825,182 for the nine months ended
December
31, 2006, compared to $5,066,962 for the nine months ended December 31,
2005, an
increase of $15,758,220 or 311%. These increases are directly attributable
to
the growth of our staff and the corresponding increase in wages and salaries
and
employee benefits as well as increases in operating expenses such as advertising
expenditures and public relations expenditures and the amortization of
prepaid
consulting expenses of $3,515,000.
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 nine months ended December 31, 2006 and 2005, we recorded
expenses
relating to these non-cash payments to consultants, including amortization
of
prepaid consulting expenses, of $14,734,147 and $4,204,389, respectively.
This
represented a $10,529,758 increase in non-cash expenses related to consultants.
During the nine months ended December 31, 2006, we also issued 431,666
shares of
common stock, valued at approximately $1,768,481 to certain employees
as
additional compensation compared to recording a $47,500 expense in the
three
months ended December 31, 2005. This represented a $1,720,981 increase
in
non-cash expenses related to employees. The overall increase in non-cash
charges
attributable to consultants and employees was $12,250,739.
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. We recorded a $791,362 increase in our
advertising and marketing expenses related to our product launch.
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.
Research
and Development Expenses
Research
and development expenses were $937,915 for the nine months ended December
31,
2006, compared to $421,594 for the nine months ended December 31, 2005,
an
increase of $516,321 or 123%. These increases are directly attributable
to the
growth of our development team and the corresponding increase in wages
and
salaries and employee benefits.
Net
Loss
We
reported a net loss of $21,609,866 for the nine months ended December
31, 2006,
compared to a net loss of $5,499,473 for the nine months ended December
31,
2005, resulting in an increased loss of $16,110,393. In addition, our
accumulated deficit at December 31, 2006 totaled $31,157,019. These increases
are attributable primarily to the factors discussed above.
CASH
REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES
At
December 31, 2006 we had $72,488 of cash compared to $393,433 at March
31, 2006,
a decrease of $320,945. At December 31, 2005, we had cash of $94,723. At
December 31, 2006, we had a working capital deficit of $987,841 compared
to a
working capital position of $3,019,786 at March 31, 2006.
Operating
Activities
For
the
nine month periods ended December 31, 2006 and 2005, net cash used in operating
activities was $4,576,604 and $1,027,815,
respectively. The $3,548,789 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 nine months ended December 31,
2006
and 2005 were $21,609,866 and $5,499,473, respectively, an increase of
$16,110,393.
Investing
Activities
For
the
nine month periods ended December 31, 2006 and 2005, net cash used in investing
activities was $829,890 and $41,635, respectively. The increase
was attributable to purchases of property and equipment and payments for
trademarks and royalties.
Financing
Activities
For
the
nine month periods ended December 31, 2006 and 2005, net cash provided
by
financing activities was $5,085,549 and $948,199, respectively. All of
the cash
provided by financing activities in the 2006 period was from the issuance
of
common stock, net of issuance costs. In the nine months ended December
31, 2006,
we raised $5,069,117 from the issuance of common stock, net of issuance
costs.
Future
Financing Needs
Since
our
inception in August 2002 through December 31, 2006, we have raised
approximately $6.6 million through funds provided by founders and private
placement offerings. This has been sufficient to keep development of our
first
product moving forward. Although we expect this trend 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.
Going
Concern
As
of the
three months ended December 31, 2006, we have started to generate revenue,
and
through December 31, 2006 have incurred net losses of $31,157,019 and
had
negative cash flows from operations of $6,383,394 since our inception
through
December 31, 2006. Our ability to continue as a going concern is dependent
upon
out 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
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 to generate positive operating
results.
Our
independent registered public accounting firm has previously indicated
in its
report included with the Form 10-KSB filed in June 2006 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.
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 December 31, 2006, 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-Based Payments,
using
the modified-prospective transition method. Under this transition method,
compensation cost recognized in the nine months ended December 31, 2006
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 March
31,
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 December 31, 2006,
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 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 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
for Acquiring,
or in Conjunction with Selling Goods or Services.
All
transactions in which goods or services are the consideration received
for the
issuance of equity instruments are accounted for based on the fair value
of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date
on
which the third-party performance is complete or the date on which it is
probable that performance will occur. 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.
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:
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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.
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Delivery:
Delivery is considered to occur when the products are shipped
and risk of
loss and reward have been transferred to the customer.
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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.
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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).
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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 three months ended December 31,
2006, we
recorded a total of $62,220 under such types of arrangements.
We
carried out an evaluation as of December 31, 2006, under the supervision
and
with participation of our management, including our Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of our disclosure controls
and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of
1934.
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that disclosure controls and procedures were effective
as
of the end of the period covered by this report to ensure that information
required to be disclosed by us in our reports that we file or submit under
the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms. Subsequent to December 31, 2006, there have been no significant
changes in our internal controls over financial reporting that occurred
during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
We
currently are not a party to any material legal proceedings.
During
the nine month period ended December 31, 2006, we received $5,069,117 in
net
proceeds from the sale of approximately 3,470,000 shares of common
stock.
During
the period, we also issued to independent third parties approximately 2,905,000
shares of common stock for services provided, valued at approximately $11.2
million (based on closing price on the respective grant date). We also
issued
431,666 shares of common stock, valued at approximately $1.77 million (based
on
the closing price on the respective grant date), to certain employees as
additional compensation.
During
the nine months ended December 31, 2006, we issued 150,429 warrants to
purchase
shares of common stock with exercise prices ranging between $1.50 and $2.25.
We
have estimated the value of these warrants to be approximately
$513,000.
We
believe the transactions to be exempt under Section 4(2) of the Securities
Act
of 1933, as amended, 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 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.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
We
held
our Annual Meeting of Stockholders on April 18, 2006. The holders of 10,590,284
(63.88%) of the Company’s 16,577,946 outstanding shares as of the record date
were present at the meeting in person or by proxy. The only matters submitted
to
a vote of shareholders were 1. Change our company name to Left Behind Games
Inc., 2. Elect Troy A. Lyndon, Jeffrey Frichner, Thomas Axelson and Ray
Dixon to
the board of directors; 3. Authorize Corbin & Company, LLP, located in
Irvine, California to provide audits for the Company on an ongoing
basis.
With
respect to the proposal that the number of shares voted in favor of the
proposal
to change our name to Left Behind Games was 10,584,934; the number of shares
voted against such proposal was 4,825; and the number of shares that abstained
was 525.
With
respect to the proposal to elect Troy A. Lyndon, Jeffery Frichner, Thomas
Axelson and Ray Dixon to our board of directors was 10,587,059; the number
of
shares voted against such proposal was 1,825; and the number of shares
that
abstained was 1,400.
With
respect to the proposal to authorize Corbin & Company, LLP, to provide our
audits on an ongoing basis,: the number of shares voted in favor was 10,587,809;
the number of shares voted against such proposal was 1,825.
On
June
20, 2006, we entered into an agreement with Chance Thomas for him to provide
the
score for "LEFT BEHIND: Eternal Forces." Mr. Thomas was involved in the
creation
of the music for the "X-Men: The Official Movie Game," "King Kong", and
Vivendi's "Lord of the Rings" series.
On
June
7, 2006, Double Fusion, an in-game advertising technology and service provider,
agreed to provide in game advertising and product placement for "Left Behind:
Eternal Forces" which is set in New York City. Before game development
began, we
shot thousands of photos in the streets of New York City. We intend for
advertising secured by Double Fusion to be integrated on the billboards
and
video screens that actually exist in the New York City, in Times Square
and
other well known sections of the city.
Double
Fusion has relationships with ad agencies worldwide. Advertising will be
integrated directly into the game, taking advantage of the capabilities
of
the Double Fusion software and services platform. The Double Fusion
technology platform allows advertisements to be dynamically changed and
updated
within the title, in a trackable and measurable fashion, and supports 3D
and
video advertising placement opportunities as well as billboards and other
static
graphic images.
On
October 1, 2006, we entered into a distribution
agreement with Cokem International, Ltd. ("Cokem"), a distributor of software,
video games and related products. Under the agreement, Cokem agreed to
order
inventory components, assemble our inventory, solicit and receive orders,
warehouse, fulfill, distribute and sell our products.
Item
6. Exhibits.
(a) Exhibits
(filed with this report unless indicated below)
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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
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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
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Certification
of principal executive officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Certification
of principal financial officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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In
accordance with the requirements of the Exchange Act, the Registrant caused
this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
LEFT
BEHIND GAMES INC.
By:
/s/ Troy
Lyndon
Troy
Lyndon, Chief Executive Officer
(Principal
Executive Officer)
By:
/s/ James B.
Frakes
James
B.
Frakes, Chief Financial Officer
(Principal
Financial Officer)
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