ITEM 1. DESCRIPTION OF BUSINESS
Background
Left Behind Games Inc. d/b/a Inspired Media Entertainment (herein referred to as the “Company”, “LFBG”, “we”, “us”, “our” or similar terms), was founded on December 31, 2001 and incorporated in the state of Delaware on August 22, 2002. The Company is engaged in the development, production and sale of Christian inspirational PC video games based upon the popular Left Behind series of novels, published by Tyndale House Publishers. The mission of the company 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. As of the date of this Annual Report, we produce and sell inspirational video games.
Our common stock is quoted on the OTC Bulletin Board under the ticker symbol “LFBG.”
On that December 31, 2001, we signed a license agreement with Tyndale House Publishers for the exclusive world-wide rights to the Left Behind brand for the purpose of electronic games. According to Tyndale House Publishers, the Left Behind’s book series has sold more than sixty three (63) million copies and as a result, the ten initial books, followed by children’s books, comic books, music and three movies with the Left Behind brand name have generated hundreds of millions of dollars at retail. According to a Barna Research study, Left Behind has also become a recognized brand name by more than one-third (1/3) of Americans.
Left Behind Games Inc. became a public company on February 7, 2006. On that date, through a reverse merger acquisition, we acquired the public entity Bonanza Gold, Inc., a Washington corporation which had been in operation since 1961. As a result of the share exchange agreement, LFBG shareholders and management controlled the new public company. And as part of the transaction, we changed the name to Left Behind Games, Inc. and are currently doing business under the name “Inspired Media Entertainment.”
Due to the high impact of the brand name Left Behind Games, recognized within the marketplace, we have retained this name although other products have been added to our line. As time goes on and we continue to add new products, we anticipate changing our name to Inspired Media Entertainment.
Our Company became one of the first to develop, publish, and distribute products game for the multi-billion dollar inspirational marketplace when in November of 2006, we released our first product, “LEFT BEHIND: Eternal Forces”, a PC real-time strategy game. We successfully gained entry into more than ten thousand (10,000) retail locations, including Target, Best Buy, Amazon.com, 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 in late 2006, we believe that it significantly impacted our initial release. Due to this experience, we decided to build our own direct-to-store distribution channel for the Christian and inspirational marketplaces. In time for the Christmas shopping season in 2007, we established account relationships with over fifteen hundred (1,500) stores directly.
On July 5, 2007, we obtained an exclusive license to sell three (3) PC games featuring Charlie Church Mouse to the Christian Booksellers Association (CBA) market from Lifeline Studios, Inc., the developer and original publisher. On June 30, 2009, we expanded our license agreement for Charlie Church Mouse PC Games to include all distribution channels worldwide.
On May 20, 2008, we acquired the publishing and distribution rights to the PC game, “Keys of the Kingdom.” This new game features brain-teasing dynamics and inspirational scriptures. We agreed to pay the author a royalty of fifteen percent (15%) of gross profits.
Since becoming incorporated, we have not had or been involved in any bankruptcy, receivership or similar proceeding.
Recent Developments
From January 7th to May 15th, 2009 we performed thirteen (13) direct-marketing tests through one of our primary marketplaces, the Christian churches themselves. Based upon the statistical results, we project that 11.2% of them will provide the Company with monies from an unsolicited mailing which includes 10 of our games. Better than this, based upon our own direct-marketing phone call campaigns, we have found that more than 10% of churches that will gladly accept our games in unsolicited packages and send us cash for the games. With more than 300,000 churches in the USA alone, this provides a vast marketplace.
In June 2009, we started a new Independent Representative Campaign and expect to establish a powerful Direct Rep distribution channel of our own in the coming weeks, months and years. In time, we believe the majority of our income could be generated from this direct contact network. This Direct Rep program is made up of work-at-home independent contractors that call Pastors in an effort to encourage the sale of our games.
On June 24, 2009, we announced that Wal-Mart has approved a test market in an undisclosed number of stores for Left Behind PC Games, with a preliminary launched date of October 12, 2009. The test is expected to run through Christmas. We anticipate that the games should be available for sale in time for the Christmas shopping season.
Also on June 23, 2009, we signed an agreement with Leading Points Corporation to represent the Company at military-focused retailers on bases including the Army, Air Force, Navy, Coast Guard and Marine exchanges.
On July 7, 2009, we signed a distribution agreement with Jack of All Games, the distribution subsidiary of Take-Two Interactive (Nasdaq: TTWO), to distribute our games, providing us with potential distribution of our products into stores including Wal-Mart, Best Buy, Target, EB Games, GameStop, Toys "R" Us, Blockbuster and other leading retailers.
So far in 2009, the Company has accomplished major goals which are expected to provide a firm financial foundation by the end of the year.
Principal Products or Services and Their Markets
All of the games are now branded under the name of Left Behind Games. However, they fall into three categories due to the acquisition of the Charlie Church Mouse brand name and the Keys of the Kingdom rights. See www.inspiredmedia.com & www.supportgoodgames.com. These games have received positive support from well respected Christian leaders, including the Billy Graham Evangelistic Association and Joel Osteen’s Church (Lakewood), one of the largest mega-churches in the U.S.
Following are expanded descriptions of these three PC game branded product lines:
Left Behind Games.
Two of our primary video games are based upon the Left Behind novels and products. These entail fictional storylines focused on events at the end of the world, including the ultimate battles of good against evil. They are very action oriented and supremely suitable for an engaging series of electronic games.
Our initial product was a PC game called “Left Behind: Eternal Forces” (“EF”). EF is a real time strategy game played by one (1) person or online by up to eight (8) players on PCs. The game was launched in November 2006, and we have made nine (9) free updates since the launch. It is loosely based on the Left Behind series, but is not specific to any one of the Left Behind novels. EF has sold more than 70,000 copies.
Our newest game, “Left Behind: Tribulation Forces” was launched in November 2007. It is a sequel EF and it takes the real-time genre to an entirely new level. Greater emphasis is placed upon the idea that spiritual weapons such as “prayer” and “worship” are more powerful to achieve the goals of the game than the user of “guns”. Tribulation Forces includes the original forty (40) missions of Eternal Forces, with five (5) new in-depth missions. A new American Militia faction and enhanced artificial intelligence system provides gamers a more challenging experience. Multiplayer features are enhanced and the world graphics have been substantially improved, along with new maps representing a larger portion of a post-apocalyptic New York City.
Charlie Church Mouse Games
We launched “The Charlie Church Mouse” (“CCM”) video games in 2007. CCM games are educational software programs utilizing Bible stories designed for pre-school, kindergarten and early elementary age children. Each of our three CCM games teaches valuable life lessons through Biblical stories. Sequential stories increase the degree of difficulty to challenge children. All of the games reinforce academic skills, character development and moral integrity through the exploration of timeless Bible stores that parents embrace and children relate to and enjoy.
Keys of the Kingdom Game
We launched “Keys of the Kingdom” PC game in summer 2008. This game features brain-teasing dynamics and inspirational scriptures. We are obligated to pay the author a royalty of fifteen percent (15%) of gross profits pursuant to our royalty agreement with the developer.
Social Networking Site Abandoned.
We originally developed a social networking website named DreamWebSpace.com, but as part of our focus returning specifically to games, the company chose to abandon the project in April 2008.
Additional Products & Marketing
Although we started as a one item company, we have expanded our product line to include six (6) games with plans to eventually release one new game per quarter. We also are actively seeking to acquire new products, and potentially businesses, to further 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 (5) church sponsored outreach events called “Eternal Forces Mondays.” These events provide opportunities for churches to send their youth to local LAN Centers and for youth pastors and members to invite others to an event outside of church. A LAN Center is a game center that allows gamers to play in a social environment, often for an hourly fee.
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 download that may represent sources of additional revenue for us beyond the traditional retail outlets and the CBA (inspirational) marketplace.
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 Left Behind branded games 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
Company’s Core Demographic. The company’s primary audience is consumers who desire to play inspirational and family-friendly video games.
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 personal computer (“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.
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. According to a recent CNBC News report, even though we are in a recession, computer game sales continue to increase. PricewaterhouseCoopers predicts that the sale of software games will reach $21.6 Billion by 2013. If Christian games capture just 1% of that market, that comes to $210 million annually. Currently, we estimate that between than $2-5 million is per year is spent on Christian games annually.
In 2007, according to the NPD Group, games on computers like Tribulation Forces accounted for $910.7 million in sales with 36.4 million units sold. According to the Entertainment Software Association, the ‘strategy’ genre of Tribulation Forces is played by more than 33% of PC gamers and represents the largest gaming segment in computer games.
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 twenty (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 thirty-five hundred (3,500) responses were received. Of those responding, seventy-two percent (72%) classified themselves as players of video games, and ninety-two percent (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 two-thirds (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.
In 2006, according to a Peter D. Hart Research Associates study, seventy-five percent (75%) of American heads-of-household play computer and video games, thirty-nine percent (39%) of computer gamers are over the age of thirty-five (35) and the average game player is thirty (30) years old, nineteen percent (19%) are age fifty (50) or older, and forty-three percent (43%) are women. The study also found the typical game purchaser is thirty-seven (37) years old, and adult gamers have been playing for an average of twelve (12) years. Further data shows just thirty-five percent (35%) of gamers are under the age of eighteen (18), while forty-three percent (43%) are 18 - 49 years old. Interestingly, women over the age of eighteen (18) constitute a greater portion of the game playing population (28%) than boys 6-17 (21%).
The same survey illustrated 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 (3) 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 sixteen hundred (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 "T” for “Teen" rated games (30%) and by "M” for “Mature" 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 seventy percent (70%) of games are rated "E" for everyone (appropriate for ages 6 and up). Our first product is rated “T” for Teens.
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.
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.
NPD’s 2005 study found forty-two percent (42%) of most frequent gamers play online, with fifty-six percent (56%) being male and forty-four percent (44%) being female. A full thirty-four percent (34%) of heads of households play games on a wireless device such as a cell phone or PDA reflecting a substantial increase from twenty percent (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 and 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) in sales.
Marketing
We used a variety of avenues for promoting and marketing the launch of Eternal Forces 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 versus 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, Left Behind Games: External Forces, 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 (2) 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 a Massive Multi-player Online Game (“MMOG”), at some point in the future, our game could migrate to the MMOG platform without tremendous changes in design, game play, storylines and structure.
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
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 guarantee that third parties will assert that we are infringing upon their proprietary rights even if we believe that is not the case. 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. The failure to resolve such claims on favorable terms could result in management spending time and energy on such matters instead of our business which could cause 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.
The Left Behind License. On October 11, 2002, the publisher of the Left Behind book series granted us 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.
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. We were behind in our payments to the licensor. If these are not paid, in the event the licensor makes a demand, it could result in the termination of the license agreement. In such case, we shall continue to have the rights to sell all games in the marketplace along with all inventory already purchased. On September 28, 2008, the Company and licensor modified terms of the agreement to eliminate minimum royalty guarantees. Instead, within 30 days from the end of each month, Company shall provide royalties to licensor based upon its agreement for the preceding month. Additionally, the license term of 3 years automatically renews to additional terms in perpetuity.
Distribution Methods of the Products and/or Services
North American Market. We distributed LEFT BEHIND: Eternal Forces (“EF”) in the holiday season of 2006 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. That distribution agreement was subsequently mutually terminated in 2007. On July 7, 2009, we signed a distribution agreement with Take-Two Interactive (Nasdaq: TTWO) to distribute our games, providing us with potential distribution of our products into retailers including Wal-Mart, Best Buy, Target, EB Games, GameStop, Toys "R" Us, Blockbuster and other leading retailers. The initial term of the agreement is one-year, but will automatically renew if not terminated by either party.
International Market. We currently sell our products internationally through distributors into 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.
International Church Market. We are currently testing a church marketing program in Brazil and plan to have results to announce in the near future.
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
The video game industry is intensely competitive and new video game products and platforms are regularly introduced. 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 us. Due to these greater resources, certain of our competitors are 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. Also 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.
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.
We intend to 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.
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 staff allowing them to create more games.
Employees
We employ 8 full-time and 2 part-time workers in the United States.
ITEM 1A.
ITEM 1A. 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 risks 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 or debt securities. No assurance can be given that additional capital will be available when required or on terms acceptable to us. It is likely that raising additional funds will continue to dilute our investors’ interests in the Company. 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 as well as our predecessor independent registered public accounting firm indicated that these matters, among others, raise substantial doubt about our ability to continue as a going concern.
Need for substantial additional funds.
At March 31, 2009, we only had $7,778 cash on hand. Our assets decreased from $1,297,560 for the fiscal year ended March 31, 2008 to $305,521 for the fiscal year ended March 31, 2009, a decrease of 76.5%. At March 31, 2009, we had no Accounts Receivable and we had $2,424,190 in Accounts Payable. We currently need additional funds to finance our operations and the development of our product line within the next twelve months. 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.
A prolonged recession could materially adversely affect our operation.
We are currently experiencing the worst world recession since the Great Depression and the Country’s unemployment rate is increasing. Our Net Revenues decreased from $241,405 for the fiscal year ended March 31, 2008 to $196,316 for the fiscal year ended March 31, 2009, a decrease of 21.9% percent. Sales of video games such as ours, are considered to be “discretionary” items and in periods of economic slowdown and increased unemployment traditionally slow down. Period 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.
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.
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.
Our revenues will be partially 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.
There can be no assurance that the Left Behind Games series will sustain its popularity and continue to grow. According to the publisher, the final book in the series was released in April 2007 and, as a result, it is likely that the popularity of the series is past its peak. A decline in the popularity of the Left Behind Games series will likely 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 Games series, there can be no guarantee that any video game product based upon the series will enjoy the same popularity or achieve commercial success.
We identified a material weakness in internal control over financial reporting during fiscal years 2009 and 2008. If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately, which may cause investors to lose confidence in our reported financial information and have an adverse effect on the price of our common stock.
Management identified a material weakness in our internal controls over financial reporting regarding revenue recognition accounting during our fiscal years ended subsequent to fiscal year 2007. While we believe that we have mitigated the material weakness related to revenue recognition, we performed an evaluation of internal controls over financial reporting and concluded that we have material weaknesses in existing Segregation of Duties issues and Limited Resources issues, which are only partially mitigated by the controls currently in place. We plan to mitigate the Segregation of Duties issues by hiring additional personnel in our finance department once we have achieved positive cash flow from operations or have raised significant additional working capital. There can be no assurance that we will be able rectify these material weaknesses.
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 materially 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.
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 Games 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. Two 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 Games series.
On October 11, 2002, we secured the license from the publisher of the Left Behind Games series to use the copyrights and trademarks relating to the Left Behind Games series to develop video game products. The license requires us to pay royalties and other fees on an ongoing basis to the publisher of the Left Behind Games series and to meet certain product development, manufacturing and distribution milestones. To date, we are in arrears on these license payments but the publisher of the Left Behind series has allowed us to continue with the licensing arrangement although there can be no assurance they will continue to do so.
The license also grants the publisher of the Left Behind Games 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 Games series under the license, the publisher of the Left Behind Games 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 Games 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 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 Games series. In the event the license 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 Games series.
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.
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.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
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.
The application of the "penny stock" rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
Our common shares are thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
Our common shares have historically been sporadically or "thinly-traded" on the OTCBB, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.
The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly-traded public float, limited operating history and lack of revenue which could lead to wide fluctuations in our share price. The price at which you purchase our common shares may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week period ended March 31, 2009, the high and low closing sale prices of a share of our common stock were $.03 and $0.0011, respectively. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky" investment due to our limited operating history , our low level of revenue and or lack of profitability to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
Volatility in our common share price may subject us to securities litigation.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.
Our officers and directors beneficially own or control the majority of voting shares as of July 15, 2009, which may limit your ability or that of other shareholders, whether acting individually or together, to propose or direct the management or overall direction of our company.
Additionally, this concentration of ownership could discourage or prevent a potential takeover of our company that might otherwise result in you receiving a premium over the market price for your common shares.
Our issuance of additional common shares in exchange for services or to repay debt, would dilute your proportionate ownership and voting rights and could have a negative impact on the market price of our common stock.
Our board may generally issue shares of common stock to pay for debt or services, without further approval by our shareholders based upon such factors that our board of directors may deem relevant at that time.
The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to our company and shareholders. Our bylaws also require us to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements with our directors, officers and employees. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees that we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and shareholders.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
We operate in a 2,500 square foot sales and distribution facility in Temecula, California under a sublease agreement through October 2009. Its cost is $1,850 per month. We now operate on a month to month basis under the sublease.
Previously, our corporate offices consisted 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 four percent (4%). We abandoned that facility in March 2008 and are seeking a resolution with the landlord. Our financial statements for the year ended March 31, 2009 include a contingency accrual of approximately $180,000 in the event the landlord seeks and is granted damages.
Investment Policies
We do not have any investments in real estate or interests in real estate or investments in real estate mortgages other than that discussed above. We also do not have any investments in any securities of or interests in persons primarily engaged in real estate activities.
Description of Real Estate and Operating Data
See above.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation from time to time in the ordinary course of our business. More than 6 months ago, we received a letter from our former President, and current director, Jeffrey Frichner, demanding payment of $37,500 pursuant to our Separation Agreement with him that is allegedly owed to him by us.
On September 26, 2008, we entered into a settlement agreement with Leonard Linsker in the amount of $75,000 or 10 million shares, whichever is less. Mr. Linsker is currently in the process of selling his settlement shares.
On April 3, 2009, Beta Winchester LLP was granted a judgment for $40,137.60. However, we believe that their attorney neglected to inform the judge that they are holding $45,000 of our funds as a deposit. Accordingly, we do not believe this issue to be material and are seeking a remedy in court.
We are currently not involved in any other litigation or any pending legal proceedings that we believe could have a material adverse effect on our financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 8, 2009, the Company filed with the SEC a Definitive Information Statement therein notifying the Company’s shareholder of record as of the close of business on February 19, 2009 that a majority of the Company shareholders signed a written consent on February 13, 2009 at the Company’s offices, to vote on the following proposals:
1.
To elect Richard Knox, Sr. to replace Leslie Bocskor, who resigned, as a member to our board of directors for a period of one year or until his respective successor is elected and qualifies;
2.
To appoint J Crane, CPA P.C. as the independent registered public accountants for the fiscal year ending March 31, 2009;
3.
To increase the Company’s authorized number of shares of common stock from 400 million to one billion two hundred million (1,200,000); and
4.
To increase the Company’s authorized number of shares from preferred stock from 20 million to sixty (60) million.
The foregoing actions took April 13, 2009.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
(a) Market for Common Equity and Related Stockholder Matters
Our common stock is traded on NASD’s Over-the-Counter/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 (2) 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.
Holders
As of July 2, 2009, there were approximately two thousand two hundred (2,200) holders of record of our common and preferred stock.
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.
Common Stock
We are authorized to issue one billion two hundred million (1,200,000) shares of $0.001 par value common stock of which 677,798,293 shares are currently outstanding as of June 30, 2009. 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.
In 2004, 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 one percent (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.
Preferred Stock
We are authorized to issue sixty million (60,000,000) shares of $0.001 par value preferred stock of which 3,586,245 preferred A shares and 12,230,932 preferred B shares are issued and outstanding as of June 30, 2009 respectively. 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. Each share of series B preferred stock has voting power equal to 200 shares of common stock for a twelve month period. Subsequently, each series B preferred share has voting power equal to one vote of common stock.
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, 2009, we received $80,252 in net proceeds from the sale of 102,549,333 shares of common stock and 3,884,467 shares of preferred B stock.
During the fiscal year ended March 31, 2009, we also issued to independent third parties 48,700,281 shares of common stock for consulting services rendered, valued at $299,788 (based on the closing price on the respective grant date). We also issued 2,025,000 shares of common stock, valued at $54,650 (based on the closing price on the respective grant date), to certain employees and directors as additional compensation. We also issued 900,000 shares for interest, valued at $7,120 (based on the closing price on the respective grant date), issued 26,442,308 shares valued at $141,751 (based on the closing price on the respective grant date) to convert accounts payable to equity and issued 25,909,438 shares of common stock for debt conversions.
During the fiscal year ended March 31, 2008, we issued 4,381,250 warrants to purchase shares of common stock all with an exercise price of $0.05. We have estimated the value of these warrants to be approximately $135,000.
From April 1, 2009 to June 30, 2009, we received $147,214 in net proceeds from the sale of 148,735,928 shares of common stock.
We believe the above-referenced 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 these sales 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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to furnish information under this Item 6.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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:
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continued development of our technology;
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consumer acceptance of our current and future products
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dependence on key personnel;
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competitive factors;
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the operation of our business; and
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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 an early stage company which is one of the first companies to develop, publish, and distribute products into the multi-billion dollar video game and inspirational markets. Our goal is to become a leading publisher in the new market of inspirational games.
Our products include games based upon the popular Left Behind series of novels, the Charlie Church Mouse television programs and others. 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 sixty three (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 one-third (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 license to make video games. We have no interest in, nor do we profit from any other Left Behind branded products.
To date, we have financed our operations primarily through the sale of shares of our common stock. During the fiscal year ended March 31, 2009, we borrowed a net $490,083 in notes payable and raised net proceeds of $84,137 from the sale of 102,549,333 shares of our common stock and 3,884,467 shares of our series B preferred stock. We continue to generate operating losses. However, a reduction in our expenses has limited those losses significantly as compared to previous years.
Furthermore, the report by our Independent Registered Public Accounting Firm on our financial statements includes a paragraph describing substantial doubt about our ability to continue as a “going concern”.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal Years Ended March 31, 2009 and March 31, 2008
Net Revenues
We recorded net revenues of $196,316 for the fiscal year ended March 31, 2009 compared to $251,405 in the fiscal year ended March 31, 2008, a decrease of $55,089, or twenty two percent (22%). The revenue level declined due to reduced sell through in large retail stores as we focused our sales efforts largely into the Christian bookstore market and more recently, the church marketplace.
Cost of Sales - Product Costs
We recorded cost of sales - product costs of $60,534 for the fiscal year ended March 31, 2009 compared to $446,704 in the fiscal year ended March 31, 2008, a decrease of $386,170, or eighty six percent (86%). Cost of sales - product costs consists of product costs and inventory-related operational expenses. Cost of sales - product costs decreased because the lower level of net revenues noted above and to reduced product costs on a per unit basis.
Cost of Sales - Intellectual Property Licenses
We recorded cost of sales - intellectual property licenses of $13,426 for the fiscal year ended March 31, 2009 compared to $7,775 for the fiscal year ended March 31, 2008, an increase of $5,651. Cost of sales - intellectual property licenses consists of certain royalty expenses, amortization of prepaid royalty costs and amortization of certain intangible assets. In the fiscal years ended March 31, 2009, and 2008, all of the cost of sales - intellectual property licenses related to royalties for the Left Behind, Keys of the Kingdom and Charlie Church Mouse games.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of employee salaries and related costs, stock-based compensation to employees and consultants, advertising and public relations expenses associated with our product launch, and other general and administrative expenses. The following table notes the principal components of our selling, general and administrative expenses in each of the fiscal years:
Selling, general and administrative expenses were $1,864,805 for the fiscal year ended March 31, 2009, compared to $5,040,218 for the fiscal year ended March 31, 2008, a decrease of $3,175,413 or 63%. Selling, general and administrative expenses represented approximately 94% of our overall costs and expenses in the fiscal year ended March 31, 2009 compared to 88% in the fiscal year ended March 31, 2008.
Many of these selling, 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, 2009 and 2008, we recorded expenses relating to these non-cash payments to consultants, including amortization of prepaid consulting expenses, of $299,788 and $906,496, respectively. This represented a $606,708 decrease during the year ended March 31, 2009. During the fiscal years ended March 31, 2009 and 2008, we also issued shares of common stock to our employees, valued at approximately $54,650 and $1,125,088, respectively, a decrease of $1,070,438. The overall decrease in non-cash charges attributable to stock-based compensation to consultants and employees was $1,677,146.
The other significant factors contributing to the decrease in selling, general and administrative expenses were reductions in our advertising and public relations expenditures, employee salaries, communications expenses, insurance expense, travel and entertainment expense, office expense, and professional fees. Please see the above table for the specific reductions in each of these expense catagories. These expense reductions were generally the result of our reduction in staffing levels as part of our overall downsizing of our operations to conserve cash.
Product Development Expenses
Product development expenses were $52,557 for the fiscal year ended March 31, 2009 compared to $309,914 for the fiscal year ended March 31, 2008, a decrease of $257,357 or 83%. This decrease was due to reductions in our internal development staff.
Other Income
We recorded other income of $718,838 in the fiscal year ended March 31, 2009. This other income was composed of $250,000 from a gain on the modification of our license of the Left Behind brand and a $468,838 gain that arose from the cancellation of our initial distribution agreement. There was no other income recorded in the fiscal year ended March 31, 2008.
Other Expense
We recorded other expenses of $67,394 and $32,524 in the fiscal years ended March 31, 2009 and 2008, respectively. These other losses primarily related to losses that arose from writing off certain fixed assets and intangible assets as well as the impact of the abandonment of leasehold improvements that arose in connection with our corporate downsizing.
Interest Expense
We recorded interest expense of $818,065 and $637,566 in the fiscal years ended March 31, 2009 and 2008, respectively. Our interest expense included amortization of debt discount and debt issuance costs of $614,415 and 451,182 in the fiscal years ended March 31, 2009 and 2008, respectively.
Net Loss
As a result of the above factors, we reported a net loss of $1,961,627 for the fiscal year ended March 31, 2009, compared to a net loss of $6,227,296 for the fiscal year ended March 31, 2008, resulting in a reduced loss of $4,265,669. In addition, our accumulated deficit at March 31, 2009 totaled $44,001,054. These increases are attributable primarily to the factors discussed above.
CASH REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2009 we had $7,778 of cash compared to $2,695 of cash at March 31, 2008, an increase of $5,083. At March 31, 2009, we had a working capital deficit of $3,642,535 compared to a working capital deficit of $3,098,173 at March 31, 2008.
Operating Activities
For the fiscal years ended March 31, 2009 and 2008, net cash used in operating activities was $569,137 and $2,487,488, respectively. The $2,278,350 decrease in cash used in our operating activities was primarily due to the decrease in our general and administrative expenses and research and development expenses as we reduced our expenditures over the fiscal year ended March 31, 2009 to conserve cash. The net losses for the fiscal years ended March 31, 2009 and 2008 were $1,961,627 and $6,227,696, respectively, a decrease of $4,265,669.
Investing Activities
For the fiscal years ended March 31, 2009 and 2008, net cash used in investing activities was $0 and $19,124, respectively. The decrease was attributable to curtailed purchases of property and equipment and payments for trademarks and royalties to conserve cash.
Financing Activities
For the fiscal years ended March 31, 2009 and 2008, net cash provided by financing activities was $574,220 and $2,494,342, respectively. The primary elements of cash provided by financing activities in both fiscal years were issuances of notes payable and the sale of common stock.
Future Financing Needs
Since our inception in August 2002 through March 31, 2009, we have raised approximately $10 million through funds provided by private placement offerings. This was sufficient to enable us to develop 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 our development team on a product-by-product basis without substantially increasing our long-term monthly burn-rate of cash.
To date, we have financed our operations primarily through the sale of shares of our common stock. During the fiscal year ended March 31, 2009, we borrowed a net $490,083 in notes payable and raised net proceeds of $84,137 from the sale of 102,549,333 shares of our common stock and 3,884,467 shares of our series B preferred stock. We continue to generate operating losses. However, the reduction in our expenses has limited those losses significantly over previous years.
Furthermore, the report by our Independent Registered Public Accounting Firm on our financial statements includes a paragraph describing substantial doubt about our ability to continue as a “going concern”.
Going Concern
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have suffered continuing losses from operations, are in default on certain debt, have negative working capital of approximately $3,642,535, which, among other matters, raises substantial doubt about our ability to continue as a going concern. A significant amount of additional capital will be necessary to advance the development and distribution of our products to the point at which they may generate sufficient gross profits to cover our operating expenses. We intend to fund operations through debt and/or equity financing arrangements, which management believes may be insufficient to fund our capital expenditures, working capital and other cash requirements (consisting of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal year ending March 31, 2009. Therefore, we will be required to seek additional funds to finance our long-term operations.
We are currently addressing our liquidity issue by continually seeking investment capital through the public markets, specifically, through private placements of common stock and debt. However, no assurance can be given that we will receive any funds in addition to the funds we have received to date.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable 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 March 31, 2009, our management believes there is no impairment of our long-lived assets other than the lease-hold improvements of its abandoned office space and certain trademark costs both of which have been written off in the fiscal year ended March 31, 2009. 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 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 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 March 31, 2008, we had no options outstanding and therefore 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 Binomial Lattice 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 Binomial Lattice 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(R), 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 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:
•
Persuasive evidence of an arrangement exists: 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 has occurred: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.
•
The seller’s price to the buyer is fixed and determinable: If an arrangement includes rights of return or rights to refunds without return, revenue is recognized at the time the amount of future returns or refunds can be reasonably estimated or at the time when the return privilege has substantially expired in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. If an arrangement requires us to rebate or credit a portion of our sales price if the customer subsequently reduces its sales price for our product to its customers, revenue is recognized at the time the amount of future price concessions can be reasonably estimated, or at the time of customer sell-through.
•
Collectibility is reasonably assured: 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).
Historically, we recorded revenue upon shipment of product to our channel partners and direct customers then adjusted for a reserve to cover anticipated product returns and/or future price concessions, or the “ship-to method.” After considering (i) the limited sales history of our product, (ii) the limited business history with our primary channel partner and largest retail customer and (iii) the competitive conditions in the software industry, we determined that return privileges and price protection rights granted to our customers impacted our ability to reasonably estimate sales returns and future price concessions, and therefore, we were unable to conclude that our sales arrangements had a fixed and determinable price at the time our inventory was shipped to customers. As a result, we have revised our revenue recognition policies.
For sales to our primary channel partner and largest retail customer, we defer revenue recognition until the resale of the products to the end customers, or the “sell-through method.” Under sell-through revenue accounting, accounts receivable are recognized and inventory is relieved upon shipment to the channel partner or retail customer as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred by recording “deferred income - product sales” (gross profit margin on these sales) as shown on the face of the consolidated balance sheet. When the related product is sold by our primary channel partner or our largest retail customer to their end customers, we recognize previously deferred income as sales and cost of sales. Our primary channel partner and largest retail customer each provide us with sell-through information on a frequent basis regarding sales to end customers and in-channel inventories.
For sales to our on-line store customers, revenues are deferred until such time as the right of return privilege granted to the customers lapses, which is thirty (30) days from the date of sale for unopened games.
For sales to our Christian bookstore customers and all other customers that cannot provide us with sell-through information and for which we may accept product returns from time to time, revenues are recognized on a cash receipts basis.
In the future, we intend to continue using the sell-through methodology from customers that supply us with sell through reports. We also plan to continue recognizing sales on our on-line store after a one month lag to allow for the right that we have given our on-line customers to return unopened games for thirty (30) days.
We continue to accumulate historical product return and price concession information related to our Christian bookstore customers and all other customers. In future periods, we may elect to return to the accrual methodology of recording revenue for those customers upon shipment with estimated reserves at which time we believe we can reasonably estimate returns and price concessions to these customers based upon our historical results.
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 end 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 us, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the years ended March 31, 2008 and 2007, we had no such types of arrangements.
Off-Balance Sheet Arrangements
We presently do not have any off-balance sheet arrangements
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial Statements are attached hereto and filed as a part of this Report under Item 15A.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 10, 2008, our Board of Directors dismissed Haskell & White LLP (“H&W") as our independent registered public accounting firm. The decision to change principal accountants was approved by the Board of Directors of the Company on November 10, 2008.
The reports of H&W on our consolidated financial statements for the year ended March 31, 2008, did not contain an adverse opinion or disclaimer of opinion. Their opinion was not qualified or modified as to uncertainty, audit scope, or accounting principle other than a going concern qualification.
During the year ended March 31, 2008 and through November 10, 2008, there were no disagreements with H&W any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of H&W, would have caused it to make reference thereto in its reports on the financial statements for such years.
We provided H&W with a copy of this disclosure on November 10, 2008, requesting H&W to furnish us with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by us, and, if not, stating the respects in which it does not agree. A copy of the letter furnished by H&W has been filed as Exhibit 16.1 to this Form 10-K.
On November 10, 2008, our Board of Directors appointed J. Crane CPA, P.C. as its new independent registered public accounting firm.
During our fiscal year ended March 31, 2008 and through the subsequent interim period ended June 30, 2008, neither we nor anyone on our behalf consulted J. Crane CPA, P.C. regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
During the years ended March 31, 2008, 2007, 2006 and 2005 and through June 30, 2008 there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO"), who is also our acting Chief Financial Officer ("CFO"), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date") within ninety (90) days prior to the filing of our March 31, 2009 Form 10-K.
Based upon that evaluation, our CEO concluded that, as of March 31, 2009, our disclosure controls and procedures were effective in timely alerting management to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic filings with the SEC.
Internal Control over Financial Reporting
(a) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management, with the participation of its CEO, assessed the effectiveness of our internal control over financial reporting as of March 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of The Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment under such criteria, management concluded that our internal control over financial reporting was not effective as of March 31, 2009 due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal 2009 identified a lack of sufficient segregation of duties, particularly in cash disbursements. Specifically, this material weakness is such that the design of controls over the area of cash disbursements relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.
Management has identified a lack of sufficient personnel in the accounting function due to the limited resources of the Company with appropriate skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted accounting principles, particularly as it relates to taxes. Specifically, this material weakness led to segregation of duties issues and resulted in audit adjustments to the annual consolidated financial statements and revisions to related disclosures, including tax reporting.
We are in the process of developing and implementing remediation plans to address our material weaknesses.
Management has identified specific remedial actions to address the material weaknesses described above:
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Improve the effectiveness of the accounting group by continuing to augment our existing resources with additional consultants or employees to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions and preparation of tax disclosures. We plan to mitigate the segregation of duties issues by hiring additional personnel in the accounting department once we have achieved positive cash flow from operations, or has raised significant additional working capital.
·
Improve segregation procedures by strengthening cross approval of various functions including cash disbursements and quarterly internal audit procedures where appropriate.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over financial reporting during the quarter ended March 31, 2009 that have materially affected or are reasonably likely to materially affect these controls. Thus, no corrective actions with regard to significant deficiencies or material weaknesses were necessary.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Commission that permit us to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
Not applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
Our directors and executive officers as of July 7, 2009, include the following persons:
Name
Age
Position
Troy A. Lyndon
Chairman & Chief Executive Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
Michael Knox
Director
Richard Knox, Sr.
Director
Troy A. Lyndon, Chief Executive Officer and Chairman, age 44, is our CEO. Mr. Lyndon’s background includes more than 20 years in the development and publishing of video games. Following are a few excerpts taken from a write-up about him in Wikipedia as well as from his biography which can be seen at www.troylyndon.com.
At age 13, Troy Lyndon developed and sold his first video game professionally, titled Space Voyager for the Radio Shack TRS-80. After successfully publishing his first five games before the age of 20, Lyndon dropped out of Moorpark College (majoring in business administration) to pursue video game development full-time.
Among his long list of accomplishments, Lyndon produced the game version of Howard the Duck, which he believes sold more games than VHS copies of the movie. With co-developer, Michael Knox, he developed ABC's Monday Night Football and Dream Team Basketball for the PC. Monday Night Football was recognized as one of the best sports games of the year by nomination from the Software Publishers' Association.
Due to the success of Monday Night Football on the PC, Electronic Arts sought out Lyndon and his partner Knox to develop a football game which became the first 3D Madden Football game ever and the most successful sports game franchise in video game history. Over five years, Knox and Lyndon, with the assistance of Knox, Sr., grew their development company, Park Place Productions, to 130 employees servicing at peak 14 publishers while making 45 games at once. Lyndon and Knox were recognized when awarded the Inc. Magazine Entrepreneur of the Year Award by Ernst & Young and Merrill Lynch in 1993.
After more than 20 years of success, in 1998 Lyndon left the video games industry to serve on the Jesus Film Project, the largest missionary organization of Campus Crusade for Christ. While there Lyndon started Jesus Technologies where he worked on numerous projects for Campus Crusade and other ministries, including completion of improvements to the Jesus Film DVD Internet Game, as well as a new version of the Missions Atlas Project, The Jesus Film CD-ROM in Arabic, the Jesus: Fact or Fiction DVD, the Jesus Film Kiosk, the Outreach CD Project, an InTouch Ministries CD-ROM and the Evangelism Toolbox CD-ROM for Campus Crusade for Christ, in association with the Billy Graham Evangelistic Association. In 2003, Lyndon left Campus Crusade to fulfill his vision of developing video games "with a purpose."
Along with his Campus Crusade projects, in 2000 Lyndon invented a technology to allow consumers to click on items of interest in a video stream, whether it be a fancy car of a nice sweater. He now holds the patent for this technology, and although it has not yet been developed for mainstream interactive television, clearly our world is moving in that direction.
In 2002, Lyndon was engaged to manage all of the interactive programming still needed to complete the first interactive Bible and encyclopedia suite ever created called iLumina. Its features include QuickTime VR, full-screen video animation, and a fully interactive verse-by-verse first graphical view of the New Living Translation Bible.
Michael Knox, Director, is the Vice President of V2P Communications, one of the world’s leading Internet audio marketing firms. Mr. Knox is also a recipient of the Entrepreneur of the Year award from Inc. Magazine, Merrill Lynch and Ernst & Young. From 1995 to 2001, Mr. Knox served as President for OmniNet Media.com, Executive Producer for Narrow Broadcastings, Inc. and VP Business Development for IRI Entertainment. From 1989 to 1994, Mr. Knox served as Chief Executive Officer of Park Place Productions, which became North America’s largest independent developer of video games, developing more than fifty (50) computer and video game projects.
Richard Knox, Sr., Director, is a seasoned businessman, former nuclear physicist, software developer, Pastor, founder and President of Ohana Haven Ministries in the State of Hawaii. Mr. Knox started his career off earning his B.S. Engineering Physics at the University of Illinois and shortly thereafter, began working for Lawrence Livermore Laboratory while continuing his education for another 3 years attending the Graduate School of Engineering Sciences with the University of California. Mr. Knox served the Laboratory for 16 years working on numerous government programs as a Containment Scientist for nuclear underground tests, where he was responsible for the supervision of up to 500 engineers and approval of all equipment fielded for nuclear-device emplacement at the Nevada Test Site. After retiring from the Laboratory, Mr. Knox started his own software development and publishing business, creating consumer CAD software which sold 80,000 copies. Shortly thereafter, he joined his son and our CEO, Mr. Lyndon in the 90’s, to develop games at North America’s largest independent developer of video games, Park Place Productions, where he was in charge of 80 personnel, overseeing all game production while managing communications and negotiations with clients. Since that time, Richard has relocated to Oahu, Hawaii to pursue personal interests, including the oversight of a ministry and most recently, Pastor of his own congregation. Richard and his wife Vicki, celebrate 50 years of marriage and have 4 children and 10 grandchildren.
Significant Employees
Troy Lyndon, our chief executive officer
Family Relationships
Our two outside directors have a father-son relationship
Compliance with Section 16(a) of the Exchange Act
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 (10%) 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 March 31, 2009, Section 16(a) filing requirements applicable to its directors, officers, and greater than ten percent (10%) beneficial owners were complied with.
Code of Ethics
We have not yet prepared a written code of ethics and employment standards. Due to the fact that we only have three persons serving as the Company’s executive directors and directors, we do not feel that having a written code of ethics is warranted. As the Company grows and its executive team and board grow, the Company anticipates adopting and implementing a Code of Ethics.
Corporate Governance
We currently do not have a corporate governance committee. Our board only consist three directors and as such, acts in the capacity of the corporate governance committee.
Nominating Committee
We currently do not have a nominating committee. Our board only consist three directors and as such, acts in the capacity of the nominating committee.
Audit Committee
We currently do not have an audit committee financial expert or an independent audit committee expert due to the fact that our Board currently does not have an independent audit committee. Our board only consist three directors and as such, acts in the capacity of the audit committee.
Financial Expert
We have deemed Troy Lyndon to be the Board’s “financial expert” as defined in the 2002 Sarbanes Oxley Act.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Our compensation discussion and analysis addresses the following topics with respect to Named Executive Officer (“NEO”) compensation processes and decisions:
(a) General
Our Board has not yet appointed a Compensation Committee, so the full Board is responsible for establishing our overall compensation strategy, with support from management and consultants. To date, however, our Board has not approved the compensation of our management. The Board also oversees our 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, our 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, our Board anticipates adopting more formal and structured compensation policies and programs, including the formation of a compensation committee. At such time, our 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.
Our Board meets in-person at least once per year. It also meets as necessary, either in person or via telephone to discuss compensation and other issues. It met eight (8) times during the past fiscal year. Our Board works with our management in carrying out its responsibilities.
Base Salary
Our Chief Executive Officer
We hired Troy A. Lyndon as our CEO 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 achieve certain revenue benchmarks. The initial benchmark to receive an increase in his salary over the current level of $150,000 is to receive a bonus when $4 million in revenue is achieved in a fiscal year. On July 16, 2008, the Board of Directors approved a salary increase for Mr. Lyndon. Since that time, Mr. Lyndon has chosen to defer the payment of such increase until a later day. Furthermore, although not brought to a vote of the Board, both Lyndon and the Board anticipate it will issue Lyndon anti-dilutable shares of common stock equal to 10% of the Company’s outstanding shares in the event his leadership brings the company to operational profitability by March 31, 2012.
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 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 us. We implemented the 2006 Stock Incentive Plan in January 2007 (the “Plan”). We did not grant any options to our executive officers or employees under this plan in the fiscal year ended March 31, 2009.
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 CEO and other executive officers.
Deferred Compensation
In the fiscal year ended March 31, 2009, no deferred compensation was paid to our officers or directors.
Severance and Change of Control Payments
Our Board 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
Our primary executive officer 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.
We also provide health insurance for Mr. Lyndon.
Compensation Committee Interlocks and Insider Participation
We have not yet designated a Compensation Committee. All compensation matters are approved by the full Board. 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.
(b) Summary Compensation Table
The cash and non-cash compensation that we have paid during the fiscal year ended March 31, 2009 and March 31, 2008 or that was earned by our CEO and our other former employees or officers is detailed in the following table.
Name and Principal Position
Year
Salary
Stock
Awards (1)
All Other
Compensation
Total
Troy A. Lyndon
Chairman and Chief Executive Officer
$85,000
$150,000
--
$300,000
$109,380(2)
$8,831
$194,380
$458,831
James B. Frakes
Former Chief Financial Officer
--
$160,800
--
$120,000
--
--
--
$280,800
Kevin Hoekman
Former Senior Producer
--
$120,000
--
$60,000
--
--
--
$180,000
______________________
(1)
Stock grants are valued as of the grant date.
*
Indicates that the applicable officer served as such for only a portion of the fiscal year indicated.
(2)
Includes $10,380 as automobile related compensation and $99,000 earned income not paid as a result of cash-flow difficulties.
(c) Narrative Disclosure to Summary Compensation Table
See above.
(d) Outstanding Equity Awards at Fiscal Year-End Table
None
(e) Additional Narrative Disclosure
None
(f) Compensation of Directors
No compensation was awarded to, earned by or paid to our directors for their role as director for the fiscal year ended March 31, 2009.
Directors Compensation Program
Currently, our directors do not receive compensation. It is anticipated, however, that each of our directors will receive compensation at some point in the future.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of June 30, 2009 with respect to any person (including any “group”, as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who is known us to be the beneficial owner of more than five percent (5%) of any class of our voting securities, and as to those shares of our equity securities beneficially owned by each of our directors, our executive officers and all of our directors and executive officers and all of our directors and executive officers as a group. Unless otherwise specified in the table below, such information, other than information with respect to our directors and officers, is based on a review of statements filed, with the SEC pursuant to Sections 13 (d), 13 (f), and 13 (g) of the Exchange Act with respect to our common stock. The number of shares of common stock beneficially owned by each person is determined under the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within sixty (60) days after the date hereof, through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.
The table also shows the number of shares beneficially owned as of June 30, 2009 by each of the individual directors and executive officers and by all directors and executive officers as a group.
The table below sets forth all persons (including any group) who are known to us to be the beneficial owner of more than five percent (5%) of any class of our voting securities.
Name and Address of Beneficial Owner
Class of
Voting Stock
Number of Shares
of Voting Stock
Beneficially Owned (1)
Percentage
of Class
Troy A. Lyndon
CEO & Chairman of the Board
25060 Hancock, Suite 103 Box 110
Murrieta, California 92562
Common Stock
13,678,350
2.1%
Michael Knox
Director of the Board
25060 Hancock Ave., Suite 103 Box 110
Murrieta, CA 92562
Common Stock
1,000,000
0.2%
Demos Pappasavvas (2)
25060 Hancock Ave., Suite 103 Box 110
Murrieta, CA 92562
Common Stock
Series B Preferred
107,156,860
2,310,466
16.1%
Peter Quigley
25060 Hancock Ave., Suite 103 Box 110
Murrieta, CA 92562
Common Stock
Series B Preferred
74,930,000
3,350,000
11.3%
Martin MacDonald
25060 Hancock Ave., Suite 103 Box 110
Murrieta, CA 92562
Common Stock
Series B Preferred
34,215,000
1,613,750
5.1%
All Officers & Directors As a Group (2 Persons)
Common Stock
14,678,350
2.2%
______________________
(1)
Calculates outstanding securities plus securities that may be acquired within the next 60 days.
(2)
Includes 101,856,860 shares underlying convertible notes payable.
Changes in Control
We have not entered into any arrangements which may result in a change in our control.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
We have not entered into any arrangements which are considered transactions with related persons.
Parents
None.
Promoters and Control Persons
Not applicable.
Director Independence
We currently have three (3) directors, Messrs. Troy A. Lyndon, Michael Knox and Richard Knox, Sr. Mr. Lyndon is not independent as he is our CEO and Chairman of our Board. We consider Messrs. Michael Knox and Richard Knox, Sr. to be independent.
In determining whether directors are independent, we have developed the following categorical standards for determining the materiality of relationships that the directors may have with us. A director shall not be deemed to have a material relationship with us that impairs the director's independence as a result of any of the following relationships:
1.
the director is an officer or other person holding a salaried position of an entity (other than a principal, equity partner or member of such entity) that provides professional services to us and the amount of all payments from us to such entity during the most recently completed fiscal year was less than two percent (2%) of such entity’s consolidated gross revenues;
2.
the director is the beneficial owner of less than five percent (5%) of the outstanding equity interests of an entity that does business with us;
3.
the director is an executive officer of a civic, charitable or cultural institution that received less than the greater of $1 million or two percent (2%) of its consolidated gross revenues, as such term is construed by the New York Stock Exchange for purposes of Section 303A.02(b)(v) of the Corporate Governance Standards, from us or any of our subsidiaries for each of the last three (3) fiscal years;
4.
the director is an officer of an entity that is indebted to us, or to which we are indebted, and the total amount of either our or the business entity's indebtedness is less than three percent (3%) of the total consolidated assets of such entity as of the end of the previous fiscal year; and
5.
the director obtained products or services from us on terms generally available to customers of us for such products or services. The Board retains the sole right to interpret and apply the foregoing standards in determining the materiality of any relationship.
The Board shall undertake an annual review of the independence of all non-management directors. To enable the Board to evaluate each non-management director, in advance of the meeting at which the review occurs, each non-management director shall provide the Board with full information regarding the director’s business and other relationships with us, our affiliates and senior management.
Directors must inform the Board whenever there are any material changes in their circumstances or relationships that could affect their independence, including all business relationships between a Director and us, its affiliates, or members of senior management, whether or not such business relationships would be deemed not to be material under any of the categorical standards set forth above. Following the receipt of such information, the Board shall re-evaluate the director's independence.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal year ended March 31, 2009 and 2008, our current independent auditor, J. Crane CPA, P.C. billed us $45,200. For the fiscal years ended 3/31/09 and 3/31/08, Haskell & White, our former independent auditor, billed us $97,108 and $12,500, respectively, for audit services. Also in the fiscal years ended 3/31/09 and 3/31/08, KMJ Corbin another former independent auditor, billed us $950 and $142,295, respectively, for audit services.
Audit Fees. The aggregate fees billed for the years ended March 31, 2009, 2008 and 2007 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, 2008 and 2007 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, 2008 and 2007 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 J Crane CPA, PC and the estimated fees related to these services.
ITEM 15.
ITEM 15. EXHIBITS.
(a) Exhibits. The following documents are filed as part of this report:
Exhibit 3.1
Articles of Incorporation dated March 29, 1961***
Exhibit 3.2
Amendment to Articles of Incorporation dated August 20, 1962***
Exhibit 3.3
Amendment to Articles of Incorporation dated October 17, 1977***
Exhibit 3.4
Amendment to Articles of Incorporation dated June 15, 1999***
Exhibit 3.5
Amended and Restated Articles of Incorporation dated January 30, 2004***
Exhibit 3.6
Bylaws***
Exhibit 10.1
Share Exchange Agreement**
Exhibit 10.2
Employment Agreement with Troy A. Lyndon**
Exhibit 10.3
Addendum dated June 2, 2004 to Employment Agreement with Troy A. Lyndon**
Exhibit 10.4
Addendum dated February 1, 2005 to Employment Agreement with Troy A. Lyndon**
Exhibit 10.5
Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.6
Addendum dated June 2, 2004 to Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.7
Addendum dated February 1, 2005 to Employment Agreement with Jeffrey S. Frichner**
Exhibit 10.8
Employment Agreement with Thomas H. Axelson**
Exhibit 10.9
Addendum dated June 2, 2004 to Employment Agreement with Thomas H. Axelson**
Exhibit 10.10
Addendum dated February 1, 2005 to Employment Agreement with Thomas H. Axelson**
Exhibit 10.12
Distribution Agreement with COKeM International****
Exhibit 10.13
Separation Agreement with Jeffrey S. Frichner*
Exhibit 14.1
Code of Ethics for Chief Executive Officer and Senior Financial Officers***
Exhibit 16.1
Letter of Haskell & White LLP, dated November 13, 2008*****
Exhibit 31.1
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
Exhibit 32.1
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference from Form 8-K filed on June 13, 2007
** Incorporated by reference from Form 8-K filed on February 10, 2006
*** Incorporated by reference from Form 10-SB filed on February 23, 2004
**** Incorporated by reference from Form 10K-SB filed on July 16, 2007
*****
Incorporated by reference from Form 8-K filed on November 13, 2008
ITEM 15A. FINANCIAL STATEMENTS.
LEFT BEHIND GAMES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 and 2008, 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 audit.
We conducted our audit 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 audits 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, 2009 and 2008, and the results of its operations and its cash flows for the year 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 4 to the consolidated financial statements, the Company has incurred significant operating losses and negative cash flows from operations through March 31, 2009, and has an accumulated deficit at March 31, 2009. 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 4. 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.
/s/ J. Crane CPA, P.C.
Cambridge, MA
July 15, 2009
LEFT BEHIND GAMES INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND 2008
See reports of independent registered public accounting firms and
accompanying notes to consolidated financial statements
LEFT BEHIND GAMES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended March 31, 2009 and March 31, 2008
See reports of independent registered public accounting firms and
accompanying notes to consolidated financial statements
LEFT BEHIND GAMES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
For The Years Ended March 31, 2009 and March 31, 2008
See reports of independent registered public accounting firms and
accompanying notes to consolidated financial statements
LEFT BEHIND GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended March 31, 2009 and March 31, 2008
See reports of independent registered public accounting firms and
accompanying notes to consolidated financial statements
LEFT BEHIND GAMES INC.
Consolidated Statements of Cash Flows (Continued)
For The Years Ended March 31, 2009 and March 31, 2008
See reports of independent registered public accounting firms and
accompanying notes to consolidated financial statements
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
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 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.
We hold 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.
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 $163 at March 31, 2008. During the years ended March 31, 2008 and 2007, we paid approximately $171,000 and $180,000 respectively, for software development services provided by LB Games Ukraine, all of which has been eliminated in consolidation.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 2-NUMBER NOT USED
NOTE 3- 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.
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 $250,000. At March 31, 2009 and 2008, we did not have balances 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.
Inventories
Raw materials, work in process and finished goods are stated at the lower of average cost or market. In accordance with SFAS No. 95,
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 Agreement
The cost of the License Agreement is amortized on a straight-line basis over its terms (see Notes 7 and 8).
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, 2009, the Company recorded $1,624 of amortization expense related to its capitalized trademark costs. During the year ended March 31, 2008, the Company recorded $44,190 of amortization expense related to its capitalized trademark costs, which included an accelerated amortization of costs associated with certain trademarks in the amount of $39,672 since it was uncertain whether the Company could recoup the capitalized costs through future cash flows associated with that trademark.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
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 license agreement requires payments of royalties to the licensor. The license 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 license 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, 2009, we recorded cost of sales - intellectual property costs of $8,046 related to the Charlie Church Mouse license, $2,185 related to the LEFT BEHIND license and $3,195 related to the Keys of the Kingdom license for a total of $13,426. During the year ended March 31, 2008, we recorded cost of sales - intellectual property costs of $7,775 related to the Charlie Church Mouse license.
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 March 31, 2009, 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.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
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-Based Payment, 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 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. 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 Binomial Lattice 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 Binomial Lattice 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. 123R, 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 192,423,085 and 679,178 for the years ended March 31, 2009 and 2008, respectively.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
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 (deficit). We determined that the translation gain or loss did not have a material impact on our stockholders’ equity (deficit) as of March 31, 2009 and 2008. 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, 2009 and 2008.
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 March 31, 2009 and 2008.
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.
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:
•
Persuasive evidence of an arrangement exists: 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 has occurred: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.
•
The seller’s price to the buyer is fixed and determinable: If an arrangement includes rights of return or rights to refunds without return, revenue is recognized at the time the amount of future returns or refunds can be reasonably estimated or at the time when the return privilege has substantially expired in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. If an arrangement requires us to rebate or credit a portion of our sales price if the customer subsequently reduces its sales price for our product to its customers, revenue is recognized at the time the amount of future price concessions can be reasonably estimated, or at the time of customer sell-through.
•
Collectibility is reasonably assured: 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).
Historically, we recorded revenue upon shipment of product to our channel partners and direct customers then adjusted for a reserve to cover anticipated product returns and/or future price concessions, or the “ship-to method.” After considering (i) the limited sales history of our product, (ii) the limited business history with our primary channel partner and largest retail customer and (iii) the competitive conditions in the software industry, we determined that return privileges and
price protection rights granted to our customers impacted our ability to reasonably estimate sales returns and future price concessions, and therefore, we were unable to conclude that our sales arrangements had a fixed and determinable price at the time our inventory was shipped to customers. As a result, we have revised our revenue recognition policies.
For sales to our primary channel partner and largest retail customer, we defer revenue recognition until the resale of the products to the end customers, or the “sell-through method.” Under sell-through revenue accounting, accounts receivable are recognized and inventory is relieved upon shipment to the channel partner or retail customer as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred by recording “deferred income - product sales” (gross profit margin on these sales) as shown on the face of the consolidated balance sheet. When the related product is sold by our primary channel partner or our largest retail customer to their end customers, we recognize previously deferred income as sales and cost of sales. Our primary channel partner and largest retail customer each provide us with sell-through information on a frequent basis regarding sales to end customers and in-channel inventories.
For sales to our on-line store customers, revenues are deferred until such time as the right of return privilege granted to the customers lapses, which is 30 days from the date of sale for unopened games.
For sales to our Christian bookstore customers and all other customers that cannot provide us with sell-through information and for which we may accept product returns from time to time, revenues are recognized on a cash receipts basis.
In the future, we intend to continue using the sell-through methodology with our primary channel partner and largest retail customer. We also plan to continue recognizing sales on our on-line store after a one month lag to allow for the right that we have given our on-line customers to return unopened games for 30 days.
We continue to accumulate historical product return and price concession information related to our Christian bookstore customers and all other customers. In future periods, we may elect to return to the accrual methodology of recording revenue for those customers upon shipment with estimated reserves at which time we believe we can reasonably estimate returns and price concessions to these customers based upon our historical results.
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 end 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 years ended March 31, 2009 and 2008, we did not have any such payments.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009 and 2008
Recent Accounting Pronouncements
In December 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS," ("SFAS No. 157") which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not require any new fair value measurements. The guidance in SFAS No. 157 applies to derivatives and other financial instruments measured at estimated fair value under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 applies to certain assets and liabilities that are being measured and reported on a fair value basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. This Statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.
SFAS No. 157 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Our adoption of SFAS 157 for our financial assets and liabilities on April 1, 2008 did not have a material impact on our consolidated financial statements. In February 2008, the FASB issued Staff Position ("FSP") FAS 157-2 ("FSP FAS
157-2") which defers the effective date of SFAS 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent recurring basis until years beginning after November 15, 2008. We are currently reviewing the adoption requirements of FSP FAS 157-2 related to our nonfinancial assets and liabilities and has not yet determined the impact, if any, this will have on its consolidated financial statements.
The fair value of our warrants is determined based on observable market based inputs or unobservable inputs that are corroborated by market data, which is a Level 3 classification.
The following outlines the significant weighted average assumptions we used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing model:
Years Ended March 31,
2009 2008
----------- -----------
Risk free interest rate 4.73% 4.51% - 4.85%
Average expected life 3 years 3 years
Expected volatility 185.0% 84% - 88.6%
Expected dividends None None
We did not make any changes to our valuation techniques compared to the prior fiscal year.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 expands the scope of specific types of assets and liabilities that an entity may carry at fair value on its statement of financial position, and offers an irrevocable option to record the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have not yet elected to use the fair value option, and as such, our adoption SFAS No. 159 as of April 1, 2008 did not have a material impact on our consolidated financial statements.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
Recent Accounting Pronouncements, Continued
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSB APB 14-1"). FSP APB 14-1 requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component.
The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. FSP APB 14-1 also requires an accretion of the resulting debt discount over the expected life of the debt. Retrospective application to all periods presented is required and a cumulative-effect adjustment is recognized as of the beginning of the first period presented. This standard is effective for us in the first quarter of fiscal year 2010. We are currently evaluating the impact of FSP APB 14-1 on our financial position and on our results of operations.
In June 2008, the FASB ratified the Emerging Issues Task Force ("EITF") Issue No. 07-5, "Determining whether an Instrument (or Embedded Feature) is indexed to an Entity's own Stock" ("EITF 07-5"). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to our own stock and (b) classified in stockholders' equity in the statement of financial position would not be consider a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. We have outstanding warrants to purchase common stock that have been preliminarily evaluated as ineligible for equity classification under EITF 07-5 because of certain provision that may result in an adjustment to the exercise price of the warrants. Accordingly, the adjustment feature may cause the warrant to fail to be indexed solely to our stock. The warrants would therefore be classified as liabilities and re-measured at fair value with changes in the fair value recognized in operating results. We have not completed our analysis of these instruments nor determined the effects of pending adoption, if any, on our consolidated financial statements
In April 2009, the FASB issued FSP FAS 107-1/APB 28-1 ("FSP 107-1"), which is entitled "Interim Disclosures about Fair Value of Financial Instruments." This pronouncement amended SFAS No 107, Disclosures about Fair Value of Financial Instruments, to require disclosure of the carrying amount and the fair value of all financial instruments for interim reporting periods and annual financial statements of publicly traded companies (even if the financial instrument is not recognized in the balance sheet), including the methods and significant assumptions used to estimate the fair values and any changes in such methods and assumptions. FSP 107-1 also amended APB Opinion No. 28, Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009 if a company also elects to early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly, and FSP FAS 115-2/FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. We have not completed our analysis nor determined its effects on our financial position or results of operations.
In April 2009, the FASB also issued FSP FAS 157-4, which generally applies to all assets and liabilities within the scope of any accounting pronouncements that require or permit fair value measurements. This pronouncement, which does not change SFAS No. 157's guidance regarding Level 1 inputs, requires the entity to (i) evaluate certain factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal market activity, (ii) consider whether the preceding indicates that transactions or quoted prices are not determinative of fair value and, if so, whether a significant adjustment thereof is necessary to estimate fair value in accordance with SFAS No. 157, and (iii) ignore the intent to hold the asset or liability when estimating fair value. FSP FAS 157-4 also provides guidance to consider in determining whether a transaction is orderly (or not orderly) when there has been a significant decrease in the volume and level of activity for the asset or liability, based on the weight of available evidence. This pronouncement is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption of FSP FAS 157-4 also requires early adoption of the pronouncement described in the following paragraph. However, early adoption for periods ended before March 15, 2009 is not permitted. We have not completed our analysis nor determined its effects on our financial position or results of operations.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
Recent Accounting Pronouncements, Continued
In April 2009, the FASB issued FSP FAS 115-2 and 124-2 (hereinafter referred to as "FAS 115-2/124-2"), which amends the other-than-temporary impairment ("OTTI") recognition guidance in certain existing U.S. GAAP (including SFAS No. 115 and 130, FSP FAS 115-1/FAS 124-1, and EITF Issue 99-20) for debt securities classified as available-for-sale and held-to-maturity. FAS 115-2/124-2 requires the entity to consider (i) whether the entire amortized cost basis of the
security will be recovered (based on the present value of expected cash flows), and (ii) its intent to sell the security. Based on the factors described in the preceding sentence, this pronouncement also explains the process for determining the OTTI to be recognized in "other comprehensive income" (generally, the impairment charge for other than a credit loss) and in earnings. FAS 115-2/124-2 does not change existing recognition or measurement guidance related to OTTI of equity securities. This pronouncement is effective as described in the preceding paragraph. Certain transition rules apply to debt securities held at the beginning of the interim period of adoption when an OTTI was previously recognized. If an entity early adopts either FSP 107-1 or FSP FAS 157-4, the entity is also required to early adopt this pronouncement. In addition, if an entity early adopts FAS 115-2/124-2, it is also required to early adopt FSP FAS 157-4. We have not completed our analysis nor determined its effects on our financial position or results of operations.
In November 2007, the EITF issued a consensus on EITF 07-1, "Accounting for Collaborative Arrangements" ("EITF 07-1"). The Task Force reached a consensus on how to determine whether an arrangement constitutes a collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be reported by the partners to a collaborative arrangement in each of their respective income statements, how payments made to or received by a partner pursuant to a collaborative arrangement should be presented in the income statement, and what participants should disclose in the notes to the financial statements about a collaborative arrangement. This issue shall be effective for annual periods beginning after December 15, 2008. Entities should report the effects of applying this Issue as a change in accounting principle through retrospective application to all periods to the extent practicable. Upon application of this issue, the following should be disclosed: a) a description of the prior-period information that has been retrospectively adjusted, if any, and b) the effect of the change on revenue and operating expenses (or other appropriate captions of changes in the applicable net assets or performance indicator) and on any other affected financial statement line item. We are currently evaluating the impact, if any, of the adoption of EITF 07-1 on our consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141(R) replaces the cost-allocation process of SFAS No. 141, "Business Combinations" ("SFAS 141") which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. This statement applies prospectively and is effective for annual periods beginning after December 15, 2008. Earlier adoption is prohibited. We do not believe the adoption of SFAS 141(R) will have a material effect on our consolidated financial statements.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding corporate governance and financial reporting. Among the many requirements of the Act is for management to annually assess and report on the effectiveness of its internal control over financial reporting under Section 404(a) and for its registered public accountant to attest to this report under Section 404(b). The SEC has modified the effective date and adoption requirements of Section 404(a) and Section 404(b) implementation for non-accelerated filers multiple times, such that we are first required to issue our management report on internal control over financial reporting in this annual report on Form 10-K for the fiscal year ending March 31, 2009. Based on current SEC requirements, we will not be required to have our auditor attest to management's assessment until our fiscal year ending March 31, 2010.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
Recent Accounting Pronouncements, Continued
In May 2007, the FASB issued Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”), which amends FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48,” together with FSP FIN 48-1 referred as “FIN 48, as amended”). As of April 1, 2007, we adopted the provisions of FIN 48, as amended, which clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48, as amended, prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position an entity takes or expects to take in a tax return. To recognize a tax position, the tax position must be more-likely-than-not sustainable upon examination by the relevant taxing authority, and the relevant measurement of the position must be the largest amount of benefit that we would more than 50% likely realize upon settlement. We would recognize the benefit of a position in the interim reporting period during which it meets the threshold, unless we effectively settle it earlier through examination, negotiation, or litigation or the applicable statute of limitations period expires.
We did not recognize any additional liability for unrecognized tax benefit as a result of the implementation. As of March 31, 2009, the Company did not increase or decrease liability for unrecognized tax benefit related to tax positions in prior period nor did the company increase its liability for any tax positions in the current year. Furthermore, there were no adjustments to the liability or lapse of statute of limitation or settlements with taxing authorities.
We expect resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained, therefore, we do not expect to have any unrecognized tax benefits that, if recognized, that would affect the effective tax rate.
We will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of March 31, 2008, we have not recognized liabilities for penalty and interest as we do not have liability for unrecognized tax benefits.
We are subject to taxation in the US and various states. Our tax years for 2005, 2006, and 2007 are subject to examination by the taxing authorities. With few exceptions, we are is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2005.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
Customer Concentrations
During the years ended March 31, 2009 and 2008, one customer accounted for 44% and another customer accounted for 33% of net sales, respectively. We did not have any accounts receivable at March 31, 2009.
NOTE 4 - 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 $1,961,627 and $6,227,296 during the years ended March 31, 2009 and 2008, respectively, and had an accumulated deficit of $44,001,054 at March 31, 2009. In addition, we used cash in our operations of $569,137 and $2,487,487 during the years ended March 31, 2009 and 2000, respectively. Additionally, we are in default on certain notes payable. However, from April 1, 2009 to June 30, 2009, the majority of our notes were converted to stock.
Over the past year, we have significantly reduced our cost of operations. The size of our operations was reduced from 75 workers in 3 countries to less than 10 in the USA, and we consolidated our offices into one location in Murrieta, California. A new Board of Directors took office on December 3, 2007. We are currently pursuing a new product strategy of developing intellectual property (new products) aimed at leveraging existing products which are modified to become inspirational for significantly less than our previous product development expenses. This is evidenced by our cost of development for our new PC Game, ‘Keys of the Kingdom’ which was announced at the recent International Christian Retail Show. In the past year, we have successfully built a direct-to-store distribution channel to more than 1,500 stores and this year, plans to increase revenue from the mainstream, inspirational and direct-to-consumer sales channels. A new program is underway to provide consumers an opportunity to buy our products in exchange for a donation to be made to their favorite charity, church or ministry. We expect to continue to reduce costs and increase margins as was evidenced by our per unit cost drop in the past year from $3.63 to $1.50. We plan to continue to control and reduce costs where necessary in an effort to reach profitability. Management plans to raise additional capital in the later half of 2008 to fund ongoing business operations and to then reevaluate capital needs upon a review of sales performance resulting from the upcoming holiday season.
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 5 - INVENTORIES
Inventories consisted of the following at March 31, 2009 and 2008:
We established an inventory reserves of $0 and $306,060 in the fiscal years ended March 31, 2009 and 2008 to cover product obsolesce.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2009 and 2008:
Depreciation expense for the years ended March 31, 2009 and 2008 was $58,575 and $116,440, respectively.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consisted of the following at March 31, 2009 and 2008:
As of March 31, 2009, we wrote off our intangible assets as their was doubt as to their recoverability. Amortization expense related to our trademarks was $1,624 for the year ended March 31, 2009. We did not have amortization expense related to our license agreement in the year ended March 31, 2009 as that license agreement was fully amortized at March 31, 2008. Trademarks were amortized on a straight-line basis over their lives. Due to the write off, we no longer have future amortization expense related to the trademarks.
NOTE 8 - RELATED PARTY TRANSACTIONS
As LB Games Ukraine was 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 years ended March 31, 2009 and March 31, 2008, we paid approximately $57,802 and $171,000 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 were classified as a current liability in the amount of $56,023 on the accompanying consolidated balance sheet as of March 31, 2008. At March 31, 2009, no amounts were owed to related parties.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following for the years ended March 31:
No current provision for federal income tax is required for the years ended March 31, 2009 and 2008, since the Company incurred net operating losses through March 31, 2009.
The tax effect of temporary differences that give rise to significant portions of the deferred tax asset at March 31, 2009 and 2008 are presented below:
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
The provision for income taxes for both fiscal 2009 and 2008 was $_____, 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:
As of March 31, 2009, we had net operating loss carryforwards of approximately $__________ available to offset future taxable Federal and state income. The Federal and state net operating loss carryforwards expire at various dates through 2026 and 2016, respectively.
Section 382 of the Internal Revenue Code may limit utilization of our Federal and California net operating loss carryforwards upon any change in control of the Company.
As of March 31, 2009, we owed accrued payroll taxes of $303,318 to various governmental authorities.
NOTE 10 - STOCKHOLDERS’ EQUITY
Common Stock
We are authorized to issue 1,200,000,000 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.
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.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 10 - STOCKHOLDERS’ EQUITY - CONTINUED
During the fiscal year ended March 31, 2009, we received $84,137 in net proceeds from the sale of 102,549,333 shares of our common stock and 3,884,467 shares of our series B preferred stock.
During the fiscal year ended March 31, 2009, we also issued to independent third parties 48,700,281 shares of common stock for services provided, valued at $299,788 (based on the closing price on the respective grant date). We also issued 2,025,000 shares of common stock, valued at $54,650 (based on the closing price on the respective grant date), to certain employees and directors as additional compensation. We also issued 900,000 shares for interest, valued at $7,120 (based on the closing price on the respective grant date), issued 26,442,308 shares valued at $141,751 (based on the closing price on the respective grant date) to convert accounts payable to equity and issued 26,909,438 shares of common stock related to debt conversions.
During the fiscal year ended March 31, 2009, we issued 562,500 warrants to purchase shares of our common stock all with an exercise price of $0.05 per share. We have estimated the value of the 2009 warrants to be approximately $11,250. During the fiscal year ended March 31, 2008, we issued 4,381,250 warrants to purchase shares of common stock all with an exercise price of $0.05 per share (see Note 14). We have estimated the value of these 2008 warrants to be approximately $135,000.
Also during the fiscal year ended March 31, 2008, we issued 260,000 shares of common stock valued at $61,400 to accredited investors and 65,000 shares of common stock to the Broker-Dealer valued at $15,350 in association with our Bridge Loan borrowings of $130,000.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 10 - STOCKHOLDERS’ EQUITY - CONTINUED
Preferred Stock
We are authorized to issue sixty million (60,000,000) shares of $0.001 par value preferred stock of which 3,586,245 preferred A shares and 12,230,932 preferred B shares are issued and outstanding as of June 30, 2009 respectively. 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. Each share of series B preferred stock has voting power equal to 200 shares of common stock for a twelve month period. Subsequently, each series B preferred share has voting power equal to one vote of common stock.
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, 2008.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
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 years ended March 31, 2009 and 2008 to consultants and other service providers is estimated using the Binomial Lattice option-pricing model on the date of grant using the following assumptions: (i) no dividend yield, (ii) volatility of 84% to 185%, (iii) weighted-average risk-free interest rates of 4.51% to 4.85%, and (iv) expected lives of three years.
The following table represents a summary of the warrants outstanding at March 31, 2009 and 2008 and changes during the years then ended:
The following outlines the significant weighted average assumptions used to estimate the fair value information presented utilizing the Binomial Lattice option pricing models:
Years Ended March 31,
2009 2008
----------- -----------
Risk free interest rate 4.73% 4.51% - 4.85%
Average expected life 3 years 3 years
Expected volatility 185.0% 84% - 88.6%
Expected dividends None None
The following table summarizes information about warrants outstanding at March 31, 2009:
Exercise Price
Number of
Warrant Shares
Weighted Average
Remaining
Contractual Life (Years)
$2.25
172,592
0.17
$0.50
2,146
0.76
$0.05
4,943,750
1.80
5,118,488
The outstanding warrants at March 31, 2009 are immediately exercisable.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
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 of our chief executive officer. This contract provides for minimum annual salaries and is renewable annually. In the event of termination of this employment agreement by LBG without cause, we would be required to pay continuing salary payments for specified periods in accordance with the employment contract. Although not brought to a vote of the Board, both Lyndon and the Board anticipate it will issue Lyndon anti-dilutable shares of common stock equal to 10% of the Company’s outstanding shares in the event his leadership brings the company to operational profitability by March 31, 2012.
Leases
We operate in a 2,500 square foot sales and distribution facility in Temecula, California under a sublease agreement through October 2009. Its cost is $1,850 per month. We now operate on a month to month basis under the sublease.
Previously, our corporate offices consisted 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 four percent (4%). We abandoned that facility in March 2008 and are seeking a resolution with the landlord.
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 each customer. The commission rates for these independent representatives typically vary from three percent to five percent to thirty percent of the net amount we collect from customers.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
Left Behind License
On October 11, 2002, the publisher of the Left Behind book series granted us 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.
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. We were behind in our payments to the licensor. If these are not paid, in the event the licensor makes a demand, it could result in the termination of the license agreement. In such case, we shall continue to have the rights to sell all games in the marketplace along with all inventory already purchased. On September 28, 2008, the Company and licensor modified terms of the agreement to eliminate minimum royalty guarantees. Instead, within 30 days from the end of each month, Company shall provide royalties to licensor based upon its agreement for the preceding month. Additionally, the license term of 3 years automatically renews to additional terms in perpetuity.
Litigation
We are subject to litigation from time to time in the ordinary course of our business. More than 6 months ago, we received a letter from our former President, and current director, Jeffrey Frichner, demanding payment of $37,500 pursuant to our Separation Agreement with him that is allegedly owed to him by us.
On September 26, 2008, we entered into a settlement agreement with Leonard Linsker in the amount of $75,000 or 10 million shares, whichever is less.
On April 3, 2009, Beta Winchester LLP was granted a judgment for $40,137.60. However, we believe that their attorney neglected to inform the judge that they are holding $45,000 of corporate funds as a deposit. Accordingly, we do not believe this issue to be material and are seeking a remedy in court.
We are currently not involved in any other litigation or any pending legal proceedings that we believe could have a material adverse effect on our financial position or results of operations.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
NOTE 13 - NOTES PAYABLE
During the fiscal years ended March 31, 2009 and 2008 we entered into several borrowing arrangements. The amounts borrowed under those arrangements are included in notes payable in the accompanying consolidated balance sheet.
Future minimum principal payments required under our notes payable are as follows:
Year Ending March 31,
Principal Amount
Less Discount
Notes Payable, Net
1,012,813
(101,666
)
911,147
311,737
(216,082
)
95,655
28,125
(18,750
)
9,375
1,352,675
(336,498
)
1,016,177
In the fiscal years ended March 31, 2009 and 2008, we received an aggregate $158,200 from twelve investors in the form of convertible zero coupon notes (the “Notes”). The investors funded the Notes at various times between January and April 2009. The Notes called for the investors to invest at a 36% discount from the principal value of the Notes. The notes have a three year term and are convertible to our common stock at $0.025 per share. There is no prepayment penalty to the Notes.
As an inducement for the investors to enter into the Notes, we granted to each investor on the date of his Note a warrant to purchase Common Stock shares (“Warrant Shares”), collectively with the shares issued upon conversion of the Notes, with the shares vesting pro-rata during the three year term, or upon conversion of the Note to Common Stock. All Warrant Shares have an exercise price of $0.05 (“Exercise Price”) and are exercisable for a term of three years by cash exercise only. The warrants have a three year life and vest over that same three year period.
We evaluated the criteria of paragraphs 12-32 of EITF 00-19, with regards to the warrants granted as part of the Notes. As required by FSP EITF 00-19-2, the evaluation was performed without regard to the contingent obligation to transfer consideration or liquidated damages. We concluded that the warrants appear to meet the conditions in paragraphs 12-32 of EITF 00-19 for equity classification.
The warrants were valued at approximately $146,000 under the Binomial Lattice valuation approach based on a three year life, risk free interest rates ranging from 4.51% to 4.85% and volatilities ranging from 84% to 185%.
Based upon the valuation of the warrants and the 36% original issue discount, we recorded an initial note discount of $247,188, which fully covered the principal amount of the convertible zero coupon notes. This note discount will be amortized over the three year term of each Note with the amortization charged to interest expense.
No charge for the beneficial conversion feature was made because the note discount fully discounted the cash received and principal value of the Notes.
During the fiscal year ended March 31, 2008, we borrowed from certain shareholders under short term promissory notes. Certain of those notes were secured by our assets and required interest payments in our common stock. The interest rates ranged from 10% to 24%. We are currently in default on a portion of these short-term notes. We also are in default on one remaining Meyers bridge loan (see Note 15).
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, 2009.
At March 31, 2009, we also had $117 of deferred revenue related to our on-line store sales. As we allow a one-month period for our on-line store customers to return our games, we record the revenue from the last month of each quarter as deferred revenue and then recognize that revenue once the one-month period has elapsed.
At March 31, 2008, we had $480,090 of deferred revenue primarily related to receivables that arose from products shipped primarily to the Christian bookstore market. In the fiscal year ended March 31, 2009 we have either collected that deferred revenue or written off those receivables.
NOTE 15 - BRIDGE LOAN
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. We have not filed such registration statement.
As of March 31, 2008, we received an aggregate $386,600 in net proceeds (net of commissions and legal fees) under the Bridge Loan and the gross amount at that date that we would need to repay to the investors was $450,000. As of March 31, 2008, that amount was later reduced to $340,000 due to partial conversions to equity and by a partial repayment (see
below). During the year ended March 31, 2008, we recorded $27,841 of interest expense related to the agreed ten percent interest rate under the Bridge Loan. Overall, we paid Meyers cash commissions of $57,900 on the amount funded, of which $16,900 was paid during the year ended March 31, 2008. These commissions were recorded to debt issuance costs and are being amortized over the one year term of the Bridge Loan.
LEFT BEHIND GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 31, 2009 and 2008
As of March 31, 2008, we issued an aggregate 900,000 shares to the investors as part of the Bridge Units and 225,000 shares to Meyers as part of their compensation. Overall, we valued the 900,000 shares issued to the investors at $358,200, of which $61,400 was related to the issuance of 260,000 shares during the year ended March 31, 2008, based on the closing market price of our stock on the days in which the funding events occurred and capitalized that amount to debt issuance costs on our March 31, 2008 consolidated balance sheet. Overall, the shares issued to Meyers were valued at $221,650, of which $15,350 was related to the issuance of 65,000 shares during the year ended March 31, 2008, based on the closing market price of our stock and were also capitalized to debt issuance costs on our March 31, 2008 condensed consolidated balance sheet. Those costs are being amortized to interest expense over the term of the loan. We charged $392,250 of the debt issuance costs to interest expense in the year ended March 31, 2008 and we will charge the remaining amount to interest expense over the remainder of the one year term of the Bridge Loan.
Two of the investors in the Bridge Loan subsequently agreed to convert their aggregate note balances of $110,000 to common stock. We issued an additional 880,000 shares to convert the principal balance of their notes and recorded the $110,000 to common stock and additional paid-in capital. We also accelerated the unamortized value of the debt issuance costs attributable to their notes. This resulted in additional interest expense of $40,617 that was recorded in the year ended March 31, 2008. Since the effective conversion price of the 880,000 shares issued to convert that $110,000 of debt was $0.125 per share and that conversion price was $0.095 less than the closing price of $0.22 on the date of conversion, we also recorded an additional interest charge of $83,600 relating to that beneficial conversion in the year ended March 31, 2008.
In the year ended March 31, 2008, we made a partial repayment of $25,000 to one of the investors in the Bridge Loan. As a result of this repayment, we accelerated the remaining amount of debt financing costs of $5,042 attributable to that investor and charged that amount to interest expense.
The combination of the $110,000 in conversions and the $25,000 partial repayment reduced the amount outstanding under the Bridge Loan as of March 31, 2008 to $315,000. At March 31, 2009, the remaining $150,000 balance was in default.
However, as described below in our subsequent events section, all but one investor has signed to convert their notes to stock and one remaining investor has provided a verbal commitment to convert his note to shares in early July, 2009.
NOTE 16 - SUBSEQUENT EVENTS
In April, May and June, 2009, we received $147,214 in net proceeds from the sale of 148,735,928 shares of common stock.
In April, May and June, 2009, we received notice from numerous convertible note holders to convert to stock, resulting in the issuance of 181,943,434 shares of common stock.
In April, May and June, 2009, we issued 1,915,876 shares to consultants for services.
On April 3, 2009, Beta Winchester LLP was granted a judgment for $40,137.60. However, we believe that their attorney neglected to inform the judge that they are holding $45,000 of corporate funds as a deposit. Accordingly, we do not believe this issue to be material and are seeking a remedy in court.
In June, 2009, we resolved a dispute with a shareholder by issuing 844,063 shares of common stock.
On June 24, 2009, we announced that Wal-Mart has approved a test market in an undisclosed number of stores for Left Behind PC Games. The games should be available for sales in time for the Christmas shopping season.
In June 23, 2009, we signed an agreement with Leading Points Corporation to represent the company at military-focused retailers on bases including the Army, Air Force, Navy, Coast Guard and Marine exchanges.
On July 7, 2009, we signed a distribution agreement with Jack of All Games, the distribution subsidiary of Take-Two Interactive (Nasdaq: TTWO), to distribute our games, providing us with potential distribution of our products into stores including Wal-Mart, Best Buy, Target, EB Games, GameStop, Toys "R" Us, Blockbuster and other leading retailers.
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.
LEFT BEHIND GAMES INC.
(Registrant)
July 15, 2009
By:
/s/ Troy A. Lyndon
Troy A. Lyndon
Chief Executive Officer (Principal Executive 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:
Date
Signature
Title
July 15, 2009
/s/ TROY A. LYNDON
(Troy A. Lyndon)
Chief Executive Officer and Director (Principal Executive Officer, Principal Accounting Officer and Principal Financial Officer)
July 15, 2009
/s/ MICHAEL KNOX
(Michael Knox)
Director
July 15, 2009
/s/ RICHARD KNOX, SR.
(Richard Knox, Sr.)
Director