Left Behind Games - Christian Video Games, Games for Kids, Bible Games, Christian Games, Video Games, Christian PC Computer Games

Form 10-K for LEFT BEHIND GAMES INC.

15-Jul-2009

Annual Report

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:

- continued development of our technology;
- consumer acceptance of our current and future products
- dependence on key personnel;
- competitive factors;
- the operation of our business; and
- general economic conditions.

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:

Fiscal Year Ended March 31,
2009 2008 Change
Non-cash payments to consultants $299,788 $906,496 $(606,708)
Stock grants to employees 54,650 1,125,088 (1,070,438)
Advertising and public relations
expenditures 61,438 156,909 (95,471)
Employee salaries 614,838 1,330,759 (715,921)
Communications expense 36,989 138,704 (101,715)
Insurance expense 82,087 131,977 (49,890)
Travel and entertainment 15,709 57,576 (41,867)
Office expense 67,203 324,417 (257,214)
Professional fees 418,629 503,007 (84,378)
All other general & administrative
expenses 213,474 365,285 (151,811)
Total selling, general & $1,864,805 $5,040,218 $(3,175,413)
administrative expenses

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 . . .

PC Games. One of the most popular forms of entertainment.

Tribulation Forces | Left Behind Games. LEFT BEHIND: Tribulation Forces is a real-time strategy game based on the best-selling LEFT BEHIND book series, created by Tim LaHaye and Jerry Jenkins. Join the ultimate fight of Good versus Evil, commanding Tribulation Forces, the Global Community Peacekeepers the all new American Militia!

Eternal Forces | Left Behind Games. LEFT BEHIND: Eternal Forces is a real-time strategy game based upon the best-selling LEFT BEHIND book series created by Tim LaHaye and Jerry Jenkins. Join the ultimate fight of Good against Evil, commanding Tribulation Forces or the Global Community Peacekeepers! In addition to the game, this full boxed version includes the first book of the LEFT BEHIND series which has sold over 30 million copies in 30+ languages worldwide.

Bible Games. Great Bible Games for Kids and Adults, Christian Video Games.

Keys of the Kingdom | Left Behind Games. Keys of the Kingdom is a brain-teasing logic PC game which takes you to the romantic epoch of noble knights and heroic adventures! You will move back in time and try to help Sir Lancelot save the township from the oppressive King. Along the journey to the King's castle, Sir Lancelot and his faithful horse will need to solve many exciting puzzles invented by the guards who block your way. Outsmart them all to reach your goal and meet the King.

Christian Computer Games, Games for Kids, Bible Games, Christian Video Computer PC Games

PC Games. One of the most popular forms of entertainment.

Games for Kids. PC Games for Kids, Bible Games, Christian Video Games for Kids.

Charlie Church Mouse. Here children have an opportunity to learn, explore, and have fun with the help of a lovable friend, Charlie Church Mouse. Children not only learn classic bible stories from the Old & New Testament, they also learn academic skills vital to early childhood development.

Bible Games. Great Bible Games for Kids and Adults, Christian Video Games.

Christian Video Games. Left Behind Games Games and Inspired Media Entertainment.

Christian Video Games. Where Games are for Sale.