SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q/A

Amendment No. 2


(Mark One)


 X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the quarterly period ended September 30, 2009


OR


     . TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


For the transition period from _____to_____


COMMISSION FILE NUMBER 000-50603


LEFT BEHIND GAMES INC.

----------------------

(Exact name of registrant as specified in its charter)


WASHINGTON

 

91-0745418

-------------------------------

 

----------------------

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)


25060 HANCOCK AVENUE, SUITE 103 BOX 110, MURRIETA, CA 92562

---------------------------------------------------- -----

(Address of principal executive offices) (Zip Code)


(951) 894-6597

---------------

(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   X . NO       .


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       . No       .


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

       .

Accelerated filer

       .

Non accelerated filer

       . (Do not check if a smaller reporting company)

Smaller reporting company

   X .


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES       . NO   X .  


As of October 29, 2009, the registrant had outstanding 971,467,844 shares of common stock, $.001 par value.





PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2009 AND MARCH 31, 2009

3

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

4

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

5

 

 

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

22

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

30

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

31

 

 

 

ITEM 1A.

RISK FACTORS

31

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

31

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

31

 

 

 

ITEM 5.

OTHER INFORMATION

31

 

 

 

ITEM 6.

EXHIBITS

32


EXPLANATORY NOTE


The Registrant is amending its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, previously filed on December 8, 2009, to correct certain general and administrative expenses related to a consulting arrangement and to record corrections to accrued liabilities for items that were overstated during the three and six month periods ended September 30, 2009.  Except for the foregoing matters, no other information included in our original Form 10-Q for the three and six month periods ended September 30, 2009, is amended by this Form 10-Q/A.



2



PART I.  FINANCIAL INFORMATION


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

March 31,

 

 

2009

 

2009

 

 

(Unaudited)

 

(Audited)

ASSETS

 

Restated

 

 

Current assets

 

 

 

 

Cash

$

54,630

$

7,778

Inventories, net

 

172,975

 

180,997

Prepaid royalties

 

30,426

 

9,179

Prepaid expenses and other current assets

 

302

 

3,636

 

 

 

 

 

Total current assets

 

258,333

 

201,590

 

 

 

 

 

Property and equipment, net

 

77,583

 

98,004

Intellectual property, net

 

120,313

 

--

Other assets

 

9,073

 

5,927

 

 

 

 

 

Total assets

$

465,302

$

305,521

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

2,378,805

$

2,525,095

Payroll liabilities payable

 

194,618

 

303,318

Convertible debt

 

120,000

 

--

Notes payable, net of discounts

 

268,452

 

703,689

Notes payable in default

 

150,737

 

312,488

Deferred revenue

 

1,442

 

117

 

 

 

 

 

Total current liabilities

 

3,114,054

 

3,844,707

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Stockholders' Deficit

 

 

 

 

Series A preferred stock, $0.001 par value; 3,586,245 shares

 

 

 

 

Authorized, issued and outstanding;

 

 

 

 

liquidation preference of $188,500

 

3,586

 

3,586

Series B preferred stock, $0.001 par value; 16,413,755 shares

 

 

 

 

authorized; 11,080,929 shares issued and outstanding

 

 

 

 

as of September 30, 2009 and March 31, 2009

 

11,081

 

11,081

Common stock, par value $0.001 per share; 1,200,000,000 shares

 

 

 

 

authorized; 913,080,174 and 344,358,992 shares issued and

 

 

 

 

outstanding as of Sept 30, 2009 and March 31, 2009, respectively

 

913,026

 

344,359

Treasury stock

 

24,500

 

--

Additional paid-in capital

 

44,416,471

 

40,203,449

Deferred stock-based compensation

 

--

 

(100,025)

Accumulated deficit

 

(48,017,416)

 

(44,001,636)

 

 

(2,648,752)

 

(3,539,186)

Total liabilities and stockholders' deficit

$

465,302

$

305,521


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



3



LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ending

September 30, 2009 and 2008

(Unaudited)


 

 

Three Months

 

Three Months

 

Six Months

 

Six Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

2009

 

2008

 

2009

 

2008

 

 

Restated

 

 

 

Restated

 

 

Net revenues

$

18,591

$

58,190

$

42,396

$

118,742

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales – product costs

 

14,156

 

3,073

 

26,907

 

33,487

Cost of sales – intellectual property costs

 

3,004

 

1,239

 

7,191

 

3,714

General and administrative

 

2,779,845

 

491,748

 

3,475,340

 

1,292,615

Product development

 

48,361

 

850

 

49,961

 

51,977

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

2,845,366

 

496,910

 

3,559,399

 

1,381,793

 

 

 

 

 

 

 

 

 

Operating loss

 

(2,826,775)

 

(438,720)

 

(3,517,003)

 

(1,263,051)

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

Interest and other debt expenses

 

225,272

 

231,209

 

498,472

 

374,553

Other expense

 

305

 

426

 

305

 

5,113

 

 

 

 

 

 

 

 

 

Total other expense

 

225,577

 

231,635

 

498,777

 

379,666

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

Gain from extraordinary events

 

--

 

468,837

 

--

 

468,837

Debt forgiveness income

 

--

 

250,000

 

--

 

250,000

 

 

 

 

 

 

 

 

 

Total other income

 

--

 

718,837

 

--

 

718,837

 

 

 

 

 

 

 

 

 

Net profit (loss)

$

(3,052,352)

$

48,482

$

(4,015,780)

$

(923,880)

 

 

 

 

 

 

 

 

 

Basic and diluted profit (loss) per common share

$

(0.00)

$

(0.00)

$

(0.01)

$

(0.01)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

799,254,783

 

158,769,935

 

623,060,609

 

150,782,564


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



4



LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Unaudited)


 

 

Six Months

 

Six Months

 

 

Ended

 

Ended

 

 

September 30,

 

September 30,

 

 

2009

 

2008

 

 

Restated

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

$

(4,015,780)

$

(923,880)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

16,403

 

42,785

Interest paid in common stock

 

--

 

17,356

Loss on disposal of assets

 

--

 

5,247

Recognition of deferred stock compensation

 

100,025

 

--

Beneficial conversion feature on conversions of notes payable

 

131,251

 

--

Estimated fair value of common stock issued to consultants for services

 

299,830

 

157,411

Estimated fair value of common stock issued to employees and directors for services

 

60,000

 

101,500

Convertible debt issued for services

 

2,416,000

 

--

Amortization of debt discount

 

317,631

 

67,128

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

--

 

51,622

Inventories

 

8,022

 

(23,275)

Prepaid expenses

 

3,334

 

3,420

Other assets and prepaid royalties

 

(7,206)

 

71,844

Accounts payable and accrued expenses

 

72,011

 

453,218

Deferred income – product sales

 

1,325

 

(300,440)

Deferred rent

 

--

 

(1,427)

 

 

 

 

 

Net cash used in operating activities

 

(597,154)

 

(277,491)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Payments for trademarks and prepaid royalties

 

--

 

--

 

 

 

 

 

Net cash used in investing activities

 

--

 

--

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from the issuance of notes payable

 

25,000

 

346,500

Principal repayments of notes payable

 

--

 

(29,240)

Payments on advances from related parties

 

--

 

(35,434)

Proceeds from the issuance of common stock

 

619,006

 

--

 

 

 

 

 

Net cash provided by financing activities

 

644,006

 

281,826

 

 

 

 

 

Net increase in cash

 

46,852

 

4,335

 

 

 

 

 

Cash at beginning of period

 

7,778

 

2,695

 

 

 

 

 

Cash at end of period

$

54,630

$

7,030


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



5



LEFT BEHIND GAMES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(Unaudited)


 

 

Six Months

 

Six Months

 

 

Ended

 

Ended

 

 

September 30,

 

September 30,

 

 

2009

 

2008

 

 

Restated

 

 

Supplemental disclosures of cash flow information: 

 

 

 

 

 

 

 

 

 

Cash paid during the period for: 

 

 

 

 

 

 

 

 

 

Interest

$

--

$

--

 

 

 

 

 

Income taxes

$

--

$

--

 

 

 

 

 

Supplemental disclosures of non-cash and investing and financing information:

 

 

 

 

 

 

 

 

 

Issuance of common stock in exchange for note receivable

$

--

$

--

 

 

 

 

 

Issuance of common stock under license agreement

$

137,500

$

--

 

 

 

 

 

Issuance of common stock for deferred compensation

$

--

$

156,500

 

 

 

 

 

Exchange of equipment for settlement of accounts payable

$

503

$

661

 

 

 

 

 

Amendment to royalty agreement, debt forgiveness

$

--

$

(250,000)

 

 

 

 

 

Discount on convertible notes payable

$

--

$

405,839

 

 

 

 

 

Conversion of notes payable into common stock

$

1,262,601

$

--

 

 

 

 

 

Return of common stock as treasury shares

$

24,500

$

--


The accompanying notes to condensed consolidated financial statements.



6



LEFT BEHIND GAMES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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 licenses from Tyndale to develop, manufacture and distribute video games and related products based on the LEFT BEHIND series of novels published by Tyndale, from Lifeline Studios to distribute the Charlie Church Mouse series of games and from Another Day Ltd. to distribute the Keys of the Kingdom game.


BASIS OF PRESENTATION

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Such rules and regulations allow us to condense and omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America. We believe these unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) that are necessary for a fair presentation of our consolidated financial position and consolidated results of operations for the periods presented. We have evaluated subsequent events through October 29, 2009, 13 business days before our condensed consolidated financial statements were issued (see Note 11) since we effected a forward stock split after that date (See Note 12). The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K/A for the year ended March 31, 2009. The interim unaudited consolidated financial information contained in this filing is not necessarily indicative of the results to be expected for any other interim period or for the full year ending March 31, 2010.

 

RESTATEMENT


We have restated our financial statements for the three and six month periods ended September 30, 2009, previously filed on December 8, 2009, to correct certain general and administrative expenses related to a consulting arrangement during the three and six month periods ended September 30, 2009 (see Note 12).  Except for the foregoing matters, no other information included in our original Form 10-Q for the quarter ended September 30, 2009, is amended by this Form 10-Q/A.



7



The following table shows the impact of this restatement on our consolidated statement of operations and consolidated balance sheet:


CONSOLIDATED STATEMENT OF OPERATIONS

Three Months Ended September 30, 2009

(Unaudited)


 

 

 

Previously

 

 

 

 

 

 

 

Reported

 

Adjustments

 

Restated

 

 

 

 

 

 

 

 

Revenues

$

18,591

$

-

$

18,591

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

Cost of sales – product costs

 

14,156

 

-

 

14,156

Cost of sales – intellectual property costs

 

3,004

 

-

 

3,004

General and administrative

 

617,345

 

2,162,500

(1)

2,779,845

Product development

 

48,361

 

-

 

48,361

 

Operating loss

 

(664,275)

 

(2,162,500)

 

(2,826,775)

 

 

 

 

 

 

 

 

Other income (expense):

 

(225,577)

 

-

 

(225,577)

Net loss

$

(889,852)

$

(2,162,500)

$

(3,052,352)

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

Loss per share

$

(0.00)

$

(0.00)

$

(0.00)

 

Weighted average common shares

 

799,254,783

 

 

 

799,254,783


(1) To correct general and administrative expenses to properly reflect the costs of consulting arrangements


CONSOLIDATED STATEMENT OF OPERATIONS

Six Months Ended September 30, 2009

(Unaudited)


 

 

 

Previously

 

 

 

 

 

 

 

Reported

 

Adjustments

 

Restated

 

 

 

 

 

 

 

 

Revenues

$

42,396

$

-

$

42,396

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

Cost of sales – product costs

 

26,907

 

-

 

26,907

Cost of sales – intellectual property costs

 

7,191

 

-

 

7,191

General and administrative

 

1,182,092

 

2,293,248

(1)

3,475,340

Product development

 

49,961

 

-

 

49,961

 

Operating loss

 

(1,223,755)

 

(2,293,248)

 

(3,517,003)

 

 

 

 

 

 

 

 

Other income (expense)

 

(498,777)

 

-

 

(498,777)

Net loss

$

(1,722,532)

$

(2,293,248)

$

(4,015,780)

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

Loss per share

$

(0.00)

$

(0.01)

$

(0.01)

 

Weighted average common shares

 

623,030,609

 

-

 

623,030,609


(1) To correct general and administrative expenses to properly reflect the costs of consulting arrangements and to record corrections to accrued liabilities for items that were overstated previously




8



CONSOLIDATED BALANCE SHEET

September 30, 2009

(Unaudited)


 

 

 

Previously

 

 

 

 

 

 

 

Reported

 

Adjustments

 

Restated

ASSETS:

 

 

 

 

 

 

 

Total assets

$

465,302

$

-

$

465,302

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

 

Accounts payable and accrued expenses

$

2,501,557

$

$      (122,752)

(2)

$

2,378,805

Convertible debt issued for services

 

-

 

120,000

(1)

120,000

All other liabilities

 

615,249

 

-

 

615,249

Total liabilities

 

3,116,806

 

(2,752)

 

3,114,054

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

Series A preferred stock

 

3,586

 

-

 

3,586

Series B preferred stock

 

11,081

 

-

 

11,081

Common stock

 

913,026

 

-

 

913,026

Treasury stock

 

24,500

 

-

 

24,500

Additional paid-in capital

 

42,120,471

 

2,296,000

(1)

44,416,471

Accumulated deficit

 

(45,724,168)

 

(2,293,248)

(1), (2)

(48,017,416)

  Stockholders’ deficit

 

(2,651,504)

 

2,752

 

(2,648,752)

Total liabilities and stockholders’ deficit

$

465,302

$

-

$

465,302


(1) To correct general and administrative expenses to properly reflect the costs of consulting arrangements.

(2) To correct wage and salary expense that was understated previously and to record corrections to accrued liabilities for items that were overstated previously.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The accompanying consolidated financial statements include the accounts of LBG and, effective July 2005, include the accounts of LB Games Ukraine LLC (“LB Games Ukraine”), a variable interest entity in which LBG is the primary beneficiary. LB Games Ukraine is a related party created to improve control over software development with independent contractors internationally. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.


Risks and Uncertainties


We maintain our cash accounts with a several financial institutions. Accounts at these financial institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2009 and March 31, 2009, 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. Accounting standards provide 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.



9



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.


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 Lifeline Studios international license agreement will be amortized over the two-year life of the agreement on a straight-line basis over its terms.


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 six months ended September 30, 2009, we recorded $2,254 in cost of goods sold related to the Left Behind brand license, $3,753 in cost of goods sold related to the Charlie Church Mouse license and $1,184 in cost of goods sold related to Keys of the Kingdom license. During the six months ended September 30, 2008, we recorded $3,714 in cost of goods sold 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 September 30, 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.



10



Income Taxes


We account for income taxes under the provisions of accounting standards. Under those standards, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.


Stock-Based Compensation


Effective April 1, 2006, the first day of our fiscal year 2007, we adopted the fair value recognition provisions of accounting standards that then went into effect, 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 the new accounting standard, 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 the new standard. That standard also 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 that standard 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 accounting standards 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 accounting standards. 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 accounting standards, 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 deferred stock based compensation in our consolidated balance sheets.


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.

There were 60,952,195 and 116,403,229 potentially dilutive common shares outstanding for the three months ended September 30, 2009 and 2008, respectively, have not been included in loss per share calculations. At September 30, 2009, the potentially dilutive common shares arose from the following instruments:


Convertible notes

 

41,341,268

Warrants

 

4,943,750

Preferred stock series A

 

3,586,245

Preferred stock series B

 

11,080,932

 Total

 

60,952,195




11



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’ deficit. We determined that the translation gain or loss did not have a material impact on our stockholders’ deficit as of September 30, 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 three months ended September 30, 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 three months ended September 30, 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 accounting standards. 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 accounting standards. 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).


For sales to our large retail customers, 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 large retail customers 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. At September 30, 2009, we had no deferred revenue from large retail customers.


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.



12



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 accounting standards, 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.


Historically, we have promoted 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 accounting standards, certain payments made to customers by us, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the three months ending September 30, 2009 and 2008, we did not have any such payments.


Recent Accounting Pronouncements


In December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces FASB SFAS 141, Business Combinations. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141R will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. SFAS 141R will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date. This compares to the cost allocation method previously required by SFAS No. 141. SFAS 141R will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, SFAS 141R will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This Statement will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption of this standard is not permitted and the standards are to be applied prospectively only. Upon adoption of this standard, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of SFAS No. 141R is not expected to have a material effect on its financial position, results of operations or cash flows.


In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of SFAS No. 160 is not expected to have a material effect on its financial position, results of operations or cash flows.


In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133.” (“SFAS 161”). SFAS 161 establishes the disclosure requirements for derivative instruments and for hedging activities with the intent to provide financial statement users with an enhanced understanding of the entity’s use of derivative instruments, the accounting of derivative instruments and related hedged items under Statement 133 and its related interpretations, and the effects of these instruments on the entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not expect its adoption of SFAS 161 to have a material impact on its financial position, results of operations or cash flows.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “ Determination of the Useful Life of Intangible Assets” . This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of SFAS FSP 142-3, to have a material impact on its financial position, results of operations or cash flows.



13



In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” ( “FSP APB 14-1” ). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not expect the adoption of FSP APB 14-1, to have a material impact on its financial position, results of operations or cash flows.


In October 2008, the FASB issued FSP FAS 157-3, “ Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS 157-3”), with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to clarify the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 did not have a material effect on the Company’s financial position, results of operations or cash flows.


In April 2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed,” which further clarifies the principles established by SFAS No. 157. The guidance is effective for the periods ending after June 15, 2009 with early adoption permitted for the periods ending after March 15, 2009. The adoption of FSP FAS 157-4 did not have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth (1) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company has evaluated the impact the adoption of SFAS 165 will have on its financial statements and does not believe the adoption of SFAS 165 has had or will have a material impact on its financial statements.

 

In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS 166 will have on its financial statements.


In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS 167 will have on its financial statements.


In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. The Codification is not expected to have a significant impact on the Company’s consolidated financial statements.



14



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 were required to issue our management report on internal control over financial reporting in our annual report on Form 10-K for the fiscal year ended March 31, 2009. Based on current SEC requirements, we will be required to have our auditor attest to the effectiveness of internal controls over financial reporting for our fiscal year ending March 31, 2011.


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.


Customer Concentrations

 

During the three month period ended September 30, 2009, we had no customers accounting for greater than 5% of our revenues. During the three month period ended September 30, 2008, our largest retail customer accounted for 77% of our revenue.


NOTE 3 - GOING CONCERN AND LIQUIDITY CONSIDERATIONS


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 $4,015,780 during the year ended March 31, 2009 and six months ending September 30, 2009, respectively, and had an accumulated deficit of $48,017,416 at September 30, 2009. In addition, we used cash in our operations of $597,154 during the six months ended September 30, 2009. However, from April 1, 2009 to September 30, 2009, approximately 69% of our notes payable were converted to common 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 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 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 2009 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 4 - INVENTORIES


Inventories consisted of the following at September 30, 2009 and March 31, 2009:


 

 

September 30,

2009

 

 

March 31,

2009

Raw Materials

 

$

76,495

 

$

101,812

Finished Goods

 

 

96,480

 

 

79,185

Total Inventories 

 

$

172,975

 

$

180,997




15



NOTE 5 - PROPERTY AND EQUIPMENT


Property and equipment consisted of the following at September 30, 2009 and March 31, 2009:


 

 

 

September 30,

 

 

March 31,

 

 

2008

 

2008

Office furniture and equipment

 

$

807

 

$

4,322

Computer equipment

 

 

136,881

 

 

137,384

 

 

 

137,688

 

 

141,706

Less accumulated depreciation

 

 

(60,105)

 

 

(43,702)

 

 

$

77,583

 

$

98,004


Depreciation expense for the six month periods ended September 30, 2009 and 2008 was $16,403 and $42,785, respectively.


NOTE 6 - INTANGIBLE ASSETS


Intangible assets consisted of the following at September 30, 2009 and March 31, 2009:


 

 

June 30,

2009

 

March 31,

2009

License

 

$

137,500

 

$

-

Less accumulated amortization

 

 

(17,187)

 

 

-

 

 

$

120,313

 

$

-


We are amortizing the license over its two year term.


NOTE 7 - 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 have elected to all net losses of this variable interest entity in excess of our ownership interest and the actual capital we have invested in this entity. During the six months ending September 30, 2009, we did not make any payments to LB Games Ukraine.


NOTE 8 - STOCKHOLDERS’ EQUITY


Common Stock


We are authorized to issue 3,000,000,000 shares of common stock, $0.001 par value per share (see Note 12). The holders of our common stock are entitled to one vote per share of common stock held and have equal rights to receive dividends when, and if, declared by our Board of Directors, out of funds legally available therefore, subject to the preference of any holders of preferred stock. In the event of liquidation, holders of common stock are entitled to share ratably in the net assets available for distribution to stockholders, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights.


During the six months ending September 30, 2009 and 2008, we issued to independent third parties 24,624,571 and 16,830,362 shares of common stock for services provided, valued at $299,830 and $198,955 (based on the closing price on the respective grant date), respectfully. We also issued 4,000,000 and 1,675,000 shares of common stock, valued at $60,000 and $52,900 (based on the closing price on the respective grant date), respectfully, to certain employees as additional compensation.


During the six months ended September 30, 2008, we issued 562,500 warrants to purchase shares of common stock all with an exercise price of $0.05 (see Note 10). We estimated the value of these warrants to be approximately $11,000 using the binomial lattice method.


Also, during the six month period ended September 30, 2009, certain of our investors converted notes payable to 263,865,743 shares of our common stock at various conversion prices, reducing our debt by $938,656. We also raised $619,006 through the sale of 274,230,410 shares of common stock, sold at various prices.



16



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 are designated as preferred A shares and 11,080,929 preferred B shares and are issued and outstanding as of September 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 obtain 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.


Series A Preferred Stock


The holders of series A preferred stock have a liquidation preference equal to the sum of the converted principal, accrued interest and value of converted common stock, aggregating $188,500 at September 30, 2009.


Series B 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 the event of liquidation, holders of preferred stock are entitled to share ratably in the net assets available for distribution to stockholders. Due to its liquidation preference, the series A preferred stock will have priority over series B preferred stock in the event of a liquidation.


We did not issue any preferred shares in the six months ending September 30, 2009.


Series C Preferred Stock


On September 28, 2009, the Company filed a Certificate of Designations for a Series C Preferred Stock. The authorized number of Series C Preferred Stock is 10,000. The holders of the Series C Preferred Stock shall be entitled to vote on all matters to be voted upon by the holders of the Company’s common stock and each share shall have the voting equivalent of one million (1,000,000) shares of common stock. The voting rights of the Company’s common stockholders may be limited by the issuance of Series C Preferred Stock.


Series D Preferred Stock


On September 28, 2009, the Company filed a Certificate of Designations for a Series D Convertible Preferred Stock. The authorized number of Series D Convertible Preferred Stock is 1,000. The holders of the Series D Convertible Preferred Stock have no voting power whatsoever, except as otherwise provided by the Washington Business Corporation Act and for provisions protection of the Series D Convertible Preferred Stock Certificate of Designations. In each instance, each share of Series D Convertible Preferred Stock shall be entitled to one vote. Each holder of Series D Convertible Preferred Stock shall have the right, at such holder’s option, at any time or from time to time from and after the day immediately following the date the Series D Convertible Preferred Stock is first issued, to convert each share of Series D Convertible Preferred Stock into one million (1,000,000) fully-paid and non-assessable shares of the Company’s common stock. The voting rights of the Company’s common stockholders may be limited by the issuance and/or conversion of Series D Convertible Preferred Stock.


NOTE 9 - 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.



17



Antidilution Rights to Common Stock


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.


Employment Agreements


We have entered into no new employment agreements with key employees.


Leases


We operate in a 4,300 square foot sales and distribution facility in Temecula, California under a sublease agreement through October 2010 with an option to extend such lease for up to four 12 month periods. Its cost is $2,850 per month.


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. We have recorded as exit costs approximately $60,000 for the potential liabilities associated with abandoning those facilities.


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 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.


Content License


In July 2007, and subsequently in June, 2009, we entered into a Software Publishing Agreements to publish three pc video games under the Charlie Church Mouse (“CCM”) brand. That license agreement requires us to pay royalties to the licensor at a rate of twenty percent of the gross margin on the cash receipts from sales of CCM branded games net of any amounts received as or for any sales, use, customs or other taxes, or postage, shipping, handling, freight, delivery, insurance, maintenance service, sales programs and commissions, interest or finance charges. We paid an original license fee of $25,000 and a renewal fee of another $25,000 in connection with the signing of the Software Publishing Agreements and have a prepaid license fee amount of $30,426 under prepaid expenses and other current assets on our September, 30, 2009 balance sheet.


Litigation


We are subject to litigation from time to time in the ordinary course of our business.


On July 25, 2009, Xerox Corporation filed suit against us for $67,000, representing full payment of two three year operating leases we have on two Xerox WorkCentre systems. We have disputed Xerox’s refusal to service the systems under the terms of the



18



lease. We understand that out counsel and counsel representing Xerox have come to terms to resolve this dispute although there can be no assurance such a resolution will be finalized.


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.


NOTE 10 - NOTES PAYABLE


During the three months ended September 30, 2009, we borrowed $25,000 from an investor on a short term basis (“September 2009 individual loan”).


Notes payable consist of the following at September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

Face Amount of

 

 

 

Notes Payable,

 

 

Notes Payable

 

Note Discounts

 

Net of Discounts

Zero coupon notes

$

42,812

$

(18,867)

$

23,945

Meyers bridge notes (in default)

 

30,000

 

-

 

30,000

Individual loans (in default)

 

95,737

 

-

 

95,737

September 2009 individual loan

 

25,000

 

 

 

25,000

1 year convertible notes

 

238,307

 

--

 

238,307

3 year convertible notes

 

6,200

 

-

 

6,200

   Total notes payable

$

438,056

$

(18,867)

$

419,189

 

 

 

 

 

 

 

At both June 30, 2009 and March 31, 2009, the Meyers bridge notes and the individual loans were in default.

 

 

 

 

 

 

 

Notes payable consist of the following at March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

Face Amount of

 

 

 

Notes Payable,

 

 

Notes Payable

 

Note Discounts

 

Net of Discounts

Zero coupon notes

$

247,187

$

(156,150)

$

91,037

Meyers bridge notes (in default)

 

150,000

 

-

 

150,000

Individual loans (in default)

 

162,488

 

-

 

162,488

1 year convertible notes

 

700,325

 

(101,666)

 

598,659

3 year convertible notes

 

92,675

 

(78,682)

 

13,993

   Total notes payable

$

1,352,675

$

(336,498)

$

1,016,177


In the three months ended September 30, 2009, holders of the zero coupon notes converted $129,375 of their principal into our common stock.


In the three months ended September 30, 2009, holders of the Meyers bridge notes converted $65,000 of their principal into our common stock.


In the three months ended September 30, 2009, holders of the 1 year convertible notes did not convert any of their principal into our common stock.


In the three months ended September 30, 2009, holders of the 3 year convertible notes did not convert any of their principal into our common stock.


NOTE 11 - DEFERRED REVENUES


At September 30, 2009, we had $1,442 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.



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NOTE 12 – CONVERTIBLE DEBT ISSUED FOR SERVICES


On September 2, 2008, the Company entered into a one-year consulting agreement (the “2008 Consulting Agreement”) with a consultant (the “Consultant”) pursuant to which, in exchange for services rendered by the Consultant to the Company, the Consultant received an aggregate of 8,500,000 shares of common stock of the Company.  In April of 2009, the Company added an addendum to 2008 Consulting Agreement (the “First Addendum”) whereby the Consultant also earned $10,000 per month for the services rendered and received an additional 20,000,000 shares of the Company’s common stock.  The First Addendum also provided that Consultant had the right to convert the monies owed under the amended consulting agreement into shares of common stock of the Company at a rate of $0.005 no later than March 31, 2010.  In April of 2009, the Company added a second addendum to the 2008 Consulting Agreement (the “Second Addendum”) whereby the conversion rate was reduced to $0.001 per share.  All other terms remained the same.  In April of 2009, the parties entered into the third addendum to the 2008 Consulting Agreement (the “Third Addendum”) whereby the Consultant agreed that in the event the Consultant sold common stock of the Company at a rate exceeding 10,000,000 shares per 30 calendar day period, the Consultant would pay the Company an early-sell fee for each period of $100,000 or an amount equally agreed upon by the Company and Consultant.  As of September 30, 2009, none of the debt was converted and therefore no fees were paid under this arrangement.


On July 23, 2009, the Company replaced the 2008 Consulting Arrangement with a new automatically renewable six month consulting agreement (the “2009 Consulting Agreement”) whereby the Consultant earned a sales commission but not less than $40,000 per month in exchange for services rendered.  The 2009 Consulting Agreement also stated that if during the term of such agreement, the Company does not pay the Consultant as scheduled, the Consultant shall have the choice to accept such monies owed at a later date or to convert such amounts owed into common stock of the Company at a rate of $0.001 per share, in the Consultant’s sole discretion. 


In determining the fair value of the convertible debt issued for services, the Company followed guidance in ASC 470-20-30 “Convertible Instruments Issued to Nonemployees for Goods and Services.”  Under ASC 470-20-30, convertible instruments issued for services are to be valued using the measurement date as determined under ASC 505-50 “Equity-Based Payments to Non-Employees.”  In addition, ASC 470-20-30 provides guidance on determining fair value of convertible instruments issued for services as follows: (1) Fair value of services if determinable (2) Cash received for similar convertible instruments sold to unrelated parties or (3) At a minimum, the value of the equity that could be received if the instrument were converted.  The Company determined that the fair value of the common stock that could be received if the debt were converted  was the best measure of fair value in the above transactions.  Accordingly the value of the underlying common stock on the measurement date, as determined by ASC 505-50, was used to determine the fair value of the convertible debt. 


The Company estimated the fair value of the convertible notes issued to the consultant for services during the six months ended September 30, 2009 to be $2,416,000 and recorded this amount as consulting expense.  During the six months ended September 30, 2009, none of the convertible debt was converted and  the consultant had an outstanding convertible debt balance of $120,000.


NOTE 13 – SUBSEQUENT EVENTS


October 9, 2009 represents the record date of a 3:2 forward-split, which became effective as of October 13, 2009.


Between September 30, 2009, and October 29, 2009, we have raised $168,562 based upon various terms, resulting in the sale of 18,575,300 shares of common stock. During that period, an investor exercised a warrant for 1,031,250 common shares through the payment of $10,313. We also issued 37,781,120 shares of common stock as result of our forward stock split.


On November 9, 2009, we filed a Definitive Information Statement to:


1. To elect Mr. Troy A. Lyndon, Richard Knox, Sr. and Richard Knox Jr. to serve as members of the Company’s Board of Directors until the next annual stockholders’ meeting or until his respective successor is duly elected and qualify;


2. To amend the Company’s Certificate of Incorporation to increase the authorized common stock from 1.2 billion (1,200,000,000) to 3 billion (3,000,000,000); and


3. To ratify the Company’s Board of Directors’ appointment of J. Crane CPA, P.C as the Company’s public accountants for the fiscal year ended March 31, 2010.



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Pursuant to a Joint Written Consent of the Board of Directors and Majority Stockholders, on October 29, 2009, the Board of Directors and Troy A. Lyndon, our Chief Executive Officer, Chief Financial Officer and Chairman, and Richard J. Knox, Jr., one of our Directors, jointly approved of the above action. Mr. Lyndon owns an aggregate of 12,027,378 shares of common stock and 10,000 shares of Series C Preferred Stock. Each share of Common Stock has the right to one vote on the proposals above and each Series C Preferred Stock has the voting equivalency of 10 million shares of Common Stock; thereby giving Mr. Lyndon total voting power equal to 10,012,027,378 shares of Common Stock, approximately 91.1% of the total voting securities (10,986,135,018 shares consisting of 971,467,844 shares of Common Stock, 3,586,245 of Series A Preferred Stock, 11,080,929 shares of Series B Preferred Stock and 10,000 shares of Series C Preferred Stock having the voting equivalency of 10 billion shares of Common Stock). Mr. Richard J. Knox, Jr. who owns 3,000,000 shares of Common Stock also approved of the above proposals. Together, Mr. Lyndon and Mr. Knox own the voting equivalency of 10,015,027,378 shares of Common Stock, approximately 91.4% of the issued and outstanding voting securities. The Board of Directors considered the above proposals in September 2009 when they were in discussions regarding the Company’s forward stock split of 3-for-2. Upon the consummation of the forward stock split on October 13, 2009, the Company’s had 971,467,844 shares of common stock issued and outstanding, only 228,532,156 shares less than the total 1.2 billion shares then currently authorized pursuant to the Company’s Certificate of Incorporation. The Board of Directors decided to increase the Company’s authorized common stock to 3 billion shares to give the Company additional ability to issue shares in future financings or corporate transactions, if any, or for compensation for services rendered by various individuals or entities.


On October 13, 2009, we effectuated a 3-for-2 forward stock split issued and outstanding as of the close of business on October 9, 2009.


On November 9, 2009, we filed a Definitive Information Statement with the SEC and commenced mailing such statement to stockholders of record as of the close of business on October 29, 2009 that the following actions had been approved by the holders of a majority of voting securities:


1.

To elect Mr. Troy A. Lyndon, Richard Knox, Sr. and Richard Knox Jr. to serve as members of the Company’s Board of Directors until the next annual stockholders’ meeting or until his respective successor is duly elected and qualify;


2.

To amend the Company’s Certificate of Incorporation to increase the authorized common stock from 1.2 billion (1,200,000,000) to 3 billion (3,000,000,000);


3.

To ratify the Company’s Board of Directors’ appointment of J. Crane CPA, P.C as the Company’s public accountants for the fiscal year ended March 31, 2010; and


4.

To transact any other business that may properly come before the meeting or any adjournment or postponement of the meeting.


Pursuant to a Joint Written Consent of the Board of Directors and Majority Stockholders, on October 29, 2009, the Board of Directors and Troy A. Lyndon, our Chief Executive Officer, Chief Financial Officer and Chairman, and Richard J. Knox, Jr., one of our Directors, jointly approved of the above actions. Mr. Lyndon owns an aggregate of 12,027,378 shares of common stock and 10,000 shares of Series C Preferred Stock. Each share of Common Stock has the right to one vote on the proposals above and each Series C Preferred Stock has the voting equivalency of 10 million shares of Common Stock; thereby giving Mr. Lyndon total voting power equal to 10,012,027,378 shares of Common Stock, approximately 91.1% of the total voting securities (10,986,135,018 shares consisting of 971,467,844 shares of Common Stock, 3,586,245 of Series A Preferred Stock, 11,080,929 shares of Series B Preferred Stock and 10,000 shares of Series C Preferred Stock having the voting equivalency of 10 billion shares of Common Stock). Mr. Richard J. Knox, Jr. who owns 3,000,000 shares of Common Stock also approved of the above proposals. Together, Mr. Lyndon and Mr. Knox own the voting equivalency of 10,015,027,378 shares of Common Stock, approximately 91.4% of the issued and outstanding voting securities. The Board of Directors considered the above proposals in September 2009 when they were in discussions regarding the Company’s forward stock split of 3-for-2. Upon the consummation of the forward stock split on October 13, 2009, the Company’s had 971,467,844 shares of common stock issued and outstanding, only 228,532,156 shares less than the total 1.2 billion shares then currently authorized pursuant to the Company’s Certificate of Incorporation. The Board of Directors decided to increase the Company’s authorized common stock to 3 billion shares to give the Company additional ability to issue shares in future financings or corporate transactions, if any, or for compensation for services rendered by various individuals or entities.



21



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by the condensed consolidated financial statements and notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.


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.


THE COMPANY


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.”



22



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.


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 markets and 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.

 

To date, we have financed our operations primarily through the sale of shares of our common stock. During the six months ended September 30, 2009, we raised $619,006 through the sale of common stock to from certain accredited investors under several different formats. We continue to generate operating losses and have only just begun to generate revenues.


Furthermore, the report by our Independent Registered Public Accounting Firm on our financial statements includes a paragraph describing substantial doubt about our ability to continue as a “going concern” as of and for the year ended March 31, 2009.


Series C Preferred Stock


On September 28, 2009, the Company filed a Certificate of Designations for a Series C Preferred Stock. The authorized number of Series C Preferred Stock is 10,000. The holders of the Series C Preferred Stock shall be entitled to vote on all matters to be voted upon by the holders of the Company’s common stock and each share shall have the voting equivalent of one million (1,000,000) shares of common stock. The voting rights of the Company’s common stockholders may be limited by the issuance of Series C Preferred Stock.


Series D Preferred Stock


On September 28, 2009, the Company filed a Certificate of Designations for a Series D Convertible Preferred Stock. The authorized number of Series D Convertible Preferred Stock is 1,000. The holders of the Series D Convertible Preferred Stock have no voting power whatsoever, except as otherwise provided by the Washington Business Corporation Act and for provisions protection of the Series D Convertible Preferred Stock Certificate of Designations. In each instance, each share of Series D Convertible Preferred Stock shall be entitled to one vote. Each holder of Series D Convertible Preferred Stock shall have the right, at such holder’s option, at any time or from time to time from and after the day immediately following the date the Series D Convertible Preferred Stock is first issued, to convert each share of Series D Convertible Preferred Stock into one million (1,000,000) fully-paid and non-assessable shares of the Company’s common stock. The voting rights of the Company’s common stockholders may be limited by the issuance and/or conversion of Series D Convertible Preferred Stock.


Subsequent Events


On October 13, 2009, we effectuated a 3-for-2 forward stock split of the shares of common stock issued and outstanding as of the close of business on October 9, 2009.


On November 9, 2009, we filed a Definitive Information Statement with the SEC and commenced mailing such statement to stockholders of record as of the close of business on October 29, 2009 that the following actions had been approved by the holders of a majority of voting securities:


1.

To elect Mr. Troy A. Lyndon, Richard Knox, Sr. and Richard Knox Jr. to serve as members of the Company’s Board of Directors until the next annual stockholders’ meeting or until his respective successor is duly elected and qualify;


2.

To amend the Company’s Certificate of Incorporation to increase the authorized common stock from 1.2 billion (1,200,000,000) to 3 billion (3,000,000,000);


3.

To ratify the Company’s Board of Directors’ appointment of J. Crane CPA, P.C as the Company’s public accountants for the fiscal year ended March 31, 2010; and



23



4.

To transact any other business that may properly come before the meeting or any adjournment or postponement of the meeting.


Pursuant to a Joint Written Consent of the Board of Directors and Majority Stockholders, on October 29, 2009, the Board of Directors and Troy A. Lyndon, our Chief Executive Officer, Chief Financial Officer and Chairman, and Richard J. Knox, Jr., one of our Directors, jointly approved of the above actions. Mr. Lyndon owns an aggregate of 12,027,378 shares of common stock and 10,000 shares of Series C Preferred Stock. Each share of Common Stock has the right to one vote on the proposals above and each Series C Preferred Stock has the voting equivalency of 10 million shares of Common Stock; thereby giving Mr. Lyndon total voting power equal to 10,012,027,378 shares of Common Stock, approximately 91.1% of the total voting securities (10,986,135,018 shares consisting of 971,467,844 shares of Common Stock, 3,586,245 of Series A Preferred Stock, 11,080,929 shares of Series B Preferred Stock and 10,000 shares of Series C Preferred Stock having the voting equivalency of 10 billion shares of Common Stock). Mr. Richard J. Knox, Jr. who owns 3,000,000 shares of Common Stock also approved of the above proposals. Together, Mr. Lyndon and Mr. Knox own the voting equivalency of 10,015,027,378 shares of Common Stock, approximately 91.4% of the issued and outstanding voting securities. The Board of Directors considered the above proposals in September 2009 when they were in discussions regarding the Company’s forward stock split of 3-for-2. Upon the consummation of the forward stock split on October 13, 2009, the Company’s had 971,467,844 shares of common stock issued and outstanding, only 228,532,156 shares less than the total 1.2 billion shares then currently authorized pursuant to the Company’s Certificate of Incorporation. The Board of Directors decided to increase the Company’s authorized common stock to 3 billion shares to give the Company additional ability to issue shares in future financings or corporate transactions, if any, or for compensation for services rendered by various individuals or entities.


WHERE YOU CAN FIND MORE INFORMATION


We are subject to the informational requirements of the Securities Exchange Act and must file reports, proxy statements and other information with the SEC. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site http://www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located at 25060 Hancock Avenue, Suite 103 Box 110, Murrieta, CA 92562. Our phone number is (951) 894-6597. Our Web site is http://www.leftbehindgames.com.


RESULTS OF OPERATIONS


Three Months Ended September 30, 2009 and 2008

 

Revenues


We recorded net revenues of $18,591 for the three months ended September 30, 2009 compared to $58,190 in the three months ended September 30, 2008. This represented a decline in our revenues of $39,599, or 68%. The revenues in the three months ended June 30, 2009 were from a mix of Left Behind: Eternal Forces, Left Behind:Tribulation Forces, three Charlie Church Mouse (“CCM”) games and Keys of the Kingdom.


No significant amount of our revenue for the three months ended September 30, 2009 came from a large retail customer. However, for the three months ended September 30, 2008, 77% of our revenue came from our largest retail customer.


Our revenue declined primarily because (a) we record our revenues based primarily on sell through at major retailers and cash receipts from our Christian bookstore and other customers and (b) we had a significantly larger presence in a number of major retailers with reported sellthrough in the 2008 period compared to the 2009 period where almost all of our shipments were to the Christian bookstore marketplace. We expect to report the revenue related from those shipments to the Christian bookstore marketplace as we collect those accounts receivable in later periods.

 

Cost of Sales - Product Costs

 

We recorded cost of sales - product costs of $14,156 for the three months ended September 30, 2009 compared to $3,073 in the three months ended September 30, 2008. This represented an increase in our cost of sales – predict costs of $1,083, or 58%. The increase in cost of sales – product costs was due to the product mix on revenues that were collected in the September 2009 quarter and to a lower gross margin due to reductions in the wholesale prices of our products. Cost of sales - product costs consists of product costs and inventory-related operational expenses.



24



Cost of Sales – Intellectual Property Licenses

 

We recorded cost of sales – intellectual property licenses of $3,004 for the three months ended September 30, 2009 compared to $1,239 in the three months ended September 30, 2008. This represents an increase in our intellectual property costs of $1,765, or 143%.


General and Administrative Expenses

 

General and administrative expenses were $2,779,845 for the three months ended September 30, 2009, compared to $491,748 for the three months ended September 30, 2008, an increase of $2,288,097.


The increase was primarily due to a $2,162,500 charge that recorded the fair value of convertible debt issued to a consultant for services.  Additional factors included an increase in professional fees of $235,671 and an increase in marketing costs of $38,275. Those increases were partially offset by a $151,829 decrease in wages due to headcount reductions.

 

Many of these general and administrative expenses, particularly in the professional fee area, were non-cash charges since we paid many of our consultants in shares of our common stock rather than in cash. During the three months ended September 30, 2009 and 2008, we recorded expenses relating to these non-cash payments to consultants of $149,393 and $66,844, respectively. This represented an $82,549 increase.


Product Development Expenses


Product development expenses were $48,361 for the three months ended September 30, 2009, compared to $850 for the three months ended September 30, 2008, an increase of $47,511. This increase was the result of investments in new game and software infrastructure development in the 2009 period largely with outside contractors

 

Interest Expense

 

We recorded interest expense of $225,272 for the three months ended September 30, 2009, compared to $231,209 in the three months ended September 30, 2008, a decrease of $5,937, or 3%. Our interest expense is comprised of interest incurred on outstanding debts, accretion of the debt discounts related to zero coupon notes and the recognition of expense due to the beneficial conversion feature resulting from the discounted conversion rate offered to the holders of notes payable who elected to accept a discounted conversion rate during the reporting period.  During the three months ended September 30, 2009, we recorded an expense of $131,251 that represented the beneficial conversion feature expense. We did not record any expense related to beneficial conversion feature expense during the three months ended September 30, 2008.  The accretion of debt discount was $77,559 in the September 2009 period compared to $14,872 in the 2008 period.


Other Income


In the three months ended September 30, 2008, we recorded debt forgiveness income of $250,000 from a restructuring of our Left Behind Games license and a gain from extraordinary events of $468,837 related to the termination and settlement of the distribution arrangement with our former primary distributor.


Net Loss

 

As a result of the above factors, we reported a net loss of $3,052,352 for the three months ended September 30, 2009, compared to net income of $48,482 for the three months ended September 30, 2008. In addition, our accumulated deficit at September 30, 2009 totaled $48,017,416.


Six Months Ended June 30, 2009 and 2008

 

Revenues


We recorded net revenues of $41,396 for the six months ended September 30, 2009 compared to $118,742 in the six months ended September 30, 2008. This represented a decline in our revenues of $77,346, or 65%. The revenues in the six months ended June 30, 2009 were from a mix of Left Behind: Eternal Forces, Left Behind: Tribulation Forces, three Charlie Church Mouse (“CCM”) games and Keys of the Kingdom.


No significant amount of our revenue for the six months ended September 30, 2009 came from a large retail customer. However, for the six months ended September 30, 2008, 32% of our revenue came from our largest retail customer.



25



Our revenue declined primarily because (a) we record our revenues based primarily on sell through at major retailers and cash receipts from our Christian bookstore and other customers and (b) we had a significantly larger presence in a number of major retailers with reported sell through in the 2008 period compared to the 2009 period where almost all of our shipments were to the Christian bookstore marketplace. We expect to report the revenue related from those shipments to the Christian bookstore marketplace as we collect those accounts receivable in later periods.

 

Cost of Sales - Product Costs

 

We recorded cost of sales - product costs of $26,907 for the six months ended September 30, 2009 compared to $33,487 in the six months ended September 30, 2008. This represented a decrease in our cost of sales – predict costs of $6,580, or 20%. The decrease in cost of sales – product costs was due to the lower revenue volume combine with the product mix on revenues that were collected in the September 2009 quarter and also to a lower gross margin due to reductions in the wholesale prices of our products. Cost of sales - product costs consists of product costs and inventory-related operational expenses.


Cost of Sales – Intellectual Property Licenses

 

We recorded cost of sales – intellectual property licenses of $7,191 for the six months ended September 30, 2009 compared to $3,714 in the six months ended September 30, 2008. This represents an increase in our intellectual property costs of $3,477, or 94%.


General and Administrative Expenses

 

General and administrative expenses were $3,475,340 for the six months ended September 30, 2009, compared to $1,292,615 for the six months ended September 30, 2008, an increase of $2,182,725, or 169%.


The increase was due to $2,416,000 in charges that recorded the fair value of convertible debt issued to a consultant for services.  Additional factors included a $122,752 correction to accrued liabilities for items that were overstated previously, a decrease in wages of $259,057 due to headcount reductions and by a $38,417 decrease in office expense due to our downsizing. Those decreases were partially offset by an increase in professional fees of $183,739.

 

Many of these general and administrative expenses, particularly in the professional fee area, were non-cash charges since we paid many of our consultants in shares of our common stock rather than in cash. During the six months ended September 30, 2009 and 2008, we recorded expenses relating to these non-cash payments to consultants of $299,830 and $157,411, respectively. We also made stock-based payments to some of our employees in both periods, $60,000 in the six months ended September 30, 2009 and $101,500 in the 2008 period. The combination of stock-based payments to both consultants and employees was $359,830 in the 2009 period and $258,911 in the 2008 period, an increase of $100,919.


Product Development Expenses


Product development expenses were $49,961 for the six months ended September 30, 2009, compared to $51,977 for the six months ended September 30, 2008, a decrease of $2,016.

 

Interest Expense

 

We recorded interest expense of $498,472 for the six months ended September 30, 2009, compared to $374,553 in the six months ended September 30, 2008, an increase of $123,919, or 33%.  Our interest expense is comprised of interest incurred on outstanding debts, accretion of the debt discounts related to zero coupon notes and the recognition of expense due to the beneficial conversion feature resulting from the discounted conversion rate offered to the holders of notes payable who elected to accept a discounted conversion rate during the reporting period. During the six months ended September 30, 2009, we recorded an expense of $131,251 that represented the beneficial conversion feature expense. We did not record any expense related to beneficial conversion feature expense during the six months ended September 30, 2008.  The accretion of the debt discount was $317,631 for the six months ended September 30, 2009 as compared to $67,128 for the six months ended September 30, 2008.


Other Income


In the six months ended September 30, 2008, we recorded debt forgiveness income of $250,000 from a restructuring of our Left Behind Games license and a gain from extraordinary events of $468,837 related to the termination and settlement of the distribution arrangement with our former primary distributor.



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Net Loss

 

As a result of the above factors, we reported a net loss of $4,015,780 for the six months ended September 30, 2009, compared to a net loss of $923,880 for the six months ended September 30, 2008. In addition, our accumulated deficit at September 30, 2009 totaled $48,017,416.


CASH REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES


At September 30, 2009 we had $54,630 of cash compared to $7,778 of cash at March 31, 2009, an increase of $46,852 largely due to private sales of our common stock to accredited investors. At September 30, 2009, we had a working capital deficit of $2,885,721 compared to a working capital deficit of $3,643,117 at March 31, 2009.


Operating Activities


For the six month periods ended September 30, 2009 and 2008, net cash used in operating activities was $597,154 and $277,491, respectively. The $319,663 increase in cash used in our operating activities was primarily due to the increased loss. The net losses for the six month periods ended September 30, 2009 and 2008 were $4,015,780 and $923,880, respectively, an increase of $3,091,900.


Investing Activities


We did not have any investing activities for the six month periods ending June 30, 2009 and 2008.


Financing Activities


For the six month periods ended September 30, 2009 and 2008, net cash provided by financing activities was $644,006 and $281,826, respectively. The primary element of cash provided by financing activities in the six month period ended September 30, 2009 was raised through the sale of common stock and in the six month period ended September 30, 2008, through borrowings under notes payable.


Future Financing Needs


Since our inception in August 2002 through September 30, 2009, we have raised approximately $11 million through funds provided by private placement offerings and convertible notes. This was sufficient to enable us to develop our first product and expand our product line to include 6 games. 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. We will need to continue raising capital through privately placed offerings in order to continue our operations over the next twelve months. 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 and through the issuance of debt instruments. During the six months ended June 30, 2009, we raised $619,006 through the sale of common stock to certain accredited. We continue to generate operating losses.


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” as of and for the year ended March 31, 2009.



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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 $2,885,721, 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, 2010. 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. Accounting standards provide 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 September 30, 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, 2008. 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.



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Stock-Based Compensation. Effective April 1, 2006, on the first day of our fiscal year 2006, we adopted the fair value recognition provisions of the accounting standards applied at that time, 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 accounting standards, 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 accounting standards. Accounting standards 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 this accounting standard 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 accounting standards 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 accounting standards. 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 accounting standards, 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 accounting standards. 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).


For sales to our large retail customers, 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 large retail customers provide us with sell-through information on a frequent basis regarding sales to end customers and in-channel inventories.



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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 accounting standards, 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.


Historically, we promoted 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 accounting standards, certain payments made to customers by us, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the six month periods ended September 30, 2009 and 2008, we had no such types of arrangements.


Off-Balance Sheet Arrangements


We presently do not have any off-balance sheet arrangements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


Not applicable.


ITEM 4. CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures


Our Principal Executive Officer and Principal Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.


Our Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2009. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure.


Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2009, there were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II -- OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS.


We are subject to litigation from time to time in the ordinary course of our business.


On July 25, 2009, Xerox Corporation filed suit against the Company for $67,000, representing full payment of two three year operating leases we have on two Xerox WorkCentre systems. The Company has disputed Xerox’s refusal to service the systems under the terms of the lease. Company’s counsel and counsel representing Xerox have come to terms to resolve this dispute.


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 1A. RISK FACTORS.


Not applicable.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


During the six months ending September 30, 2009, we issued to independent third parties, some of whom were accredited investors, 24,624,571 shares of common stock for services provided, valued at $299,830 (based on the closing price on the respective grant date). We also issued 4,000,000 shares of common stock, valued at $60,000 (based on the closing price on the respective grant date), to certain employees as additional compensation. Such shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuances did not involve a public offering of securities.


Also, during the three months ended September 30, 2009, holders of our zero coupon notes converted $129,375 of their principal into our common stock and holders of the Meyers bridge notes converted $65,000 of their principal into our common stock. The shares were issued pursuant to the registration exemptions afforded the Company under Section 3(a)(9) promulgated under the Securities Act of 1933, as amended, due to the fact that the securities were converted for no additional consideration.


On September 28, 2009, the Board of Directors of the Company, with Mr. Richard J. Knox, Jr., recusing himself from making such determination, issued ten (10) shares of Series D Convertible Preferred Stock to Richard J. Knox, Jr., a member of the Board of Directors of the Company, in consideration for services rendered. Such shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuances did not involve a public offering of securities.


On September 28, 2009, the Board, with Troy A. Lyndon recusing himself from making such determination, agreed to issue one hundred (100) shares of Series D Convertible Preferred Stock and ten thousand (10,000) shares of Series C Preferred Stock, to Mr. Lyndon, the Company Chief Executive Officer and Principal Executive Officer, as a reward for significant improvements to the Company’s operations and market cap increase by more than 2000% over the past year. Such shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded the Company under Section 4(2) promulgated thereunder due to the fact that such issuances did not involve a public offering of securities.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.


Due to our failure to repay one Bridge Loans at the end of its one year terms, the loan have been declared in default and we are now accruing a penalty interest rate of 15% per annum on the $30,000 in remaining bridge loan. Subsequently to September 30, 2009, the remaining $30,000 bridge loan was converted to stock and is no longer in default.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.


None during the quarter ended September 30, 2009. See “Subsequent Events” under “Item 2. Management's Discussion And Analysis Or Plan Of Operation.”


ITEM 5. OTHER INFORMATION.


None



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ITEM 6. EXHIBITS.


(a)

Exhibits. The following documents are filed as part of this report:


Exhibit No.:

Description:

3.1

Articles of Amendment to the Certificate of Incorporation of Left Behind Games, Inc., dated September 28, 2009

3.2*

Certificate of Designation of Series C Preferred Stock

3.3*

Certificate of Designation of Series D Preferred Stock

31.1

Certification by Troy A. Lyndon , Principal Executive Officer and Principal Financial and Accounting Officer, of Left Behind Games, Inc., pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certification by Troy A. Lyndon , Principal Executive Officer and Principal Financial and Accounting Officer, of Left Behind Games, Inc., pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.


*Filed as an exhibit to Form 8-K (File No.: 000-50603) filed with the SEC on September 28, 2009 and incorporated by reference herein.



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SIGNATURES


In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


LEFT BEHIND GAMES, INC.


Date: February 22, 2011

BY: /S/ TROY A. LYNDON                              

TROY A. LYNDON

CHAIRMAN, PRESIDENT, CHIEF

ACCOUNTING OFFICER AND

CHIEF EXECUTIVE OFFICER

(Principal Executive Officer)

(Principal Financial and Accounting Officer)





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