10QSB 1 leftbehind_10qsb-063007.htm LEFT BEHIND GAMES, INC. LEFT BEHIND GAMES, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-QSB
 
S 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2007
 
Commission File No. 000-50603
 
LEFT BEHIND GAMES INC.

(Exact name of registrant as specified in its charter)
 
 
Washington
000-50603
91-0745418
(State or other jurisdiction
(Commission File Number)
(IRS Employer
of Incorporation)
 
Identification Number)
 
25060 Hancock Avenue
Suite 103 Box 110
 
 
Murrieta, California 92562
 
 
(Address of principal executive offices)
 
 
 
 
 
(951) 894-6597
 
 
(Registrant’s Telephone Number)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
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 (the "Exchange Act") 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 o
 
As of August 10, 2007, the Registrant had 50,192,347 shares of common stock outstanding.
 

 
TABLE OF CONTENTS
 
 
 
 
 
 
 
Page
PART I  -  FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements
2
 
 
 
Item 2.
Management's Discussion and Analysis or Plan of Operation
20
 
 
 
Item 3.
Controls and Procedures
25
 
 
 
PART II  -  OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
26
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
 
 
 
Item 3.
Defaults Upon Senior Securities
26
 
 
 
Item 4.
Submission of Matters to a Vote of Security Holders
26
 
 
 
Item 5.
Other Information
27
 
 
 
Item 6.
Exhibits
27
 
 
 
SIGNATURES
28
 


Part I - Financial Information
 
 
LEFT BEHIND GAMES INC.
 
 
June 30,
 
March 31,
 
 
 
2007
 
2007
 
ASSETS
 
(unaudited)
 
  
 
 
 
  
 
  
 
CURRENT ASSETS:
 
  
 
  
 
Cash
 
$
10,627
 
$
14,965
 
Accounts receivable, net
   
523,888
   
502,660
 
Inventories
   
366,478
   
380,174
 
Debt issuance costs
   
334,044
   
359,133
 
Prepaid expenses and other current assets
   
53,742
   
38,846
 
Total current assets
   
1,288,779
   
1,295,778
 
 
         
Property and equipment, net
   
336,210
   
368,313
 
Intangible assets, net
   
48,402
   
43,441
 
Other assets
   
52,373
   
52,373
 
 
 
$
1,725,764
 
$
1,759,905
 
 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT
         
 
         
CURRENT LIABILITIES:
         
Accounts payable and accrued expenses
 
$
1,983,132
 
$
2,039,672
 
Royalty payable to related party
   
250,000
   
250,000
 
Advances from related party
   
50,000
   
73,000
 
Notes payable
   
455,333
   
395,056
 
Deferred revenue
   
100,323
   
100,323
 
           Total current liabilities
   
2,838,788
   
2,858,051
 
 
         
Deferred rent
   
6,690
   
5,257
 
               
Total liabilities
   
2,845,478
   
2,863,308
 
               
Commitments and contingencies
         
 
         
Stockholders' equity (deficit):
         
Series A preferred stock, $0.001 par value; 10,000,000 shares authorized; 3,586,245
shares issued and outstanding; liquidation preference of $188,500
   
3,586
   
3,586
 
Common stock, $0.001 par value; 200,000,000 shares authorized; 46,724,847 and
35,904,898 shares issued and outstanding as of June 30, 2007 and March 31, 2007, respectively
   
46,662
   
35,842
 
Additional paid-in-capital
   
35,805,841
   
34,488,429
 
Stockholder note receivable
   
(25,000
)
 
--
 
Accumulated deficit 
   
(36,950,803
)
 
(35,631,260
)
           Total stockholders' deficit
   
(1,119,714
)
 
(1,103,403
)
 
 
$
1,725,764
 
$
1,759,905
 

See accompanying notes to the condensed consolidated financial statements.
 
2

 
LEFT BEHIND GAMES INC.
(unaudited)
 
 
   
 For the
Three Months Ended
June 30,
 
   
2007
 
2006
 
Net revenues
 
$
56,815
 
$
-
 
 
         
Costs and expenses:
             
Cost of sales - product costs
   
20,652
   
-
 
   General and administrative
   
1,108,678
   
2,431,352
 
   Product development
   
103,002
   
188,701
 
 
         
          Total costs and expenses
   
1,232,332
   
2,620,053
 
 
         
          Operating loss
   
(1,175,517
)
 
(2,620,053
)
 
         
Other (expense) income:
         
   Interest expense
   
(140,239
)
 
--
 
   Other income (expense)
   
(1,387
)
 
39
 
          Total other (expense) income, net
   
(141,626
)
 
39
 
 
         
Loss before provision for income taxes
   
(1,317,143
)
 
(2,620,014
)
Provision for income taxes
   
2,400
   
800
 
 
         
Net loss
 
$
(1,319,543
)
$
(2,620,814
)
 
         
Net loss available to common stockholders per common share:
         
    Basic and diluted
 
$
(0.03
)
$
(0.17
)
 
         
Weighted average common shares outstanding:
         
    Basic and diluted
   
41,593,313
   
15,766,945
 
 
See accompanying notes to the condensed consolidated financial statements.
 
3

 
LEFT BEHIND GAMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(unaudited)
 
 
   
For the
Three Months Ended
June 30,
 
   
2007
 
2006
 
Cash flows from operating activities:
 
 
 
 
 
Net loss
 
$
(1,319,543
)
$
(2,620,814
)
Adjustments to reconcile net loss to net cash used in operating activities:
         
Depreciation and amortization
   
30,405
   
10,394
 
Amortization of debt issuance costs
   
118,739
   
--
 
Loss on disposal of assets
   
1,387
   
--
 
Estimated fair value of common stock issued to consultants for services
   
249,357
   
1,482,082
 
Estimated fair value of common stock issued to employees and directors for services
   
93,325
   
45,000
 
Changes in operating assets and liabilities:
         
Accounts receivable
   
(21,228
)
   
Inventories
   
13,696
     
Prepaid expenses and other current assets
   
(14,896
)
 
(3,330
)
Other assets
   
--
   
(45,270
)
Accounts payable and accrued expenses
   
(55,100
)
 
141,698
 
Deferred rent
   
1,433
   
--
 
Deferred salaries
   
--
   
6,000
 
Net cash used in operating activities
   
(902,425
)
 
(984,240
)
 
         
Cash flows from investing activities:
         
Payments for trademarks
   
(6,090
)
 
(36,740
)
Purchases of property and equipment
   
--
   
(117,169
)
Net cash used in investing activities
   
(6,090
)
 
(153,909
)
 
         
Cash flows from financing activities:
         
Payment of debt issuance costs
   
(16,900
)
 
--
 
Borrowings under notes payable
   
130,000
   
--
 
Principal payments under notes payable
   
(69,723
)
 
--
 
Payments on advances from related party
   
(23,000
)
 
--
 
Proceeds from issuance of common stock, net of issuance costs
   
883,800
   
791,298
 
Net cash provided by financing activities
   
904,177
   
791,298
 
Net decrease in cash
   
(4,338
)
 
(346,851
)
Cash at beginning of period
   
14,965
   
393,433
 
Cash at end of period
 
$
10,627
 
$
46,582
 
 
See accompanying notes to condensed consolidated financial statements
 
4

 
LEFT BEHIND GAMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
 
 
   
For the
Three Months Ended
June 30,
 
   
2007
 
2006
 
Supplemental disclosure of cash flow information: 
 
 
 
 
 
Cash paid during the period for: 
 
 
 
 
 
 
 
 
 
 
 
Interest
 
$ 
503
 
$ 
-
 
 
 
 
 
 
 
 
 
Income taxes 
 
$ 
2,400
 
$ 
1,600
 
 
 
 
 
 
 
 
 
Supplemental disclosure of non-cash investing and financing activities: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock in exchange for note receivable
 
$ 
25,000
 
$ 
110,000
 
 
 
 
 
 
 
 
 
Issuance of common stock as debt issuance costs
 
$ 
76,750
 
--
 
               
Exchange of equipment for settlement of accounts payable
 
$ 
1,440
 
--
 
 
See accompanying notes to condensed consolidated financial statements

5

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED 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 recently completed the development of a video game based upon the popular LEFT BEHIND series of novels published by Tyndale House Publishers (“Tyndale”) and as of November 2006 began commercially selling the video game to retail outlets nationwide.
 
White Beacon, Inc., a Delaware Corporation (“White Beacon”), an entity beneficially owned and controlled by Troy Lyndon, our chief executive officer and Jeffrey Frichner, our former president, holds an exclusive worldwide license (the “License”) from Tyndale to develop, manufacture and distribute video games and related products based on the “LEFT BEHIND SERIES” of novels published by Tyndale. White Beacon has granted us a sublicense (the “Sublicense”) to exploit the rights and fulfill the obligations of White Beacon under the License (see Note 6).
 
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-QSB and Rule 10-01 of Regulation S-X. Such rules and regulations allow us to condense and omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America. We believe these 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.  The information included in this Form 10-QSB should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-KSB for the year ended March 31, 2007. 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, 2008.  
 
6

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
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 unaudited condensed consolidated financial statements.

Risks and Uncertainties
 
We maintain our cash accounts with a single financial institution.  Accounts at this financial institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At June 30, 2007 and March 31, 2007, we did not have any 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 long-lived assets and the realizability of accounts receivable, inventories and deferred tax assets.
 
Software Development Costs
 
Research and development costs, which consist of software development costs, are expensed as incurred. Software development costs primarily include payments made to independent software developers under development agreements.  Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed, provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for the development costs that have alternative future uses.  We believe that the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model.  No software development costs have been capitalized to date.
 
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.
 
7

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
Intangible Assets
 
License and Sublicense Agreements
 
The cost of the License and Sublicense agreements are amortized on a straight-line basis over their related terms (see Note 6).
 
Trademarks
 
The cost of trademarks includes funds expended for trademark applications that are in various stages of the filing approval process. The trademark costs are being amortized on a straight-line basis over their estimated useful lives. During the three months ended June 30, 2007, the Company recorded $1,129 of amortization expense related to its capitalized trademark costs. There was no amortization of trademark costs in the three months ended June 30, 2006 since none of the trademarks had been issued at that time.
 
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 sales at the greater of the contractual rate or an effective royalty rate based on expected net product sales.
 
Our contracts with some licensors include minimum guaranteed royalty payments which are recorded to expense and as a liability at the contractual amount when no significant performance remains with the licensor. Minimum royalty payment obligations are classified as current liabilities to the extent such royalty payments are contractually due within the next twelve months.
 
Significant judgment is required to estimate the effective royalty rate for a particular contract. Because the computation of effective royalty rates requires us to project future revenue, it is inherently subjective as our future revenue projections must anticipate, for example, (1) the total number of titles subject to the contract, (2) the timing of the release of these titles, (3) the number of software units we expect to sell, and (4) future pricing.
 
Our Sublicense agreement requires payments of royalties to the licensor.  The Sublicense agreement provides for royalties to be calculated as a specified percentage of sales and provides for guaranteed minimum royalty payments. Royalties payable calculated using the agreement percentage rates are being recognized as cost of sales as the related sales are recognized.  Guarantees advanced under the Sublicense agreement are recorded as a component of cost of sales during the period in which the Company is contractually obligated to make minimum guaranteed royalty payments.
 
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 June 30, 2007, we believe there is no impairment of our long-lived assets.  There can be no assurance, however, that market conditions will not change or that there will be demand for our products, which could result in impairment of long-lived assets in the future.

8

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
Income Taxes
 
We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes.  Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations.
 
Stock-Based Compensation
 
Effective April 1, 2006, the first day of our fiscal year 2007, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the three month period ended June 30, 2007 includes: (a) compensation cost for all share-based payments granted and not yet vested prior to April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (b) compensation cost for all share-based payments granted subsequent to March 31, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Currently, no stock options have been granted to employees. Therefore, we believe the adoption of SFAS No. 123(R) had an immaterial effect on the accompanying unaudited condensed consolidated financial statements.
 
We calculate stock-based compensation by estimating the fair value of each option using the Black-Scholes option pricing model. Our determination of the fair value of share-based payment awards is made as of the respective dates of grant using the option pricing model and that determination is affected by our stock price as well as assumptions regarding the number of subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behavior. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the option.

9

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 


Stock-Based Compensation, continued
 
Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.
 
In accordance with EITF Issue No. 00-18, Accounting Recognition for Certain Accounting Transactions Involving Equity Instruments Granted to Other Than Employees, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of the common stock issued for certain future consulting services as prepaid expenses in our consolidated balance sheet.
 
Basic and Diluted Loss per share
 
Basic loss per common share is computed by dividing net loss by the weighted average number of shares outstanding for the period.  Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding assuming all potential dilutive common shares were issued.  Basic and diluted loss per share are the same for the periods presented as the effect of warrants (in both periods) and convertible deferred salaries (in the three months ended June 30, 2006) on loss per share are anti-dilutive and thus not included in the diluted loss per share calculation.
 
Foreign Currency and Comprehensive Income
 
We have determined that the functional currency of LB Games Ukraine is the local currency of that company. Assets and liabilities of the Ukrainian subsidiary are translated into U.S. dollars at the period end exchange rates. Income and expenses, including payroll expenses, are translated at an average exchange rate for the period and the translation gain or loss is accumulated as a separate component of stockholders’ equity. We determined that the translation gain or loss did not have a material impact on our stockholders’ equity as of June 30, 2007 and 2006. As a result, we have not presented a separate accumulated other comprehensive income (loss) on our unaudited condensed 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 month periods ended June 30, 2007 and 2006.
 
Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. The components of comprehensive income were not materially impacted by foreign currency gains or losses during the three month periods ended June 30, 2007 and 2006.
 
Fair Value of Financial Instruments
 
Our financial instruments consist of cash, accounts receivable, accounts payable, related party advances, notes payable and accrued expenses. The carrying amounts of these financial instruments approximate their fair value due to their short maturities or based on rates currently available to the Company for notes payable.
 
10

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
Revenue Recognition
 
We evaluate the recognition of revenue based on the criteria set forth in Statement of Position ("SOP") 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as revised by SAB No. 104, “Revenue Recognition”. We evaluate revenue recognition using the following basic criteria and recognize revenue when all four of the following criteria are met:
 
 
 
 
 
• 
Evidence of an arrangement: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue.
 
 
 
 
• 
Delivery: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.
 
 
 
 
• 
Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable.
 
 
 
 
• 
Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must make assumptions and judgments in order to: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific objective evidence of fair value (“VSOE”) exists for each undelivered element; and (4) allocate the total price among the various elements we must deliver. Changes to any of these assumptions or judgments, or changes to the elements in a software arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.
 
Product Revenue: Product revenue, including sales to resellers and distributors (“channel partners”), is recognized when the above criteria are met. We reduce product revenue for estimated future returns, price protection, and other offerings, which may occur with our customers and channel partners.
 
Revenue from Sales of Consignment Inventory. We have placed consignment inventory with certain customers. We receive payment from those customers only when they sell our product to the final consumers. We recognize revenue from the sale of consignment inventory only when we receive payment from those customers.
 
Shipping and Handling: In accordance with EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”, we recognize amounts billed to customers for shipping and handling as revenue. Additionally, shipping and handling costs incurred by us are included in cost of goods sold.
 
The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). In accordance with EITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the three months ended June 30, 2007 and 2006, we did not have any of those types of arrangements.
 
11

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 


Cost of Sales
 
Cost of sales consists of product costs, royalty expenses, license costs and inventory-related operational expenses.

Customer Concentrations
 
During the three months ended June 30, 2007, no customer accounted for more than 10% of net sales.
 
Recent Accounting Pronouncements
 
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 . SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. The Company is required to adopt SFAS No. 159 in the first quarter of 2008, and is still evaluating the effect, if any, on its consolidated financial position and consolidated results of operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes valuation techniques for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not yet determined what impact, if any, SFAS No. 157 will have on its financial statements.
 
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on April 1, 2007, the first day of fiscal 2007. FIN 48 is an interpretation of SFAS No. 109 and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return. FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48 the Company may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company adopted FIN 48 effective January 1, 2007. There was no impact on the Company’s consolidated financial statements as a result of the implementation of FIN 48.

NOTE 3 - GOING CONCERN
 
The accompanying unaudited condensed 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 incurred net losses of $1,319,543 for the three months ended June 30, 2007, and have an accumulated deficit totaling $36,950,803 as of June 30, 2007. 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 and debt instruments. 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 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.
 
12

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 


NOTE 4 - INVENTORIES
 
Inventories consisted of the following at June 30, 2007 and March 31, 2007:
 
   
June 30, 2007
 
March 31, 2007
 
Raw Materials
 
$
316,570
 
$
318,623
 
Finished Goods
   
49,908
   
61,551
 
Total Inventories 
 
$
366,478
 
$
380,174
 

NOTE 5 - PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following at June 30, 2007 and March 31, 2007:
 
   
June 30, 2007
 
March 31, 2007
 
Office furniture and equipment
 
$
66,985
 
$
66,985
 
Leasehold improvements
 
 
187,413
 
 
187,413
 
Computer equipment
 
 
201,794
 
 
205,756
 
 
 
 
456,192
 
 
460,154
 
 
 
 
 
 
 
 
 
Less accumulated depreciation
 
 
(119,982
)
 
(91,841
)
 
 
 
 
 
 
 
 
 
 
$
336,210
 
$
368,313
 
 
Depreciation expense for the three month periods ended June 30, 2007 and 2006 was $28,147 and $10,043, respectively.

NOTE 6 - RELATED PARTY TRANSACTIONS
 
Sublicense Agreement
 
On October 11, 2002, Tyndale granted White Beacon an exclusive worldwide license, as amended, to use the copyrights and trademarks relating to the storyline and content of the books in the LEFT BEHIND series of novels for the manufacture and distribution of video game products for personal computers, CD-ROM, DVD, game consoles, and the Internet. The License was initially set to expire on December 31, 2006, subject to automatic renewal for three additional three-year terms so long as Tyndale was paid royalties in an aggregate amount equal to or in excess of $1,000,000 during the initial term and $250,000 during each renewal term.
 
The License requires White Beacon to pay the following royalties: (i) 4% of the gross receipts on console game platform systems and (ii) 10% of the gross receipts on all non-electronic products and for electronic products produced for use on personal computer systems. White Beacon was required to guarantee a minimum royalty of $250,000 during the initial four-year term of the License. White Beacon was also required to pay $100,000 to Tyndale as an advance against future royalties payable to Tyndale under the License agreement, all of which was paid by the Company in fiscal 2003 (see below).
 
13

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 


NOTE 6 - RELATED PARTY TRANSACTIONS, CONTINUED
 
On November 14, 2002, White Beacon granted LBG a Sublicense of all of its rights and obligations under its License with Tyndale, with the written approval of Tyndale. In consideration for receiving the Sublicense, we issued to White Beacon 3,496,589 shares of our common stock valued at $5,850, which was the estimated fair value of the common stock on the date of issuance.
 
In September 2006, the License was amended and extended to December 31, 2009 after which it is subject to automatic renewals for additional three year terms if we have paid and/or prepaid royalties of $250,000 during each renewal period. As part of this amendment, we were required to pay Tyndale the remaining $750,000 of the agreed original minimum royalty payment on or before March 31, 2007.
 
The license was further amended on May 14, 2007. Under this amendment the remaining amount of the minimum royalty payment was reduced from $750,000 to $250,000 and the date of that payment was extended from March 31, 2007 to December 31, 2007. At June 30, 2007 and March 31, 2007, we have recorded a royalty payable of $250,000 related to this Sublicense Agreement.
 
LB Games Ukraine
 
As LB Games Ukraine is currently providing software development services only to us and due to our history of providing on-going financial support to that entity, through consolidation we absorb all net losses of this variable interest entity in excess of the equity. LB Games Ukraine’s sole asset is cash which has a balance of $604 at June 30, 2007. During the three month periods ended June 30, 2007 and 2006, we paid $56,943 and $42,677, respectively, for software development services provided by LB Games Ukraine, which has been recorded as product development cost during the period.
 
Other
 
During 2007, we determined we owed our chief executive officer a total of $50,000 as part of a capital transaction that was entered into during a prior period. As of June 30, 2007, the balance was $50,000 and is included in advances from related party in the accompanying unaudited condensed consolidated balance sheet.
 
On June 8, 2007, we entered into a separation agreement with Jeffrey S. Frichner under which he resigned as our president. Mr. Frichner remains a director. As part of that agreement, we agreed to pay him three payments of $12,500 on June 30, 2007, July 31, 2007 and August 31, 2007. We have not yet made any of those payments. We recorded the $37,500 to accrued liabilities in the accompanying unaudited condensed consolidated balance sheet and recorded the related expense to general and administrative expenses.
 
At various times between December 2006 and March 2007, several of our officers and a former officer advanced us funds to help us with our working capital requirements. These advances were non-interest bearing. During the three months ended June 30, 2007, we repaid the remaining $23,000 of such advances to one of our former officers.
 
14

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 


NOTE 7 - STOCKHOLDERS’ EQUITY
 
Common Stock
 
We are authorized to issue 200,000,000 shares of common stock, $0.001 par value per share.  The holders of our common stock are entitled to one vote per share of common stock held and have equal rights to receive dividends when, and if, declared by our Board of Directors, out of funds legally available therefore, subject to the preference of any holders of preferred stock.  In the event of liquidation, holders of common stock are entitled to share ratably in the net assets available for distribution to stockholders, subject to the rights, if any, of holders of any preferred stock then outstanding.  Shares of common stock are not redeemable and have no preemptive or similar rights.
 
During the three months ended June 30, 2007 and 2006, we issued 9,088,000 and 695,035 shares of common stock for net proceeds of $883,800 (excluding a stockholder note receivable for $25,000) and $791,298 (excluding a stockholder note receivable for $110,000), respectively. Related to the proceeds in the three months ended June 30, 2006, we incurred offering costs of $141,250. There were no offering costs associated with the shares we sold for cash in the three months ended June 30, 2007.
 
During the three months ended June 30, 2007 and 2006, we issued 981,949 and 85,000 shares of common stock for services provided by independent third parties, valued at $249,357 and $127,500 (based on the closing price of our common stock on the respective issuance dates), respectively.
 
During the three months ended June 30, 2007 and 2006, we issued 425,000 and 30,000 shares of common stock, valued at $93,325 and $45,000, respectively, (based on the closing price of our common stock on the respective issuance dates), to certain employees as additional compensation.
 
During the three months ended June 30, 2007, we issued 325,000 shares of common stock valued at $76,750 to investors and investment bankers in connection with the receipt of $130,000 in gross proceeds under a bridge financing. We recorded this amount to debt issuance costs and will amortize that amount over the one year term of the financing. We previously had recorded $412,000 to debt issuance costs related to earlier fundings under the bridge financing. We amortized $118,739 of debt issuance costs as interest expense during the three month period ended June 30, 2007.

Preferred Stock
 
We are authorized to issue 10,000,000 shares of preferred stock, $0.001 par value per share, of which all have been designated Series A preferred stock. The holders of the Series A preferred stock are entitled to one vote per share on all matters subject to stockholder vote. The Series A preferred stock is convertible on a one for one basis into our common stock at the sole discretion of the holder.  The holders of the Series A preferred stock have equal rights to receive dividends when, and if, declared by our Board of Directors, out of funds legally available therefore. In the event of liquidation, holders of preferred stock are entitled to share ratably in the net assets available for distribution to stockholders.
 
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 June 30, 2007.
 
15

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
Stock Incentive Plan
 
In January 2007, we adopted the Left Behind Games Inc. 2006 Stock Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable officers, directors, and employees of Left Behind Games Inc. (the "Company") and its subsidiaries and other persons to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company and its shareholders, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The Company is authorized to issue 2,500,000 shares of common stock under the Plan, all of which can be issued in a number of forms including direct stock issuances and stock options. We registered the Plan under an S-8 registration statement in January 2007. As of August 3, 2007, 1.26 million shares had been issued under the Plan, all of which were direct stock issuances.

NOTE 8 - COMMITMENTS AND CONTINGENCIES
 
Guarantees and Indemnities
 
We have made certain indemnities and guarantees, under which we may be required to make payments to a guaranteed or indemnified party in relation to certain actions or transactions.  We indemnify our directors, officers, employees and agents, as permitted under the laws of the State of Delaware.  We have also indemnified our consultants, investment bankers, sublicensor and distributors against any liability arising from the performance of their services or license commitment, pursuant to their agreements.  In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facility.  The duration of the guarantees and indemnities varies, and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make.  Historically, we have not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.
 
Employment Agreements
 
We have entered into employment agreements with certain of our key employees.  Such contracts provide for minimum annual salaries and are renewable annually.  In the event of termination of certain employment agreements by LBG without cause, we would be required to pay continuing salary payments for specified periods in accordance with the employment contracts.  
 
Leases
 
In June 2006, the Company entered into a non-cancelable operating lease for its corporate facility in Murrieta, California which expires on May 31, 2010. The terms of the lease require initial monthly rents of $7,545 and escalate at 4% annually through lease expiration.  In October 2006, we entered into a three year lease to rent 3,500 square feet of additional space in Murrieta, California at $3,920 per month. This additional space is being used for both administrative, sales and warehouse purposes. For the three months ended June 30, 2007 and 2006, we recorded approximately $37,000 and $15,000, respectively, of rent expense.
 
16


LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
Independent Sales Representatives
 
In order to help us secure retail distribution of our initial product, we entered into consulting arrangements with several independent representatives. The payment arrangements to these independent representatives are based upon the ultimate amount paid to us by the retail customers. The commission rates for these independent representatives typically vary from three percent to five percent of the net amount we collect from the retail customer.
 
Music Licenses

In April 2006, we entered into a license agreement with a record company for the use of certain music recordings to be used in connection with our game production. The license agreement requires us to pay royalties to the record company at a rate of $0.10 per unit ($0.05 per unit for the master license and an additional $.05 per unit for the performance license) and also requires the payment of other fees. The agreement remains in effect for two years.  We have calculated and accrued the amount due to this licensor as of June 30, 2007 and recorded that provision for licensing fees to cost of sales. In May 2007, this arrangement was subsequently modified to $0.025 for the master license and $0.025 for the performance license. We have accrued license fees relating to this arrangement of approximately $47,000 and charged that expense to our cost of sales during the year ended March 31, 2007. As of June 30, 2007, we have paid $25,000 and have $22,000 included in accrued expenses related to this arrangement.
 
In November 2006, we also entered into an agreement with a second record company for the use of certain music recordings to be used in connection with our game production. That license agreement also requires us to pay royalties to the record company at a rate of $0.10 per unit ($0.05 per unit for the master license and an additional $.05 per unit for the performance license) and remains in effect for three years. We have accrued license fees relating to this arrangement of approximately $10,000, of which $5,000 has been paid as of June 30, 2007.
 
NOTE 9 - NOTES PAYABLE
 
As of June 30, 2007, we had entered into several borrowing arrangements. The amounts borrowed under those arrangements are included in notes payable in the accompanying consolidated balance sheets.
 
The following table is a recap of our notes payable outstanding as of June 30, 2007:
 
Financing of insurance premiums
 
$
5,333
   
Bridge loan
   
450,000
   
     Total notes payable
 
$
455,333
   
 
We entered into an insurance financing arrangement in November 2006. The insurance financing arrangement is unsecured, expires in November 2007, requires monthly principal payments of $5,333 and accrues interest at a rate of 9.3 percent.
 
In January 2007, we entered into a Bridge Loan arrangement with Meyers Associates L.P. (“Meyers”), a broker-dealer. Under this unsecured Bridge Loan arrangement we agreed to issue two shares of our common stock for every $1 lent to us by accredited investors (the “Bridge Units”). We also agreed to pay to the investors 10% simple interest on the funds lent to us and to pay Meyers a commission of 10% of proceeds received under the arrangement and a non-accountable expense allowance that is equal to 3% of the gross funds that we received. Meyers also received 25% shares coverage. We agreed to repay the Bridge Loan at the earlier of (i): twelve months after the date of issuance; (ii) the consummation of any $1.5 million financing; and (iii) the date on which the outstanding principal amount is prepaid in full. The initial completion date of the Bridge Loan was March 31, 2007, which was subsequently extended to May 31, 2007 at which time it terminated.
 
17

 
LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
We agreed to provide the investors in this Bridge Offering the same registration rights provided to investors in our next private placement. In the event that a private placement is not completed at our election within 90 days from the completion of this Bridge Offering, we agreed to file with the SEC within 120 days from the final completion of this Bridge Offering a registration statement under the Securities Act of 1933, as amended, concerning the resale of the shares of our Common Stock included in the Bridge Units.
 
As of June 30, 2007, we received $386,600 in net proceeds (net of commissions and legal fees) under the Bridge Loan and the gross amount at that date that we will need to repay to the investors is $450,000. That amount was later reduced to $340,000 due to partial conversions to equity (see Note 11 - Subsequent Events). During the three months ended June 30, 2007, we recorded $10,701 of interest expense related to the agreed ten percent interest rate under the Bridge Loan. Through June 30, 2007, we have paid Meyers cash commissions of $57,900 on the amount funded, of which $16,900 was paid during the three months ended June 30, 2007. These commissions were recorded to debt issuance costs and are being amortized over the one year term of the Bridge Loan.
 
As of June 30, 2007, we issued 900,000 shares to the investors as part of the Bridge Units and 225,000 shares to Meyers as part of their compensation. We valued the 900,000 shares issued to the investors at $358,200, of which $61,400 was related to the issuance of 260,000 shares during the three months ended June 30, 2007, based on the closing market price of our stock on the days in which the funding events occurred and capitalized that amount to debt issuance costs on our June 30, 2007 condensed consolidated balance sheet. The shares issued to Meyers were valued at $221,650, of which $15,350 was related to the issuance of 65,000 shares during the three months ended June 30, 2007, based on the closing market price of our stock and were also capitalized to debt issuance costs on our June 30, 2007 condensed consolidated balance sheet. Those costs are being amortized to interest expense over the term of the loan. We charged $118,738 of the debt issuance costs to interest expense in the three months ended June 30, 2007 and we will charge the remaining amount to interest expense over the remainder of the one year term of the Bridge Loan.
 
In December 2006, we entered into an arrangement to factor our receivables. The arrangement with the factor was secured by certain accounts receivable that they lent against and was intended to self liquidate as the factor collected those specific accounts receivable. The factoring arrangement carried a factoring fee of 7.0 percent of the funds advanced under the arrangement. During the three months ended June 30, 2007, we paid off the remaining balance of $3,723 under that factoring arrangement and recorded $244 in interest expense related to this arrangement.
 
In three months ended June 2007, we paid off $23,000 that we owed to a former executive which we borrowed under an informal, non-interest bearing arrangement (see Note 6 - Related Party Transactions).
 
In March 2007, we borrowed $50,000 under a short term loan arrangement from an investor through Southpointe Financial, an affiliate, a mortgage broker that is partially controlled by one of our directors. We repaid the loan plus an agreed $10,000 in financing charges on April 5, 2007, which was recorded as interest expense in the three months ended June 30, 2007.

NOTE 10 - DEFERRED REVENUES
 
In July 2006, we entered into a revenue share agreement with Double Fusion, an in-game advertising technology and service provider, under which Double Fusion will provide in-game advertising and product placement to go into our first video game product. Under this agreement, Double Fusion advanced $100,000 to us as an upfront deposit, which we received during the three months ended September 30, 2006. Under the agreement, Double Fusion will pay us 65% of net advertising revenues as our part of the revenue share related to in-game advertising placements that they sell. Once they have recouped $100,000 from our 65% revenue share, we will recognize this $100,000 upfront deposit as revenue. Until that time, we have classified this amount as deferred revenue in the current liabilities section of the accompanying balance sheet as of June 30, 2007.
 
18


LEFT BEHIND GAMES INC.
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 
NOTE 11 - SUBSEQUENT EVENTS
 
Subsequent to June 30, 2007 and through August 10, 2007, we raised additional equity through the sale of our common stock to accredited investors. We raised $172,000 in cash and a note for $45,000 from the sale of 2,170,000 shares of our common stock.
 
Subsequent to June 30, 2007, we issued 382,500 shares of our common stock to independent third parties for services performed, valued at $69,725 (based on the closing price of our common stock on the respective issuance dates).
 
Subsequent to June 30, 2007, we issued 35,000 shares of our common stock to an employee as additional compensation, valued at $6,300 (based on the closing price of our common stock on the respective issuance dates).
 
Subsequent to June 30, 2007, two of the investors in the Bridge Loan (see Note 9) agreed to convert their aggregate note balances of $110,000 to common stock. We issued an additional 880,000 shares to convert the principal balance of their notes and recorded the $110,000 to common stock and additional paid-in capital. We also accelerated the unamortized value of the debt issuance costs attributable to their notes. This resulted in additional interest expense of $40,617. Since the effective conversion price of the 880,000 shares issued to convert that $110,000 of debt was $0.125 per share and that conversion price was $0.095 less than the closing price of $0.22 on the date of conversion, we will record in the three months ending September 30, 2007 an additional interest charge of $83,600 relating to that beneficial conversion.
 
19

 
 
Forward Looking Statements
 
This document contains statements that are considered forward-looking statements. Forward-looking statements give our current expectations, plans, objectives, assumptions or forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward -looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” and similar expressions. These statements are based on our current plans and are subject to risks and uncertainties, and as such our actual future activities and results of operations may be materially different from those set forth in the forward looking statements. Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions due to a number of factors, including:
 
 
o
continued development of our technology;
 
o
dependence on key personnel;
 
o
competitive factors;
 
o
the operation of our business; and
 
o
general economic conditions.
 
These forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.
 
Overview
 
Left Behind Games Inc., a Washington corporation, formerly known as Bonanza Gold, Inc., doing business through its subsidiary Left Behind Games Inc., a Delaware corporation is in the business of developing and publishing video game products based upon the popular Left Behind series of novels. Pursuant to a share exchange agreement closed on February 7, 2006, we became a subsidiary of Left Behind Games Inc. Washington. As a result of the share exchange agreement, our shareholders took majority control of Left Behind Games Inc. Washington and our management became the management of Left Behind Games Inc. Washington (collectively, “we”, “our” or “LBG”).
 
We are a company founded to develop and publish video game products based upon the popular Left Behind series of novels. We have the exclusive world-wide rights to the Left Behind book series and brand, for the purpose of making video games. Left Behind novels and products are based upon fictional storylines focused on events at the end of the world, including the ultimate battles of good against evil, which are very action oriented and supremely suitable for an engaging series of video games. Left Behind’s series of books has sold more than 63 million copies. Left Behind branded products have generated more than $500 million at retail for the Left Behind book series. Left Behind has also become a recognized brand name by more than 1/3 of Americans. Our management believes that Left Behind products have experienced financial success, including the novels, children's books, graphic novels (comic books), movies, and music. Our interest in the Left Behind brand is limited to our sublicense to make video games. We have no interest in, nor do we profit from any other Left Behind brand.
 
Our rights to use the Left Behind brand to make video games is based solely on our sublicense with White Beacon which entitles us to all of its rights and obligations under its license with the publisher of the Left Behind book series. White Beacon’s exclusive worldwide license from the publisher of the Left Behind book series grants it, and us through our sublicense, the rights to develop, manufacture, market and distribute video game products based on the Left Behind series.
 
20

 
We have developed our first high quality video game and other associated products based upon the Left Behind trademark. We released our first game in November 2006.
 
To date, we have financed our operations primarily through the sale of shares of our common stock. During the three months ended June 30, 2007, we borrowed $130,000 under a Bridge Loan and raised net proceeds of $883,800 from the sale of 9,088,000 shares of our common stock. We continue to generate operating losses and have only just begun to generate revenues. Furthermore, the report of our Independent Registered Public Accounting Firm on our financial statements includes a “going concern” modification.

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2007 and 2006
 
Revenues
 
We recorded net revenues of $56,815 for the three months ended June 30, 2007. There was no corresponding revenue for the three months ended June 30, 2006. All of these revenues were from the sale of our initial product, a video game named Left Behind: Eternal Forces. The majority of the sales were to major retail chains either directly or through distributors. We also sold our game to Christian bookstores and over the internet. The net revenue figure is net of a reserve that we have accrued to cover any potential markdowns or returns of the game.
 
Cost of Sales - Product Costs
 
We recorded cost of sales - product costs of $20,652 for the three months ended June 30, 2007. As discussed above, there was no corresponding cost of sales sold in the three months ended June 30, 2006. Cost of sales - product costs consists of product costs and inventory-related operational expenses.
 
General and Administrative Expenses
 
General and administrative expenses were $1,108,678 for the three months ended June 30, 2007, compared to $2,431,352 for the three months ended June 30, 2006, a decrease of $1,322,674 or 54%.
 
Many of these general and administrative expenses were non-cash charges since we paid many of our consultants in shares of our common stock rather than in cash. During the three months ended June 30, 2007 and 2006, we recorded expenses relating to these non-cash payments to consultants of $249,357 and $1,482,082, respectively. This represented a $1,232,725 decrease. During the three months ended June 30, 2007, we also issued 425,000 shares of common stock, valued at approximately $93,325 to certain employees as additional compensation. During the three months ended June 30, 2006, we issued 30,000 shares of common stock, valued at approximately $45,000 to certain employees as additional compensation. The overall decrease in non-cash charges attributable to consultants and employees was $1,184,400.
 
The remainder of the decrease was due to a variety of factors, including decreases in advertising and marketing expenses.
 
Product Development Expenses

Product development expenses were $103,002 for the three months ended June 30, 2007, compared to $188,701 for the three months ended June 30, 2006, a decrease of $85,699 or 45%. These decreases are directly attributable to the reduction in the number of employees working on our development team and a reduction in consulting fees from outside contractors involved in game development and testing.
 
Interest Expense
 
We recorded interest expense of $140,239 for the three months ended June 30, 2007, while we did not have any interest expense in the three months ended June 30, 2006. Our interest expense largely related to the borrowings under our Bridge Loan. Interest expense related to the Bridge Loan included $10,701 of interest related to the ten percent coupon and $118,739 of amortization of debt issuance costs.
 
21

 
Income Taxes 
 
We recorded income taxes of $2,400 for the three months ended June 30, 2007, compared to $800 for the three months ended June 30, 2006.
 
Net Loss
 
As a result of the above factors, we reported a net loss of $1,319,543 for the three months ended June 30, 2007, compared to a net loss of $2,620,814 for the three months ended June 30, 2006, resulting in a reduced loss of $1,301,271. In addition, our accumulated deficit at June 30, 2007 totaled $36,950,803.
 
CASH REQUIREMENTS, LIQUIDITY AND CAPITAL RESOURCES
 
At June 30, 2007 we had $10,627 of cash compared to $14,965 at March 31, 2007, a decrease of $4,338. At June 30, 2007, we had a working capital deficit of $1,550,009 compared to a working capital deficit of $1,562,273 at March 31, 2007.
 
Operating Activities
 
For the three month periods ended June 30, 2007 and 2006, net cash used in operating activities was $902,425 and $984,240, respectively. The $81,815 decrease in cash used in our operating activities was primarily due to a reduction in our net loss.
 
Investing Activities
 
For the three month periods ended June 30, 2007 and 2006, net cash used in investing activities was $6,090 and $153,909, respectively. The decrease was attributable to our not acquiring any property and equipment and investing only $6,090 in trademarks in the three months ended June 30, 2007 compared to investing $117,169 in property and equipment and $36,740 in trademarks during the three months ended June 30, 2006.
 
Financing Activities
 
For the three month periods ended June 30, 2007 and 2006, net cash generated by financing activities was $904,177 and $791,298, respectively. The primary factors in this $112,879 increase were raising $883,800 from the issuance of common stock and $130,000 from issuances under the Bridge Loan, partially offset by $69,723 in principal payments under notes payable and a $16,900 payment of debt issuance costs; compared to raising $791,298 in net proceeds from the sale of common stock in the three months ended June 30, 2006.
 
Future Financing Needs
 
Since our inception in August 2002 through June 30, 2007, we have raised approximately $8.2 million through funds provided by private placement offerings. This has been sufficient to enable us to development our first product and to make some improvements to that product. Although we expect this trend of financing our business through private placement offerings to continue, we can make no guarantee that we will be adequately financed going forward. However, it is also anticipated that in the event we are able to continue raising funds at a pace that exceeds our minimum capital requirements, we may elect to spend cash to expand operations or take advantage of business and marketing opportunities for our long-term benefit. Additionally, we intend to continue to use equity whenever possible to finance marketing, public relations and development services that we may not otherwise be able to obtain without cash.

Going Concern
 
As of the fiscal year ended March 31, 2007, we started to generate revenue, and from inception through June 30, 2007 have incurred net losses of $36,950,803 and have had negative cash flows from operations of $7,789,288 from our inception through June 30, 2007. Following the launch of our product, we significantly downsized both our domestic and contracted international workers in order to reduce our ongoing cash expenditures. We also built up a significant level of accounts payable due to the expenses associated with our product launch.
 
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Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We plan to continue to provide for our capital requirements by issuing additional equity. No assurance can be given that additional capital will be available when required or on terms acceptable to us. We also cannot give assurance that we will achieve sufficient revenues in the future to achieve profitability and cash flow positive operations. The outcome of these matters cannot be predicted at this time and there are no assurances that, if achieved, we will have sufficient funds to execute our business plan or to generate positive operating results.
 
Our independent registered public accounting firm has indicated that these matters, among others, raise substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies
 
Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, however, in the past the estimates and assumptions have been materially accurate and have not required any significant changes. Specific sensitivity of each of the estimates and assumptions to change based on other outcomes that are reasonably likely to occur and would have a material effect is identified individually in each of the discussions of the critical accounting policies described below. Should we experience significant changes in the estimates or assumptions which would cause a material change to the amounts used in the preparation of our financial statements, material quantitative information will be made available to investors as soon as it is reasonably available.
 
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
Software Development Costs. Research and development costs, which consist of software development costs, are expensed as incurred. Software development costs primarily include payments made to independent software developers under development agreements. SFAS No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed, provides for the capitalization of certain software development costs incurred after technological feasibility of the software is established or for the development costs that have alternative future uses. We believe that the technological feasibility of the underlying software is not established until substantially all product development is complete, which generally includes the development of a working model. No software development costs have been capitalized to date.
 
Impairment of Long-Lived Assets.  We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the present value of estimated future cash flows. At June 30, 2007, our management believes there is no impairment of its long-lived assets. There can be no assurance however; that market conditions will not change or that there will be demand for our products, which could result in impairment of long-lived assets in the future.
 
Stock-Based Compensation. Effective April 1, 2006, on the first day of our fiscal year 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payments, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the fiscal year ended March 31, 2007 includes: (a) compensation cost for all share-based payments granted and not yet vested prior to April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (b) compensation cost for all share-based payments granted subsequent to March 31, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. As of June 30, 2007, we had no options outstanding and therefore believe the adoption of SFAS No. 123(R) to have an immaterial effect on the accompanying consolidated financial statements.
 
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We calculate stock-based compensation by estimating the fair value of each option using the Black-Scholes option pricing model. Our determination of the fair value of share-based payment awards are made as of their respective dates of grant using the option pricing model and that determination is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behavior. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The calculated compensation cost, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of the option.
 
Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur. We account for stock-based awards to non-employees by using the fair value method.
 
In accordance with EITF Issue No. 00-18, Accounting Recognition for Certain Accounting Transactions Involving Equity Instruments Granted to Other Than Employees, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we have recorded the fair value of the common stock issued for certain future consulting services as prepaid expenses in its consolidated balance sheet.
 
Revenue Recognition.  We evaluate the recognition of revenue based on the criteria set forth in SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as revised by SAB No. 104, “Revenue Recognition”. We evaluate revenue recognition using the following basic criteria and recognize revenue when all four of the following criteria are met:
 
 
 
 
• 
Evidence of an arrangement: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue.
 
 
 
 
• 
Delivery: Delivery is considered to occur when the products are shipped and risk of loss and reward have been transferred to the customer.
 
 
 
 
• 
Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable.
     
 
• 
Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).
 
Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must make assumptions and judgments in order to: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific objective evidence of fair value (“VSOE”) exists for each undelivered element; and (4) allocate the total price among the various elements we must deliver. Changes to any of these assumptions or judgments, or changes to the elements in a software arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.
 
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Product Revenue: Product revenue, including sales to resellers and distributors (“channel partners”), is recognized when the above criteria are met. We reduce product revenue for estimated future returns, price protection, and other offerings, which may occur with our customers and channel partners.
 
Shipping and Handling: In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs”, we recognize amounts billed to customers for shipping and handling as revenue. Additionally, shipping and handling costs incurred by us are included in cost of goods sold.
 
The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures have been deducted from revenue. During the three months ended June 30, 2007, we recorded a total of $0 under such types of arrangements.
 
 
We carried out an evaluation as of June 30, 2007, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Subsequent to June 30, 2007, there have been no significant changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II  - OTHER INFORMATION
 
 
We currently are not a party to any material legal proceedings.
 
 
During the three months ended June 30, 2007, we issued 9,088,000 shares of common stock for net proceeds of $883,800 (excluding a stockholder note receivable for $25,000).. There were no offering costs associated with the shares we sold for cash in the three months ended June 30, 2007.
 
During the three months ended June 30, 2007, we issued 981,949 shares of common stock for services provided by independent third parties, valued at $249,357 (based on the closing price of our common stock on the respective issuance dates), respectively.
 
During the three months ended June 30, 2007, we issued 425,000 shares of common stock, valued at $93,325, (based on the closing price of our common stock on the respective issuance dates), to certain employees as additional compensation.
 
During the three months ended June 30, 2007, we issued 325,000 shares of common stock valued at $76,750 to investors and investment bankers to receive $130,000 in gross proceeds under a bridge financing.
 
Subsequent to June 30, 2007 and through August 10, 2007, we raised additional equity through the sale of our common stock to accredited investors. We raised $172,000 in cash and a note for $45,000 from the sale of 2,170,000 shares of our common stock.
 
Subsequent to June 30, 2007, we issued 382,500 shares of our common stock to independent third parties for services performed, valued at $69,725 (based on the closing price of our common stock on the respective issuance dates).
 
Subsequent to June 30, 2007, we issued 35,000 shares of our common stock to an employee as additional compensation, valued at $6,300 (based on the closing price of our common stock on the respective issuance dates).
 
Subsequent to June 30, 2007, two of the investors in the Bridge Loan (see Note 9) agreed to convert their aggregate note balances of $110,000 to common stock. We issued an additional 880,000 shares to convert the principal balance of their notes and recorded the $110,000 to common stock and additional paid-in capital. We also accelerated the unamortized value of the debt issuance costs attributable to their notes. This resulted in additional interest expense of $40,617. Since the effective conversion price of the 880,000 shares issued to convert that $110,000 of debt was $0.125 per share and that conversion price was $0.095 less than the closing price of $0.22 on the date of conversion, we will record in the three months ending September 30, 2007 an additional interest charge of $83,600 relating to that beneficial conversion.
 
We believe the transactions to be exempt under Section 4(2) of the Securities Act of 1933, as amended, because they do not involve a public offering. We believe that this sale of securities did not involve a public offering on the basis that each investor is an accredited investor as defined in Rule 501 of Regulation D and because we provided each of our investors with a private placement memorandum disclosing items set out in Rule 501 and 506 of Regulation D.  The shares sold were restricted securities as defined in Rule 144(a)(3). Further, each common stock certificate issued in connection with this private offering bears a legend providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of legal counsel that registration is not required under the Securities Act of 1933.
 
 
None.
 
Item 4.  Submission of Matters to a Vote of Security Holders.
 
None.
 
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Item 5.  Other Information.
 
None
 
Item 6.  Exhibits.
 
(a)    Exhibits (filed with this report unless indicated below)
 
 
Exhibit 31.1
Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Exhibit 31.2
Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Exhibit 32.1
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Exhibit 32.2
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
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In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
LEFT BEHIND GAMES INC.
 
Dated: August 20, 2007
 
By: /s/ Troy Lyndon                                             
Troy Lyndon, Chief Executive Officer
 (Principal Executive Officer)
 

By: /s/ James B. Frakes                                         
James B. Frakes, Chief Financial Officer
(Principal Financial Officer)
 
 
 
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