REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of
Majesco Entertainment Company
We have audited the accompanying consolidated balance sheetssheet of Majesco Entertainment Company and subsidiarySubsidiary (the “Company”) as of October 31, 2008 and 2007,2010, and the related consolidated statements of operations, stockholders’ equity and accumulated other comprehensive loss, and cash flows for the yearsyear then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Majesco Entertainment Company and subsidiary as of October 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of Majesco Entertainment Company and subsidiary’s internal control over financial reporting as of October 31, 2008, included in the accompanyingControls and Proceduresand, accordingly, we do not express an opinion thereon.
McGladrey & Pullen, LLP
New York, New York
January 29, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Majesco Entertainment Company
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Majesco Entertainment Company and subsidiary for the year ended October 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Majesco Entertainment Company and Subsidiary at October 31, 2010 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/S/ EISNERAMPER LLP
January 31, 2011
Edison, New Jersey
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Majesco Entertainment Company
We have audited the accompanying consolidated balance sheet of Majesco Entertainment Company and Subsidiary (the “Company”) as of October 31, 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Majesco Entertainment Company and Subsidiary at October 31, 2009 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/S/ AMPER, POLITZINER & MATTIA, LLP
January 28, 2010
Edison, New Jersey
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Majesco Entertainment Company
We have audited the accompanying consolidated statements of operations, stockholders’ equity, and accumulated other comprehensive loss, and cash flows of Majesco Entertainment Company and subsidiary for the year ended October 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Majesco Entertainment Company and subsidiary for the year ended October 31, 20062008, in conformity with United StatesU.S. generally accepted accounting principles.
As disclosed in Note 2, the Company changed its method of accounting for stock-based compensation, effective November 1, 2005.
/s/ MCGLADREY & PULLEN, LLP
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered losses that raise substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters in also described in Note 1. The financial statements do not include any adjustments that might result from this uncertainty.
GOLDSTEIN GOLUB KESSLERMcGladrey & Pullen, LLP
New York, New York
January 19, 200729, 2009
F-3
F-4
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | |
| | | | | | | | | | October 31, | |
| | October 31, | | | 2010 | | 2009 | |
| | 2008 | | 2007 | |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 5,505 | | $ | 7,277 | | | $ | 8,004 | | | $ | 11,839 | |
Accounts and other receivables | | 3,032 | | 670 | | |
Inventory | | 5,619 | | 3,850 | | |
Capitalized software development costs and license fees, current portion | | 6,812 | | 2,171 | | |
Due from factor | | | | 1,015 | | | | 1,172 | |
Accounts and other receivables, net | | | | 725 | | | | 1,145 | |
Inventory, net | | | | 8,418 | | | | 6,190 | |
Advance payments for inventory | | | | 5,454 | | | | 3,126 | |
Capitalized software development costs and license fees | | | | 4,903 | | | | 3,678 | |
Prepaid expenses | | 1,956 | | 1,128 | | | | 921 | | | | 847 | |
| | | | | | | | | | |
Total current assets | | 22,924 | | 15,096 | | | | 29,440 | | | | 27,997 | |
Property and equipment — net | | 563 | | 568 | | |
Capitalized software development costs and license fees, net of current portion | | — | | 549 | | |
Property and equipment, net | | | | 520 | | | | 447 | |
Other assets | | 83 | | 100 | | | | 69 | | | | 83 | |
| | | | | | | | | | |
Total assets | | $ | 23,570 | | $ | 16,313 | | | $ | 30,029 | | | $ | 28,527 | |
| | | | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 10,697 | | $ | 7,488 | | | $ | 11,375 | | | $ | 9,356 | |
Share-based litigation settlement | | 1,250 | | 2,822 | | |
Due to factor | | 983 | | 1,527 | | |
Customer billings due to distribution partner | | 1,487 | | — | | | | — | | | | 230 | |
Inventory financing payables | | 1,540 | | — | | | | 5,557 | | | | 6,053 | |
Advances from customers | | 265 | | 425 | | |
Advances from customers and deferred revenue | | | | 945 | | | | 543 | |
| | | | | | | | | | |
Total current liabilities | | 16,222 | | 12,262 | | | | 17,877 | | | | 16,182 | |
Warrant liability | | 211 | | 1,460 | | | | 144 | | | | 626 | |
Commitments and contingencies | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | |
Common stock — $.001 par value; 250,000,000 share authorized; 30,127,950 and 28,675,962 issued and outstanding at October 31, 2008 and October 31, 2007 respectively | | 30 | | 29 | | |
Additional paid in capital | | 101,722 | | 100,201 | | |
Common stock — $.001 par value; 250,000,000 shares authorized; 39,326,376 and 38,553,740 shares issued and outstanding at October 31, 2010 and 2009, respectively | | | | 39 | | | | 38 | |
Additional paid-in capital | | | | 114,824 | | | | 113,484 | |
Accumulated deficit | | | (94,172 | ) | | | (97,524 | ) | | | (102,333 | ) | | | (101,361 | ) |
Accumulated other comprehensive loss | | | (443 | ) | | | (115 | ) | | | (522 | ) | | | (442 | ) |
| | | | | | | | | | |
Net stockholders’ equity | | 7,137 | | 2,591 | | | | 12,008 | | | | 11,719 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 23,570 | | $ | 16,313 | | | $ | 30,029 | | | $ | 28,527 | |
| | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-4
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
| | | | | | | | | | | | |
| | Year Ended October 31, | |
| | 2008 | | | 2007 | | | 2006 | |
Net revenues | | $ | 63,887 | | | $ | 50,967 | | | $ | 66,683 | |
| | | | | | | | | |
Cost of sales | | | | | | | | | | | | |
Product costs | | | 28,881 | | | | 25,936 | | | | 32,259 | |
Software development costs and license fees | | | 11,917 | | | | 7,746 | | | | 14,599 | |
| | | | | | | | | |
| | | 40,798 | | | | 33,682 | | | | 46,858 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Gross profit | | | 23,089 | | | | 17,285 | | | | 19,825 | |
Operating costs and expenses | | | | | | | | | | | | |
Product research and development | | | 3,306 | | | | 2,311 | | | | 2,607 | |
Selling and marketing | | | 8,628 | | | | 7,421 | | | | 10,910 | |
General and administrative | | | 9,549 | | | | 8,376 | | | | 11,251 | |
Depreciation and amortization | | | 300 | | | | 296 | | | | 430 | |
Gain on settlements | | | — | | | | (266 | ) | | | (4,753 | ) |
Settlement of litigation and related charges, net | | | (1,572 | ) | | | 2,822 | | | | — | |
Loss on impairment of software development costs | | | 101 | | | | 154 | | | | 2,375 | |
| | | | | | | | | |
| | | 20,312 | | | | 21,114 | | | | 22,820 | |
| | | | | | | | | |
Operating income (loss) | | | 2,777 | | | | (3,829 | ) | | | (2,995 | ) |
Other expenses (income) | | | | | | | | | | | | |
Interest and financing costs, net | | | 649 | | | | 1,552 | | | | 2,371 | |
Change in fair value of warrants | | | (1,250 | ) | | | (611 | ) | | | — | |
| | | | | | | | | |
Income (loss) before income taxes | | | 3,378 | | | | (4,770 | ) | | | (5,366 | ) |
Income taxes | | | 26 | | | | — | | | | — | |
| | | | | | | | | |
Net income (loss) | | $ | 3,352 | | | $ | (4,770 | ) | | $ | (5,366 | ) |
| | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | |
Basic and diluted | | $ | 0.12 | | | $ | (0.20 | ) | | $ | (0.24 | ) |
| | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic and diluted | | | 27,547,211 | | | | 23,891,860 | | | | 22,616,419 | |
| | | | | | | | | |
See accompanying notes
F-5
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Common Stock | | | Additional | | | | | | | Other | | | Net | |
| | -$.001 par value | | | Paid In | | | Accumulated | | | Comprehensive | | | Stockholders’ | |
| | Number | | | Amount | | | Capital | | | Deficit | | | Loss | | | Equity | |
Balance — October 31, 2005 | | | 22,242,476 | | | $ | 22 | | | $ | 92,158 | | | $ | (87,388 | ) | | $ | (31 | ) | | $ | 4,761 | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Settlement of accounts payable | | | 116,442 | | | | — | | | | 126 | | | | — | | | | — | | | | 126 | |
Restricted stock grants — directors | | | 71,393 | | | | — | | | | 127 | | | | — | | | | — | | | | 127 | |
Restricted stock grants — employees | | | 997,151 | | | | 1 | | | | 114 | | | | — | | | | — | | | | 115 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 1,818 | | | | — | | | | — | | | | 1,818 | |
Issuance of warrants for services | | | | | | | | | | | 186 | | | | | | | | | | | | 186 | |
Net loss | | | — | | | | — | | | | — | | | | (5,366 | ) | | | — | | | | (5,366 | ) |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (18 | ) | | | (18 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | | | | | (5,384 | ) |
| | | | | | | | | | | | | | | | | | |
Balance — October 31, 2006 | | | 23,427,462 | | | $ | 23 | | | $ | 94,529 | | | $ | (92,754 | ) | | $ | (49 | ) | | $ | 1,749 | |
| | | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Settlement of accounts payable | | | 238,562 | | | | — | | | | 365 | | | | — | | | | — | | | | 365 | |
Restricted stock grants — employees and directors | | | 727,438 | | | | 1 | | | | 732 | | | | — | | | | — | | | | 733 | |
Exercise of stock options | | | 33,334 | | | | | | | | 49 | | | | — | | | | — | | | | 49 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 773 | | | | — | | | | — | | | | 773 | |
Private placement of securities | | | 4,244,335 | | | | 4 | | | | 3,743 | | | | — | | | | — | | | | 3,747 | |
Issuance of common stock for assets | | | 4,831 | | | | 1 | | | | 10 | | | | — | | | | — | | | | 11 | |
Net loss | | | — | | | | — | | | | — | | | | (4,770 | ) | | | — | | | | (4,770 | ) |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (66 | ) | | | (66 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | | | | | (4,836 | ) |
| | | | | | | | | | | | | | | | | | |
Balance — October 31, 2007 | | | 28,675,962 | | | $ | 29 | | | $ | 100,201 | | | $ | (97,524 | ) | | $ | (115 | ) | | $ | 2,591 | |
| | | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of private placement of securities | | | — | | | | — | | | | (40 | ) | | | — | | | | — | | | | (40 | ) |
Restricted stock grants — directors | | | 181,397 | | | | — | | | | 191 | | | | — | | | | — | | | | 191 | |
Restricted stock grants, net — employees | | | 1,354,731 | | | | 1 | | | | 1,132 | | | | — | | | | — | | | | 1,133 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 233 | | | | — | | | | — | | | | 233 | |
Issuance of warrants for services | | | — | | | | — | | | | 77 | | | | — | | | | — | | | | 77 | |
Treasury stock to be retired | | | (84,140 | ) | | | — | | | | (72 | ) | | | — | | | | — | | | | (72 | ) |
Net income | | | — | | | | — | | | | — | | | | 3,352 | | | | — | | | | 3,352 | |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (328 | ) | | | (328 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | | | | | 3,024 | |
| | | | | | | | | | | | | | | | | | |
Balance — October 31, 2008 | | | 30,127,950 | | | $ | 30 | | | $ | 101,722 | | | $ | (94,172 | ) | | $ | (443 | ) | | $ | 7,137 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended October 31, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Net revenues | | $ | 75,648 | | | $ | 94,452 | | | $ | 63,887 | |
| | | | | | | | | | | | |
Cost of sales | | | | | | | | | | | | |
Product costs | | | 38,718 | | | | 39,699 | | | | 28,881 | |
Software development costs and license fees | | | 17,524 | | | | 29,329 | | | | 11,917 | |
Loss on impairment of software development costs and license fees — future releases | | | 1,021 | | | | 2,515 | | | | — | |
| | | | | | | | | | | | |
| | | 57,263 | | | | 71,543 | | | | 40,798 | |
| | | | | | | | | | | | |
Gross profit | | | 18,385 | | | | 22,909 | | | | 23,089 | |
| | | | | | | | | | | | |
Operating costs and expenses | | | | | | | | | | | | |
Product research and development | | | 3,347 | | | | 4,672 | | | | 3,306 | |
Selling and marketing | | | 8,432 | | | | 14,618 | | | | 8,628 | |
General and administrative | | | 8,127 | | | | 8,557 | | | | 9,549 | |
Depreciation and amortization | | | 183 | | | | 263 | | | | 300 | |
Settlement of litigation and related charges, net | | | — | | | | 404 | | | | (1,572 | ) |
Loss on impairment of software development costs and license fees — cancelled games | | | 407 | | | | 966 | | | | 101 | |
| | | | | | | | | | | | |
| | | 20,496 | | | | 29,480 | | | | 20,312 | |
| | | | | | | | | | | | |
Operating (loss) income | | | (2,111 | ) | | | (6,571 | ) | | | 2,777 | |
Other expenses (income) | | | | | | | | | | | | |
Interest and financing costs, net | | | 999 | | | | 1,318 | | | | 649 | |
Change in fair value of warrant liability | | | (482 | ) | | | 415 | | | | (1,250 | ) |
| | | | | | | | | | | | |
(Loss) income before income taxes | | | (2,628 | ) | | | (8,304 | ) | | | 3,378 | |
Income taxes | | | (1,656 | ) | | | (1,115 | ) | | | 26 | |
| | | | | | | | | | | | |
Net (loss) income | | $ | (972 | ) | | $ | (7,189 | ) | | $ | 3,352 | |
| | | | | | | | | | | | |
Net (loss) income per share: | | | | | | | | | | | | |
Basic and diluted | | $ | (0.03 | ) | | $ | (0.24 | ) | | $ | 0.12 | |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic and diluted | | | 37,019,750 | | | | 29,770,382 | | | | 27,547,211 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-6
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated
| | | | |
| | Common Stock
| | | Additional
| | | | | | Other
| | | Net
| |
| | $.001 par value | | | Paid-In
| | | Accumulated
| | | Comprehensive
| | | Stockholders’
| |
| | Number | | | Amount | | | Capital | | | Deficit | | | Loss | | | Equity | |
|
Balance — October 31, 2007 | | | 28,675,962 | | | $ | 29 | | | $ | 100,201 | | | $ | (97,524 | ) | | $ | (115 | ) | | $ | 2,591 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of private placement of securities | | | — | | | | — | | | | (40 | ) | | | — | | | | — | | | | (40 | ) |
Restricted stock grants — directors | | | 181,397 | | | | — | | | | 191 | | | | — | | | | — | | | | 191 | |
Restricted stock grants, net — employees | | | 1,354,731 | | | | 1 | | | | 1,132 | | | | — | | | | — | | | | 1,133 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 233 | | | | — | | | | — | | | | 233 | |
Issuance of warrants for services | | | — | | | | — | | | | 77 | | | | — | | | | — | | | | 77 | |
Treasury stock — retired | | | (84,140 | ) | | | — | | | | (72 | ) | | | — | | | | — | | | | (72 | ) |
Net income | | | — | | | | — | | | | — | | | | 3,352 | | | | — | | | | 3,352 | |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (328 | ) | | | (328 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | — | | | | — | | | | — | | | | — | | | | 3,024 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance — October 31, 2008 | | | 30,127,950 | | | $ | 30 | | | $ | 101,722 | | | $ | (94,172 | ) | | $ | (443 | ) | | $ | 7,137 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Sale of common stock | | | 6,420,000 | | | | 6 | | | | 8,622 | | | | — | | | | — | | | | 8,628 | |
Settlement of litigation | | | 1,130,000 | | | | 1 | | | | 1,411 | | | | — | | | | — | | | | 1,412 | |
Exercise of warrants | | | 28,807 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Restricted stock grants — directors | | | 234,183 | | | | — | | | | 229 | | | | — | | | | — | | | | 229 | |
Restricted stock grants, net — employees | | | 612,800 | | | | 1 | | | | 1,384 | | | | — | | | | — | | | | 1,385 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 116 | | | | — | | | | — | | | | 116 | |
Net loss | | | — | | | | — | | | | — | | | | (7,189 | ) | | | — | | | | (7,189 | ) |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | — | | | | — | | | | — | | | | — | | | | (7,188 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance — October 31, 2009 | | | 38,553,740 | | | $ | 38 | | | $ | 113,484 | | | $ | (101,361 | ) | | $ | (442 | ) | | $ | 11,719 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock in connection with: | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock grants — directors | | | 261,706 | | | | — | | | | 218 | | | | — | | | | — | | | | 218 | |
Restricted stock grants, net — employees | | | 510,930 | | | | 1 | | | | 962 | | | | — | | | | — | | | | 963 | |
Non-cash compensation charges — stock options | | | — | | | | — | | | | 121 | | | | — | | | | — | | | | 121 | |
Warrants issued for services | | | — | | | | — | | | | 39 | | | | — | | | | — | | | | 39 | |
Net loss | | | — | | | | — | | | | — | | | | (972 | ) | | | — | | | | (972 | ) |
Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | (80 | ) | | | (80 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | — | | | | — | | | | — | | | | — | | | | (1,052 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance — October 31, 2010 | | | 39,326,376 | | | $ | 39 | | | $ | 114,824 | | | $ | (102,333 | ) | | $ | (522 | ) | | $ | 12,008 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-7
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended October 31, | |
| | Year Ended October 31, | | | 2010 | | 2009 | | 2008 | |
| | 2008 | | 2007 | | 2006 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | |
Net income (loss) | | $ | 3,352 | | $ | (4,770 | ) | | $ | (5,366 | ) | |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | |
Change in fair value of warrants | | | (1,250 | ) | | | (611 | ) | | — | | |
Net (loss) income | | | $ | (972 | ) | | $ | (7,189 | ) | | $ | 3,352 | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | | (482 | ) | | | 415 | | | | (1,250 | ) |
Depreciation and amortization | | 315 | | 296 | | 430 | | | | 183 | | | | 263 | | | | 315 | |
Amortization of capitalized software development costs and prepaid licenses fees | | 6,122 | | 3,116 | | 11,051 | | |
Provision for price protection | | | | 3,226 | | | | 5,363 | | | | 2,556 | |
Amortization of capitalized software development costs and prepaid license fees | | | | 6,543 | | | | 13,418 | | | | 6,122 | |
Non-cash compensation expense | | 1,558 | | 1,505 | | 2,246 | | | | 1,301 | | | | 1,730 | | | | 1,558 | |
Warrant issued for services | | 77 | | — | | — | | | | 39 | | | | — | | | | 77 | |
Write-off of accounts receivable | | 255 | | — | | — | | | | — | | | | — | | | | 255 | |
Share-based litigation settlement | | | (1,572 | ) | | 2,822 | | — | | | | — | | | | 404 | | | | (1,572 | ) |
Gain on settlements | | — | | | (266 | ) | | | (4,753 | ) | |
Loss on impairment of software development costs | | 101 | | 154 | | 2,375 | | |
Loss on asset disposals | | | | 27 | | | | — | | | | — | |
Loss on impairment of software development costs and license fees | | | | 1,428 | | | | 3,481 | | | | 101 | |
Changes in operating assets and liabilities | | | | | | | | | | | | | |
Due to/from factor — net | | | (544 | ) | | 2,716 | | | (8,153 | ) | | | (3,325 | ) | | | (7,186 | ) | | | (3,100 | ) |
Accounts and other receivables | | | (2,806 | ) | | 2,433 | | | (2,481 | ) | | | 618 | | | | 1,368 | | | | (2,806 | ) |
Inventory | | | (1,769 | ) | | | (1,412 | ) | | 5,620 | | | | (2,243 | ) | | | (412 | ) | | | (1,769 | ) |
Capitalized software development costs and prepaid license fees | | | (10,362 | ) | | | (4,501 | ) | | 2,863 | | | | (9,197 | ) | | | (13,741 | ) | | | (10,362 | ) |
Income tax receivable | | — | | — | | 826 | | |
Prepaid expenses | | | (833 | ) | | 1,097 | | | (1,718 | ) | |
Other assets | | | (17 | ) | | | (18 | ) | | 9 | | |
Advance payments for inventory | | | | (2,328 | ) | | | (2,875 | ) | | | 662 | |
Prepaid expenses and other assets | | | | (66 | ) | | | 874 | | | | (1,512 | ) |
Accounts payable and accrued expenses | | 3,314 | | | (2,791 | ) | | | (3,204 | ) | | | 2,041 | | | | (779 | ) | | | 3,314 | |
Litigation settlement | | | | — | | | | (700 | ) | | | — | |
Customer billings due to distribution partner | | 1,487 | | — | | — | | | | (230 | ) | | | (1,257 | ) | | | 1,487 | |
Advances from customers | | | (126 | ) | | | (536 | ) | | 477 | | | | 402 | | | | 245 | | | | (126 | ) |
| | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | (2,698 | ) | | | (766 | ) | | 222 | | |
Net cash used in operating activities | | | | (3,035 | ) | | | (6,578 | ) | | | (2,698 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | |
Purchases of property and equipment | | | (314 | ) | | | (163 | ) | | | (207 | ) | | | (283 | ) | | | (146 | ) | | | (314 | ) |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (314 | ) | | | (163 | ) | | | (207 | ) | | | (283 | ) | | | (146 | ) | | | (314 | ) |
| | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | |
Proceeds from exercise of stock options | | — | | 49 | | — | | |
Treasury stock, to be retired | | | (72 | ) | | — | | — | | |
Sale of common stock, net of expenses | | | | — | | | | 8,628 | | | | — | |
Treasury stock — retired | | | | — | | | | — | | | | (72 | ) |
Inventory financing | | 1,540 | | | (1,390 | ) | | 1,390 | | | | (496 | ) | | | 4,513 | | | | 1,540 | |
Proceeds from private placement, net of expenses | | | (40 | ) | | 5,819 | | — | | | | — | | | | — | | | | (40 | ) |
| | | | | | | | | | | | | | |
Net cash provided by financing activities | | 1,428 | | 4,478 | | 1,390 | | |
Net cash (used in) provided by financing activities | | | | (496 | ) | | | 13,141 | | | | 1,428 | |
| | | | | | | | | | | | | | |
Effect of exchange rates on cash and cash equivalents | | | (188 | ) | | | (66 | ) | | | (18 | ) | | | (21 | ) | | | (83 | ) | | | (188 | ) |
| | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (1,772 | ) | | 3,483 | | 1,387 | | | | (3,835 | ) | | | 6,334 | | | | (1,772 | ) |
Cash and cash equivalents — beginning of year | | 7,277 | | 3,794 | | 2,407 | | | | 11,839 | | | | 5,505 | | | | 7,277 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 5,505 | | $ | 7,277 | | $ | 3,794 | | | $ | 8,004 | | | $ | 11,839 | | | $ | 5,505 | |
| | | | | | | | | | | | | | |
| | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | | | | | | | |
| | |
Cash paid during the year for interest | | $ | 676 | | $ | 1,638 | | $ | 2,285 | | | $ | 1,006 | | | $ | 1,322 | | | $ | 676 | |
| | | | | | | | | | | | | | |
Cash paid during the year for income taxes | | — | | — | | — | | | $ | — | | | $ | 1 | | | $ | — | |
| | | | | | | | | | | | | | |
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | | |
| | |
Issuance of common stock in payment of accounts payable | | — | | $ | 365 | | $ | 126 | | | $ | — | | | $ | 459 | | | $ | — | |
| | | | | | | | | | | | | | |
Issuance of common stock for assets | | — | | $ | 11 | | — | | |
| | | | | | | | |
Change in warrant liability incurred on private placement | | $ | (1,250 | ) | | $ | 2,071 | | — | | |
| | | | | | | | |
See accompanying notes to consolidated financial statements
F-7
F-8
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The following financial statements present the financial results of Majesco Entertainment Company and Majesco Europe Limited, its wholly owned UK subsidiary, (“Majesco” or “Company”“the Company”) on a consolidated basis.
2. PRINCIPAL BUSINESS ACTIVITY
| |
2. | PRINCIPAL BUSINESS ACTIVITY |
The Company is a provider of interactive entertainment products. The Company’s offerings include video game software and other digital entertainment products.
The Company’s products provide it with opportunities to capitalize onprimarily for the large and growing installed base of interactive entertainment platforms and an increasing number of interactive entertainment enthusiasts. The Companyfamily oriented, mass-market consumer. It sells its products directly and through resellers, primarily to U.S.large retail chains, including Best Buy, GameStop/Electronics Boutique, Target, Toys “R” Usspecialty retail stores, video game rental outlets and Wal-Mart. Majesco also sells products internationally through partnerships with international publishers. The Company has developed retail and distribution network relationships over its more than 22-year history.
Majesco provides offeringsdistributors. It publishes video games for most major current generation interactive entertainment hardware platforms, including Nintendo’s Game Boy Advance, or GBA, DS, Micro, GameCubeDSi and Wii, Sony’s PlayStation 2,3, or PS2,PS3, and PlayStation Portable, or PSP®, Microsoft’s Xbox and Xbox 360 and the personal computer, or PC. It also publishes games for numerous digital platforms, including mobile platforms like iPhone, iPad and iPod Touch, as well as online platforms such as Facebook.
Majesco’s offerings include
The Company’s video game softwaretitles are targeted at various demographics at a range of price points. Due to the larger budget requirements for developing and marketing premium console titles for core gamers, it focuses on publishing more casual games targeting mass-market consumers. In some instances, its titles are based on licenses of well known properties and, in other digital entertainment products. cases based on original properties. The Company collaborates and enters into agreements with content providers and video game development studios for the creation of its video games.
The Company’s operations involve similar products and customers worldwide. These products are developed and sold domestically and internationally. The Company may also enter into agreements with licensees, particularly for sales of its products internationally. The Company is centrally managed and theits chief operating decision makers, the chief executive and other officers, use consolidated and other financial information supplemented by sales information by product category, major product title and platform for making operational decisions and assessing financial performance. Accordingly, the Company operates in a single segment.
Net sales by geographic region were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended October 31, | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 2010 | | % | | 2009 | | % | | 2008 | | % | |
| | Years Ended December 31, | | | (in thousands) | |
| | 2008 | | % | | 2007 | | % | | 2006 | | % | |
United States | | $ | 57,932 | | | 90.7 | % | | $ | 43,564 | | | 85.5 | % | | $ | 56,743 | | | 85.1 | % | | $ | 73,817 | | | | 97.6 | % | | $ | 90,428 | | | | 95.7 | % | | $ | 57,932 | | | | 90.7 | % |
Europe | | 5,955 | | | 9.3 | % | | 7,403 | | | 14.5 | % | | 9,940 | | | 14.9 | % | | | 1,831 | | | | 2.4 | % | | | 4,024 | | | | 4.3 | % | | | 5,955 | | | | 9.3 | % |
| | | | | | | | | | | | | | | | | | | | | | �� | | | | | |
Total | | $ | 63,887 | | | 100.0 | % | | $ | 50,967 | | | 100.0 | % | | $ | 66,683 | | | 100.0 | % | | $ | 75,648 | | | | 100.0 | % | | $ | 94,452 | | | | 100.0 | % | | $ | 63,887 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
In June 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) became the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The ASC did not create any new GAAP standards but incorporated existing accounting and reporting standards into a topical structure with a new referencing system to identify authoritative accounting standards, replaced the prior references.
Principles of Consolidation.The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary located in the United Kingdom. Significant intercompany accounts and transactions have been eliminated in consolidation.
F-9
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition.The Company recognizes revenue upon the shipment of its products when: (1) title and riskthe risks and rewards of lossownership are transferred; (2) persuasive evidence of an arrangement exists; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable is probable. Certain products are sold to customers with a street date (the earliest date these products may be resold by retailers). Revenue for sales of these products is not recognized prior to their street date. Some of the Company’s software products provide limited online features at no additional cost to the consumer. Generally, such features have been considered to be incidental to the Company’s overall product offerings and an inconsequential deliverable. Accordingly, the Company does not defer any revenue related to products containing these limited online features. However, in instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, such characteristics will be taken into account when applying the Company’s revenue recognition policy.
The Company has an arrangement in which it distributes video games published by another company for a fee based on the gross sales of their products. The Company does not take title to the inventory in the
F-8
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transaction, however the Company does warehouse, ship and invoice the customer. The Company records accounts receivable based on the gross amount of the amount billed and an amount payable to the distribution partner for the amount billed, less the Company’s distribution fee and certain expenses. The Company records revenue for these services at the net amount earned becausedistribution agreements where it is acting as an agent for the principal in the transaction as defined by EITF 99-19.ASC Topic 605, Revenue Recognition, Subtopic 45,Principal Agent Considerations, on a net basis. The Company has recorded approximately $0.0 million, $0.3 million and $0.3 million of fees from a distribution partner for each of the yearyears ended October 31, 2010, 2009 and 2008, respectively, approximately $2.1$0 and $0.1 million in accounts receivable due from its factor at October 31, 2008,2010 and $1.52009, respectively, and $0 and $0.2 million in amountsbillings payable to its distribution partner at October 31, 2008.2010 and 2009, respectively, related to its activities as an agent.
The Company generally sells its products on a no-return basis, although in certain instances, the Company may provideprovides price protection or other allowances on certain unsold products. Price protection, when granted and applicable, allows customers a partial credit against amounts they owe the Company with respect to merchandise unsold by them. Revenue is recognized, and accounts receivable is presented, net of estimates of these allowances.
The Company estimates potential future product price protection and other allowances related to current period product revenue. The Company analyzes historical experience, current sell through of retailer inventory of the Company’s products, current trends in the video game market, the overall economy, changes in customer demand and acceptance of the Company’s products and other related factors when evaluating the adequacy of price protection and other allowances.
Sales incentives or other consideration given by the Company to customers that are considered adjustments of the selling price of its products, such as rebates and product placement fees, are reflected as reductions of revenue. Sales incentives and other consideration that represent costs incurred by the Company for assets or servicesbenefits received, such as the appearance of the Company’s products in a customer’s national circular ad, are reflected as selling and marketing expenses.expenses, in accordance with, Accounting Standards Codification (“ASC”)605-50,Customer Payments and Incentives.
Shipping and handling, which consist principally of transportation charges incurred to move finished goods to customers, amounted to $0.8$0.4 million, $0.7$1.0 million and $0.5$0.8 million and are included in selling expenses for the years ended October 31, 2008, 20072010, 2009 and 2006,2008, respectively.
In certain instances, customers and distributors provide the Company with cash advances on their orders. These advances are then applied against future sales to these customers. Advances are classified as advances from customers and deferred revenue in the accompanying balance sheet.
Capitalized Software Development Costs and Intellectual Property Licenses.License Fees.Software development costs include fees, in the form of milestone payments made to independent software developers underand licensors, and, prior to its closing in July 2009, direct payroll and overhead costs for the Company’s internal development arrangements.studio. Software development costs are capitalized once technological feasibility of a product is established and it is determined thatmanagement expects such costs shouldto be recoverable against future revenues.
F-10
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For products where proven game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on aproduct-by-product basis. Amounts related to software development that are not capitalized are charged immediately to product research and development costs. Commencing upon a related product’s release capitalized software development costs and prepaid license fees are amortized to cost of sales based upon the higher of (i) the ratio of current revenue to total projected revenue or (ii) straight-line charges over the expected marketable life of the product.
Prepaid license fees represent license fees to holdersowners for the use of their intellectual property rights in the development of the Company’s products. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid license fees) and a current liability (accrued royalties payable) at the contractual amount upon execution of the contract or when specified milestones or events occur and when no significant performance remains with the licensor. Licenses are expensed to cost of sales at the higher of (i) the contractual royalty rate based on actual sales or (ii) an effective rate based upon total projected revenue related to such license. Capitalized software development costs are classified as non-current if they relate to titles for which the Company estimates the release date to be more than one year from the balance sheet date.
Commencing upon the related product’s release,
The amortization period for capitalized software development costs and prepaid license fees are amortized to cost of sales based upon the higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The amortization period is usually no longer than one year from the initial release of the product. If actual revenues or revised forecasted revenues fall below the initial forecasted revenue for a particular license, the charge to cost of sales may be larger than anticipated in any given quarter. The recoverability of capitalized software development costs and prepaid license fees is evaluated quarterly based on the expected performance of the specific products forto which the costs relate. The following criteria are usedWhen, in management’s estimate, future cash flows will not be sufficient to evaluate expected product performance: historical performancerecover previously capitalized costs, the Company expenses these capitalized costs to cost of comparable products using comparable technology; orders forsales as software development costs and license fees — future release, in the productperiod such a determination is made. These expenses may be incurred prior to a game’s release. If a game is cancelled and never released to market, the amount is expensed to general and administrative expenses. If the Company was required to write off licenses, due to changes in market conditions or product acceptance, its release;results of operations could be materially adversely affected.
Prepaid license fees and estimated performance of a sequel productmilestone payments made to the Company’s third party developers are typically considered non-refundable advances against the total compensation they can earn based onupon the sales performance of the product on whichproducts. Any additional royalty or other compensation earned beyond the sequelmilestone payments is based.
F-9
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSexpensed to cost of sales as incurred.
Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs. If revised forecasted or actual product sales are less than and/or revised forecasted or actual costs are greater than the original forecasted amount utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.
For the years ended October 31, 2008, 2007 and 2006, the Company charged operations $0.1, $0.2 and $2.4 million, respectively to write-off capitalized costs related to video games for which development was stopped.
Advertising Expenses.The Company generally expenses advertising costs as incurred except for production costs associated with media campaigns that are deferred and charged to expense at the first run of the ad.advertisement. Advertising costs charged to operations were $1.6$2.4 million, $1.4$6.4 million and $5.0$1.6 million for the years ended October 31, 2008, 2007,2010, 2009 and 2006,2008, respectively.
Income taxes.The Company accounts for income taxes under the asset and liability method using Statement of Financial Accounting Standards (''SFAS’’) No. 109, ''Accounting for Income Taxes.’’method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not likely.
Stock Based Compensation.In December 2004, Stock based compensation consists primarily of expenses related to the Financial Accounting Standards Board (''FASB’’) issued Statementissuance of Financial Accounting Standards No. 123 (R) (revised 2004), ''Share-Based Payment’’ which revised Statement of Financial Accounting Standards No. 123, ''Accounting for Stock-Based Compensation’’. This statement supersedes Opinion No. 25, ''Accounting forstock options and restricted stock grants. Stock Issuedoptions are granted to Employees.’’ The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the statement of operations. The revised statement has been implemented by the Company effective November 1, 2005.
Non cash compensation expenses accounted for under SFAS No. 123 (R) were $1.6, $1.5 and $2.2 million for the years ended October 31, 2008, 2007 and 2006, respectively.or
F-10
F-11
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | | | | |
| | October 31, | | October 31, | | October 31, |
| | 2008 | | 2007 | | 2006 |
Risk free annual interest rate | | | 3.3 | % | | | 4.6 | % | | | 4.30 | % |
Expected volatility | | | 65 | % | | | 107 | % | | | 90 | % |
Expected life | | 4.25 years | | 4.25 years | | 5 years |
Assumed dividends | | None | | None | | None |
Effective November 1, 2005, the Company adopted SFAS No. 123 (R) utilizing the modified prospective method. SFAS No. 123 (R) requires the recognition of stock-based compensation expense in the financial statements.
Under the modified prospective method, the provisions of SFAS No. 123 (R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS 123, “Accounting for Stock Based Compensation”, shall be recognized in net earnings in the periods after the date of adoption. Stock based compensation consists primarily of stock options. Stock options are granted to employeesdirectors at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. Stock options generally vest over two to three years and have a term of seven years. Compensation expense for stock options is recognized on a straight line basis over the vesting period of the award.award, based on the fair value of the option on the date of grant.
The fair value for options issued was estimated at the date of grant using a Black-Scholes option-pricing model. The risk free rate was derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor was determined based on the company’sCompany’s historical stock prices and those of comparable companies. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | | | | |
| | October 31,
| | October 31,
| | October 31,
|
| | 2010 | | 2009 | | 2008 |
|
Risk free annual interest rate | | 1.3% | | 2.2% | | 3.3% |
Expected volatility | | 74% | | 76% | | 65% |
Expected life | | 4.25 years | | 4.25 years | | 4.25 years |
Assumed dividends | | None | | None | | None |
Restricted stock grants are granted to directors and employees and have a vesting period of six months to three years. The value of restricted stock grants are measured based on their fair value on the date of grant and amortized over the vesting period.
Non cash compensation expenses related to stock options and restricted stock grants are recorded in general and administrative expenses in the accompanying statements of operations.
See note 15 for a full discussion of stock based compensation arrangements.
Cash and cash equivalents.Cash equivalents consist of highly liquid investments with insignificant rate risk and with original maturities of three months or less at the date of purchase.
At various times, the Company had deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.
Inventory.Inventory, which consists primarily of finished goods, is stated at the lower of cost as determined by thefirst-in, first-out method, or market. The Company estimates the net realizable value of slow-moving inventory on atitle-by-title basis and charges the excess of cost over net realizable value to cost of sales.
Property and equipment.Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets.assets, generally three to five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.
Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date
F-11
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are theprice protection and other estimated customer allowances,
F-12
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the valuation of inventory and the recoverability of advance payments for software development costs and intellectual property licenses. Actual results could differ from those estimates.
Foreign Currency Translation.The functional currency of the Company’s foreign subsidiary is its local currency. All assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at the exchange rate in effect at the end of the year, and revenue and operating expenses are translated at weighted average exchange rates during the year. The resulting translation adjustments are included in accumulated other comprehensive loss in the statement of stockholders’ equity.
Earnings (loss) per share.Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings (loss) per common share has not been presented for the periods because the impact of the conversion or exercise, as applicable, of the following warrants and stock options outstanding at the end of each period would be anti-dilutive.
| | | | | | | | | | | | |
| | October 31, |
| | 2008 | | 2007 | | 2006 |
Warrants (1) | | | 1,922,735 | | | | 1,854,877 | | | | 2,220,687 | |
Stock options | | | 1,352,610 | | | | 1,167,191 | | | | 1,527,494 | |
Unit purchase option (see Note 11) | | | 388,734 | | | | 388,734 | | | | — | |
| | |
(1) | | During the twelve months ended October 31, 2007, warrants to purchase 2,063,545 shares of common stock expired and warrants to purchase 1,697,735 shares of common stock related to an equity financing were issued (see Note 12). |
Recent Accounting Pronouncements.In September 2006, FASB issued SFAS No. 157 ''Fair Value Measurements.’’ This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that requireanti-dilutive either due to net losses or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Management is currently evaluating theantidilutive effect of this pronouncement on its financial statements.
In December 2007, the FASB issued SFAS No. 141(R),Business Combinations(''SFAS 141(R)’’), which establishes principlesexercise of stock options and requirements for howwarrants after applying the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. SFAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and will impact the Company’s financial statements only in the event of such a business combination.
F-12
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities(''SFAS 159’’). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new guidance is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of the adoption of SFAS 159 on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements an Amendment of ARB No. 51(''SFAS 160’’), which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the non-controlling owners of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management believes this Statement will have no impact on the financial statements of the Company once adopted.
In March 2008, the FASB issued FASB Statement No. 161,Disclosures About Derivative Instruments and Hedging Activities, which amends and expands the disclosure requirements of FASB Statement No. 133 with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how the derivative instruments and the related hedged items are accounted for and how the related hedged items affect an entity’s financial position, performance and cash flows. This Statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008. Management believes this Statement will have no impact on the financial statements of the Company once adopted.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect the adoption of this statement to have a material impact on the Company’s results of operations, financial position or cash flows.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 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 SFAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will be the Company’s fiscal year 2010. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and
F-13
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsequent to, the effective date. We do not expect the adoption of this statement to have a material impact on the Company’s results of operations, financial position or cash flows.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexedtreasury stock method due to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. It is effective for fiscal years beginning after December 15, 2008,exercise price in excess of fair market value (see notes 13 and interim periods within those fiscal years, which is our first quarter of 2009. We do not expect the adoption of EITF 07-5 will have a material impact on results of operations, financial position, or cash flows.15).
| | | | | | | | | | | | |
| | October 31, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Warrants | | | 2,226,469 | | | | 2,201,469 | | | | 2,311,469 | |
Stock options | | | 1,699,216 | | | | 1,483,929 | | | | 1,352,610 | |
Restricted stock | | | 1,749,535 | | | | 1,895,180 | | | | 2,218,373 | |
Reclassifications.For comparability, certain 20062008 and 2009 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2007.2010.
Commitments and Contingencies.The Company accounts for commitments and contingencies in accordance with financial accounting standards board Statement No. 5, Accounting for Contingencies. The company records a liability for commitments and contingencies when the amount is both probable and reasonably estimable.
Concentrations. The Company develops and distributes video game software for proprietary platforms under licenses from Nintendo, Sony and Microsoft, which must be periodically renewed. The Company’s agreements with these manufacturers also grant them certain control over the supply and manufacturing of the Company’s products. If these arrangements are disrupted, the Company’s operations could be adversely affected.
Fair Value.The carrying value of cash and cash equivalents, accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses, due to factor, and advances from customers are reasonable estimates of the fair values because of their short-term maturity.
4. FACTORED RECEIVABLESRecent Accounting Pronouncements.
Amendments to Variable Interest Entity Guidance — In June 2009, the FASB issued ASC Topic860-10-65,Accounting for Transfers of Financial Assets. The standard removes the concept of a qualifying special purpose entity from ASC Topic 860,Transfers and Servicing, and eliminates the exception for qualifying special purpose entities from consolidation guidance. In addition, the standard establishes specific conditions for reporting a transfer of a portion of a financial asset as a sale. If a transfer does not meet established sale conditions, the transferor and transferee must account for the transaction as a secured borrowing. An enterprise that continues to transfer portions of a financial asset that do not meet the established sale conditions would be eligible to record a sale only after it has transferred all of its interest in that asset. The effective date is fiscal years beginning after November 15, 2009. Accordingly, the Company will adopt the provisions in the first quarter of fiscal 2011. The Company is still evaluating the impact that the adoption of this new guidance will have on its consolidated financial position, cash flows and results of operations.
F-13
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiple-Deliverable Revenue Arrangements — In October 2009, the FASB issued new guidance related to the accounting for multiple-deliverable revenue arrangements. These new rules amend the existing guidance for separating consideration in multiple-deliverable arrangements and establish a selling price hierarchy for determining the selling price of a deliverable. These new rules will become effective, on a prospective basis, for the Company on November 1, 2010. The Company is still evaluating the impact that the adoption of this new guidance will have on its consolidated financial position, cash flows and results of operations.
Certain Revenue Arrangements That Include Software Elements — In October 2009, the FASB issued new guidance that changes the accounting model for revenue arrangements by excluding tangible products containing both software and non-software components that function together to deliver the product’s essential functionality and instead have these types of transactions be accounted for under other accounting literature in order to determine whether the software and non-software components function together to deliver the product’s essential functionality. These new rules will become effective, on a prospective basis, for the Company on November 1, 2010. The Company is still evaluating the impact that the adoption of this new guidance will have on its consolidated financial position, cash flows and results of operations.
Fair Value — In January 2010, the FASB issued an update toASC 820-10,Measuring Liabilities at Fair Values. The update toASC 820-10 requires disclosure of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, and a gross presentation of activity within the Level 3 rollforward, presenting separately information about purchases, sales issuances and settlements. The update toASC 820-10 was adopted by the Company in 2010, except for the gross presentation of the Level 3 rollforward which will be adopted by the Company in fiscal year 2011. The Company is currently evaluating the impact of the update toASC 820-10, but does not expect the adoption to have a material impact on its financial position, results of operations, and cash flows.
As of November 1, 2009, the Company adopted the guidance for Fair Value Measurements which establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
| | |
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
| • | Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data. |
|
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
F-14
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below segregates all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
| | | | | | | | | | | | | | | | |
| | | | | Quoted Prices
| | | | | | Significant
| |
| | | | | in Active Markets
| | | Significant Other
| | | Unobservable
| |
| | October 31,
| | | for Identical Assets
| | | Observable Inputs
| | | Inputs
| |
| | 2010 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | (in thousands) | |
|
Assets: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 1,045 | | | $ | 1,045 | | | $ | — | | | $ | — | |
Bank- deposit | | $ | 6,959 | | | $ | 6,959 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Total financial assets | | $ | 8,004 | | | $ | 8,004 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant liability | | $ | 144 | | | $ | — | | | $ | — | | | $ | 144 | |
| | | | | | | | | | | | | | | | |
Total financial liabilities | | $ | 144 | | | $ | — | | | $ | — | | | $ | 144 | |
| | | | | | | | | | | | | | | | |
On September 5, 2007, the Company issued warrants in connection with a private placement of its common stock. The warrants have an exercise price of $2.04 per share and a term of five years. The warrants contain provisions that may require settlement by transferring assets under certain change of control circumstances. Therefore, they are classified as liabilities in accordance with ASC Topic 480, Distinguishing Liabilities from Equity.
The Company measures the fair value of the warrants at each balance sheet date, and records the change in fair value as a non-cash charge or gain to earnings each period. The warrants were valued at $144,000 and $626,000 at October 31, 2010 and 2009, respectively. The Company recorded a non-cash gain of $482,000 and a non-cash charge of $415,000 in the years ended October 31, 2010 and 2009, respectively, due to the change in fair value of warrants. The Company used the Black-Scholes method to value the warrants, assuming volatility ranging from 65.4% to 76.1%, a life of 2.4 to 5 years, and a risk-free rate ranging from 0.4% to 4.16%.
The following table is a rollforward of the fair value of the warrants, as to which fair value is determined by Level 3 inputs:
| | | | | | | | |
| | Year
| | | Year
| |
| | Ended
| | | Ended
| |
| | October 31,
| | | October 31,
| |
Description | | 2010 | | | 2009 | |
| | (in thousands) | |
|
Beginning balance | | $ | 626 | | | $ | 211 | |
Total loss (gain) included in net loss | | | (482 | ) | | | 415 | |
| | | | | | | | |
Ending balance | | $ | 144 | | | $ | 626 | |
| | | | | | | | |
The carrying value of accounts receivable, accounts payable and accrued expenses, due from factor, and advances from customers are reasonable estimates of the fair values because of their short-term maturity.
The Company uses a factor to approve credit and to collect the proceeds from a substantial portion of its sales. Under the terms of the agreement, the Company assignssells to the factor and the factor purchases from the Company eligible accounts receivable.
F-15
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Company’s factoring agreement, the Company sells its accounts receivable to the factor. The factor, in its sole discretion, determines whether or not it will accept a receivable based on its assessment of credit risk. Once a receivable is accepted by the factor, the factor assumes substantially all of the credit risk associated with a receivable. If the receivable.factor does not accept the credit risk on a receivable, the Company may sell the accounts receivable to the factor while retaining the credit risk. In both cases, the Company surrenders all rights and control over the receivable to the factor. However, in cases where the Company retains the credit risk, the amount can be charged back to the Company in the case of non-payment by the customer, though this has only infrequently occurred. The factor is required to remit payments to the Company for the assigned accounts receivable in accordance with the terms of the assigned invoice, regardless of whether the factor receives payment on the receivable, so long aspurchased from it, provided the customer does not have a valid dispute related to the invoice. The amount remitted to the Company by the factor equals the invoiced amount, adjusted for allowances and discounts the Company has provided to the customer, less factor charges of 0.45 to 0.5% of the invoiced amount.
The Company reviews the collectability of accounts receivable for which it holds the credit risk quarterly, based on a review of an aging of open invoices and payment history, to make a determination if any allowance for bad debts is necessary.
In addition, the Company may request that the factor provide it with cash advances based on its accounts receivable and inventory, up to a maximum of $20 million. The factor may either accept or reject the Company’s request for advances at its discretion. Generally, the factor allowed the Company to take advances in an amount equal to 70% of net accounts receivable, plus 60% of the Company’s inventory balance up to a maximum of $2.5 million. Occasionally, the factor allows the Company to take advances in excess of these amounts for short term working capital needs. These excess amounts are typically repaid within a30-day period. At October 31, 2010 and 2009, the Company had no excess advances outstanding.
Amounts to be paid to the Company by the factor for any accounts receivable are offset by any amounts previously advanced by the factor. The interest rate is prime plus 1.5%, annually, subject to a 5.5% floor. In certain cases, the Company assigns accounts receivable to the factor to provide collection services and to serve as collateralcircumstances, an additional 1.0% annually is charged for advances however, the company retains the credit risk.against inventory.
Approximately $12.0$13.8 million of accounts receivable was assignedsold to the factor at October 31, 2008,2010, of which the Company assumed credit risk of approximately $7.1$1.4 million. .Approximately $19.3 million of accounts receivable was sold to the factor at October 31, 2009, of which the Company assumed credit risk of approximately $6.9 million.
The Company also utilizes purchase order financing through the factor, up to a maximum of $2.0 million, to provide funding for the manufacture of its products (see Note 8)10). In connection with these arrangements, the factor has a security interest in substantially all of the Company’s assets. The factor charges 0.5% of invoiced amounts, subject to certain minimum charges per invoice, for these credit and collection services.
In addition, the Company may request that the
Due from factor provide cash advances based upon the Company’s accounts receivable and inventory. The factor may either accept or reject the request for advances in its discretion. Amounts to be advanced to the Company by the factor for any assigned receivable are offset by any amounts previously advanced by the factor. As of October 31, 2008, the factor was advancing approximately 80%consists of the eligible accounts receivable and also is advancing approximately 60% of inventory. Total advances under the factoring arrangement include letters of credit for purchase order financing (see Note 8) and is limited to $20 million in cash advances including $2 million for letters offollowing:
| | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | |
|
Accounts receivable sold to factor | | $ | 13,754 | | | $ | 19,307 | |
Less: allowances | | | (3,298 | ) | | | (4,380 | ) |
advances from factor | | | (9,441 | ) | | | (13,755 | ) |
| | | | | | | | |
| | $ | 1,015 | | | $ | 1,172 | |
| | | | | | | | |
F-14
F-16
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
credits. The interest rate is prime plus 1.5% on outstanding advances, in certain circumstances, an additional 1% is added for advances on inventory balances. The factor’s charges and interest expense on the advances are included in ''interest and financing costs’’ in the accompanying consolidated statement of operations.
Due to factor consists of the following:
| | | | | | | | |
| | October 31, | |
| | (in thousands) | |
| | 2008 | | | 2007 | |
Accounts receivable assigned to factor | | $ | 12,004 | | | $ | 7,015 | |
Less: allowances | | | (3,359 | ) | | | (3,105 | ) |
advances from factor | | | (9,628 | ) | | | (5,437 | ) |
| | | | | | |
| | $ | (983 | ) | | $ | (1,527 | ) |
| | | | | | |
The following table sets forth the adjustments to the price protection and other customer sales incentive allowances included as a reduction of the amounts due from factor:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | Year Ended October 31,
| |
| | Year Ended October 31, | | | (in thousands) | |
| | (in thousands) | | | 2010 | | 2009 | | 2008 | |
| | 2008 | | 2007 | | 2006 | |
Balance — beginning of year | | $ | (3,105 | ) | | $ | (4,047 | ) | | $ | (9,551 | ) | | $ | (4,380 | ) | | $ | (3,359 | ) | | $ | (3,105 | ) |
Add: provisions | | | (2,556 | ) | | | (1,953 | ) | | | (3,799 | ) | | | (3,482 | ) | | | (5,031 | ) | | | (2,556 | ) |
Less: amounts charged against allowance | | 2,302 | | 2,895 | | 9,303 | | | | 4,564 | | | | 4,010 | | | | 2,302 | |
| | | | | | | | | | | | | | |
Balance — end of year | | $ | (3,359 | ) | | $ | (3,105 | ) | | $ | (4,047 | ) | | $ | (3,298 | ) | | $ | (4,380 | ) | | $ | (3,359 | ) |
| | | | | | | | | | | | | | |
5. PREPAID EXPENSES
The following table presents the major components of accounts receivable:
| | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | |
|
Trade receivables | | $ | 726 | | | $ | 1,388 | |
Allowances | | | (25 | ) | | | (295 | ) |
Other | | | 24 | | | | 52 | |
| | | | | | | | |
| | $ | 725 | | | $ | 1,145 | |
| | | | | | | | |
The following table presents the major components of prepaid expenses:
| | | | | | | | |
| | October 31, | |
| | (in thousands) | |
| | 2008 | | | 2007 | |
| | | | | | |
Advance payments for inventory | | $ | 242 | | | $ | 889 | |
Prepaid media advertising | | | 1,598 | | | | — | |
Other (less than 5% of total assets) | | | 116 | | | | 239 | |
| | | | | | |
| | $ | 1,956 | | | $ | 1,128 | |
| | | | | | |
| | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | |
|
Prepaid media advertising | | $ | 746 | | | $ | 627 | |
Other | | | 175 | | | | 220 | |
| | | | | | | | |
| | $ | 921 | | | $ | 847 | |
| | | | | | | | |
| |
8. | PROPERTY AND EQUIPMENT, NET |
The following table presents the components of property and equipment, net:
| | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | |
|
Computers and software | | $ | 2,699 | | | $ | 2,695 | |
Furniture and equipment | | | 739 | | | | 520 | |
Leasehold improvements | | | 150 | | | | 150 | |
| | | | | | | | |
| | | 3,588 | | | | 3,365 | |
Accumulated depreciation | | | (3,068 | ) | | | (2,918 | ) |
| | | | | | | | |
| | $ | 520 | | | $ | 447 | |
| | | | | | | | |
F-17
6. ACCOUNTS PAYABLEMAJESCO ENTERTAINMENT COMPANY AND ACCRUED EXPENSESSUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
9. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
The following table presents the major components of accounts payable and accrued expenses:
| | | | | | | | |
| | October 31, | |
| | (in thousands) | |
| | 2008 | | | 2007 | |
Accounts payable-trade | | | 5,264 | | | $ | 3,579 | |
Royalties | | | 2,268 | | | | 2,278 | |
Sales commissions | | | 203 | | | | 179 | |
Salaries and other compensation | | | 1,987 | | | | 706 | |
Other accruals | | | 975 | | | | 746 | |
| | | | | | |
| | $ | 10,697 | | | $ | 7,488 | |
| | | | | | |
F-15
| | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | |
|
Accounts payable-trade | | $ | 4,856 | | | $ | 4,029 | |
Royalty and software development | | | 5,517 | | | | 4,152 | |
Sales commissions | | | 120 | | | | 197 | |
Salaries and other compensation | | | 592 | | | | 648 | |
Other accruals | | | 290 | | | | 330 | |
| | | | | | | | |
| | $ | 11,375 | | | $ | 9,356 | |
| | | | | | | | |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CUSTOMER BILLINGS DUE TO DISTRIBUTION PARTNER
The Company has an arrangement in which it distributes video games published by another company for a fee based on the gross sales of their products. The Company does not take title to the inventory in the transaction, however the Company does warehouse, ship and invoice the customer. The Company records accounts receivable based on the gross amount of the amount billed and an amount payable to the distribution partner for the amount billed, less the Company’s distribution fee and certain expenses. The Company records revenue for these services at the net amount earned because it is acting as an agent for the principal in the transaction as defined by EITF 99-19. The Company has recorded approximately $0.3 million of fees for the year ended October 31, 2008, approximately $2.1 million in accounts receivable due from its factor at October 31, 2008, and $1.5 million in amounts payable to distribution partner at October 31, 2008.
| |
10. | INVENTORY FINANCING PAYABLE |
8. INVENTORY FINANCING PAYABLE
Manufacturers require the Company to prepay or present letters of credit inupon placing a purchase order to manufacture the products required under purchase orders from the Company’s customers.for inventory. The Company has arrangements with its factor and a finance company for purchase order financing in order to provide letters of credit necessary for the manufacture of products. The Company’s factor provides letters of credit for which the factor charges 0.5% of the purchase order amount for 30 days. The Company also utilizes letters of credit from a finance company which chargesprovides financing secured by the specific goods underlying the goods ordered from the manufacturer. The finance company makes the required payment to the manufacturer at the time a purchase order is placed, and is entitled to demand payment from the Company when the goods are delivered. The Company pays a financing fee equal to 1.5% of the purchase order amount for each transaction, for 30 days, plus administrative fees. Additional charges of 0.05% per day (18% annualized) are incurred if the lettersfinancing remains open for more than 30 days.
| |
11. | COMMON STOCK OFFERING |
On September 17, 2009, the Company sold 6,420,000 shares of credit remain outstandingcommon stock in excessa “registered direct offering” at a purchase price of $1.50 per share. The sale of the original time period and/or the financing company is not paid at the time the products are received.
9. ADVANCES FROM CUSTOMERS
In certain instances, customersshares was made pursuant to Subscription Agreements and distributors have agreeda Prospectus Supplement dated September 17, 2009. The gross proceeds to provide the Company with cash advances on their orders. These advances are then applied against future sales to these customers.
10. SETTLEMENTS AND OTHER
During the year ended October 31, 2007 the Company recorded gains on settlement of liabilities of $0.3 million, representing the settlement of accounts payable for marketing expenses for less than the invoiced amount.
During the year ended October 31, 2006 the Company recorded gains on settlement of liabilities of $4.8 million, consisting of $1.5 million related to negotiated reductions in royalties due for certain video and video game titles, $0.5 million gain onfrom the sale of the rights to certain video game titles and a $2.8 million gain on the settlement of accounts payable for legal, marketing and development expenses for less than the invoiced amount.
During 2006, the Company sold and transferred all of its rights, title and interest with respect to the interactive software games’’Ghost Rider’’and’’The Darkness’’ that were in development (together, the ''Products’’). Under the terms of the agreement, the Company was paid $7,216,000 in cashshares, before deducting for the Products, all intellectual propertyPlacement Agent’s fees and contractsoffering expenses, was approximately $9.6 million. The Company recorded net proceeds of $8.6 million, net of $0.8 million of placement agency fees and expenses, and $0.2 million of other expenses related to the Products,offering, as additional paid in capital. The shares were registered with the Securities and any and all assets related to the Products that are in the possession of or controlled by the Company, and the third party publisher assumed all of the Company’s obligations and liabilities related to the Products. Additionally, $784,000Exchange Commission on a prospectus which was paid directly to two vendors to relieve the Company of obligations. During the year ended October 31, 2005, the Company wrote down the capitalized value attributable to the products to approximate the sales price. Accordingly, there was no gain recognized in 2006. The Company also sold the rights to the console version of Teen Titans for gross proceeds of $1.1 million, resulting in a gain of $500,000.declared effective on August 28, 2009.
During the years ended October 31, 2008, 2007 and 2006, the Company charged operations $0.1 million, $0.2 million, and $2.4 million, respectively, to write-off capitalized costs related to games for
F-16
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which development plans were changed such that it is uncertain whether potential value of that development will be realized.
11. PRIVATE PLACEMENT
On September 5, 2007, the Company completed a private placement of 3,966,668 units, each consisting of one share of common stock and a warrant to purchase 0.4 shares of common stock, in which the Company raised $6.0 million in gross proceeds from a group of institutional and accredited investors in exchange for 3,966,668 shares of common stock and warrants to purchase an additional 1,586,668 shares of common stock at $2.04 per share. Each unit had a price of $1.50 and consisted of one share of common stock and warrants to purchase 0.4 shares of common stock. The private placement resulted in net proceeds of $5.8 million after deducting the placement agent fees and other related expenses. In addition, the placement agent received (i) 277,667 shares of common stock and warrants to purchase 111,067 shares of common stock and (ii) a unit purchase option, exercisable commencing March 2008, to purchase at $1.50 per share, units consisting of (1) 277,667 shares of common stock, and (2) warrants to purchase up to 111,067 shares of common stock at $2.04. Based on the price of $1.50 per unit in the offering, the shares and warrants issued to the placement agent had a fair value of $416,500 on the date of the offering, which is included in equity.proceeds.
The warrants issued in the transaction have an exercise price of $2.04 per share and a term of five years, which begins six months from the issue date. The Company is obligated to file a registration statement for resale of the shares issued in the transaction, and the shares underlying the warrants within 45 days of the closing of the transaction, and have the registration declared effective by the Securities and Exchange Commission within 120 days of the closing of the transaction. The Company is also required to use its best efforts to keep the registration statement continuously effective and to have its shares listed on an eligible market, as defined in the agreement, for a period of two years after the registration statement is declared effective. If the registration obligations are not met, the Company is subject to a cash penalty of 1% for each month the registration is delayed, subject to a maximum of 18%. The Company’s registration statement related to the securities was declared effective by the Securities and Exchange Commission on December 10, 2007.
Additionally, the warrants contain a cashless exercise feature if a registration statement is not effective on the date of exercise, and a provision for exercise price adjustments under certain circumstances as defined in the warrant agreement. If the Company is sold, merged, or otherwise enters into a ''fundamental transaction’’“fundamental transaction” as defined in the warrant agreement, the successor entity is required to issue securities to the warrant holders equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by the warrants. In the event the successor entity is not a publicly traded corporation whose securities are traded on a trading market, as defined in the securities purchase agreement the warrant holder can elect to receive a cash payment equal to the lesser of one
F-18
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dollar per share, or the transaction value of a share of common stock, as defined in the agreement, multiplied by: (i) on or prior to the first anniversary of the warrant, 55%; (ii) after the first anniversary of the warrant, but before the second, 45%; (iii) after the second anniversary of the warrant, but before the third, 35%, (iii) after the secondthird anniversary of the warrant, but before the third,fourth, 25%. The Warrantswarrants contain a provision that may require settlement by transferring assets. Therefore, they are classified as liabilities at October 31, 2007 in accordance with FASB statement No. 150,ASC Topic 480Accounting with certain financial instruments with Characteristics of both, Distinguishing Liabilities and Equity, and FASB Staff position 150-1Issuers Accounting for Freestanding Financial Instruments Composed of More Than One option or Forward Contract Embodying Obligations under FASB Statement 150.from Equity.
The Company initially allocated $2.1 million of the proceeds received in the transaction to the warrants based on the fair values of the warrants on the date of the transaction. The Company will measuremeasures the fair value of the warrants at each balance sheet date, and recordrecords the change in fair value as a non cash charge or gain to earnings each period. The warrants were valued at $0.2$0.1 million, $0.6 million and $1.5$0.2 million at October 31, 2008
F-17
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2010, 2009 and 2007,2008, respectively, due to fluctuations in the Company’s stock price. This resulted in a non-cash gain of $1.3$0.5 million, a non-cash loss of $0.4 million, and $0.6a non-cash gain of $1.3 million due to the change in fair value of warrants during the yearyears ended October 31, 2010, 2009 and 2008, and 2007.respectively. The Company used the Black ScholesBlack-Scholes method to value the warrants assuming 70% volatility and a 4.16% cost of capital.(see note 4 for assumptions).
12. COMMON STOCK PURCHASE WARRANTS
| |
13. | COMMON STOCK PURCHASE WARRANTS |
The following table sets forth the number shares of common stock purchaseablepurchasable under outstanding stock purchase warrants at October 31, 20082010 and 2007.
| | | | | | | | | | | | | | | | |
Issued in | | | | | | Exercise | | October 31, | | October 31, |
connection with | | Issue date | | Expiration date | | Price | | 2008 | | 2007 |
Equity financing | | September 5, 2007 | | March 5, 2013 | | $ | 2.04 | | | | 1,697,735 | | | | 1,697,735 | |
Consulting services | | June 14, 2006 | | May 31, 2013 | | $ | 1.55 | | | | 150,000 | | | | 150,000 | |
Consulting services | | November 1, 2007 | | July 31, 2010 | | $ | 2.07 | | | | 75,000 | | | | — | |
Other | | February 22, 2004 | | February 21, 2008 | | $ | 11.30 | | | | — | | | | 7,142 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | 1,922,735 | | | | 1,854,877 | |
| | | | | | | | | | | | | | | | |
2009.
| | | | | | | | | | | | | | | | |
Issued in
| | | | | | Exercise
| | | October 31,
| | | October 31,
| |
connection with | | Issue date | | Expiration date | | Price | | | 2010 | | | 2009 | |
|
Equity financing | | September 5, 2007 | | March 5, 2013 | | $ | 2.04 | | | | 1,697,735 | | | | 1,697,735 | |
Consulting services | | June 14, 2006 | | May 31, 2013 | | $ | 1.55 | | | | 40,000 | | | | 40,000 | |
Consulting services | | November 1, 2007 | | July 31, 2010 | | $ | 2.07 | | | | — | | | | 75,000 | |
Consulting services | | March 29, 2010 | | March 28,2015 | | $ | 1.06 | | | | 100,000 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | 1,837,735 | | | | 1,812,735 | |
| | | | | | | | | | | | | | | | |
Additionally, in connection with the September 5, 2007 equity financing, the Company issued a unit purchase option, to purchase at $1.50 per share, units consisting of (1) 277,667 shares of common stock, and (2) warrants to purchase up to 111,067 shares of common stock at $2.04, with terms identical to the warrants issued in the financing.
F-19
13. INCOME TAXESMAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The (benefit) provision for income taxes for the years ended October 31, 2008, 20072010, 2009 and 20062008 consists of:
| | | | | | | | | | | | |
| | October 31, | |
| | (000’s omitted) | |
| | 2008 | | | 2007 | | | 2006 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 26 | | | $ | — | | | $ | — | |
State | | | — | | | | — | | | | — | |
Deferred: | | | | | | | | | | | | |
Federal | | | 953 | | | | (1,610 | ) | | | (1,048 | ) |
State | | | 186 | | | | (311 | ) | | | (203 | ) |
Less: valuation allowance | | | (1,139 | ) | | | 1,921 | | | | 1,251 | |
| | | | | | | | | |
| | $ | 26 | | | $ | — | | | $ | — | |
| | | | | | | | | |
F-18
| | | | | | | | | | | | |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | | | 2008 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | — | | | $ | 26 | |
State | | | (1,656 | ) | | | (1,115 | ) | | | — | |
Deferred: | | | | | | | | | | | | |
Federal | | | (403 | ) | | | (2,273 | ) | | | 953 | |
State | | | (84 | ) | | | (484 | ) | | | 186 | |
Impact of change in effective tax rates on deferred taxes | | | 1,312 | | | | (1,760 | ) | | | — | |
Less: valuation allowance | | | (825 | ) | | | 4,517 | | | | (1,139 | ) |
| | | | | | | | | | | | |
| | $ | (1,656 | ) | | $ | (1,115 | ) | | $ | 26 | |
| | | | | | | | | | | | |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between income taxes computed at the statutory federal rate and the provision for income taxes for 2008, 20072010, 2009 and 2006 and,2008 relates to the following
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
| | (000’s | | | Percent of | | | (000’s | | | Percent of | | | (000’s | | | Percent of | |
| | omitted) | | | Pretax | | | omitted) | | | Pretax | | | omitted) | | | Pretax | |
| | Amount | | | income | | | Amount | | | income | | | Amount | | | income | |
Tax (benefit) at federal statutory rate | | $ | 1,149 | | | | 34 | % | | $ | (1,622 | ) | | | (34 | )% | | $ | (1,824 | ) | | | (34 | )% |
State income taxes, net of federal income taxes | | | 223 | | | | 7 | % | | | (311 | ) | | | (6 | )% | | | (203 | ) | | | (4 | )% |
|
Change in valuation allowance | | | (1,139 | ) | | | (34 | )% | | | 1,921 | | | | 40 | % | | | 1,251 | | | | 23 | % |
Other | | | (207 | ) | | | (6 | )% | | | 12 | | | | — | | | | 776 | | | | 15 | % |
| | | | | | | | | | | | | | | | | | |
| | $ | 26 | | | | 1 | % | | | — | % | | | — | % | | $ | — | | | | — | % |
| | | | | | | | | | | | | | | | | | |
following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
| | (in thousands)
| | | Percent of
| | | (in thousands)
| | | Percent of
| | | (in thousands)
| | | Percent of
| |
| | Amount | | | Pretax income | | | Amount | | | Pretax income | | | Amount | | | Pretax income | |
|
Tax (benefit) at federal statutory rate | | $ | (894 | ) | | | (34 | )% | | $ | (2,823 | ) | | | (34 | )% | | $ | 1,149 | | | | 34 | % |
State income taxes, net of federal income taxes | | | (84 | ) | | | (3 | )% | | | (515 | ) | | | (6 | )% | | | 223 | | | | 7 | % |
Effect of permanent items | | | 433 | | | | 17 | % | | | 581 | | | | 7 | % | | | (207 | ) | | | (6 | )% |
Sale of state net operating losses | | | (1,656 | ) | | | (63 | )% | | | (1,115 | ) | | | (13 | )% | | | — | | | | — | |
Change in valuation allowance | | | (825 | ) | | | (32 | )% | | | 4,517 | | | | 54 | % | | | (1,139 | ) | | | (34 | )% |
Reduction of deferred benefit of state net operating losses | | | 1,312 | | | | 50 | % | | | 1,608 | | | | 19 | % | | | — | | | | — | |
Impact of change in effective tax rate on deferred taxes and other | | | 58 | | | | 2 | % | | | (3,368 | ) | | | (40 | )% | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | (1,656 | ) | | | (63 | )% | | $ | (1,115 | ) | | | (13 | )% | | $ | 26 | | | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-20
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Componentscomponents of deferred income tax assets (liabilities) were as follows:
| | | | | | | | | |
| | | | | | | | | | October 31,
| |
| | October 31, | | | (in thousands) | |
| | (000’s omitted) | | | 2010 | | 2009 | |
| | 2008 | | 2007 | |
Impairment of capitalized software development costs and prepaid license fees not currently deductible | | $ | 36 | | $ | 10 | | | $ | 209 | | | $ | 1,004 | |
Litigation Settlement | | 611 | | 1,145 | | |
Depreciation and amortization | | | | 17 | | | | — | |
Impairment of inventory | | 50 | | 168 | | | | 80 | | | | 103 | |
Compensation expense not deductible until options are exercised | | 1,632 | | 1,221 | | | | 1,715 | | | | 1,669 | |
All other temporary differences | | 341 | | 478 | | | | 471 | | | | 852 | |
Net operating loss carry forward | | 26,444 | | 27,231 | | | | 30,314 | | | | 30,003 | |
Less valuation allowance | | | (29,114 | ) | | | (30,253 | ) | | | (32,806 | ) | | | (33,631 | ) |
| | | | | | | | | | |
Deferred tax asset | | $ | — | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Realization of deferred tax assets, including those related to net operating loss carryforwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Based upon the Company’s current operating results, management has concludedcannot conclude that it is not more likely than not that such assets will be realized.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ''change“change in ownership’’ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. The net operating loss carryforwards available for income tax purposes at October 31, 20082010 amounts to approximately $73.5$82.6 million and expires between 20232025 and 2027.
14. STOCK-BASED COMPENSATION ARRANGEMENTS2030 for federal income taxes, and approximately $36.1 million for state income tax.
The Company files income tax returns in the U.S., various states and the United Kingdom. As of October 31, 2010, the Company had no unrecognized tax benefits, which would impact its tax rate if recognized. As of October 31, 2010, the Company had no accrual for the potential payment of penalties. As of October 31, 2010, the Company was not subject to any U.S. federal, state or foreign income tax examinations. The Company’s U.S. federal tax returns have been examined for the tax years 2003 through 2004, and income taxes for Majesco Europe Limited have been examined for the year ended October 31, 2006 in the United Kingdom with the results of such examinations being reflected in the Company’s results of operations as of October 31, 2010. The Company does not anticipate any significant changes in its unrecognized tax benefits over the next 12 months.
In the years ended October 31, 2010 and 2009, the Company received proceeds of approximately $1.7 million and $1.1 million, respectively, from the sale of the rights to approximately $21.2 million and $25.9 million, respectively, of New Jersey state income tax net operating loss carryforwards, under the Technology Business Tax Certificate Program administered by the New Jersey Economic Development Authority, which is reflected as an income tax benefit in the consolidation statement of operations.
| |
15. | STOCK-BASED COMPENSATION ARRANGEMENTS |
On February 13, 2004, the stockholders approved a stock option plan that provides for the granting of options to purchase the Company’s common stock.stock-based awards. The plan covers employees, directors and consultants and provides for among other things, the issuance of restricted stock, non-qualified options and incentive stock options. On June 8, 2005, the Company’s stockholders and Board of Directors approved the amendment and
F-21
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
restatement to the Company’s 2004 Employee, Director and Consultant Stock Plan (renamed 2004 Employee, Director and Consultant Incentive Plan) (the “Plan”) to: (a) increase the number of shares of common stock reserved for issuance under the Plan by 4 million;4,000,000; (b) add a share countingshare-counting formula to the Plan pursuant to which each share issued under restricted stock or other awards, other than options or stock appreciation rights, counts against the number of
F-19
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
total shares available under the Plan as 1.3 shares, and each share issued as options or stock appreciation rights counts against the total shares available under the Plan as one share; (c) increase the share limitation on the number of awards that may be granted to any participant in any fiscal year to 1,000,000; (d) add provisions for the grant of cash awards and other types of equity based awards; and (e) delete a provision allowing for the repricing of awards. On June 11, 2007, the Company’s stockholders and Board of Directors approved an amendment to the 2004 Employee, Director and Consultant Incentive Plan to increase the number of shares of common stock reserved for issuance under the Plan by four million.4,000,000, and on April 21, 2009 the Company’s stockholders and Board of Directors approved an amendment to the Plan to increase the number of common shares available for issuance under the Plan by 3,000,000 shares.
As of October 31, 2008,2010, the Company hashad reserved 7.610.6 million shares of common stock for issuance under the Plan, of which 1.31.7 million are available for future issuance.
A summary of the status of the Company’s outstanding stock options as of October 31 and changes during the years then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 2010 | | 2009 | | 2008 | |
| | 2008 | | 2007 | | 2006 | | | | | Weighted
| | | | Weighted
| | | | Weighted
| |
| | Weighted | | Weighted | | Weighted | | | | | Average
| | | | Average
| | | | Average
| |
| | Average | | Average | | Average | | | Number Of
| | Exercise
| | Number Of
| | Exercise
| | Number Of
| | Exercise
| |
| | Number Of | | Exercise | | Number Of | | Exercise | | Number Of | | Exercise | | | Shares | | Price | | Shares | | Price | | Shares | | Price | |
| | Shares | | Price | | Shares | | Price | | Shares | | Price | |
Outstanding at beginning of year | | 1,167,191 | | $ | 6.78 | | 1,527,494 | | $ | 6.19 | | 1,820,550 | | $ | 8.45 | | | | 1,483,929 | | | $ | 5.24 | | | | 1,352,610 | | | $ | 5.61 | | | | 1,167,191 | | | $ | 6.78 | |
Granted | | 239,133 | | $ | 0.89 | | 46,818 | | $ | 2.35 | | 296,700 | | $ | 1.45 | | | | 289,475 | | | $ | 0.68 | | | | 144,079 | | | $ | 1.88 | | | | 239,133 | | | $ | 0.89 | |
Canceled | | | (53,714 | ) | | $ | 9.92 | | | (373,787 | ) | | $ | 4.38 | | | (589,756 | ) | | $ | 6.88 | | |
Cancelled | | | | (74,188 | ) | | $ | 3.23 | | | | (12,760 | ) | | $ | 6.14 | | | | (53,714 | ) | | $ | 9.92 | |
Exercised | | — | | — | | | (33,334 | ) | | $ | 1.46 | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Outstanding at end of year | | 1,352,610 | | $ | 5.61 | | 1,167,191 | | $ | 6.78 | | 1,527,494 | | $ | 6.19 | | | | 1,699,216 | | | $ | 4.55 | | | | 1,483,929 | | | $ | 5.24 | | | | 1,352,610 | | | $ | 5.61 | |
| | | | | | | | | | | | | | |
Options exercisable at year-end | | 1,051,736 | | $ | 6.91 | | 823,108 | | $ | 8.24 | | 539,056 | | $ | 8.92 | | | | 1,362,440 | | | $ | 5.46 | | | | 1,252,103 | | | $ | 5.94 | | | | 1,051,736 | | | $ | 6.91 | |
| | | | | | | | | | | | | | |
Weighted-average fair value of options granted during the year | | $ | 0.58 | | $ | 1.78 | | $ | 1.45 | | | | | | | $ | 0.38 | | | | | | | $ | 1.12 | | | | | | | $ | 0.58 | |
| | | | | | | | | | | | | | |
The intrinsic value of shares outstanding at October 31, 2008 was $0.
The fair value of options granted during the year ended October 31, 2010 was $138,697.$110,000.
The intrinsic value of options shares outstanding at October 31, 2010 was $0 based on estimated fair value of $0.62 per share.
F-22
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about outstanding stock options at October 31, 2008:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | | | | | Weighted- | | | | | | | | | | |
| | | | | | Average | | Weighted- | | | | | | Weighted- |
| | | | | | Remaining | | Average | | | | | | Average |
Range of | | Number | | Contractual | | Exercise | | Number | | Exercise |
Exercise Prices | | Outstanding | | Life (Years) | | Price | | Exercisable | | Price |
$0.89 | | | 239,133 | | | | 6.8 | | | $ | 0.89 | | | | — | | | $ | 0.89 | |
$1.41 and $2.80 | | | 282,474 | | | | 4.5 | | | $ | 1.74 | | | | 220,733 | | | $ | 1.72 | |
$3.20 | | | 377,935 | | | | 3.8 | | | $ | 3.20 | | | | 377,935 | | | $ | 3.20 | |
$7.23 to $8.00 | | | 114,300 | | | | 3.6 | | | $ | 7.33 | | | | 114,300 | | | $ | 7.33 | |
$13.30 | | | 288,771 | | | | 2.4 | | | $ | 13.30 | | | | 288,771 | | | $ | 13.30 | |
$14.00 to $28.00 | | | 49,997 | | | | 2.8 | | | $ | 19.96 | | | | 49,997 | | | $ | 19.96 | |
| | | | | | | | | | | | | | | | | | |
$0.89 to $28.00 | | | 1,352,610 | | | | 4.1 | | | $ | 5.61 | | | | 1,051,736 | | | $ | 6.91 | |
| | | | | | | | | | | | | | | | | | |
2010:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | Weighted-
| | | | | | | | | | |
| | | | | Average
| | | Weighted-
| | | | | | Weighted-
| |
| | | | | Remaining
| | | Average
| | | | | | Average
| |
Range of
| | Number
| | | Contractual
| | | Exercise
| | | Number
| | | Exercise
| |
Exercise Prices | | Outstanding | | | Life (Years) | | | Price | | | Exercisable | | | Price | |
|
$0.68 | | | 289,475 | | | | 6.8 | | | $ | 0.68 | | | | — | | | $ | — | |
$0.89 | | | 210,147 | | | | 4.8 | | | $ | 0.89 | | | | 210,147 | | | $ | 0.89 | |
$1.17 and $2.80 | | | 403,496 | | | | 3.4 | | | $ | 1.77 | | | | 356,193 | | | $ | 1.69 | |
$3.20 | | | 363,685 | | | | 1.8 | | | $ | 3.20 | | | | 363,685 | | | $ | 3.20 | |
$7.23 to $8.00 | | | 100,000 | | | | 1.7 | | | $ | 7.23 | | | | 100,000 | | | $ | 7.33 | |
$13.30 | | | 282,416 | | | | 0.4 | | | $ | 13.30 | | | | 282,416 | | | $ | 13.30 | |
$14.00 to $28.00 | | | 49,997 | | | | 0.9 | | | $ | 19.96 | | | | 49,997 | | | $ | 19.96 | |
| | | | | | | | | | | | | | | | | | | | |
$0.68 to $28.00 | | | 1,699,216 | | | | 3.1 | | | $ | 4.55 | | | | 1,362,438 | | | $ | 5.46 | |
| | | | | | | | | | | | | | | | | | | | |
The weighted average contractual term of exercisable options outstanding at October 31, 20082010 was 3.52.3 years.
F-20
| | | | | | | | | | | | |
| | | | | | | | Weighted-Average
| |
| | | | | | | | Remaining
| |
| | | | | Weighted-Average
| | | Contractual
| |
| | Number
| | | Fair Value at
| | | Life
| |
| | Outstanding | | | Grant Date | | | (Years) | |
|
Non-Vested shares at October 31, 2009 | | | 231,826 | | | $ | 0.88 | | | | 6.4 | |
Options Granted | | | 289,475 | | | $ | 0.38 | | | | 6.8 | |
Options Vested | | | (161,919 | ) | | $ | 0.70 | | | | 5.0 | |
Non-vested options forfeited or expired | | | (22,606 | ) | | $ | 0.80 | | | | 5.2 | |
| | | | | | | | | | | | |
Non-Vested shares at October 31, 2010 | | | 336,776 | | | $ | 0.50 | | | | 6.6 | |
| | | | | | | | | | | | |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | |
| | | | | | | | | | Weighted-Average |
| | | | | | Weighted-Average | | Remaining |
| | Number | | Fair Value at | | Contractual Life |
| | Outstanding | | Grant Date | | (Years) |
Non-Vested shares at October 31, 2007 | | | 344,083 | | | $ | 4.37 | | | | 4.7 | |
Options Granted | | | 239,133 | | | $ | 0.58 | | | | 6.8 | |
Options Vested | | | (228,628 | ) | | $ | 5.41 | | | | 4.7 | |
Options forfeited or expired | | | (53,714 | ) | | $ | 3.56 | | | | 4.3 | |
| | | | | | | | | | | | |
Non-Vested shares at October 31, 2008 | | | 300,874 | | | $ | 0.71 | | | | 6.4 | |
| | | | | | | | | | | | |
As of October 31, 20082010 and 2007,2009, there was approximately $0.1 million and $0.2 million of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.11.4 and 0.81.2 years, respectively. The total fair value of shares vested during October 31, 20082010 was $1.2$0.1 million.
A summary of the status of the Company’s restricted stock grants for the twelve12 months ended October 31, 2008, 20072010, 2009 and 20062008 is as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | October 31,
| | October 31,
| | October 31,
| |
| | October 31, | | October 31, | | October 31, | | 2010 | | 2009 | | 2008 | |
| | 2008 | | 2007 | | 2006 |
Balance at beginning of period | | 1,411,470 | | 1,022,033 | | 13,948 | | | | 1,895,180 | | | | 2,218,373 | | | | 1,411,470 | |
Granted | | 1,546,397 | | 937,299 | | 1,104,945 | | | | 1,243,467 | | | | 955,183 | | | | 1,546,397 | |
Vested | | | (711,661 | ) | | | (336,627 | ) | | | (60,549 | ) | | | (1,040,566 | ) | | | (1,187,740 | ) | | | (711,661 | ) |
Cancelled | | | (27,833 | ) | | | (211,235 | ) | | | (36,311 | ) | | | (348,546 | ) | | | (90,636 | ) | | | (27,833 | ) |
| | | | | | | | | | | | | | |
Outstanding at end of period | | 2,218,373 | | 1,411,470 | | 1,022,033 | | | | 1,749,535 | | | | 1,895,180 | | | | 2,218,373 | |
| | | | | | | | | | | | | | |
The fair value of restricted shares granted during the yearyears ended October 31, 2010, 2009 and 2008 was $0.9 million, $1.8 million and $1.5 million.million, respectively.
F-23
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of restricted shares granted during the year ended October 31, 2007 was $1.9 million.
As of October 31, 2008,2010, there was approximately $2.4$1.5 million of unrecognized compensation cost related to restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.1 years.
On March 29, 2010, the Company issued warrants to purchase an aggregate of 100,000 shares of common stock to a consultant in consideration for services, under the Plan. The warrants are exercisable at an exercise price of $1.06 at any time over a five-year period.
On July 21, 2006, the Company issued warrants to purchase an aggregate of 150,000 shares of common stock to a consulting firm in consideration for services, under the Plan. TheOn June 12, 2009, warrants are exercisable at an exercise pricefor 110,000 shares were exercised, resulting in the issuance of $1.55 at any time over a seven year period. The Company recorded $186,000 of expense in 2006, reflecting the fair value of the warrants on the date of issuance.
On November 1, 2007, the Company issued warrants to purchase an aggregate of 75,000approximately 29,000 shares of common stock toon the basis of a consulting firm in consideration for services, under the Plan. The warrants are exercisable at an exercise price of $2.07 at any time over a seven year period.
15. EMPLOYEE RETIREMENT PLANcashless exercise.
| |
16. | EMPLOYEE RETIREMENT PLAN |
The Company has a defined contribution 401(k) plan covering all eligible employees.
The Company charged to operations $66,000, $41,000$81,000, $75,000 and $51,000$66,000 for contributions to the retirement plan for the yearyears ended October 31, 2008, 20072010, 2009 and 20062008, respectively.
Certain stockholders and key employees of the Company serve as trustees of the plan.
F-21
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. MAJOR CUSTOMERS
Sales to Wal-Mart, Inc. represented 13%approximately 20%, 14%18% and 11%13% of net revenues in 2008, 20072010, 2009 and 2006,2008, respectively. Sales to Toys “R” Us Inc.GameStop represented 29%approximately 12%, 16% and 17% of net revenues in 2006. Sales to Gamestop represented 17%, 21%2010, 2009 and 12% of net revenues in 2008, 2007 and 2006, respectively. Sales to Best Buy represented approximately 10%, 14% and 13% 10% of sales in 20082010, 2009 and 2007,2008, respectively. Sales to Target represented approximately 10%, 11% and 11% of sales in 2010, 2009 and 2008, respectively. Sales to Cokem represented 11%approximately 20%, 9% and 10% of sales in 2010, 2009 and 2008, respectively.
17. CONTINGENCIES AND COMMITMENTS
| |
18. | CONTINGENCIES AND COMMITMENTS |
Commitments
At October 31, 2008,2010, the Company was committed under agreements with certain software developers for future milestone payments aggregating $5.1$4.1 million. Milestone payments represent scheduled installments due to the Company’s developers based upon the developers providing the Company certain deliverables, as predetermined in the Company’s contracts. In addition, the Company may have to pay royalties for products sold. These payments will be used to reduce future royalties due to the developers from sales of the Company’s videogames.video games.
The Company is obligated under non-cancelable operating leases for administrative offices, automobiles, and equipment expiring at various dates through 2011.2015. The future aggregate minimum rental commitments exclusive of required payments for operating expenses are as follows (in thousands):
| | | | |
Year ending October 31, | | (000’s omitted) | |
2009 | | $ | 556 | |
2010 | | | 177 | |
Thereafter | | | 30 | |
| | | |
| | $ | 763 | |
| | | |
follows:
| | | | |
Year ending October 31, | | (in thousands) | |
|
2011 | | $ | 276 | |
2012 | | | 276 | |
2013 | | | 260 | |
2014 | | | 267 | |
2015 | | | 74 | |
| | | | |
| | $ | 1,153 | |
| | | | |
F-24
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense amounted to $655,000, $505,000$433,000, $767,000 and $500,000$655,000 for the years ended October 31, 2008, 20072010, 2009 and 2006,2008, respectively.
At October 31, 2008, the Company had open letters of credit aggregating $4.6 million under the Company’s purchase order assignment arrangements for inventory to be delivered during the subsequent year.
The Company has entered into “at will” employment agreements with several key executives. These employment agreements include provisions for, among other things, annual compensation, bonus arrangements and stock optionequity grants. These agreements also contain provisions related to severance terms and change of control provisions.
Contingencies
On September 27, 2007, the Company entered into settlement agreements to settle certain litigations pending in the United States District Court, District of New Jersey: (i) a securities class action brought on behalf of a purported class of purchasers of the Company’s securities; (ii) a private securities action filed by Trinad Capital Master Fund, Ltd. (“Trinad”); and (iii) a second action filed by Trinad purportedly on behalf of the Company. All three actions are now concluded.
On
In January 16, 2009, the Company entered into an amendment to the securities class action settlement agreement. Under the terms of the settlement agreement in the securities class action, as amended, which is subject to notice to the shareholder claimants and court approval, the Company’s insurance carrier will make a cash payment, the Company willagreed to make cash payments of $466,667totaling $0.7 million in three installments. The first two payments were made in January 2009 and $233,333 in MayFebruary 2009, and the last payment was made in May 2009. The Company will contributealso contributed one million shares of its common stock. The shares being
F-22
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contributedstock to the settlement will be distributed tofund. The Company’s insurance carrier also contributed a cash payment.
On February 23, 2009, the settlement claimants if and whenwas approved by the Court, grants final approval of the settlement and the settlement becomes effective.
During the twelve months ended October 31, 2007, the Company recorded a $2.8 million charge in connection with the expected settlement of the class action litigation, based onwas dismissed. The dismissal is no longer subject to appeal. The settlement administrator distributed the shares and cash to eligible settlement claimants in May 2009 and the matter is now closed.
Under the terms of the original settlement. The charge is comprised of $2.5 million, representing the fair value, on the date the agreement was executed, of the common stock expected to be distributed when the settlement becomes effective and $0.3 million representing the increase in the value of the shares since that date. During the year ended October 31, 2008, the Company recorded a gain on litigation settlement of $0.3 million representing the decline in the value of the shares to be issued under the settlement, as if it occurred on October 31, 2008.
The estimated settlement liability was further adjusted as of October 31, 2008, to reflect the terms of the amended settlement agreement entered into on January 16, 2009. Accordingly, an additional gain on settlement of litigation of $1.3 million was recorded during the year ended October 31, 2008. The total estimated liability at October 31, 2008 is $1.3 million, comprised of the $0.7 million in cash payments, and $0.6 million representing 1.0 million shares of common stock at the closing market price of $0.55 at that date. The value of the common stock on the date the shares are issued may be different than $0.55, resulting in further adjustment to the settlement liability.
The settlement of the private securities claim in the action brought by Trinad, on its own behalf, provides that the Company’s insurance carrier will makemade a cash payment to Trinad, subject to final approval ofTrinad. The Court dismissed this action on February 23, 2009 and the class action settlement by the Court.matter is now closed.
The settlement agreement in the action filed by Trinad, purportedly on behalf of the Company, willdid not result in a payment to the Company. Plaintiff’sCompany, and Trinad’s attorneys willdid not receive any fees in connection with the settlement. AsThis settlement was approved by the Court, and the Court dismissed the action on May 12, 2009. The dismissal is no longer subject to appeal and the matter is now closed.
The Company recorded aggregate expense of $2.0 million under the amended settlement agreements, reflecting $0.7 million in cash payments, and the $1.3 million fair value of common stock, on its date of issuance, March 30, 2009.
The Company originally recorded an accrual equal to the $2.5 million fair value of common stock to be issued under the settlement agreement on the date of its execution, September 27, 2007. The accrual was adjusted each quarter to reflect the change in the value of shares to be issued under the agreement. This adjustment resulted in a resultgain of $0.3 million for the nine months ended July 31, 2008. The accrual was further adjusted at October 31, 2008 to $1.3 million reflecting the $0.7 million in cash payments, and $0.55 per share fair value of one million shares of common stock to be issued under the revised settlement agreement at that date. The share based portion of the filingaccrual was adjusted to the fair value of this lawsuit by Trinad,the shares to be issued, at each balance sheet date thereafter, until their issuance on March 30, 2009. The fair value of the shares on date of issuance was $1.3 million ($1.25 per share), resulting in expense of $0.7 million for the year ended October 31, 2009.
Additionally, on March 30, 2009, the Company has taken actions that it and Trinad believe will benefit the Company’s shareholders and address someissued 130,000 shares of the issues raised in the lawsuit. This settlement is subjectcommon stock, with a fair value of $0.2 million, to notice to the Company’s shareholders and to court approval.
Since the settlements are subject to notice to shareholders and to court approval, there is no assurance that the settlements described above will be consummated. Further if these settlements are not achieved, there can be no assurance that the Company’s insurance will be adequate to cover the Company’s costs relating to these litigations. Any expenses incurred in connection with such litigation not covered by available insurance or any adverse resolutiona group of such litigation could have a material adverse effect on the Company’s financial condition.
As previously disclosed, on July 26, 2007, Charlie Bolton filed a complaint against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey. The allegations in the complaint are similar to thoseunderwriters named as defendants in the class action and Trinad Capital’s action againstlitigation, in payment of $0.5 million in legal fees for which the Company and several current and former directors and officers discussed above. On September 16, 2008,was responsible under an indemnification
F-25
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement. The gain of $0.3 million resulting from the Company entered into a settlement with Bolton providing for a cash payment from insurance proceeds,difference between the fair value of the stock issued and the action haslegal expenses, which had been dismissed, with prejudice.recorded as general and administrative expenses during prior periods, was included in Settlement of Litigation and related charges, net, for the year ended October 31, 2009.
The Company at times may be a party to other routine claims and suits in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of suchany current routine claims will not have a material adverse effect on the Company’s business, financial condition, and results of operations or liquidity.
F-23
| |
19. | EXIT COSTS AND WORKFORCE REDUCTION |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RELATED PARTY TRANSACTIONS
The Company receives printing and packaging services from a business of whichIn July 2009, the brother of Morris Sutton,decision was made to close the Company’s former Chairman Emeritus,development studio located in California. After a reduction of the studio’s performance, and unclechanges in the availability and cost of Jesse Sutton,development with the Company’s Chief Executive Officer, isthird party partners, management believed that closing the studio and taking advantage of these external opportunities represented a principal. Duringbetter value for the yearsCompany. As a result, the Company incurred approximately $0.2 million in severance and lease termination costs, which were recorded as a charge to product research and development expenses in the year ended October 31, 2008, 2007 and 2006, respectively,2009.
During January 2010, Company management initiated a plan of restructuring to better align its workforce to its revised operating plans. As part of the plan, the Company was charged $0.1reduced its personnel count by 16 employees, representing 17% of its workforce. The Company recorded charges of approximately $0.4 million $1.2 millionin the year ended October 31, 2010 in connection with the terminations, which consist primarily of severance and $1.5 million for these services. These chargesunused vacation payments. The expenses are included in productoperating costs and expenses as shown in the accompanying consolidated statement of operations. Such charges are,table below:
| | | | |
| | Year Ended
| |
| | October 31, 2010 | |
| | (in thousands) | |
|
Product research and development | | $ | 90 | |
Selling and Marketing | | | 243 | |
General and Administrative | | | 70 | |
| | | | |
Total | | $ | 403 | |
| | | | |
The Company has no remaining obligations related to the Company’s knowledge, on terms no less favorable to those that would be incurred in arm’s length transactionsthese activities.
| |
20. | RELATED PARTY TRANSACTIONS |
The Company currently has an agreement with other providers of similar services.
Morris Sutton, the Company’s former Chief Executive Officer and Chairman Emeritus, resigned from the Company effective January 1, 2007, becomingunder which he provides services as a consultant. The agreement provides for a monthly retainer of $13,000. Mr. Sutton was also eligible to receive a commission in an amount equal to 2% of net sales to certain accounts before January 1, 2010. Commissions were recorded when the sales occurred, but were not paid as an employeeuntil payments of the related accounts receivable are received from customers. Consulting expenses for periodsthe year ended October 31, 2009 include $28,000 of fees earned in each of November and December of 2008 under Mr. Sutton’s prior to November 1, 2006.agreement which expired on December 31, 2008.
F-26
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes expense to Morris Sutton, in thousands:
| | | | | | | | |
| | Year Ended | |
| | October 31, | |
| | 2008 | | | 2007 | |
Consulting | | $ | 350 | | | $ | 292 | |
Commissions | | | 111 | | | | 42 | |
Business expenses | | | 49 | | | | 70 | |
| | | | | | |
Total | | $ | 510 | | | $ | 404 | |
| | | | | | |
:
| | | | | | | | | | | | |
| | Year Ended
| |
| | October 31,
| |
| | (in thousands) | |
| | 2010 | | | 2009 | | | 2008 | |
|
Consulting | | $ | 150 | | | $ | 213 | | | $ | 350 | |
Commissions | | | 131 | | | | 189 | | | | 111 | |
Business expenses | | | 11 | | | | 6 | | | | 49 | |
| | | | | | | | | | | | |
Total | | $ | 292 | | | $ | 408 | | | $ | 510 | |
| | | | | | | | | | | | |
The Company had accounts payable and accrued expenses of approximately $30,000$0, $37,000 and $75,000$30,000 as of October 31, 2010, 2009 and 2008, and 2007, respectively, dueunder the agreement with Morris Sutton.
The Company entered into an agreement with a Board member, effective March 2010, to Sutton Sales, LLC,provide specified strategic consulting services, in addition to his services as a company controlled by Morris Sutton.. Asboard member, on amonth-to-month basis at a monthly rate of $10,000. For the year ended October 31, 2007, accounts receivable due from Sutton Sales totaled approximately $152,000.
19. SUBSEQUENT EVENT
In November, 2008 the Company received proceeds of approximately $1.1 million from the sale of the rights to approximately $14.2 million of New Jersey state income tax net operating loss carryforwards,2010, consulting fees incurred under the Technology Business Tax Certificate Program administered by the New Jersey Economic Development Authority. The amount represents utilization of approximately 34% of the $41.0 million of net operating loss carryforwards availableagreement amounted to the Company in the State of New Jersey, prior to the transfer. The amount will be recorded as an income tax benefit during the quarter ending January 31, 2009.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is a comparative breakdown of the Company’s unaudited quarterly results for the immediately preceding eight quarters:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | |
| | Jan. 31, | | | Apr. 30, | | | July 31, | | | Oct. 31, | | | Jan. 31, | | | Apr. 30, | | | July 31, | | | Oct. 31, | |
| | 2007 | | | 2007 | | | 2007 | | | 2007 | | | 2008 | | | 2008 | | | 2008 | | | 2008 | |
| | (in thousands, except per share data) | |
Net revenues | | $ | 14,495 | | | $ | 14,564 | | | $ | 10,010 | | | $ | 11,898 | | | $ | 18,664 | | | $ | 12,775 | | | $ | 14,456 | | | $ | 17,992 | |
Cost of sales | | | 9,992 | | | | 8,452 | | | | 7,053 | | | | 8,185 | | | | 11,152 | | | | 8,342 | | | | 8,306 | | | | 12,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | | 4,503 | | | | 6,112 | | | | 2,957 | | | | 3,713 | | | | 7,512 | | | | 4,433 | | | | 6,150 | | | | 4,994 | |
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Product research and development | | | 608 | | | | 543 | | | | 536 | | | | 624 | | | | 901 | | | | 708 | | | | 812 | | | | 885 | |
$73,000.F-24
F-27
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | |
| | Jan. 31, | | | Apr. 30, | | | July 31, | | | Oct. 31, | | | Jan. 31, | | | Apr. 30, | | | July 31, | | | Oct. 31, | |
| | 2007 | | | 2007 | | | 2007 | | | 2007 | | | 2008 | | | 2008 | | | 2008 | | | 2008 | |
| | (in thousands, except per share data) | |
Selling and marketing | | | 1,731 | | | | 1,903 | | | | 2,039 | | | | 1,748 | | | | 2,305 | | | | 1,915 | | | | 2,264 | | | | 2,144 | |
General and administrative | | | 2,273 | | | | 2,135 | | | | 1,664 | | | | 2,304 | | | | 2,108 | | | | 2,020 | | | | 2,737 | | | | 2,684 | |
Depreciation and amortization | | | 73 | | | | 72 | | | | 75 | | | | 76 | | | | 77 | | | | 86 | | | | 59 | | | | 78 | |
Other Operating Costs (1) | | | — | | | | 2,327 | | | | (75 | ) | | | 458 | | | | (322 | ) | | | — | | | | | | | | (1,149 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (182 | ) | | | (868 | ) | | | (1,282 | ) | | | (1,497 | ) | | | 2,443 | | | | (296 | ) | | | 278 | | | | 352 | |
Interest and finance charges | | | 744 | | | | 467 | | | | 266 | | | | 75 | | | | 199 | | | | 97 | | | | 121 | | | | 232 | |
Change in fair value of warrants | | | — | | | | — | | | | — | | | | (611 | ) | | | (458 | ) | | | (136 | ) | | | (363 | ) | | | (293 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (926 | ) | | | (1,335 | ) | | | (1,548 | ) | | | (961 | ) | | | 2,702 | | | | (257 | ) | | | 520 | | | | 413 | |
Provision for income taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 26 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (926 | ) | | $ | (1,335 | ) | | $ | (1,548 | ) | | $ | (961 | ) | | $ | 2,702 | | | $ | (257 | ) | | $ | 520 | | | $ | 387 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.04 | ) | | $ | (0.06 | ) | | $ | (0.06 | ) | | $ | (0.04 | ) | | $ | 0.10 | | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | (0.04 | ) | | $ | (0.06 | ) | | $ | (0.06 | ) | | $ | (0.04 | ) | | $ | 0.10 | | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares Outstanding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 23,627,419 | | | | 23,831,737 | | | | 23,862,617 | | | | 24,439,973 | | | | 27,388,797 | | | | 27,416,230 | | | | 27,476,286 | | | | 26,893,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | | 23,627,419 | | | | 23,831,737 | | | | 23,862,617 | | | | 24,439,973 | | | | 27,413,681 | | | | 27,416,230 | | | | 27,476,286 | | | | 26,893,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
(1) Other operating expenses consist of: |
| |
Settlement of litigation | | | — | | | $ | 2,500 | | | | — | | | $ | 322 | | | $ | (322 | ) | | | — | | | | — | | | | (1,250 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gain on settlements | | | — | | | $ | (173 | ) | | $ | (75 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss on impairment of software development costs | | | — | | | | — | | | | — | | | $ | 136 | | | | — | | | | — | | | | — | | | $ | 101 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-25