UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
(Mark One)
(Mark One)
þ
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
  
For the fiscal year ended October 31, 20102013
OR
o
 
¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
For the Transition Period from         to          
 
Commission FileNo. 000-51128
MAJESCO ENTERTAINMENT COMPANY
(Exact name of registrant as specified in its charter)
 
DELAWARE
06-1529524
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
160 Raritan Center Parkway
Edison, New Jersey 08837
(Address of principal executive office)
 
Registrant’s telephone number, including area code (732) 225-8910
 
Securities registered pursuant to Section 12(b) of the Act: NONE
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, Par Value $0.001
(Title of class)
(Title of class)
NASDAQ Capital Market
(Name of exchange on which registered)
 
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o¨     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o¨     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oþ    No o¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein and, will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. oþ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o¨
Accelerated filer o¨
Non-accelerated filer o¨
Smaller reporting company þ
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o¨     No þ
 
The aggregate market value of the common stock held by non-affiliates as of April 30, 20102013 was $24.2$24 million.
 
The outstanding number of shares of common stock as of January 28, 20118, 2014 was 39,519,707.46,374,301.
 
The Registrant’s proxy or information statement is incorporated by reference into Part III of this Annual Report onForm 10-K.

 
TABLE OF CONTENTS
 
  
Page
PART I
Item 1.Business1
Item 1A.Risk Factors7
Item 1A.Risk Factors9
Item 1B.Unresolved Staff Comments2017
Item 2.PropertiesProperties2017
Item 3.Legal Proceedings2017
Item 4.Mine Safety Disclosures(Removed and Reserved)2017
PART II
PART II
Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities2018
Item 6.Selected Financial Data2219
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations2320
Item 7A.Quantitative and Qualitative Disclosures About Market Risk3528
Item 8.Financial Statements and Supplementary Data3528
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure3529
Item 9A.Controls and Procedures3529
Item 9B.Other Information3630
PART III
PART III
Item 10.Directors, Executive Officers and Corporate Governance3731
Item 11.Executive Compensation3731
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters3731
Item 13.Certain Relationships and Related Transactions, Director Independence3731
Item 14.Principal AccountantAccounting Fees and Services3731
PART IV
PART IV
Item 15.Exhibits, Financial Statement Schedules37
EX-21.1
EX-23.1
EX-23.2
EX-23.3
EX-31.1
EX-31.2
EX-32.1


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Item 1.  Business.31
 
Item 1. Business.
Forward-looking Statements
 
Statements in this annual report onForm 10-K that are not historical facts constitute forward-looking statements that are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. TheseExamples of forward-looking statements relateinclude statements relating to future events orindustry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial performance and involve known and unknown risks, uncertaintiesposition, and other factorsfinancial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie forward-looking statements. Risks and uncertainties that may causeaffect our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Those factorsstatements include, among other things, those listed under “Risk Factors” and elsewhere in this annual report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions.subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results. References herein to “we,” “us,” and “the Company” are to Majesco Entertainment Company.
Introduction
 
We are a provider ofdevelop, publish and distribute video game products primarily for the family oriented, mass-marketcasual-game consumer. Our products allow us to capitalize on the large and growing installed base of interactive entertainment enthusiasts on a variety of different consoles, and handheld platforms. We sell our products primarily to large retail chains, specialty retail stores video game rental outlets and distributors. We have developed our retail and distribution network relationships over our24-year history.
We publish video games for almost all major current generation interactive entertainment hardware platforms, including Nintendo’s DS, DSi, 3DS, Wii and Wii,WiiU, Sony’s PlayStation 3, or PS3, and PlayStation Portable, or PSP®, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. We also publish games for numerous digital platforms, includingsuch as Xbox Live Arcade and PlayStation Network, or PSN, mobile platforms like iPhone, iPadsuch as the iOS and iPod Touch, as well asAndroid phones, and online platforms such as Facebook.Facebook and Steam.
 
Our video game titles are targeted at various demographics at a range of price points. In some instances, these titles are based on licenses of well known properties and, in other cases based on original properties. We collaborate and enter into agreements with content providers and video game development studios for the creation of our video games.
Due to the larger budget requirements for developing and marketing premium console titles for core gamers, we focus on publishing more casual games targeting mass-marketcasual-game consumers. Over the past 5 years, we have focusedIn some instances, our titles are based on the Nintendo DSlicenses of well-known properties and, Wii, which attracted our target demographics. More recently,in other platforms such as Xbox 360cases based on original properties. We enter into agreements with content providers and PlayStation 3 have started to see mass-market adoption, and we have begun to develop games for these platforms. With the recent launches of new motion-based peripherals such as Kinect for Xbox 360 and Move for PlayStation 3, we expect these platforms to see even broader mass-market acceptance. Additionally, Nintendo is expected to introduce the 3DS, its next-generation handheld platform, in March 2011, which we plan to support. We will continue to evaluate opportunities to reach our target demographic as other platforms move in this direction. We currently have six 3DS, four Kinectvideo game development studios for the Xbox 360, three Wiicreation of our video games.
Our operations involve similar products and three DS gamescustomers worldwide. These products are developed and sold domestically and internationally. The Company is centrally managed and our 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, we operate in development.a single segment.
Corporate Background
 
Our principal executive offices are located at 160 Raritan Center Parkway, Edison, NJ 08837, and our telephone number is(732) 225-8910. Our web site address is www.majescoentertainment.com. Majesco Sales Inc. was incorporated in 1986 under the laws of the State of New Jersey. On December 5,


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2003, Majesco Sales Inc. completed a reverse merger with Majesco Holdings Inc. (formerly ConnectivCorp), then a publicly traded company with no active operations. Majesco Holdings Inc. was incorporated in 19982004 under the laws of the State of Delaware. As a result of the merger, Majesco Sales Inc. became a wholly-owned subsidiary and the sole operating business of the public company. On April 4, 2005, Majesco Sales Inc. was merged into Majesco Holdings Inc., and, in connection with the merger, Majesco Holdings Inc. changed its name to Majesco Entertainment Company.
Industry Overview
 
The interactive entertainment industry is mainly comprised of video game hardware platforms, video game software market is comprised of two primary sectors. The first sector is software for dedicated console systems such as the Xbox, PlayStation and peripherals. WithinWii, and handheld gaming systems, such as DS and 3DS. The majority of software for these platforms has historically been purchased in packaged form through retail outlets. However, in recent years an increasing amount of software has been made available digitally through online networks such as Microsoft’s Xbox Live Arcade, or XBLA, and Sony’s PlayStation Network, or PSN. The second sector is software for multipurpose devices such as personal computers and mobile devices such as smartphones and tablets. Significant growth is projected in this industry, area, particularly in the form of downloadable and online games for use with mobile devices or over online social networks such as Facebook. These platforms often utilize different customer monetization models such as “freemium” gaming where a customer accesses certain game functionality for free, while paying for certain content in the form of in-game microtransactions for virtual goods or premium game features. Publishers may also earn advertising revenue by displaying third-party ads to users.
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North American combinedretail sales of video game hardware, video game software and video game peripherals were approximately $18.5$7 billion in 20102012 according to the NPD Group, a global provider of consumer market research information.
Video Game Hardware Platforms
Video game hardware platforms are comprised of home game consoles, or consoles, and portable handheld game devices, or handhelds, as well as multi-functional devices such as PCs, Personal Digital Assistants, or PDAs, and mobile phones. The current generation of consoles includes Nintendo’s Wii, Sony’s PlayStation 3 and Microsoft’s Xbox 360. On November 22, 2005, Microsoft launched the first of the next-generation consoles, the Xbox 360. According to the NPD Group, a global provider of consumer and retail market research information, the U.S. installed base for the Xbox 360 as of December 2010 was approximately 25.4 million. Sony’s PlayStation 3 and Nintendo’s Wii, were released in North America on November 17, 2006 and November 19, 2006, respectively. According to the NPD Group, the U.S. installed bases for the Wii and PlayStation 3 as of December 2010 were approximately 34.2 million and 15.5 million, respectively. These advanced consoles feature improved graphics capabilities, increased storage capacity and incremental online, wireless and multi-media entertainment functionality intended to attract a wider audience.
The current generation of handhelds is dominated by Nintendo’s DS, which launched in November 2004 and features a dual screen, wi-fi capability, higher capacity storage media than its predecessor Game Boy Advance, or “GBA”, and is backward compatible with GBA cartridges. On June 11, 2006, Nintendo released the DS Lite, a 20% lighter update of the original DS that was also slimmer and brighter. According to the NPD Group, the Nintendo DS installed base is 47.0 million in the U.S. as of December 2010. In April 2009, Nintendo released the DSi, the third generation DS that features larger screens, a camera, downloadable applications and more. In March 2005, Sony launched the Sony PlayStation Portable system. According to the NPD Group, the PSP installed base was approximately 19.0 million in the U.S. as of December 2010.
The ability of multi-functional devices, such as PCs, PDAs and mobile phones, to serve as video game platforms has also been greatly enhanced. This is due to periodic advances in microprocessors, graphics chips, storage capacity, operating systems and media and digital rights management. These advances have enabled developers to introduce video games for multi-functional devices with enhanced game play technology and high resolution graphics.
Video Game Software
Video game software is created by the console and handheld manufacturers and by independent publishers and developers. Console and handheld manufacturers license publishers to develop video games for their platforms and retain a significant degree of control over the content, quality and manufacturing of these products. Most manufacturers also receive a royalty for every software title manufactured for their platform. The publishers, subject to the approval of the platform manufacturers, determine the types of games they will create. Publishers either utilize their own in-house development teams or outsource game development to third party developers. Following development, publishers then market and sell these products to retailers, either directly or through resellers.


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Traditionally, video games and video content have been delivered using CDs, DVDs or cartridges. More recently, full games and other downloadable content, including additional levels, weapons, vehicles and more, can now be delivered digitally via online platforms like Xbox LIVE, or “XBLA”, PlayStation Network, and WiiWare. Additionally, mobile platforms such as iPhone and Android have emerged as significant destinations for mass-market casual games. Finally, social networking sites such as Facebook have proven to be large, rapidly growing platforms forfree-to-play social games.
Strategy
 
Our objective is to be an innovative provider of video games for the mass market with a focus on developing and publishing a wide range of casual and family oriented video games.casual-game consumer. Specifically, we strive to:
 
Develop franchise titles with capability to sell multiple sequels.Build our digital business and product offering.
 
Video game franchises are those game brands that successfully sell multiple sequels. These provide valuable long-term benefits bothIn 2011, we began building a business in consumer base growth,digitally-delivered games alongside our traditional console and revenue predictability. A core strategy for growth is to pursuehandheld business. This business encompasses mobile games on Apple’s IOS and Android devices, downloadable games on XBLA, PSN and WiiWare, and platforms such as Steam and free-to-play social games on Facebook. Through the developmentend of 2013, we have launched several paid downloadable games and cultivation of long-term franchises both through internally generated intellectual property and long-term licensing arrangements.freemium games on these platforms.
 
Focus product development effortsIn August 2013, we established “Midnight City”, a publishing label fordigitally-delivered games created by independent developers on quality games that are easy to“pick-up-and-play,” priced affordablyvarious online gaming platforms. Midnight City supports independent developers with customized publishing services, including public relations, marketing, and targeted for the mass market.community content, primarily on digital distribution platforms like Xbox Live Arcade, PlayStation Network, Steam and other PC downloadable sites.
 
Video game developmentAdditionally, in October 2013, we entered the online casino gaming business through an equity investment in GMS Entertainment Limited (GMS”). GMS acquired the operations of casual games is generally less expensivePariplay LTD a developer of both fixed odd and simpler than development ofrandom based online and mobile games for use in real money online games, social casinos and lottery systems. GMS is also a licensed online gambling operator headquartered in the core gamer demographic, where expectations for graphic quality and depthIsle of play are very high. In general, from a game play/content perspective, we are focusing on publishing games that are relatively easy to play and whose subject matter will appeal to as wide an audience as possible. Historically, we focused our game development efforts on products for the Nintendo DS and Wii systems, which have appealing price points and unique play mechanics that continue to resonate with the mainstream gamer and have experienced significant installed base growth over the past four years. However, there are many new platforms that have emerged recently that are capturing the mass-market consumer. With the introduction of motion-based gaming to both the Xbox 360 and PlayStation 3 platforms, we see these consoles appealing to a wider audience. We see opportunities in these emerging platforms, and have begun developing games for Kinect for Xbox 360, Move for PlayStation 3, Nintendo 3DS, iPhone, and Facebook.
Man.
Grow Cooking Mama franchise
Our most successful franchise to date has beenCooking Mama, which, through December 31, 2010, has sold over 8 million units across eight SKUs. We have successfully extended theMamabrand onto multiple games, includingGardening Mama,Crafting Mama, andBabysitting Mama. We will look to continue to grow this series with additional sequels and brand extensions and innovations.
Leverage our industry relationships and entrepreneurial environment toenter new categories and bring innovative products to market.
 
In the past, we have leveraged our experience, entrepreneurial environment and industry relationships with developers, manufacturers, content providers, retailers and resellers to create and distribute new and innovative products. We will continue to capitalize on current market trends and pursue new product opportunities in categories related to our core business.
 
Focus product development efforts on quality games that are easy to“pick-up-and-play,” priced affordably and targeted for themass market.
Video game development of casual games is generally less expensive and simpler than development of games for the core-gamer demographic, where expectations for graphic quality and depth of play are very high. In general, from a game-play and content perspective, we are focused on publishing games that are relatively easy to play and whose subject matter will appeal to a wide audience. Historically, we focused our game development efforts on products for the Nintendo DS and Wii systems, which experienced significant installed base growth, with appealing price points and unique play mechanics, and resonated with the mainstream gamer. With the introduction of motion-based gaming to both the Xbox 360 and PlayStation 3, we began developing games for these platforms and plan to continue to focus on mass-market gaming for new platforms.
Develop franchise titles with the capability to sell multiple sequels.
Video game franchises are those game brands that successfully sell multiple sequels. These provide valuable long-term benefits both in customer base growth and revenue predictability. A core strategy for growth is to pursue the development and cultivation of long-term franchises both through internally generated intellectual property and long-term licensing arrangements.
Leverage success of our existing franchises.
We have been able to extend our existing products through platform and brand extensions. For exampleZumba Fitness launched in November 2010 for the Nintendo Wii, Kinect for Xbox 360, and PlayStation 3 Move. We continued to capitalize on the rapid growth of this fitness program with additional releases in fiscal 2012 and fiscal 2013, includingZumba Fitness 2, for the Nintendo Wii,Zumba Fitness Rush on Kinect for Xbox 360,Zumba Core for the Wii and Xbox 360 and Zumba Dance for iOS and Android mobile devices, and in November 2013,Zumba World Party for the Wii, WiiU, Xbox 360 and Xbox One.Zumba Fitness games have sold over nine million units worldwide.
We have also successfully extended theCookingMama brand onto multiple games, includingGardening Mama,CraftingMama,BabysittingMamaandCamping Mama and across multiple platforms including Nintendo DS, Wii, and 3DS systems.
Products
 
We offer our customers a wide selection of interactive entertainmentvideo game products for a variety of platforms.


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Our most successful franchise We own intellectual property related to date has beenCooking Mamawhich, through December 31, 2010, has sold over 8 million units across eight SKUs. In North America,Cooking Mamafor the Nintendo DS was first introduced in September 2006 at a $19.99 value pricecertain games and has sold more than three million units. Subsequent versions for the DS were released at a $29.99 retail price, includingCooking Mama 2: Dinner with Friendslaunched in November 2007;Gardening Mama, launched in March 2009;Cooking Mama 3: Shop and Chop, released in October 2009; andCrafting Mama, launched in October 2010.
The initial Wii version,Cooking Mama: Cook Off, launched in March 2007 at a $49.99 retail price. Later releases for the Wii, also at $49.99, includeCooking Mama: World Kitchen, released in November 2008 andBabysitting Mama, released in November 2010.
Games
In addition to intellectual properties that we own, we also license the rights to content from developers or media entertainment companies for certain games, such as infor the cases ofAge of Empires,Cake Mania,Jillian Michaels,Nancy Drew,Tetris, Night at the Museum,titlesAlvin and the Chipmunks: The Squeakquel,Chipmunks, Hulk Hogan’s Main Event, NBA Baller Beatsand most recently, Phineas and Ferb. We also distribute games developed by others, includingHello Kitty Picnic,Monster High Skulltimate Roller Maze andMonster High 13 Wishes.
When a “hit” product proves to have strong consumer acceptance, it may account for a large percentage of our overall net revenue. This occurred in the case ofZumba. In fiscal years 2013, 2012 and 2011, revenue from sales ofZumba represented approximately 55%,76% and 70% of our total net revenue, respectively. Previously,Cooking Mamarepresented a significant portion of revenue in certain years. These brands grew through numerous iterations across multiple platforms.
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Zumba Fitness was introduced in November 2010. Together with its sequels, Zumba Fitness has sold over ten million copies worldwide and was the number one fitness title of 2011 according to NPD. Additional sequel releases includedZumba Fitness 2.for the Nintendo Wii,Zumba Fitness Rush for Xbox 360 andZumba Core for the Wii and Xbox 360, in fiscal 2012, and Zumba World Party for the Wii, WiiU, Xbox 360 and Xbox One and Zumba Dance for iOS and Android mobile devices, in fiscal 2013.


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The originalCooking Mama game was first introduced in 2006 for the Nintendo DS and theCooking Mama franchise has sold over nine million units across multiple titles in North America. The most recentCooking Mama game,Cooking Mama 4: Kitchen Magic, was released in November 2011 for the Nintendo 3DS.
Selected titles, their compatible platforms and launch dates include:
 
Selected Titles
Platform
Launch Date
     
Selected TitlesPlatformLaunch Date
Cooking Mama: Cook OffWiiMarch 2007
Bust-A-Move Bash!
WiiApril 2007
The New York Times CrosswordsDSMay 2007
Nancy Drew: Deadly Secret of Olde World ParkMama DS September 2007
Cooking Mama 2: Dinner with FriendsDSNovember 2007
Nanostray 2DSMarch 2008
BlastWorks: Build, Trade, DestroyWiiJune 2008
Wonder World Amusement ParkWiiJuly 2008
Zoo HospitalWiiSeptember 2008
Jillian Michaels’ Fitness Ultimatum 2009WiiOctober 20082006
Cooking Mama: World Kitchen Wii November 2008
Gardening Mama DS March 2009
Night at the Museum: Battle of the SmithsonianJillian Michaels Xbox 360, Wii, DS May 2009
Jillian Michaels’ Fitness Ultimatum 2010Wii, DSOctober 2009
A Boy and His BlobWiiOctoberMarch 2009
Cooking Mama 3: Shop and Chop DS October 2009
Hello Kitty Party DS November 2009
Alvin and the Chipmunks: The Squeakquel Wii, DS December 2009
Serious Sam HD: The First EncounterXBLAJanuary 2010
Attack of the Movies3-D
Wii, Xbox 360May 2010
Tetris Party DeluxeWii, DSJune 2010
SwordsWiiSeptember 2010
Serious Sam HD: The Second EncounterXBLASeptember 2010
Greg Hastings Paintball 2 Xbox 360, Wii September 2010
Gardening MamaiPhone, iPadOctober 2010
My Baby 3 & FriendsDSOctober 2010
Crafting Mama DS October 2010
Babysitting MamaWiiNovember 2010
Zumba FitnessWii, Xbox 360, PS3November 2010
Camping Mama: Outdoor AdventuresDSOctober 2011
Hulk Hogan’s Main EventXbox 360October 2011
Alvin and the Chipmunks: ChipwreckedWii, Xbox 360, DSNovember 2011
Cooking Mama 4: Kitchen Magic3DSNovember 2011
Zumba Fitness 2WiiNovember 2011
Zumba RushXbox 360February 2012
NBA Baller BeatsXbox 360September 2012
Double DragonXBLA, PSNSeptember 2012
Hello Kitty Picnic3DSOctober 2012
Zumba CoreWii, Xbox 360October 2012
Monster High Skulltimate Roller MazeDS, 3DS, WiiMarch 2013
Phineas and FerbDS, 3DS, Wii, WiiU, Xbox 360August 2013
Monster High 13 WishesDS, 3DS, WiiOctober 2013
Zumba World PartyWii, WiiU, Xbox 360, Xbox OneNovember 2013
Zumba KidsWii, WiiU, Xbox 360, Xbox OneNovember 2013
Many of our games were launched for consoles and handheld devices that are now late in their life cycle. In 2012 and 2013, Nintendo’s Wii U, Microsoft’s Xbox One and Sony’s Playstation Vita and Playstation 4 were launched in the United States and Europe. In fiscal 2013, we released certain games for the WiiU and Xbox One. To date, we have not released any games for the new Sony platforms.
We also create titles for mobile platforms, including Apple’s iOS and Android. Selected titles, their compatible platforms and launch dates include:
Selected Titles
Platform
Launch Date
Legends of LootiOS, AndroidOctober 2012
SciFi HeroesiOS, AndroidNovember 2012
Flea SymphonyiOS, AndroidNovember 2012
Zumba DanceiOS, AndroidJuly 2013
Romans from MarsiOS, AndroidOctober 2013
In August 2013, we established the Midnight City label dedicated to supporting independent developers with customized publishing services, including public relations, marketing, and community content, primarily on digital distribution platforms like Xbox Live Arcade, PlayStation Network, Steam and other PC downloadable sites. In fiscal 2013, we released two games under the Midnight City label:
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Peripheral Products
Selected Titles
Platform
Launch Date
Slender: The ArrivalSteamOctober 2013
Blood of the WerewolfSteamOctober 2013
 
WhileWe have also published social games for online play on platforms such as Facebook and Zynga. In January 2013, as part of a larger workforce realignment, we are no longer actively engaged in this category,closed our peripheral products in the past consisted principally of our back catalog TV Arcadeplug-and-play products. These products are stand-alone games that connect directly into television sets with standard RCA cables. These are battery operated and require no additional hardware or software.social game development studio.


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Product Development
 
Prior to initiating the development of a video game title, we generally perform market research, studio due diligence and financial analyses.analysis. A title mustis then be approvedreviewed by our “green light” committee comprised of members from our executive, product development, finance, sales and marketing and legal/business affairs teams before being accepted for publication.teams. Once accepted, the title is evaluated at regular milestones to ensure it is progressing on time, according to specifications and on budget.
 
We primarily use third party development studios to createdevelop our packaged video game software products. However, we employ game producers and quality assurance personnel to manage the creation of the game and its ultimate approval by the first party hardware manufacturer. We carefully select third parties to develop video games based on their capabilities, suitability, availability and cost. We usually have broad rights to commercially utilize products created by the third party developers we work with. Development contracts are structured to provide developers with incentives to provide timely and satisfactory performance by associating payments with the achievement of substantive development milestones, and by providing for the payment of royalties to them based on sales of the developed product, only after we recoup development costs. We have worked, and continue to work, with independent third party developers, such as:
 
•  Wayforward
•  Panic Button
•  First Playable
•  DreamRift
•  Arkadium
•  Foundation 9
• Zoe Mode
• Panic Button
• 1st Playable Productions
• Behaviour Interactive and
• Wayforward Technologies.
 
The development process for video games also involves working with platform manufacturers from the initial game concept phase through approval of the final product. During this process, we work closely with the developers and manufacturers to ensure that the title undergoes careful quality assurance testing. Each platform manufacturer requires that the software and a prototype of each title, together with all related artwork and documentation, be submitted for its pre-publication approval. This approval is generally discretionary.
On November 7, 2007, we announced the creation of an internal development facility to be based in Los Angeles focused on products and properties for the casual gamer. During the subsequent 18 months, the studio developed games for the Wii and DS. After evaluation of the studio’s performance and changes in the availability and cost of development with our third party partners, we closed the studio and decided to work solely with external development partners.
Intellectual Property
 
Like other entertainment companies, our business is affected by the creation, acquisition, exploitation and protection of intellectual property in many ways.
Platform Licenses
 
Hardware platform manufacturers require that publishers obtain a license from them to publish titles for their platforms. We currently have non-exclusive licenses from Nintendo, Microsoft and Sony for each of the popular console and handheld platforms. Each license generally extends for a term of between two to four years and is terminable under a variety of circumstances. Each license allows us to create one or more products for the applicable system, and requires us to pay aper-unit license feeand/or royalty payment from the title produced and may include other compensation or payment terms. Publishers are not required to obtain licenses for publishing video game software for PCs. All of the hardware manufacturers approve each of the titles we submit for approval on atitle-by-title basis, at their discretion. We are also dependent on approvals from distributors for our video game software for PCs and mobile devices.


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Licenses from Third Parties
 
While we develop original titles, most of our titles are based on rights, licenses and properties, including copyrights and trademarks, owned by third parties. Even our original titles usually include somemay require rights orto properties from third parties.parties, such as rights to music or content. License agreements with third parties generally extend for a term of between two to four years, are limited to specific territories or platforms and are terminable under a variety of events.circumstances. Several of our licenses are exclusive within particular territories or platforms. The licensors often have strict approval and quality control rights. Typically, we are obligated to make minimum guaranteed royalty payments over the term of these licenses and advance payments against these guarantees, but other compensation or payment terms, such as milestone payments, are also common. From time to time, we may also license other technologies from third party developers for use in our products, which also are subject to royalties and other types of payment.
Licenses to Third PartiesEnforcement
 
As we create original titles we may decideWe actively engage in enforcement and other activities to license rightsprotect our intellectual property. We typically own the copyright to third parties, sometimes on an exclusive basis,our software code and content and register copyrights and trademarks in order to generate publicity or market demand for our titles, to generate additional revenue related to complementary products or a combination of these factors. For example, for certain titles we have sold the movie rights, entered into strategy guide deals and licensed a comic book series and an apparel line.United States as appropriate.
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Manufacturing
 
Sony, Nintendo and Microsoft control the manufacturing of our products that are compatible with their respective video game consoles, as well as the manuals and packaging for these products, and ship the finished products to us for distribution. Video games for Microsoft, Nintendo and Sony game consoles consist of proprietary format CD-ROMs or DVD-ROMsproprietary-format optical discs and are typically delivered to us within the relatively short lead time of approximately two to three weeks. Sony PSP products adhere to a similar production time frame, but use a proprietary media format called a Universal Media Disc, or UMD.
With respect to GBADS and DS3DS products, which use a cartridge format, Nintendo typically delivers these products to us within 4530 to 6045 days after receipt of a purchase order.
 
Initial production quantities of individual titles are based upon estimated retail orders and consumer demand. At the time a product is approved for manufacturing, we must generally provide the platform manufacturer with a purchase order for that product, and pay for the entire purchase price prior to production. To date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products. However, manufacturers’ difficulties, which are beyond our control, could impair our ability to bring products to the marketplace in a timely manner. Some of our inventory items are packaged with accessories, such as belts for ourZumba games, basketballs for ourNBA Baller Beats game, and dolls for ourBabysitting Mama game. The purchase of these accessories involves longer lead times and minimum purchase amounts, which require us to maintain higher levels of inventory than for other games.
We operate in a capital intensive industry. Significant working capital is required to finance the manufacturing of inventory of products, especially during the peak holiday selling season.
We typically ship orders immediately upon receipt of the order. To the extent that any backlog exists at the end of any period, it is not a material indicator of future results.
 
Sales and Marketing
North America
 
Historically, our marketing programs have principally supported our premium game titles. While we support most of our titles in some manner, those with the most potential will have long lead time,times, multi-faceted marketing programs designed to generate enthusiasm and demand. Specific consumer marketing strategies we may employ include: TV; radio and print advertising; website and online marketing; demo distribution; promotions and cross-promotions with third parties; andpoint-of-purchase advertising.
 
Additionally, we customize public relations programs that are designed to create awareness with all relevant audiences, including core gamers and mass-entertainment consumers.audiences. To date, our public relations efforts have resulted in significant coverage for our company and individual titles in computer and video game publications, such as Game Informer, GameProIGN and Nintendo Power, as well as major newspapers, magazines and broadcast outlets, such as CNN, USA Today, Wired, Maxim, Newsweek,


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The and the New York Times, and TV Guide, among others. We also host media events throughout the year at which print, broadcast and online journalists can preview, review and evaluate our products prior to their release.
 
In addition to regularface-to-face meetings and communications with our sales force, we employ extensive trade marketing efforts including: direct marketing to buyers and store managers; trade shows; various store manager shows; and distribution and sales incentive programs.
 
We sell our products primarily to large retail chains, specialty retail stores video game rental outlets and distributors. OurWe believe our sales team has strong relationships with major retailers and communicates with them frequently. To supplement our sales team, we currently utilize six sales representative organizations located throughout the United States. The firms we use were chosen based on their performance and retailer relationships. On average, two sales representatives per organization are assigned to our accounts. It is customary for the sales representatives and resellers of our games who are assigned specific customers to also distribute games produced by other publishers. Distribution channels are dominated by a select group of companies, and a publisher’s access to retail shelf space is a significant competitive factor.
 
International
 
We do business internationally through our office in the United Kingdom, by entering intoprimarily under license and distribution agreements with leading international publishers505 Games s.r.l. for distribution in Europe and the PAL territories. During 2009,These agreements may vary by product and by territory. In a distribution agreement, we terminatedmanufacture the product, and sell it into the distributors at a wholesale price, with our distribution partner being responsible for retail sell-in and marketing the product. In a licensing agreement, with our then currentlicensing partner is responsible for the manufacture and subsequently negotiated alternative distribution arrangements on a territory by territory basis.sale of the product and we receive royalties and usually an up-front royalty advance.
 
In addition, in 2009, we movedDigital
We also distribute games online through XBLA and PSN, Steam, Facebook, and Zynga and across networks for mobile devices such as Apple’s iPhone. We utilize various methods to a direct distribution model for the United Kingdom market whereby we sold directly to our retail customers using local distributors to ship our product. We believed this model offered the potential to get better placementand drive awareness of our products at retail and to improve margins by reducing the distribution fee incurred under our existing distribution agreements. We incurred some increase in overhead as we added positions in sales and marketing to facilitate this operation. While this model offered more potential for profitability, we assumed some credit risk associated withtitles on these customers, and were responsible for various promotional allowances to which we did not have exposure under our previous distribution model. Largely as a result of the downturnemerging platforms, including online advertising on Facebook, on platform homepages in the United Kingdom video game market,cases of XBLA and PSN, and on online sites. We also acquire users through both paid and unpaid channels, due to the business performed below expectations.viral nature of social and mobile games.
 
In 2010, we shifted our business model from publishing and distribution to a licensing approach. The licensing model requires significantly reduced costs and overhead, as compared to distribution, but will allow us the potential to achieve profitability from our products in the European market.
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In January 2010, we reduced personnel associated with international sales and marketing efforts as part of a plan of restructuring to better align our workforce to our revised operating plans.
Customers
 
Our customersCustomers of our packaged software are comprised of national and regional retailers, specialty retailers and video game rental outlets. We believe we have developed close relationships with a number of retailers, including Amazon, Best Buy, GameStop, Target, Toys R Us and Wal-Mart.Walmart. We also believe we have strong relationships with U&I Entertainment, Cokem, Ingram and SVG, who act as resellers of our products to smaller retail outlets.products. For the fiscal year ended 2010,2013, our top fourtwo retail accounts were Wal-Mart, GameStop Best Buy, and Target, each accounting for approximately 20%, 12%, 10% and 10%14% of our revenue. Revenue from 505 Games s.r.l. under distribution and license arrangements in Europe represented approximately 15%, 22% and 11% of revenue in 2013, 2012 and 2011, respectively. Fluctuations in revenue earned from 505 Games reflect variances in both release slates and distribution arrangements from year to year. A substantial reduction in purchases, termination of purchases or business failure by any of our significant customers could have a material adverse effect on us.
Competition
We compete with many other first and third party publishers and developers in the handheld, console and online segments. In the console and handheld segment, we compete with first party publishers such as Nintendo, Microsoft and Sony, each of which develop software for their respective platforms, as well as third party publishers such as Activision Blizzard, Electronic Arts, Sega, Take-Two Interactive and Ubisoft. In the social and mobile segments, we compete with a range of large and small developers and publishers, which include social-game distributors Electronic Arts and Zynga and mobile-game publishers, Glu Mobile and Rovio. We expect competition to increase in this area in the future.
 
In general, our products compete with other forms of entertainment for leisure time and discretionary spending of consumers. These other forms of entertainment include motion pictures,movies, television, music, online content and music.social media. More specifically, the market for interactive entertainment products is highly competitive and relatively few products achieve significant market acceptance. We continue to face


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significant competition with respect to our products, which may also result in price reductions, reduced gross margins and loss of market share. Many of our competitors have significantly greater financial, marketing and product development resources than we do.
 
With respect to our video game products, we compete with many other third party publishers in the handheld, console and value segments. We expect that competition may increase in the future.
Current and future competitors may be able to:
 
•  respond more quickly to new or emerging technologies or changes in customer preferences;
•  carry larger inventories;
•  gain access to wider distribution channels;
•  undertake more extensive marketing campaigns;
•  adopt more aggressive pricing policies;
•  devote greater resources to securing the rights to valuable licenses and relationships with leading software developers;
•  maintain better relationships with licensors and secure more valuable licenses;
•  make higher royalty payments; and
•  secure more and better shelf space.
•   respond more quickly to new or emerging technologies or changes in customer preferences;
•   carry larger inventories;
•   gain access to wider distribution channels;
•   undertake more extensive marketing campaigns;
•   adopt more aggressive pricing policies;
•   devote greater resources to securing the rights to valuable licenses;
•   develop stronger relationships with leading software developers;
•   make higher royalty payments; and
•   secure more and better shelf space.
 
Competitive factors such as the foregoing may have a material adverse effect on our business.
Seasonality
 
The interactive entertainment business is highly seasonal, with sales typically higher during the peak holiday selling season during the fourth quarter of the calendar year. Traditionally, the majority of our sales for this key selling period ship in our fiscal fourth and first quarters, which end on October 31 and January 31, respectively. Significant working capital is required to finance the manufacturing of inventory of products that ship during these quarters.
Employees
 
We had 7061 full-time employees in the United States and one1 full-time employee in the United Kingdom as of October 31, 2010.2013. We have not experienced any work stoppages and consider our relations with our employees to be good.
Financial Information About Geographic Areas
See “Note 1—Principal Business Activity and Basis of Presentation” in the notes to the consolidated financial statements included on Page F-7.
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Item 1A.  Risk Factors.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, referred to herein as the SEC. Our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available to the public free of charge over the Internet at our website at http://www.majescoentertainment.com or at the SEC’s web site at http://www.sec.gov. Our SEC filings will be available on our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. Information contained on our website is not incorporated by reference into this 10-K. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can view our Code of Conduct and Ethics and the charters for each of our committees of the Board of Directors free of charge on the corporate governance section of our website.
Item 1A.  Risk Factors.
Our business and operations are subject to a number of risks and uncertainties asdescribed below. However, the risks and uncertainties described below are not theonly ones we face. Additional risks and uncertainties that we are unaware of, or thatwe may currently deem immaterial, may become important factors that could harm ourbusiness, financial condition or results of operations. If any of the following risksactually occur, our business, financial condition or results of operations couldsuffer.
We have experienced recent net losses and we may incur future net losses, which maycause a decrease in our stock price.
 
WeWhile we generated net income for fiscal years 2012 and 2011, we incurred net losses of $1.0$12.6 million in fiscal year2013, $1.0 million in 2010 and $7.2 million in 2009. We may not be able to continue to generate revenues sufficient to offset our costs and may sustain further net losses in future periods. ContinuedAny such losses may have an adverse effect on our future operating prospects, liquidity and stock price.


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Our business activities may require additional financing that might not be obtainableon acceptable terms, if at all, which could have a material adverse effect on ourfinancial condition, liquidity and our ability to operate going forward.
 
Although there can be no assurance, our management believes that based on our current plan there are sufficient capital resources from existing levels of cash and operations, including our factoring and purchase order financing arrangements, to finance our operational requirements through at least the next 12 months. If we are unable to achievemaintain profitability, or if unforeseen events occur that would require additional funding, we may need to raise capital or incur debt to fund our operations. We would expect to seek such capital through sales of additional equity or debt securitiesand/or loans from financial institutions, but there can be no assurance that funds will be available to us on acceptable terms, if at all, and any sales of such securities may be dilutive to investors.
 
Failure to obtain financing or obtaining financing on unfavorable terms could result in a decrease in our stock price and could have a material adverse effect on future operating prospects, or require us to significantly reduce operations.
We are heavily reliant on our factoring arrangement.
 
We utilize credit under a factoring agreement with Rosenthal & Rosenthal, Inc. (referred to herein as Rosenthal) whereby we sell our receivables for immediate payment of a portion of the invoice amount and, in some instances, the ability to take additional cash advances. This is our primary source of financing. If Rosenthal suffered financial difficulty, or our relationship with Rosenthal deteriorated, this could significantly impact our liquidity.
We have experienced volatility in the price of our stock.
 
The price of our common stock has experienced significant volatility. In the 1224 months ended October 31, 2010,2013, the high and low bid quotations for our common stock as reported by the Nasdaq Capital Market ranged between a high of $1.28$3.63 and a low of $0.49.$0.52. The historic market price of our common stock may be higher or lower than the price paid for our shares and may not be indicative of future market prices, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
 
 •price and volume fluctuations in the overall stock market from time to time;
 
•actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;
 
•our, or a competitor’s, announcement of new products, services or technological innovations;
 
•departures of key personnel;
 
•general economic, political and market conditions and trends; or
 
•other risks and uncertainties as may be detailed from time to time in our public announcements and filings with the Securities and Exchange Commission, referred to herein as the SEC.
 
We may not be able to sustain or increase the value of our common stock. Declines in the market price of our stock could adversely affect our ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stockand/or to conduct future financing activities with or involving our common stock.
 
In addition, purchases or sales of large quantities of our stock could have a significant effect on our stock price.


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We seek to manage our business with a view to achieving long-term results, and thiscould have a negative effect on short-term trading.
Our focus is on creation of stockholder value over time, and we intend to make decisions that will be consistent with this long-term view. As a result, some of our decisions, such as whether to make or discontinue operating investments or pursue or discontinue strategic initiatives, may be in conflict with the objectives of short-term traders. Further, this could adversely affect our quarterly or other short-term results of operations.
We may not be able to maintain our listing on the Nasdaq Capital Market.
 
Our common stock currently trades on the Nasdaq Capital Market, referred to herein as Nasdaq. This market has continued listing requirements that we must continue to maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of $35 million; or (iii) net income from continuing operations of $500,000 in the most recentlycompleted fiscal year or in the two of the last three fiscal years. Our results of operations and our fluctuating stock price directly impact our ability to satisfy these listing standards. In the event we are unable to maintain these listing standards, we may be subject to delisting.
 
FromOn March 2, 2010 to January 26, 2011, we were not in compliance with the minimum bid price requirement of $1.00 per share pursuant to Nasdaq Listing Rule 5550(a)(2). On January 28, 2011,1, 2013, we received a letter from Nasdaq indicatingnotifying us that we had regained compliance withfor the rule as30 consecutive trading days preceding the closingdate of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Marketplace Rule 5550(a)(2).
The letter also stated that, in accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until August 28, 2013, to regain compliance with the minimum bid price requirement. On August 29, 2013, we were notified by Nasdaq that the Company had been provided an additional 180 calendar day grace period, or until February 24, 2014. Compliance is achieved if the bid price per share of our common stock closes at $1.00 per share or greater for 10a minimum of ten consecutive trading days. The Company is now in full compliance with Nasdaq listing requirements.days prior to February 24, 2014.
 
As mentioned If we do not achieve compliance within the required period, the Nasdaq staff will provide written notification that the Company’s securities are subject to delisting. In that event and at that time, we may appeal the Nasdaq staff delisting determination to a Nasdaq Listing Qualifications Panel in order to present to the panel our intended plan of compliance, which would likely include a reverse stock split in order to increase our bid price above our stock is volatile, and there is no guarantee that we will continue to meet the minimum bid price requirementamount in order to attempt to regain compliance. If the panel does not accept our plan  for compliance, or the other continued listing requirements of Nasdaq. If we fail to do so,regain compliance, we maycould be subject to delisting.delisted.
 
A delisting from Nasdaq would result in our common stock being eligible for listing on theOver-The-Counter Bulletin Board (“OTCBB”(the “OTCBB”) or other markets that are. The OTCBB is generally considered to be a less efficient system than markets such as Nasdaq or other national exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Additionally, trading of our common stock in these marketson the OTCBB may make us less desirable to institutional investors and may, therefore, limit our future equity funding options and could negatively affect the liquidity of our stock.
A significant portion of our revenue in 20102013 was generated from games based on one licensed franchise.theZumba Fitness property.
 
Approximately 44%55% of our net revenuesrevenue in 2010 and 49% of our revenues in 2009 were2013 was generated from games based on the Cooking Mama franchise, developed for use on the Nintendo DS and Wii.Zumba Fitness series of games. We license the rights to publish these games from a third party. We have secured rights to publish other games based onIn November 2011, we released the Cooking Mama character, which are scheduled sequelsZumba Fitness 2 andZumba Fitness Rushfor future release. However,the Wii and Kinect platforms, respectively. In November 2012, we released the sequelZumba Fitness Corefor the Wii and Kinect platforms. In November 2013, we released the sequelZumba Fitness World Partyfor the Wii and Kinect platforms. We cannot guarantee that any of the new versions, or future versions, if any, will be as successful as the previous versions. If the new versions are not successful, this may have a significant impact on our revenues.
In addition, even if successful, we currently have not secured, and may be unable to secure, the rights to publish further sequels to these games, which may adversely affect our business and financial performance. Further, if rights to publish sequels are granted to one of our competitors, new products published by them could have a negative impact on our existing Zumba titles in the marketplace.
 
A decrease in the popularity of our licensed brands and, correspondingly, the video games we publish based on those brands could negatively impact our revenues and financial position.
Certain games released in 2013 were based upon popular licensed brands. As previously mentioned, approximately 55% of our net revenues in 2013 were generated from theZumbafranchise games, first commercially released in November 2010. A decrease in the popularity of theZumbaproperty or other licensed properties would negatively impact our ability to sell games based upon such licenses and could lead to lower net sales, profitability, and/or an impairment of our licenses, which would negatively impact our profitability.
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Customer accommodations could materially and adversely affect our business, resultsof operations, financial condition and liquidity.
 
When demand for our offerings falls below expectations, we may negotiate accommodations to retailers or distributors in order to maintain our relationships with our customers and access to our sales channels. These accommodations include negotiation of price discounts and credits against future orders commonly referred to as price protection. At the time of product shipment, we establish provisions for price protection and other similar allowances. These provisions are established according to our estimates of the potential for markdown allowances based upon historical rates, expected sales, retailer inventories of products and other factors. We cannot predict with certainty whether existing provisions will be sufficient to offset any accommodations we will provide, nor can we predict the amount or nature of accommodations that we will provide in the future. If actual accommodations exceed our provisions, our earnings would be reduced, possibly materially. Any such reduction may have an adverse effect on our business, financial condition or results of operations. The granting of price protection and other allowances reduces our ability to collect receivables and impacts our


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availability for advances from our factoring arrangement. The continued granting of substantial price protection and other allowances may require additional funding sources to fund operations, but there can be no assurance that such funds will be available to us on acceptable terms, if at all.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand.
A significant portion of our cost structure is attributable to expenditures for personnel, facilities and external development. In the event of additional declines in our current expected sales, we may not be able to dispose of facilities, reduce personnel, terminate contracts or make other changes to our cost structure without disruption to our operations or without significant cash termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in sales or cash flow. Moreover, reducing costs may hinder our ability to develop a sufficient number of products to publish in the future.
If we do not consistently meet our product development schedules, our operatingresults will be adversely affected.
 
Our business is highly seasonal, with the highest levels of consumer demand and a significant percentage of our sales occurring during the end of the year holiday period. In addition, we often seek to release our products in conjunction with specific events, such as the release of a related movie. If we miss these key selling periods for any reason, including product development delays, our sales will suffer disproportionately. Likewise, if a key event to which our product release schedule is tied were to be delayed or cancelled, our sales would also suffer disproportionately. Our ability to meet product development schedules is affected by a number of factors, including the creative processes involved, the ability of third party developers to deliver work in a timely fashion and the need to fine-tune our products prior to their release. We have experienced development delays for our products in the past, which caused us to push back release dates. In the future, any failure to meet anticipated production or release schedules would likely result in a delay of revenueand/or possibly a significant shortfall in our revenue, harm our profitability, and cause our operating results to be materially different than anticipated.
Accessories related to two of our most successful titles expose us to hardware manufacturing and shipping risks.
OurZumba Fitness games require a belt accessory for use on the Nintendo Wii and WiiU platforms. The manufacturers of the belt accessory are located in China. Anything that impacts the ability of the manufacturers to produce or otherwise supply the belt accessories for us or increases their costs of production, including the utilization of such manufacturer’s capacity by another company; changes in safety, environment or other regulations applicable to the accessories and the manufacturing thereof; natural or manmade disasters that disrupt manufacturing, transportation or communications; labor shortages, civil unrest or other issues negatively impacting Chinese companies; increases in the prices of raw materials; increases in fuel prices and other shipping costs; and increases in local labor costs in China, may increase the prices we must pay for the accessories or otherwise impede our ability to supply the accessories to the market. If we are unable to supply such accessories, sales of the titles will be impacted.
Video games that are not high quality may not sell according to our forecast, whichcould materially impact our profitability in any given quarter.
 
Consumers who buyIn the past few years, the quality standards of games targeted atdeveloped for the mass market and core gamers prefer high-quality games.consumer have improved, affecting consumers’ expectations for quality. If our games are not high quality, consumers may not purchase as many games as we expect, which could materially impact our revenue and profitability and possibly result in any given quarter.write-downs of capitalized development costs.
 
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Increased competition for limited shelf space and promotional support from retailerscould affect the success of our business and require us to incur greater expenses tomarket our products.
 
Retailers typically have limited shelf space and promotional resources, such as circulars and in-store advertising, to support any one product among an increasing number of newly introduced entertainment offerings.
 
Competition for retail support and shelf space is expected to increase, which may require us to increase our marketing expenditures or reduce prices to retailers. Competitors with more extensive lines, popular products and greater financial resources frequently have greater bargaining power with retailers. Accordingly, we may not be able to achieve or maintain the levels of support and shelf space that our competitors receive. As a result, sales of our products may be less than expected, which would have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in our quarterly operating results due to seasonality in the interactiveentertainment industry and other factors related to our business operations couldresult in substantial losses to investors.
 
We have experienced, and may continue to experience, significant quarterly fluctuations in sales and operating results. The interactive entertainment market is highly seasonal, with sales typically significantly higher during the year-end holiday buying season. Other factors that cause fluctuations in our sales and operating results include:
 
•  the timing of our release of new titles as well as the release of our competitors’ products;
•  the popularity of both new titles and titles released in prior periods;
•  the profit margins for titles we sell;


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•  the timing of our release of new titles as well as the release of our competitors’ products;

•  the popularity of both new titles and titles released in prior periods;
•  the profit margins for titles we sell;
•  the competition in the industry for retail shelf space;
•  fluctuations in the size and rate of growth of consumer demand for titles for different platforms; and
•  the timing of the introduction of new platforms and the accuracy of retailers’ forecasts of consumer demand.
•  the competition in the industry for retail shelf space;
•  fluctuations in the size and rate of growth of consumer demand for titles for different platforms; and
•  the timing of the introduction of new platforms and the accuracy of retailers’ forecasts of consumer demand.
 
We believe thatquarter-to-quarter comparisons of our operating results are not a good indication of our future performance. We may not be able to maintain consistent profitability on a quarterly or annual basis. In addition, our operating results may be below the expectations of public market analysts and investors causing the price of our common stock to fall or significantly fluctuate.
A weak global economic environment could result in a reduced demand for our productsand increased volatility in our stock price.
 
Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and retailers may defer or choose not to make purchases in response to tighter credit and negative financial news, which could negatively affect demand for our products. Additionally, due to the weak economic conditions and tightened credit environment, some of our retailers and customers may not have the same purchasing power, leading to lower purchases of our games for placement into distribution channels. Consequently, demand for our products could be materially different from expectations, which could negatively affect our profitability and cause our stock price to decline.
A significant portion of our sales is derived from our international operations, which may subject us to economic, currency, political, regulatory and other risks.
As we do not directly distribute our games outside of North America, our success and profitability internationally are wholly dependent on the competence and efforts of our international distributors. Moreover, our international operations are vulnerable to a number of additional factors outside of our control, including different consumer preferences; language and cultural differences; foreign currency fluctuations; changes in regulatory requirements; and taxes and tariffs. Such factors may have a negative impact on the sales of our games outside of North America.
Catastrophic events or geo-political conditions may disrupt our business.
Our products are developed within a relatively small number of studio facilities located throughout the world. If a fire, flood, earthquake or other disaster, condition or event such as political instability, civil unrest or a power outage, adversely affected any of these facilities during the development of a product, it could significantly delay the release of the product, which could result in a substantial loss of sales and cause our operating results to differ materially from expectations.
Our business may be affected by issues in the economy that affect consumer spending.
 
Our products involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic conditions and economic cycles. Certain economic conditions, such as United States or international general economic downturns, including periods of increased inflation, unemployment levels, tax rates, interest rates, gasoline and other energy prices or declining consumer confidence could reduce consumer spending. Reduced consumer spending may result in reduced demand for our products and may also require increased selling and promotional expenses. A reduction or shift in domestic or international consumer spending could negatively impact our business, results of operations and financial condition. Consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. If economic conditions worsen, our business, financial condition and results of operations could be adversely affected.
 
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The loss of any of our key customers could adversely affect our sales.
 
Our sales to Wal-Mart, GameStop Best Buy and Target each accounted for approximately 20%, 12%, 10% and 10%, respectively,14% of our revenue for the fiscal year 2010.2013 and several other major retailers accounted for between 4 and 10% of our revenue each. Although we seek to broaden our customer base, we anticipate that a small number of customers will continue to account for a large concentration of our sales given the consolidation of the retail industry. We do not have written agreements in place with several of our major customers. Consequently, our relationship with these retailers could change at any time. In addition, revenue from 505 Games s.r.l. in Europe represented approximately 15%, 22% and 11% of revenue in 2013, 2012 and 2011, respectively. Our business, results of operations and financial condition could be adversely affected if:
 
•  
we lose any of our significant customers;
•  any of these customers purchase fewer of our offerings;
•  any of these customers encounter financial difficulties, resulting in the inability to pay vendors, store closures or liquidation; or
•  we experience any other adverse change in our relationship with any of these customers.


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Increased sales of used video game products could lower our sales.
Certain of our largersignificant customers;
•  any of these customers sell used video games, which are generally priced lower than new video games and do not resultpurchase fewer of our offerings;
•  any of these customers encounter financial difficulties, resulting in the inability to pay vendors, store closures or liquidation; or
•  we experience any revenue to the publisherother adverse change in our relationship with any of the games, and the market for these games has been growing. If our customers continue to increase their sales of used video games, it could negatively affect our sales of new video games and have an adverse impact on our operating results.customers.
Significant competition in our industry could continue to adversely affect ourbusiness.
 
The market for interactive entertainment products is highly competitive and, relatively few products achieve significant market acceptance. We face significant competition with respect to our products, which may also result in price reductions, reduced gross margins and loss of market share. Many of our competitors have significantly greater financial, marketing and product development resources than we do. As a result, current and future competitors may be able to:
 
•  respond more quickly to new or emerging technologies or changes in customer preferences;
•  undertake more extensive marketing campaigns;
•  devote greater resources to secure rights to valuable licenses and relationships with leading software developers;
•  gain access to wider distribution channels; and
•  have better access to prime shelf space.
•  respond more quickly to new or emerging technologies or changes in customer preferences;
•  undertake more extensive marketing campaigns;
•  devote greater resources to secure rights to valuable licenses and relationships with leading software developers;
•  gain access to wider distribution channels; and
•  have better access to prime shelf space.
 
We compete with many other third party publishers in both our handheld and console market segments. In addition, console and handheld manufacturers, such as Microsoft, Nintendo and Sony, publish software for their respective platforms. Further, media companies and film studios are increasing their focus on the video game software market and may become significant competitors. We expect competition to increase as more competitors enter the interactive entertainment market.
 
We cannot assure you that we will be able to successfully compete against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations or financial condition.
If our marketing and advertising efforts fail to resonate with our customers, our business and operating results could be adversely affected.
 
Our products are marketed through a variety of advertising and promotional programs such as television and online advertising, print advertising, retail merchandising, website development and event sponsorship. Our ability to sell our products is dependent in part upon the success of these programs. If the marketing for our products fail to resonate with our customers, particularly during the critical holiday season or during other key selling periods, or if advertising rates or other media placement costs increase, these factors could have a material adverse impact on our business and operating results.
Increasing development costs for games which may not perform as anticipated candecrease our profitability and could result in potential impairments of capitalizedsoftware development costs.
 
Video games can be increasingly expensive to develop. Because the current generation console platforms and computers have greater complexity and capabilities than the earlier platforms and computers, costs are higher to develop games for the current generation platforms and computers. If these increased costs are not offset by higher revenues and other cost efficiencies in the future, our margins and profitability will be impacted, and could result in impairment of capitalized software development costs. If these platforms, or games we develop for these platforms, do not achieve significant market penetration, we may not be able to recover our development costs, which could result in the impairment of capitalized software costs.


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Our business is dependent on the viability of console hardware.
 
Our business depends on hardware on which consumers play our games. Our business can be adversely affected by various factors affecting hardware as follows:
 
•  Software pricing.  Software prices for the current console games are higher than prices for games for the predecessor platforms. There is no assurance that consumers will continue to pay the higher prices on these games. Additionally, as it gets later in the console cycle, consumers may be unwilling to continue to pay the higher prices that they paid closer to the launch of the consoles.
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•  Hardware shortages.  The current console hardware systems have experienced hardware shortages, including Nintendo’s Wii console. Hardware shortages generally negatively affect the sales of video games since consumers do not have consoles on which to play the games.
•  Software pricing.  Software prices for the current console games are higher than prices for games for the predecessor platforms. There is no assurance that consumers will continue to pay the higher prices on these games. Additionally, as it gets later in the console cycle, consumers may be unwilling to continue to pay the higher prices that they paid closer to the launch of the consoles.
•  Significant development costs.  The complexity and capabilities of the current consoles lead to higher development costs for games to make use of the consoles. Greater costs can lead to lower operating margins, negatively affecting our profitability.
•  Significant development costs.  The complexity and capabilities of the current consoles lead to higher development costs for games to make use of the consoles. Greater costs can lead to lower operating margins, negatively affecting our profitability.
Our business is highly dependent on the continued growth of current generation video gamegaming console platforms and our ability to develop commercially successful products for theseplatforms.
 
We derive most of our revenue from the sale of products for play on video game platforms manufactured by third parties. The success of our business is dependent upon the continued growth of these platforms and our ability to develop commercially successful products for these platforms.
Transitions in console platforms could adversely affect the market for interactive entertainment software.
In 2005, Microsoft released the Xbox 360 and, in 2006, Sony and Nintendo introduced the PS3 and Wii, respectively. Nintendo launched its next-generation console, the Wii U, during November 2012. In November 2013, Microsoft released the Xbox One and Sony released the Playstation 4. When new console platforms are announced or introduced into the market, consumers typically reduce their purchases of game console software products for older console platforms in anticipation of new platforms becoming available. During these periods, sales of game console software products we publish may decline until new platforms are introduced and achieve wide consumer acceptance. This decline may not be offset by increased sales of products for the new console platforms. As console hardware moves through its life cycle, platform hardware manufacturers typically enact price reductions and decreasing prices may put downward pressure on software prices. During platform transitions, we may simultaneously incur costs both in continuing to develop and market new titles for prior-generation video game platforms, which may not sell at premium prices, and also in developing products for current-generation platforms, which will not generate immediate or near-term revenue. As a result, our operating results during platform transitions may be more volatile and more difficult to predict than during other times, and such volatility may cause greater fluctuations in our stock price.
Termination or modification of our agreements with platform hardware manufacturers, who arealso competitors and frequently control the manufacturing of our titles, mayadversely affect our business.
 
We are required to obtain a license in order to develop and distribute software for each of the manufacturers of video game hardware. We currently have licenses from Sony to develop products for PlayStation, PlayStation 2, PlayStation 3 and PSP, from Nintendo to develop products for the GBA, GameCube, the DS, DSi, 3DS, Wii and WiiWiiU and from Microsoft to develop products for the Xbox, Xbox 360 and the Xbox 360.One. These licenses are non-exclusive and, as a result, our competitors also have licenses to develop and distribute video game software for these systems. These licenses must be periodically renewed, and if they are not, or if any of our licenses are terminated or adversely modified, we may not be able to publish games for such platforms or we may be required to do so on less attractive terms.
 
Our contracts with these manufacturers grant them approval rights with respect to new products and often also grant them control over the manufacturing of our products. While we believe our relationships with these manufacturers are good, the potential for delay or refusal to approve or support our products exists, particularly since these manufacturers are also video game publishers and, hence, are also our competitors. We may suffer an adverse effect on our business if these manufacturers:
 
•  do not approve a project for which we have expended significant resources;
•  refuse or are unable to manufacture or ship our products;
•  increase manufacturing lead times or delay the manufacturing of our products; or
•  require us to take significant risks in prepaying and holding an inventory of products.


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•  do not approve a project for which we have expended significant resources;

•  refuse or are unable to manufacture or ship our products;
•  increase manufacturing lead times or delay the manufacturing of our products; or
•  require us to take significant risks in prepaying and holding an inventory of products.
The video game hardware manufacturers set the royalty rates and other fees that wemust pay to publish games for their platforms, and therefore have significantinfluence on our costs. If one or more of these manufacturers change their feestructure, our profitability will be materially impacted.
 
In order to publish products for a video game system such as the Xbox 360 or Wii, we must take a license from Microsoft and Nintendo, respectively, which gives these companies the opportunity to set the fee structures that we must pay in order to publish games for that platform. Similarly, these companies have retained the flexibility to change their fee structures, or adopt different fee structures for new features for their video game systems. The control that hardware manufacturers have over the fee structures for their video game systems could adversely impact our costs, profitability and margins.
  
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Our platform licensors control the fee structures for online distribution of our games on their platforms.
Pursuant to certain of our publisher license agreements, such platform licensors retain sole discretion to determine the fees to be charged for both base level and premium online services available via their online platforms. Each licensor’s ability to set royalty rates makes it challenging for us to predict our costs, and increased costs may negatively impact our operating margins. As a result of such varying fee structures, we may be unable to distribute our games in a cost-effective manner through such distribution channels.
We may be unable to develop and publish new products if we are unable to secure ormaintain relationships with third party video game software developers.
 
We utilize the services of independent software developers to develop our video games. Consequently, our success in the video game market depends on our continued ability to obtain or renew product development agreements with quality independent video game software developers. However, we cannot assure you that we will be able to obtain or renew these product development agreements on favorable terms, or at all, nor can we assure you that we will be able to obtain the rights to sequels of successful products that were originally developed for us by independent video game developers.
 
Many of our competitors have greater financial resources and access to capital than we do, which puts us at a competitive disadvantage when bidding to attract independent video game developers. We may be unable to secure or maintain relationships with quality independent developers if our competitors can offer them better shelf access, better marketing support, more development funding, higher royalty rates, more creative control or other advantages. Usually, our agreements with such developers are easily terminable if either party declares bankruptcy, becomes insolvent, ceases operations or materially breaches the terms of such agreements.
 
In addition, many independent video game software developers have limited financial resources. Many are small companies with a few key individuals without whom a project may be difficult or impossible to complete. Consequently, we are exposed to the risk that these developers will go out of business before completing a project, lose key personnel or simply cease work on a project for which we have hired them.
If we are unable to maintain or acquire licenses to intellectual property, we maypublish fewer titles and our revenue may decline.
 
Many of our video game titles are based on or incorporate intellectual property and other character or story rights acquired or licensed from third parties. We expect that many of our future products will also be based on intellectual property owned by others. The cost of acquiring these licenses is often high, and competition for these licenses is intense. Many of our competitors have greater resources to capitalize on licensing opportunities. Our licenses are generally limited in scope to specific platformand/or geographic territories and typically last for two to three years. We may not be able to obtain new licenses, renew licenses when they expire or include new offerings under existing licenses. If we are unable to obtain new licenses or maintain existing licenses that have significant commercial value at reasonable costs, we may be unable to sustain our revenue growth in the future other than through sales or licensing of our independently created material.
We rely on business partners in many areas of our business and our business may be harmed if they are unable to honor their obligations to us.
We rely on development partners, distribution partners, licensors, third-party service providers, and vendors, among other business partners, in many areas of our business. The failure of these business partners to provide adequate services, such as the failure of an international distribution partner to meet deadline release dates, or the failure of a licensor to market the game containing its licensed property in accordance with our agreement, could disrupt or otherwise adversely impact our business operations and the sales of our games. Furthermore, as many of our business partners reside and/or operate outside of North America, the global economy and other international issues may present obstacles that would prevent them from honoring their obligations to us. Alternative arrangements may not be available to us due, for example, to the unique properties of a business partner such a licensor. In addition, with respect to other business partners, alternative arrangements may not be available to us on commercially reasonable terms or we may experience business interruptions during any transition to a new business partner. If we experience disruptions with or lose any such business partner, our business could be negatively affected.
If we are unable to successfully introduce new products on a timely basis, oranticipate and adapt to rapidly changing technology, including new hardware platformtechnology, our business may suffer.
 
A significant component of our strategy is to continue to bring new and innovative products to market, and we expect to incur significant development, licensing and marketing costs in connection with this strategy.


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The process of introducing new products or product enhancements is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing new titles and other products that gain wide acceptance in the marketplace, we may not recoup our investment costs in these new products, and our business, financial condition and results of operations may be materially adversely affected as a result thereof.
  
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Furthermore, interactive entertainment platforms are characterized by rapidly changing technology. We must continually anticipate the emergence of, and adapt our products to, new interactive entertainment platforms and technologies. The introduction of new technologies, including new console and handheld technology, software media formats and delivery channels, could render our previously released products obsolete, unmarketable or unnecessary. In addition, ifnew platforms may not be as commercially successful as previous generations. If we incur significant expense developing products for a new system or hardware that is ultimately unpopular, sales of these products may be less than expected and we may not be able to recoup our investment. Conversely, if we choose not to publish products for a new system or hardware that becomes popular, our revenue growth, reputation and competitive position may be adversely affected. Even if we are able to accurately predict which video game platforms will be most successful, we must deliver and market offerings that are accepted in our extremely competitive marketplace.
Technology changes rapidly in our business and if we fail to anticipate new technologies orData breaches involving the manner in which people play our games, the quality, timeliness and competitiveness ofsource code for our products or customer data stored by us could adversely affect our reputation and services will suffer.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must implement and take advantage of in order to make our products and services competitive in the market. If we fail to anticipate and adapt to these and other technological changes, our market share and our operating results may suffer. Our future success in providing online games, wireless games and other content will depend on our ability to adapt to rapidly changing technologies, develop applications to accommodate evolving industry standards and improve the performance and reliability of our applications.
We have invested in products for systems utilizing new motion-based game technology, and if these new systems prove to be commercially unsuccessful, then sales of our products will suffer,revenues.
 
We are developing productsstore the source code and game assets for our games throughout the course of the games’ development and retain them thereafter on our systems. In addition, as we increase our presence in the social and mobile games market, we expect that we will store the confidential information of our customers. A breach of the systems utilizing motion-basedon which such source code and game technology, such as Microsoft’s Kinect for Xbox 360assets, customer information and Sony’s Move for PlayStation 3. Consumers may not embrace and purchase these new systemsand/other sensitive data is stored could lead to piracy of our software or the products for them litigation against us in connection with data security breaches. Data intrusion into a server for a varietygame with online features could also disrupt the operation of reasons, such as:
•  being accustomed to and satisfied with non-motion-based gaming systems;
•  being accustomed to and satisfied with the Nintendo Wii, which has been the sole player in the motion-based game system genre for the past four years;
•  with particular respect to exercise games, failing to appreciate the convergence of technology and exercise, choosing traditional, non-simulated modes of exercise instead;
•  lacking the additional physical space required to play motion-based games.
game. If these motion-based systems ultimately failwe are subject to achieve consumer acceptance, then theany such data security breaches, we may experience a loss in sales ofor be forced to pay damages in any such lawsuits, which will adversely impact our products forrevenues. In addition, damage to our reputation resulting from a data breach could have a negative impact on our future profitability. We may also incur costs in implementing additional security measures to ensure that such systems will be negatively impacted.
breach is not repeated.
We have invested in products for the Nintendo 3DS, and if this system proves to be commercially unsuccessful, then sales of our products will suffer.
We are developing products for the Nintendo 3DS, a new system that allows for three dimensional game playing. Consumers may be reluctant to purchase the 3DS system for a variety of reasons, including being accustomed to and satisfied with current two dimensional systems and being wary of


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eye fatigue, a potential side effect of the 3DS cited in Nintendo’s warning guidelines. Furthermore, the warning guidelines advise that children under six, whose eye muscles are still developing, should not use the 3D mode. Nintendo’s DS, the precursor to the 3DS, has traditionally been popular with young audiences, however parents of young children may be reluctant to purchase the 3DS system. If for theseand/or other reasons the system ultimately fails to achieve consumer acceptance, then sales of our 3DS products will be negatively impacted.
Competition with emerging forms of home-based entertainment may reduce sales of our products.
 
We also compete with other forms of entertainment and leisure activities. For example, we believe the overall growth in the use of the Internet and online services, including social networking, by consumers may pose a competitive threat if customers and potential customers spend less of their available time using interactive entertainment software and more of their time using the Internet and online services.
Our adoption of new business models could fail to produce positive results.
 
We are developing products for new platforms, including online distribution. These new platforms, such as iOS and Android mobile devices, Facebook and Steam, utilize new business models, such asincluding generating revenue through micro-transactions by end users, subscription services and subscription services.advertising. Forecasting our revenues and profitability for these new business models is inherently uncertain and volatile. Our actual revenues and profits for these businesses may be significantly greater or less than our forecasts. Additionally, these new business models could fail for one or more of our titles, resulting in the loss of our investment in the development and infrastructure needed to support these new business models, and the opportunity cost of diverting management and financial resources away from our core businesses.
The growth of digital distribution of games may have an adverse effect on our business and financial performance.
 
Historically, our products have been sold to and through traditional retail channels, such as physical retail stores.  The majority of our console video games are purchased through retailers, however the digital distribution of titles through online services is becoming an increasing form of consumption for consumers.  As technology improves, we expect digital distribution to become more prevalent and if we are unable to enhance our distribution to deliver games digitally, this will strongly impact our ability to sell our products and our resulting operating performance. In addition, certain of our significant customers could be adversely affected.
Our business is “hit” driven. If we do not deliver “hit” titles, or if consumersprefer competing products, our sales could suffer.
 
While many new products are regularly introduced, only a relatively small number of “hit” titles account for a significant portion of net revenue. Competitors may develop titles that imitate or compete with our “hit” titles, and take sales away from us or reduce our ability to command premium prices for those titles. Hit products published by our competitors may take a larger share of consumer spending than we anticipate, which could cause our product sales to fall below our expectations. If our competitors develop more successful products or offer competitive products at lower prices, or if we do not continue to develop consistently high-quality and well received products, our revenue, margins, and profitability will decline.
 
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Intellectual property claims may increase our product costs or require us to cease selling affected products, which could adversely affect our earnings and sales.
 
Development of original content, including publication and distribution, sometimes results in claims of intellectual property infringement. Although we make efforts to ensure our products do not violate the intellectual property rights of others, it is possible that third parties still may allege infringement. These claims and any litigation resulting from these claims, could prevent us from selling the affected product, or require us to redesign the affected product to avoid infringement or obtain a license for future sales of the affected product.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and future business prospects. Any litigation resulting from these claims could require us to incur substantial costs and divert significant resources, including the efforts of our technical and management personnel.


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Our intellectual property is vulnerable to misappropriation and infringement whichcould adversely affect our business prospects.
 
Our business relies heavily on proprietary intellectual property, whether our own or licensed from third parties. Despite our efforts to protect our proprietary rights, unauthorized parties may try to copy our products, or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as the law of the United States. Our rights and the additional steps we have taken to protect our intellectual property may not be adequate to deter misappropriation, particularly given the difficulty of effectively policing unauthorized use of our properties. If we are unable to protect our rights in intellectual property, our business, financial condition or results of operations could be materially adversely affected.
If our products contain defects, our business could be harmed significantly.
 
The products that we publish and distribute are complex and may contain undetected errors when first introduced or when new versions are released. Despite extensive testing prior to release, we cannot be certain that errors will not be found in new products or releases after shipment, which could result in loss of or delay in market acceptance. This loss or delay could significantly harm our business and financial results.
Rating systems for digital entertainment software, potential legislation and consumeropposition could inhibit sales of our products.
 
Trade organizations within the video game industry require digital entertainment software publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and impose penalties for noncompliance. Certain countries have also established similar rating systems as prerequisites for sales of digital entertainment software in their countries. In some instances, we may be required to modify our products to comply with the requirements of these rating systems, which could delay the release of those products in these countries. We believe that we comply with such rating systems and properly display the ratings and content descriptions received for our titles. Several proposals have been made for legislation to regulate the digital entertainment software, broadcasting and recording industries, including a proposal to adopt a common rating system for digital entertainment software, television and music containing violence or sexually explicit material; and the Federal Trade Commission has issued reports with respect to the marketing of such material to minors. Consumer advocacy groups have also opposed sales of digital entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas, including legislation prohibiting the sale of certain “M” rated video games to minors, and by engaging in public demonstrations and media campaigns. Retailers may decline to sell digital entertainment software containing graphic violence or sexually explicit material, which may limit the potential market for any of our titles with an “M” rating. Further, if any groups, whether governmental entities, hardware manufacturers or advocacy groups, were to target any of our “M” rated titles, we might be required to significantly change or discontinue a particular title, which could adversely affect our business.
Our business is subject to risks generally associated with the entertainmentindustry, and we may fail to properly assess consumer tastes and preferences, causingproduct sales to fall short of expectations.
 
Our business is subject to all of the risks generally associated with the entertainment industry and, accordingly, our future operating results will depend on numerous factors beyond our control, including the popularity, price and timing of new hardware platforms being released; economic, political and military conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot be predicted. A decline in the popularity of certain game genres or particular platforms could cause sales of our titles to decline dramatically. The period of time necessary to develop new game titles, obtain approvals of platform licensors and produce finished products is variable and may be unpredictable. During this period, consumer appeal for a particular titlegames may decrease, causing product sales to fall short of expectations. If domestic and worldwide economic conditions affecting consumer confidence decline or become uncertain, including unfavorable changes in actual or anticipated unemployment rates; tax and government spending; and inflation or interest rates, our revenues could be adversely affected.


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We seek to manage our business with a view to achieving long-term results, and this could have a negative effect on short-term trading.
 
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Our focus is on creation of stockholder value over time, and we intend to make decisions that will be consistent with this long-term view. As a result, some of our decisions, such as whether to make or discontinue operating investments or pursue or discontinue strategic initiatives, may be in conflict with the objectives of short-term traders. Further, this could adversely affect our quarterly or other short-term results of operations.
If we do not continue to attract and retain key personnel, we will be unable toeffectively conduct our business.
 
The market for technical, creative, marketing and other personnel essential to the development and marketing of our products and management of our businesses is extremely competitive. We are frequently competing for this talent with other companies with greater resources. Our ability to operate within the highly competitive interactive entertainment industry is dependent upon our ability to attract and retain our employees. If we cannot successfully recruit and retain the employees we need, or replace key employees following their departure, our ability to develop and manage our businesses will be impaired.
If we fail to maintain an effective system of internal controls, we may not be ableto accurately report our financial results. As a result, current and potentialstockholders could lose confidence in our financial reporting, which could have anegative impact on our stock price.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Reportannual report onForm 10-K our assessment of the effectiveness of our internal controls over financial reporting. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that our internal controls over financial reporting will remain effective. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we may be subject to liabilityand/or sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our common stock.
Our investment in online gaming company GMS Entertainment Ltd. may have an adverse effect on our business and financial performance.
On August 6, 2013, Majescoand the founder of Orid Media Limited (referred to herein as Orid) formed GMS Entertainment Limited (referred to herein as GMS), a company incorporated in the Isle of Man, for the purpose of pursuing an online casino games strategy.  On October 14, 2013, GMS Entertainment acquired the operations and certain assets and liabilities of Orid and Pariplay Limited (referred to herein as Pariplay). Orid designs and develops both fixed odd and random based online and mobile games for use in real money online games, social casinos and lottery systems. Pariplay is a licensed online gambling operator headquartered in the Isle of Man. The founder of Orid and Pariplay maintains a 50% interest in GMS. We account for GMS on the equity method as a corporate joint venture and will recognize in our financial statements our share of the earnings or losses of GMS in the periods for which they are reported by them.
This investment involves significant challenges and risks, including that the transaction does not advance our business strategy, that we do not realize a satisfactory return on our investment, that we acquire unknown liabilities, that we experience difficulty in the integration of business systems and technologies, or that management’s attention is diverted from our other businesses. These events could harm our operating results or financial condition.
Pariplay operates in highly competitive industries and its success depends on its ability to effectively compete with numerous domestic and foreign businesses.
Pariplay faces significant competition as it seeks to offer products and services for the lottery and gaming businesses and the evolving interactive lottery and gaming industries. We cannot assure you that its products and services will be profitable or that it will be able to attract and retain players as its products and services compete with other offerings.
We may not be able to capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the lottery and gaming industries, in part due to laws and regulations governing the industry.
Pariplay’s online, social, casual and mobile products and services are part of the new and evolving interactive gaming industry. Part of our strategy is to take advantage of the liberalization of internet and mobile gaming, both within the U.S. and internationally. This industry involves significant risks and uncertainties, including legal, business and financial risks. The success of this industry and of our interactive products and services will be affected by future developments in social networks, mobile platforms, regulatory developments, data privacy laws and other factors that we are unable to predict and are beyond our control. This environment can make it difficult to plan strategically and can provide opportunities for competitors to grow revenues at our expense. Consequently, our future operating results relating to our interactive gaming products and services may be difficult to predict and we cannot provide assurance that our interactive gaming products and services will grow at the rates we expect, or be successful in the long term.
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Item 1B.  Unresolved Staff Comments.
Not applicable.
 
Item 2.  Properties.
Our business is subject to increasing regulation which could negatively impact our business.
Legislation is continually being introduced in the United States and other countries to mandate rating requirements or set other restrictions on the advertisement or distribution of entertainment software based on content. Adoption of government ratings system or restrictions on distribution of entertainment software based on content could harm our business by limiting the products we are able to offer to our customers and compliance with new and possibly inconsistent regulations for different territories could be costly or delay the release of our products.
As we increase the online delivery of our products and services, we are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet, such as the Children’s Online Privacy Protection Act. In addition, other laws relating to user privacy, data collection and retention, content, advertising and information security have been adopted or are being considered for adoption by many countries throughout the world. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws or the application of these laws in an unanticipated manner may harm our business.
Item 1B.  Unresolved Staff Comments.
None.
Item 2.  Properties.
 
We lease 21,250 square feet of office, development and storage space located at 160 Raritan Center Parkway, Edison, NJ 08837. The lease, which provides for base rents of approximately $24,000 per month, plus taxes, insurance and operating costs, expires on January 31, 2015.
Item 3.  Legal Proceedings.
Item 3.  Legal Proceedings.
 
None.On September 20, 2012, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Virginia by Intelligent Verification Systems, LLC against Microsoft Corporation and the Company. The complaint alleges that Kinect and certain Kinect games, including Zumba Fitness Rush, infringe the plaintiff’s patents relating to biometric facial recognition and facial expression recognition technology. Intelligent Verification Systems is seeking injunctive relief and monetary damages in an unspecified amount for the alleged infringement. We, in conjunction with Microsoft, are defending ourselves against the claim and have certain third party indemnity rights from developers for costs incurred in the litigation. We cannot currently estimate a potential range of loss if the claim against us is successful.
Item 4.  Mine Safety Disclosures.
Not applicable.
 
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Item 4.  (Removed and Reserved).
PART II
Item 5.  Market For Registrant’s Common Equity, Related Stockholder MattersMatters and Issuer Purchases of Equity Securities.
 
Our common stock is listed for trading on the Nasdaq Capital Market under the symbol “COOL.” Prior to March 13, 2006, our common stock was listed on the Nasdaq Global Market. Prior to


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January 26, 2005, our common stock was quoted on the OTCBB. The market for our common stock has often been sporadic, volatile and limited.
 
The following table shows the high and low bid quotations for our common stock as reported by Nasdaq from November 1, 20082011 through October 31, 2010.2013. The prices reflect inter-dealer quotations, without retail markup, markdown or commissions, and may not represent actual transactions.
 
         
  High  Low 
 
Fiscal Year 2009
        
First Quarter $0.92  $0.40 
Second Quarter $1.70  $0.53 
Third Quarter $2.39  $1.26 
Fourth Quarter $2.27  $0.96 
Fiscal Year 2010
        
First Quarter $1.28  $0.75 
Second Quarter $1.08  $0.77 
Third Quarter $0.88  $0.64 
Fourth Quarter $0.71  $0.49 
  High Low 
Fiscal Year 2012       
First Quarter $3.63 $2.05 
Second Quarter $3.04 $2.06 
Third Quarter $2.50 $1.64 
Fourth Quarter $1.80 $0.97 
        
Fiscal Year 2013       
First Quarter $1.25 $0.58 
Second Quarter $0.74 $0.52 
Third Quarter $0.79 $0.56 
Fourth Quarter $0.78 $0.53 
Holders of Common Stock.  On January 14, 2011,8, 2014, we had approximately 147106 registered holders of record of our common stock. On January 14, 2010,8, 2014, the closing sales price of our common stock as reported on Nasdaq was $1.30$0.66 per share.
Dividends and dividend policy.  We have never declared or paid any dividends on our common stock and we do not anticipate paying dividends on our common stock at the present time. We currently intend to retain earnings, if any, for use in our business. We do not anticipate paying dividends in the foreseeable future.
Securities authorized for issuance under equity compensation plans.  The information called for by this item is incorporated by reference from our definitive proxy statement relating to our 20112014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 20102013 fiscal year end.
Recent Sales of Unregistered Securities.  All prior sales of unregistered securities have been previously reported either on a Current Reportcurrent report onForm 8-K.8-K or a quarterly report on Form 10-Q. 


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Item 6.  Selected Financial Data.
Item 6.Selected Financial Data.
 
The following tables summarize certain selected consolidated financial data, which should be read in conjunction with our audited consolidated financial statements and the notes thereto and with management’s discussion and analysis of financial condition and results of operations included elsewhere in this report.
 
                     
  Year Ended October 31, 
  2010  2009  2008  2007  2006 
     (in thousands, except share data)    
 
Consolidated Statement of Operations Data:
                    
Net revenues $75,648  $94,452  $63,887  $50,967  $66,683 
Cost of sales(1)  57,263   71,543   40,798   33,682   46,858 
                     
Gross profit (loss)  18,385   22,909   23,089   17,285   19,825 
Operating expenses(2)  20,496   29,480   20,312   21,114   22,820 
                     
Operating (loss) income  (2,111)  (6,571)  2,777   (3,829)  (2,995)
Interest and financing costs, net  999   1,318   649   1,552   2,371 
Other non-operating expense (income)(3)  (482)  415   (1,250)  (611)  — 
                     
(Loss) income before income taxes  (2,628)  (8,304)  3,378   (4,770)  (5,366)
(Benefit) provision for income taxes  (1,656)  (1,115)  26   —   — 
                     
Net (loss) income $(972) $(7,189) $3,352  $(4,770) $(5,366)
                     
Net (loss) income attributable to common stockholders $(972) $(7,189) $3,352  $(4,770) $(5,366)
                     
Net (loss) income attributable to common stockholders per share:                    
Basic and Diluted $(0.03) $(0.24) $0.12  $(0.20) $(0.24)
                     
Weighted average shares outstanding:                    
Basic and Diluted  37,019,750   29,770,382   27,547,211   23,891,860   22,616,419 
                     
                     
  October 31 
  2010  2009  2008  2007  2006 
     (In thousands)    
 
Consolidated Balance Sheet Data:
                    
Cash and cash equivalents $8,004  $11,839  $5,505  $7,277  $3,794 
Working capital  11,563   11,815   6,702   2,834   977 
Total assets  30,029   28,527   23,570   16,313   15,011 
Non-current liabilities  144   626   211   1,460   — 
Stockholders’ equity  12,008   11,719   7,137   2,591   1,749 
  Year Ended October 31, 
  2013 2012 2011 2010 2009 
  (In thousands, except share data) 
Consolidated Statement of Operations Data:                
Net revenues $47,267 $132,287 $125,291 $75,648 $94,452 
Cost of sales(1)  35,099  88,772  79,816  57,263  71,543 
Gross profit  12,168  43,515  45,475  18,385  22,909 
Operating expenses(2)  24,404  39,803  34,115  20,496  29,480 
Operating (loss) income  (12,236)  3,712  11,360  (2,111)  (6,571) 
Interest and financing costs, net  409  958  1,255  999  1,318 
Other non-operating expense (income)(3)  (17)  (1,932)  2,847  (482)  415 
(Loss) income before income taxes  (12,628)  4,686  7,258  (2,628)  (8,304) 
Income taxes  14  73  426  (1,656)  (1,115) 
Net (loss) income $(12,642) $4,613 $6,832 $(972) $(7,189) 
Net (loss) income per share:                
Basic $(0.30) $0.12 $0.18 $(0.03) $(0.24) 
Diluted $(0.30) $0.11 $0.17 $(0.03) $(0.24) 
Weighted average shares outstanding:                
Basic  41,601,343  39,973,248  38,527,589  37,019,750  29,770,382 
Diluted  41,601,343  40,823,197  40,123,968  37,019,750  29,770,382 
 
  October 31, 
  2013 2012 2011 2010 2009 
  (In thousands) 
Consolidated Balance Sheet Data:                
Cash and cash equivalents $13,385 $18,038 $13,689 $8,004 $11,839 
Working capital  15,667  27,746  23,791  11,563  11,815 
Total assets  37,649  49,298  52,377  30,029  28,527 
Non-current liabilities  -  -  1,949  144  626 
Stockholders’ equity  20,053  29,337  23,235  12,008  11,719 
____________
 
(1)Cost of sales includes $0.0 million, $0.0 million, $2.7 million, $1.0 million and $2.5 million in 2013, 2012, 2011, 2010 and 2009, respectively, to recognize impairments to the carrying value of products for future release.
 
(2)Operating expenses include: (i)(1) for 2013, an impairment of software development costs and license fees — cancelled games of $0.7 million; (ii) for 2012, an impairment of capitalized software development costs and license fees — cancelled games of $1.2 million; (iii) for 2011, an impairment of capitalized software development costs and license fees — cancelled games of $1.5 million; (iv) for 2010, an impairment of capitalized software development costs and license fees — cancelled games of $0.4 million; (ii)and (v) for 2009, a settlement of litigation and related charges, net, of $0.4 million, and impairment of capitalized software development costs and


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license fees — cancelled games of $1.0 million; (iii) for 2008, a settlement of litigation and related charges, net, of $1.6 million, and impairment of software development costs and license fees — cancelled games of $0.1 million; (iv) for 2007, a settlement of litigation and related charges, net, of $2.8 million, a gain from settlement of liabilities of $0.3 million and impairment of software development costs and license fees — cancelled games of $0.2 million; and (v) for 2006, a gain from settlement of liabilities and other of $4.8 million, and impairment of software development costs and license fees — cancelled games of $2.4 million.
 
(3)Other non-operating expense includes: (i) for 2013, a gain from a change in fair value of warrants of  less than $0.1 million (ii) for 2012, a gain from a change in fair value of warrants of $1.9 million; (iii) for 2011, a loss from a change in fair value of warrants of $2.8 million; (iv) for 2010, a gain from a change in fair value of warrants of $0.5 million (ii)million; and (v) for 2009, a chargeloss from a change in fair value of warrants of $0.4 million; (iii) for 2008, a gain from a change in fair value of warrants of $1.3 million; and (iv) for 2007, a gain from a change in fair value of warrants of $0.6 million.
 
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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition andresults of operations together with “Selected Financial Data” and our consolidatedfinancial statements and related notes appearing elsewhere in this annual report onForm 10-K. This discussion and analysis contains forward-looking statementsthat involve risks, uncertainties and assumptions. The actual results may differmaterially from those anticipated in these forward-looking statements as a result ofcertain factors, including, but not limited to, those set forth under ‘Risk Factors’ “Risk Factors”and elsewhere in this annual report onForm 10-K.
Overview
 
We are a provider of video game products primarily for the family oriented, mass-marketcasual-game consumer. We sell our products primarily to large retail chains, specialty retail stores, video game rental outlets and distributors. We publish video games for almost all major current generation interactive entertainment hardware platforms, including Nintendo’s DS, DSi, 3DS and Wii, Sony’s PlayStation 3, or PS3, and PlayStation Portable, or PSP®, Microsoft’s Xbox 360 and  Xbox One and the personal computer, or PC. We also publish games for numerous digital platforms includingsuch as Xbox Live Arcade and PlayStation Network, or PSN, and mobile platforms likesuch as iPhone, iPad and iPod Touch,Android devices, as well as online platforms such as Facebook.Facebook and Zynga.com.
 
Our video game titles 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, we focus on publishing more casual games targeting mass-marketcasual-game consumers. In some instances, our titles are based on licenses of well knownwell-known properties and, in other cases based on original properties. We collaborate and enter into agreements with content providers and video game development studios for the creation of our video games.
 
Our operations involve similar products and customers worldwide. These products are developed and sold domestically and internationally. The Company is centrally managed and our 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, we operate in a single segment.
Net Revenues.  Our revenues are principally derived from sales of our video games. We provide video games primarily for the mass market and casual gamecasual-game player. Our revenues are recognized net of estimated provisions for price protection and other allowances.
Cost of Sales.  Cost of sales consists of product costs and amortization and impairment of software development costs and license fees. A significant component of our cost of sales is product costs. Product costs are comprised primarily of manufacturing and packaging costs of the disc or cartridge media, royalties to the platform manufacturer and manufacturing and packaging costs of peripherals. In cases where we act as a distributor for other publishers products, cost of sales may increase as we acquire products at a higher fixed wholesale price. While the product costs as a percentage of revenue


23

is higher on these products, we do not incur upfrontup front development and licensing fees or resulting amortization of software development costs. Commencing upon the related product’s release, capitalized software development and intellectual property license costs are amortized to cost of sales. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, we expense these capitalized costs to cost of sales — loss on impairment of software development costs and license fees —– future releases. These expenses may be incurred prior to a game’s release.
Gross Profit.  Gross profit is the excess of net revenues over product costs and amortization and impairment of software development and license fees. Development and license fees incurred to produce video games are generally incurred up front and amortized to cost of sales. The recovery of these costs and total gross profit is dependent upon achieving a certain sales volume, which varies by title.
Product Research and Development Expenses.  Product research and development expenses relate principally to our cost of supervision of third party video game developers, testing new products, development of social games and conducting quality assurance evaluations during the development cycle as well as costs incurred at our development studio, which was closed in 2009, that are not allocated to games for which technological feasibility has been established. Costs incurred are primarily employee-related, may include equipment, and are not allocated to cost of sales.
Selling and Marketing Expenses.  Selling and marketing expenses consist of marketing and promotion expenses, including television advertising, the cost of shipping products to customers and related employee costs. Credits to retailers for trade advertising are a component of these expenses.
General and Administrative Expenses.  General and administrative expenses primarily represent employee related costs, including corporate executive and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent one of the second largest componentcomponents of our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings.
 
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Loss on Impairment of Software Development Costs and License Fees- CancelledGames.  Loss on impairment of software development costs and license fees — cancelled games consists of contract termination costs, and the write-off of previously capitalized costs, for games that were cancelled prior to their release to market. We periodically review our games in development and compare the remaining cost to complete each game to projected future net cash flows expected to be generated from sales. In cases where we don’t expect the projected future net cash flows generated from sales to be sufficient to cover the remaining incremental cash obligation to complete the game, we cancel the game, and record a charge to operating expenses. While we incur a current period charge on these cancellations, we believe we are limiting the overall loss on a game project that is no longer expected to perform as originally expected due to changing market conditions or other factors. Significant management estimates are required in making these assessments, including estimates regarding retailer and customer interest, pricing, competitive game performance and changing market conditions.
Interest and Financing Costs.  Interest and financing costs are directly attributable to our factoring and our purchase-order financing arrangements.
Such costs include commitment fees and fees based upon the value of customer invoices factored.
Income Taxes.  Income taxes consists of our provision/(benefit) for income taxes, and proceeds from the sale of rights to certainas affected by our  net operating loss carryforwards in the state of New Jersey. Utilizationcarryforwards. Future utilization of our net operating loss, (“NOL”)or NOL, carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating lossNOL carryforwards before utilization. Due to our history of losses, a valuation allowance sufficient to fully offset our NOL and other deferred tax assets has been established under current accounting pronouncements, and this valuation allowance will be maintained until sufficient positive evidence exists to support its reversal. In fiscal 2012 and 2011, we reversed our valuation allowance to the extent of our NOLs used, and recorded certain alternative minimum taxes and state taxes.


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Seasonality and Variations in Interim Quarterly Results
 
Our quarterly net revenues, gross profit and operating income are impacted significantly by the seasonality of the retail selling season, and the timing of the release of new titles. Sales of our catalog and other products are generally higher in the first and fourth quarters of our fiscal year (ending January 31 and October 31, respectively) due to increased retail sales during the holiday season. Sales and gross profit as a percentage of sales also generally increase in quarters in which we release significant new titles because of increased sales volume as retailers make purchases to stock their shelves and meet initial demand for the new release. These quarters also benefit from the higher selling prices that we are able to achieve early in the product’s life cycle. Therefore, sales results in any one quarter are not necessarily indicative of expected results for subsequent quarters during the fiscal year.
Critical Accounting Estimates
 
Our discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).of America, or GAAP.
 
The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.
 
We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results.
Revenue Recognition.  We recognize revenue upon the shipment of our product when: (1) risks and rewards of ownership are transferred; (2) persuasive evidence of an arrangement exists; (3) we have 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. Included in advances from customers and deferred revenue as of October 31, 2013 is deferred revenue of $5.2 million on sales of products with a future street date. In connection with this deferred revenue, the Company has approximately $1.7 million of deferred cost of sales – product included in prepaid expenses and other current assets. Some of our software products provide limited online features at no additional cost to the consumer. Generally, we have considered such features to be incidental to our overall product offerings and an inconsequential deliverable. Accordingly, we do 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 our revenue recognition policy. To date, the Company has not earned significant revenues from such features. In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available (assuming all other recognition criteria are met).
 
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When we enter into license or distribution agreements that provide for multiple copies of games in exchange for guaranteed amounts, revenue is recognized in accordance with the terms of the agreements, generally upon delivery of a master copy, assuming our performance obligations are complete and all other recognition criteria are met, or as per-copy royalties are earned on sales of games.
We operate hosted online games in which players can play for free and purchase virtual goods for use in the games. We recognize revenues from the sale of virtual goods as service revenues over the estimated period in which players use the game. We currently estimate these periods of use to be three to four months. We will periodically assess our estimates for this period of use and future increases or decreases in these estimates will affect our recognized revenues prospectively. We also recognize advertising revenue related to advertising placed on our game sites as ads are displayed. We have not earned significant revenue to date related to online games.
Price Protection and Other Allowances.  We generally sell our products on a no-return basis, although in certain instances, we provide price protection or other allowances on certain unsold products in accordance with industry practices. Price protection, when granted and applicable, allows customers a partial credit with respect to merchandise unsold by them. Revenue is recognized net of estimates of these allowances. Sales incentives and other consideration that represent costs incurred by us for benefits received, such as the appearance of our products in a customer’s national circular advertisement, are generally reflected as selling and marketing expenses. We estimate potential future product price protection and other discounts related to current period product revenue. In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available (assuming all other recognition criteria are met).


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Our provisions for price protection and other allowances fluctuate over periods as a result of a number of factors including analysis of historical experience, current sell-through of retailer inventory of our products, current trends in the interactive entertainment market, the overall economy, changes in customer demand and acceptance of our products and other related factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price protection in any accounting period. However, actual allowances granted could materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions, technological obsolescence due to new platforms, product updates or competing products. For example, the risk of requests for allowances may increase as consoles pass the midpoint of their lifecycle and an increasing number of competitive products heighten pricing and competitive pressures. While management believes it can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, this will result in a change in our provisions, which would impact the net revenuesand/or selling and marketing expenses we report. For the12-month periods ended October 31, 2010, 20092013, 2012 and 2008,2011, we provided allowances for future price protection and other allowances of $3.5$3.0 million, $5.0$4.3 million and $2.6$4.0 million, respectively. The fluctuationsFluctuations in the provisions reflected our estimates of future price protection based on the factors discussed above. We limit our exposure to credit risk by factoring a portion of our receivables to a third party that buys without recourse. For receivables that are not sold without recourse, we analyze our aged accounts receivables, payment history and other factors to make a determination if collection of receivables is likely, or a provision for uncollectible accounts is necessary.
Capitalized Software Development Costs and License Fees.  Software development costs include development fees, primarily in the form of milestone payments made to independent software developers, and, prior to 2010, direct payroll and overhead costs for our internal development studio.developers. Software development costs are capitalized once technological feasibility of a product is established and management expects such costs to be recoverable against future revenues. 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 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 holders for the use of their intellectual property rights in the development of our products. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (capitalized 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 commitment 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 we estimate the release date to be more than one year from the balance sheet date. Non-current costs amounted to $0 and $500 as of October 31, 2013 and 2012, respectively.
 
The amortization period for capitalized software development costs and license fees 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 license fees is evaluated quarterly based on the expected performance of the specific products to which the costs relate.
 
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When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, we expense these capitalized costs to cost of sales — loss on impairment of software development costs and license fees —– future releases, in the period such a determination is made.


26

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 operating costs and expenses —– loss on impairment of capitalized software development costs and license fees —– cancelled games. As of October 31, 2010,2013, the net carrying value of our licenses and software development costs was $4.9$7.8 million. If we were required to write off licenses or software development costs, due to changes in market conditions or product acceptance, our results of operations could be materially adversely affected.
 
License fees and milestone payments made to our third party developers are typically considered non-refundable advances against the total compensation they can earn based upon the sales performance of the products. Any additional royalty or other compensation earned beyond the milestone payments is expensed to cost of sales as incurred.
 
Inventory.  Inventory, which consists principallyWe have expensed as research and development all costs associated with the development of finished goods,social games. These games have not earned significant revenues to date and we are continuing to evaluate alternatives for future development and monetization.
Inventory.  Inventory is stated at the lower of cost or market. Cost is determined by thefirst-in, first-out method. We estimate the net realizable value of slow-moving inventory on atitle-by-title basis and charge the excess of cost over net realizable value to cost of sales.
Some of our inventory items are packaged with accessories, such as basketballs for ourNBA Baller Beats game, belts for ourZumba games and dolls for ourBabysitting Mama game. The purchase of these accessories involves longer lead times and minimum purchase amounts, which require us to maintain higher levels of inventory than for other games. Therefore, these items have a higher risk of obsolescence, which we review periodically based on inventory and sales levels.
Accounting for Stock-Based Compensation.  Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including, in the case of stock option awards, estimating expected stock volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
Commitments and Contingencies.  We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.


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Results of Operations
 
The following table sets forth our results of operations expressed as a percentage of total revenues:
 
             
  Year Ended October 31, 
  2010  2009  2008 
 
Net revenues  100.0%  100.0%  100.0%
Cost of sales            
Product costs  51.2   42.0   45.2 
Software development costs and license fees  23.2   31.0   18.7 
Loss on impairment of software development costs and license fees — future releases  1.3   2.7   — 
             
Gross profit  24.3   24.3   36.1 
Operating expenses            
Product research and development  4.4   5.0   5.1 
Selling and marketing  11.2   15.5   13.5 
General and administrative  10.8   9.1   15.0 
Depreciation and amortization  0.2   0.3   0.5 
Settlements, loss on impairments and other expenses (income)  0.5   1.4   (2.3)
             
Operating (loss) income  (2.8)  (7.0)  4.3 
Interest and financing costs and other non-operating expenses (income)  0.7   1.8   (1.0)
             
(Loss) income before income taxes  (3.5)  (8.8)  5.3 
Benefit from income taxes  2.2   1.2   — 
             
Net (loss) income  (1.3)%  (7.6)%  5.3%
             
  Year Ended October 31,  
  2013  2012  2011  
Net revenues 100.0% 100.0% 100.0% 
Cost of sales          
Product costs 39.4  35.3  43.8  
Software development costs and license fees 34.9  31.8  17.7  
Loss on impairment of software development costs and license fees — future releases -  -  2.2  
Gross profit 25.7  32.9  36.3  
Operating expenses          
Product research and development 11.7  5.9  5.6  
Selling and marketing 16.6  15.2  11.7  
General and administrative 19.4  7.6  8.4  
Workforce reduction 1.7  -  -  
Depreciation and amortization 0.8  0.4  0.3  
Loss on impairment of software development costs and license fees — canceled games 1.4  1.0  1.2  
Operating (loss) income (25.9)  2.8  9.1  
Interest and financing costs and other non-operating expenses 0.8  (0.8)  3.3  
(Loss) income before income taxes (26.7)  3.6  5.8  
Income taxes 0.0  0.1  0.3  
Net (loss) income (26.7)% 3.5% 5.5% 
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The following table sets forth the components of settlements and loss on impairments for the years ended October 31, 2010, 20092013, 2012 and 2008.2011.
 
             
  Year Ended October 31, 
  2010  2009  2008 
  (in thousands) 
 
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 
             
Balance — end of year $407  $1,370  $(1,471)
             
  Year Ended October 31, 
  2013 2012 2011 
  (in thousands) 
Loss on impairment of software development costs and license fees — cancelled games $675 $1,219 $1,512 
 
The following table sets forth the source of net revenues, by game platform, for the previous three fiscal years in millions:ended October 31, 2013, 2012 and 2011.
 
                         
  Year Ended October 31, 
  2010  2009  2008 
     % of
     % of
     % of
 
  Net
  Total Net
  Net
  Total Net
  Net
  Total Net
 
  Revenues  Revenues  Revenues  Revenues  Revenues  Revenues 
 
Nintendo Wii $23.6   31.2% $50.1   53.0% $21.8   34.0%
Nintendo DS  48.9   64.6   40.5   42.8   39.4   61.7 
Other(1)  3.1   4.2   3.9   4.2   2.7   4.3 
                         
Total $75.6   100.0% $94.5   100.0% $63.9   100.0%
                         


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  Year Ended October 31, 
  2013  2012 2011 
  Net
Revenues		  % of 
Total Net 
Revenues		  Net 
Revenues		 % of  
Total Net  
Revenues		  Net  
Revenues		 % of  
Total Net  
Revenues		 
Nintendo Wii, WiiU $21.9 46% $79.0 60% $73.2 58%
Microsoft Xbox 360  10.4 22%  34.9 26   23.2 18 
Nintendo DS  8.1 17%  13.8 10   22.2 18 
Nintendo 3DS  3.8 8%  1.7 1   - - 
Sony Playstation 3  0.9 2%  0.9 1   4.7 4 
Accessories and other  2.2 5%  2.0 2   2.0 2 
TOTAL $47.3 100% $132.3 100% $125.3 100%
(1)Consists primarily of net revenues for other console and handheld games, such as PlayStation, Xbox and Game Boy Advance, as well as downloadable PC games, distribution fees, licensing fees and peripheral products and accessories.
  
Year ended October 31, 20102013 versus year ended October 31, 20092012
Net Revenues.Net revenues for the year ended October 31, 20102013 decreased approximately 64% to $75.6$47.3 million from $94.5$132.3 million in the comparable period last year. The $18.8 million decrease was primarily due primarily to decreasedlower sales of our Zumba Fitness products and smaller slate of new releases for the Microsoft Kinect. The decline in Zumba sales was due to the timing of our newly released titles, and declining sales for successive sequel releases, particularly on the Nintendo Wii platform. Our results for the year ended October 31, 2012 included revenues from the launch of two new Zumba sequel titles for both the Nintendo Wii and Microsoft Kinect for the Xbox 360. The first set of Zumba sequels, Zumba 2 for the Nintendo Wii and Zumba Rush for the XBOX 360 were released in November 2011 and February 2012, respectively, and Zumba Core for the Nintendo Wii and XBOX 360 were released in October 2012. Both of these releases occurred during our 2012 fiscal year. Comparatively, we had no launch revenues for Zumba console games in our results for the same period in fiscal 2013 as our fourth sequel Zumba title, Zumba World Party was released in November 2013. Additionally, we have experienced comparatively lower sales for each successive Zumba sequel. We believe declining software sales for all video games for the Nintendo Wii, console. In October 2008, we released two games forreflecting the end of life of the Wii platform, Jillian Michaels’ Fitness Ultimatum,contributed to declining Zumba sales, as well as the life of the product. Net revenues in the European market decreased to approximately $8.2 million from $28.8 million a year ago, also reflecting both Zumba-release timing and Cooking Mama: World Kitchen. The successa decline in sequel sales. Overall Zumba sales accounted for 55% of these games, during a time of rapid growth for the Wii platform resulted in significant salesour net revenues during the 2008 holiday selling season, and reorders thereafter, impactingperiod, compared to 76% in the year ended October 31, 2009. Comparatively, while we did release a sequel to the Jillian Michaels game, Jillian Michaels: Resolution, for the 2009 holiday season, its revenues were substantially lower than the previous year’s title, due primarily to similar titles introduced by other publishers at the same time. Also, we did not release a Cooking Mama title for Nintendo Wii until Babysitting Mama was released after the year ended October 31, 2010, in November 2010. In addition, the market for Wii games generally became more competitive as the platform matured, and the number of games for the consumer to choose from increased.prior year.
 
Gross Profit.Gross profit for the year ended October 31, 20102013 was $18.4$12.2 million compared to a gross profit of $22.9$43.5 million last year. The decrease in gross profit was primarily attributable to decreased net revenues for the year ended October 31, 2009. The decrease in gross profit was attributable to the lower net revenues for the year2013, as discussed above. Gross profit as a percentage of net sales was approximately 24%26% for both the year ended October 31, 2010 and2013, compared to 33% for the year ended October 31, 2009, as generally decreased2012. The decrease in gross profit percentages on 2010as a percentage of sales were offset byprimarily reflects lower charges for impairment of capitalized softwareaverage net selling prices and higher development and license costs — future releases.fees in the current period.
When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized softwareProduct Research and Development Expenses.Research and development and intellectual property license costs, we expense these capitalized costs to cost of sales. Significant management estimates are required in making these assessments, including estimates regarding retailer and customer interest, pricing, competitive game performance, and changing market conditions. In the year ended October 31, 2009, we recorded $2.5 million of such charges for impaired titles, compared to $1.0expenses were $5.5 million for the year ended October 31, 2010. Excluding the effects of impairment charges, the decrease in gross profits as a percentage of sales, was primarily attributable to a lower average selling price for Wii products during the year ended October 31, 2010, as2013, compared to $7.8 million of expenses for the year ended October 31, 2009. We attributesame period in 2012. Lower internal development expenses, including the decreaseimpact of headcount reductions resulting from the closing of our social games studio in average selling price toJanuary 2013, were partially offset by increased competitivenessthird-party development costs of mobile games in the Wii marketplace as the console matured.
current-year period.
Product Research
Selling and DevelopmentMarketing Expenses.  Product researchTotal selling and developmentmarketing expenses decreased $1.3 million to $3.3were approximately $7.9 million for the year ended October 31, 2010, from $4.72013, compared to $20.2 million for the year ended October 31, 2009.2012. The decrease was primarily the result ofdue to decreased media advertising and marketing expenses related to our development studio. After evaluation of the studio’s performance,Zumba, NBA Baller Beats and changes in the availabilityother new releases. Commissions and cost of development with our third-party partners, we reduced the number of personnel at the studio in the second half of 2009. Additionally, approximately $0.4 million was expensed for a video game technology project that was terminated during the year ended October 31, 2009.
Selling and Marketing Expenses.  Total selling and marketing expensesother costs were approximately $8.4 million for the year ended October 31, 2010 compared to $14.6 million for the year ended October 31, 2009. The $6.2 million decrease was due primarily toalso lower advertising media costs of approximately $4.0 million, lower shipping and commission expense related to lower sales and lower international selling costs due to the Company’s change in its international business model. During the year ended October 31, 2009 we ran several televisionlesser sales volumes and internet advertising campaigns. After analyzing the costs and benefits of these programs, we decided to reduce our media-related expenditures during the year ended October 31, 2010. In addition, during the year ended October 31, 2010, we reduced sales and other staff in the U.S., and sales staff in the United Kingdom, related to the


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termination of our direct distribution strategy in Europe. Selling and Marketing expense as a percentage of net sales was approximately 11% for the year ended October 31, 2010 compared to 16% for the year ended October 31, 2009.
January 2013 headcount reduction.
General and Administrative Expenses.For the year ended October 31, 2010,2013, general and administrative expenses were $8.1 million, a decrease of $0.4decreased to $9.2 million from $8.6$10.1 million forin the year ended October 31, 2009.comparable prior-year period. The decrease was due primarily toreflected lower non-cash, stock-based compensation expense, whichcosts, including stock compensation and other administrative expenses. The prior year period also included charges for uncollectible accounts receivable. These decreases we partially offset by higher legal and consulting expenses.
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Workforce Reduction. Workforce reduction costs amounted to $1.4$0.8 million and $1.7 million for the years ended October 31, 2010 and 2009, respectively. Non cash compensation expense for the year ended October 31, 2010 was impacted by the effects of forfeitures from employee terminations during the fiscal year.
Settlement of Litigation Charges.  Settlement of litigation charges in the year ended October 31, 2009 represented2013. There were no such costs in the changeprior-year period. On January 8, 2013, we implemented a realignment of our workforce to reduce certain fixed costs and provide for a more flexible variable cost based model using outside subcontractors in fair value sincethe production of our games. The realignment included a reduction in workforce of approximately 40 employees. Workforce reduction costs consisted primarily of severance costs.
Loss on Impairment of Capitalized Software Development Costs and License Fees – Cancelled Games.For the year ended October 31, 20082013, loss on impairment of onecapitalized software development costs and license fees – cancelled games, amounted to $0.7 million shares of common stock that werecompared to $1.2 million in the prior-year period. Our games in development are subject to periodic reviews to assess game design and changing market conditions. When we do not expect the projected future net cash flows generated from sales to be issued in settlementsufficient to cover the remaining incremental cash obligation to complete a game, we cancel the game, and record a charge to operating expenses for the carrying amount of our class action securities litigation. The shares were issued in Marchthe game. In fiscal 2013, we reduced the number of 2009.
console-game development projects initiated.
Operating Loss.(Loss) Income.Operating loss for the year ended October 31, 20102013 was approximately $2.1$12.2 million, compared to operating income of $3.7 million in 2012, primarily as a decreaseresult of $4.5 million from $6.6decreased revenues and gross profits discussed above and our January 2013 workforce reduction offset by lower advertising costs and impairment losses.
Change in Fair Value of Warrant Liability.Prior to March 2013, we had outstanding warrants that were recorded at fair value as liabilities and re-measured on a quarterly basis. We recorded a gain of $1.9 million for the year ended October 31, 2009. As2012, reflecting a decrease in the fair value of the warrants. In the year ended October 31, 2013, the warrants expired and the change in the fair value of the warrant liability was not significant.
Income Taxes.In the year ended October 31, 2013 and 2012, our income tax expense was not significant, representing primarily minimum state and federal income taxes.
GMS Entertainment Limited. In October 2013, GMS completed an asset purchase agreement to acquire substantially all of the assets of Orid Media, a designer and developer of online casino games, including all of the outstanding share capital of its wholly-owned subsidiary Pariplay. The operations of GMS from the date of the asset purchase to October 31, 2013 were not material.
Year ended October 31, 2012 versus year ended October 31, 2011
Net Revenues.Net revenues for the year ended October 31, 2012 increased to $132.3 million from $125.3 million in the comparable period last year. The increase was primarily due to increased sales of our Zumba Fitness products, partially offset by decreased sales of our catalog games for the Nintendo DS and Wii. The 2012 results include revenue from the release of two Zumba Fitness sequel products for the Nintendo Wii and Microsoft Xbox 360, as well as catalog sales of our original Zumba fitness product. Comparably, 2011 only includes sales of our original Zumba Fitness products. Sales in the European market increased to $28.8 million from $15.2 million in the same period a year ago. During the year ended October 31, 2012, we recorded product sales revenues from the release of Zumba products in Europe under a distribution agreement with a third party. Under this agreement, we retain all rights to manufacture finished products for the European markets and a third party purchases the goods for resale. Additionally, we continued to receive licensing royalties on European distribution of our original Zumba Fitness products released during the twelve months ended October 31, 2011, under a licensing and manufacturing agreement with a third party. Under this agreement, the third party had rights to manufacture and sell the product in certain territories, and we received a royalty based on their sales. Revenue fromZumba Fitness products accounted for approximately 76% and 70% of total revenue in 2012 and 2011, respectively, on a consolidated basis.
Gross Profit.Gross profit for the year ended October 31, 2012 was $43.5 million compared to a gross profit of $45.5 million in the same period last year. Gross profit as a percentage of sales decreased, offsetting the increase in net revenues discussed above, decreased operatingabove. Gross profit as a percentage of net sales was 33% for the year ended October 31, 2012, compared to 36% for the year ended October 31, 2011. The decrease in gross profit as a percentage of sales was primarily due to the impact of higher license costs and promotional allowances to retailers on our Zumba products and lower gross margins on our other products, including the effects of amortizing software development costs of new releases. Gross profit in the current year was also affected by $1.3 million of valuation charges for excess inventory, primarily related toBaller Beats and accessory balls. The prior year included corresponding inventory charges forBabysitting Mama which was packaged with a doll.
Product Research and Development Expenses.Research and development expenses during fiscal 2010increased to $7.8 million for the year ended October 31, 2012, from $7.0 million in 2011. The increase was primarily due to costs related to our online and mobile games business and increased production headcount. Development costs associated with online and mobile games amounted to $4.2 million in 2012 versus $3.2 million in 2011, as the full-year effects of internal costs resulting from the June 2011 acquisition of Quick Hit were partially offset by decreased revenueslower spending for third-party development. In January of 2013, we decided to close the facility acquired from Quick Hit and gross profits.plan to have these games developed by outside developers.
 
Selling and Marketing Expenses.Total selling and marketing expenses were approximately $20.2 million for the year ended October 31, 2012, compared to $14.7 million for the year ended October 31, 2011. The increase was primarily due to increased media advertising, primarily related toZumba Fitness and certain new releases, and to sales commissions and other variable costs associated with increased sales volumes. The year ended October 31, 2012 included the effects of $4.0 million of reimbursements from vendors under cooperative advertising arrangements. We had no such cooperative advertising arrangements in the year ended October 31, 2011
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General and Administrative Expenses.For the year ended October 31, 2012, general and administrative expenses were $10.1 million, compared to $10.5 million for the year ended October 31, 2011, as lower incentive compensation costs were offset by increases in other expenses.
Loss on Impairment of Software Development Costs and License Fees – Cancelled Games.For the year ended October 31, 2012, loss on impairment of software development costs and license fees – cancelled games, amounted to $1.2 million compared to $1.5 million in the prior-year period. Our games in development are subject to periodic reviews to assess game design and changing market conditions. When we do not expect the projected future net cash flows generated from sales to be sufficient to cover the remaining incremental cash obligation to complete a game, we cancel the game, and record a charge to operating expenses for the carrying amount of the game. We may cancel games at any stage of development and impairment losses may fluctuate significantly from period to period.
Interest and Financing Costs Net.. Interest and financing costs, which includes financing costs associated with our factoring activities were approximately $1.0 million for the year ended October 31, 20102012 compared to $1.3 million for the year ended October 31, 2009. The decrease was due to lower factoring fees resulting from lower sales.2011, reflecting reduced borrowing activity during the year.
 
Operating Income. Operating income for the year ended October 31, 2012 was approximately $3.7 million, compared to $11.4 million in the comparable period in 2011, reflecting generally lower gross profit percentages and increased marketing expenses for new releases, including our Zumba products.
Change in Fair Value of Warrants.Warrant Liability.  On September 5, 2007, we issued warrants in connection with an equity financing. The warrants contain a provision that may require settlement by transferring assets. Therefore, they are recorded at fair value as liabilities in accordance with ASC Topic 480,Distinguishing Liabilities from Equity.
We recorded a gain of $0.5$1.9 million for the year ended October 31, 2010, reflecting2012, which reflected a decrease in the fair value of the warrants primarily based upon the decreased market price of a share of our common stock during the year,period, compared to a chargeloss of $0.4$2.8 million forrecognized in the year ended October 31, 2009,2011, which reflectedresulted primarily from an increase in the fair value of warrantsincreasing share price during the year.
period.
Income Taxes.  In December 2009 and November 2008, we 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 of New Jersey stateOur income tax operating loss carryforwards, under the Technology Business Tax Certificate Program administered by the New Jersey Economic Development Authority. These net proceeds have been recorded as an income tax benefit during the years ended October 31, 2010 and 2009, respectively.
Net Loss.  Net loss forexpense was less than $0.1 million in the year ended October 31, 2010 was $1.02012 and $0.4 million a decrease of $6.2 million from a net loss of $7.2 million forin the year ended October 31, 2009. The decrease was due primarily to the decreased operating expenses discussed above, together with lower impairment charges2011, which represented our current alternative minimum tax provision and the effects of remeasuring our warrant liability, which more than offset reduced salescertain state income taxes and gross profits.
Year ended October 31, 2009 versus year ended October 31, 2008
Net Revenues.  Net revenues for the year ended October 31, 2009 increased to $94.5 million from $63.9 million for the year ended October 31, 2008. The $30.6 million increase was due primarily to incremental revenue growth from several successful new releases during the 2009 fiscal year, including:Cooking Mama: World Kitchenfor the Nintendo Wii,Gardening Mamafor the Nintendo DS,Jillian Michaels’ Fitness Ultimatum 2009for the Nintendo Wii (released in late October 2008); andAnother Night at the Museum: Battle of the Smithsonian.The impact of these releases, combined with continued strong re-order sales for our catalogCooking Mamaproducts resulted in growth in net revenues of 48%. Additionally, we releasedCooking Mama 3: Shop and Chopfor the Nintendo DS andJillian


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Michaels’ Resolutionfor the Nintendo Wii, late in October 2009. The release of these two titles contributed to the fiscal 2009 revenue growth.
Gross Profit.  Gross profit for the year ended October 31, 2009 was $22.9 million compared to a gross profit of $23.1 million for the year ended October 31, 2008. Gross profit as a percentage of net sales was 24.3% for the year ended October 31, 2009 compared to 36.1% for the year ended October 31, 2008. The decrease in gross profit as a percentage of revenue was due primarily to: (i) an impairment of capitalized software development and license costs of $2.5 million related to games scheduled for release in 2010 that had a carrying value in excess of their fair value based on projected future cash flows; (ii) the release of certain video games with sales that were inadequate to cover development costs and minimum royalty payments, resulting in gross losses on those games (includingOur House: Party!andMajor Minor’s Majestic March); and (iii) higher royalty costs as a percent of net revenues on certain games when compared to the prior year.
Product Research and Development Expenses.  Research and development costs increased $1.4 million to $4.7 million for the year ended October 31, 2009 from $3.3 million for the comparable period in 2008. The increase was primarily the result of expenses related to our development studio and approximately $0.2 million paid to developers for the development of mobile games. During the year ended October 31, 2009, substantially all of the work performed in the studio was allocated to non-capitalizable projects. Therefore, we reduced our personnel used for internal development and incurred approximately $0.2 million in severance and lease termination costs. Development costs for mobile games were recorded as research and development costs because we were evaluating opportunities in this market and no significant revenue contribution was expected from then-current projects.
Selling and Marketing Expenses.  Total selling and marketing expenses increased from $8.6 million for the year ended October 31, 2008 to $14.6 million for the year ended October 31, 2009. The increase was due primarily to higher media costs associated with TV and internet advertising campaigns to support the launch of our new Cooking Mama titles, Jillian Michaels titles, and the launch of ourGoPlaybrand. The increased expenditures were incurred primarily during the nine months ended July 31, 2009. After an assessment of the market’s response to the programs the Company reducedreflected the use of media advertising during the fourth quarter of fiscal 2009. Selling and marketing expense as a percentage of net sales was approximately 15.5% and 13.5% for the year ended October 31, 2009 and 2008, respectively.
General and Administrative Expenses.  For the year ended October 31, 2009, general and administrative expenses were $8.6 million, a decrease of $0.9 million from $9.5 million in the comparable period in 2008. The decrease was due primarilyavailable NOL carryforwards to lower compensation expenses resulting from incentive compensation plans. Our incentive compensation plan is primarily based on net income generated by the Company. During 2009, we generated a net loss, resulting in significantly lower incentive compensation expense. General and administrative expenses include $1.7 million and $1.6 million of non-cash compensation expenses for the years ended October 31, 2009 and 2008, respectively.
Settlement of Litigation and Related Charges.  Settlement of litigation charges is comprised of $0.7 million related to the change in fair value of common stock issued in settlement of our class action securities litigation and a gain on the settlement of legal fees of $0.3 million.
Loss on impairment of software development costs and license fees — cancelled games.  Loss on impairment of capitalized software development costs and license fees — cancelled games increased to $1.0 million for the 12 months ended October 31, 2009 from $0.1 million for the 12 months ended October 31, 2008, due primarily to a higher number of cancelled games in 2009 due to changing market conditions.
Operating (Loss) Income.  Operating loss for the year ended October 31, 2009 was $6.6 million, compared to operating income of $2.8 million for the year ended October 31, 2008. The decrease in operating income primarily resulted from the impact of the lower gross profit, higher product research


31

and development expenses, impairment of software development and capitalized licenses and higher selling and marketing expenses discussed above.
Interest and Financing Costs, Net.  Interest and financing costs increased to $1.3 million for the year ended October 31, 2009 from $0.6 million for the year ended October 31, 2008. The increase of $0.7 million was the result of a higher percentage of our inventory purchases being financed through our purchase order financing facility for seasonal inventory needs, and higher factoring fees related to higher sales volume.
Change in Fair Value of Warrants.  On September 5, 2007, we issued warrants in connection with an equity financing. The warrants contain a provision that may require settlement by transferring assets. Therefore, they are recorded at fair value as liabilities in accordance with ASC Topic 480,Distinguishing Liabilities from Equity.
We recorded an expense of $0.4 million for the year ended October 31, 2009, reflecting the increase in fair value of the warrants during that period and income of $1.3 million for the year ended October 31, 2008, reflecting the decrease in fair value of the warrants during that period.
Income Taxes.  For the year ended October 31, 2009, we did not record any income tax benefit related to the utilization of net operating loss carryforwards because realization of the resulting loss carryforwards cannot be assured. Income taxes for the year ended October 31, 2009 include a gain resulting from proceeds of approximately $1.1 million from the sale of the rights to approximately $25.9 million 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.
For the year ended October 31, 2008, we only provided for alternative minimum taxes because our net operating loss carryforwards exceeded ouroffset taxable income.
Net (Loss) Income.  Net loss for the year ended October 31, 2009 was $7.2 million, a decrease of $10.6 million from net income of $3.4 million for the comparable period in 2008. This decrease was due primarily to the increased operating loss, the settlement of litigation and related charges, net, the increase of net interest and financing expenses and the change in fair value of warrants, partially offset by a gain from the sale of certain state net operating loss carryforwards, as discussed above.
Liquidity and Capital Resources
 
We incurred a net loss
As of $1.0 million for the year ended October 31, 2010, compared with a net loss of $7.22013, our cash and cash equivalents balance was $13.4 million for the year ended October 31, 2009, and net income of $3.4 million for the year ended October 31, 2008. Historically,funds available to us under our factoring agreement was $4.8 million. Additionally, we have funded our operating losses through sales of our equity and use ofapproximately $8.3 million available on our purchase order financing agreement. We expect continued fluctuations in the use and factor arrangementsavailability of cash due to satisfy seasonalthe seasonality of our business, timing of receivables collections and working capital needs. We raised approximately $8.6 million in net proceeds from the sale ofneeds necessary to finance our equity securities in September 2009.business.
 
Our current plan is to fund our operations throughexisting cash and cash equivalents andproduct sales. BasedHowever, our operating results may vary significantly from period to period and we have incurred operating losses. Our sales have declined significantly during 2013 partially due to the late lifecycle of existing generation gaming platforms, the introduction of competing platforms such as mobile gaming, and lower sales of our Zumba fitness products. As a result, we have reduced our operating expenses.We believe, based on our current working capital financing arrangements, level offorecasts and existing cash on hand and operating plan, management believes itcash equivalents we can operate under the existing level of financing forfund our operations through at least one year.January 31, 2015. However, we may be required to modify thatour plan, or seek outside sources of financing, and/or equity sales, if our current operating plan and sales targets are not met. There can be no assurance that such funds will be available on acceptable terms, if at all. In the event that we are unable to negotiate alternative financing, or negotiate terms that are acceptable to us, we may be forced to modify our business plan materially, including making reductions in game development and other expenditures. Additionally, we are dependent on our purchase order financing and account receivable factoring agreement to finance our working capital needs, including the purchase of inventory. If the current level of financing was reduced or we fail to meet our operational objectives, it could create a material adverse change in the business.
Our cash
Factoring and cash equivalents balance was $8.0 million as of October 31, 2010. We had approximately $5.6 million outstanding under our purchase order financing arrangement, primarily forPurchase Order Financing.


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goods to be received and sold within 60 days of October 31, 2010. We expect continued fluctuations in the use and availability of cash due to the seasonality of our business, timing of receivables collections and working capital needs necessary to finance our business and growth objectives through at least the next year.
 
To satisfy our liquidity needs, we factor our receivables. We also utilize purchase order financing through the factor and through a finance company to provide funding for the manufacture of our products. In connection with these arrangements, the finance company and the factor have a security interest in substantially all of our assets.
Under our factoring agreement, we have the ability to take cash advances against accounts receivable and inventory of up to $20.0$30.0 million, and the availability of up to $2.0 million in letters of credit. The factor, in its sole discretion, can reduce the availability of financing at anytime. In addition,any time. Outstanding advances against accounts receivable under our factoring agreement amounted to $1.7 million at October 31, 2013. We also utilize financing to provide funding for the manufacture of our products. Under an agreement with a finance company, we have up to $10.0 million of availability for letters of credit and purchase order financingfinancing. These funds are available for the purchase of inventory, and are re-payable upon receipt of the inventory by us. In connection with another lender.these arrangements, the finance company and the factor have a security interest in substantially all of our assets. We had outstanding advances against accounts receivable of approximately $9.4$1.8 million under our factoring agreementfor purchase order financing at October 31, 2010.2013.
 
Factoring and Purchase Order Financing.  As mentioned above, to provide liquidity, we take advances from our factor and utilize purchase order financing to fund the manufacturing of our products.
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Under the terms of our factoring agreement, we sell our accounts receivable to the factor. The factor, in its sole discretion, determines whether or not it will accept the credit risk associated with a receivable. If the factor does not accept the credit risk on a receivable, we may sell the accounts receivable to the factor while retaining the credit risk. In both cases we surrender all rights and control over the receivable to the factor. However, in cases where we retain the credit risk, the amount can be charged back to us in the case of non-payment by the customer. The factor is required to remit payments to us for the accounts receivable purchased from us, provided the customer does not have a valid dispute related to the invoice. The amount remitted to us by the factor equals the invoiced amount, adjusted for allowances and discounts we have provided to the customer, less factor charges of 0.45 to 0.50%0.5% of the invoiced amount.
 
In addition, we may request that the factor provide us with cash advances based on our accounts receivable and inventory. The factor may either accept or reject our request for advances at its discretion. Generally, the factor allowed us to take advances in an amount equal to 70% of net accounts receivable, plus 60% of our inventory balance, up to a maximum of $2.5 million of our inventory balance. Occasionally, the factor allows us to take advances in excess of these amounts for short termshort-term working capital needs. These excess amounts are typically repaid within a30-day period. At October 31, 2010,2013, we had no excess advances outstanding.
 
Amounts to be paid to us 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 circumstances, an additional 1.0% annually is charged for advances against inventory.
 
Manufacturers require us to present a letter of credit, or pay cash in advance in order to manufacture the products required under a purchase order. We utilize letters of credit either from amay finance these orders utilizing our finance company or our factor. The finance company charges 1.5% of the purchase order amount for each transaction for 30 days, plus administrative fees. Our factor provides purchase order financing at a cost of 0.5% of the purchase order amount for each transaction for 30 days. Additional charges are incurred if letters of creditborrowings remain outstanding in excess of the original time periodand/or the financing company is not paid at the time the products are received. When our liquidity position allows, we will pay cash in advance instead of utilizing purchase order financing. This results in reduced financing and administrative fees associated with purchase order financing.
Advances from Customers.On a case by case basis, distributors and other customers have agreed to provide us with cash advances on their orders. These advances are then applied against future sales


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to these customers. In exchange for these advances, we offer these customers beneficial pricing or other considerations.
Contingencies and Commitments.
 
ContingenciesOn September 20, 2012, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Virginia by Intelligent Verification Systems, LLC against Microsoft Corporation and Commitments.  Atthe Company. The complaint alleges that Kinect and certain Kinect games, including Zumba Fitness Rush, infringe the plaintiff’s patents relating to biometric facial recognition and facial expression recognition technology. Intelligent Verification Systems is seeking injunctive relief and monetary damages in an unspecified amount for the alleged infringement. We, in conjunction with Microsoft, are defending ourselves against the claim and have certain third party indemnity rights from developers for costs incurred in the litigation. We cannot currently estimate a potential range of loss if the claim against us is successful.
The Company at times we may be a party to routine claims and suits in the ordinary course of business. InWe record a liability when it is both probable that a liability has been incurred and the opinionamount of management, after consultationthe loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matters above. While the Company believes that it has valid defenses with respect to the legal counsel,matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of any current such routine claims would notthe matter could have a material adverse effect on the Company’s business,our consolidated financial condition, andposition, cash flows or results of operations or liquidity.operations.
 
The table below summarizes our contractual obligations as of October 31, 2013, in thousands. In addition, certain license agreements provide for minimum commitments for marketing support.
  Payments due by period 
  Total of 
payments		 Less than one
year		 1-3 years 3-5 years More than 5
years		 
Operating leases $370 $297 $73 - - 
Software development  1,688  1,688  - - - 
Total $2,058 $1,985 $73 - - 
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On January 8, 2013, we implemented a realignment of our workforce to reduce certain fixed costs and provide for a more flexible variable cost based model using outside subcontractors in the production of our games. The realignment included a reduction in workforce, including employees related to the closure of our studio in Massachusetts, which focused on social games for Facebook, game-testing personnel in our New Jersey facility, and other marketing and support personnel. We recorded charges of approximately $0.8 million in the first quarter of fiscal 2013 relating to this reduction in force, consisting primarily of severance payments and termination benefits.  These commitments were fully paid in fiscal 2013.
Off-Balance Sheet Arrangements
 
As of October 31, 2010,2013, we had no off-balance sheet arrangements.
 
Inflation
Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.
Cash Flows
 
Cash and cash equivalents were $8.0 million on October 31, 2010, compared to $11.8$13.4 million as of October 31, 2009.2013, compared to $18.0 million as of October 31, 2012. Working capital as of October 31, 20102013 was $11.6$15.7 million compared to $11.8$27.7 million as of October 31, 2012. Total cash and equivalents, plus advances available to us under our factoring agreement was $18.2 million and $31.3 million at October 31, 2009.
2013 and 2012, respectively.
Operating Cash Flows.  Our principal operating source of cash is from the sales of our interactive entertainment products. Our principal operating uses of cash are for payments associated with third party developers of our software; costs incurred to manufacture, sell and market our video games and general and administrative expenses.
 
For the year ended October 31, 2010,2013, we used approximately $3.0$4.6 million in cash for operating activities, compared to $6.6$6.1 million of net cash flows provided by operations in the previousprior year. The decreasechange in cash usedflows from operations was primarily due to decreased operating (loss)  income, which decreased $15.9 million from $3.7 million of operating income in the year ended October 31, 2012 to $12.2 million of operating activities is due primarily toloss in the decreased net lossyear ended October 31, 2013. In the current year, reported operating cash flow was positively affected by the collection of $6.2 million, partially offsetprior-year accounts receivable. In 2012, reported cash flows from operations were negatively affected by an increase in the net change in the amount invested in capitalized software development and license fees of $4.5 million. During the fiscal year ended October 31, 2008, we began investing in several game projects for release in the fiscal year ended October 31, 2009, impacting the cash used during fiscal 2009. The change in operating cash flows for the 12 months ended October 31, 2010 was also impacted by changes in other working capital accounts. Increased cash flow from relative decreases in accounts receivable balances and increases in accounts payable and accrued liability balancesfrom October 2012 releases, the effects of which were partially offset by greater increasesthe timing of development costs and amortization. Operating income excludes the non-cash effects of the change in inventory on handour warrant liability and prepaid balances with manufacturers.interest and financing costs.
 
For the year ended October 31, 2009,2012, we usedgenerated approximately $6.6$6.1 million in cash flow from operating activities, compared to $2.7$9.4 million forof net cash flows from operations in the year ended October 31, 2008.prior year. The increasedecrease in cash used inprovided by operating activities was primarily due primarily to the increased net loss of $10.5decreased operating income, which decreased $7.7 million partially offset by a decrease in the net change in the amount invested in capitalized software development and license fees of $7.7 million. Capitalized software development and license fees increased $4.6from $11.4 million for the 12 months ended October 31, 2008, compared to a decrease of $3.1 million for the 12 months ended October 31, 2009. We generally invest in game development projects with a development time of three to 18 months. During the fiscal year ended October 31, 2008, we began investing in several game projects for release in the year ended October 31, 2009, resulting2011 to $3.7 million of operating income in a use of cash, and increase in capitalized software development costs and license fees at October 31, 2008. During fiscal 2009, these amounts were charged to operating expenses, resulting in a non-cash charge to net income for the 12 monthsyear ended October 31, 2009. We also reduced2012. Operating income excludes the amount invested in capitalized software development and license fees, at October 31, 2009, for games to be released in fiscal 2010, based on an assessmentnon-cash effects of market conditions. We expect the amount invested in game development to fluctuate based on seasonality, scheduled release dates, and market conditions in the future. The change in operating cash flows for the 12 months ended October 31, 2009 was also impacted by offsetting changes in other working capital accounts, most significantly by (1) increases in advance payments for inventory, the net amount due from factorour warrant liability and decreased accounts payableinterest and accrued expenses and (2) decreases in prepaid expenses and accounts receivable. The change in operating cash flows for the 12 months ended October 31, 2008 was also impacted by offsetting changes in other working capital accounts. The cash flow impact of increases in accounts receivable and inventory the cash flow impact of were offset by increased accounts payable and customer billings due from distribution partner.financing costs.


34

Investing Cash Flows.  Cash used in investing activities for the years ended October 31, 2010, 2009,2013, 2012 and 2008 are primarily related to2011 included purchases of computer equipment and leasehold improvements of $0.3 million, $0.1$0.3 million and $0.3$0.5 million, respectively.
In 2011, the Company used $0.8 million to acquire the assets of Quick Hit, Inc. and in 2013, the Company invested $3.5 million in GMS Entertainment, a joint venture formed to pursue online casino gaming.
Financing Cash Flows.  Net cash used in financing activities for the year ended October 31, 2010 was $0.5 million, representing decreased inventory financing.
Net cash generated(used in) provided by  financing activities for the yearyears ended October 31, 2009 consists primarily2013, 2012 and 2011 amounted to $3.7 million, $(1.4) million and $(2.5) million, respectively. In 2013, the Company received proceeds of $2.0 million from a direct sale of its common stock to an investor. In addition, the Company used $1.8 million of its purchase financing facility for the purchase of inventory for the 2013 holiday selling season. In 2012 and 2011, the net use of cash in financing activities reflected decreases in inventory financing balances. In 2011, the effect of the net decrease in outstanding financing was partially offset by $1.8 million of net of proceeds from a public offeringthe exercise of common stock of $8.6 million (see note 11 to the financial statements),outstanding options and an increase in outstanding borrowings under our purchase order financing agreement, to finance seasonal inventory purchases.warrants.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
As a smaller reporting company, we are not required to provide the information under this item, pursuant toRegulation S-K Item 305(e).
Item 8.  Financial Statements and Supplementary Data.
Item 8.  Financial Statements and Supplementary Data.
 
The financial statements required by Item 8 are submitted in a separate section of this report, beginning onPage F-1, are incorporated herein and made a part hereof.
 
28
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.
 
Item 9A.  
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.  Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange ActRules 13a-15(e) and15d-15(e), as of the end of the period covered by this report.
 
In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
No system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our companyCompany have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Subject to the limitations above, management believes that the consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.
 
Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and


35

procedures (as defined in Exchange ActRules 13a-15(e) and15d-15(e)) were effective at a reasonable assurance level.
 
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, or GAAP. Our internal control over financial reporting includes those policies and procedures that:
 
 •pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;
 
 •provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
 
 •provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of our internal control over financial reporting as of October 31, 2010.2013. In making this assessment, management used the framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management determined that our system of internal control over financial reporting was effective as of October 31, 2010.2013.
29

 
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management was not subject to attestation by our registered public accounting firm.
Item 9B.  Other Information.
Item 9B.  Other Information.
 
Not applicable.


36

 
30

PART III
 
The information required by Part III ofForm 10-K under the items listed below are incorporated by reference from our definitive proxy statement relating to the 20112014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 20102013 fiscal year end:end.
Item 10 – Directors, Executive Officers and Corporate Governance.
Item 11 – Executive Compensation.
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13 – Certain Relationships and Related Transactions and Director Independence.
Item 14 – Principal Accountant Fees and Services.
Directors, Executive Officers and Corporate Governance.
Item 11 – Executive Compensation.
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13 – Certain Relationships and Related Transactions and Director Independence.
Item 14 – Principal Accountant Fees and Services.
PART IV
Item 15.  Exhibits, Financial Statement Schedules.
Item 15.  Exhibits, Financial Statement Schedules.
 
(1) Financial Statements.Statements.
 
The financial statements required by item 15 are submitted in a separate section of this report, beginning onPage F-1, incorporated herein and made a part hereof.
 
(2) Financial Statement Schedules.Schedules.
 
Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.
 
(3)Exhibits.Exhibits.
 
The following exhibits are filed with this report, or incorporated by reference as noted:
 
     
 3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
 3.2 Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report onForm 8-K filed on June 17, 2005).
 4.1 Securities Purchase and Registration Rights Agreement dated as of August 29, 2007 by and among Majesco Entertainment Company and the Investors named therein (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on September 5, 2007).
 4.2 Form of Common Stock Purchase Warrant issued to investors (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on September 5, 2007).
 4.3 Restricted Stock Agreement dated June 7, 2010 between Majesco Entertainment Company and Chris Gray (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 14, 2010).
 4.4 Warrant Purchase Agreement dated March 29, 2010 between Majesco Entertainment Company and Gerald A. Amato (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on September 14, 2010).
 10.1 Lease Agreement, dated as of February 2, 1999, by and between 160 Raritan Center Parkway, L.L.C. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 11, 2004).
 10.2 Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on October 22, 2004).
 10.3 Amendment, dated March 18, 1999, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 22, 2004).
 10.4 Amendment, dated September 30, 2004, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 22, 2004).


37

2.1Asset Purchase Agreement, dated June 3, 2011, among Majesco Entertainment Company, Quick Hit, Inc. and MMV Capital Partners Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on June 6, 2011).
3.1Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
3.2Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 17, 2005).
4.1Securities Purchase and Registration Rights Agreement dated as of August 29, 2007 by and among Majesco Entertainment Company and the Investors named therein (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on September 5, 2007).
4.2Form of Common Stock Purchase Warrant issued to investors (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on September 5, 2007).
4.3Warrant Purchase Agreement dated March 29, 2010 between Majesco Entertainment Company and Gerald A. Amato (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on September 14, 2010).
10.1Lease Agreement, dated as of February 2, 1999, by and between 160 Raritan Center Parkway, L.L.C. and Majesco Sales Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 11, 2004).
10.2Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 22, 2004).
10.3Amendment, dated March 18, 1999, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 22, 2004).
10.4Amendment, dated September 30, 2004, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 22, 2004).

     
 10.5 Assignment of Monies Due Under Factoring Agreement, dated July 21, 2000, by and among Majesco Sales Inc., Rosenthal & Rosenthal, Inc. and Transcap Trade Finance (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 22, 2004).
 10.6 Master Purchase Order Assignment Agreement, dated July 21, 2000, between Majesco Sales Inc. and Transcap Trade Finance (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 22, 2004).
 10.7 Sixth Amendment to Master Purchase Order Assignment Agreement, dated September 12, 2003, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 22, 2004).
 10.8 Seventh Amendment to Master Purchase Order Assignment Agreement, dated October 16, 2003, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on October 22, 2004).
 10.9 Eighth Amendment to Master Purchase Order Assignment Agreement, dated April 14, 2004, by and between Transcap Trade Finance and Majesco Sales Inc. (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K filed on October 22, 2004).
 10.10 Guaranty and Pledge Agreement, dated July 21, 2000, by and among Jesse Sutton, Joseph Sutton, Morris Sutton, Adam Sutton and Transcap Trade Finance (incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K filed on October 22, 2004).
 10.11 Amendment, dated October 18, 2005, to Factoring Agreement, dated April 24, 1989, between Majesco Sales, Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K filed on February 1, 2006).
 10.12 Amendment, dated October 1, 2008, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K filed on January 29, 2009)
 #10.13 Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on June 15, 2009).
 #10.14 Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
 #10.15 Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
 #10.19 2008 Executive Officer Incentive Bonus Program (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 15, 2008).
 #10.20 Amended and Restated Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 15, 2008).
 #10.21 Employment Agreement, dated January 8, 2008, between Jesse Sutton and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 13, 2008).
 10.23 2009 Executive Officer Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 21, 2009).
 10.24 First Amendment to Lease by and between the Company and the Landlord dated May 1, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 6, 2009).
 10.25 Form of Personal Indemnification Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 15, 2009).
 10.26 Placement Agency Agreement dated September 17, 2009, by and between the Company and Roth Capital Partners, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 18, 2009).
 10.27 Form of Subscription Agreement between the Company and each of the investors signatory thereto (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on September 18, 2009).
 10.28 Confidential License Agreement for the Wii Console (Western Hemisphere), effective February 21, 2007, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on June 14, 2010).

38

     
 10.29 First Amendment to the Confidential License Agreement for the Wii Console (Western Hemisphere), effective January 4, 2010, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
 10.30 Add On Content Addendum to the Confidential License Agreement for the Wii Console, effective November 2, 2009, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
 10.31 Confidential License Agreement for Nintendo DS (Western Hemisphere), effective May 1, 2005, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
 10.32 First Amendment to the Confidential License Agreement for Nintendo DS (Western Hemisphere), effective April 30, 2008, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
 10.33 Letter Agreement re: Game Publishing for Nintendo DSI, dated February 25, 2009, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
 # 10.34 2010 Executive Officer Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 16, 2010).
 # 10.35 2011 Executive Officer Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 20, 2011).
 16.1 Letter from Goldstein Golub Kessler LLP (GGK) to the Company, notifying the Company that the partners of GGK became partners of McGladrey & Pullen, LLP in a limited asset purchase agreement and that GGK resigned as independent registered public accounting firm for the Company, dated October 26, 2007 (incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K filed on November 1, 2007).
 16.2 Letter furnished by Goldstein Golub Kessler LLP in response to the Company’s request, addressed to the Securities and Exchange Commission, dated November 1, 2007, indicating their agreement with the statements contained in the Current Report on Form 8-K filing dated November 1, 2007 (incorporated by reference to Exhibit 16.2 to our Current Report on Form 8-K filed on November 1, 2007).
 16.3 Letter from McGladrey & Pullen, LLP regarding change in certifying accountant, dated May 4, 2009 (incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K filed on May 6, 2009).
 16.4 Letter from Amper, Politziner & Mattia, LLP regarding change in certifying accountant, dated August 17, 2010 (incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K filed on August 20, 2010)
 *21.1 Subsidiaries
 *23.1 Consent of EisnerAmper LLP
 *23.2 Consent of Amper, Politziner & Mattia, LLP
 *23.3 Consent of McGladrey & Pullen, LLP
 *31.1 Certification of Principal Executive Officer
 *31.2 Certification of Principal Financial Officer
 *32.1 Section 1350 Certificate of President and Chief Financial Officer
31

 
10.5Assignment of Monies Due Under Factoring Agreement, dated July 21, 2000, by and among Majesco Sales Inc., Rosenthal & Rosenthal, Inc. and Transcap Trade Finance (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 22, 2004).
10.6Amendment, dated October 18, 2005, to Factoring Agreement, dated April 24, 1989, between Majesco Sales, Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K filed on February 1, 2006).
10.7Amendment, dated October 1, 2008, to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K filed on January 29, 2009)
#10.8Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
#10.9Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2005).
#10.10Amended and Restated Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 15, 2008).
10.11First Amendment to Lease by and between the Company and the Landlord dated May 1, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 6, 2009).
10.12Form of Personal Indemnification Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 15, 2009).
10.13Placement Agency Agreement dated September 17, 2009, by and between the Company and Roth Capital Partners, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 18, 2009).
10.14Form of Subscription Agreement between the Company and each of the investors signatory thereto (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on September 18, 2009).
10.15
Confidential License Agreement for the Wii Console (Western Hemisphere), effective February 21, 2007, by and between Nintendo of America Inc. and Majesco Entertainment Company(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
10.16
First Amendment to the Confidential License Agreement for the Wii Console (Western Hemisphere), effective January 4, 2010, by and between Nintendo of America Inc. and Majesco Entertainment Company(incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
10.17
Add On Content Addendum to the Confidential License Agreement for the Wii Console, effective November 2, 2009, by and between Nintendo of America Inc. and Majesco Entertainment Company(incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2010).
10.18Second Amendment to the Confidential License Agreement for the Wii Console, effective February 20, 2013, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 21, 2013).
#10.19Amended Directors Compensation Policy (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on March 14, 2011)
10. 20XBOX 360 Publisher License Agreement, effective September 13, 2005, by and between Microsoft Licensing, GP and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 14, 2011).
+10.21Amendment to the XBOX 360 Publisher License Agreement (2008 renewal, etc.), effective September 1, 2009, by and between Microsoft Licensing, GP and Majesco Entertainment Company (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on September 14, 2011).
+10.22Amendment to the XBOX 360 Publisher License Agreement (Russian Incentive Program, Hits Program Revisions), effective February 4, 2010, by and between Microsoft Licensing, GP and Majesco Entertainment Company (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on September 14, 2011).
#10.23Employment Agreement, dated January 8, 2009, between Jesse Sutton and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 13, 2009).
 
32
#
#10.24Employment Agreement, dated July 25, 2011, between Michael Vesey and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 29, 2011).
#10.252012 Executive Officer Incentive Bonus Program (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 2, 2012).
#10.262011 Executive Officer Incentive Bonus Program (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 20, 2011).
#10.272010 Executive Officer Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 16, 2010).
#10.28Majesco Entertainment Company Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 25, 2013).
#10.29Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 24, 2012).
10.30Common Stock Purchase Agreement, dated August 2, 2013, by and between Majesco Entertainment Company and Yair Goldfinger (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 6, 2013).
*21.1Subsidiaries
*23.1Consent of EisnerAmper LLP
*31.1Certification of Principal Executive Officer
*31.2Certification of Principal Financial Officer
*32.1Section 1350 Certificate of President and Chief Financial Officer
**101.INSXBRL Instance Document
**101.SCHXBRL Taxonomy Extension Schema Document
**101.CALXBRL Taxonomy Extension Calculation Linkbase Document
**101.LABXBRL Taxonomy Extension Labels Linkbase Document
**101.PREXBRL Taxonomy Extension Presentation Linkbase Document
____________
#Constitutes a management contract, compensatory plan or arrangement.
 
±
We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request.
*Filed herewith.
**In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this annual report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
(b) Exhibits.
 
See (a)(3) above.
 
(c) Financial Statement Schedules.
 
See (a)(2) above.

39

33

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 By: 
By:
/s/ Jesse Sutton,
Chief Executive Officer and Director
Date: January 14, 2014
Chief Executive Officer and Director
Date: January 31, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
   
/s/ Jesse Sutton
Chief Executive Officer and DirectorJanuary 14, 2014
Jesse Sutton(Principal Executive Officer)
/s/ Michael Vesey
Chief Financial Officer (PrincipalJanuary 14, 2014
Michael VeseyFinancial and Accounting Officer)
/s/ Allan I. Grafman
Chairman of the BoardJanuary 14, 2014
Allan I. Grafman    
Signature
 
Title
Date
 
/s/ Laurence Aronson
DirectorJanuary 14, 2014
Laurence Aronson    
/s/  Jesse Sutton

Jesse Sutton		 Chief Executive Officer and
/s/ Louis Lipschitz
Director
(Principal Executive Officer)		 January 31, 201114, 2014
Louis Lipschitz    
/s/  Michael Vesey

Michael Vesey		 Interim Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Keith McCurdy
Director January 31, 201114, 2014
Keith McCurdy    
/s/  Allan I. Grafman

Allan I. Grafman		 Chairman of the Board
/s/ Stephen Wilson
Director January 31, 201114, 2014
Stephen Wilson    
/s/  Laurence Aronson

Laurence Aronson		34DirectorJanuary 31, 2011
/s/  Louis Lipschitz

Louis Lipschitz		DirectorJanuary 31, 2011
/s/  Keith McCurdy

Keith McCurdy		DirectorJanuary 31, 2011
/s/  Stephen Wilson

Stephen Wilson		DirectorJanuary 31, 2011


40

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
  
Page
Page
ReportsReport of Independent Registered Public Accounting Firms
Firm		 F-2 – F-4
Consolidated balance sheets — October 31, 20102013 and 2009
2012		 F-5F-3
Consolidated statements of operations — Years ended October 31, 2010, 20092013, 2012 and 2008
2011		F-4
Consolidated statements of comprehensive (loss) income — Years ended October 31, 2013, 2012 and 2011F-5
Consolidated statements of stockholders’ equity — Years ended October 31, 2013, 2012 and 2011 F-6
Consolidated statements of stockholders’ equity and comprehensive income (loss) — Years ended October 31, 2010, 2009 and 2008
F-7
Consolidated statements of cash flows — Years ended October 31, 2010, 20092013, 2012 and 2008
2011		 F-8F-7
Notes to consolidated financial statements
 F-9F-8 – F-27F-20
F-1


F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To theThe Board of Directors and Stockholders of
Majesco Entertainment Company
 
We have audited the accompanyingconsolidated balance sheetsheets of Majesco Entertainment Company and Subsidiary (the “Company””Company”) as of October 31, 2010,2013 and 2012, and the relatedconsolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and comprehensive loss, and cash flows for each of the year then ended. Theseyears in the three-year period ended October 31, 2013.  The 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.audits.
 
We conducted our auditaudits 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 auditaudits 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,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 audit providesaudits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, theconsolidated financial position of Majesco Entertainment Company and Subsidiary atas of October 31, 20102013 and 2012, and theconsolidated results of their operations and their cash flows for each of the year thenyears in the three-year period ended October 2013, in conformity with accounting principles generally accepted in the United States of America.
 
/S/  EISNERAMPER LLP
/s/ EisnerAmper LLP
Iselin, New Jersey
January 14, 2014
 
F-2

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, 2008, in conformity with U.S. generally accepted accounting principles.
/s/  MCGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
January 29, 2009


F-4

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
         
  October 31, 
  2010  2009 
 
ASSETS
        
Current assets:        
Cash and cash equivalents $8,004  $11,839 
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  921   847 
         
Total current assets
  29,440   27,997 
Property and equipment, net  520   447 
Other assets  69   83 
         
Total assets
 $30,029  $28,527 
         
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $11,375  $9,356 
Customer billings due to distribution partner  —   230 
Inventory financing payables  5,557   6,053 
Advances from customers and deferred revenue  945   543 
         
Total current liabilities
  17,877   16,182 
Warrant liability  144   626 
Commitments and contingencies        
Stockholders’ equity:        
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  (102,333)  (101,361)
Accumulated other comprehensive loss  (522)  (442)
         
Net stockholders’ equity
  12,008   11,719 
         
Total liabilities and stockholders’ equity
 $30,029  $28,527 
         
See accompanying notes to consolidated financial statements


F-5

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
 
             
  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 
             
  October 31, 
  2013 2012 
ASSETS       
Current assets:       
Cash and cash equivalents $13,385 $18,038 
Due from factor, net  2,134  12,501 
Accounts and other receivables  1,169  3,936 
Inventory  4,859  7,762 
Advance payments for inventory  1,064  257 
Capitalized software development costs and license fees  7,825  3,489 
Prepaid expenses and other current assets  2,827  1,724 
Total current assets  33,263  47,707 
Property and equipment, net  817  1,003 
Investment in GMS Entertainment Limited  3,500  - 
Other assets  69  588 
Total assets $37,649 $49,298 
LIABILITIES AND STOCKHOLDERS’ EQUITY       
Current liabilities:       
Accounts payable and accrued expenses $8,994 $15,490 
Inventory financing  1,764  - 
Advances from customers and deferred revenue  6,838  4,454 
Warrant liability - current  -  17 
Total current liabilities  17,596  19,961 
Commitments and contingencies       
Stockholders’ equity:       
Common stock — $.001 par value; 250,000,000 shares authorized; 46,295,969 and
    41,862,321 shares issued and outstanding at October 31, 2013 and 2012,
    respectively		  46  42 
Additional paid-in capital  124,148  120,755 
Accumulated deficit  (103,530)  (90,888) 
Accumulated other comprehensive loss  (611)  (572) 
Net stockholders’ equity  20,053  29,337 
Total liabilities and stockholders’ equity $37,649 $49,298 
See accompanying notes
F-3

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
  Years Ended October 31, 
  2013 2012 2011 
Net revenues $47,267 $132,287 $125,291 
Cost of sales          
Product costs  18,625  46,718  54,939 
Software development costs and license fees  16,474  42,054  22,151 
Loss on impairment of software development costs and license fees – future
   releases		  -  -  2,726 
   35,099  88,772  79,816 
Gross profit  12,168  43,515  45,475 
Operating costs and expenses          
Product research and development  5,542  7,784  6,992 
Selling and marketing  7,854  20,157  14,707 
General and administrative  9,176  10,077  10,506 
Workforce reduction  776  -  - 
Loss on impairment of software development costs and license fees —
   cancelled games		  675  1,219  1,512 
Depreciation and amortization  381  566  398 
   24,404  39,803  34,115 
Operating (loss) income  (12,236)  3,712  11,360 
Other expenses (income)          
Interest and financing costs  409  958  1,255 
Change in fair value of warrant liability  (17)  (1,932)  2,847 
(Loss) income before income taxes  (12,628)  4,686  7,258 
Income taxes  14  73  426 
Net (loss) income $(12,642) $4,613 $6,832 
Net (loss) income per share:          
Basic $(0.30) $0.12 $0.18 
Diluted $(0.30) $0.11 $0.17 
Weighted average shares outstanding:          
Basic  41,601,343  39,973,248  38,527,589 
Diluted  41,601,343  40,823,197  40,123,968 
See accompanying notes 
F-4

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
  Year Ended October 31, 
  2013 2012 2011 
           
Net (loss) income $(12,642) $4,613 $6,832 
Other comprehensive (loss) income          
Foreign currency translation adjustments  (39)  (45)  (5) 
Other comprehensive (loss) income  (39)  (45)  (5) 
Comprehensive (loss) income $(12,681) $4,568 $6,827 
 
See accompanying notes to condensed consolidated financial statements


F-6

F-5

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(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, 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 
                         
             Accumulated    
  Common Stock Additional    Other Net 
  $.001 par value Paid-In Accumulated Comprehensive Stockholders’ 
  Number Amount Capital Deficit Loss Equity 
Balance — October 31, 2010 39,326,376 $39 $114,824 $(102,333) $(522) $12,008 
Issuance of common stock in
    connection with:		                  
Restricted stock grants — directors 147,549  —  192  —  —  192 
Restricted stock grants, net — employees 761,669  1  1,098  —  —  1,099 
Non-cash compensation charges
    — stock options		 —  —  137  —  —  137 
Exercise of options 69,545  —  61  —  —  61 
Exercise of warrants and units 1,002,210  1  2,852  —  —  2,853 
Warrants issued for license —  —  58  —  —  58 
Net income —  —  —  6,832  —  6,832 
Foreign currency translation adjustment —  —  —  —  (5)  (5) 
Balance — October 31, 2011 41,307,349  41  119,222  (95,501)  (527)  23,235 
Issuance of common stock in
    connection with:		                  
Restricted stock grants — directors 78,634  —  188  —  —  188 
Restricted stock grants, net — employees 537,280  1  1,365  —  —  1,366 
Non-cash compensation charges
    — stock options		 —  —  132  —  —  132 
Shares withheld for taxes (86,420)  —  (161)  —  —  (161) 
Exercise of options 13,158  —  9  —  —  9 
Exercise of warrants and units 12,320  —  —  —  —  — 
Net income —  —  —  4,613  —  4,613 
Foreign currency translation adjustment —  —  —  —  (45)  (45) 
Balance — October 31, 2012 41,862,321  42  120,755  (90,888)  (572)  29,337 
Issuance of common stock in
    connection with:		                  
Restricted stock grants — directors 304,399  —  188  —  —  188 
Restricted stock grants, net — employees 827,647  1  757  —  —  758 
Non-cash compensation charges
    — stock options		 —  —  470  —  —  470 
Shares withheld for taxes (31,731)  —  (19)  —  —  (19) 
Sale of common stock 3,333,333  3  1,997  —  —  2,000 
Net loss —  —  —  (12,642)  —  (12,642) 
Foreign currency translation adjustment —  —  —  —  (39)  (39) 
Balance — October 31, 2013 46,295,969 $46 $124,148 $(103,530) $(611) $20,053 
 
See accompanying notes to consolidated financial statements


F-7

F-6

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
             
  Year Ended October 31, 
  2010  2009  2008 
 
CASH FLOWS FROM OPERATING ACTIVITIES
            
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  183   263   315 
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  1,301   1,730   1,558 
Warrant issued for services  39   —   77 
Write-off of accounts receivable  —   —   255 
Share-based litigation settlement  —   404   (1,572)
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  (3,325)  (7,186)  (3,100)
Accounts and other receivables  618   1,368   (2,806)
Inventory  (2,243)  (412)  (1,769)
Capitalized software development costs and prepaid license fees  (9,197)  (13,741)  (10,362)
Advance payments for inventory  (2,328)  (2,875)  662 
Prepaid expenses and other assets  (66)  874   (1,512)
Accounts payable and accrued expenses  2,041   (779)  3,314 
Litigation settlement  —   (700)  — 
Customer billings due to distribution partner  (230)  (1,257)  1,487 
Advances from customers  402   245   (126)
             
Net cash used in operating activities  (3,035)  (6,578)  (2,698)
             
CASH FLOWS FROM INVESTING ACTIVITIES
            
Purchases of property and equipment  (283)  (146)  (314)
             
Net cash used in investing activities  (283)  (146)  (314)
             
CASH FLOWS FROM FINANCING ACTIVITIES
            
Sale of common stock, net of expenses  —   8,628   — 
Treasury stock — retired  —   —   (72)
Inventory financing  (496)  4,513   1,540 
Proceeds from private placement, net of expenses  —   —   (40)
             
Net cash (used in) provided by financing activities  (496)  13,141   1,428 
             
Effect of exchange rates on cash and cash equivalents  (21)  (83)  (188)
             
Net (decrease) increase in cash and cash equivalents  (3,835)  6,334   (1,772)
Cash and cash equivalents — beginning of year  11,839   5,505   7,277 
             
Cash and cash equivalents — end of year $8,004  $11,839  $5,505 
             
SUPPLEMENTAL CASH FLOW INFORMATION
            
Cash paid during the year for interest $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 $—  $459  $— 
             
  Year Ended October 31, 
  2013 2012 2011 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net (loss) income $(12,642) $4,613 $6,832 
Adjustments to reconcile net (loss) income to net cash (used in)
    provided by operating activities:		          
Depreciation and amortization  381  566  398 
Change in fair value of warrant liability  (17)  (1,932)  2,847 
Non-cash compensation expense  1,416  1,686  1,468 
Provision for price protection and customer allowances  2,993  4,324  3,928 
Amortization of capitalized software development costs and license fees  6,460  17,363  6,204 
Loss on impairment of software development costs and license fees  675  1,219  4,238 
Impairment of goodwill  -  54  - 
Provision for excess inventory  675  1,515  1,794 
Changes in operating assets and liabilities, net of acquisition:          
Due from factor  7,374  (15,888)  (2,997) 
Accounts and other receivables  2,767  (830)  (3,223) 
Inventory  2,228  2,328  (4,981) 
Capitalized software development costs and license fees  (10,971)  (9,441)  (18,064) 
Advance payments for inventory  (807)  5,678  (521) 
Prepaid expenses and other assets  (1,086)  844  (1,918) 
Accounts payable and accrued expenses  (6,417)  (4,868)  8,752 
Advances from customers and deferred revenue  2,384  (1,139)  4,660 
Net cash (used in) provided by operating activities  (4,587)  6,092  9,417 
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment  (274)  (338)  (465) 
Investment in GMS Entertainment Limited  (3,500)  -  - 
Purchase of assets of Quick Hit, Inc., net of acquired cash  -  -  (779) 
Net cash used in investing activities  (3,774)  (338)  (1,244) 
CASH FLOWS FROM FINANCING ACTIVITIES          
Sale of common stock  2,000  -  - 
Proceeds from exercise of options and warrants  -  9  1,830 
Income tax withholding from exercise of options and warrants  (19)  (161)  - 
Borrowings for (repayments of) inventory financing  1,764  (1,238)  (4,319) 
Net cash provided by (used in) financing activities  3,745  (1,390)  (2,489) 
Effect of exchange rates on cash and cash equivalents  (37)  (15)  1 
Net (decrease) increase in cash and cash equivalents  (4,653)  4,349  5,685 
Cash and cash equivalents — beginning of year  18,038  13,689  8,004 
Cash and cash equivalents — end of year $13,385 $18,038 $13,689 
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid during the year for interest and financing costs $455 $870 $1,255 
Cash paid during the year for income taxes $- $591 $3 
SUPPLEMENTAL SCHEDULE OF NON-CASH
    INVESTING AND FINANCING ACTIVITIES		          
Leased assets $- $46 $163 
Warrant liability reclassified to additional paid-in capital upon exercise $- $- $1,042 
Issuance of warrants for license fees $- $- $58 
 
See accompanying notes to consolidated financial statements


F-8


F-7

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
 
1.  BASIS OF PRESENTATION
1.  PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
 
The followingaccompanying financial statements present the financial results of Majesco Entertainment Company and Majesco Europe Limited, its wholly owned subsidiary, (“Majesco” or “the Company”) on a consolidated basis.
 
2.  
PRINCIPAL BUSINESS ACTIVITY
The Company is a provider of video game products primarily for the family oriented, mass-market consumer. It sells its products primarily to large retail chains, specialty retail stores, video game rental outlets and distributors. It publishes video games for major current generation interactive entertainment hardware platforms, including Nintendo’s DS, DSi3DS and Wii, Sony’s PlayStation 3, or PS3, and PlayStation Portable, or PSP®, Microsoft’s Xbox 360 andXbox One andthe personal computer, or PC. It also publishes games for numerous digital platforms, including mobile platforms like the iPhone, iPad and iPod Touch,Android devices, as well as online platforms such as Facebook.Facebook and Zynga.
 
The Company’s video game titles 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 knownwell-known properties and, in other 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 its 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.
Geographic regions. Net salesrevenues by geographic region were as follows:
                         
  Years Ended October 31, 
  2010  %  2009  %  2008  % 
  (in thousands) 
 
United States $73,817   97.6% $90,428   95.7% $57,932   90.7%
Europe  1,831   2.4%  4,024   4.3%  5,955   9.3%
               ��         
Total $75,648   100.0% $94,452   100.0% $63,887   100.0%
                         
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.
 
  Years Ended October 31, 
  2013 % 2012 % 2011 % 
United States $39,109 82.7%$103,457 78.2%$110,115 87.9%
Europe  8,158 17.3% 28,830 21.8% 15,176 12.1%
Total $47,267 100.0%$132,287 100.0%$125,291 100.0%
Major customers. Sales to GameStop represented approximately14%,11% and21% of net revenues in 2013, 2012 and 2011, respectively. Sales to Target represented approximately14%,11% and10% of sales in 2013, 2012 and 2011, respectively. Sales to Wal-Mart, Inc. represented approximately18% and18% of net revenues in 2012 and 2011, respectively. Sales to Best Buy represented approximately11% of sales in 2011. Revenue from 505 Games s.r.l, primarily reflecting revenue from Europe, represented approximately15%,22% and11% of sales in 2013, 2012 and 2011, respectively.
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. In addition, for the years ended October 31, 2013, 2012 and 2011 sales of the Company’s Zumba Fitness games accounted for approximately55%,76% and70% of revenue, respectively. We license the rights to publish these games from a third party. If we do not license rights for additional Zumba games or if any new versions are not successful, this may have a significant impact on our future revenues.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the risks and rewards of ownership 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 records revenue for distribution agreements where it is acting as an agent as defined by 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 years ended October 31, 2010, 2009 and 2008, respectively, approximately $0 and $0.1 million in accounts receivable due from its factor at October 31, 2010 and 2009, respectively, and $0 and $0.2 million in billings payable to its distribution partner at October 31, 2010 and 2009, respectively, related to its activities as an agent.
F-8

 
The Company generally sells its products on a no-return basis, although in certain instances, the Company provides 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 benefits received, such as the appearance of the Company’s products in a customer’s national circular ad, are reflected as selling and marketing expenses, in accordance with Accounting Standards Codification (“ASC”)605-50,Customer Payments and Incentives.
 
In addition, some of the Company’s software products are sold exclusively as downloads of digital content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available (assuming all other recognition criteria are met).
We operate hosted online games in which players can play for free and purchase virtual goods for use in the games. We recognize revenues from the sale of virtual goods as service revenues over the estimated period in which players use the game. We currently estimate these periods of use to be three to four months. We will periodically assess our estimates for this period of use and future increases or decreases in these estimates will affect our recognized revenues prospectively. We also recognize advertising revenue related to advertising placed on our game sites as ads are served. The Company has not earned significant revenue to date related to its online games.
The Company records revenue for distribution agreements where it is acting as an agent as defined by ASC Topic 605,Revenue Recognition, Subtopic 45, Principal Agent Considerations, on a net basis. When the Company enters into license or distribution agreements that provide for multiple copies of games in exchange for guaranteed amounts, revenue is recognized in accordance with the terms of the agreements, generally upon delivery of a master copy, assuming our performance obligations are complete and all other recognition criteria are met, or as per-copy royalties are earned on sales of games.
Shipping and handling, which consist principally of transportation charges incurred to move finished goods to customers, amounted to $0.4 million, $1.0 million$500, $992 and $0.8 million and are included in selling expenses$930 for the years ended October 31, 2010, 20092013, 2012 and 2008, respectively.2011, respectively, and are included in selling and marketing expenses.
 
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.
sheets. Included in advances from customers and deferred revenue are $1,179 and $969 of deferred license revenue at October 31, 2013 and 2012, respectively, and $5,204 and $3,366 of deferred revenue on sales of products with a future street date, as of October 31, 2013 and 2012, respectively. In connection with this deferred revenue, the Company has approximately $1,748 and $1,093 of deferred cost of sales – product included in prepaid expenses and other current assets as of October 31, 2013 and 2012, respectively.
Capitalized Software Development Costs and License Fees.Software development costs include fees in the form of milestone payments made to independent software developers and licensors, and, prior to its closing in July 2009, direct payroll and overhead costs for the Company’s internal development studio.licensors. Software development costs are capitalized once technological feasibility of a product is established and management expects such costs to 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.
 
F-9

Prepaid license fees represent license fees to owners 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. The non-current portion of capitalized software development costs and license fees was $0 and $500 as of October 31, 2013 and 2012, respectively, which is included in other assets.
 
The amortization period for capitalized software development costs and prepaid license fees 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 to which the costs relate. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, the Company expenses these capitalized costs to cost“cost of sales as softwaresales-software development costs and license fees, — future release,” in the period such a determination is made. These expenses may be incurred prior to a game’s release.release for games that have been developed. If a game is cancelled prior to completion of development and never released to market, the amount is expensed to generaloperating costs and administrative expenses. If the Company was required to write off licenses, due to changes in market conditions or product acceptance, its results of operations could be materially adversely affected.
Costs of developing online free-to-play social games, including payments to third-party developers are expensed as research and development expenses. Revenue from these games is largely dependent on players’ future purchasing behavior in the game and currently the Company cannot reliably project that future net cash flows from developed games will exceed related development costs.
 
Prepaid license fees and milestone payments made to the Company’s third party developers are typically considered non-refundable advances against the total compensation they can earn based upon the sales performance of the products. Any additional royalty or other compensation earned beyond the milestone payments is expensed to cost of sales as incurred.
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 advertisement. Advertising costs charged to operations were $2.4 million, $6.4 million$3,361, $11,849, and $1.6 million$6,677 for the years ended October 31, 2010, 20092013, 2012 and 2008,2011, respectively.
Income taxes.  The Company accounts for income taxes under the asset and liability 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.Stock based compensation consists primarily of expenses related to the issuance of stock options and restricted stock grants. Stock options are granted to employees or


F-11

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directors 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 to ten years. Compensation expense for stock options is recognized on a straight line basis over the vesting period of the award, based on the fair value of the option on the date of grant.
 
The fair value for options issued wasis estimated at the date of grant using a Black-Scholes option-pricing model. The risk free rate wasis derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor wasis determined based on the Company’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.
prices.
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.
 Such estimates may change and additional charges may be incurred until the related inventory items are sold or otherwise disposed of.
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, 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.
F-10

 
Estimates.The preparation of financial statements in conformity with GAAPaccounting principles generally accepted in the United States of America 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 of the financial statements and the reported amounts of revenues and expenses during the reporting period.periods. Among the more significant estimates included in these consolidated financial statements are price 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.licenses and the assessment of realization of deferred tax assets. 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.
income (loss).
Earnings
Income (Loss) Per Share.Basic income (loss) per share.  Basic earnings (loss) pershare of common sharestock is computed by dividing net income (loss) applicable to common stockholders by the weighted-averageweighted average number of shares of common stock outstanding for the period. Diluted earningsBasic income (loss) per common share has not been presented for the periods becauseexcludes the impact of unvested shares of restricted stock issued as long term incentive awards to directors, officers and employees. Diluted income per share reflects the conversion or exercise, as applicable,potential impact of the following warrants and stock options outstanding at the end of each period would be anti-dilutive either due to net losses or the antidilutive effect of the exercise ofcommon stock options and unvested shares of restricted stock and outstanding common stock purchase warrants after applyingthat have a dilutive effect under the treasury stock method due to an exercise price in excess of fair market value (see notes 13 and 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 
method.
 
Reclassifications.  For comparability, certain 2008 and 2009 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2010.
Commitments and Contingencies.  The Company records  We are subject to claims and litigation in the ordinary course of our business. We record 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.
Recent Accounting Pronouncements.
Amendments to Variable Interest Entity GuidanceComprehensive Income — In June 2009,2011, the FASBFinancial Accounting Standards Board (FASB) issued an update to ASC Topic860-10-65,220,Accounting for Transfers of Financial AssetsComprehensive Income. The standard removes the concept of a qualifying special purpose entity fromupdate to ASC Topic 860,Transfers and Servicing, and eliminates the exception for qualifying special purpose entities from consolidation guidance. In addition, the standard220 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 accountstandards for the transaction as a secured borrowing. An enterprise that continues to transfer portionsreporting and presentation 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.comprehensive income. The update became 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 impact2012. Adoption of the update toASC 820-10, but doesdid not expect the adoption to have a material impact on itsthe Company’s financial position, results of operations, and cash flows.
Comprehensive Income — In February 2013, the FASB issued a further update to ASC 220,Comprehensive Income. The update establishes information requirements for amounts reclassified out of other comprehensive income by component and for the presentation on the face of the income statement, or in the notes of significant amounts reclassified out of accumulated other comprehensive income by line item of net income. The update became effective for the Company on February 1, 2013. Adoption of the update did not have a material impact on the Company’s financial position, results of operations, and cash flows.
 
4.  
Income Taxes — In July 2013, the FASB issued an update to ASC 740,Income Taxes. The update to ASC 740 establishes standards for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update becomes effective for the Company on November 1, 2014. Adoption of the update is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows.

3. FAIR VALUE
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 
                 
  October 31,
2013		 Quoted prices
in active 
markets for 
identical 
assets  
(level 1)		 Significant 
other 
observable 
inputs  
(level 2)		 Significant
unobservable
inputs
(level 3)		 
Assets:             
Money market funds $7,283 $7,283 $— $— 
Bank deposits  6,102  6,102  —  — 
Total financial assets $13,385 $13,385 $— $— 
F-11

 
On September 5, 2007, the
  October 31,
2012		 Quoted prices
in active 
markets for 
identical 
assets  
(level 1)		 Significant 
other 
observable 
inputs  
(level 2)		 Significant 
unobservable
inputs
(level 3)		 
Assets:  ��          
Money market funds $16,048 $16,048 $— $— 
Bank deposits  1,990  1,990  —  — 
Total financial assets $18,038 $18,038 $— $— 
Liabilities:             
Warrant liability $17 $— $— $17 
Total financial liabilities $17 $— $— $17 
The Company issuedhad outstanding 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 requirerequired settlement by transferring assets under certain change of control circumstances. Therefore, they arecircumstances and were classified as liabilities in accordance with ASC Topic 480, Distinguishing Liabilities from Equity.
the Company’s consolidated balance sheets. The Company measuresmeasured the fair value of the warrants at each balance sheet date, using the Black-Scholes method, and records the changerecorded a gain or loss 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 theperiod as change in fair value of warrants. The Company used the Black-Scholes method towarrants had a fair 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%.$0 at expiration in March 2013.
 
The following table is a rollforward ofAssumptions used to determine the fair value of the warrants were:
  2013  2012  2011  
Estimated fair value of stock  $0.61-$1.00   $1.00-$3.37   $0.62-$3.75  
Expected warrant term  0-0.3 years   0.3-1.4 years   1.4-2.4 years  
Risk-free rate  0.0-0.1%   0.1-0.2%   0.2-0.8%  
Expected volatility  77.4-84.8%   77.4-80.0%   73.5-79.7%  
Dividend yield  0%   0%   0%  
A summary of the changes to the Company’s warrant liability, as to whichmeasured at fair value on a recurring basis using significant unobservable inputs (Level 3) is determined by Level 3 inputs:presented below:
 
         
  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 
         
  2013 2012 2011 
Beginning balance $17 $1,949 $144 
Warrants exercised  -  -  (1,042) 
Total loss (gain) included in net (loss) income  (17)  (1,932)  2,847 
Ending balance $- $17 $1,949 
In the fiscal year ended October 31, 2011, upon exercise of587,734 of the warrants outstanding, the warrant liability associated with those warrants, amounting to $1,042, was reclassified to additional paid-in capital.
 
The carrying value of accounts receivable, accounts payable and accrued expenses, due from factor, and advances from customers are reasonable estimates of thetheir fair values because of their short-term maturity.

5.  FACTORED RECEIVABLES
4. DUE FROM FACTOR, NET
 
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 sells 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 the credit risk associated with a receivable. If the 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 accounts receivable purchased 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 of0.45 to 0.5%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.
 
F-12

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$30 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%70% of net accounts receivable, plus 60%60% of the Company’s inventory balance up to a maximum of $2.5$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, 20102013 and 2009,2012, 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 circumstances, an additional 1.0%1.0% annually is charged for advances against inventory.
Approximately $13.8 million of accounts receivable was sold to the factor at October 31, 2010, of which the Company assumed credit risk of approximately $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$2.5 million, to provide funding for the manufacture of its products (see Note 10).products. 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.invoice.
 
Due from factor consists of the following:
 
         
  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 
         
  October 31, 
  2013 2012 
Outstanding accounts receivable sold to factor $9,131 $19,938 
Less: customer allowances  (3,319)  (5,591) 
Less: provision for price protection  (1,943)  (1,846) 
Less: advances from factor  (1,735)  - 
  $2,134 $12,501 


F-16

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The following table sets forth the adjustmentsOutstanding accounts receivable sold to the price protectionfactor as of October 31, 2013 and other customer sales incentive2012 for which the Company retained credit risk amounted to $260 and $387, respectively. As of October 31, 2013 and 2012, there were no allowances included as a reduction of the amounts due from factor:for uncollectible accounts.
             
  Year Ended October 31,
 
  (in thousands) 
  2010  2009  2008 
 
Balance — beginning of year $(4,380) $(3,359) $(3,105)
Add: provisions  (3,482)  (5,031)  (2,556)
Less: amounts charged against allowance  4,564   4,010   2,302 
             
Balance — end of year $(3,298) $(4,380) $(3,359)
             

6.  ACCOUNTS RECEIVABLE
5. ACCOUNTS RECEIVABLE
 
The following table presents the major components of accounts receivable:and other receivables:
  October 31, 
  2013 2012 
Royalties receivable $702 $593 
Trade accounts receivable, net of allowances of $0 and $0  467  3,343 
  $1,169 $3,936 

6. INVENTORIES
 
         
  October 31,
 
  (in thousands) 
  2010  2009 
 
Trade receivables $726  $1,388 
Allowances  (25)  (295)
Other  24   52 
         
  $725  $1,145 
         
Inventories consist of the following:
 
7.  PREPAID EXPENSES
  October 31 
  2013 2012 
Finished goods $3,969 $6,538 
Packaging and components  890  1,224 
  $4,859 $7,762 

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
The following table presents the major components of prepaid expenses:
 
         
  October 31,
 
  (in thousands) 
  2010  2009 
 
Prepaid media advertising $746  $627 
Other  175   220 
         
  $921  $847 
         
  October 31, 
  2013 2012 
Deferred costs of sales $1,748 $1,093 
Prepaid advertising  994  87 
Other  85  544 
  $2,827 $1,724 
 
In October 2012 and 2013, the Company sold certain products to customers with a street-date provision restricting customers from reselling the products until a specified release date, which was after October 31, 2012 and 2013, respectively. Accordingly, the Company deferred revenue associated with the sales. Deferred cost of sales represents inventory costs associated with the revenue deferred.
F-13
8.  PROPERTY AND EQUIPMENT, NET
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 
         
  October 31, 
  2013 2012 
Computers and software $3,430 $3,385 
Furniture and equipment  1,554  1,315 
Leasehold improvements  154  327 
   5,138  5,027 
Accumulated depreciation  (4,321)  (4,024) 
  $817 $1,003 


F-17


MAJESCO ENTERTAINMENT COMPANY9. ACCOUNTS PAYABLE AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSACCRUED EXPENSES
9.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
The following table presents the major components of accounts payable and accrued expenses:
 
         
  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 
         
  October 31, 
  2013 2012 
Accounts payable-trade $4,436 $4,847 
Royalty and software development  3,612  8,914 
Salaries and other compensation  742  838 
Income taxes payable  4  - 
Other accruals  200  891 
  $8,994 $15,490 

10.  INVENTORY FINANCING PAYABLE
 
10.  INVENTORY FINANCING PAYABLE
ManufacturersCertain manufacturers require the Company to prepay or present letters of credit upon placing a purchase order for inventory. The Company has arrangements with a finance company which provides 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%1.5% of the purchase order amount for each transaction, plus administrative fees. Additional charges of 0.05%0.05% per day (18%(18% annualized) are incurred if the financing remains open for more than 30 days.

11.  COMMON STOCK OFFERING
On September 17, 2009, the Company sold 6,420,000 shares of common stock in a “registered direct offering” at a purchase price of $1.50 per share. The sale of the shares was made pursuant to Subscription Agreements and a Prospectus Supplement dated September 17, 2009. The gross proceeds to the Company from the sale of the shares, before deducting for the Placement Agent’s fees and offering 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 offering, as additional paid in capital. The shares were registered with the Securities and Exchange Commission on a prospectus which was declared effective on August 28, 2009.
12.  WARRANT LIABILITY
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.
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. 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” 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 STATEMENTS11.  STOCKHOLDERS’ EQUITY
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 third anniversary of the warrant, but before the fourth, 25%. The warrants contain a provision that may require settlement by transferring assets. Therefore, they are classified as liabilities in accordance with ASC Topic 480, Distinguishing Liabilities 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 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 $0.1 million, $0.6 million and $0.2 million at October 31, 2010, 2009 and 2008, respectively, due to fluctuations in the Company’sCommon stock price. This resulted in a non-cash gain of $0.5 million, a non-cash loss of $0.4 million, and a non-cash gain of $1.3 million due to the change in fair value of warrants during the years ended October 31, 2010, 2009 and 2008, respectively. The Company used the Black-Scholes method to value the warrants (see note 4 for assumptions).
13.  COMMON STOCK PURCHASE WARRANTS
 
The following table sets forth the number shares of common stock purchasable under outstanding stock purchase warrants at October 31, 20102013 and 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 
                 
2012:
 
Issued in connection with Issue date Expiration date  Exercise
Price		 October 31,
2013		 October 31,
2012		 
Equity financing September 5, 2007 March 5, 2013 $2.04 - 1,110,001 
Consulting services June 14, 2006 May 31, 2013 $1.55 - 16,500 
Consulting services March 29, 2010 March 28, 2015 $1.06 50,000 50,000 
         50,000 1,176,501 
In 2007, the Company completed a private placement of units consisting of shares of common stock and warrants. The warrants required settlement by transferring assets under certain change of control circumstances and were classified as liabilities in the Company’s consolidated balance sheets in accordance with ASC Topic 480, Distinguishing Liabilities fromEquity. The Company measured the fair value of the warrants at each balance sheet date, using the Black-Scholes method, and recorded a gain or loss in earnings each period as change in fair value of warrants. The warrants had a fair value of $0 at expiration in March 2013 and $17 at October 31, 2012. The Company recorded non-cash gains of $17 and $1,932 in the years ended October 31, 2013 and 2012, respectively, and a non-cash loss of $2,847 in the year ended October 31, 2011 due to changes in the fair value of the warrants (see Note 3).
Additionally, in connection with the September 5, 2007 equity financing,private placement, the Company issued a unit purchase option,options, to purchase at $1.50$1.50 per share, units consisting of (1) 277,667 shares of common stock, and (2) warrants to purchase up to111,067 shares of common stock at $2.04,$2.04, with terms identical to the warrants issued in the financing. The units and underlying warrants were exercised in the year ended October 31, 2011.


F-19

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
F-14
14.  INCOME TAXES
A summary of the status of the Company’s outstanding warrants and units as of October 31 and changes during the years then ended is presented below: 
  2013 2012 2011 
Outstanding at beginning of year 1,176,501 1,196,501 2,226,469 
Issued - - 100,000 
Exercised - (20,000) (1,029,968) 
Cancelled or expired (1,126,501) - (100,000) 
Outstanding at end of year 50,000 1,176,501 1,196,501 
Sale of common stock
On August 2, 2013, the Company sold shares of common stock to an investor and shareholder in Orid Media (See Note 17), with respect to a registered direct offer and sale by the Company of3,333,333 shares of the Company’s common stock at an offering price of $.60per share, resulting in proceeds to the Company of $2,000.

12. STOCK-BASED COMPENSATION ARRANGEMENTS
On February 13, 2004, the stockholders approved a stock option plan that provides for the granting of 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 under terms determined by the Company. As of October 31, 2013, the Company had approximately751,000 shares available for future issuances under the plan.
Non-cash compensation expenses related to stock options and restricted stock grants are recorded in general and administrative expenses in the accompanying consolidated statements of operations and totaled $1,416, $1,686 and $1,468 for the years ended October 31, 2013, 2012 and 2011, respectively. 
A summary of the status of the Company’s outstanding stock options as of October 31, 2013 and changes during the year then ended is presented below:
  Number Of
Shares		 Weighted  
Average  
Exercise  
Price		 
Outstanding at beginning of year 1,241,567 $4.72 
Granted 2,208,702 $0.69 
Cancelled (86,625) $3.64 
Exercised - $- 
Outstanding at end of year 3,363,644 $2.10 
Options exercisable at year-end 1,078,522 $5.02 
Weighted-average fair value of options granted during the year   $0.42 
The fair value of options granted during the year ended October 31, 2013 was $932.
The intrinsic value of options outstanding at October 31, 2013 was $5. The intrinsic value of options exercised in the year ended October 31, 2012 was $13.
The weighted average contractual term of exercisable and outstanding options October 31, 2013 was2.4 years and5.2 years, respectively.
F-15

 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended October 31:
  2013  2012  2011  
Risk free annual interest rate 0.9%  0.5%  1.5%  
Expected volatility 81%  86%  76%  
Expected life 4.18 years  4.25 years  4.25 years  
Assumed dividends None  None  None  
The value of stock option grants is amortized over the vesting period of, generally, one to three years. As of October 31, 2013, there was approximately $526 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of2.0 years.
A summary of the status of the Company’s restricted stock grants as of October 31, 2013 and changes during the year then ended is presented below:
2013
Balance at beginning of year1,379,714
Granted1,366,399
Vested(910,604)
Cancelled(234,352)
Outstanding at end of year1,601,157
The fair value of restricted shares granted during the years ended October 31, 2013, 2012 and 2011 was $888, $1,171 and $2,084, respectively. The fair value of restricted shares vested during the years ended October 31, 2013, 2012 and 2011 was $605, $1,698 and $2,489, respectively.
The value of restricted stock grants are measured based on their fair value on the date of grant and amortized over the vesting period of, generally, six months to three years. As of October 31, 2013, there was approximately $1,312 of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of2.0 years.
On March 29, 2010, the Company issued warrants to purchase an aggregate of100,000 shares of common stock at an exercise price of $1.06 per share to a consultant in consideration for services. In the years ended October 31, 2013, 2012 and 2011,0,20,000 and30,000 warrants, respectively, were exercised and50,000 warrants were outstanding as of October 31, 2013. The warrants are exercisable through March 28, 2015.
On July 21, 2006, the Company issued warrants to purchase an aggregate of150,000 shares of common stock at an exercise price of $1.55 per share to a consultant in consideration for services. In the years ended October 31, 2013, 2012 and 2011,0,0, and23,500 warrants were exercised on a cashless basis for0,0, and14,160 shares of common stock, respectively, and all of the remaining warrants, representing16,500 shares, expired in the year ended October 31, 2013.
On June 6, 2011, the Company issued170,652 shares of restricted common stock for the retention and compensation of employees of Quick Hit, Inc. (See Note 16). The shares of restricted common stock had a transaction-date fair value of $524, which was included in as stock-based compensation expense over the 18-month vesting period of the shares.

13.  INCOME TAXES
The provision (benefit) provision for income taxes for the years ended October 31, 2010, 20092013, 2012 and 2008 consists2011 consisted of:
 
             
  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 
             
  2013 2012 2011 
Current:          
Federal $8 $34 $274 
State  6  39  152 
Deferred:          
Federal  (3,823)  1,259  3,954 
State  99  213  77 
Impact of change in effective tax rates on deferred taxes  -  —  1,937 
Less: valuation allowance  3,724  (1,472)  (5,968) 
  $14 $73 $426 
F-16

 
The difference between income taxes computed at the statutory federal rate and the provision for income taxes for 2010, 20092013, 2012 and 2008 relates2011 related to the 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%
                         
  2013  2012  2011  
  Amount Percent of  
Pretax income		 Amount Percent of  
Pretax income		 Amount Percent of  
Pretax income		  
Tax (benefit) at federal statutory rate $(4,294) 34% $1,593 34% $2,469 34% 
State income taxes, net of federal
    income taxes		  105 (1)%  252 5%  229 3% 
Effect of warrant liability  (6) -%  (657) (14)%  968 13% 
Effect of other permanent items  322 (2)%  325 7%  48 1% 
Impact of change in effective tax rates
    on deferred taxes		  - -%  — —%  1,937 27% 
Change in valuation allowance  3,724 (29)%  (1,472) (31)%  (5,968) (82)% 
Reduction of deferred benefits  163 (2)%  32 1%  743 10% 
  $14 -% $73 2% $426 6% 


F-20

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The components of deferred income tax assets (liabilities) were as follows:
 
         
  October 31,
 
  (in thousands) 
  2010  2009 
 
Impairment of capitalized software development costs and prepaid license fees not currently deductible $209  $1,004 
Depreciation and amortization  17   — 
Impairment of inventory  80   103 
Compensation expense not deductible until options are exercised  1,715   1,669 
All other temporary differences  471   852 
Net operating loss carry forward  30,314   30,003 
Less valuation allowance  (32,806)  (33,631)
         
Deferred tax asset $—  $— 
         
  October 31, 
  2013 2012 
Depreciation and amortization $(9) $(103) 
Impairment of inventory  482  565 
Compensation expense not deductible until options are exercised  392  244 
All other temporary differences  903  1,673 
Net operating loss carry forward  27,223  22,987 
Less valuation allowance  (28,991)  (25,366) 
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,allowance, as management cannot conclude that it is 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 in 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, 20102013 amounts to approximately $82.6 million$79,908 and expires between2025 and 20302031 for federal income taxes, and approximately $36.1 million$26,017 for state income tax.taxes, which primarily expires between2014 and2020 and approximately $5,000 for United Kingdom income taxes.
 
The Company files income tax returns in the U.S., various states and the United Kingdom. As of October 31, 2010,2013, the Company had no unrecognized tax benefits, which would impact its tax rate if recognized. As of October 31, 2010,2013, the Company had no accrual for the potential payment of penalties. As of October 31, 2010,2013, 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 2004,2011, and income taxes for Majesco Europe Limited have been examined for the year ended October 31,tax years through 2006 in the United Kingdom with the results of such examinations being reflected in the Company’s results of operations as of October 31, 2010.2013. 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.
F-17
15.  STOCK-BASED COMPENSATION ARRANGEMENTS
On February 13, 2004, the stockholders approved a stock option plan that provides for the granting of 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 STATEMENTS14. INCOME (LOSS) PER SHARE
 
restatement toThe table below provides a reconciliation of basic and diluted average shares outstanding used in computing income (loss) per share, after applying the Company’s 2004 Employee, Directortreasury stock method.
  2013 2012 2011 
Basic weighted average shares outstanding 41,601,343 39,973,248 38,527,589 
Common stock options - 222,355 385,487 
Non-vested portion of restricted stock grants - 467,074 900,681 
Warrants - 160,520 310,211 
Diluted weighted average shares outstanding 41,601,343 40,823,197 40,123,968 
Options, warrants and Consultant Stock Plan (renamed 2004 Employee, Directorrestricted stock grants representing a total of5,014,841,4,145,802 and Consultant Incentive Plan) (the “Plan”) to: (a) increase the number of761,265 potential shares of common stock reserved for issuance under the Plan by 4,000,000; (b) add a share-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 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 Plan to increase the number of shares of common stock reserved for issuance under the Plan by 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, 2010, the Company had reserved 10.6 million shares of common stock for issuance under the Plan, of which 1.7 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 
     Weighted
     Weighted
     Weighted
 
     Average
     Average
     Average
 
  Number Of
  Exercise
  Number Of
  Exercise
  Number Of
  Exercise
 
  Shares  Price  Shares  Price  Shares  Price 
 
Outstanding at beginning of year  1,483,929  $5.24   1,352,610  $5.61   1,167,191  $6.78 
Granted  289,475  $0.68   144,079  $1.88   239,133  $0.89 
Cancelled  (74,188) $3.23   (12,760) $6.14   (53,714) $9.92 
Exercised  —   —   —   —   —   — 
                         
Outstanding at end of year  1,699,216  $4.55   1,483,929  $5.24   1,352,610  $5.61 
                         
Options exercisable at year-end  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     $0.38      $1.12      $0.58 
                         
The fair value of options granted during the year ended October 31, 2010 was $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, 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, 2010 was 2.3 years.
             
        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 
             
As of October 31, 20102013, 2012 and 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 1.4 and 1.2 years, respectively. The total fair value of shares vested during October 31, 2010 was $0.1 million.
A summary of the status of the Company’s restricted stock grants for the 12 months ended October 31, 2010, 2009 and 2008 is as follows:
             
  October 31,
  October 31,
  October 31,
 
  2010  2009  2008 
 
Balance at beginning of period  1,895,180   2,218,373   1,411,470 
Granted  1,243,467   955,183   1,546,397 
Vested  (1,040,566)  (1,187,740)  (711,661)
Cancelled  (348,546)  (90,636)  (27,833)
             
Outstanding at end of period  1,749,535   1,895,180   2,218,373 
             
The fair value of restricted shares granted during the years ended October 31, 2010, 2009 and 2008 was $0.9 million, $1.8 million and $1.5 million, respectively.


F-23

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 2010, there was approximately $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. On June 12, 2009, warrants for 110,000 shares2011, respectively, were exercised, resultingnot included in the issuancecalculation of approximately 29,000 shares ofdiluted earnings per common stock on the basis of a cashless exercise.
16.  EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering all eligible employees.
The Company charged to operations $81,000, $75,000 and $66,000 for contributions to the retirement planshare for the years ended, October 31, 2010, 2009as the effect of their inclusion would be anti-dilutive based on the Company’s share price and, 2008, respectively.in 2013, the Company’s net loss.
 
Certain stockholdersThe table below provides total potential shares outstanding, including those that are anti-dilutive, at each balance sheet date: 
  October 31, 
2013		 October 31, 
2012		 
Shares issuable under common stock warrants 50,000 1,176,501 
Shares issuable under stock options 3,363,684 1,241,567 
Non-vested portion of restricted stock grants 1,601,157 1,379,713 

15.  COMMITMENTS AND CONTINGENCIES
Contingencies
On September 20, 2012, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Virginia by Intelligent Verification Systems, LLC against Microsoft Corporation and key employeesthe Company. The complaint alleges that Kinect and certain of the Company’s Kinect games, including Zumba Fitness Rush, infringe the plaintiff’s patents relating to biometric facial recognition and facial expression recognition technology. Intelligent Verification Systems is seeking injunctive relief and monetary damages in an unspecified amount for the alleged infringement. The Company, serve as trusteesin conjunction with Microsoft, is defending itself against the claim and has certain third party indemnity rights from developers for costs incurred in the litigation. The Company cannot currently estimate a potential range of loss if the claim against the Company is successful.
In addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the plan.loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.
17.  MAJOR CUSTOMERS
Sales to Wal-Mart, Inc. represented approximately 20%, 18% and 13% of net revenues in 2010, 2009 and 2008, respectively. Sales to GameStop represented approximately 12%, 16% and 17% of net revenues in 2010, 2009 and 2008, respectively. Sales to Best Buy represented approximately 10%, 14% and 13% of sales in 2010, 2009 and 2008, respectively. Sales to Target represented approximately 10%, 11% and 11% of sales in 2010, 2009 and 2008, respectively. Sales to Cokem represented approximately 20%, 9% and 10% of sales in 2010, 2009 and 2008, respectively.
18.  CONTINGENCIES AND COMMITMENTS
Commitments
 
At October 31, 2010,2013, the Company was committed under agreements with certain software developers for future milestone payments aggregating $4.1 million.$1,688. 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. TheseCertain of these payments will be used to reduce future royalties due to the developers from sales of the Company’s video games.
 
The Company is obligated under non-cancelable operating leases for administrative offices automobiles, and equipment expiring at various dates through fiscal 2015. The future aggregate minimum rental commitments exclusive of required payments for operating expenses are as 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
Year ending October 31,   
2014 297 
2015 73 
 
Total rent expense amounted to $433,000, $767,000$505, $539 and $655,000$513 for the years ended October 31, 2010, 20092013, 2012 and 2008,2011, respectively.
F-18

 
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 equity grants. These agreements also contain provisions related to severance terms and change of control provisions.
ContingenciesWorkforce Reduction
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.
 
In January 2009,2013, the Company entered into an amendmentimplemented a realignment of its workforce to reduce certain fixed costs and provide for a more flexible cost model in the development and distribution of its games. The realignment included a reduction in workforce of approximately 40 employees, including employees related to the securities class action settlement agreement. Under the terms of the settlement agreement in the securities class action, as amended, the Company agreed to make cash payments totaling $0.7 million in three installments. The first two payments were made in January and February 2009, and the last payment was made in May 2009. The Company also contributed one million sharesclosure of its common stock to the settlement fund. The Company’s insurance carrier also contributed a cash payment.
On February 23, 2009, the settlement was approved by the Court,studio in Massachusetts, which focused on social games for Facebook, game-testing personnel in its New Jersey facility, and the class action was dismissed. The dismissal is no longer subject to appeal. The settlement administrator distributed the sharesother marketing and cash to eligible settlement claimants in May 2009 and the matter is now closed.
Under the terms of the settlement of the private securities claim in the action brought by Trinad, on its own behalf, the Company’s insurance carrier made a cash payment to Trinad. The Court dismissed this action on February 23, 2009 and the matter is now closed.
The settlement agreement in the action filed by Trinad, purportedly on behalf of the Company, did not result in a payment to the Company, and Trinad’s attorneys did not receive any fees in connection with the settlement. This 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.support personnel.
 
The Company recorded aggregate expense of $2.0 million underand paid 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 gain 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 accrual was adjusted to the fair value of 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 issued 130,000 shares of common stock, with a fair value of $0.2 million, to a group of underwriters named as defendants in the class action litigation, in payment of $0.5 million in legal fees for which the Company 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 difference between the fair value of the stock issued and the legal expenses, which had been recorded as general and administrative expenses during prior periods, was included in Settlement of Litigation and relatedfollowing charges net, for the year ended October 31, 2009.
The Company at times may be a party to claims and suits in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of any current routine claims will not have a material adverse effect on the Company’s business, financial condition, and results of operations or liquidity.
19.  EXIT COSTS AND WORKFORCE REDUCTION
In July 2009, the decision was made to close the Company’s development studio located in California. After a reduction of the studio’s performance, and changes in the availability and cost of development with the Company’s third party partners, management believed that closing the studio and taking advantage of these external opportunities represented a better value for the Company. 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, 2009.2013:
 
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 reduced its personnel count by 16 employees, representing 17% of its workforce. The Company recorded charges of approximately $0.4 million in the year ended October 31, 2010 in connection with the terminations, which consist primarily of severance and unused vacation payments. The expenses are included in operating costs and expenses as shown in the table below:
     
  Year Ended
 
  October 31, 2010 
  (in thousands) 
 
Product research and development $90 
Selling and Marketing  243 
General and Administrative  70 
     
Total $403 
     
Severance costs $766 
Lease termination costs  10 
Total workforce reduction costs $776 
 
The Company has no remaining obligations related to these activities.

16. PURCHASE OF ASSETS
On June 3, 2011, the Company acquired certain assets and assumed certain liabilities of Quick Hit, Inc. (“Quick Hit”), a developer and operator of online games for an aggregate purchase price of $837 in cash. The acquisition was financed with available cash on hand. The Company also entered into an exclusive license and option agreement with a senior lender to Quick Hit for the source code to an online interactive football game developed by Quick Hit, under which the Company paid $125 and $125 in the years ended October 31, 2012 and 2011, respectively.
The acquisition was accounted for as a purchase business combination pursuant to ASC 805,Business Combinations, and as such the Quick Hit assets acquired and liabilities assumed were recorded at their estimated respective fair values and the excess of the purchase price over the fair value of the identifiable assets acquired and the liabilities assumed was recorded as Goodwill, primarily related to Quick Hit’s development team for social games. The Company made significant assumptions and estimates in determining the allocation of the purchase price of certain tangible and intangible assets acquired and liabilities assumed in connection with the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
  Valuation 
Intangible assets $105 
Property and equipment  434 
Working Capital and other assets  244 
Net identifiable assets  783 
Goodwill  54 
Net assets acquired $837 
In connection with a reduction of planned development activities to be performed by the former Quick Hit development team, the Company determined that the Goodwill recorded in connection with the acquisition was impaired as of October 31, 2012 and recorded a charge of $54 to general and administrative expenses in the year then ended.
The following supplemental financial information reflects the pro forma consolidated results of the Company and Quick Hit, Inc. for the twelve months ended October 31, 2011, adjusted for the application of the acquisition method of accounting, as if the acquisition had occurred prior to the beginning of the fiscal year. Quick Hit was originally formed in 2008 to develop and operate a series of online, head-to-head sports games with aspects of massively multiplayer online role-playing games and 3D technology. Accordingly, the supplemental pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the Quick Hit acquisition actually been completed prior to the fiscal year.
  (unaudited) 
Net revenues $126,020 
Net income  3,837 
Basic net income per share  0.10 
Diluted net income per share  0.10 
 
F-19
20.  RELATED PARTY TRANSACTIONS
In the year ended October 31, 2011, net revenues and net losses related to the former Quick Hit operations amounted to approximately $240 and $1,488, respectively.

17. INVESTMENT IN GMS ENTERTAINMENT LIMITED
In August 2013, the Company formed GMS Entertainment Limited (“GMS”) with a shareholder of Orid Media to pursue online casino gaming. GMS is a company limited by shares and incorporated in the Isle of Man. In connection with the formation of GMS and upon completion of the asset purchase agreement described below in October 2013, the Company invested $3,500 in cash and an additional $1,000 contingent on the financial performance of GMS, to be used for the acquisition of the assets and for working capital purposes.  The Company is not obligated to provide additional funding to GMS. In exchange for its investment, the Company received shares of preferred stock in GMS, which share equally with shares of GMS common stock in dividends and have an aggregate liquidation preference of $3,500. The shares of preferred stock are currently convertible into an equal number of shares of GMS common stock, currently representing50% of the total outstanding shares of GMS common stock. The Company has 50% of the voting control of GMS and the right to appoint one-half of the directors of GMS.  All business activities and transactions that significantly impact GMS must be approved by both equity owners. The Company accounts for GMS on the equity method as a corporate joint venture.
In October 2013, GMS completed an asset purchase agreement to acquire substantially all of the assets of Orid Media, a designer and developer of online casino games, including all of the outstanding share capital of its wholly-owned subsidiary Pariplay. Under the agreement, GMS purchased the assets for $2,500, plus an additional $1,000 contingent on the financial performance of GMS. Under the equity method of accounting, the Company will recognize its share of GMS’s earnings and losses together with any loss in value of its investment that is other than a temporary decline. GMS’s fiscal year end is September 30 and, accordingly, the Company’s policy is to  record its share of GMS’s results on the basis of a one-month delay.  
Upon completion of the investment by the Company and the asset purchase, the assets of GMS consisted of approximately $1,100 of cash and working capital and $2,500 of intangible assets and goodwill. The operations of GMS from the date of the asset purchase to October 31, 2013 were not material.
In addition, in August 2013, the Company sold shares of its common stock to another shareholder of Orid Media, resulting in proceeds to the Company of $2,000(See Note 11).

18.  EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering all eligible employees. The Company charged to operations $68, $85 and $59 for contributions to the retirement plan for the years ended October 31, 2013, 2012 and 2011, respectively. Certain stockholders and key employees of the Company serve as trustees of the plan.

19.  RELATED PARTY TRANSACTIONS
The Company has an agreement with Morris Sutton, the Company’s former Chief Executive Officer and Chairman Emeritus, under 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$13. For the sales occurred, but were not paid until payments of the related accounts receivable are received from customers. Consulting expenses for the yearyears ended October 31, 2009 include $28,000 of fees earned in each of November2013, 2012 and December of 2008 under Mr. Sutton’s prior 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,:
             
  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 $0, $37,000 and $30,000 as of October 31, 2010, 2009 and 2008, respectively, under the agreement with Morris Sutton.
The Company entered into an agreement with a Board member, effective March 2010, to provide specified strategic consulting services, in addition to his services as a board member, on amonth-to-month basis at a monthly rate of $10,000. For the year ended October 31, 2010,2011, consulting fees incurred under the agreement amounted to $73,000.$150, $150 and $150, respectively.


F-27

Beginning in the fiscal year ended October 31, 2011, the Company has purchased a portion of its Zumba belt accessories from a second supplier, on terms equal to those of its original supplier. The Company estimates that Morris Sutton and another relative of Jesse Sutton, the Company’s Chief Executive Officer, earned compensation from such supplier of approximately $254, $710 and $260 in the fiscal years ended October 31, 2013, 2012 and 2011, respectively, based on the value of the Company’s purchases.
In the year ended October 31, 2012, the Company purchased $35 of supplies from a company controlled by Morris Sutton.
The Company has an agreement with a Board member under which he provides specified strategic consulting services. The agreement provides for a monthly retainer of $10. For the years ended October 31, 2013, 2012 and 2011, consulting fees incurred under the agreement amounted to $120, $120 and $120, respectively.

20. SUBSEQUENT EVENT
In the first quarter of fiscal 2014, the Company incurred expenses of approximately $360 for one-time severance payments and termination benefits.
F-20