UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
FORM 10-K/A
(Mark One)Amendment No. 1)

(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, 20132015
  
OR
  
¨oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  
 For the Transition Period from         to          

 
Commission File No. 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 Parkway4041-T Hadley Road
Edison,South Plainfield, New Jersey 0883707080
(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)
 
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 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o¨

 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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 this Form 10-K or any amendment to this Form 10-K.  Rþ

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” in Rule 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 in Rule 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, 20132015 was $24$8.5 million.

The outstanding number of shares of common stock as of January 8, 201425, 2016 was 46,374,301.11,675,866.

The Registrant’s proxy or information statement is incorporated by reference into Part III of this Annual Report on Form 10-K.

 
EXPLANATORY NOTE

Majesco Entertainment Company (the “Company,” “we,” “us,” “our” or “Majesco”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, originally filed with the Securities and Exchange Commission on January 29, 2016.  The purpose of this Amendment is to include Part III information.  This information was previously omitted from the 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the Part III information to be incorporated in our Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after our fiscal year-end.  We are filing this Amendment to include Part III information in our Form 10-K because a definitive proxy statement containing such information will not be filed by the Company within 120 days after the end of the fiscal year covered by our Form 10-K.  The reference on the cover to the Form 10-K to the incorporation by reference to portions of our definitive proxy statement into Part III of the Form 10-K is hereby deleted.  This Amendment hereby amends and restates the cover page and Part III, Items 10 through 14 in their entirety.

In accordance with Rule 12b-15 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), Part III, Items 10 through 14 of our Form 10-K are hereby amended and restated in their entirety.  In addition, new certifications of our principal executive officer and principal financial officer are attached, each as of the filing date of this Amendment.  This Amendment does not amend or otherwise update any other information in our 10-K.  Accordingly, this Amendment should be read in conjunction with our Form 10-K and with our filings with the SEC subsequent to our Form 10-K.


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PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following table sets forth information about our current Directors and Executive Officers.

We currently have a staggered board of directors comprised of three classes and each director serves until the Annual Meeting associated with their class. Class I board members will serve until our Annual Meeting in 2018, Class II Directors will serve until our Annual Meeting in 2019 and Class III Directors will serve until our Annual Meeting in 2017.
The Board has reviewed the materiality of any relationship that each of our directors has with Majesco, either directly or indirectly. Based upon this review, the Board has determined that the following members of the Board are “independent directors” as defined by the rules of the Nasdaq Stock Market: Michael Beeghley, Andrew Kaplan, Edward M. Karr and Mohit Bhansali.

NameAgePosition with the Company
Barry Honig44Chairman, Chief Executive Officer and Class III Director
Michael Brauser60Co-Chairman and Class II Director
John Stetson30Chief Financial Officer
Edward Karr46Class I Director
Andrew Kaplan49Class II Director
Mohit Bhansali41Class III Director
David Rector69Class I Director
Michael Beeghley49Class III Director
Background Information

Barry Honig, age 44, was appointed our Chairman, Chief Executive Officer and Director on September 25, 2015.  Mr. Honig has been President of GRQ Consultants, Inc., since January 2004, where he is a private investor and consultant to early stage companies. Mr. Honig is a founder and Director of Pershing Gold (PGLC), a Nasdaq listed emerging gold producer, since September 29, 2010. Mr. Honig is currently the Chairman of the Board of Directors of Levon Resources Ltd.  Mr. Honig was the Founder/Co-Chairman of InterCLICK, Inc. (ICLK) from 2007 until its sale to Yahoo! Inc. in December 2011. Mr. Honig served as Co-Chairman of Chromadex Corporation (CDXC), a natural products company, from 2011 to 2015. Mr. Honig graduated from George Washington University in 1993 with a BA in Business Administration.  The Company believes Mr. Honig is qualified to serve as a director due to his extensive business and management expertise and his extensive knowledge of capital markets.
Michael Brauser, age 60, was appointed Co-Chairman of our Board of Directors on September 25, 2015. Mr. Brauser has been a self-employed investor/venture capitalist since 2003 investing in both public and private companies.  He has been the manager of, and an investor with, Marlin Capital Partners, LLC, a private investment company, since 2003. From 1999 through 2002, he served as President and Chief Executive Officer of Naviant, Inc. (eDirect, Inc.), an Internet marketing company.  He was also the founder of Seisant Inc. (eData.com, Inc.).  Between October 2005 and November 2006, he served as Chairman of the Board of Directors of SendTec, Inc. (SNDN), a publicly-traded customer acquisition ad agency.  He served as the Chairman of the Board of Directors of Chromadex Corp. (CDXC) from October 2011 to March 2015 and served as the Chairman of the Board of Directors of Interclick, Inc. (ICLK) from 2007 until its acquisition by Yahoo!.  Mr. Brauser is currently the Chairman of IDI, Inc. (IDI). The Company believes Mr. Brauser is qualified to serve as a director due to his extensive business and management expertise from his background as an executive officer of a number of public companies and his knowledge of accounting and finance.

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John Stetson, age 30, was appointed our Chief Financial Officer, Executive Vice President and Secretary on September 25, 2015.  Mr. Stetson has been the Managing Member of HS Contrarian Investments LLC, a private investment firm with a focus on early stage companies since 2010. In addition, Mr. Stetson served as Executive Vice President, Chief Financial Officer, and Director of Marathon Patent Group, Inc. (MARA), a Nasdaq listed patent monetization company from June 2012 to February 2015. Mr. Stetson was President & Co-Founder of Fidelity Property Group, Inc. from April 2010 to July 2014, a real estate development group focused on acquisition, rehabilitation, and short-term disposition of single family homes that completed 190 transactions, and generated over $46 million in sales. Mr. Stetson was an Investment Analyst from 2008 to 2009 for Heritage Investment Group and worked in the division of Corporate Finance of Toll Brothers from 2007 to 2008. Mr. Stetson received his BA in Economics from the University of Pennsylvania.

Edward M. Karr, age 46, was appointed as a member of our Board of Directors on September 25, 2015.  Mr. Karr has been founder and Managing Director of Strategic Asset Management S.A. and also is a Director of Pershing Gold Corporation (PGLC), Dataram Corporation (DRAM) and Levon Resources (LVN.TO).  He is a former member of the board of directors Spherix serving from November 2012 until December 2014.  He has more than 20 years of capital markets experience as a financial analyst, money manager and investor. Prior to founding Strategic Asset Management, Mr. Karr managed a private Swiss asset management, investment banking and trading firm based in Geneva, Switzerland for ten years. At the firm, he was responsible for all of the capital market transactions, investment and marketing activities. In 2004, Futures Magazine named Mr. Karr as one of the world’s Top Traders. He has been featured on CNBC and has been quoted in numerous financial publications. Prior to moving to Europe, Mr. Karr worked for Prudential Securities in the United States and has been in the financial services industry for over twenty years. Before his entry into the financial services arena, Mr. Karr was affiliated with the United States Antarctic Program and spent thirteen consecutive months working in the Antarctic, receiving the Antarctic Service Medal for winter over contributions of courage, sacrifice and devotion. Mr. Karr studied at Embry-Riddle Aeronautical University, Lansdowne College in London, England and received a B.S. in Economics/Finance with Honours (magna cum laude) from Southern New Hampshire University. Mr. Karr has lived in Geneva since 1997.  He is a current board member, Nominating Committee Chair and past President of the American International Club of Geneva and Chairman of Republican’s Overseas Switzerland.  Mr. Karr is qualified to serve as a director due to his extensive business and management expertise and his extensive knowledge of capital markets.  Mr. Karr qualifies as an “audit committee financial expert” under the applicable SEC rules and accordingly contributes to the Board his understanding of generally accepted accounting principles and his skills in auditing, as well as in analyzing and evaluating financial statements.

Andrew Kaplan age 49, was appointed as a member of our Board of Directors on September 25, 2015.  Mr. Kaplan has been a Vice President of Barry Kaplan Associates for the past 20 years, a leading financial public relations firm for both public and private companies in the US, Canada and abroad. Prior to working at BKA, he had six years’ experience working at major investment banks involved in deal structure, mergers and acquisitions and trading. Mr. Kaplan is a member of the Board of Directors of Naked Brand Group (NAKD) and Coral Gold Resources, Ltd. (CLH.V).  He holds a BSBA from the University of Hartford in Finance and Insurance.  Mr. Kaplan is qualified to serve as a director due to his extensive business and management expertise and his extensive knowledge of capital markets.

Mohit Bhansali, age 41, has served as one of our directors since December 17, 2014.  He served as an executive officer and a director of Spiral Energy Tech Inc. from December 2011 through September 2014.  In addition, Mr. Bhansali has served as the President, Secretary and a director of Northern Wind Energy Corp. (formerly Icarus Wind Energy, Inc.) since December 2011 and as the Chief Executive Officer, Chief Financial Officer and Treasurer of Northern Wind Energy Corp. from December 2011 through October 2013, as a director of Silver Horn Mining Ltd. since November 2013, as a co-founder and the Chief Executive Officer of Equity Stock Transfer since November 2011, as a partner of Deadbeat Records LLC since 2010, as a securities specialist at Sichenzia Ross Friedman Ference LLP from 2009 through 2011 and as a securities specialist at Haynes and Boone, LLP from 2006 through 2009.  Mr. Bhansali worked as an equity trader with Tradescape and Etrade Securities from 1999 through 2002. In considering Mr. Bhansali as a director of the Company, the Board considered his entrepreneurial experience, his knowledge of capital markets and his experience in a variety of executive roles and his management experience.

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David Rector, age 69, has been a director for Sevion Therapeutics Inc. since February 2002 and was appointed Interim CEO in January 2015. In July 2015 Mr. Rector was appointed to serve as a Director of Majesco Entertainment Company.  Mr. Rector also served as a director and member of the compensation and audit committee of the Dallas Gold and Silver Exchange Companies Inc. (formerly Superior Galleries, Inc.) from May 2014 to September 2015.  From January 2014 through January 2015, Mr. Rector served on the board of directors of MV Portfolios, Inc. (formerly California Gold Corp.) Since 1985, Mr. Rector has been the Principal of The David Stephen Group, which provides enterprise consulting services to emerging and developing companies in a variety of industries. From November 2012 through January 2014, Mr. Rector served as the CEO and President of Valor Gold. Since February 2012 through January 2013, Mr. Rector served as the VP Finance & Administration of Pershing Gold Corp. From May 2011 through February 2012, Mr. Rector served as the President of Sagebrush Gold, Ltd. From October 2009 through August 2011, Mr. Rector had served as President and CEO of Li3 Energy, Inc. From July 2009 through May 2011, Mr. Rector had served as President and CEO of Nevada Gold Holdings, Inc. From September 2008 through November 2010, Mr. Rector served as President and CEO Universal Gold Mining Corp. Since October 2007 through February 2013, Mr. Rector has served as President and CEO of Standard Drilling, Inc. From May 2004 through December 2006, Mr. Rector had served in senior management positions with Nanoscience Technologies, Inc., a development stage company engaged in the development of DNA Nanotechnology. From 1983 until 1985, Mr. Rector served as President and General Manager of Sunset Designs, Inc., a domestic and international manufacturer and marketer of consumer product craft kits, and a wholly-owned subsidiary of Reckitt & Coleman N.A. From 1980 until 1983, Mr. Rector served as the Director of Marketing of Sunset Designs. From 1971 until 1980, Mr. Rector served in progressive roles in the financial and product marketing departments of Crown Zellerbach Corporation, a multi-billion dollar pulp and paper industry corporation. Mr. Rector received a Bachelor of Science degree in Business/Finance from Murray State University in 1969. As a result of these professional and other experiences, Mr. Rector has a deep business understanding of developing companies. Mr. Rector also brings corporate governance experience through his service on other company boards.

Michael Beeghley, age 49, was appointed to our Board of Directors on December 18, 2015.  Mr. Beeghley has 25 years of financial industry experience, including 23 years specifically in corporate finance and financial advisory services. Mr. Beeghley has been serving as President of Applied Economics LLC (“Applied Economics”), a national corporate finance and financial advisory services firm for 18 years. As President of Applied Economics, Mr. Beeghley has initiated managed and closed over $1 billion in corporate finance transactions and has managed, completed and signed over 2,000 financial advisory engagements. Mr. Beeghley is a national expert on mergers & acquisitions and securities valuation, and has been quoted or interviewed for the Atlanta Journal-Constitution, Atlanta Business Chronicle, The Georgia Business Report (GPTV), Catalyst Magazine, and Reuters News Service (New York).  He has spoken on financial topics throughout the United States and has been an instructor for the American Institute of Certified Public Accountants, teaching business valuation to societies in ten states. Additionally, Mr. Beeghley has testified as an expert and provided expert opinions on numerous economic, financial and securities issues. Prior to forming Applied Economics, Mr. Beeghley was a Manager in the Corporate Finance Group of Ernst & Young, LLP and a Senior Analyst in the Corporate Finance Group of PricewaterhouseCoopers.  Mr. Beeghley is qualified to serve as a director due to his extensive corporate finance background.

Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including Directors, pursuant to which the officer was selected to serve as an officer.
Family Relationships
None of our Directors are related by blood, marriage, or adoption to any other Director, executive officer, or other key employees.

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Other Directorships
Other than as disclosed above, none of the Directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).

Legal Proceedings
We are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any of the items set forth under Item 401(f) of Regulation S-K.
 
Corporate Governance
 
General
 
TABLE OF CONTENTSWe believe that good corporate governance is important to ensure that the Company is managed for the long-term benefit of our stockholders. This section describes key corporate governance practices that we have adopted.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Page
PART I
Item 1.Business1
Item 1A.Risk Factors7
Item 1B.Unresolved Staff Comments17
Item 2.Properties17
Item 3.Legal Proceedings17
Item 4.Mine Safety Disclosures17
PART II
Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities18
Item 6.Selected Financial Data19
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations20
Item 7A.Quantitative and Qualitative Disclosures About Market Risk28
Item 8.Financial Statements and Supplementary Data28
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure29
Item 9A.Controls and Procedures29
Item 9B.Other Information30
PART III
Item 10.Directors, Executive Officers and Corporate Governance31
Item 11.Executive Compensation31
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters31
Item 13.Certain Relationships and Related Transactions, Director Independence31
Item 14.Principal Accounting Fees and Services31
PART IV
Item 15.Exhibits, Financial Statement Schedules31
Item 1. Business.
Forward-looking Statements
Statements in this annual report on Form 10-K that are not historical facts constitute forward-looking statements that are made pursuant to the safe harbor provisions of Section 21E16(a) of the Securities Exchange Act of 1934 orrequires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Exchange Act. ExamplesSEC. These persons are required by regulation to furnish us with copies of forward-looking statements include statements relating to industry prospects,all Section 16(a) reports that they file. Based on our future economic performance including anticipated revenues and expenditures, resultsreview of operations or financial position, and other financial 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 affect our future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements 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 negativecopies of these termsreports received by us, or written representations from the reporting persons that no other comparable terminology. These statements are subjectreports were required, we believe that, during fiscal year 2015, all filing requirements applicable to businessour current officers, directors 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 forgreater than 10% beneficial owners were complied with, with the accuracy or completeness of these statements. We are under no duty to update anyexception of the forward-looking statements afterForm 4 filed by Michael Vesey on March 20, 2015, 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 develop, publish and distribute video game products primarily forForm 4 filed by Laurence Aronson on May 5, 2015, the casual-game consumer. We sell our products primarily to large retail chains, specialty retail stores and distributors. We publish video games for major current generation interactive entertainment hardware platforms, including Nintendo’s DS, DSi, 3DS, Wii and WiiU, Sony’s PlayStation 3, or PS3, Microsoft’s Xbox 360 and Xbox OneForm 4 filed by Mohit Bhansali on May 29, 2015, the Form 4 filed by Trent Davis on May 5, 2015, the Form 4 filed by Jesse Sutton on May 29, 2015 and the personal computer, or PC. We also publish games for digital platforms, such as Xbox Live ArcadeForm 4 filed by David Rector on July 31, 2015, which were filed late.

Code of Business and PlayStation Network, or PSN, mobile platforms such as the iOS and Android phones, and online platforms such as Facebook and Steam.
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 casual-game consumers. In some instances, our titles are based on licenses of well-known properties and, in other cases based on original properties. We 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.
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, 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 2004 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 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 Wii, 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 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 retail sales of video game software were approximately $7 billion in 2012 according to the NPD Group, a global provider of consumer market research information.
Strategy
Our objective is to be an innovative provider of video games for the casual-game consumer. Specifically, we strive to:
Build our digital business and product offering.
In 2011, we began building a business in digitally-delivered games alongside our traditional console and handheld 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 end of 2013, we have launched several paid downloadable games and freemium games on these platforms.
In August 2013, we established “Midnight City”, a publishing label fordigitally-delivered games created by independent developers on various online gaming platforms. Midnight City supports 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.
Additionally, in October 2013, we entered the online casino gaming business through an equity investment in GMS Entertainment Limited (GMS”). GMS acquired the operations of Pariplay LTD a developer of both fixed odd and random 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 Isle of Man.
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.Ethical Conduct

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 video game products foradopted a variety of platforms. We own intellectual property related to certain games and license the rights to content from developers or media entertainment companies for certain games, such as for the titlesAlvin and the Chipmunks, Hulk Hogan’s Main Event, NBA Baller Beatsand 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 2for 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.
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
Cooking MamaDSSeptember 2006
Cooking Mama: World KitchenWiiNovember 2008
Gardening MamaDSMarch 2009
Jillian MichaelsDSMarch 2009
Cooking Mama 3: Shop and ChopDSOctober 2009
Hello Kitty PartyDSNovember 2009
Alvin and the Chipmunks: The SqueakquelWii, DSDecember 2009
Greg Hastings Paintball 2Xbox 360, WiiSeptember 2010
Crafting MamaDSOctober 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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Selected Titles
Platform
Launch Date
Slender: The ArrivalSteamOctober 2013
Blood of the WerewolfSteamOctober 2013
We 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 closed our social game development studio.
Product Development
Prior to initiating the development of a video game title, we generally perform market research, studio due diligence and financial analysis. A title is then reviewed by our “green light” committee comprised of members from our executive, product development, finance, sales and marketing and legal/business affairs 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 develop 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:
• 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.
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 a per-unit license fee and/or royalty payment from the title produced and may include other compensation or payment terms. All of the hardware manufacturers approve each of the titles we submit for approval on a title-by-title basis, at their discretion. We are also dependent on approvals from distributors for our video game software for PCs and mobile devices.
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 may require rights to properties from third 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 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.
Enforcement
We actively engage in enforcement and other activities to protect our intellectual property. We typically own the copyright to our software code and content and register copyrights and trademarks in the United States as appropriate.
4

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 optical discs and are typically delivered to us within the relatively short lead time of approximately two to three weeks. With respect to DS and 3DS products, which use a cartridge format, Nintendo typically delivers these products to us within 30 to 45 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 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; and point-of-purchase advertising.
Additionally, we customize public relations programs that are designed to create awareness with all relevant 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, IGN and Nintendo Power, as well as major newspapers, magazines and broadcast outlets, such as CNN, USA Today, Wired, Maxim, Newsweek, and the New York Times, 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 regular face-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 and distributors. We believe our sales team has strong relationships with major retailers and communicates with them frequently. To supplement our sales team, we currently utilize sales representative organizations located throughout the United States. The firms we use were chosen based on their performance and retailer relationships. 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, primarily under license and distribution agreements with 505 Games s.r.l. for distribution in Europe and the PAL territories. These agreements may vary by product and by territory. In a distribution agreement, we manufacture 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, our licensing partner is responsible for the manufacture and sale of the product and we receive royalties and usually an up-front royalty advance.
Digital
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 market and drive awareness of our titles on these emerging platforms, including online advertising on Facebook, on platform homepages in the cases of XBLA and PSN, and on online sites. We also acquire users through both paid and unpaid channels, due to the viral nature of social and mobile games.
5

Customers
Customers 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 Walmart. We also believe we have strong relationships with U&I Entertainment, Cokem, Ingram and SVG, who act as resellers of our products. For the fiscal year ended 2013, our top two retail accounts were GameStop and Target, each accounting for approximately 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 movies, television, music, online content and 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 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.
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;
•   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 61 full-time employees in the United States and 1 full-time employee in the United Kingdom as of October 31, 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.
6

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 ourCorporate Code of Conduct and Ethics that applies to all employees, including our principal executive officer and the charters for eachprincipal financial and accounting officer, and directors. The code can be found on our website at www.majescoentertainment.com . We will provide, without charge, a copy of our committeesCorporate Code of Conduct and Ethics upon request to: Secretary, Majesco Entertainment Company, 4041-T Hadley Road, S. Plainfield, New Jersey 07080. Disclosure regarding any amendments to, other than technical, administrative or non-substantive amendments, or waivers from, provisions of the Corporate Code of Conduct and Ethics that apply to our directors, principal executive and financial officers will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver.

Committees of the Board of Directors freeand Meetings

The Board has a policy that directors make all reasonable efforts to attend our Company’s annual stockholder meetings. [At the time of charge on the corporate governance sectionannual shareholder's meeting the Company had three directors, two of our website.
Item 1A.  Risk Factors.
Our businesswhich attended last year’s annual stockholders’ meeting.  In fiscal year 2015, there were a total of 18 meetings of the Board and operations are subject tothe various committees of the Board met a total of 8 times. No director attended fewer than 94% of the total 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 anymeetings of the following risksactually occur, our business, financial condition or resultsBoard and of operations couldsuffer.committees of the Board on which he served during fiscal year 2015. The independent members of the Board also met regularly in executive session.

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We have experienced recent net losses and we may incur future net losses, which maycause a decrease in our stock price.
 
While we generated net incomeTo assist it in carrying out its duties, the Board of Directors has delegated certain authority to an Audit Committee, a Compensation Committee and a Nominating Committee as the functions of each are described below.

Director  Board  
Audit
Committee
  
Compensation
Committee
  
Nominating and
Governance Committee
Barry Honig  Chair         
Michael Brauser  Co-Chair         
Edward Karr*  X  Chair  X   
Andrew Kaplan *  X  X  Chair   Chair 
Mohit Bhansali*  X  X      
David Rector  X         
Michael Beeghley*  X        X 
Meetings in 2015:  18  6  2  0

*Denotes directors who meet our criteria for “independence.”
Audit Committee.   The Board has a standing Audit Committee, currently consisting of Edward Karr (Chairman), Andrew Kaplan and Mohit Bhansali. Our Audit Committee held 6 meetings during fiscal years 2012year 2015. The Audit Committee acts under a written charter, which more specifically sets forth its responsibilities and 2011, we incurred net lossesduties, as well as requirements for the Audit Committee’s composition and meetings. Our Audit Committee charter complies with Rule 10A-3 of $12.6 millionthe Exchange Act, and the requirements of The NASDAQ Capital Market. Our Audit Committee was established in fiscal 2013, $1.0 million in 2010 and $7.2 million in 2009. We may notaccordance with Section 3(a)(58)(A) of the Exchange Act. The charter of the Audit Committee can be able to continue to generate revenues sufficient to offset our costs and may sustain net losses in future periods. Any such losses may have an adverse effectfound on our future operating prospects, liquidity and stock price.website at www.majescoentertainment.com.

Our business activities may require additional financingThe Board has determined 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 maintain 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 securities and/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 portioneach member of the invoice amount and, in some instances,audit committee is “independent,” as that term is defined by applicable SEC rules. In addition, the ability to take additional cash advances. ThisBoard has determined that each member of the audit committee is our primary source“independent,” as that term is defined by the rules 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 NASDAQ Capital Market.
 
The priceBoard has determined that Mr. Edward Karr is a “financial expert” serving on its Audit Committee, and that Mohit Bhansali and Andrew Kaplan are each independent, as the SEC has defined that term in Item 407 of our common stockRegulation S-K. Please see the biographical information for these individuals contained in the section above entitled, “The Board of Directors.”

Nominating and Governance Committee.   The Board has experienced significant volatility. Ina standing Nominating and Governance Committee. The Nominating and Governance Committee consists of Andrew Kaplan (Chairman) and Michael Beeghley. The Nominating and Governance Committee may employ a variety of methods for identifying and evaluating nominees for director. Both members of the 24 months ended October 31, 2013, the highNominating and low bid quotations for our common stockGovernance Committee qualify as reportedindependent as defined by the rules of the Nasdaq Capital Market ranged betweenStock Market. The Nominating and Governance Committee held no meetings during fiscal year 2015. The Nominating and Governance Committee acts under a highwritten charter, which more specifically sets forth its responsibilities and duties, as well as requirements for its composition and meetings. The charter of $3.63the Nominating and a lowGovernance Committee can be found on our website at www.majescoentertainment.com.
The Nominating and Governance Committee regularly assesses the size of $0.52. The historic market pricethe Board, the need for particular expertise on the Board, the upcoming election cycle of our common stockthe Board and whether any vacancies on the Board are expected due to retirement or otherwise. Candidates may be higherevaluated at regular or lowerspecial meetings of the Nominating and Governance Committee, and may be considered at any point during the year.
As reflected in its charter, factors considered by the Nominating and Governance Committee in the selection of director nominees are those it may deem appropriate, including judgment, character, high ethics and standards, integrity, skills, diversity, independence, experience with businesses and organizations of a comparable size to the Company, the interplay of the candidate’s experience with the experience of other members of the Board of Directors and the extent to which the candidate would be a desirable addition to the Board or any of its committees. In addition, in considering nominees for director, the Nominating and Governance Committee will review the qualifications of available candidates that are brought to the attention of the Nominating and Governance Committee by any member of the Board, stockholders and management or identified by the Nominating and Governance Committee through the use of search firms or otherwise.

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The Nominating and Governance Committee does not set specific, minimum qualifications that nominees must meet in order for the Nominating and Governance Committee to recommend them to the Board, but rather believes that each nominee should be evaluated based on his or her individual merits, taking into account the needs of the Company and the composition of the Board. Members of the Nominating and Governance Committee discuss and evaluate possible candidates in detail prior to recommending them to the Board. While we do not have a formal policy on diversity, the Nominating and Governance Committee considers diversity of experience as one of the factors it considers in conducting its assessment of director nominees, along with such other factors as it deems appropriate given the then current needs of the Board and the Company, to maintain a balance of knowledge, experience and capability.
If a stockholder wishes to propose a candidate for consideration as a nominee by the Nominating and Governance Committee, it should follow the procedures described in this section and in the Company’s Nominating and Governance Committee Charter. The Nominating and Governance Committee Charter adopted by the Nominating and Governance Committee provides that nominees recommended by stockholders are given appropriate consideration and will be evaluated in the same manner as other nominees. Following verification of the stockholder status of persons proposing candidates, the Nominating and Governance Committee makes an initial analysis of the qualifications of any candidate recommended by stockholders or others pursuant to the criteria summarized above to determine whether the candidate is qualified for service on the Board of Directors before deciding to undertake a complete evaluation of the candidate. If any materials are provided by a stockholder or professional search firm in connection with the nomination of a director candidate, such materials are forwarded to the Nominating and Governance Committee as part of its review. Other than the price paid forverification of compliance with procedures and stockholder status, and the initial analysis performed by the Nominating and Governance Committee, a potential candidate nominated by a stockholder is treated like any other potential candidate during the review process by the Nominating and Governance Committee.
Compensation Committee; Compensation Committee Interlocks and Insider Participation.   The Compensation Committee of the Board is composed entirely of directors who are not our shares and may not be indicativecurrent or former employees, each of future market prices, depending on many factors, somewhom meets the applicable definition of “independent” as defined by the rules of The NASDAQ Capital Market. None of the members of the Compensation Committee during fiscal 2015 (i) had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of related party transactions or (ii) was an executive officer of a company of which an executive officer of the Company is a director. The current members of the Compensation Committee are beyondAndrew Kaplan (Chairman), and Edward Karr. The Compensation Committee has no interlocks with other companies. The Compensation Committee held 2 meetings during fiscal year 2015. The charter of the Compensation Committee can be found on our controlwebsite at  www.majescoentertainment.com.
The Compensation Committee is responsible for establishing and may not be directly relatedadministering our executive compensation policies. The role of the Compensation Committee is to our operating performance. These factors include, but are not limited to,(i) formulate, evaluate and approve compensation of the following: Company’s directors, executive officers and key employees, (ii) oversee all compensation programs involving the use of the Company’s stock, and (iii) produce, if required under the securities laws, a report on executive compensation for inclusion in the Company’s proxy statement for its annual meeting of stockholders. The duties and responsibilities of the Compensation Committee under its charter include:
●Annually reviewing and setting compensation of executive officers;

●
Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors;
 
 •●price
Reviewing and volume fluctuationsapproving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting 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 SEC.Chief Executive Officer’s compensation levels based on this evaluation;
 
●
Reviewing competitive practices and trends to determine the adequacy of the executive compensation program;
●
Approving and overseeing incentive compensation and equity-based plans for executive officers that are subject to Board approval;
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●
Making recommendations to the Board as to the Company’s compensation philosophy and overseeing the development and implementation of compensation programs;
●
Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors;
●
Reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting the Chief Executive Officer’s compensation levels based on this evaluation;
When appropriate, the Compensation Committee may, in carrying out its responsibilities, form and delegate authority to subcommittees. The Chief Executive Officer plays a role in determining the compensation of our other executive officers by evaluating the performance of those executive officers. The Chief Executive Officer’s evaluations are then reviewed by the Compensation Committee. This process leads to a recommendation for any changes in salary, bonus terms and equity awards, if any, based on performance, which recommendations are then reviewed and approved by the Compensation Committee.

The Compensation Committee has the authority, at the Company’s expense, to select, retain, terminate and set the fees and other terms of the Company’s relationship with any outside advisors who assist it in carrying out its responsibilities, including compensation consultants or independent legal counsel.

Board of Directors Leadership Structure and Role in Risk Oversight.   The Board of Directors has responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The primary responsibility of our Board of Directors is to oversee the management of our company and, in doing so, serve the best interests of the company and our stockholders. The Board of Directors selects, evaluates and provides for the succession of executive officers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources. Our Board of Directors also participates in decisions that have a potential major economic impact on our company. Management keeps the directors informed of company activity through regular communication, including written reports and presentations at Board of Directors and committee meetings.
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have determined that it is in the best interest of the Company and its shareholders to partially combine these roles. Due to the small size of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officers positions combined.  We mayalso have a Co-Chairman who is not bean executive officer of the Company.
The Company currently has seven directors, including Mr. Honig, its Chairman, who also serves as the Company’s Chief Executive Officer and Mr. Brauser, the Company’s Co-Chairman. The Co- Chairmen and the Board are actively involved in the oversight of the Company’s day to day activities.
While management is responsible for managing the day to day issues faced by the Company, the Board has an active role, directly and through its committees, in the oversight of the Company’s risk management efforts. The Board carries out this oversight role through several levels of review. The Board regularly reviews and discusses with members of management information regarding the management of risks inherent in the operation of the Company’s business and the implementation of the Company’s strategic plan, including the Company’s risk mitigation efforts.
Each of the Board’s committees also oversees the management of the Company’s risks that are under each committee’s areas of responsibility. For example, the Audit Committee oversees management of accounting, auditing, external reporting, internal controls, and cash investment risks. The Nominating and Governance Committee oversees the Company’s compliance policies, Code of Conduct and Ethics, conflicts of interests, director independence and corporate governance policies. The Compensation Committee oversees risks arising from compensation practices and policies. While each committee has specific responsibilities for oversight of risk, the Board is regularly informed by each committee about such risks. In this manner the Board is 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 stock and/or to conduct future financing activities with or involving our common stock.coordinate its risk oversight.

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In addition, purchases or sales of large quantities of our stock could have a significant effect on our stock price.
ITEM 11. EXECUTIVE COMPENSATION

Executive Officers
 Summary Compensation Table
 
7

We seekThe following Summary Compensation Table sets forth summary information as to managecompensation paid or accrued during the last two fiscal years ended October 31, 2015 and October 31, 2014. During the last two fiscal years ended October 31, 2015 and October 31, 2014, none of our business with a view to achieving long-term results, and thiscould have a negative effect on short-term trading.other executive officers earned compensation in excess of $100,000.
 
Our focus
Name and Principal Position Year 
Salary
($)
 
Bonus
($)
 
Stock
Awards (1)
($)
 
Option
Awards (2)
($)
 
Non-Equity
Incentive
Plan
Compensation (3) ($)
 
All Other
Compensation (4) ($)
 
Total
($)
Jesse Sutton,  2014   363,000       -0-   -0-     13,859(11)  376,859 
Chief Executive Officer (5)
  2015   273,646       15,841(14)  30,546(19)    513,859(12)  833,892 
                               
Michael Vesey  2014   300,000       -0-   -0-     -0-   300,000 
Chief Financial Officer (6)
  2015   140,770       46,560(15)  14,684(20)    305,900(13)  507,914 
                               
John Stetson  2014   -0-       -0-             -0- 
Chief Financial Officer (7)
  2015   8,308       372,000
(16)
            380,308 
                               
Barry Honig  2014   -0-       -0-             -0- 
Chief Executive Officer and Co-Chairman of the Board of Directors (8)
  2015   8,308       496,000
(17)
            504,308 
                               
David Rector  2014   -0-                       
Chief Executive Officer (9)
  2015   6,708       116,000
(18)
  6,273
(21)
        128,981 
                               
Gary Anthony  2014   145,500   12,000   -0-             157,500 
Chief Accounting Officer (10)  2015   89,200   30,000   28,000
(22)
            147,500 
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(1)  Represents the aggregate grant date fair value for restricted stock awards granted during fiscal years 2014 and 2015, respectively, computed in accordance with FASB ASC Topic 718. See Note 12 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2015 for details as to the assumptions used to determine the grant date fair value of the restricted stock awards.

(2)  Represents the aggregate grant date fair value for option awards granted during fiscal years 2014 and 2015, respectively, computed in accordance with FASB ASC Topic 718. See Note 12 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2015 for details as to the assumptions used to determine the grant date fair value of the option awards.

(3)  
Represents amounts paid to named executive officers in the applicable year pursuant to the Company’s STI Plan.
(4)  Represents health and dental insurance premiums in excess of coverage provided to other employees.

(5)  Resigned on July 27, 2015

(6)  Resigned on March 17, 2015

(7)  Appointed on September 25, 2015

(8)  Appointed on September 25, 2015

(9)  Served as Chief Executive Officer from July 27, 2015 until September 25, 2015

(10)  Served as Chief Accounting Officer from April 1, 2015 to September 25, 2015, prior to this beginning May 2011, he served as the Company’s Corporate Controller.

(11)  Represents $13,859 paid for health and dental insurance premiums in excess of coverage provided to other employees

(12)  Represents $13,859 paid for health and dental insurance premiums in excess of coverage provided to other employees as well as $500,000 paid in severance payments paid to Zift Interactive, LLC., of which Mr. Sutton is the Manager and over whose securities he has voting and dispositive power.

(13)  Represents $5,900 paid for health and dental insurance premiums in excess of coverage provided to other employees and $300,000 in severance payments.

(14)  Represents 23,295 shares at a grant date fair value of $0.68 per common share.

(15)  Represents 15,530 shares at a grant date fair value of $0.68 per common share and 30,000 shares at a grant date fair value of $1.20 per common share.

(16)  Represents 300,000 shares at a grant date fair value of $1.24 per common share.

(17)  Represents 400,000 shares at a grant date fair value of $1.24 per common share.

(18)  Represents 100,000 shares at a grant date fair value of $1.16 per common share.

(19)  Represents stock options to purchase 71,750 common shares at an exercise price of $0.68 per common share.

(20)  Represents stock options to purchase 34,470 common shares at an exercise price of $0.68 per common share.

(21)  Represents stock options to purchase 6,993 common shares at an exercise price of $1.43 per common share.

(22)  Represents 20,000 shares at a grant date fair value of $1.34 per common share.

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Narrative Disclosure to Summary Compensation Table
Incentive Bonus Opportunity
The Compensation Committee has the authority to award incentive bonuses to our executives. The incentive bonus program is based on creationthe Company’s fiscal year performance.
The incentive bonus program is an important component of total cash compensation because it rewards our executives for achieving annual financial and operational goals and emphasizes variable or “at risk” compensation.
            On April 19, 2013, the Compensation Committee approved the adoption of a new annual short-term incentive plan for fiscal year 2013 and subsequent years (the “STI Plan”).  In 2013, under the STI Plan, each of the named executive officers was eligible to receive an incentive bonus based upon a targeted percentage of his base salary, which was 100% for the Chief Executive Officer and 50% for the Chief Financial Officer.  The incentives could be earned based on our performance relative to a mix of strategic objectives, such as (i) growing cash flow from our console business, (ii) expanding our digital games business, measured in terms of revenue, infrastructure and talent acquisitions, business acquisitions, and product pipeline, and (iii) managing to adjusted operating income, cash flow and liquidity goals, eliminating operating losses on certain platforms, and repositioning the Company to invest in growth areas. In addition, in determining the eligibility for bonuses under the plan, the payout level for the strategic objectives was based on the Committee’s discretionary assessment of each officer’s performance relative to the overall mix of objectives.  Based on its review of overall performance, the Compensation Committee approved an incentive payout of $150,000 for the Chief Executive Officer and $84,000 for the Chief Financial Officer.
No incentive plan was offered for fiscal year 2015.  
Long-Term Incentives
We believe that long-term performance will be enhanced through equity awards that reward our executives and other employees for maximizing stockholder value over time and we intend to make decisions that will be consistent with this long-term view. As a result, somealign the interests of our decisions, such as whetherexecutives and other employees with those of stockholders. The Compensation Committee believes that the use of equity awards offers the best approach to make or discontinue operating investments or pursue or discontinue strategic initiatives,achieving our compensation goals because equity ownership ties a significant portion of an individual’s compensation to the performance of our stock.

On March 30, 2015, at our 2015 Annual Meeting, our shareholder’s approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”) and the reservation of 2,250,000 shares of our common stock thereunder.  Awards under the 2014 Plan may be granted pursuant to the 2014 Plan only to persons who are eligible persons. Under the 2014 Plan, “Eligible Person” means any person who is either: (a) an officer (whether or not a director) or employee of the Company or one of its subsidiaries; (b) a director of the Company or one of its subsidiaries; or (c) an individual consultant who renders bona fide services (other than services in conflictconnection with the objectivesoffering or sale of short-term traders. Further, this couldsecurities of the Company or one of its subsidiaries in a capital-raising transaction or as a market maker or promoter of securities of the Company or one of its subsidiaries) to the Company or one of its subsidiaries and who is selected to participate in the 2014 Plan by the 2014 Plan administrator; provided, however, that an Eligible Person may only participate in the 2014 Plan if such participation would not adversely affect our quarterlyeither the Company’s eligibility to use Form S-8 to register, under the Securities Act of 1933, as amended, the offering and sale of shares issuable under the 2014 Plan by the Company or the Company’s compliance with any other short-term results of operations.
We may not be able to maintain our listing on the Nasdaq Capital Market.applicable laws.
 
OurOn December 17, 2014, the Company granted restricted stock shares to certain of its executive officers and directors in consideration for their respective roles in the Company.  These restricted stock awards, were granted under the Company’s Amended and Restated 2004 Employee, Director and Consultant Incentive plan and were subject to a trigger event that occurred on September 30, 2015, which vested the shares in full.
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The shares of granted to our officers and directors under these stock awards are as follows:

NameShares
Jesse Sutton23,295
Michael Vesey15,530
Laurence Aronson23,295
Stephen Wilson15,530
Trent Davis6,470
Mohit Bhansali6,470
Adam Sultan12,942

On December 17, 2014, the Company granted options to purchase common stock currently trades onto certain of its executive officers and directors in consideration for their respective roles in the Nasdaq Capital Market, referred to herein as Nasdaq. This market has continued listing requirements that we must continue to maintain to avoid delisting.Company.  The standards include, among others, a minimum bid stock options were granted with an exercise price requirement of $1.00$0.68 per share and any of: (i)would fully vest upon a minimum stockholders’ equitytrigger event, which occurred on September 30, 2015, and are exercisable until December 17, 2019. They granted were granted under the Company 2014 Equity Incentive Plan.

 The shares of $2.5 million; (ii)granted to our officers and directors under these stock awards are as follows:

NameOption Award
Jesse Sutton71,705
Michael Vesey34,470
Laurence Aronson71,705
Stephen Wilson64,470
Trent Davis56,030
Mohit Bhansali56,030
Adam Sultan12,058


On April 23, 2015, Laurence Aronson, Mohit Bhansali and Trent Davis were each granted 7,143 stock options on common shares each both with an exercise price of $1.40 per share. These awards were granted under our 2014 Equity Incentive Plan. The options fully vested on October 23, 2015, and they are exercisable until April 23, 2020.

On June 27, 2015, David Rector was granted 100,000 restricted stock units.  The vesting on this grant was accelerated on January 12, 2016. These awards were granted under our 2014 Equity Incentive Plan.

On July 27, 2015, David Rector was granted 6,993 stock options on common shares with an exercise price of $1.43 per share. These awards were granted under our 2014 Equity Incentive Plan.

On September 30, 2015, we entered into Restricted Stock Agreements with certain of our executive officers and directors.  The stock awards provide for grants of common stock to our officers and directors under our 2014 Equity Incentive Plan which shall vest at a marketrate of 1/24 of the stock awarded each month for twenty-four months.  Vesting of the stock awards shall accelerate upon the occurrence of a Qualified Transaction. A Qualified Transaction includes one or more acquisitions with an aggregate value of listed securitiesat least $25 million.
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The shares 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 operationscommon stock granted to our officers and our fluctuatingdirectors under these stock price directly impact our ability to satisfy these listing standards. In the event weawards are unable to maintain these listing standards, we may be subject to delisting.as follows:

NameShares
Barry Honig400,000
John Stetson300,000
Michael Brauser400,000
Mohit Bhansali25,000
Edward Karr50,000
Andrew Kaplan50,000
 
On December 18, 2015, we entered into Restricted Stock Agreements with certain of our executive officers and directors.  The stock awards provide for grants of common stock to our officers and directors under our 2014 Equity Incentive Plan which shall vest at a rate of 1/24 of the stock awarded each month for twenty-four months.  Vesting of the stock awards shall accelerate upon the occurrence of a Qualified Transaction. A Qualified Transaction includes one or more acquisitions with an aggregate value of at least $25 million.

The shares of common stock granted to our officers and directors under these stock awards are as follows:

NameShares
Michael Beeghley50,000

Additionally, on December 18, 2015, Michael Bauser, Andrew Kaplan, Edward Karr, and Michael Beeghley were granted 9,523 stock options on common shares each both with an exercise price of $1.05 per share. These options shall fully vest six months from the grant date.
Employment Agreements
During 2014 and 2015, we had employment agreements with each of the named executive officers. Mr. Sutton’s employment agreement provided for an annual base salary of $363,000 and a discretionary bonus of up to 100% of his base salary. Mr. Vesey’s employment agreement provided for an annual base salary of $300,000 and an annual cash bonus to be determined in the sole discretion of the Company and based on such factors as the Company establishes.  Mr. Honig’s and Mr. Stetson’s employment agreements each provide for an annual base salary of $120,000 and a discretionary bonus to be determined by the Compensation Committee.
Under the employment agreements, each of the named executive officers would be entitled to certain payments and benefits if the Company terminated the executive’s employment without “cause” or the executive terminated his employment for “good reason”. Benefits are also provided if the executive is terminated in connection with a change in control. The benefit levels under the employment agreements generally include continued payment of base salary, a bonus for the year of termination, accelerated vesting of equity awards and continued welfare benefits, and are described in more detail under the “Potential Payments Upon Termination or Change-In-Control” below.

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Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options and grants of unvested stock awards outstanding on the last day of the fiscal year ended October 31, 2015, to each of the executive officers named in the Summary Compensation Table.

  Option Awards Stock Awards
Name Number of Securities Underlying Unexercised Options Exercisable (#) Number of Securities Underlying Unexercised Options Unexercisable (#) 
Option
Exercise Price
($)
 
Option
Expiration
Date
 
Number of Shares or Units of Stock That Have Not Vested
(#)
 
Market Value of Shares or Units of Stock That Have Not Vested
($) (1.26)(1)
Barry Honig  --   --   --  --  383,333(4) $483,000 
Michael Brauser  --             383,333(4) $483,000 
John Stetson  --   --   --  --  287,500((4) $362,250 
David Rector  6,993(2)  --  $1.43  July 27, 2020  --  $- 
Michael Beeghley  --       --     -   - 
Andrew Kaplan  --   --   --     47,917(4) $60,375 
Mohit Bhansali  56,030(7)     $0.68  December 31, 2021  23,958(4) $30,188 
   7,143(8)     $1.40  April 30, 2020        
Edward Karr  --       --     47,917(4) $60,375 
Trent Davis (4)
  71,705(9)  --  $0.68  December 31, 2021  --   -- 
   7,143(11)     $1.40  April 30, 2020        
Stephen Wilson (5)
  --   --   --  --  --   -- 
Laurence Aronson (6)
  2,323(9)  --  $15.19  August 1, 2016  --   -- 
   1,880      $4.76  August 1, 2017        
   1,961      $17.36  August 1, 2018        
   2,579      $12.32  August 2, 2019        
   7,559      $4.48  August 3, 2020        
   15,848      $1.66  August 3, 2021        
   71,705      $0.68  March 28, 2022        
   7,143      $1.40  April 23, 2020        

(1)  The market value of the shares is determined by multiplying the number of shares times $1.26, the closing price of our common stock on The NASDAQ Capital Market on October 31, 2015, the last business day of our fiscal year.

(2)  Option to purchase 6,993 common shares was exercisable on January 27, 2016.

(3)  Vests at the end of each calendar month, at a rate of 1/24 of such shares per month.

(4)  Resigned on July 27, 2015

(5)  Resigned on February 1, 2015

(6)  Resigned on September 25, 2015
(7)  Option to purchase 56,030 common shares was exercisable on September 30, 2015

(8)  Option to purchase 7,143 common shares was exercisable on October 22, 2015

(9)  Options to purchase 2,323 common shares exercisable on August 2011; options to purchase 1,880 common shares exercisable on August 2012; options to purchase 1,961 common shares exercisable on August 2013; options to purchase 2,579 common shares exercisable on August 2014; options to purchase 7,559 common shares exercisable on August 2015; options to purchase 15,848 common shares exercisable on September 25, 2015; options to purchase 71,705 common shares at $0.68 on September 25, 2015; and option to purchase 7,143 common shares was exercisable on September 25, 2015.

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Potential Payments Upon Termination or Change-In-Control
We have entered into agreements that require us to make payments and/or provide benefits to certain of our executive officers in the event of a termination of employment or a change of control. The following summarizes the potential payments to each named executive officer for which we have entered into such an agreement assuming that one of the events identified below occurs.
Mr. Barry Honig, Chief Executive Officer
Pursuant to his employment agreement, if the Company terminates Mr. Honig’s employment without “cause” (as such term is defined in the employment agreement) or Mr. Honig resigns for “good reason” or following a “Change of Control” (as such terms are defined in Mr. Honig’s employment agreement), he will receive severance benefits from the Company, including a cash amount equal to 100% of Mr. Honig’s base salary, annual bonus and share awards during the preceding year.
Mr. John Stetson, Chief Financial Officer
Pursuant to his employment agreement, if the Company terminates Mr. Stetson’s employment without “cause” (as such term is defined in the employment agreement) or Mr. Stetson resigns for “good reason” or following a “Change of Control” (as such terms are defined in Mr. Stetson’s employment agreement), he will receive severance benefits from the Company, including a cash amount equal to 100% of Mr. Stetson’s base salary, annual bonus and share awards during the preceding year.
Mr. Jesse Sutton, Former Chief Executive Officer
Pursuant to his employment agreement, if the Company terminates Mr. Sutton’s employment without Cause (as such term is defined in the employment agreement) or Mr. Sutton resigns for Good Reason (as such term is defined in the employment agreement), he will receive severance benefits from the Company, including:
● continued payment of his base salary on a regular payroll basis for a period of 12 months;
● within 30 days of termination, a payment equal to the average of the percentages used to calculate Mr. Sutton’s Annual Incentive Cash Bonus (as such term is defined in the employment agreement) in each of the previous three fiscal years times Mr. Sutton’s then current base salary (the “Severance Bonus”);
● acceleration and full vesting as of the date of termination of all unvested restricted stock, stock options and other equity awards held by Mr. Sutton at the time of such termination; and
●
 continued Company contributions toward Mr. Sutton’s health care, dental, disability and life insurance benefits on the same basis as immediately prior to the date of termination for 12 months following the date of termination, unless Mr. Sutton is actually covered or becomes covered by an equivalent benefit (at the same cost to him, if any) from another source.

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If the Company terminates Mr. Sutton’s employment without Cause or Mr. Sutton resigns for Good Reason within 24 months following a Change of Control (as such term is defined in the employment agreement), he will receive severance benefits (in lieu of all other severance programs/amounts) from the Company, including:
● within 30 days of termination, a payment in an amount equal to: (i) two years base salary; and (ii) the Severance Bonus;
●
 acceleration and full vesting as of the date of termination of all unvested restricted stock, stock options and other equity awards held by Mr. Sutton at the time of such termination; and
●
 continued Company contributions toward Mr. Sutton’s health care, dental, disability and life insurance benefits on the same basis as immediately prior to the date of termination for 12 months following the date of termination, unless Mr. Sutton is actually covered or becomes covered by an equivalent benefit (at the same cost to him, if any) from another source.
On July 27, 2015, Mr. Sutton resigned as our Chief Executive Officer. We entered into a separation agreement with Mr. Sutton (the “Sutton Separation Agreement”), under which terms Mr. Sutton will continue, for twenty-four months following his resignation, to provide certain consulting and support services (the “Services”) to us, as more fully described in the Sutton Separation Agreement.  Pursuant to the Sutton Separation Agreement, Mr. Sutton is to receive a severance payment, which included 50% of the Net Monthly Revenues (as defined in the Sutton Separation Agreement) generated by us from the Download Business (as defined in the Sutton Separation Agreement), but in no even more than $10,000 per month; provided that Mr. Sutton is still providing the Services. In addition, the Company will continue its contributions towards Mr. Sutton’s health care benefits for a period of twelve (12) months following Mr. Sutton’s resignation or until Mr. Sutton becomes covered by an equivalent benefit and Mr. Sutton shall have a period of eighteen (18) months from his date of resignation to exercise any previously issued stock options, except that the original expiration date of any such options shall not be extended.

Mr. Michael Vesey, Former Chief Financial Officer
Pursuant to his amended and restated employment agreement, effective as of August 22, 2013, if the Company terminates Mr. Vesey’s employment without Cause (as such term is defined in the employment agreement) or Mr. Vesey resigns for Good Reason (as such term is defined in the employment agreement), he will receive severance benefits from the Company, including:
●
continued payment of his base salary on a regular payroll basis for a period of 12 months;
●
a bonus payment, which shall be an amount equal to his average “target” annual incentive opportunity over the prior three years and shall be payable immediately after the effective date of Mr. Vesey’s release;
●
acceleration and full vesting as of the date of termination of all unvested restricted stock, stock options and other equity awards held by Mr. Vesey at the time of such termination; and
●
continued Company contributions toward Mr. Vesey’s health care, dental, disability and life insurance benefits on the same basis as immediately prior to the date of termination for 12 months following the date of termination, unless Mr. Vesey is actually covered or becomes covered by an equivalent benefit (at the same cost to him, if any) from another source.

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If the Company terminates Mr. Vesey’s employment without Cause or Mr. Vesey resigns for Good Reason within 12 months following a Change of Control (as such term is defined in the employment agreement), he will receive severance benefits (in lieu of all other severance programs/amounts) from the Company, including:
●
continued payment of his base salary on a regular payroll basis for a period of 12 months;
●
a bonus payment, which shall be an amount equal to his average “target” annual incentive opportunity over the prior three years and shall be payable immediately after the effective date of Mr. Vesey’s release;
●
acceleration and full vesting as of the date of termination of all unvested restricted stock, stock options and other equity awards held by Mr. Vesey at the time of such termination; and
●
continued Company contributions toward Mr. Vesey’s health care, dental, disability and life insurance benefits on the same basis as immediately prior to the date of termination for 12 months following the date of termination, unless Mr. Vesey is actually covered or becomes covered by an equivalent benefit (at the same cost to him, if any) from another source.
We entered into a Separation Agreement with Mr. Vesey (the “Vesey Separation Agreement”) on February 17, 2015, pursuant to which Mr. Vesey resigned as our Chief Financial Officer on March 1, 2013, we17, 2015.  Pursuant to the Vesey Separation Agreement, upon his resignation and in addition to the other benefits as outlined in the Vesey Employment Agreement, Mr. Vesey received a letter from Nasdaq notifying us that forlump sum payment of $200,000 and an additional payment of $100,000 thereafter payable in six equal monthly installments.  In addition, the 30 consecutive trading days precedingCompany agreed to vest all of Mr. Vesey’s previously unvested securities held as of the date of the letter,Vesey Separation Agreement, other than the bid pricesecurities granted pursuant to the Company’s 2014 Equity Incentive Plan, and the Company further agreed that, subject to shareholder approval of ourthe 2014 Equity Incentive Plan, in consideration for Mr. Vesey’s ongoing consulting services for a period of six months following the separation, the Company granted Mr. Vesey 30,000 shares of restricted common stock had closed belowunder the $1.00 per share minimum required for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Marketplace Rule 5550(a)(2).2014 Equity Incentive Plan. 


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 a minimum of ten consecutive trading days prior to February 24, 2014.
 
 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 the minimum amount in order to attempt to regain compliance. If the panel does not accept our plan  for compliance, or we fail to regain compliance, we could be delisted.
A delisting from Nasdaq would result in our common stock being eligible for listing on the Over-The-Counter Bulletin Board (the “OTCBB”). 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 on 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.
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A significant portion of our revenue in 2013 was generated from games based on theZumba Fitness property.
 
Approximately 55% of our net revenue in 2013 was generated from theZumba Fitness series of games. We license the rights to publish these games from a third party. In November 2011, we released the sequelsZumba Fitness 2 andZumba Fitness Rushfor 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.
8

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 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 revenue and/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.
In the past few years, the quality standards of games developed for the mass market 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 write-downs of capitalized development costs.
9

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;
•  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 that quarter-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 GameStop and Target each accounted for approximately 14% of our revenue for the fiscal year 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.
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.
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.
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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•  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 gaming 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 DS, DSi, 3DS, Wii and WiiU and from Microsoft to develop products for the Xbox, Xbox 360 and Xbox 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.
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 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 platform and/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.
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, new 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.
Data breaches involving the source code for our products or customer data stored by us could adversely affect our reputation and revenues.
We store 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 on which such source code and game assets, customer information and other sensitive data is stored could lead to piracy of our software or litigation against us in connection with data security breaches. Data intrusion into a server for a game with online features could also disrupt the operation of such game. If we are subject to any such data security breaches, we may experience a loss in sales or be forced to pay damages in any such lawsuits, which will adversely impact our revenues. 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 breach is not repeated.
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, including generating revenue through micro-transactions by end users, subscription services and 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.
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 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. 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 particular games 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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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 report on Form 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 liability and/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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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.
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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PART II
Item 5.  Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed for trading on the Nasdaq Capital Market under the symbol “COOL.” The market for our common stock has often been sporadic, volatile and limited.Director Compensation
 
The following table shows the high and low bid quotations for our common stock as reported by Nasdaq from November 1, 2011 through October 31, 2013. The prices reflect inter-dealer quotations, without retail markup, markdowntotal compensation paid or commissions, and may not represent actual transactions.
  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 8, 2014, we had 106 registered holders of record of our common stock. On January 8, 2014, the closing sales price of our common stock as reported on Nasdaq was $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 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 2013 fiscal year end.
Recent Sales of Unregistered Securities.  All prior sales of unregistered securities have been previously reported either on a current report on Form 8-K or a quarterly report on Form 10-Q. 
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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, 
  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: (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; and (v) for 2009, a settlement of litigation and related charges, net, of $0.4 million, and impairment of capitalized software development costs and license fees — cancelled games of $1.0 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; and (v) for 2009, a loss from a change in fair value of warrants of $0.4 million.
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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”and elsewhere in this annual report on Form 10-K.
Overview
We are a provider of video game products primarily for the family oriented, casual-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 such as Xbox Live Arcade and PlayStation Network, or PSN, and mobile platforms such as iPhone, iPad and Android devices, as well as online platforms such as 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 casual-game consumers. In some instances, our titles are based on licenses of well-known properties and, in other cases based on original properties. We 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-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 is higher on these products, we do not incur up 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 evaluationsaccrued during the development cycle 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 largest components 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, as affected by our  net operating loss carryforwards. Future utilization of our net operating loss, 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 NOL 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.
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 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).
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 revenues and/or selling and marketing expenses we report. For the 12-month periods ended October 31, 2013, 2012 and 2011, we provided allowances for future price protection and other allowances of $3.0 million, $4.3 million and $4.0 million, respectively. Fluctuations 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. 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 a product-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. 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, 2013, the net carrying value of our licenses and software development costs was $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.
We have expensed as research and development all costs associated with the development of 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 the first-in, first-out method. We estimate the net realizable value of slow-moving inventory on a title-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.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of total revenues:
  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, 2013, 2012 and 2011.
  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 years ended October 31, 2013, 2012 and 2011.
  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%
Year ended October 31, 2013 versus year ended October 31, 2012
Net Revenues.Net revenues for the year ended October 31, 2013 decreased approximately 64%2015 to $47.3 million from $132.3 million in the comparable period last year. The decrease was primarily due to lower saleseach of our Zumba Fitness productsdirectors, current 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, reflecting the end of life of the Wii platform, 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 a decline in sequel sales. Overall Zumba sales accounted for 55% of our net revenues during the period, compared to 76% in the prior year.former.
 
Gross Profit.Gross profit for the year ended October 31, 2013 was $12.2 million compared to a gross profit of $43.5 million last year. The decrease in gross profit was primarily attributable to decreased net revenues for the year ended October 31, 2013, as discussed above. Gross profit as a percentage of net sales was 26% for the year ended October 31, 2013, compared to 33% for the year ended October 31, 2012. The decrease in gross profit as a percentage of sales primarily reflects lower average net selling prices and higher development and license fees in the current period.
Name 
Fees Earned or Paid in Cash
($)
 
Stock
Awards
($) (1)
 
Option Awards
($) (2)
 
All Other Compensation
($)
 
Total
($)
Barry Honig  -   496,000(6)      -   496,000 
Michael Brauser  -   496,000(6)      -   496,000 
Mohit Bhansali  31,800   35,400(7)  30,140(11)  -   97,340 
Edward Karr  5,000   62,000(8)      -   67,000 
Andrew Kaplan  5,000   62,000(8)      -   67,000 
Michael Beeghley  5,000           -   5,000 
David Rector  -   116,000(9)  6,273(12)  -   122,273 
Trent Davis (3)
  31,000   4,400(10)  30,140(11)  -   65,540 
Stephen Wilson (4)
  12,500   -   30,546(13)  -   43,046 
Laurence Aronson (5)
  32,200   -   78,848(14)  -   69,018 
Product Research and Development Expenses.Research and development expenses were $5.5 million for the year ended October 31, 2013, compared to $7.8 million of expenses for the same period in 2012. Lower internal development expenses, including the impact of headcount reductions resulting from the closing of our social games studio in January 2013, were partially offset by increased third-party development costs of mobile games in the current-year period.
Selling and Marketing Expenses.Total selling and marketing expenses were approximately $7.9 million for the year ended October 31, 2013, compared to $20.2 million for the year ended October 31, 2012. The decrease was primarily due to decreased media advertising and marketing expenses related to Zumba, NBA Baller Beats and other new releases. Commissions and other costs were also lower due to lesser sales volumes and our January 2013 headcount reduction.
General and Administrative Expenses.For the year ended October 31, 2013, general and administrative expenses decreased to $9.2 million from $10.1 million in the comparable prior-year period. The decrease primarily reflected lower compensation costs, 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 $0.8 million in the year ended October 31, 2013. There were no such costs in the prior-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 the 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, 2013, loss on impairment of capitalized software development costs and license fees – cancelled games, amounted to $0.7 million compared 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 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. In fiscal 2013, we reduced the number of console-game development projects initiated.
Operating (Loss) Income.Operating loss for the year ended October 31, 2013 was approximately $12.2 million, compared to operating income of $3.7 million in 2012, primarily as a result of decreased 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, 2012, 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. 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 increased 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 lower spending for third-party development. In January of 2013, we decided to close the facility acquired from Quick Hit and 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. Interest and financing costs, which includes financing costs associated with our factoring activities were approximately $1.0 million for the year ended October 31, 2012 compared to $1.3 million for the year ended October 31, 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 Warrant Liability. We recorded a gain of $1.9 million for the year ended October 31, 2012, 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 period, compared to a loss of $2.8 million recognized in the year ended October 31, 2011, which resulted primarily from an increasing share price during the period.
Income Taxes.Our income tax expense was less than $0.1 million in the year ended October 31, 2012 and $0.4 million in the year ended October 31, 2011, which represented our current alternative minimum tax provision and certain state income taxes and reflected the use of available NOL carryforwards to offset taxable income.
Liquidity and Capital Resources
As of October 31, 2013, our cash and cash equivalents balance was $13.4 million and funds available to us under our factoring agreement was $4.8 million. Additionally, we have approximately $8.3 million available on our purchase order financing agreement. 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.
Our current plan is to fund our operations throughexisting cash and cash equivalents andproduct sales. However, 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 forecasts and existing cash and cash equivalents we can fund our operations through at least January 31, 2015. However, we may be required to modify our 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.
Factoring and Purchase Order Financing.
To satisfy our liquidity needs, we factor our receivables. Under our factoring agreement, we have the ability to take cash advances against accounts receivable and inventory of up to $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 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 financing. These funds are available for the purchase of inventory, and are re-payable upon receipt of the inventory by us. In connection with these arrangements, the finance company and the factor have a security interest in substantially all of our assets. We had outstanding advances of $1.8 million for purchase order financing at October 31, 2013.
26

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 0.5% 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-term working capital needs. These excess amounts are typically repaid within a 30-day period. At October 31, 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 pay cash in advance in order to manufacture the products required under a purchase order. We may 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 borrowings remain outstanding in excess of the original time period and/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 to these customers. In exchange for these advances, we offer these customers beneficial pricing or other considerations.
Contingencies and Commitments.
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.
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 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 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.
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 - - 
27

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, 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 $13.4 million as of October 31, 2013, compared to $18.0 million as of October 31, 2012. Working capital as of October 31, 2013 was $15.7 million compared to $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, 2013 and 2012, respectively.
Operating Cash Flows.  Our principal operating source of cash is 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, 2013, we used approximately $4.6 million in cash for operating activities, compared to $6.1 million of net cash flows provided by operations in the prior year. The change in cash flows 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 loss in the year ended October 31, 2013. In the current year, reported operating cash flow was positively affected by the collection of prior-year accounts receivable. In 2012, reported cash flows from operations were negatively affected by an increase in accounts receivable from October 2012 releases, the effects of which were partially offset by the timing of development costs and amortization. Operating income excludes the non-cash effects of the change in our warrant liability and interest and financing costs.
For the year ended October 31, 2012, we generated approximately $6.1 million in cash flow from operating activities, compared to $9.4 million of net cash flows from operations in the prior year. The decrease in cash provided by operating activities was primarily due to decreased operating income, which decreased $7.7 million from $11.4 million in the year ended October 31, 2011 to $3.7 million of operating income in the year ended October 31, 2012. Operating income excludes the non-cash effects of the change in our warrant liability and interest and financing costs.
Investing Cash Flows.  Cash used in investing activities for the years ended October 31, 2013, 2012 and 2011 included purchases of computer equipment and leasehold improvements of $0.3 million, $0.3 million and $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) provided by  financing activities for the years ended October 31, 2013, 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 the exercise of outstanding options and warrants.
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 to Regulation S-K Item 305(e).
Item 8.  Financial Statements and Supplementary Data.
The financial statements required by Item 8 are submitted in a separate section of this report, beginning on Page F-1, are incorporated herein and made a part hereof.

(1)  28

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 Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-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 Company 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 Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-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 in Rules 13a-15(f) and 15d-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 toRepresents the maintenance of records thataggregate grant date fair value for stock awards granted by us 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 statementsfiscal year 2015 computed 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, 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, 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.
Not applicable.
30

PART III
The information required by Part III of Form 10-K under the items listed below are incorporated by reference from our definitive proxy statement relating to the 2014 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 2013 fiscal year end.
Item 10 – Directors, Executive Officers and Corporate Governance.
Item 11 – Executive Compensation.
ItemFASB ASC Topic 718. See Note 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.
(1) Financial Statements.
The financial statements required by item 15 are submitted in a separate section of this report, beginning on Page F-1, incorporated herein and made a part hereof.
(2) Financial Statement 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.
The following exhibits are filed with this report, or incorporated by reference as noted:
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).
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 tocondensed consolidated financial statements reported in our Annual Report on Form 10-K filed on February 1, 2006).for our fiscal year ended October 31, 2015 for details as to the assumptions used to determine the fair value of the stock awards.

(2)  
10.7Amendment, dated October 1, 2008,Represents the aggregate grant date fair value of options granted in fiscal year 2015 computed in accordance with FASB ASC Topic 718. See Note 12 to Factoring Agreement, dated April 24, 1989, between Majesco Sales Inc. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.23 toour condensed consolidated financial statements reported in our Annual Report on Form 10-K filedfor our fiscal year ended October 31, 2015 for details as to the assumptions used to determine the fair value of the option awards.

(3)  Resigned on July 27, 2015

(4)  Resigned on February 1, 2015

(5)  Resigned on September 25, 2015

(6)  Represents 400,000 shares at a grant date fair value of $1.24 per common share.

(7)  Represents 6,470 shares at a grant date fair value of $0.68 per common share and 25,000 shares at a grant date fair value of $1.24 per common share.

(8)  Represents 50,000 shares at a grant date fair value of $1.24 per common share.

(9)  Represents 100,000 shares at a grant date fair value of $1.16 per common share.

(10)  Represents 6,470 shares at a grant date fair value of $0.68 per common share.

(11)  Represents stock options to purchase 56,030 common shares at an exercise price of $0.68 per common share and stock options to purchase 7,143common shares at an exercise price of $1.40 per common share.

(12)  Represents stock options to purchase 6,993 common shares at an exercise price of $1.43 per common share.

(13)  Represents stock options to purchase 71,750 common shares at an exercise price of $0.68 per common share.

(14)  Represents stock options to purchase 71,750 common shares at $0.68; and option to purchase 7,143 common shares at $1.40 per common share.
-18-
Name Number of Stock Options Held at Fiscal Year-End Number of Shares of Restricted Stock Held at Fiscal Year-End
Barry Honig  --   400,000(3)
Michael Brauser      400,000(3)
Mohit Bhansali  56,030(1)  25,000(3)
   7,143(2)  6,470((5)
Edward Karr      50,000(3)
Andrew Kaplan      50,000(3)
Michael Beeghley        
David Rector  6,993(2)  100,000(4)
Trent Davis (6)         56,030(1)  6,470(5)
Stephen Wilson (7)  --   -- 
Laurence Aronson (8)  2,323(9)  -- 
   1,880(10)    
   1,961(11)    
   2,579(12)    
   7,559(13)    
   15,848(14)    
   71,705(15)    
   7,143(16)    
(1)  
Options to purchase 56,030 common shares at $0.68 per share became exercisable on September 30, 2015.
(2)  
Options to purchase 7,143 common shares at $1.40 per shares became exercisable on January 29, 2009)27, 2016.
(3)  
Vests at the end of each calendar month, at a rate of 1/24 of such shares per month, starting on the grant date of September 30, 2015.
(4)  
Represents a restricted stock grant given to Mr. Rector on August 28, 2015, which was originally scheduled to vest in three equal installments on the first, second and third anniversaries of the grant date or upon a change in control of the Company, provided Mr. Rector was serving as Chief Executive Officer. The vesting schedule was accelerated, and the 100,000 shares vested in full on January 12, 2016.
(5)  
Shares vested on September 30, 2015.
(6)  
Resigned on July 27, 2015
(7)  
Resigned on February 1, 2015
(8)  
Resigned on September 25, 2015
(9)  
Options to purchase 2,323 common shares at $17.36 per share became fully exercisable on August 3, 2011.
(10)  
Options to purchase 1,880 common shares at $4.76 per shares became fully exercisable on August 3, 2012.
(11)  
Options to purchase 1,961 common shares at $17.36 per shares became fully exercisable on August 3, 2013.
(12)  
Options to purchase 2,579 common shares at $12.32 per shares became fully exercisable on August 3, 2014.
(13)  
Options to purchase 7,559 common shares at $4.48 per shares became fully exercisable on August 3, 2015.
(14)  
Options to purchase 15,848 common shares at $1.66 per shares became fully exercisable upon resignation, September 25, 2015.
(15)  
Options to purchase 71,705 common shares at $0.68 per share became exercisable upon resignation, September 25, 2015.
(16)  Options to purchase 7,143 common shares at $1.40 per share became exercisable upon resignation, September 25, 2015.
-19-
 Director Compensation Policy
During the fiscal year ended October 31, 2015, our directors were compensated in accordance with the following terms.  Each non-employee director received an annual cash retainer of $5,000, other than the Chair of the Company’s Audit Committee, who received $6,000. In addition, the Chairman of the Board received an additional annual cash retainer of $10,000.
Each non-employee director was also entitled to receive 5-year options to purchase shares of the Company’s common stock valued at $10,000, calculated by dividing $10,000 by the closing stock price on the date the award was granted. The options vest in full six months after the grant date, provided the applicable director is still serving on the Board of Directors.

Each non-employee director was entitled to a fee of $2,500 for each board meeting at which the director was present in person, and each member of our Board committees was entitled to a fee of $800 for each committee meeting at which the director was present in person. Each non-employee director was entitled to a fee of $300 for each teleconference called by either the Chairman of the Board of Directors, the President of the Company or the Chairman of a Board committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

The following table is based upon 11,915,804_shares of common stock outstanding as of January 31, 2016, and sets forth, based on the public filings of such individuals and entities and our knowledge of securities issued by us to them, certain information concerning the ownership of voting securities of: (i) each current member of the Board, (ii) our Chief Executive Officer and other executive officers named in the Summary Compensation Table, (iii) all of our current directors and executive officers as a group and (iv) each beneficial owner of more than 5% of the outstanding shares of any class of our voting securities. Except as otherwise indicated, addresses are c/o Majesco Entertainment Company, 4041-T Hadley Road, S. Plainfield, New Jersey 07080.


Common Stock
 
Number of Shares of Common Stock Beneficially Owned
 
Percentage of Common Stock
Greater than 5% Holders:
       
Melechdavid Inc. (1)
  
736,048
 (2)  
6.18%
 
5154 La Gorce Drive
Miami Beach, FL 33140
        
Executive Officers and Directors:
        
Barry Honig (3)
  
607,570
 (4)  
5.10%
 
Michael Brauser (5)
  
559,435
 (6)  
4.69%
 
John Stetson (7)
  
281,059
 (8)  
2.36%
 
David Rector
  
106,993
(9)  
*
 
Michael Beeghley
  
6,250
(10) (11)  
*
 
Andrew Kaplan
  
12,500
(10)  
*
 
Mohit Bhansali
  
69,423
(12)(13)  
*
 
Edward Karr
  
12,500
(10)  
*
 
Current Executive Officers and Directors as a Group(8 persons)
  
1,655,730
   
13.81%

 
*
Represents beneficial ownership of less than 1% of the shares of common stock.

-20-

(1)
Mark Groussman is the President of Melechdavid Inc. and the Trustee of Melechdavid Inc. Retirement Plan and in such capacity he is deemed to hold voting and dispositive power over the securities held by such entities.
#10.8
(2)
Form
Based solely on review of Non-Qualifiedthe holder's Schedule 13G filed with the SEC on July 9, 2015, includes 678,348 shares held by Melechdavid Inc. and 57,700 shares held by Melechdavid Inc. Retirement Plan.
Excludes 485,294 shares of common stock underlying Series A Convertible Preferred Stock, Option Agreement (incorporated346,640 shares of common stock underlying Series B Preferred Stock, 666,667 shares of common stock underlying Series C Convertible Preferred Stock and 666,667 shares of common stock underlying warrants held by referenceMelechdavid Inc. Each of the forgoing classes of preferred stock and the warrants contains an ownership limitation such that the holder may not convert or exercise, as applicable, any of such securities to Exhibit 10.2the extent that such conversion or exercise, as applicable, would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
Excludes 367,648 shares of common stock underlying Series A Convertible Preferred Stock and 262,606 shares of common stock underlying Series B Convertible Preferred Stock held by Melechdavid Inc. Retirement Plan.  Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to our Quarterly Report on Form 10-Q filed on June 14, 2005).the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
(3)
Barry Honig is the Trustee of GRQ Consultants, Inc. 401K and GRQ Consultants, Inc. Roth 401K FBO Barry Honig, and he is a Manager of Marlin Capital Investments, LLC. In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.
#10.9
(4)
Form
Based solely on a review of the holder’s Schedule 13D filed with the SEC on October 13, 2015, includes 357,889 shares of common stock held by Barry Honig, of which 100,000 shares represent the vested portion (including shares vesting within 60 days) of a 400,000 share restricted stock award under our 2014 Equity Incentive Plan approved by the Company’s shareholders, and which vest at a rate of 1/24 of such award shares per month or upon a Qualified Transaction as defined in the award.
Includes 91,076 shares of common stock held by GRQ Consultants, Inc. 401K, and 110,470 shares of common stock held by GRQ Consultants, Inc. Roth 401K FBO Barry Honig.
Excludes 2,205,883 shares of common stock underlying shares of Series A Convertible Preferred Stock Option Agreement (incorporatedheld by referenceMr. Honig, and 1,575,600 shares of common stock underlying shares of Series B Convertible Preferred Stock held by Mr. Honig.  Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to Exhibit 10.3the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
Excludes 154,657 shares of common stock underlying shares of Series A Convertible Preferred Stock and 833,334 shares of common stock underlying shares of Series C Convertible Preferred Stock held by GRQ Consultants, Inc. Roth 401K FBO Barry Honig; 117,648 shares of common stock underlying shares of Series A Convertible Preferred Stock and 84,000 shares of common stock underlying Series B Convertible Preferred Stock held by Marlin Capital Investments, LLC; and 833,334 shares of common stock underlying shares of Series C Convertible Preferred Stock and 333,333 shares of Common Stock underlying shares of Series D Convertible Preferred Stock held by GRQ Consultants, Inc. 401K.  Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to our Quarterly Report on Form 10-Q filed on June 14, 2005).the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
(5)
Michael Brauser is Chairman of the Betsy & Michael Brauser Charitable Family Foundation, Trustee of Grander Holdings, Inc. 401K and a Manager of Marlin Capital Investments, LLC. In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.

-21-

(6)
Based solely on a review of the holder’s Schedule 13D filed with the SEC on October 13, 2015, includes 100,100 shares of common stock held by Michael Brauser, of which 100,000 shares represent the vested portion (including shares vesting within 60 days) of a 400,000 share restricted stock award under the 2014 Equity Incentive Plan approved by our shareholders, and which vest at a rate of 1/24 of such award shares per month or upon a Qualified Transaction, as defined in the award.
Excludes 2,205,883 shares of common stock underlying Series A Convertible Preferred Stock and 1,575,630 shares of Common Stock underlying shares of Series B Convertible Preferred Stock held by Michael Brauser. Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
Includes 235,786 shares of common stock held by Michael & Betsey Brauser TBE, 125,000 shares of Common Stock held by Betsy & Michael Brauser Charitable Family Foundation, and 146,684 shares of common stock held by Grander Holdings, Inc. 401K.
#10.10
(7)
Amended
John Stetson is President of Stetson Capital Investments, Inc. and Restated Non-Employee Director Compensation Policy (incorporatedStetson Capital Investments, Inc. Retirement Plan. In such capacities he is deemed to hold voting and dispositive power over the securities held by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on September 15, 2008).such entities.
(8)
Includes 114,391 shares of common stock, of which 75,000 shares represent the vested portion (including shares vesting within 60 days) of a 300,000 share restricted stock award under the 2014 Equity Incentive Plan approved by the Company’s shareholders, and which vest at a rate of 1/24 of such award shares per month or upon a Qualified Transaction as defined in the award.
Includes 83,334 shares of common stock held by Stetson Capital Investments and 83,334 shares of common stock held by Stetson Capital Investments, Inc. Retirement Plan.
Excludes 55,147 shares of common stock underlying Series A Preferred Stock and 66,660 shares of common stock underlying Series D Preferred Stock. Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding common stock together with all shares owned by the holder and its affiliates.
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
(9)
Confidential License Agreement for the Wii Console (Western Hemisphere), effective February 21, 2007, by
Includes 100,000 common shares and between Nintendooptions to purchase 6,993 shares 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).common stock that are exercisable within 60 days.
  
10.16
(10)
First Amendment to
Includes 12,500 shares which represent the Confidential License Agreement forvested portion (including shares vesting within 60 days) of a 50,000 share restricted stock grant which vests at the Wii Console (Western Hemisphere), effective January 4, 2010, by and between Nintendoend 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).each calendar month at a rate of 1/24 of such shares per month.
10.17
(11)
Add On Content Addendum to
Includes 6,250 shares which represent the Confidential License Agreement forvested portion (including shares vesting within 60 days) of a 50,000 share restricted stock grant which vests at the Wii Console, effective November 2, 2009, by and between Nintendoend 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).each calendar month at a rate of 1/24 of such shares per month.
(12)
Includes 6,250 shares which represent the vested portion (including shares vesting within 60 days) of a 25,000 shares of restricted stock grant which vests at the end of each calendar month at a rate of 1/24 of such shares per month.
10.18
(13)
Second Amendment
Includes options to the Confidential License Agreement for the Wii Console, effective February 20, 2013, by and between Nintendopurchase 63,173 shares 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).common stock that are exercisable.
  
Change in Control

The Company is not aware of any arrangement that might result in a change in control in the future. The Company has no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in the Company’s control.

-22-
 
Equity Compensation Plan Information (as of October 31, 2015)
Plan category Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (#) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (#)
   (a) (b) (c)
Equity compensation plans approved by security holders  579,485  $2.82   596,992 
Equity compensation plans not approved by security holders  -0-   -0-   -0- 
Total  579,485  $2.82   596,992 
As to the options granted to date, there were no options exercised during the fiscal year ended October 31, 2015.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. As required by SEC rules, the Company discloses all related party transactions in which the amount involved exceeds the lesser of $120,000 or 1% of the average of the smaller reporting company’s total assets at year-end for the last two fiscal years. During the fiscal year ended December 31, 2015, the Company had no such related party transactions.

-23-
Policy for Review of Related Party Transactions

The Company has a formal written policy governing the review and approval of related person transactions, which is posted under the heading “Corporate Governance” of the Investor Relations section of our website at www.majescoentertainment.com.  For purposes of this policy, consistent with The NASDAQ Stock Market rules, the terms “related person” and “transaction” are as defined in Item 404(a) of Regulation S-K under the Securities Act of 1933, as amended. The policy provides that each director and executive officer shall promptly notify our General Counsel of any transaction involving the Company and a related person. Such transaction will be presented to and reviewed by the Nominating and Governance Committee for approval, ratification or such other action as may be appropriate. The Nominating and Governance Committee shall approve only those related person transactions that are determined to be in, or not inconsistent with, the best interests of the Company and its stockholders, taking into account all available facts and circumstances as the Nominating and Governance Committee determines in good faith to be necessary. These facts and circumstances will typically include, but not be limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction, whether there are any compelling business reasons for the Company to enter into the transaction, whether the transaction would impair the independence of an otherwise independent director and whether the transaction would present an improper conflict of interest for any director or executive officer, taking into account the size of the transaction, the overall financial position of the director, executive officer or other related person, the direct or indirect nature of the director’s, executive officer’s or other related person’s interest in the transaction and the ongoing nature of the proposed relationship. In reviewing and approving such transactions, the Nominating and Governance Committee shall obtain, or shall direct management to obtain on its behalf, all information that the Nominating and Governance Committee believes to be relevant and important to review prior to its decision as to whether to approve any such transaction.
The Board may adopt any further policies and procedures relating to the approval of related person transactions that it deems necessary or advisable from time to time.
Director Independence

Our common stock is listed on The NASDAQ Capital Market. Under applicable NASDAQ rules, each of Messrs. Karr, Kaplan and Bhansali would be considered an independent director.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth fees billed to us by our independent auditors for the years ended October 31, 2015 and 2014 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
  2015  2014 
Audit Fees $139,900  $177,500 
Audit Related Fees  11,300   18,375 
Tax Fees  --   -- 
Other Fees  --   -- 
Total Fees $151,200  $195,875 
-24-
Audit Fees
Consist of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the principal accountants in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.”
Tax Fees
Consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of federal and state income tax returns.
All Other Fees
Consist of fees for product and services other than the services reported above.
Audit Committee Pre-approval Policies and Procedures

Our Audit Committee assists the Board in overseeing and monitoring the integrity of the Company’s financial reporting process, its compliance with legal and regulatory requirements and the quality of its internal and external audit processes. The role and responsibilities of the Audit Committee are set forth in a written charter adopted by the Board, which is available on our website at www.majescoentertainment.com. The Audit Committee is responsible for selecting, retaining and determining the compensation of our independent public accountant, approving the services they will perform, and reviewing the performance of the independent public accountant. The Audit Committee reviews with management and our independent public accountant our annual financial statements on Form 10-K and our quarterly financial statements on Forms 10-Q. The Audit Committee reviews and reassesses the charter annually and recommends any changes to the Board for approval. The Audit Committee is responsible for overseeing our overall financial reporting process. In fulfilling its responsibilities for the financial statements for fiscal year 2015, the Audit Committee took the following actions:
32●

reviewed and discussed the audited financial statements for the fiscal year ended October 31, 2015 with management and EisnerAmper LLP (“EisnerAmper”), our independent public accountant;
● discussed with EisnerAmper the matters required to be discussed in accordance with the rules set forth by the Public Company Accounting Oversight Board (“PCAOB”), relating to the conduct of the audit; and
 
#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● 
received written disclosures and the letter from EisnerAmper regarding its independence as required by applicable requirements of certain provisions contained in this exhibit.the PCAOB regarding EisnerAmper’s communications with the Audit Committee and the Audit Committee further discussed with EisnerAmper its independence. The copy filed as an exhibit omitsAudit Committee also considered the information subjectstatus of pending litigation, taxation matters and other areas of oversight relating to the confidentiality request.financial reporting and audit process that the Audit Committee determined appropriate.
*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.
 
33

SIGNATURESOur Audit Committee approved all services that our independent accountants provided to us in the past two fiscal years.
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
The following documents are filed as exhibits:
31.1                 Certificate under Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer.
31.1                 Certificate under Section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer.

-25-

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

By:
/s/ Jesse Sutton,Barry Honig
Barry Honig, Chief Executive Officer (Principal Executive Officer)

Date: February 26, 2016

By:    /s/ John Stetson
John Stetson, Chief Financial Officer (Principal Financial and Director
Accounting Officer)

Date: January 14, 2014February 26, 2016
 

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
Title
Date
   
/s/ Jesse SuttonBarry Honig
Barry Honig
Chief Executive Officer and DirectorJanuary 14, 2014
Jesse SuttonCo-Chairman of the Board of Directors
(Principal Executive Officer)
February 26, 2016
/s/ John Stetson
John Stetson
/s/ Michael Vesey
Chief Financial Officer (PrincipalJanuary 14, 2014
Michael VeseyFinancial and Accounting Officer)
February 26, 2016
/s/ Michael Brauser
Michael Brauser
/s/ Allan I. Grafman
ChairmanCo-Chairman of the Board of Directors
January 14, 2014February 26, 2016
Allan I. Grafman
/s/ Laurence AronsonMichael Beeghley
Michael Beeghley
DirectorJanuary 14, 2014February 26, 2016
Laurence Aronson
/s/ Louis LipschitzMohit Bhansali
Mohit Bhansali
DirectorJanuary 14, 2014February 26, 2016
Louis Lipschitz
/s/ Keith McCurdyAndrew Kaplan
Andrew Kaplan
DirectorJanuary 14, 2014February 26, 2016
Keith McCurdy
/s/ Stephen WilsonEdward Karr
Edward Karr
DirectorJanuary 14, 2014February 26, 2016
Stephen Wilson
/s/ David Rector
David Rector
Director
34

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting FirmF-2
Consolidated balance sheets — October 31, 2013 and 2012F-3
Consolidated statements of operations — Years ended October 31, 2013, 2012 and 2011F-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 2011F-6
Consolidated statements of cash flows — Years ended October 31, 2013, 2012 and 2011F-7
Notes to consolidated financial statementsF-8 – F-20February 26, 2016
 

 
F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM-26-
The Board of Directors and Stockholders
Majesco Entertainment Company
We have audited the accompanyingconsolidated balance sheets of Majesco Entertainment Company and Subsidiary (the ”Company”) as of October 31, 2013 and 2012, and the relatedconsolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 
In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of Majesco Entertainment Company and Subsidiary as of October 2013 and 2012, and theconsolidated results of their operations and their cash flows for each of the years in the three-year period ended October 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
Iselin, New Jersey
January 14, 2014
F-2

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

  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-5

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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, 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
F-6

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
  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

F-7

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1.  PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
The accompanying 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.
The Company is a provider of video game products primarily for the mass-market consumer. It sells its products primarily to large retail chains, specialty retail stores, and distributors. It publishes video games for major current generation interactive entertainment hardware platforms, including Nintendo’s DS, 3DS 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 digital platforms, including mobile platforms like the iPhone, iPad and Android devices, as well as online platforms such as 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-known properties and, in other cases based on original properties. The Company 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 revenues by geographic region were as follows:
  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.
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.
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 $500, $992 and $930 for the years ended October 31, 2013, 2012 and 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 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. 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 a product-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 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.
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 of sales-software development costs and license fees,” in the period such a determination is made. These expenses may be incurred prior to a game’s 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 operating costs and 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 $3,361, $11,849, and $6,677 for the years ended October 31, 2013, 2012 and 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 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 is estimated at the date of grant using a Black-Scholes option-pricing model. The risk free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.
Cash and cash equivalents.  Cash equivalents consist of highly liquid investments 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 is stated at the lower of cost as determined by the first-in, first-out method, or market. The Company estimates the net realizable value of slow-moving inventory on a title-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 accounting 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 periods. Among the more significant estimates included in these consolidated financial statements are price protection and customer allowances, the valuation of inventory and the recoverability of advance payments for software development costs and intellectual property 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 income (loss).
Income (Loss) Per Share.Basic income (loss) per share of common stock is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Basic income (loss) per share excludes 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 potential impact of common stock options and unvested shares of restricted stock and outstanding common stock purchase warrants that have a dilutive effect under the treasury stock method.
Commitments and Contingencies.  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.
Recent Accounting Pronouncements.
Comprehensive Income — In June 2011, theFinancial Accounting Standards Board (FASB) issued an update to ASC 220,Comprehensive Income. The update to ASC 220 establishes standards for the reporting and presentation of comprehensive income. The update became effective for the Company on November 1, 2012. Adoption of the update did not have a material impact on the 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.
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
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.
  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

  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 had outstanding warrants that required settlement by transferring assets under certain change of control circumstances and were classified as liabilities in the Company’s consolidated balance sheets. 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.
Assumptions 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 measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is presented below:
  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 their fair values because of their short-term maturity.

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.
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 to0.5% 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 $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 to70% of net accounts receivable, plus60% of the Company’s inventory balance up to a maximum of $2.5 million. Occasionally, the factor allows the Company to take advances in excess of these amounts for short term working capital needs. These excess amounts are typically repaid within a 30-day period. At October 31, 2013 and 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 additional1.0% annually is charged for advances against inventory.
The Company also utilizes purchase order financing through the factor, up to a maximum of $2.5 million, to provide funding for the manufacture of its 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.
Due from factor consists of the following:
  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 
Outstanding accounts receivable sold to the factor as of October 31, 2013 and 2012 for which the Company retained credit risk amounted to $260 and $387, respectively. As of October 31, 2013 and 2012, there were no allowances for uncollectible accounts.

5. ACCOUNTS RECEIVABLE
The following table presents the major components of accounts 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
Inventories consist of the following:
  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, 
  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
The following table presents the components of property and equipment, net:
  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 

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents the major components of accounts payable and accrued expenses:
  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
Certain 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 to1.5% of the purchase order amount for each transaction, plus administrative fees. Additional charges of0.05% per day (18% annualized) are incurred if the financing remains open for more than 30 days.

11.  STOCKHOLDERS’ EQUITY
Common stock warrants
The following table sets forth the number shares of common stock purchasable under outstanding stock purchase warrants at October 31, 2013 and 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 private placement, the Company issued unit purchase options, to purchase at $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, 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-14

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.
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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) for income taxes for the years ended October 31, 2013, 2012 and 2011 consisted of:
  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 
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The difference between income taxes computed at the statutory federal rate and the provision for income taxes for 2013, 2012 and 2011 related to the following:
  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% 
The components of deferred income tax assets (liabilities) were as follows:
  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, 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, 2013 amounts to approximately $79,908 and expires between2025 and2031 for federal income taxes, and approximately $26,017 for state income 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, 2013, the Company had no unrecognized tax benefits, which would impact its tax rate if recognized. As of October 31, 2013, the Company had no accrual for the potential payment of penalties. As of October 31, 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 tax years through 2011, and income taxes for Majesco Europe Limited have been examined for 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, 2013. The Company does not anticipate any significant changes in its unrecognized tax benefits over the next 12 months. 
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14. INCOME (LOSS) PER SHARE
The table below provides a reconciliation of basic and diluted average shares outstanding used in computing income (loss) per share, after applying the treasury 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 restricted stock grants representing a total of5,014,841,4,145,802 and761,265 potential shares of common stock at October 31, 2013, 2012 and 2011, respectively, were not included in the calculation of diluted earnings per common share for the years ended, as the effect of their inclusion would be anti-dilutive based on the Company’s share price and, in 2013, the Company’s net loss.
The 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 the 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, in 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 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.
Commitments
At October 31, 2013, the Company was committed under agreements with certain software developers for future milestone payments aggregating $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. Certain 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 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,   
2014 297 
2015 73 
Total rent expense amounted to $505, $539 and $513 for the years ended October 31, 2013, 2012 and 2011, respectively.
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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.
Workforce Reduction
In January 2013, the Company implemented 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 closure of its studio in Massachusetts, which focused on social games for Facebook, game-testing personnel in its New Jersey facility, and other marketing and support personnel.
The Company recorded and paid the following charges in the year ended October 31, 2013:
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 
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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. For the years ended October 31, 2013, 2012 and 2011, consulting fees incurred under the agreement amounted to $150, $150 and $150, respectively.
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.
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