discussed with the Board of Directors.To 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.
Selected TitlesDirector | | PlatformBoard | | Launch DateAudit Committee | | Compensation Committee | | Nominating and Governance Committee |
| Denver Lough | | Chair | | | | | | |
Serious SamEdward Swanson | | XBLAX | | March 2010 |
Bloodrayne Betrayal | | Steam, XBLA, PSN | | September 2011 |
Double Dragon:NeonJohn Stetson | | Steam, XBLA, PSNX | | September 2012 |
Bloodrayne | | XBLA, PSN | | July 2013 |
Greg Hastings PaintballSteve Gorlin* | | XBLA, PSNX | | July 2013 |
Zumba DanceX | | iOSX | | July 2013Chair |
Slender: The ArrivalJeff Dyer* | | SteamX | | October 2013 |
Blood of the WerewolfChair | | SteamX | | October 2013X |
The BridgeJon Mogford* | | XBLAX | | November 2013 |
RBI BaseballX | | XBLAChair | | April 2014X |
*Denotes directors who meet our criteria for “independence.”
Audit Committee. The Board of Directors has a standing Audit Committee, currently consisting of Jeff Dyer (Chairman), Steve Gorlin and Jon Mogford, as of January 1, 2018. Our Audit Committee held 4 meetings during fiscal year 2017. The Audit Committee acts under a written charter, which more specifically sets forth its responsibilities and duties, as well as requirements for the Audit Committee’s composition and meetings. Our Audit Committee charter complies with Rule 10A-3 of the Exchange Act, and the requirements of The NASDAQ Capital Market. Our Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The charter of the Audit Committee can be found on our website atwww.polarityte.com.
The Board of Directors has determined that each member of the audit committee is “independent,” as that term is defined by applicable SEC rules. In addition, the Board of Directors has determined that each member of the audit committee is “independent,” as that term is defined by the rules of The NASDAQ Capital Market.
The Board of Directors has determined that Mr. Jeff Dyer is a “financial expert” serving on its Audit Committee, and that Steve Gorlin and Jon Mogford are each independent, as the SEC has defined that term in Item 407 of Regulation 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 of Directors has a standing Nominating and Governance Committee. As of January 1, 2018, the Nominating and Governance Committee consists of Steve Gorlin (Chairman), Jeff Dyer and Jon Mogford. The Nominating and Governance Committee may employ a variety of methods for identifying and evaluating nominees for director. Both members of the Nominating and Governance Committee qualify as independent as defined by the rules of The NASDAQ Capital Market. The Nominating and Governance Committee held 2 meetings during fiscal year 2017. The Nominating and Governance Committee acts under a written charter, which more specifically sets forth its responsibilities and duties, as well as requirements for its composition and meetings. The charter of the Nominating and Governance Committee can be found on our website atwww.polarityte.com.
The Nominating and Governance Committee regularly assesses the size of the Board of Directors, the need for particular expertise on the Board of Directors, the upcoming election cycle of the Board of Directors and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. Candidates may be evaluated at regular or special 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 of Directors 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 of Directors, stockholders and management or identified by the Nominating and Governance Committee through the use of search firms or otherwise.
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 of Directors, 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 of Directors. Members of the Nominating and Governance Committee discuss and evaluate possible candidates in detail prior to recommending them to the Board of Directors. 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 of Directors 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 verification 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.
Director Nominations
There have been no material changes to the procedures by which a stockholder may recommend nominees to the Board of Directors since our last disclosure of these procedures.
Compensation Committee; Compensation Committee Interlocks and Insider Participation. The Compensation Committee of the Board of Directors is composed entirely of directors who are not our current or former employees, each of whom 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 2017 (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, as of January 1, 2018, are Jon Mogford (Chairman), Steve Gorlin and Jeff Dyer. The Compensation Committee has no interlocks with other companies. The Compensation Committee held 2 meetings during fiscal year 2017. The charter of the Compensation Committee can be found on our website atwww.polarityte.com.
The Compensation Committee is responsible for establishing and administering our executive compensation policies. The role of the Compensation Committee is to (i) formulate, evaluate and approve compensation of the 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; |
Slender: The Arrival | |
| ● | Periodically reviewing and making recommendations to the Board of Directors with respect to compensation of non-employee directors; |
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| ● | 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; |
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| ● | Reviewing competitive practices and trends to determine the adequacy of the executive compensation program; |
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| ● | 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 of Directors as to the Company’s compensation philosophy and overseeing the development and implementation of compensation programs; |
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| ● | Periodically reviewing and making recommendations to the Board of Directors with respect to compensation of non-employee directors; |
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| ● | 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.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers
Summary Compensation Table
The following Summary Compensation Table sets forth summary information as to compensation paid or accrued during the last two fiscal years ended October 31, 2017 and October 31, 2016.
| Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($) | | | Stock Awards (1) ($) | | | Option Awards (2) ($) | | | Non-Equity Incentive Plan Compensation (3) ($) | | | All Other Compensation (4) ($) | | | Total ($) | |
| Denver Lough, | | | 2017 | | | | 315,000 | | | | 100,000 | | | | -0- | | | | 2,121,250 | (9) | | | -0- | | | | -0- | | | | 2,536,250 | |
| Chairman of the Board, Chief Executive Officer, Chief Scientific Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Barry Honig, | | | 2017 | | | | -0- | | | | -0- | | | | 393,750 | (5) | | | -0- | | | | -0- | | | | -0- | | | | 393,750 | |
| Former Chief Executive Officer and Co-Chairman of the Board | | | 2016 | | | | 55,385 | | | | -0- | | | | 451,500 | (10) | | | 293,125 | (11) | | | -0- | | | | -0- | | | | 800,010 | |
| Edward Swanson | | | 2017 | | | | 270,000 | | | | 100,000 | | | | -0- | | | | 1,794,578 | (12) | | | -0- | | | | -0- | | | | 2,164,578 | |
| Chief Operating Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| John Stetson | | | 2017 | | | | 168,000 | | | | -0- | | | | 551,250 | (6) | | | -0- | | | | -0- | | | | -0- | | | | 719,250 | |
| Chief Financial Officer | | | 2016 | | | | 151,385 | | | | -0- | | | | 451,500 | (10) | | | 293,125 | (11) | | | -0- | | | | -0- | | | | 896,010 | |
| David Rector | | | 2017 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Former Chief Executive Officer | | | 2016 | | | | -0- | | | | -0- | | | | 42,998 | (16) | | | 32,782 | (15) | | | -0- | | | | -0- | | | | 75,780 | |
| Cameron Hoyler | | | 2017 | | | | 145,000 | | | | 10,000 | | | | 722,000 | (7) | | | 762,594 | (13) | | | -0- | | | | -0- | | | | 1,639,594 | |
| Chief Legal Officer, General Counsel | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jennifer Burdman | | | 2017 | | | | 47,596 | | | | 15,000 | | | | 189,500 | (8) | | | 1,168,050 | (14) | | | | | | | | | | | 1,420,146 | |
| Chief Intellectual Property Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Represents the aggregate grant date fair value for restricted stock awards granted during fiscal years 2016 and 2017, respectively, computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2017 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 2016 and 2017, respectively, computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2017 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 short-term incentive plan. |
| (4) Represents health and dental insurance premiums in excess of coverage provided to other employees. |
| (5) Represents 125,000 shares at a grant date fair value of $3.15 per common share. |
| (6) Represents 175,000 shares at a grant date fair value of $3.15 per common share. |
| (7) Represents 50,000 shares at a grant date fair value of $14.44 per common share. |
| (8) Represents 10,000 shares at a grant date fair value of $18.95 per common share. |
| (9) Represents stock options to purchase 1,000,000 common shares at an exercise price of $3.15 per common share. |
(10) Represents 87,500 shares at a grant date fair value of $5.16 per common share. (11) Represents stock options to purchase 87,500 common shares at an exercise price of $4.80 per common share. |
| (12) Represents stock options to purchase 846,000 common shares at an exercise price of $3.15 per common share. |
| (13) Represents stock options to purchase 75,000 common shares at an exercise price of $13.12 per common share. |
| (14) Represents stock options to purchase 90,000 common shares at an exercise price of $19.88 per common share. |
| (15) Represents stock options to purchase 8,333 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share. |
| (16) Represents 8,333 shares at a grant date fair value of $5.16 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 the 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.
No incentive plan was offered for fiscal year 2016.
During the fiscal year 2017, the Company issued inducement bonuses in the amount of $100,000 to each of Dr. Denver Lough and Dr. Ned Swanson in December 2016. No additional performance bonuses were paid in fiscal year 2017.
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 that align the interests of our executives and other employees with those of stockholders. The Compensation Committee believes that the use of equity awards offers the best approach to 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 stockholders approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”) and the reservation of 2,250,000 shares of our Common Stock thereunder. On May 10, 2016, at our 2016 annual meeting, our stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”) and the reservation of 4,000,000 shares of our Common Stock thereunder. On March 10, 2017, at a special meeting of stockholders, our stockholders approved the Company’s 2017 Equity Incentive Plan and the reservation of 3,450,000 shares of our Common Stock thereunder (the “2017 Plan,” and together with the 2014 Plan and the 2016 Plan, the “Plans”), which amount was increased to 7,300,000 shares on October 18, 2017 at our 2017 annual meeting. Awards under the Plans may be granted pursuant to the Plans only to persons who are eligible persons. Under the Plans, “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 connection with the offering or sale of securities 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 Plans by the Plan administrator; provided, however, that an Eligible Person may only participate in the Plans if such participation would not adversely affect either the Company’s eligibility to use Form S-8 to register, under the Securities Act, the offering and sale of shares issuable under the Plans by the Company or the Company’s compliance with any other applicable laws.
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 the 2014 Plan. The stock awards all vested on December 1, 2016.
The shares of Common Stock granted to our officers and directors under these stock awards are as follows:
| Name | | XBLA, PSNShares | |
| Barry Honig | | September 2014 | 66,666 | |
Costume Quest 2John Stetson | | Steam, XBLA, PSN | 50,000 | |
| Michael Brauser | | October 2014 | 66,666 | |
GrappleMohit Bhansali | | Steam | 4,166 | |
| Edward Karr | | March 2015 | 8,333 | |
KrautscapeAndrew Kaplan | | Steam | 8,333 | |
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 the 2014 Plan. The stock awards all vested on December 1, 2016.
The shares of Common Stock granted to our officers and directors under these stock awards are as follows:
| Name | | April 2015Shares | |
Avalanche 2: Super AvalancheMichael Beeghley | | Steam | 8,333 | |
Additionally, on December 18, 2015, Michael Brauser, Andrew Kaplan, Edward Karr, and Michael Beeghley were granted option to purchase 1,587 stock shares of Common Stock with an exercise price of $6.30 per share. These options fully vested six months from the grant date.
On June 1, 2016, Michael Brauser, Michael Beeghley, Andrew Kaplan, Edward Karr, Mohit Bhansali and David Rector were granted options to purchase 1,915 shares of Common Stock at an exercise price of $5.22 per share which options vested in full six months from the date of grant.
On December 1, 2016, the Company granted options with an exercise price of $3.15 per share to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | August 2015Number of Options | |
Gone HomeDenver Lough
Chief Executive Officer, Chief Scientific Officer and Chairman | | Xbox 1, PSN | 1,000,000 | |
Edward Swanson
Chief Operating Officer and director | | January 2016 | 846,000 | |
On December 7, 2016, the Company granted options with an exercise price of $3.12 per share to the individuals listed below pursuant to the 2017 Plan.
A BoyName and His BlobPosition | | Steam, XBLA, PSN, iOS,Number of Options | |
| Michael Neumeister | | January 2016 | | |
| Chief Medical Officer | | | 141,000 | |
Jeff Dyer
Director | | | 141,000 | |
| Matthew Swanson | | | 141,000 | |
| Stephen Milner | | | 50,000 | |
Anthony Blum
Laboratory Manager | | | 10,000 | |
| Nicholas Baetz | | | 50,000 | |
Devin Miller
Director of Translational Medicine and Regulatory Strategy | | | 75,000 | |
| Christine Hashimoto | | | 10,000 | |
Mary Dyer Lough
Clinical Research Coordinator | | | 10,000 | |
On February 8, 2017, the Company granted options with an exercise price of $4.72 per share to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Options | |
Steve Gorlin
Director | | | 50,000 | |
Jon Mogford
Director | | | 50,000 | |
On April 6, 2017, the Company granted options with an exercise price of $13.12 per share to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Options | |
Cameron Hoyler
Chief Legal Officer,General Counsel | | | 50,000 | |
On August 12, 2017, the Company granted options with an exercise price of $19.88 per share to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Options | |
Jennifer Burdman
Chief Intellectual Property Officer | | | 90,000 | |
Retail distribution.
PriorOn December 1, 2016, the Company granted restricted stock awards to July 2015,the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Restricted Stock Awards | |
Barry Honig
Former Chief Executive Officer and Chairman | | | 125,000 | |
John Stetson
Chief Financial Officer and Director | | | 175,000 | |
Michael Brauser
Former Director | | | 75,000 | |
Michael Beeghley
Director | | | 15,000 | |
Andrew Kaplan
Former Director | | | 15,000 | |
Edward Karr
Former Director | | | 15,000 | |
Mohit Bhansali
Former Director | | | 15,000 | |
David Rector
Former Director | | | 15,000 | |
Steve Gorlin
Director | | | 50,000 | |
Jon Mogford
Director | | | 50,000 | |
On April 6, 2017, the Company granted restricted stock awards to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Restricted Stock Awards | |
Cameron Hoyler
Chief Legal Officer,General Counsel | | | 50,000 | |
On August 2, 2017, the Company granted restricted stock awards to the individuals listed below pursuant to the 2017 Plan.
| Name and Position | | Number of Restricted Stock Awards | |
Jennifer Burdman
Chief Intellectual Property Officer | | | 10,000 | |
Employment and Separation Agreements
During 2016 and 2017, we derived the majority of revenues from the sale of games for dedicated game consoles through retail distribution. Specifically, we have generated a substantial amount of our revenues in this channel from two “hit” franchises,
Cooking MamaandZumba Fitness. These titles are late in their life cycle, and as a result, generated significantly reduced sales than early in their life cycle. We have also released a number of other titles, primarily for the casual game consumer on the Nintendo DS, Nintendo WII and Microsoft 360 Kinect. Retail distribution no longer constitutes any focus of our business.Product Development
We primarily use third party development studios to develop our games. However, we may employ game-production 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 typically have broad rights to commercially utilize products created by the third party developers we work with. Development contracts are structured to provide developershad employment agreements 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.
The process for producing 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
Our business is dependent upon intellectual property rights in numerous respects. We typically own the copyright to our software code and content and register copyrights and trademarks in the United States as appropriate.
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 consolefollowing named executive officers.Denver Lough’s Employment Agreement
On December 1, 2016, the Company entered into an employment agreement with Dr. Denver Lough. Pursuant to the terms of the agreement, Dr. Lough will serve as Chairman of the Board of Directors and handheld platforms. Each license generally extendsas Chief Executive Officer and Chief Scientific Officer of the Company for a term of between two (2)one year which shall be automatically renewed for successive one year periods thereafter unless earlier terminated. Pursuant to four (4) yearsthe agreement, the Company shall pay Dr. Lough (i) a one-time signing bonus of $100,000, (ii) an annual base salary of $350,000, (iii) an annual discretionary bonus, as determined by the Board of Directors, in an amount up to 100% of Dr. Lough’s then current base salary and is terminable under(iv) 10 year options to purchase up to 1,000,000 shares of the Company’s Common Stock at an exercise price of $3.15 per share (equal to 100% of the market price as defined by The NASDAQ Capital Market) which options shall vest in 24 equal installments commencing on the one month anniversary of the agreement. The options were granted pursuant to the 2017 Plan.
On November 10, 2017, the Company entered into a variety of circumstances. Each license allows us to create one or more productsnew executive employment agreement (the “Lough Agreement”) with Dr. Lough, providing for the applicable system,continuation of his role as the Chief Executive Officer 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. AllChief Scientific Officer 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 extendCompany for a term of
between two (2)three years, which term shall be automatically renewed for successive one year periods thereafter unless either party provides the other party with written notice of his or its intention not to
four (4) years, are limitedrenew the Lough Agreement at least three months prior to
specific territories or platformsthe expiration of the initial term.Pursuant to the Lough Agreement and are terminable underin consideration for his services to the Company, Dr. Lough received a variety$150,000 continuation bonus and will receive a base salary 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$530,000 per annum in accordance with the Company’s regular payroll practices. For each fiscal year during the term of these licenses and advance payments against these guarantees, but other compensation or payment terms, suchemployment, Dr. Lough shall be eligible to receive a bonus in the amount of 100% of annual salary, if any, as milestone payments, are also common. Frommay be determined from time to time weby the Board of Directors in its discretion and shall be eligible to participate in any equity-based incentive compensation plan or program adopted by the Company. Dr. Lough, if terminated while not in material breach of the Lough Agreement, shall also have the right to participation payments paid to the Company (or any affiliate) from commercial transactions associated with U.S. Patent Application No. 14/954,335 and PCT International Patent Application No. PCT/US2015/063114 and any and all patents and patent applications, whether domestic or foreign, claiming priority thereto or arising therefrom (including all divisionals, continuations, reissues, reexaminations, renewals, extensions, and supplementary protection certificates of any such patents and patent application) and intellectual property rights associated with the patents (sales or licenses to third parties).
The terms of the Lough Agreement supersede any prior employment agreement or arrangement between Dr. Lough and the Company.
Edward Swanson’s Employment Agreement
On December 1, 2016, the Company entered into an employment agreement with Edward Swanson. Pursuant to the terms of the agreement, Dr. Swanson will serve as Chief Operating Officer of the Company for a term of one year which shall be automatically renewed for successive one year periods thereafter unless earlier terminated. Pursuant to the agreement, the Company shall pay Dr. Swanson (i) a one-time signing bonus of $100,000, (ii) an annual base salary of $300,000, (iii) an annual discretionary bonus, as determined by the Board of Directors, in an amount up to 100% of Dr. Swanson’s then current base salary and (iv) 10 year options to purchase up to 846,000 shares of the Company’s Common Stock pursuant to the 2017 Plan at an exercise price equal to 100% of the market price as defined by The NASDAQ Capital Market which options shall vest in 24 equal installments commencing on the one month anniversary of the agreement.
On November 10, 2017, the Company entered into a new executive employment agreement (the “Swanson Agreement”) with Dr. Swanson, providing for the continuation of his role as the Chief Operating Officer and Chief Translational Medicine Officer of the Company for a term of two years, which term shall be automatically renewed for successive one year periods thereafter unless either party provides the other party with written notice of his or its intention not to renew the Swanson Agreement at least three months prior to the expiration of the initial term.
Pursuant to the Swanson Agreement and in consideration for his services to the Company, Dr. Swanson received a $100,000 continuation bonus and will receive a base salary of $400,000 per annum in accordance with the Company’s regular payroll practices. For each fiscal year during the term of employment, Dr. Swanson shall be eligible to receive a bonus in the amount of 100% of annual salary, if any, as may be determined from time to time by the Board of Directors in its discretion and shall be eligible to participate in any equity-based incentive compensation plan or program adopted by the Company.
The terms of the Swanson Agreement supersede any prior employment agreement or arrangement between Dr. Swanson and the Company.
John Stetson’s Employment Agreement
Mr. Stetson’s employment agreement provides for an annual base salary of $168,000 and a discretionary bonus to be determined by the Compensation Committee. Pursuant to the terms of the employment agreement, Mr. Stetson 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 licenseprovided 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.
On November 10, 2017, the Company entered into a new executive employment agreement (the “Stetson Agreement”) with Mr. Stetson, providing for the continuation of his role as the Chief Financial Officer of the Company for a term of two years, which term shall be automatically renewed for successive one year periods thereafter unless either party provides the other technologiesparty with written notice of his or its intention not to renew the Stetson Agreement at least three months prior to the expiration of the initial term.
Pursuant to the Stetson Agreement and in consideration for his services to the Company, Mr. Stetson received a continuation bonus of 7,500 shares of restricted Common Stock which shall vest immediately and will receive a base salary of $168,000 per annum in accordance with the Company’s regular payroll practices. For each fiscal year during the term of employment, Mr. Stetson shall be eligible to receive a bonus in the amount of 100% of annual salary, if any, as may be determined from thirdtime to time by the Board of Directors in its discretion and shall be eligible to participate in any equity-based incentive compensation plan or program adopted by the Company.
The terms of the Stetson Agreement supersede any prior employment agreement or arrangement between Mr. Stetson and the Company.
Cameron Hoyler’s Employment Agreement
On November 10, 2017, the Company entered into a new executive employment agreement (the “Hoyler Agreement”) with Mr. Hoyler, providing for the continuation of his role as General Counsel and appointment to the role of Chief Legal Officer of the Company for a term of two years, which term shall be automatically renewed for successive one year periods thereafter unless either party developersprovides the other party with written notice of his or its intention not to renew the Hoyler Agreement at least three months prior to the expiration of the initial term.
Pursuant to the Hoyler Agreement and in consideration for usehis services to the Company, Mr. Hoyler received a $50,000 continuation bonus and will receive a base salary of $385,000 per annum in our products,accordance with the Company’s regular payroll practices. For each fiscal year during the term of employment, Mr. Hoyler shall be eligible to receive a bonus in the amount of 100% of annual salary, if any, as may be determined from time to time by the Board of Directors in its discretion and shall be eligible to participate in any equity-based incentive compensation plan or program adopted by the Company.
The terms of the Hoyler Agreement supersede any prior employment agreement or arrangement between Mr. Hoyler and the Company.
Jennifer Burdman’s Employment Agreement
On July 28, 2017, the Company entered into a new executive employment agreement (the “Burdman Agreement”) with Ms. Burdman, effective as of the Effective Date, as Chief Intellectual Property Officer and Deputy General Counsel for a term of one year, which also are subjectterm shall be automatically renewed for successive one year periods thereafter unless either party provides the other party with written notice of his or its intention not to royaltiesrenew the Burdman Agreement at least three months prior to the expiration of the initial term.
Pursuant to the Burdman Agreement and other typesin consideration for his services to the Company, Ms. Burdman received a signing bonus of payment.
Customers
Customers$15,000, a base salary of $275,000 per annum in accordance with the Company’s regular payroll practices and options to purchase 100,000 share of Common Stock. For each fiscal year during the term of employment, Ms. Burdman shall be eligible to receive a bonus in the amount of 50% of annual salary, if any, as may be determined from time to time by the Board of Directors in its discretion and shall be eligible to participate in any equity-based incentive compensation plan or program adopted by the Company.Barry Honig’s Employment Agreement
Mr. Honig’s employment agreement provided for an annual base salary of $120,000 and a discretionary bonus to be determined by the Compensation Committee. Pursuant to the terms of the employment agreement, Mr. Honig 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”. Mr. Honig resigned as Chief Executive Officer on December 1, 2016.
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 packaged softwareexecutive 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 historically been nationalentered into such an agreement assuming that one of the events identified below occurs.
Dr. Denver Lough, Chief Executive Officer and regional retailers, specialty retailersChief Scientific Officer
If Dr. Lough terminates the Lough Agreement for Good Reason (as defined in the Lough Agreement) or a Change of Control (as defined in the Lough Agreement) or the Company terminates the Lough Agreement without Cause (as defined in the Lough Agreement), then Dr. Lough shall be entitled to receive (i) the sum of his then base salary from the date of termination, (ii) reasonable expenses incurred by Dr. Lough in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and video game rental outlets. Sony, Microsoft(v) all Share Awards (as defined in the Lough Agreement) earned and Valve accountedvested prior to the date of termination. In addition, Dr. Lough shall have the right to Participation Payments (as defined in the Lough Agreement) from commercial transactions associated with the Patents (as defined in the Lough Agreement) and intellectual property rights associated with such Patents. If the Company terminates the Lough Agreement for 47%Cause, the Company will have no further obligations or liability to Dr. Lough except for the obligation to (i) pay Dr. Lough his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Lough Agreement, (iii) reasonable expenses incurred by Dr. Lough in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.
Dr. Swanson, Chief Operating Officer
If Dr. Swanson terminates the Swanson Agreement for Good Reason (as defined in the Swanson Agreement) or a Change of Control (as defined in the Swanson Agreement) or the Company terminates the Swanson Agreement without Cause (as defined in the Swanson Agreement), 37%then Dr. Swanson shall be entitled to receive (i) the sum of his then base salary from the date of termination, (ii) reasonable expenses incurred by Dr. Swanson in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and (v) all Share Awards (as defined in the Swanson Agreement) earned and vested prior to the date of termination. If the Company terminates the Swanson Agreement for Cause, the Company will have no further obligations or liability to Dr. Swanson except for the obligation to (i) pay Dr. Swanson his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Swanson Agreement, (iii) reasonable expenses incurred by Dr. Swanson in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.
Mr. John Stetson, Chief Financial Officer
If Mr. Stetson terminates the Stetson Agreement for Good Reason (as defined in the Stetson Agreement) or a Change of Control (as defined in the Stetson Agreement) or the Company terminates the Stetson Agreement without Cause (as defined in the Stetson Agreement), then Mr. Stetson shall be entitled to receive (i) the sum of his then base salary from the date of termination, (ii) reasonable expenses incurred by Mr. Stetson in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and 13%(v) all Share Awards (as defined in the Stetson Agreement) earned and vested prior to the date of termination. If the Company terminates the Stetson Agreement for Cause, the Company will have no further obligations or liability to Mr. Stetson except for the obligation to (i) pay Mr. Stetson his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Stetson Agreement, (iii) reasonable expenses incurred by Mr. Stetson in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.
Mr. Cameron Hoyler, Chief Legal Officer/General Counsel
If Mr. Hoyler terminates the Hoyler Agreement for Good Reason (as defined in the Hoyler Agreement) or a Change of Control (as defined in the Hoyler Agreement) or the Company terminates the Hoyler Agreement without Cause (as defined in the Hoyler Agreement), respectively,then Mr. Hoyler shall be entitled to receive (i) the sum of saleshis then base salary from the date of termination, (ii) reasonable expenses incurred by Mr. Hoyler in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and (v) all Share Awards (as defined in the Hoyler Agreement) earned and vested prior to the date of termination. If the Company terminates the Hoyler Agreement for Cause, the Company will have no further obligations or liability to Mr. Hoyler except for the obligation to (i) pay Mr. Hoyler his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Hoyler Agreement, (iii) reasonable expenses incurred by Mr. Hoyler in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.
Ms. Jennifer Burdman, Chief Intellectual Property Officer and Deputy General Counsel
If Ms. Burdman terminates the Burdman Agreement for Good Reason (as defined in the Burdman Agreement) or a Change of Control (as defined in the Burdman Agreement) or the Company terminates the Burdman Agreement without Cause (as defined in the Burdman Agreement), then Ms. Burdman shall be entitled to receive (i) the sum of her then base salary from the date of termination, (ii) reasonable expenses incurred by Ms. Burdman in connection with the performance of her duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of her then annual bonus and (v) all Share Awards (as defined in the Burdman Agreement) earned and vested prior to the date of termination. If the Company terminates the Burdman Agreement for Cause, the Company will have no further obligations or liability to Ms. Burdman except for the obligation to (i) pay Ms. Burdman her then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Burdman Agreement, (iii) reasonable expenses incurred by Ms. Burdman in connection with the performance of her duties and (v) accrued but unused vacation time through the date of termination.
Mr. Barry Honig, Former Chief Executive Officer
Mr. Honig’s employment agreement provided for an annual base salary of $120,000 and a discretionary bonus to be determined by the Compensation Committee. Pursuant to the terms of the employment agreement, Mr. Honig would be entitled to certain payments and benefits if the Company terminated the executive’s employment without “cause” or the executive terminated his employment for “good reason”. Mr. Honig resigned as Chief Executive Officer on December 1, 2016.
Outstanding Equity Awards at Fiscal Year-End
The following table shows grants of stock options and grants of unvested stock awards outstanding on the last day of the fiscal year ended October 31, 2016. For2017, to each of the then executive officers and directors named in the Summary Compensation Table.
| | | | | | | | Option Awards | | Stock Awards | | | | |
| Name | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable (#) | | | Option Exercise Price ($) | | | 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) | |
| Denver Lough | | 458,333 | (2) | | 541,667 | (2) | | $ | 3.15 | | | November 30, 2026 | | | - | | | $ | - | |
| Edward Swanson | | 387,750 | (2) | | 458,250 | (2) | | $ | 3.15 | | | November 30, 2026 | | | - | | | $ | - | |
| John Stetson | | 87,500 | (2) | | - | (2) | | $ | 4.80 | | | April 24, 2026 | | | - | | | $ | - | |
| Cameron Hoyler | | 18,750 | (2) | | 56,250 | (2) | | $ | 13.12 | | | April 6, 2019 | | | 37,500 | (2) | | $ | 970,125 | |
| Jennifer Burdman | | 7,500 | (2) | | 82,500 | (2) | | $ | 19.88 | | | August 2, 2027 | | | 9,167 | (2) | | $ | 237,150 | |
| Steven Gorlin | | 16,667 | (2) | | 33,333 | (2) | | $ | 4.72 | | | February 8, 2027 | | | 33,333 | (2) | | $ | 862,325 | |
| Jon Mogford | | 16,667 | (2) | | 33,333 | (2) | | $ | 4.72 | | | February 8, 2027 | | | 33,333 | (2) | | $ | 862,325 | |
| Michael Neumeister | | 58,750 | (2) | | 82,250 | (2) | | $ | 3.12 | | | December 6, 2026 | | | - | | | $ | - | |
| Steven Milner | | 20,833 | (2) | | 29,167 | (2) | | $ | 3.12 | | | December 6, 2026 | | | - | | | $ | - | |
| | | 26,250 | (2) | | 63,750 | (2) | | $ | 6.57 | | | March 10, 2027 | | | - | | | $ | - | |
| Jeff Dyer | | 58,750 | (2) | | 82,250 | (2) | | $ | 3.12 | | | December 6, 2026 | | | - | | | $ | - | |
| (1) | Market value based on closing stock price of $25.87 on October 31, 2017. |
| (2) | Vests monthly, at a rate of 1/24 of such shares per month. |
| Name | | Number of
Stock Options
Held at Fiscal
Year-End | | | Number of
Shares of
Restricted
Stock Held
at Fiscal
Year-End | |
| Denver Lough | | | 1,000,000 | (1) | | | - | |
| Edward Swanson | | | 846,000 | (2) | | | - | |
| John Stetson | | | 87,500 | (3) | | | - | |
| Cameron Hoyler | | | 75,000 | (4) | | | 37,500 | |
| Jennifer Burdman | | | 90,000 | (5) | | | 9,167 | |
| Steven Gorlin | | | 50,000 | (6) | | | 33,333 | |
| Jon Mogford | | | 50,000 | (6) | | | 33,333 | |
| Michael Neumeister | | | 141,000 | (7) | | | - | |
| Steven Milner | | | 50,000 | (7) | | | - | |
| | | | 90,000 | (8) | | | - | |
| Jeff Dyer | | | 141,000 | (7) | | | - | |
| (1) | Strike price of $3.15, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of November 30, 2016 |
| (2) | Strike price of $3.15, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of November 30, 2016 |
| (3) | Strike price of $4.80, fully vested |
| (4) | Strike price of $13.12, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of April 6, 2017 |
| (5) | Strike price of $19.88, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of August 2, 2017 |
| (6) | Strike price of $4.72, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of February 8, 2017 |
| (7) | Strike price of $3.12, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of December 6, 2016 |
| (8) | Strike price of $6.57, vests monthly, at a rate of 1/24 of such shares per month, starting on the grant date of March 10, 2017 |
Director Compensation
The following table shows the total compensation paid or accrued during the fiscal year ended 2015, our top three accounts were Microsoft (digital), GameStop and Alliance Distributors, which accounted for approximately 13%, 10% and 10%October 31, 2017 to each of our revenue, respectively.directors, current and former.
| Name | | Fees Earned or Paid in Cash ($) | | | Stock Awards ($) (1) | | | Option Awards ($) (2) | | | All Other Compensation ($) | | | Total ($) | |
| Steve Gorlin | | $ | 5,000 | | | $ | 237,000 | (3) | | $ | 158,688 | (5) | | $ | - | | | $ | 400,688 | |
| Jon Mogford | | $ | 5,000 | | | $ | 237,000 | (3) | | $ | 158,688 | (5) | | $ | - | | | $ | 400,688 | |
| Jeff Dyer | | $ | 5,000 | | | $ | - | | | $ | 287,699 | (6) | | $ | - | | | $ | 292,699 | |
| Michael Beeghley | | $ | 5,000 | | | $ | 47,250 | (4) | | $ | - | | | $ | - | | | $ | 52,250 | |
| (1) Represents the aggregate grant date fair value for stock awards granted by us in fiscal year 2017 computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for fiscal year ended October 31, 2017 for details as to the assumptions used to determine the fair value of the stock awards. |
| (2) Represents the aggregate grant date fair value for options granted by us in fiscal year 2017 computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for fiscal year ended October 31, 2017 for details as to the assumptions used to determine the fair value of the option awards. |
| (3) Represents 50,000 shares at a grant date fair value of $4.74 per common share. |
| (4) Represents 15,000 shares at a grant date fair value of $3.15 per common share. |
| (5) Represents stock options to purchase 50,000 common shares at an exercise price of $4.72 per common share. |
| (6) Represents stock options to purchase 141,000 common shares at an exercise price of $3.12 per common share. |
Director Compensation Policy
During the fiscal year ended October 31, 2017, 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 fiscal 2015, we transferred our distribution activities relatedaddition, the Chairman of the Board of Directors received an additional annual cash retainer of $10,000.
Each non-employee director was also entitled to packaged software and reduced our headcount and working capital requirements dramatically in orderreceive 5-year options to focuspurchase shares of the Company’s Common Stock valued at $10,000, calculated by dividing $10,000 by the closing stock price on the download business, where games are downloaded from servers maintaineddate 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 game companies, such as Valve, Microsoft, Sony and Nintendo. Accordingly, currently our customers are substantially users of games on those platforms. We continue to explore new distribution channels for our games.
Competition
We compete with many other first and third party publishers and developers withineither the video game industry.
Seasonality
The interactive entertainment business is highly seasonal, with sales typically higher during the peak holiday selling season during the fourth quarterChairman of the calendar year. Traditionally,Board of Directors, the majority of sales of our packaged software 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 was required to finance the manufacturing of inventory of products that shipped during these quarters. By contrast, our digital distribution activities are less subject to seasonality and do not require significant investments in inventory or accounts receivable during the holiday seasons.
Employees
We had four full-time employees as of October 31, 2016.
Available Information
We file annual, quarterly, and current reports, as well as proxy statements and other information with the Securities and Exchange Commission, available to the public free of charge over the Internet at our website at http://www.majescoent.com In addition, may materials we file with the SEC are available on the SEC’s website aswww.SEC.GOVfree of charge.
Our business and operations are subject to a number of risks and uncertainties as described below. However, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that could harm our business, financial condition or results of operations. If any of the following risks actually occur, our ebusiness, financial condition or results of operations could suffer.
Certain Risk Factors Relating toPolarity
Rapid technological change could cause Polarity’s platform, PolarityTE, to become obsolete.
The technologies underlying Polarity’s platform, PolarityTE, are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. Polarity can give no assurance that others will not develop processes with significant advantages over the processes that Polarity offers or is seeking to develop. Any such occurrence could have a material and adverse effect on Polarity’s business, results of operations and financial condition.
Polarity’s revenues will depend upon adequate reimbursement from public and private insurers and health systems.
Polarity’s success will depend on the extent to which reimbursement for the costs of its treatments will be available from third party payers, such as public and private insurers and health systems. Government and other third party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement of new treatments. Therefore, significant uncertainty usually exists as to the reimbursement status of new healthcare treatments. If Polarity is not successful in obtaining adequate reimbursement for its treatment from these third party payers, the market's acceptance of Polarity’s treatment could be adversely affected. Inadequate reimbursement levels also likely would create downward price pressure on Polarity’s treatment. Even if Polarity does succeed in obtaining widespread reimbursement for its treatment, future changes in reimbursement policies could have a negative impact on Polarity’s business, financial condition and results of operations.
To be commercially successful, Polarity must convince physicians that its treatments aresafe and effective alternatives to existing treatments and that Polarity’s treatments should be used.
Polarity believes physicians will only adopt its treatment if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of Polarity’s treatment is a favorable alternative to conventional methods, including skin grating. Physicians may be slow to change their medical treatment practices for the following reasons, among others:
| ● Lack of evidence supporting additional patient benefits and Polarity’s treatments over conventional methods;
● Perceived liability risks generally associated with the use of new procedures; and
● Limited availability of reimbursement from third party payers.
|
In addition, Polarity believes that recommendations for and support of its treatments by influential physicians are essential for market acceptance and adoption. If Polarity does not receive this support or is unable to demonstrate favorable long-term clinical data, physicians and hospitals may not use Polarity’s treatment, which would significantly reduce Polarity’s ability to achieve revenue and would prevent Polarity from sustaining profitability.
Polarity’s ability to protect its intellectual property and proprietary technologythrough patents and other means is uncertain and may be inadequate, which couldhave a material and adverse effect on Polarity.
Polarity’s success depends significantly on its ability to protect its proprietary rights to the technologies used in it treatment and PolarityTE platform. Polarity relies on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect its proprietary technology. These legal means afford only limited protection and may not adequately protect Polarity’s rights or permit Polarity to gain or keep any competitive advantage. In addition, Polarity’s pending patent applications include claims to material aspects of Polarity’s procedures that are not currently protected by issued patents. The patent application process can be time consuming and expensive. Polarity cannot ensure that any of its pending patent applications will result in issued patents. Competitors may be able to design around Polarity’s patents or develop procedures that provide outcomes that are comparable or even superior to Polarity’s. Furthermore, the laws of foreign countries may not protect Polarity’s intellectual property rights to the same extent as do the laws of the United States.
The failure to obtain and maintain patents and/or protect Polarity’s intellectual property rights could have a material and adverse effect on Polarity’s business, results of operations, and financial condition. Whether a patent is valid is a complex matter of science and law, and therefore Polarity cannot be certain that, if challenged, its patents would be upheld. If one or more of those patents are invalidated, that could reduce or eliminate any competitive advantage Polarity might otherwise have had.
In the event a competitor infringes upon Polarity’s pending patent or other intellectual property rights, enforcing those rights may be costly, uncertain, difficult and time consuming. Even if successful, litigation to enforce or defend Polarity’s intellectual property rights could be expensive and time consuming and could divert Polarity’s management's attention. Further, bringing litigation to enforce Polarity’s patents subjects Polarity to the potential for counterclaims. In the event that one or more of our patents are challenged, a court or the United States Patent and Trademark Office (“USPTO”) may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm Polarity’s competitive position. If the USPTO ultimately cancels or narrows the claim in any of Polarity’s patents through these proceedings, it could prevent or hinder Polarity from being able to enforce them against competitors. Such adverse decisions could negatively impact Polarity’s future, expected revenue.
Polarity may become subject to claims of infringement of theintellectual property rights of others, which could prohibit Polarity from developingits treatment, require Polarity to obtain licenses from third parties or to developnon-infringing alternatives, and subject Polarity to substantial monetary damages.
Third parties could assert that Polarity’s procedures infringe their patents or other intellectual property rights. Whether a product infringes a patent or other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. Therefore, Polarity cannot be certain that it has not infringed the intellectual property rights of others. Because patent applications may take years to issue, there also may be applications now pending of which Polarity is unaware that may later result in issued patents that Polarity’s procedure or processes infringe. There also may be existing patents or pending patent applications of which Polarity is unaware that its procedures or processes may inadvertently infringe.
Any infringement claim could cause Polarity to incur significant costs, place significant strain on Polarity’s financial resources, divert management's attention from Polarity’s business and harm Polarity’s reputation. If the relevant patents in such claim were upheld as valid and enforceable and Polarity was found to infringe, Polarity could be prohibited from utilizing any procedure that is found to infringe unless Polarity obtains licenses to use the technology covered by the patent or other intellectual property or is able to design around the patent or other intellectual property. Polarity may be unable to obtain such a license on terms acceptable to it, if at all, and Polarity may not be able to redesign it’s processes to avoid infringement. A court could also order Polarity to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm Polarity’s reputation, business, financial condition and operating results.
Polarity’s business is subject to continuing regulatory compliance by the U.S. Food and Drug Administration (the “FDA”) and other authorities, which is costly and Polarity’s failure to comply could result in negative effects on its business.
The FDA has specific regulations governing tissue-based products, or HCT/Ps. The FDA has broad post-market and regulatory and enforcement powers. The FDA's regulation of HCT/Ps includes requirements for registration and listing of products, donor screening and testing, processing and distribution (“Current Good Tissue Practices”), labeling, record keeping and adverse-reaction reporting, and inspection and enforcement.
Even if pre-market clearance or approval is obtained, the approval or clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed, may require warnings to accompany the product or impose additional restrictions on the sale and/or use of the product. In addition, regulatory approval is subject to continuing compliance with regulatory standards, including the FDA's quality system regulations.
If Polarity fails to comply with the FDA regulations regarding its tissue regeneration processes, the FDA could take enforcement action, including, without limitation, any of the following sanctions:
● Untitled letters, warning letters, fines, injunctions, and civil penalties;
● Operating restrictions, partial suspension or total shutdown of procedure;
● Refusing requests for clearance or approval of new procedures;
● Withdrawing or suspending current applications for approval or approvals already granted; and
● Criminal prosecution.
It is likely that the FDA's regulation of HCT/Ps will continue to evolve in the future. Complying with any such new regulatory requirements may entail significant time delays and expense, which could have a material adverse effect on Polarity’s business.
Polarity faces significant uncertainty in the industry due to government healthcarereform.
There have been and continue to be proposals by the Federal Government, State Governments, regulators and third party payers to control healthcare costs, and generally, to reform the healthcare system in the United States. There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully understood. These proposals may affect aspects of Polarity’s business. Polarity also cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on Polarity.
Oversight in the industry might affect the manner in which Polarity may compete in the marketplace.
There are laws and regulations that govern the means by which companies in the healthcare industry may market their treatments to healthcare professionals and may compete by discounting the prices of their treatments, including for example, the federal Anti-Kickback Statute, the federal False Claims Act, the federal Health Insurance Portability and Accountability Act of 1996, state law equivalents to these federal laws that are meant to protect against fraud and abuse and analogous laws in foreign countries. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, in some instances civil and criminal penalties, damages, fines, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. In addition, federal and state laws are also sometimes open to interpretation, and from time to time Polarity may find itself at a competitive disadvantage if Polarity’s interpretation differs from that of our competitors.
Polarity may have significant liability exposure and its insurance may not cover all potential claims.
Polarity is exposed to liability and other claims in the event that its treatment is alleged to have caused harm. Polarity may not be able to obtain insurance for the potential liability on acceptable terms with adequate coverage or at reasonable costs. Any potential product liability claims could exceed the amount of Polarity’s insurance coverage or may be excluded from coverage under the terms of the policy. Polarity’s insurance may not be renewed at a cost and level of coverage comparable to that then in effect.
If the NASDAQ Stock Market determines that the Merger with Polarity and the issuance of the Merger Consideration results in a change of controlPresident of the Company
or the Chairman of a Board committee.On November 10, 2017, the Board of Directors approved a new Director Compensation Policy. In the new policy, our directors will be compensated in accordance with the following terms. Each non-employee director received a quarterly cash retainer of $10,000. The Company’s Audit Committee Chairman shall receive $15,000 annual Service Fee, the Compensation Committee Chairman shall receive a $10,000 annual service fee, the Nominating Governance Chairman shall receive an $8,000 annual service fee.
Each non-employee director was also entitled to receive 10-year options to purchase shares of the Company’s Common Stock valued at $50,000, calculated by dividing $150,000 by the Black-Scholes value of the stock options based on the closing stock price the day the stock options are awarded.
Each non-employee director was entitled to a fee of $1,500 for each Board of Director 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 $500 for each teleconference called by either the Chairman of the Board of Directors, the President of the Company may be requiredor the Chairman of a Board of Director committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth information known to submit a new application under NASDAQ’s original listing standards and if such application is not approved,us concerning the beneficial ownership of the Company’s common stock may be delisted from The NASDAQ Capital Market.
In connectionCommon Stock as of February 26, 2018 for:| ● | each person known by us to beneficially own more than 5% of the Company’s Common Stock; |
| |
| ● | each of our directors; |
| |
| ● | each of our executive officers; and |
| |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the Merger,rules and regulations of the Company will issue 7,050SEC. In general, a person is deemed to be the beneficial owner of (i) any shares of the Company’s Common Stock over which such person has sole or shared voting power or investment power, plus (ii) any shares which such person has the right to acquire beneficial ownership of within 60 days of the above date, whether through the exercise of options, warrants or otherwise. Applicable percentages are based on 7,357,150 shares of Common Stock outstanding on the date above, adjusted as required by rules promulgated by the SEC. Except as otherwise indicated, addresses are c/o PolarityTE, Inc., 615 Arapeen Drive, Suite 102, Salt Lake City, Utah 84108.
| Common Stock | | Number of Shares of Common Stock Beneficially Owned | | Percentage of Common Stock | |
| Executive Officers and Directors: | | | | | | |
| Denver Lough | | 7,800,000 | (1) | | 54.14 | %(2) |
| Edward Swanson | | 586,392 | (3) | | 7.97 | % |
| Steve Gorlin | | 60,417 | (4) | | * | |
| Jon Mogford | | 60,417 | (5) | | * | |
| John Stetson (6) | | 547,728 | (7) | | 7.44 | % |
| Jeff Dyer | | 96,083 | (8) | | 1.31 | % |
| Michael Neumeister | | 94,000 | (9) | | 1.28 | % |
| Current Executive Officers and Directors as a Group (8 persons) | | 9,260,037 | (1)(3)(4)(5)(7)(8)(9) | | 58.39 | % |
| | | | | | | |
| Greater than 5% Holders: | | | | | | |
Mark Groussman (10) 5154 La Gorce Drive, Miami Beach, FL 33140 | | 590,391 | (11) | | 8.02 | % |
Barry Honig (12) 555 S. Federal Hwy, #450, Boca Raton, FL 33432 | | 762,818 | (13) | | 10.37 | % |
Michael Brauser (14) 4400 Biscayne Blvd., Suite 850, Miami, FL 33137 | | 728,358 | (15) | | 9.90 | % |
Frost Gamma Investments Trust (16) 4400 Biscayne Blvd., Miami, FL 33137 | | 480,785 | | | 6.53 | % |
* Less than 1%
(1) Represents (i) 666,667 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 1,000,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, (ii) 83,333 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 400,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, and (iii) 7,050,000 shares of Common Stock underlying shares of Series E Convertible Preferred Stock.
(2) Until converted, each share of Series E Preferred Stock which are convertibleis entitled to two votes for every share of Common Stock into an aggregate of 7,050,000 shares of the Company’s common stock. NASDAQ Rule 5110(a) provides that a Company must apply for initial listing in connection with a transaction whereby a company combines with a non-NASDAQ entity, resulting in a change of control of such company and potentially allowing the non-NASDAQ entity to effectively obtain NASDAQ listing. In determining whether a change of control has occurred, NASDAQ considers all relevant factors including, changes in management, board of directors, voting power, ownership and financial structure of the Company. If The NASDAQ Stock Market determines that a change of control does in fact result from the consummation of the Merger and the issuance of the Merger Consideration and an original listing application has not been approved prior to the consummation of Merger, the Company will be in violation of NASDAQ Rule 5110(a) and the Company’s common stock could be delisted from The NASDAQ Capital Market.
Certain Other Risk Factors
Our financial resources are limited and we will need to raise additional capital in the future to continue our business.
We do not expect to generate the level of revenues going forward that we have achieved in prior years from our video game business. This significantly reduced revenue will impact our needs for future capital. We cannot ensure that additional funding will be available or, ifwhich it is available, that it can be obtainedconvertible on terms and conditions we will deem acceptable. Any additional funding derived from the sale of equity securities is likely to result in significant dilution to our existing stockholders. These matters involve risks and uncertainties that may prevent us from raising additional capital or may cause the terms upon which we raise additional capital, if additional capital is available, to be less favorable to us than would otherwise be the case. If we reach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease our business activities and dissolve the Company. In such an event, we will need to satisfy various severances, contract termination, and other dissolution-related obligations.
We have experienced recent net losses and we may incur future net losses, which may cause a decrease in our stock price.
We incurred net losses of $4.6 million in fiscal 2016 and $3.8 million in fiscal 2015. We may not be able to generate revenues sufficient to offset our costs and may sustain net losses in future periods. Any such losses may have an adverse effect on our future operating prospects, liquidity and stock price.
We have experienced volatility in the price of our stock and are subject to volatility in the future.
The price of our common stock has experienced significant volatility. The high and low bid quotations for our common stock, as reported by the NASDAQ Capital Market, ranged between a high of $14.22 and a low of $3.03 during the past 24 months. The historic market price of our common stock may be higher or lower than the price paid for our shares and may not be indicative of future market prices, depending on many factors, some of which are beyond our control. In addition, as we have significantly reduced our video game operations, and are seeking strategic alternatives, we cannot predict the performance of our stock. The price of our stock may change dramatically in response to our success or failure to consummate a strategic transaction.
Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.
Additional equity financings or other share issuances by us, including shares issued in connection with strategic alliances and corporate partnering transactions, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional sales could occur could cause the market price of our common stock to drop.
We may not be able to maintain our listing on the NASDAQ Capital Market.
Our common stock currently trades on the NASDAQ Capital Market. This market has continued listing requirements that we must continue to maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in the two of the last three fiscal years. Our results of operations and our fluctuating stock price directly impact our ability to satisfy these listing standards. In the event we are unable to maintain these listing standards, we may be subject to delisting.
A delisting from NASDAQ would result in our common stock being eligible for quotation on the Over-The-Counter market which is generally considered to be a less efficient system than listing on 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.
The rights of our common stockholders are limited by and subordinate to the rights of the holders of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock; these rights may have a negative effect on the value of shares of our common stock.
The holders of our outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock have rights and preferences generally superior to those of the holders of common stock. The existence of these superior rights and preferences may have a negative effect on the value of shares of our common stock. These rights are more fully set forth in the certificates of designations governing these instruments, and include, but are not limited to:
| ● | the right to receive a liquidation preference, prior to any distribution of our assets to the holders of our common stock; and |
| ● | the right to convert into shares of our common stock at the conversion price set forth in the certificates of designations governing the respective preferred stock, which may be adjusted as set forth therein. |
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 2014 and 2015 were based upon popular licensed brands. A decrease in the popularity of our 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.
A weak global economic environment could result in 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. Reduced consumer demand for our products could materially impact our operating results.
Termination or modification of our agreements with platform hardware manufacturers may adversely 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: (i) Sony to develop products for PlayStation, PlayStation 2, PlayStation 3 and PlayStation 4; (ii) from Nintendo to develop products for the DS, DSi, 3DS, Wii and WiiU; and (iii) from Microsoft to develop products for the Xbox, Xbox 360 and Xbox One. 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 distribute any of our games on that platform or we may be required to do so on less attractive terms.
Our platform licensors control the fee structures for online distribution of our games on their platforms.
Pursuant to the terms of certain publisher license agreements, 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.
Intellectual property claims may increase our costs or require us to cease selling affected products, which could adversely affect our financial condition and results of operations.
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 may still allege infringement. These claims and any litigation resulting from these claims may result in damage awards payable by us; 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 an adverse effect on our financial condition and results of operations. Any litigation resulting from these claims could require us to incur substantial costs.
A reduced workforce presents additional risk to the effectiveness of our internal controls.
We have significantly reduced our workforce. A smaller workforce impacts our ability to continue to undertake our historic business which could have an impact on our ability to maintain internal controls including over financial reporting, and can affect the adequacy of our controls. We cannot be certain that our internal controls over financial reporting are or 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 reputation with consumers is critical to our success. Negative consumer perceptions about our brands, games, services and/or business practices may damage our business and any costs incurred in addressing consumer concerns may increase our operating expenses.
Individual consumers form our ultimate customer base, and consumer expectations regarding the quality, performance and integrity of our products and services are high. Consumers may be critical of our brands, games, services and/or business practicesmatter submitted for a wide varietyvote of reasons. These negative consumer reactions may not be foreseeable or within our control to manage effectively. Actions we take to address consumer concerns may be costly and, in any case, may not be successful. In addition, negative consumer sentiment about our business practices may result in inquiries or investigations from regulatory agencies and consumer groups, as well as litigation, which, regardless of their outcome, may be damaging to our reputation. Any of these may have a negative impact on our business.
If our games and services do not function as consumers expect, it may have a negative impact on our business.
If our games and services do not function as consumers expect, whether because they fail to function as advertised or otherwise, our sales may suffer. If our games and services do not function as consumers expect, it may negatively impact our business.
If we are unable to sustain traditional pricing levels for our titles, our business, financial condition, results of operations, profitability, cash flows or liquidity could suffer materially.
If we are unable to sustain traditional pricing levels for our titles, whether due to competitive pressure, because retailers elect to price these products at a lower price or otherwise, it could have a negative impact on our business. Further, we make provisions for retail inventory price protection based upon certain assumed lowest prices and if competitive pressures force us to lower our prices below those levels, it could similarly have a negative impact on our business.
Our industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our new resources among, emerging technologies and business models, our business may be negatively impacted.
Technology changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products to emerging technologies, delivery platforms and business models in order to stay competitive. When we choose to incorporate a new technology into a product or to develop a product for a new platform, operating system or media format, we often are required to make a substantial investment prior to the introduction of the product. If we invest in the development of interactive entertainment products incorporating a new technology or for a new platform that does not achieve significant commercial success, our revenues from those products likely will be lower than we anticipated and may not cover our development costs. Further, our competitors may adapt to an emerging technology or business model more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers, or both. If, on the other hand, we elect not to pursue the development of products incorporating a new technology or for new platforms, or otherwise elect not to pursue a new business model, that achieves significant commercial success, it may have adverse consequences. It may take significant time and resources to shift product development resources to that technology, platform or business model, as the case may be, and may be more difficult to compete against existing products incorporating that technology or for that platform or against companies using that business model. Any failure to successfully adapt to, and appropriately allocate resources among, emerging technologies could negatively impact our business.
Competition within, and to, the interactive entertainment industry is intense, and competitors may succeed in reducing our sales.
Within the interactive entertainment industry, we compete with other publishers of interactive entertainment software developed for use on the PC, video game consoles and handheld, mobile and tablet devices or social networking sites, both within the United States and, increasingly, in international jurisdictions. Our competitors include very large corporations with significantly greater financial, marketing and product development resources than we have. A relatively small number of titles account for a significant portion of net revenues, and an even greater portion of net profit, in the interactive entertainment industry, and the availability of significant financial resources is a major competitive factor in the production of high-quality products and in the marketing of products that are ultimately well-received. Our larger competitors may be able to leverage their greater financial, technical, personnel and other resources to finance larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable properties as well as adopt more aggressive pricing policies to develop more commercially successful products for the PC or video game platforms than we do. In addition, competitors with large product lines and popular titles typically have greater leverage with retailers, distributors and other customers, who may be willing to promote titles with less consumer appeal in return for access to those competitors' more popular titles.
Increased consumer acceptance and availability of interactive entertainment developed for use by consumers on handheld, mobile and tablet devices or social networking sites or other online games, consumer acceptance and availability of technology which allows users to play games on televisions without consoles, or technological advances in online game software or the Internet could result in a decline in sales of our platform-based software.
Additionally, we compete with other forms of entertainment and leisure activities. For example, the overall growth in the use of the Internet and online services such as social networking sites by consumers may pose a competitive threat if consumers and potential consumers spend less of their available time using interactive entertainment software and more using the Internet, including those online services. Further, it is difficult to predict and prepare for rapid changes in consumer demand that could materially alter public preferences for different forms of entertainment and leisure activities. Failure to adequately identify and adapt to the competitive pressures described herein could negatively impact our business.
We may be involved in legal proceedings that may result in material adverse outcomes.
From time to time, we may be involved in claims, suits, government investigations, audits and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property, competition and antitrust matters, privacy matters, tax matters, labor and employment matters, unclaimed property matters, compliance and commercial claims. Such claims, suits, government investigations, audits and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in substantial fines and penalties, criminal sanctions, consent decrees or orders preventing us from offering certain features, functionalities, products or services, requiring us to change our development process or other business practices.
Our products are subject to ratings by the Entertainment Software Rating Board in the U.S. and similar agencies in international jurisdictions. Our failure to obtain our target ratings for our products could negatively impact our business.
The Entertainment Software Rating Board (the "ESRB") is a self-regulatory body based in the United States that provides consumers of interactive entertainment software with ratings information, including information on the content in such software, such as violence, nudity or sexual content contained in software titles. The ESRB rating categories are "Early Childhood" (i.e., content is intended for young children), "Everyone" (i.e., content is generally suitable for all ages), "Everyone 10+" (i.e., content is generally suitable for ages 10 and up), "Teen" (i.e., content is generally suitable for ages 13 and up), "Mature" (i.e., content is generally suitable for ages 17 and up) and "Adults Only" (i.e., content is suitable for adults ages 18 and up). Certain countries other than the United States have also established content rating systems as prerequisites for product sales in those countries. In some countries, a company may be required to modify its products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product, or may prevent its sale altogether in certain territories. Further, if an agency re-rates one of our games for any reason, retailers could refuse to sell it and demand that we accept the return of any unsold or returned copies or consumers could demand a refund for copies purchased. If we are unable to obtain the ratings we have targeted for our products as a result of changes in a content rating organization's ratings standards or for other reasons, it could have a negative impact on our business.
Our business, products, and distribution are subject to increasing regulation of content in key territories. If we do not successfully respond to these regulations, our business, financial condition, results of operations, profitability, cash flows or liquidity could be materially adversely affected.
Legislation is continually being introduced, and litigation and regulatory enforcement actions are taking place, that may affect the way in which we, and other industry participants, may offer content and features, and distribute and advertise our products. For example, privacy laws and regulatory guidance in many countries impose various restrictions on online and mobile advertising, as well as the collection, storage and use of personally identifiable information. We may be required to modify certain of our product development processes or alter our marketing strategies to comply with such regulations, which could be costly or delay the release of our products. In addition, many foreign countries, such as China and Germany, have laws that permit governmental entities to restrict the content and/or advertising of interactive entertainment software or prohibit certain types of content. Further, legislation which attempts to restrict marketing or distribution of such products because of the content therein has been introduced at one time or another at the federal and state levels in the United States. There is on-going risk of enhanced regulation of interactive entertainment marketing, content or sales. These laws and regulations vary by territory and may be inconsistent with one another, imposing conflicting or uncertain restrictions. The adoption and enforcement of legislation which restricts the marketing, content or sales of our products in countries in which we do business may harm the sales of our products, as the products we are able to offer to our customers and the size of the potential market for our products may be limited. Failure to comply with any applicable legislation may also result in government-imposed fines or other penalties. Moreover, the increased public dialogue concerning interactive entertainment may have an adverse impact on our reputation and consumers' willingness to purchase our products.
Item 1B. Unresolved Staff Comments.None.
We lease office space at 4041 T Hadley Road, South Plainfield, New Jersey at a cost ofShareholders. Dr. Lough beneficially owns approximately $1,613 per month under a lease agreement that expires in March 2017.
Item 3. Legal Proceedings.On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. 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. In August 2015, the defendants jointly moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply. The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument on the motion.
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.
Item 4. Mine Safety Disclosures.Not applicable.
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.
The following table shows the high and low quotations for our common stock as reported by Nasdaq from November 1, 2014 through October 31, 2016. The prices reflect inter-dealer quotations, without retail markup, markdown or commissions, and may not represent actual transactions.
| | | |
| | | |
| Fiscal Year 2015 | | |
| First Quarter | $9.54 | $3.30 |
| Second Quarter | $14.22 | $5.64 |
| Third Quarter | $10.38 | $6.54 |
| Fourth Quarter | $11.52 | $6.48 |
| | | |
| Fiscal Year 2016 | | |
| First Quarter | $13.68 | $3.66 |
| Second Quarter | $5.94 | $4.20 |
| Third Quarter | $6.30 | $3.66 |
| Fourth Quarter | $4.50 | $3.03 |
Holders of Common Stock. On December 19, 2016, we had 100 registered holders of record of our common stock. On December 19, 2016, the closing sales price of our common stock as reported on Nasdaq was $3.24 per share.
Dividends and dividend policy. Prior to October 31, 2015, we had never declared or paid any dividends on our common stock.
On January 4, 2016, we declared a special cash dividend of an aggregate of Ten Million Dollars ($10,000,000) to be paid to holders of record on January 14, 2016 of our outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of our outstanding preferred stock participated in receiving their pro rata portion of the dividend on an “as converted” basis. The dividend was paid January 15, 2016.
We do not anticipate paying future dividends at the present time. We currently intend to retain earnings, if any, for use in our business.
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 2016 Annual Meeting of Stockholders, which we intend to file within 120 days after our October 31, 2016 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.
Item 6.Selected Financial DataAs a smaller reporting company, we are not required to provide the information under this item, pursuant to Regulation S-K Item 301(c).
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 and results of operations together with “Selected Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
Majesco Entertainment Company is an innovative developer, marketer, publisher and distributor of interactive entertainment for consumers around the world. Building on more than 25 years of operating history, Majesco develops and publishes a wide range of video games on digital networks through its Midnight City label, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. Although, historically, we have sold packaged software to large retail chains, specialty retail stores, video game rental outlets and distributors and through digital distribution for platforms such as Xbox Live Arcade, PlayStation Network, or PSN, and Steam, and for mobile devices and online platforms, we are now purposed to operate, almost exclusively, in our digital software business unit.
On December 1, 2016, we entered into an Agreement and Plan of Reorganization (the “Agreement”) with Majesco Acquisition Corp., a Nevada corporation and wholly-owned subsidiary of the Company, PolarityTE, Inc., a Nevada corporation (“Polarity”) and Dr. Denver Lough, the owner of 100%54.14% of the issued and outstanding
Common Stock, but approximately 61.57% of the outstanding voting power.(3) Represents (i) 370 shares of capitalCommon Stock, (ii) 564,000 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 846,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, (iii) 20,833 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 100,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments and (iv) 1,189 shares of Common Stock acquired by Edward Swanson Roth IRA (“Roth IRA”). Edward Swanson is the Trustee of Roth IRA and in such capacity has voting and dispositive control over the securities held by such entity.
(4) Represents (i) 29,167 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 50,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, (ii) 1,042 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 5,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments (iii) 29,167 shares of Common Stock which represents the vested potion (including shares vesting within 60 days) of a 50,000 share restricted stock grant under the 2017 Plan which vests in 24 equal monthly installments, (iv) 1,042 shares of Polarity (the “Seller”Common Stock which represents the vested potion (including shares vesting within 60 days) of a 5,000 share restricted stock grant under the 2017 Plan which vests in 24 equal monthly installments
(5) Represents (i) 29,167 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 50,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, (ii) 1,042 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 5,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments (iii) 29,167 shares of Common Stock which represents the vested potion (including shares vesting within 60 days) of a 50,000 share restricted stock grant under the 2017 Plan which vests in 24 equal monthly installments, (iv) 1,042 shares of Common Stock which represents the vested potion (including shares vesting within 60 days) of a 5,000 share restricted stock grant under the 2017 Plan which vests in 24 equal monthly installments.
(6) John Stetson is the President of Stetson Capital Investments, Inc. (“Stetson Capital”), and the Trustee of Stetson Capital Investments, Inc. Retirement Plan (“Stetson Retirement Plan”). In these capacities, he has voting and dispositive control over the securities held by such entities. In addition, John Stetson is the Chief Financial Officer of the Company.
(7) Represents (i) 360,923 shares of Common Stock held by John Stetson, (ii) 19,444 shares of Common Stock held by Stetson Capital, (iii) 39,444 shares of Common Stock held by Stetson Retirement Plan (iv) an option to purchase 87,500 shares of Common Stock pursuant to the 2016 Plan, (v) an option to purchase 30,000 shares of Common Stock pursuant to the 2017 Plan, (vi) 6,250 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 30,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments and (vii) 4,167 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 20,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments.
(8) Represents (i) 8,522 shares of common stock held by Jeff Dyer, (ii) 94,000 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 141,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, (iii) 1,042 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 5,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments, and (iv) 1,042 shares of Common Stock which represents the vested potion (including shares vesting within 60 days) of a 5,000 share restricted stock grant under the 2017 Plan which vests in 24 equal monthly installments.
(9)Represents 94,000 shares of Common Stock which represents the vested portion (including shares vesting within 60 days) of an option to purchase 141,000 shares of Common Stock under the 2017 Plan which option vests in 24 equal monthly installments
(10) Mark Groussman is the President of Melechdavid, Inc. (“Melechdavid”), and the Trustee of the Melechdavid Inc., Retirement Plan (“Melechdavid Retirement Plan”). In such capacities, he has voting and dispositive control over the securities held by such entities.
(11) Represents (i) 522,800 shares of Common Stock held by Melechdavid and (ii) 67,591 shares of Common Stock held by Melechdavid Retirement Plan. Excludes (i) 54,545 shares of Common Stock underlying Series F Preferred Stock held by Melechdavid and (ii) 27,273 shares of Common Stock underlying Warrants held by Melechdavid. 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, which the holder has waived to 9.99%.
(12) Barry Honig is the Trustee of GRQ Consultants, Inc. 401K (“401K”) and GRQ Consultants, Inc. Roth 401K FBO Barry Honig (“Roth 401K”). Barry Honig is President of Barry and Renee Honig Charitable Foundation, Inc. (“Honig Foundation”). Barry Honig’s wife, Renee Honig, is the Trustee of GRQ Consultants, Inc. Roth 401K FBO Renee Honig (“Roth 401K Renee Honig”). Barry Honig is President of GRQ Consultants, Inc. (“GRQ”). In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.
(13) Represents (i) 518,400 shares of Common Stock held by Barry Honig, (ii) 146,946 shares of Common Stock held by 401K, (iii) 79,494 shares of Common Stock held by Roth 401K (iv) 494 shares of Common Stock held by Roth 401K Renee Honig, (v) 1,484 shares of Common Stock held by Honig Foundation and (vi) 16,000 shares of Common Stock held by GRQ. Excludes (i) 163,183 shares of Common Stock underlying Series A Preferred Stock held by Mr. Honig, (ii) 269,608 shares of Common Stock underlying shares of Series B Preferred Stock held by Mr. Honig, (iii) 109,091 shares of Common Stock underlying shares of Series F Preferred Stock held by 401K, (iv) 81,818 shares of Common Stock underlying shares of Series F Preferred Stock held by Roth 401K, (v) 27,273 shares of Common Stock underlying shares of Series F Preferred Stock held by Roth 401K Renee Honig, (vi) 81,818 shares of Common Stock underlying shares of Series F Preferred Stock held by Honig Foundation, (vii) 54,546 shares of Common Stock underlying Warrants held by 401K, (viii) 40,909 shares of Common Stock underlying Warrants held by Roth 401K, (ix) 13,637 shares of Common Stock underlying Warrants held by Roth 401K Renee Honig and (x) 40,909 shares of Common Stock underlying Warrants held by Honig Foundation. 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, which the holder has waived to 9.99%.
(14) Michael Brauser is Chairman of the Betsy & Michael Brauser Charitable Family Foundation (“Family Foundation”) and Trustee of Grander Holdings, Inc. 401K (“Grander 401K”). In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.
(15) Represents (i) 479,517 shares of Common Stock held by Michael Brauser, (ii) 202,792 shares of Common Stock held by Grander 401K, (iii) 9,352 shares of Common Stock held by Family Foundation, (iv) 36,697 shares of Common Stock held by Michael & Betsy Brauser. Excludes (i) 146,994 shares of Common Stock underlying Series A Preferred Stock held by Mr. Brauser, (ii) 262,606 shares of Common Stock underlying Series B Preferred Stock held by Mr. 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, which the holder has waived to 9.99%.
(16) Dr. Phillip Frost, M.D. is the trustee of Frost Gamma Investments Trust (“FGIT”). Frost Gamma L.P. is the sole and exclusive beneficiary of FGIT. Dr. Frost is one of two limited partners of Frost Gamma L.P. The closinggeneral partner of Frost Gamma L.P. is subjectFrost Gamma, Inc., and the sole shareholder of Frost Gamma, Inc. is Frost-Nevada Corporation. Dr. Frost is the sole shareholder of Frost-Nevada Corporation. Dr. Frost disclaims beneficial ownership of these securities, except to various closing conditions.
Video Game Products
the extent of any pecuniary interest therein and this report shall not be deemed an admission that Dr. Frost is the beneficial owner of these securities for purposes of Section 16 or for any other purpose. Net Revenues.Change in Control Our revenues are principally derived from sales
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 video games.
Costsecurities, the operation of Sales.which may at a subsequent date result in a change in the Company’s control. CostEquity Compensation Plan Information (as of sales includes amortizationOctober 31, 2017)
| | | (a) | | | (b) | | | (c) | |
| 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) | |
| Equity compensation plans approved by security holders | | | 3,594,583 | (1) | | $ | 7.00 | | | | 0 | |
| Equity compensation plans not approved by security holders | | | 0 | | | | 0 | | | | 0 | |
| Total | | | 3,594,583 | (1) | | $ | 7.00 | | | | 0 | |
| (1) | 89,583 securities are issued pursuant to the 2016 Plan and 3,505,000 securities are issued pursuant to the 2017 Plan |
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 impairmentits management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of capitalized software development costs and license fees. Commencing upon the related product’s release, capitalized software development and intellectual property license costs are amortizedother to cost of sales.
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. Ongoing research and development activities have been substantially reduced since fiscal 2014.
Selling and Marketing Expenses. Since July 2015, these activities are now limited to online and in social media.
General and Administrative Expenses. General and administrative expenses primarily represent employee related costs, including stock compensation, for corporate executive and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically representan extent that one of the largest componentstransacting 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 our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings, and corporate- and business-development initiatives.
Interest and Financing Costs. Interest and financing costs were directly attributable to our factoring and our purchase-order financing arrangements. Such costs included commitment fees and fees based upon the value of customer invoices factored.
Income Taxes. Income taxes consist of our provisions for income taxes, as affected by our net operating loss carryforwards. Future utilization of our net operating loss,$120,000 or NOL, carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions1% 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 unless sufficient positive evidence develops to support its reversal.
Critical Accounting Estimates
Our discussion and analysisaverage 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 ofsmaller reporting company’s total 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 when such policies affect our reported and expected financial results.
Revenue Recognition. 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).
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.
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 holdersat year-end for the use of their intellectual property rights inlast two fiscal years. During 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.
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.
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 capitalized 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. If we were required to write off licenses or capitalized 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 expense as research and development costs associated with the development of mobile and social games when we cannot reliably project that future net cash flows from developed games will exceed related development costs. These games have not earned significant revenues to date and we are continuing to evaluate alternatives for future development and monetization.
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.
Accounting for Preferred Stock and Warrant transactions. We issued units consisting of preferred shares and warrants and common stock and warrants and subsequently remeasured certain of those warrants. Determining the fair value of the securities in these transactions requires significant judgment, including adjustments to quoted share prices and expected stock volatility. Such estimates may significantly impact our results of operations and losses applicable to common stockholders.
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. We accrued contingent liabilities for certain potential licensor and customer liabilities and claims that were transferred to Zift but may not be extinguished by such transaction.
Results of Operations
Year ended October 31, 2016 versus thefiscal year ended October 31, 2015
2017, the Company had no such related party transactions.Net Revenues.Net revenuesPolicy for Review of Related Party Transactions
The Company has a formal written policy governing the year ended October 31, 2016 decreased 77% to approximately $1.5 million from $6.7 million forreview and approval of related person transactions, which is posted under the year ended October 31, 2015. The decrease was due to lower sales of Zumba titles. Additionally, there were no retail sales due to the transferheading “Corporate Governance” of the retail distribution channel to Zift in July 2015.
Gross Profit.Gross profit for the year ended October 30, 2016 decreased 62% to approximately $1.3 million compared to a gross profit of approximately $3.3 million for the year ended October 31, 2015. The decrease in gross profit reflects lower Zumba and other sales as discussed above, as well as the Company’s withdrawal from the packaged software business. Gross profit as a percentage of net revenues was 81% for the year ended October 31, 2016, compared to 49% for the year ended October 31, 2015. The increase in gross profit is due to the dramatically lower cost of sales associated with a digitally sold product.
Product Research and Development Expenses.Product research and development expenses for the year ended October 31, 2016 was approximately $90,000 compared to $174,000 for the year ended October 31, 2015. The decrease reflects the general reduction in this activity.
Selling and Marketing Expenses.Total selling and marketing expenses for the year ended October 31, 2016 decreased 98% to approximately $14,000 compared to approximately $771,000 for the year ended October 31, 2015. The decrease is primarily due to lower personnel costs and other marketing and distribution activities related to our switch to digital.
General and Administrative Expenses.For the year ended October 31, 2016, general and administrative expenses increased 13% to approximately $6.0 million compared to $5.4 million for the year ended October 31, 2015. The increase reflects a $1.7 million increase in stock based compensation partially offset by lower non-stock based compensation costs, consulting and professional fees and related support expenses. Stock based compensation increased, because during the third quarter of fiscal 2016, a total of 356,666 restricted shares and 347,010 stock options were granted, of which 177,084 restricted stock shares were granted with immediate vesting.
Workforce Reduction.For the year ended October 31, 2015, we incurred workforce reduction costs of $0.8 million pertaining to severance costs, including primarily severance costs for finance and legal executives and other personnel.
Operating loss.Operating loss for the year ended October 31, 2016 increased 26% to approximately $4.9 million, compared to an operating loss of approximately $3.9 million for the year ended October 31, 2015, primarily reflecting a greater decrease in net revenues and gross profit than the expense reductions in development and marketing activities plus an increase in stock based compensation.
Extinguishment of liabilities.During the year ended October 31, 2015, we recognized a gain on extinguishment of liabilities of approximately $1.5 million. We determined that certain accounts payable balances and claims for license fees and services would never be paid because they were no longer being pursued for payment and had passed the statute of limitations.
Net gains on asset sales and other nonoperating gains.During the year ended October 31, 2015, we recognized approximately $198,000 in net gain from the sale of certain game rights and from the sale of office furniture and equipment upon the move to a smaller office. Additionally, we recognized $50,000 from the transfer of retail distribution activities to Zift, a company owned by our former chief executive officer.
Change in fair value of warrant liability.In our December 2014 private placement of units consisting of preferred stock and warrants, we issued warrants containing certain contingent settlement terms not indexed to our own stock. We accounted for the warrants as derivative liabilities and measured their fair value on a quarterly basis and recognized on a current basis any gains or losses. In the year ended October 31, 2015, we recognized a loss of approximately $1.5 million reflecting an increase in our stock price from the previous measurement date. In our April 19, 2016, equity offering, we issued warrants. We accounted for the warrants as derivative liabilities and measure their fair value on a quarterly basis and recognize on a current basis any gains or losses. In the year ended October 31, 2016, we recognized a gain of approximately $248,000 reflecting a decrease in our stock price from the previous measurement date.
Income Taxes.In the year ended October 31, 2016, our income tax expense was not significant, representing primarily minimum state income taxes.
Liquidity and Capital Resources
As of October 31, 2016, our cash and cash equivalents balance was $6.5 million and our working capital was approximately $5.4 million, compared to cash and equivalents of $17.1 million and working capital of $15.6 million at October 31, 2015.
From fiscal 2013 through the present, we have experienced net cash outflows from operations, generally to fund operating losses due to declining revenues which we attribute to three factors: 1) the introduction of competing “freemium” games on competing handheld devices such as the Apple iPhone or iTouch, and Android powered devices; 2) a shift in game distribution from retail to digital downloads; and 3) a decline in the popularity of motion based fitness games including games we publish under the Zumba fitness brand. As a result of these factors we have reduced our operating expenses, including the reduction of game production and marketing personnel, and have eliminated substantially allInvestor Relations section of our new game development activities. In 2015, we transferred our retail distribution activities to Ziftwebsite atwww.polarityte.com. For purposes of this policy, consistent with The NASDAQ Capital Market rules, the terms “related person” and transferred related assets and liabilities, including accounts receivable, inventory, customer credits and certain other liabilities.
On December 1, 2016, we entered into an Agreement and Plan“transaction” are as defined in Item 404(a) of Reorganization (the “Agreement”) with Majesco Acquisition Corp., a Nevada corporation and wholly-owned subsidiary of the Company, PolarityTE, Inc., a Nevada corporation (“Polarity”) and Dr. Denver Lough, the owner of 100% of the issued and outstanding shares of capital stock of Polarity (the “Seller”). The closing is subject to various closing conditions. We believe we have sufficient cash on hand to fund operations though the next year.
Private Placements
The private placements described below were completed in December 2014 and May 2015. A substantial portion of the proceeds of these offerings remained subject to escrow agreements until September 2015, pending the satisfaction of release conditions.
December 2014
On December 17, 2014, pursuant to subscription agreements (the “December Subscription Agreements”) entered into with certain accredited investors (the “December Investors”) the Company completed a private placement of $6.0 million of units (the “December Units”) at a purchase price of $0.68 per Unit, with each December Unit consisting of one share of the Company’s 0% Series A Convertible Preferred Stock (each a “Series A Preferred Share”) and a five-year warrant (each a “December Warrant”) to purchase one sixth of a share of the Company’s common stock at an initial exercise price of $4.08 per share (such issuance and sale, the “December Private Placement”). The December Warrants were subsequently exchanged for shares of the Company’s 0% Series B Convertible Preferred Stock (the “Series B Preferred Shares”) and shares of the Company’s common stock (see below). The offering was made in reliance upon an exemption from registrationRegulation S-K under
Section 4(a)(2) of the Securities Act of 1933, as
amended (the “Securities Act”).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 Series A Preferred Shares are convertible into sharesBoard of Directors 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 basedis listed on The NASDAQ Capital Market. Under applicable NASDAQ Capital Market rules, each of Messrs. Dyer, Gorlin and Mogford would be considered an independent director.
On November 1, 2017, we were notified by The NASDAQ Capital Market that the Company was not in compliance with Listing Rule 5605, specifically (i) Listing Rule 5605(b)(1) requiring that a conversion calculation equalmajority of the Board of Directors must be comprised of “independent” directors, as such term is defined under Listing Rule 5605 and (ii) Listing Rule 5605(c)(2)(a) requiring an audit committee to be comprised of at least three independent directors. The notice provided that consistent with Listing Rules 5605(b)(1)(A) and 5605(c)(4), The NASDAQ Capital Market will provide the Company a cure period in order to regain compliance as follows: (x) until the earlier of the Company’s next annual shareholders’ meeting or October 18, 2018 or (y) if the next annual shareholders’ meeting is held before April 30, 2018, then the Company must evidence compliance no later than April 30, 2018. On November 6, 2017, Jon Mogford was appointed to the stated valueCompany’s audit committee in satisfaction of such Series A Preferred Share, plus all accruedListing Rule 5605(c)(2)(a).
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, 2017 and unpaid dividends, if any, on such Series A Preferred Share, as2016 for (i) services rendered for the audit of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68our annual financial statements and the initial conversion price is $4.08 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, sharesreview of its common stock at a per share priceour quarterly financial statements, (ii) services rendered that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuantare reasonably related to the Certificate of Designations, Preferences and Rightsperformance of the 0% Series A Convertible Preferred Stockaudit or review of Majesco Entertainment Company, the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements)our financial statements that are not reported as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.
The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversionAudit Fees, and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.
The proceeds of the offering and certificates representing the Series A Preferred Shares and December Warrants were deposited into escrow accounts. Upon the closing of the December Private Placement, $1.0 million of the proceeds was released to us and $1.0 million of Series A Preferred Shares and December Warrants, on a pro rata basis, was released to the investors. The remaining $5.0 million was released by the escrow agent to us and the corresponding $5.0 million of Series A Preferred Shares and December Warrants were released to the investors in September 2015,(iii) services rendered in connection with
amendments totax preparation, compliance, advice and assistance.| | | 2017 | | | 2016 | |
| Audit Fees | | $ | 198,540 | | | $ | 143,090 | |
| Audit Related Fees | | | - | | | | - | |
| Tax Fees | | | - | | | | - | |
| Other Fees | | | - | | | | - | |
| Total Fees | | $ | 198,540 | | | $ | 143,090 | |
Audit Fees
Consist of fees billed for professional services rendered for the December Subscription Agreements.
On April 30, 2015, pursuant to warrant exchange agreements,audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the holders exchanged for cancellation 1,470,590 December Warrants, including those then held in escrow, for shares of common stock or Series B Preferred Shares. An aggregate of 1,050,421 shares of common stock, which amount includes the shares of common stock issuable upon conversion of the Series B Preferred Shares, were issued or issuableprincipal accountants in connection with the exchange agreements.
The Series B Preferred Sharesstatutory and regulatory filings or engagements.Audit Related Fees
Consist of fees billed for assurance and related services that are convertible into shares of common stock based on a conversion calculation equalreasonably related to the stated value ($140.00 per share)performance of the Series B Preferred Shares, plus all accrued and unpaid dividends, if any, divided by the conversion price (initially $8.40 per share, subject to adjustment). We are prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding, subject to increase, up to 9.99%. Each holder is entitled to vote on all matters submitted to our stockholders on an “as converted basis”, subject to beneficial ownership limitations, based on a conversion price of $8.40 per share.
May 2015
On May 15, 2015 (the “May Closing Date”), we closed the sale of $5.05 million of units (the “May Units”), pursuant to separate subscription agreements (the “May Subscription Agreements”) with accredited investors entered into on April 29, 2015, at a purchase price of $7.20 per May Unit. Each May Unit consists of one share of the our common stock, provided that, if the issuance of any such shares would have resulted in the investor owning in excess of 4.99%audit or review of our
issuedconsolidated financial statements and
outstanding common stock, then such investor could elect to receive sharesare not reported under “Audit Fees.”Tax Fees
Consist of our 0% Series C Convertible Preferred Stock (the “Series C Preferred Shares”),fees billed for professional services for tax compliance, tax advice and a three-year warrant (the “May Warrants”) to purchase one sharetax planning. These services include preparation of the our common stock at an exercise pricefederal and state income tax returns.
All Other Fees
Consist of $8.40 per share (such salefees for product and issuance, the “May Private Placement”).
The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares ($120.00 per share), plus all accrued and unpaid dividends, if any, divided by the conversion price ($7.20 per share, subject to adjustment). In addition, in the event the we issue or sell, or are deemed to issue or sell, shares of our common stock at a per share price that is lessservices other than the
conversion price then in effect,services reported above.Audit Committee Pre-approval Policies and Procedures
Our Audit Committee assists the conversion price shall be reduced to such lower price, subject to certain exceptions. Notwithstanding the foregoing, until such time as we obtain the required shareholder approval pursuant to the rules of The NASDAQ Stock Market, LLC, the conversion price of the Series C Preferred Shares shall not be adjusted to a per share price below $5.16. We are prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock subject to increase, up to 9.99%. Each holder is entitled to vote on all matters submitted to our stockholders on an “as converted basis”, subject to the beneficial ownership limitation, based on a conversion price of $7.20 per share. The Series C Preferred Shares bear no interest and shall rank junior to our Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.
The May Warrants are exercisable, at any time, following the date the May Warrants are issued, at a price of $8.40 per share, subject to adjustment, and expire three years from the date of issuance. The holders may, subject to certain limitations, exercise the May Warrants on a cashless basis. The Company is prohibited from effecting an exercise of any May Warrant to the extent that, as a result of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of such May Warrant, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%.
The proceeds of the May Private Placement along with certificates evidencing the Series C Preferred Shares and Series C Warrants were deposited into an escrow accounts. On the May Closing Date, twenty percent (20%) of the proceeds of the May Private Placement ($1.01 million) and a corresponding number of Series C Preferred Shares and Series C Warrants were released to us and the investors, respectively. The remaining eighty percent (80%) of the proceeds from the May Private Placement ($4.04 million) and the corresponding percentage of Series C Preferred Shares and Series C Warrants were released to us and the investors, respectively, in September 2015 in connection with amendments to the May Subscription Agreements.
September 2015
On September 25, 2015, we entered into amendment agreements to amend the terms of our subscription agreements for the private offerings closed December 17, 2014 and May 15, 2015 to provide for the consent of the lead investor in such offerings to release of all remaining escrowed funds to us ($5.0 million under the December Private Placement and $4.04 under the May Private Placement) upon the satisfaction of certain obligations, which we satisfied. Pursuant to the amendment agreements, we were, among other things, required to increase the size of its Board of Directors in overseeing and appoint thereto, individuals deemed acceptable tomonitoring the lead investorintegrity of the Company’s financial reporting process, its compliance with legal and approved by The NASDAQ Stock Market, LLC; appoint a new Chief Executive Officer and a new Chief Financial Officer and exchange the Series C Warrants, as described further below. On September 30, 2015 we received $9.04 million in proceeds from the foregoing release of escrowed fundsregulatory requirements and the corresponding securities were released to the investors.
In accordance with the aforementioned escrow release conditions, we entered into exchange agreements with holdersquality of our outstanding Series C Warrants pursuant to which each holder received .4 shares of our common stock for each 1 warrant share exchanged for cancellation. At the election of any holder who would, as a result of receiptits internal and external audit processes. The role and responsibilities of the common stock holdAudit Committee are set forth in excess of certain beneficial ownership thresholds of our issued and outstanding common stock, such holder could receive shares of our newly designated 0% Series D Convertible Preferred Stock (the “Series D Preferred Shares”). Pursuant to the foregoing exchanges, on September 25, 2015, we issued 0 shares of common stock and 168,333 Series D Preferred Shares convertible into 280,555 shares of common stock in exchange for the cancellation of Series C Warrants to purchase 701,390 shares of common stock. Certain of our officers and directors who held Series C Warrants participated in the exchange.
The Series D Preferred Shares are convertible into shares of common stock based on a conversion ratio equal to the stated value ($1,000.00 per share) of such Series D Preferred Shares to be converted, plus all accrued and unpaid dividends, if any, dividedwritten charter adopted by the conversion price ($600.00 per share, subject to adjustment). We are prohibited from effecting a conversion of the Series D Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of Common Stock outstanding, subject to increase, up to, 9.99%. The Series D Preferred Shares bear no interest and rank senior to our common stock but junior to Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares.
On October 15, 2015, our Board of Directors,
approved a revised versionwhich is available on our website atwww.polarityte.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 of Directors 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 2017, the Audit Committee took the following actions:| ● | reviewed and discussed the audited financial statements for the fiscal year ended October 31, 2017 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 |
| |
| ● | received written disclosures and the letter from EisnerAmper regarding its independence as required by applicable requirements of the PCAOB regarding EisnerAmper’s communications with the Audit Committee and the Audit Committee further discussed with EisnerAmper its independence. The Audit Committee also considered the status of pending litigation, taxation matters and other areas of oversight relating to the financial reporting and audit process that the Audit Committee determined appropriate. |
Our 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/A
The following documents are filed as exhibits:
31.1 Certificate of Designations, Preferences and Rights of our 0% Series D Convertible Preferred Stock in order to remove any voting rightsunder Section 302 of the Series D Preferred Shares, except as otherwise required by law.
Dividends
On January 4, 2016, we declared a special cash dividendSarbanes-Oxley Act of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Preferred Shares; (iii) Series B Preferred Shares; (iv) Series C Preferred Shares and (v) Series D Preferred Shares. The holders of record2002 of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis.
April 2016 Registered Common Stock and Warrant Offering
On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 sharesChief Executive Officer.31.2 Certificate under Section 302 of the Company’s common stock, par value $0.001 per share at an offering priceSarbanes-Oxley Act of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing2002 of the offering occurred on April 19, 2016.
Off-Balance Sheet Arrangements
As of October 31, 2016, 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 $6.5 million as of October 31, 2016 compared to $17.1 million at October 31, 2015 and working capital as of October 31, 2016 was $5.4 million compared to $15.6 million at October 31, 2015.
Operating Cash Flows.Our principal operating source of cash is revenue from distribution of our interactive entertainment products, net of royalty and revenue-share payments to licensors, developers and publishers. During fiscal 2015, we reduced our development and marketing activities and distributed a greater number of games published by others, compared to prior years. Accordingly, the portion of operating cash flows used for associated working capital requirements, including pre-release development and costs incurred to manufacture, sell and market our games has generally been reduced. We incurred $1.6 million of cash outflows from operations during the year ended October 31, 2015, primarily reflecting operating losses and the settlement in cash of certain outstanding royalty and customer-credit liabilities, partially offset by the liquidation of prior inventory balances and collection of accounts receivable. We incurred $1.8 million of cash outflows from operations during the year ended October 31, 2016, primarily reflecting current operating losses, partially offset by non-cash compensation expense.
Investing Cash Flows.Cash provided by investing activities in the year ended October 31, 2015 amounted to approximately $540,000, primarily reflecting proceeds from the sale of certain game rights and the collection of certain outstanding advances to GMS.
Financing Cash Flows.Net cash used in financing activities for the year ended October 31, 2016 amounted to approximately $8.8 million, mainly related to a payment of a $10.0 million special cash dividend, partially offset by an equity capital raise of approximately $1.4 million. Net cash provided by financing activities for the year ended October 31, 2015 reflects $10.9 million of net proceeds from private placements.
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.
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 relativepursuant 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.
During the current period, we enhanced our internal control over financial reporting by employing an external firm on a contract services basis. This firm specializes in providing finance and accounting functions for small companies, and the founders and senior managers are highly experienced former employees of national accounting firms.
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 to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.21 |
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, 2016. 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 in 2013, 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, 2016.
There were no changes to internal controls over financial reporting during the most recent quarter.
This annual report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in the Annual Report on Form 10-K.
Item 9B. Other Information.None.
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 2016 Annual Meeting of Stockholders, which we will file with the SEC within 120 days after our October 31, 2016 fiscal year end.
Item 10 - Directors, Executive Officers and Corporate Governance.Item 11 - Executive Compensation.Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Item 13 - Certain Relationships and Related Transactions and Director Independence.Item 14 - Principal Accountant Fees and Services.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:
2.1 | Agreement and Plan of Reorganization (incorporated by reference to Exhibit 2.1 to our Form 8-K filed with the Commission on December 7, 2016) |
3.1 | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on September 15, 2014). |
3.2 | Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 17, 2005). |
3.3 | Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of Majesco Entertainment Company (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on December 18, 2014) |
3.4 | Certificate of Designations, Preferences and Rights of the 0% Series B Convertible Preferred Stock of Majesco Entertainment Company (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on April 30, 2015) |
3.5 | Certificate of Designations, Preferences and Rights of the 0% Series C Convertible Preferred Stock of Majesco Entertainment Company (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K filed on June 9, 2015) |
3.6 | Certificate of Designations, Preferences and Rights for 0% Series D Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 20, 2015) |
3.7 | Certificate of Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the Commission on July 29, 2016)
|
3.8 | Form of Certificate of Designation of Series E Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the Commission on December 7, 2016) |
4.1 | Form of Common Stock Purchase Warrant issued to investors (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on December 18, 2014). |
4.2 | Form of Warrant (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on April 14, 2016) |
#10.1 | Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2005). |
#10.2 | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2005). |
10.3 | Form of Personal Indemnification Agreement (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 15, 2009). |
10.4 | First Amendment to the Confidential License Agreement for the Wii Console (Western Hemisphere), effective January 4, 2010, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on June 14, 2010). |
10.5 | Add On Content Addendum to the Confidential License Agreement for the Wii Console, effective November 2, 2009, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on June 14, 2010). |
10.6 | Second Amendment to the Confidential License Agreement for the Wii Console, effective February 20, 2013, by and between Nintendo of America Inc. and Majesco Entertainment Company (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 21, 2013). |
10.7 | Intentionally omitted. |
10.8 | XBOX 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). |
+10.9 | Amendment 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). |
+10.10 | Amendment 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). |
#10.11 | Amended 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). |
#10.12 | Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on May 1, 2014). |
10.13 | Form of December 2014 Subscription Agreement between the Company and investors (incorporated by reference to Exhibit 10.1 to our form 8-k filed with the commission on September 21, 2015). |
10.14 | Form of December 2014 Registration Rights Agreement between the Company and investors (incorporated by reference to Exhibit 10.2 to our form 8-k filed with the commission on December 18, 2014). |
#10.15 | 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 1, 2015). |
10.16 | Form of May 2015 Subscription Agreement between the Company and Investors (incorporated by reference to Exhibit 10.1 to our form 8-k filed with the commission on May 21, 2015) |
10.17 | Form of May 2015 Registration Rights Agreement between the Company and investors (incorporated by reference to Exhibit 10.2 to our form 8-k filed with the commission on May 21, 2015). |
#10.19 | Separation Agreement between Majesco Entertainment Company and Jesse Sutton, dated as of July 27, 2015 (incorporated by reference to Exhibit 10.2 to our form 8-k filed with the commission on July 28, 2015) |
10.20 | Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations between the Company and Zift Interactive LLC (incorporated by reference to Exhibit 10.1 to our form 8-k filed with the commission on August 6, 2015) |
10.21 | Stock Purchase Agreement for Zift Interactive LLC between the Company and Jesse Sutton (incorporated by reference to Exhibit 10.2 to our form 8-k filed with the commission on August 6, 2015) |
10.22 | Amendment Agreement for Subscription Agreement dated December 17, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 1, 2015) |
10.23 | Amendment Agreement for Subscription Agreement dated May 15, 2015 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 1, 2015) |
10.24 | Form of Exchange Agreement dated September 30, 2015 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.25 | Executive Employment Agreement with Barry Honig (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.26 | Executive Employment Agreement with John Stetson (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.27 | Restricted Stock Agreement with Barry Honig (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.28 | Restricted Stock Agreement with John Stetson (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.29 | Restricted Stock Agreement with Michael Brauser (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.30 | Restricted Stock Agreement with Mohit Bhansali (incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.31 | Restricted Stock Agreement with Edward Karr (incorporated by reference to Exhibit 10.10 to our Current Report on Form 8-K filed on October 1, 2015) |
#10.32 | Restricted Stock Agreement with Andrew Kaplan (incorporated by reference to Exhibit 10.11 to our Current Report on Form 8-K filed on October 1, 2015) |
10.33 | Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on April 14, 2016) |
10.34 | Placement Agency Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on April 14, 2016) |
10.35 | Employment Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on December 7, 2016) |
10.36 | Employment Agreement (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the Commission on December 7, 2016) |
10.37 | Form of Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the Commission on December 7, 2016) |
10.38 | Stockholders Agreement (incorporated by reference to Exhibit 10.4 to our Form 8-K filed with the Commission on December 7, 2016) |
10.39 | Voting Agreement (incorporated by reference to Exhibit 10.5 to our Form 8-K filed with the Commission on December 7, 2016) |
10.40 | Warrant Bill of Sale of Laboratory Equipment (incorporated by reference to Exhibit 10.6 to our Form 8-K filed with the Commission on December 7, 2016) |
10.41 | Lease by and Between the Company and Paradigm Resources LC (incorporated by reference to Exhibit 10.7 to our Form 8-K filed with the Commission on December 7, 2016) |
10.42 | Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Commission on December 16, 2016) |
10.43 | Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the Commission on December 16, 2016)
|
10.44 | Form of First Amendment to Agreement and Plan of Reorganization (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the Commission on December 16, 2016)
|
*21.1 | Subsidiaries |
*23.1 | Consent of EisnerAmper LLP |
*31.1 | Certification of Principal Executive Officer |
*31.2 | Certification of Principal Financial Officer |
*32.1 | Section 1350 Certificate of President and Chief Financial Officer |
*101.INS | | XBRL Instance Document |
*101.SCH | | XBRL Taxonomy Extension Schema Document |
*101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
*101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
*101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document |
*101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
____________
# | Constitutes a management contract, compensatory plan or arrangement. |
| |
± | We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. |
| |
* | Filed herewith. |
| |
| (b) Exhibits. |
| |
| See (a)(3) above. |
| |
| (c) Financial Statement Schedules. |
| |
| See (a)(2) above. |
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 SUBSIDIARYPolarityTE, Inc. |
| | |
| | By: | /s/ Denver Lough
|
| | | Denver Lough, Chief Executive Officer (Principal |
| | (Principal Executive Officer) |
| | |
| Date: December 29, 2016 |
| |
| | By: | /s/ John StetsonDate: February 28, 2018 |
| | | |
| ` | By: | /s/ John Stetson |
| | John Stetson, Chief Financial Officer (Principal |
| | (Principal Financial and Accounting Officer) |
| | | |
| | Date: December 29, 2016February 28, 2018 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
/s/ Denver Lough
| | Chief Executive Officer and Chairman of the Board of Directors | | December 29, 2016February 28, 2018 |
Denver Lough
| | (Principal Executive Officer) | | |
| | | | | |
| /s/ John Stetson | | Chief Financial Officer and Director (Principal | | December 29, 2016 |
John Stetson | | Financial and Accounting Officer) | | February 28, 2018 |
| | | | |
/s/ Edward Swanson
| | Chief Operating Officer and Director | | December 29, 2016 |
Edward Swanson
| | | | |
| | | | |
/s/ Michael Brauser | | Director
| | December 29, 2016 |
Michael BrauserJohn Stetson | | | | |
| | | | | |
/s/ Michael BeeghleyEdward Swanson | | Chief Operating Officer and Director | | December 29, 2016February 28, 2018 |
Michael BeeghleyEdward Swanson | | | | |
| | | | | |
/s/ Mohit BhansaliSteven Gorlin | | Director | | December 29, 2016February 28, 2018 |
Mohit BhansaliSteven Gorlin | | | | |
| | | | | |
/s/ Barry Honig
Jeff Dyer | | Director | | December 29, 2016February 28, 2018 |
Barry Honig
Jeff Dyer | | | | |
| | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Majesco Entertainment Company
We have audited the accompanying consolidated balance sheets of Majesco Entertainment Company and Subsidiary (the "Company") as of October 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years then ended. 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, the consolidated financial position of Majesco Entertainment Company and Subsidiary as of October 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ EISNERAMPER LLP
Iselin, New Jersey
December 29, 2016
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| | | |
| | | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $6,523 | $17,053 |
| Accounts receivable, net | 113 | 283 |
| Capitalized software development costs and license fees | 50 | 179 |
| Prepaid expenses and other current assets | 47 | 101 |
Total current assets | 6,733 | 17,616 |
| Property and equipment, net | 18 | 45 |
| Total assets | $6,751 | $17,661 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| Current liabilities: | | |
| Accounts payable and accrued expenses | $1,284 | $1,686 |
| Warrant liability | 70 | - |
| Payable to Zift | - | 318 |
Total current liabilities | 1,354 | 2,004 |
| Total liabilities | 1,354 | 2,004 |
| | | |
| Commitments and contingencies | | |
| | | |
| Stockholders’ equity: | | |
| Convertible Preferred stock - 10,000,000 shares authorized, 7,374,454 and 9,025,265 shares issued and outstanding at October 31, 2016 and 2015, respectively, aggregate liquidation preference $4,854 and $5,968, respectively | 10,153 | 10,694 |
| Common stock - $.001 par value; 250,000,000 shares authorized; 2,782,963 and 1,851,503 shares issued and outstanding at October 31, 2016 and 2015, respectively | 3 | 2 |
| Additional paid-in capital | 123,417 | 128,497 |
| Accumulated deficit | (128,176) | (123,536) |
| Total stockholders’ equity | 5,397 | 15,657 |
| Total liabilities and stockholders’ equity | $6,751 | $17,661 |
See accompanying notes
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| | |
| | | |
| Net revenues | $1,542 | $6,693 |
| Cost of sales | | |
| Product costs | 1 | 2,328 |
| Software development costs and license fees | 285 | 1,095 |
| | 286 | 3,423 |
| Gross profit | 1,256 | 3,270 |
| Operating costs and expenses | | |
| Product research and development | 90 | 174 |
| Selling and marketing | 14 | 771 |
| General and administrative | 6,031 | 5,350 |
| Workforce reduction | - | 840 |
| Depreciation and amortization | 27 | 61 |
| | 6,162 | 7,196 |
| Operating loss | (4,906) | (3,926) |
| Other expenses (income) | | |
| Interest and financing costs (income) | (18) | 45 |
| Gain on extinguishment of liabilities | - | (1,465) |
| Gain on asset sales, net | - | (50) |
| Other non-operating gains, net | - | (198) |
| Change in fair value of warrant liability | (248) | 1,548 |
| Loss before income taxes | (4,640) | (3,806) |
| Income taxes | - | 3 |
| Net loss | (4,640) | (3,809) |
| Special cash dividend attributable to preferred stockholders | (6,002) | - |
| Conversion features accreted as dividends | - | (2,252) |
| Net loss attributable to common shareholders | $(10,642) | $(6,061) |
| | | |
| Net loss per share, basic and diluted | $(5.08) | $(4.93) |
| Weighted average shares outstanding, basic and diluted | 2,096,022 | 1,228,275 |
See accompanying notes
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
| | | | | | |
| | | | | | |
| | | | | | | | |
| Balance - October 31, 2014 | | | $1,103,397 | $7 | $125,271 | $(119,727) | $5,551 |
| Reverse split par value adjustment | - | - | - | (6) | 6 | - | - |
| Issuance of common stock in connection with: | | | | | | | |
| Restricted stock grants | - | - | 323,241 | 1 | 1,060 | - | 1,061 |
| Non-cash compensation charges - stock options | - | - | - | - | 375 | - | 375 |
| Shares withheld for taxes | - | - | (1,953) | - | (15) | - | (15) |
| Private placement of units, December 2014 | 8,823,537 | 2,156 | - | - | - | - | 2,156 |
| Exchange agreement, April 2015 | 54,201 | 4,569 | 147,059 | - | 744 | - | 5,313 |
| Private placement of units, May 2015 | 25,763 | 2,010 | 271,997 | - | 3,015 | - | 5,025 |
| Exchange agreement, September 2015 | 168,333 | 1,969 | - | - | (1,969) | - | - |
| Conversion of Series A preferred stock | (46,569) | (10) | 7,762 | - | 10 | - | - |
| Net loss | - | - | - | - | - | (3,809) | (3,809) |
| Balance - October 31, 2015 | 9,025,265. | $10,694 | 1,851,503 | $2 | $128,497 | $(123,536) | $15,657 |
Issuance of common stock in connection with: | | | | | | | |
| Restricted stock grants | - | - | 356,666 | 1 | (1) | - | - |
| Conversion of Series A preferred stock | (1,638,810) | (401) | 273,135 | - | 401 | - | - |
| Conversion of Series D preferred stock | (12,001) | (140) | 20,002 | - | 140 | - | - |
| Proceeds from stock option exercise | - | - | 31,657 | - | 129 | - | 129 |
| Stock based compensation expense | - | - | - | - | 3,142 | - | 3,142 |
| Shares issued for cash | - | - | 250,000 | - | 1,406 | - | 1,406 |
| Warrant liability | - | - | - | - | (318) | - | (318) |
| Allocation of warrant offering cost | - | - | - | - | 21 | - | 21 |
| Special cash dividend | - | - | - | - | (10,000) | - | (10,000) |
| Net loss | - | - | - | - | - | (4,640) | (4,640) |
| Balance - October 31, 2016 | 7,374,454. | $10,153 | 2,782,963 | $3 | $123,417 | $(128,176) | $5,397 |
See accompanying notes
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | |
| | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| Net loss | $(4,640) | $(3,809) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Change in fair value of warrant liability | (248) | 1,548 |
| Depreciation and amortization | 27 | 61 |
| Non-cash compensation expense | 3,142 | 1,436 |
| Provision for price protection | - | 41 |
| Amortization of capitalized software development costs and license fees | 150 | 432 |
| Capital software impairment losses | - | 148 |
| Provision for excess inventory | - | 65 |
| Gain on extinguishment of liabilities | - | (1,465) |
| Gain on asset sales | - | (50) |
| Other non-operating gains | - | (198) |
| Offering costs expensed | 21 | - |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 170 | 1,273 |
| Inventory | - | 1,227 |
| Capitalized software development costs and license fees | (21) | (85) |
| Advance payments for inventory | - | 57 |
| Prepaid expenses and other current assets | 54 | 91 |
| Accounts payable and accrued expenses | (402) | (2,194) |
| Payable to Zift | (19) | - |
| Customer credits | - | (171) |
| Advances from customers and deferred revenue | - | (21) |
| Net cash used in operating activities | (1,766) | (1,614) |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Repayment from GMS Entertainment Limited | - | 250 |
| Proceeds from sale of assets | - | 290 |
| Net cash provided by investing activities | - | 540 |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Special cash dividend | (10,000) | - |
| Proceeds from stock options exercised | 129 | - |
| Net proceeds from the sale of common stock and warrants | 1,406 | - |
| Payments to Zift | (299) | - |
| Net proceeds from sale of units | - | 10,946 |
| Income tax withholding from exercise of options and warrants | - | (15) |
| Net cash (used in) provided by financing activities | (8,764) | 10,931 |
| Net (decrease) increase in cash and cash equivalents | (10,530) | 9,857 |
| Cash and cash equivalents - beginning of year | 17,053 | 7,196 |
| Cash and cash equivalents - end of year | $6,523 | $17,053 |
| SUPPLEMENTAL CASH FLOW INFORMATION | | |
| Cash paid during the year for interest and financing costs | $- | $141 |
| Cash paid during the year for income taxes | $- | $- |
| SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES | | |
| Warrant liability settled under exchange agreement | $- | $5,313 |
| Other warrants settled under exchange agreement | $- | $1,969 |
| Conversion of preferred stock into common stock | $- | $10 |
| Conversion of Series A preferred to common stock | $401 | $- |
| Conversion of Series D preferred to common stock | $140 | $- |
| Common stock shares and warrants issued for offering costs | $75 | $- |
See accompanying notes
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, (together, “Majesco” or the “Company”) on a consolidated basis. Prior to the November 2014 sale of its equity investment, the Company had 50% of the voting control of GMS Entertainment Limited (“GMS”) and the right to appoint one-half of the directors of GMS. Accordingly, the Company accounted for GMS on the equity method as a corporate joint venture.
The Company is a provider of video game products primarily for the casual-game consumer and has published video games for interactive entertainment hardware platforms, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. It has historically sold its products through two sales channels, retail and digital. It has sold packaged software to large retail chains, specialty retail stores, video game rental outlets and distributors and through digital distribution for platforms such as Xbox Live Arcade, PlayStation Network, or PSN, and Steam, and for mobile devices and online platforms. In July 2015, the Company transferred retail distribution activities, assets and obligations to a company owned by its former chief executive officer (see Note 15).
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, the Company has focused on publishing more lower-cost games targeting casual-game consumers and independent game developer fans. In some instances, the Company’s titles are based on licenses of well-known properties and, in other cases, original properties. The Company enters into agreements with content providers and video game development studios for the creation of our video games.
The Company’s 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, it operates in a single segment.
Reverse stock-split. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment (the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).
The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, is acting as exchange agent for the Reverse Stock Split.
As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.
All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.
NASDAQ listing.On March 3, 2016, the Company was notified by The NASDAQ Stock Market, LLC (“Nasdaq”) that it was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Rule”) because the Company’s common stock failed to maintain a minimum closing bid price of $1.00 per share for the prior 30 consecutive business days. The notice had no immediate effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market.
The Company had a period of 180 calendar days, or until August 30, 2016, to achieve compliance with the Rule. The Company regained compliance with the Rule in August 2016 by effecting the Reverse Stock Split.
Major customers.Sony, Microsoft and Valve accounted for 47%, 37%, and 13%, respectively, of sales for the year ended October 31, 2016. Sony, Sidekick and Microsoft accounted for 41%, 25% and 20%, respectively, of accounts receivable as of October 31, 2016. Sales to GameStop represented approximately 10% of net revenues in 2015. In 2015, Alliance Distributors and Microsoft Corporation represented approximately 10% and 13% of total revenue, respectively. Sony, Microsoft, Valve and Nintendo accounted for 37%, 20%, 18% and 13% of total accounts receivable as of October 31, 2015, 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 Company’s products. In addition, for the years ended October 31, 2016 and 2015 sales of the Company’s Zumba Fitness games accounted for approximately 9% and 28% of net revenues, respectively.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.Since July 2015 when retail distribution activities were transferred and retail sales ceased, 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).
Prior to July 2015, when the Company entered into license or distribution agreements that provided for multiple copies of games in exchange for guaranteed amounts, revenue was recognized in accordance with the terms of the agreements, generally upon delivery of a master copy, assuming our performance obligations were complete and all other recognition criteria were met, or as per-copy royalties are earned on sales of games.
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 has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.
Accounts and Other Receivables and Accounts Payable and Accrued Expenses.The carrying amounts of accounts and other receivables and accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.
Allowance for doubtful accounts. The Company recognizes an allowance for losses on accounts receivable for estimated probable losses. The allowance is based on historical experiences, current aging of accounts, and other expected future write-offs, including specific identifiable customer accounts considered at risk or uncollectible. Any related expense associated with an allowance for doubtful accounts is recognized as general and administrative expense.
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.
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 and prepaid license fees 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 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.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.
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 more likely than not.
Stock Based Compensation.The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative expenses. 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.
The value of restricted stock grants are measured based on the fair market value of the Company's common stock on the date of grant and amortized over the vesting period of, generally, six months to three years.
Extinguishment of Liabilities.During the year ended October 31, 2015, the Company recognized a gain on extinguishment of liabilities of $1.5 million. The Company determined that certain accounts payable balances and claims for license fees and services would never be paid because they were no longer being pursued for payment and had passed the statute of limitations as of October 31, 2015.
Loss Per Share.Basic loss per share of common stock is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive.
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.
Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in fair value of warrant liability. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 3).
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 financial statements are price protection and customer allowances, the valuation of inventory, the recoverability of advance payments for capitalized software development costs and intellectual property licenses, and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.
Other Nonoperating Gains, Net.In the year ended October 31, 2015, in connection with the expiration of its prior facilities lease and its relocation, the Company disposed of property and equipment with a net book value of $92 and received proceeds of $20 from the sale of certain of the property and equipment. The $72 loss on the disposals is included in other non-operating gains, net. In addition, the Company recorded a gain of $270 on the transfer of certain game rights.
Recent Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") creating a new Topic 606,Revenue from Contracts with Customers, which broadly establishes new standards for the recognition of certain revenue and updates related disclosure requirements. The update becomes effective for the Company on November 1, 2018. The Company is reviewing the potential impact of the statement on its financial position, results of operations, and cash flows.
In January2016,FASBissuedASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-01 will have on its consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material impact on our financial statements.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. For public entities, the amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU No. 2016-08 on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact that ASU No. 2016-09 will have on its consolidated financial statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers. The new guidance is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact that ASU No. 2016-10 will have on its consolidated financial statements.
3. FAIR VALUE
In accordance with ASC 820,Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:
| Level 1: Observable inputs such as quoted prices in active markets for identical instruments | Director | | February 28, 2018 |
●
| Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market |
●
| Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation. |
Prior to the April 2015 exchange transaction described in Note 8, the Company had outstanding warrants, the December warrants, that contained re-pricing provisions for “down-round” issuances and other events not indexed to the Company’s own stock and were classified as liabilities in the Company’s consolidated balance sheets. The Company recognized these warrants as liabilities at their fair value and re-measured them through the date of their exchange in April 2015. ASC 820, Fair Value Measurements and Disclosuresprovides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.
The Company uses Level 3 inputs for its valuation methodology for the warrant liabilities. The estimated fair values were determined using a binomial option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models the Company uses to value the warrants, including the Company’s current common stock price, the remaining life of the warrants, the volatility of the Company’s common stock price, and the risk-free interest rate. In addition, as of the valuation dates, management assessed the probabilities of future financing and other re-pricing events in the binominal valuation models.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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), for the year ended October 31, 2015 is presented below:
Beginning balance - November 1, 2014 | $-
|
Issuance of warrants | 3,765
|
Change in fair value of warrant liability | 1,548
|
Settlement of warrants | (5,313)
|
Ending balance - October 31, 2015 | $-
|
Assumptions used to determine the fair value of the warrants during the year ended October 31, 2015 were:
Market price of common stockJon Mogford | | | $3.54-$7.56 | |
Expected warrant term | | | 4.5-5.0 years | |
Risk-free rate | | | 1.0% -1.7 | % |
Expected volatility | | | 80 | % |
Dividend yield | | | 0 | % |
Probability of certain litigation costs at each of three pricing thresholds | | | 0-33 | % |
Probability of future down-round financing | | | 0-50 | % |
Stock price discount | | | 0-41 | %22 |
In connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares of common stock. These warrants are exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.
The fair value of these warrants at April 19, 2016 and October 31, 2016 was determined to be approximately $318,000 and $70,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $4.74 and $3.58, respectively; (2) a risk free rate of 0.77% and 0.75%, respectively; and (3) an expected volatility of 86% and 61%, respectively.
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At October 31, 2016, the warrant liability balance of $70,000 was classified as a Level 3 instrument.
The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (from April 19, 2016 through October 31, 2016) (in thousands):
| |
Fair value - November 1, 2015
| $-
|
Additions | 318
|
Change in fair value | (248)
|
Fair value - October 31, 2016 | $70
|
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table presents the major components of prepaid expenses and other current assets (in thousands):
| | |
| | | |
| Prepaid insurance | $22 | $61 |
| Tax receivable | 18 | - |
| Other | 7 | 40 |
| Total prepaid expenses and other current assets | $47 | $101 |
5. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
| | |
| | | |
| Computers and software | $61 | $61 |
| Furniture and equipment | 78 | 78 |
| | 139 | 139 |
| Accumulated depreciation | (121) | (94) |
| | $18 | $45 |
Depreciation expense was approximately $27,000 and $61,000 for the year ended October 31, 2016 and 2015, respectively.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
| | |
| | | |
| Accounts payable-trade | $130 | $479 |
| Royalties, fees and development | 680 | 681 |
| Salaries and other compensation | 463 | 510 |
| Other accruals | 11 | 16 |
| Total accounts payable and accrued expenses | $1,284 | $1,686 |
During the year ended October 31, 2015, the Company recognized a gain on the extinguishment of liabilities for approximately $1.5 million related to certain accounts payable balances and claims for license fees and services that the Company determined would never be paid because they were no longer being pursued for payment and had passed the statute of limitations.
Salaries and other compensation includes accrued payroll expense and estimated employer 401K plan liabilities.
7. SHORT-TERM FINANCING ARRANGEMENTS
Accounts receivable and inventory
Prior to July 31, 2015, the Company used 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 sold to the factor and the factor purchased from the Company, eligible accounts receivable.
The factor, in its sole discretion, determined whether or not it would accept the credit risk associated with a receivable. If the factor did not accept the credit risk on a receivable, the Company sold the accounts receivable to the factor while retaining the credit risk. In both cases, the Company surrendered all rights and control over the receivable to the factor. However, in cases where the Company retained the credit risk, the amount could be charged back to the Company in the case of non-payment by the customer. The factor was required to remit payments to the Company for the accounts receivable purchased from it, provided the customer did not have a valid dispute related to the invoice. The amount remitted to the Company by the factor equaled the invoiced amount, adjusted for allowances and discounts the Company provided to the customer, less factor charges.
The Company reviewed the collectability of accounts receivable for which it held 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 was necessary.
In addition, the Company could request that the factor provide it with cash advances based on its accounts receivable and inventory, up to a maximum amount.
Amounts to be paid to the Company by the factor for any accounts receivable were offset by any amounts previously advanced by the factor. The interest rate was prime plus 1.5%, annually, subject to a 5.5% floor. In certain circumstances, an additional 1.0% annually was charged for advances against inventory.
The Company also maintained purchase order financing, up to a maximum of $2,500, to provide funding for the manufacture of its products. In connection with these arrangements, the factor had a security interest in substantially all of the Company’s assets. The factor charged 0.5% of invoiced amounts, subject to certain minimum charges per invoice.
Inventory purchases
Prior to July 31, 2015, certain manufacturers required the Company to prepay or present letters of credit upon placing a purchase order for inventory. The Company had arrangements with a finance company which provided financing secured by the specific goods underlying the goods ordered from the manufacturer. The finance company made the required payment to the manufacturer at the time a purchase order is placed, and was entitled to demand payment from the Company when the goods are delivered. The Company paid a financing fee equal to 1.5% of the purchase order amount for each transaction, plus administrative fees. Additional charges of 0.05% per day (18% annualized) were incurred if the financing remained open for more than 30 days.
The agreements were terminated in the year ended October 31, 2015.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS’ EQUITY
Preferred stock
Under the Company’s Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of shares: preferred and common stock. The preferred stock is issuable in series, and the Company’s Board of Directors is authorized to determine the rights, preferences, and terms of each series.
Convertible preferred stock as of October 31, 2016 consisted of the following:
| | | Shares Issued and Outstanding | | Aggregate Liquidation Preference | Common Shares Issuable Upon Conversion |
| Series A | 8,830,000 | 7,138,158 | $1,745 | $4,854 | 1,189,693 |
| Series B | 54,250 | 54,201 | 4,569 | - | 903,362 |
| Series C | 26,000 | 25,763 | 2,010 | - | 429,392 |
| Series D | 170,000 | 156,332 | 1,829 | - | 260,553 |
| Other authorized, unissued | 919,750 | - | - | - | - |
| Total | 10,000,000 | 7,374,454 | $10,153 | $4,854 | 2,783,000 |
Convertible preferred stock as of October 31, 2015 consisted of the following:
| | | Shares Issued and Outstanding | | Aggregate Liquidation Preference | Common Shares Issuable Upon Conversion |
| Series A | 8,830,000 | 8,776,968 | $2,146 | $5,968 | 1,462,828 |
| Series B | 54,250 | 54,201 | 4,569 | - | 903,362 |
| Series C | 26,000 | 25,763 | 2,010 | - | 429,392 |
| Series D | 170,000 | 168,333 | 1,969 | - | 280,555 |
| Other authorized, unissued | 919,750 | - | - | - | - |
| Total | 10,000,000 | 9,025,265 | $10,694 | $5,968 | 3,076,137 |
December Units and Series A Preferred Shares
On December 17, 2014, pursuant to subscription agreements (the “December Subscription Agreements”) entered into with certain accredited investors (the “December Investors”) the Company completed a private placement of $6.0 million of units (the “December Units”) at a purchase price of $0.68 per Unit, with each December Unit consisting of one share of the Company’s 0% Series A Convertible Preferred Stock (each a “Series A Preferred Share”) and a five-year warrant (each a “December Warrant”) to purchase one sixth of a share of the Company’s common stock at an initial exercise price of $4.08 per share (such issuance and sale, the “December Private Placement”). The December Warrants were subsequently exchanged for shares of the Company’s 0% Series B Convertible Preferred Stock (the “Series B Preferred Shares”) and shares of the Company’s common stock (see below). The offering was made in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
The Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $4.08 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of Majesco Entertainment Company, the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.
Prior to the exchange transaction described below, the December Warrants were exercisable at any time at a price of $4.08 per share, subject to adjustment, and expired five years from the date of issuance. The holders could exercise the December Warrants for shares of common stock on a cashless basis if there was no effective registration statement or no current prospectus available for resale of the underlying shares of common stock. The December Warrants were subject to certain adjustments upon certain actions by the Company as outlined in the December Warrants, including, for twenty-four months following the initial issuance date, the issuance or sale, or deemed issuance or sale, by the Company of shares of its common stock at a per share price that is less than the exercise price then in effect.
The proceeds of the offering and certificates representing the Series A Preferred Shares and December Warrants underlying the December Units issued in the offering were deposited into escrow accounts. Upon the closing of the December Private Placement on December 17, 2014 (such date, the “December Closing Date”), $1.0 million of the December Escrow Amount was released to the Company and $1.0 million of December Units to the December Investors, on a pro rata basis. Effective upon the approval of the Company’s stockholders on March 30, 2015, in one or multiple tranches, the remaining $5.0 million became eligible to be released to the Company and $5.0 million of December Units became eligible to be released to the December Investors from their respective escrow accounts, if either, (i) the lead investor has approved the release, (ii) the approval of the requisite number of December Investors has been obtained, (iii) the Company has executed definitive binding documents for certain transactions, as described in the December Subscription Agreements, and such transaction(s) are to close contemporaneously with the release, following approval by the Company’s stockholders or (iv) the following conditions are present: (a) nine months has elapsed from the December Closing Date and release is approved by each of the directors appointed at closing (being the non-continuing directors); (b) no subsequent release of the December Escrow Amount has been consummated; and (c) no more than $1.0 million is released (the “December Release Conditions”). In the event that on and as of the twelve month anniversary of the December Closing Date none of the December Release Conditions have been satisfied, $5.0 million would be returned on a pro rata basis to the December Investors, without interest or deduction, and $5,000 of December Units would be returned to the Company for cancellation. On September 25, 2015, the lead investor approved the release and the escrow agent released all funds and corresponding December Units remaining in escrow.
The Company received net proceeds of $801,000 for the December Units released from escrow, net of offering costs, and has accounted for each of the Series A Preferred Shares released from escrow, the December Warrants released from escrow and the Series A Preferred Shares and December Warrants remaining in escrow as freestanding instruments.
The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. Prior to the exchange described below, the exercise price of the released December Warrants could be adjusted downward if the Company issued securities at a price below the initial exercise price and in certain other circumstances outside the control of the Company and therefore contain contingent settlement terms not indexed solely to the Company’s own shares of common stock. Accordingly, $603,000 of proceeds were recorded as a derivative liability representing the fair value of the December Warrants released from escrow at issuance and $120,000 of offering costs allocated to the December Warrants were expensed. As a result of the allocations, described above, the Series A Preferred Shares released were deemed to have a beneficial conversion feature at issuance amounting to $397,000, which was recorded in stockholders’ equity and immediately charged as a dividend in determining net loss attributable to common stockholders.
The remaining net proceeds of $318,000 were allocated to the Series A Preferred Shares net of $79,000 of offering costs. The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon stockholder approval in March 2015 of full conversion provisions of the escrowed December Warrants, the Company recorded a warrant liability and a discount on the Series A Preferred Shares amounting to $3,162, based on the estimated fair value of the warrants. In addition, upon shareholder approval of the full conversion provisions of the escrowed Series A Preferred Shares, the carrying value of such Series A Preferred Shares, net of proceeds remaining in escrow was reclassified from temporary equity to paid-in capital. The Company recorded a beneficial conversion feature and a discount on the Series A Preferred Shares amounting to $1.8 million, which was immediately recognized as a deemed dividend in determining net loss attributable to common shareholders.
In connection with the December Private Placement, the Company also entered into separate Registration Rights Agreements with each December Investor, (as amended on January 30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the Series A Preferred Shares and December Warrants and to maintain its effectiveness until all such securities have been sold or may be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under the December Registration Rights Agreements, the Company is required to pay to the December Investors on a monthly basis an amount equal to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of December Units amended the registration rights agreement to extend the filing deadline for the registration statement to June 30, 2015.
April 2015 Exchange and Series B Preferred Shares
On April 30, 2015, pursuant to warrant exchange agreements, the Company retired the 1,470,590 December Warrants issued in the December Private Placement, including those subject to the escrow conditions and those released from escrow, in exchange for shares of the Company's common stock, or shares of 0% Series B Convertible Preferred Stock (the “Series B Preferred Shares”), in lieu of shares of common stock equal, on an as-converted basis, to the number of shares of common stock that would have otherwise been received by the holder, if such issuance would result in the recipient holder exceeding certain thresholds. An aggregate of 1,050,421 shares of common stock, which amount includes the shares of common stock issuable upon conversion of the Series B Preferred Shares, were issuable in connection with the exchange agreements. The Company re-measured the fair value of the December Warrants through the date of their exchange and recorded related losses in its statement of operations. In the year ending October 31, 2015, the Company recorded a change in fair value of $1.5 million related to the increase in the fair value of the December Warrants during the period outstanding. Upon exchange, the contingent-conversion features of the December Warrants expired and the carrying value of the warrant liability of $5.3 million was reclassified to paid-in capital and allocated to the Series B Preferred Shares and the common shares distributed. Such Series B Shares and shares of common stock exchanged for the December Warrants are not held in escrow and as such are not subject to the December Release Conditions.
The Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series B Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an as converted basis, based on a conversion price of $8.40 per share. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’ equity.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 2015 Units and Series C Preferred Shares
On May 15, 2015 (the “May Closing Date”), the Company completed a private placement pursuant to separate subscription agreements (the “May Subscription Agreements”) with accredited investors (the “May Investors”) of $5,050 of units (the “May Units”), at a purchase price of $7.20 per Unit, resulting in net proceeds to the Company of $5.0 million. Each May Unit consists of one share of the Company’s common stock, provided that, if the issuance of any such shares of common stock would have resulted in the recipient May Investor owning in excess of 4.99% of the Company’s issued and outstanding common stock, then such May Investor could elect to receive shares of the Company’s 0% Series C Convertible Preferred Stock (the “Series C Preferred Shares”) in lieu of common stock that are, on an as converted basis, equal to one share of common stock for every May Unit purchased, and a three-year warrant (the “May Warrants”) to purchase one share of the Company’s common stock at an exercise price of $8.40 per share (such sale and issuance, the “May Private Placement”). An aggregate of 25,763 Series C Preferred Shares, 271,997 shares of common stock and 701,390 May Warrants were issued under the May Units. The offering was made in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share, and the initial conversion price is $7.20 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until such time as the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.20 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.
The May Warrants are exercisable, at any time, following the date the May Warrants are issued, at a price of $8.40 per share, subject to adjustment, and expire three years from the date of issuance. The holders may, subject to certain limitations, exercise the May Warrants on a cashless basis. The Company is prohibited from effecting an exercise of any May Warrant to the extent that, as a result of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of such May Warrant, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%.
In connection with the sale of the May Units, the Company also entered into separate registration rights agreements (the “May Registration Rights Agreement”) with each May Investor. The Company agreed to use its best efforts to file a registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares, within thirty days following the May Closing Date, to cause such registration statement to be declared effective within ninety days of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company is obligated to pay to the May Investors on a monthly basis, an amount equal to 1% of the May Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline of the registration statement, the Company obtained the requisite approval from the May Investors for the waiver of its obligations under the May Registration Rights Agreement.
The proceeds of the May Private Placement were deposited into an escrow account (the “May Escrow Amount”) with Signature Bank, as escrow agent (the “May Escrow Agent”) pursuant to an escrow agreement (the “May Escrow Agreement”), entered into by and between the Company, the lead investor (as defined in the May Subscription Agreements) and the May Escrow Agent, and certificates representing the May Warrants and a record of the Shares and Series C Preferred Shares, sold in the May Private Placement were deposited and recorded with the Company’s corporate secretary (the “May Securities Escrow Agent”) to be held in escrow. On the May Closing Date, twenty percent (20%) of the May Escrow Amount ($1.0 million) was released by the May Escrow Agent to the Company in exchange for the release of twenty percent (20%) of May Units by the May Securities Escrow Agent to the May Investors. The remaining eighty percent (80%) of the May Escrow Amount ($4.0 million) was released by the May Escrow Agent to the Company and the corresponding percentage of May Units were released to the May Investors, under amendments to the May subscription agreements. On September 25, 2015, the lead investor approved the release and the May Escrow Agent and the May Securities Escrow Agent released all funds and May Units remaining in escrow.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equityand ASC 815-40 Contracts in an Entity’s Own Equityto determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity. The May Warrants do not contain contingent settlement terms not indexed solely to the Company’s own shares of common stock and, accordingly, were also recorded in stockholders' equity. The Company allocated $2.0 million, $1.3 million and $1.8 million of gross proceeds to the Series C Preferred Stock, the common stock and the warrants, respectively, based on their relative fair values. The Company incurred $25,000 of offering expenses.
September 2015 Exchange and Series D Preferred Shares
On September 25, 2015, the Company entered into Amendment Agreements (the “Amendments”) which amended the terms of the December Subscription Agreements and May Subscription Agreements. Under the Amendments, the lead investors under the subscription agreements agreed to release all funds remaining held in escrow ($5.0 million under the December 17, 2014 closing and $4.0 million under the May 15, 2015 closing) upon the appointment of certain persons as officers and directors of the Company.
In connection with the Amendments, the Company also entered into Exchange Agreements with the holders of the May Warrants (the “September Exchange Agreements”) and authorized the issuance of .4 shares of common stock for each share of our Common Stock into which the May Warrants was then convertible, in exchange for cancellation of the May Warrants. The Company agreed that holders of the May Warrants could exchange their May Warrants and receive either: (1) .4 shares of common stock for each share of common stock into which the May Warrant was exercisable immediately, or (2) at the election of any holder who would, as a result of receipt of the common stock hold in excess of 4.99% of the Company’s issued and outstanding common stock, shares of 0% Series D Convertible Preferred Stock (the “Preferred D Shares”) exercisable for common stock on the same basis, but subject to 4.9% beneficial ownership blocker provisions which at the election of the holder, could be reduced to 2.49%. Under the agreement, the Company exchanged all of its May Warrants for an aggregate of 168,333 new shares of 0% Series D Convertible Preferred Stock, which upon full conversion on a fully-diluted basis, convert into 280,555 shares of newly issued common stock.
The Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred D Share, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred D Share is $1,000.00 per share and the initial conversion price is $600.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no interest and shall rank senior to the Company’s other classes of capital stock. The Company accounted for the exchange as a redemption of the warrants and recorded the estimated fair value of Series D Convertible Preferred Stock issued, amounting to $1,969 with a charge to paid-in capital. As the value of the preferred shares issued was less than the value of the warrants redeemed, no excess value needed to be attributed and no portion of the redemption was deemed a dividend.
April 2016 Registered Common Stock and Warrant Offering
On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the warrant shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.
Each warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction.The warrants require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement by the holder. The warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Consolidated Statements of Operations in other expenses (income). The initial recognition of the warrants resulted in an allocation of the net proceeds from the offering to a warrant liability at fair value of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Share Conversion Activity
During the year ended October 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.
Warrants
A summary of the status of the Company’s outstanding warrants as of October 31 and changes during the years then ended is presented below:
| | |
| | | |
| Outstanding at beginning of year | - | 1,191 |
| Issued in offerings of units | 187,500 | 2,171,979 |
| Settled under exchange agreements | - | (2,171,979) |
| Expired | - | (1,191) |
| Outstanding at end of year | 187,500 | - |
Special Cash Dividend
On January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately, $6.0 million of the special cash dividend relates to Preferred Stock shares.
9. STOCK-BASED COMPENSATION
In the years ended October 31, 2016 and 2015, the Company recorded stock-based compensation expense amounting to $3.1 million and $1.4 million, respectively, related to restricted stock awards and stock options.
Incentive Compensation Plans
In the fiscal years ended October 31, 2016 and 2015, the Company made stock-based compensation awards under its 2016 Equity Incentive Plan (the “2016 Plan”), 2014 Equity Incentive Plan (the “2014 Plan”) and its Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (the “2004 Plan”).
2016 Plan
In the fiscal year ended October 31, 2016, the Company adopted the 2016 Plan, an omnibus equity incentive plan administered by the Company’s board of directors, or by one or more committees of directors appointed by the Board, pursuant to which the Company may issue up to 666,665 shares of the Company’s common stock under equity-linked awards to certain officers, employees, directors and consultants. The 2016 Plan permits the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, cash awards, or other awards, whether at a fixed or variable price, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof. As of October 31, 2016, the Company had zero shares available for future issuances under the 2016 Plan.
2014 Plan
In the fiscal year ended October 31, 2015, the Company adopted the 2014 Plan, an omnibus equity incentive plan administered by the Company’s board of directors, or by one or more committees of directors appointed by the Board, pursuant to which the Company may issue up to 375,000 shares of the Company’s common stock under equity-linked awards to certain officers, employees, directors and consultants. The 2014 Plan permits the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, cash awards, or other awards, whether at a fixed or variable price, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof. As of October 31, 2016, the Company had approximately 83,262 shares available for future issuances under the 2014 Plan.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 Plan
The 2004 Plan covers employees, directors and consultants and also provides for the issuance of restricted stock, non-qualified stock options, incentive stock options and other awards under terms determined by the Company. In April 2014, the Company’s stockholders and Board of Directors approved an amendment to the Plan to increase the number of common shares available for issuance under the Plan by 71,429 shares. As of October 31, 2016, the Company had approximately 19,217 shares available for future issuances under the 2004 Plan.
Stock Options
Stock-option activity in the fiscal year ended October 31, 2016:
| | | Weighted Average Exercise Price |
| Outstanding, November 1, 2014 | 71,533 | $39.24 |
| Granted | 55,070 | $4.44 |
| Forfeited | (14,188) | $31.98 |
| Expired | (15,834) | $61.08 |
| Outstanding, October 31, 2015 | 96,581 | $16.92 |
| Granted | 347,010 | $4.84 |
| Forfeited | (12,258) | $36.97 |
| Exercised | (31,657) | $4.08 |
| Expired | (17,656) | $30.72 |
| Outstanding, October 31, 2016 | 382,020 | $5.73 |
| Options exercisable, October 31, 2016 | 205,941 | $6.50 |
| Weighted-average grant date fair value of options granted during the year | | $3.38 |
Stock options are generally 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 one to three years and have a term of five to ten years. The total fair value of options granted during the year ended October 31, 2016 was approximately $1.2 million. The intrinsic value of options outstanding at October 31, 2016 was $0. The intrinsic value of options exercised during the fiscal years ended October 31, 2016 was $15,000. The weighted average remaining contractual term of exercisable and outstanding options at October 31, 2016 was 8.3 years and 8.7 years, respectively.
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:
| | |
| | | |
| Risk free annual interest rate | 1.0-1.7% | 1.4% |
| Expected volatility | 77-79% | 80% |
| Expected life | | |
| Assumed dividends | | |
The fair value of stock option grants is amortized over the vesting period of, generally, one to three years. As of October 31, 2016, there was approximately $5,000 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.1 year. Additionally, approximately 165,000 options are subject to vesting upon the achievement of a performance condition. The grant date fair value of these options is approximately $551,000.
Restricted-stock activity in the fiscal year ended October 31, 2016:
| | | Weighted-Average Grant-Date Fair Value |
| Unvested, January 1, 2015 | 21,040 | $28.56 |
| Granted | 339,813 | $6.66 |
| Vested | (113,482) | $8.88 |
| Forfeited | (16,572) | $7.98 |
| Unvested, December 31, 2015 | 230,799 | $7.47 |
| Granted | 356,666 | $5.14 |
| Vested | (312,636) | $6.10 |
| Unvested, December 31, 2016 | 274,829 | $6.00 |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant date fair value of restricted shares granted during the year ended October 31, 2016 was $5.14. The total fair value of restricted stock vested during the years ended October 31, 2016 and 2015 was approximately $1.8 million and $865,000, respectively.
The value of restricted stock grants are measured based on the fair market value of the Company's common stock on the date of grant and amortized over the vesting period of, generally, six months to three years. As of October 31, 2016, there was approximately $6,000 of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.2 years. Additionally, approximately 169,000 restricted shares are subject to vesting upon the achievement of a performance condition. The grant date fair value of these restricted shares is approximately $871,000.
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended October 31, 2016 and 2015 consisted of (in thousands):
| | | |
| Current: | | |
| Federal | $- | $- |
| State | (3) | 3 |
| Deferred: | | |
| Federal | (1,709) | 182 |
| State | (692) | 181 |
| Impact of change in effective tax rates on deferred taxes | - | - |
| Change in: valuation allowance | 2,404
| (363) |
| | $- | $3 |
The difference between income taxes computed at the statutory federal rate and the provision for income taxes for 2016 and 2015 related to the following (in thousands, except percentages):
| | | |
| | | | | |
| Tax (benefit) at federal statutory rate | $(1,577) | 34% | $(1,297) | 34% |
| State income taxes, net of federal income taxes | (695) | 15% | 184 | (5)% |
| Effect of warrant liability | (84) | 2% | 526 | (14)% |
| Effect of other permanent items | 144 | (3)% | 574 | (15)% |
| Change in valuation allowance | 2,404
| (52)% | (363) | 10% |
| Reduction of deferred benefits | (192) | 4% | 379 | (10)% |
| | $- | -% | $3 | -% |
The components of deferred income tax assets (liabilities) were as follows (in thousands):
| | |
| | | |
| Impairment of development costs | $641 | $597 |
| Depreciation and amortization | 224 | 144 |
| Impairment of inventory | - | 14 |
| Compensation expense not deductible until options are exercised | 1,116 | 174 |
| All other temporary differences | 629 | 370 |
| Net operating loss carry forward | 2,461
| 1,368 |
| Less valuation allowance | (5,071) | (2,667) |
| Deferred tax asset | $- | $- |
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realization of deferred tax assets, including those related to net operating loss carryforwards, are dependent upon future earnings, if any, of which the timing and amount are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Based upon the Company's current operating results management cannot conclude that it is more likely than not that such assets will be realized.
As a result of the Company's private placements during the fiscal year ended October 31, 2015, a change of ownership under Internal Revenue Service Section 382 has occurred and, accordingly, the annual utilization of the Company's federal net operating loss carryforwards will be severely limited. The annual limitations are expected to result in the expiration of federal net operating loss carryforwards of approximately $94.0 million before full utilization. The federal net operating loss carryforwards expected to be available for income tax purposes at October 31, 2016 after application of these limitations are estimated to be approximately $9.2 million, which expire between 2027 and 2036 for federal income taxes, and approximately $35.4 million for state income taxes, which primarily expire between 2013 and 2036.
The Company files income tax returns in the U.S., various states and the United Kingdom. As of October 31, 2016, the Company had no unrecognized tax benefits, which would impact its tax rate if recognized. As of October 31, 2016, the Company had no accrual for the potential payment of penalties. As of October 31, 2015, 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.
11. LOSS PER SHARE
Shares of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants were not included in the calculation of diluted earnings per common share for the years ended October 31, 2016 and 2015, as the effect of their inclusion would be anti-dilutive.
The table below provides total potential shares outstanding, including those that are anti-dilutive, on October 31:
| | |
| | | |
| Shares issuable upon conversion of preferred stock | 2,783,000 | 3,076,137 |
| Shares issuable upon exercise of warrants | 187,500 | - |
| Shares issuable upon exercise of stock options | 382,020 | 96,581 |
| Non-vested shares under restricted stock grants | 274,832 | 230,799 |
12. COMMITMENTS AND CONTINGENCIES
Contingencies
On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. 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. In August 2015, the defendants jointly moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply. The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument on the motion.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intelligent Verification Systems, LLC ("IVS"), filed a patent infringement complaint on September 20, 2012, in the United States District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders that excluded the plaintiff’s damages expert and dismissed the case.
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
The Company leases office space at 4041 T Hadley Road, South Plainfield, New Jersey at a cost of approximately $1,613 per month under a lease agreement that expires in March 2017. Total rent expense amounted to approximately $20,000 and $165,000 for the years ended October 31, 2016 and 2015, respectively, including charges incurred upon vacating its previous administrative offices in 2015.
The Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
13. WORKFORCE REDUCTION
In the year ended October 31, 2015, the Company incurred severance charges in connection with employee layoffs.
Changes in accrued severance liabilities in the year ended October 31, 2015 (in thousands):
| |
Accrued severance liability, beginning of period | $323
|
Severance costs accrued | 840
|
Payments | (1,163)
|
Accrued severance liability, end of period | $-
|
14. RELATED PARTY TRANSACTIONS
Prior to its termination in October 2014, the Company had a consulting agreement with Morris Sutton, the Company’s former Chief Executive Officer and Chairman Emeritus. The Company estimates that Morris Sutton and another relative of Jesse Sutton, the Company’s former Chief Executive Officer, earned compensation of approximately $26,000 in the year ended October 31, 2015 from a supplier of its Zumba belt accessory, based on the value of the Company’s purchases.
In January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A Board member of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately $2,000 and $8,000 for the years ended October 31, 2016 and 2015, respectively.
15. ASSIGNMENT OF ASSETS AND LIABILITIES
On July 31, 2015, the Company transferred to Zift Interactive LLC (“Zift”), a newly-formed subsidiary, certain rights under certain of its publishing licenses related to developing, publishing and distributing video game products through retail distribution for a term of one year. The Company transferred Zift to its former chief executive officer, Jesse Sutton. In exchange, the Company received Mr. Sutton’s resignation from the position of chief executive officer of the Company, including waiver of any severance payments and the execution of a separation agreement, together with his agreement to serve as a consultant to the Company.
In addition, the Company entered into a conveyance agreement with Zift under which it assigned to Zift certain assets used in the retail business and Zift agreed to assume and indemnify the Company for liabilities and claims related to the retail business, including customer claims for price protection and promotional allowances. The assets transferred to Zift included cash in an amount of $800,000, of which $400,000 was transferred immediately and the remaining $400,000 was payable by the Company in twelve equal consecutive monthly installments of $33,000 commencing August 1, 2015, and certain accounts receivable and inventory with an aggregate carrying value of approximately $87,000. In connection with the transfer of distribution rights and the assumption of liabilities by Zift, the Company reduced its estimated accrued liabilities for royalties, customer credits and other related liabilities by approximately $1.2 million with a credit to gains on sales of assets, net of transferred assets of $269,000. The Company has accrued approximately $219,000 of contingent liabilities for certain potential licensor and customer liabilities and claims not extinguished by the transactions. The net gain of approximately $50,000 resulting from the transactions is included in gain on asset sales, net in 2015. As of October 31, 2016, the Company did not have a balance payable to or receivable from Zift.
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering all eligible employees. The Company had no charge to operations for contributions to the retirement plan for the years ended October 31, 2016 and 2015. Certain stockholders and key employees of the Company serve as trustees of the plan. The Company believes that the operation of its 401k plan may not be in compliance with certain plan provisions. The Company is currently assessing what corrective actions may be needed to be taken to bring the plan back into compliance. The Company has recorded a liability for the estimated cost of correcting any plan deficiencies, including additional plan contributions, if required.
17. SUBSEQUENT EVENTS
PolarityTE, Inc.
On December 1, 2016, the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with Majesco Acquisition Corp., a Nevada corporation and wholly-owned subsidiary of the Company, PolarityTE, Inc., a Nevada corporation (“Polarity”) and Dr. Denver Lough, the owner of 100% of the issued and outstanding shares of capital stock of Polarity (the “Seller”). The closing is subject to various closing conditions, including, approval of stockholders of the Company in accordance with Delaware law and NASDAQ Listing Rule 5635 and a minimum cash balance available to the Company.
At closing, upon satisfaction of each of the closing conditions, the Seller will be issued 7,050 shares of the Company’s newly authorized Series E Preferred Stock (the “Preferred Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock (the “Merger Consideration” and such transaction, the “Merger”), expected to constitute approximately 50% of the issued and outstanding shares of common stock of the Company on a fully diluted basis at closing and depending in part, upon the Company’s expected cash balance at closing. Until converted, each Preferred Share is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders.
The Company is still in the process of analyzing the accounting treatment for this transaction.
Series E Preferred Stock
On or prior to the effective time of the Merger, the Company will file a Certificate of Designations, Preferences and Rights of the 0% Series E Convertible Preferred Stock (the “Certificate of Designation”) with the Delaware Secretary of State pursuant to which the Company will designate 7,050 shares of the Company’s authorized shares of preferred stock as Series E Preferred Stock. The Series E Preferred Stock are convertible into shares of common stock based on a conversion calculation equal to the stated value of such preferred stock, plus all accrued and unpaid dividends, if any, on such preferred stock, as of such date of determination, divided by the conversion price. The stated value of each Series E Preferred Stock is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Series E Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company's common stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Series E Preferred Stock. Until converted, each share of Series E Preferred Stock is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders.
2017 Equity Incentive Plan
On December 1, 2016, the Company’s Board of Directors (the “Board”) approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,450,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026.