SEC Connect
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Kd
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(Mark One)
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☒
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Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
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For the fiscal year ended October 31, 2016
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OR
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☐
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Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the Transition Period from
to
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Commission File No. 000-51128
MAJESCO ENTERTAINMENT COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE
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06-1529524
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4041-T Hadley Road
South Plainfield, New Jersey 07080
(Address of principal executive office)
Registrant’s telephone number, including area code
(732)
225-8910
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
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Common
Stock, Par Value $0.001
(Title of class)
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NASDAQ
Capital Market
(Name of exchange on which registered)
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Indicate by check mark if the registrant is a well known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and, (2) has been subject to such filing
requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein and, will not be contained,
to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting
company☒
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No ☒
The
aggregate market value of the common stock held by non-affiliates
as of April 30, 2016 was $9.4 million.
The
outstanding number of shares of common stock as of December 19,
2016 was 3,208,284.
The
Registrant’s proxy or information statement is incorporated
by reference into Part III of this Annual Report on
Form 10-K.
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Forward-looking Statements
Statements
in this Annual Report on Form 10-K that are not historical
facts constitute forward-looking statements that are made pursuant
to the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended, or the “Exchange
Act”. Examples of forward-looking statements include
statements relating to industry prospects, our future economic
performance including anticipated revenues and expenditures,
results of operations or financial position, and other financial
items, our business plans and objectives, including our intended
product releases, and may include certain assumptions that underlie
forward-looking statements. Risks and uncertainties that may affect
our future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements include,
among other things, those listed under “Risk Factors”
and elsewhere in this Annual Report. In some cases, you can
identify forward-looking statements by terminology such as
“may,” “will,” “should,”
“expects,” “intends,” “plans,”
“anticipates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other comparable terminology. These statements
are subject to business and economic risk and reflect
management’s current expectations, and involve subjects that
are inherently uncertain and difficult to predict. Actual events or
results may differ materially. Moreover, neither we nor any other
person assumes responsibility for the accuracy or completeness of
these statements. We are under no duty to update any of the
forward-looking statements after the date of this Annual Report to
conform these statements to actual results. References herein to
“we,” “us,” and “the Company”
are to Majesco Entertainment Company.
Introduction
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. Majesco is headquartered
in South Plainfield, New Jersey, and its common stock is traded on
The NASDAQ Capital Market under the symbol
“COOL”.
Although,
historically, we have sold packaged console 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 now operate, almost
exclusively a digital software distribution and licensing
business.
On
July 31, 2015, we transferred to Zift Interactive LLC
(“Zift”), a newly-formed subsidiary, certain rights
under certain of our publishing licenses related to developing,
publishing, and distributing video game products through retail
distribution for a term of one year. We then transferred Zift to
our former chief executive officer, Jesse Sutton.
Our
titles are targeted at various demographics at a range of various
price points. Due to the larger budget requirements for developing
and marketing premium console titles, we have focused on publishing
lower-cost games targeting casual-game consumers and independent
game developer fans. In some instances, our titles are based on
licenses of well-known properties and, in other cases, original
properties. We enter into agreements with content providers and
video game development studios for the creation of video games sold
domestically and internationally.
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% of
the issued and outstanding shares of capital stock of Polarity (the
“Seller”). The closing is subject to various closing
conditions.
Company Background
Our
principal executive offices are located at 4041-T Hadley Road,
South Plainfield, NJ 07080 and our telephone number is
(732) 225-8910. Our web site address is
www.majescoentertainment.com.
Majesco
Holdings Inc. (formerly ConnectivCorp) was incorporated in 2004
under the laws of the State of Delaware. As a result of a merger,
Majesco Sales Inc. became a wholly-owned subsidiary and the sole
operating business of the Company, which changed its name to
Majesco Entertainment Company.
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 the 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, acted 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 will be
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.
All
common share and per share amounts have been restated to show the
effect of the Reverse Stock Split.
Industry Overview
The
video game software market is comprised of two primary sectors: (i)
dedicated console software for systems such as the Xbox,
PlayStation, Wii, and handheld gaming systems, such as the Nintendo
DS and Nintendo 3DS. The majority of software for these platforms
has historically been purchased in packaged form through retail
outlets. However, in recent years an increasing amount of software
has been made available digitally through online networks such as
Microsoft’s Xbox Live Arcade (“XBLA”), and
Sony’s PlayStation Network (“PSN”); and (ii)
software for multipurpose devices such as personal computers
(“PCs”) and mobile devices such as smartphones and
tablets.
Online and mobile digital games
We
have released numerous games for digital distribution over various
third party networks for dedicated game consoles or PC, such as
Xbox Live Arcade, PlayStation Network and Steam. We have released
titles for various mobile platforms, including Apple’s iOS
and Android. We have published our own digital games and served as
a distributor for other developer’s products in return for a
percentage of net revenues generated by the game. Some of the games
are distributed under the label “Midnight City” which
we established to provide services to the indie game development
community.
Selected
digital titles, their compatible platforms and launch dates
included:
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Selected Titles
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Platform
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Launch Date
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Serious Sam
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XBLA
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March 2010
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Bloodrayne Betrayal
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Steam, XBLA, PSN
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September 2011
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Double Dragon:Neon
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Steam, XBLA, PSN
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September 2012
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Bloodrayne
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XBLA, PSN
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July 2013
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Greg Hastings Paintball
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XBLA, PSN
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July 2013
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Zumba Dance
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iOS
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July 2013
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Slender: The Arrival
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Steam
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October 2013
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Blood of the Werewolf
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Steam
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October 2013
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The Bridge
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XBLA
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November 2013
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RBI Baseball
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XBLA
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April 2014
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Slender: The Arrival
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XBLA, PSN
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September 2014
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Costume Quest 2
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Steam, XBLA, PSN
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October 2014
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Grapple
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Steam
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March 2015
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Krautscape
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Steam
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April 2015
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Avalanche 2: Super Avalanche
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Steam
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August 2015
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Gone Home
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Xbox 1, PSN
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January 2016
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A Boy and His Blob
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Steam, XBLA, PSN, iOS,
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January 2016
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Retail distribution.
Prior to July 2015, 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 Mama
and Zumba
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 developers with incentives to provide timely and
satisfactory performance by associating payments with the
achievement of substantive development milestones, and by providing
for the payment of royalties to them based on sales of the
developed product, only after we recoup development
costs.
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 console and handheld platforms. Each license
generally extends for a term of between two (2) to four (4) years
and is terminable under a variety of circumstances. Each license
allows us to create one or more products for the applicable system,
and requires us to pay a per-unit license fee and/or royalty
payment from the title produced and may include other compensation
or payment terms. All of the hardware manufacturers approve each of
the titles we submit for approval on a title-by-title basis, at
their discretion. We are also dependent on approvals from
distributors for our video game software for PCs and mobile
devices.
Licenses from Third Parties
While
we develop original titles, most of our titles are based on rights,
licenses and properties, including copyrights and trademarks, owned
by third parties. Even our original titles may require rights to
properties from third parties, such as rights to music or content.
License agreements with third parties generally extend for a term
of between two (2) to four (4) years, are limited to specific
territories or platforms and are terminable under a variety of
circumstances. Several of our licenses are exclusive within
particular territories or platforms. The licensors often have
strict approval and quality control rights. Typically, we are
obligated to make minimum guaranteed royalty payments over the term
of these licenses and advance payments against these guarantees,
but other compensation or payment terms, such as milestone
payments, are also common. From time to time, we may also license
other technologies from third party developers for use in our
products, which also are subject to royalties and other types of
payment.
Customers
Customers
of our packaged software have historically been national and
regional retailers, specialty retailers and video game rental
outlets. Sony, Microsoft and Valve accounted for 47%, 37%, and 13%,
respectively, of sales for the fiscal year ended October 31, 2016.
For the fiscal year ended 2015, our top three accounts were
Microsoft (digital), GameStop and Alliance Distributors, which
accounted for approximately 13%, 10% and 10% of our revenue,
respectively. In fiscal 2015, we transferred our distribution
activities related to packaged software and reduced our headcount
and working capital requirements dramatically in order to focus on
the download business, where games are downloaded from servers
maintained 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 within 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 quarter of the calendar year. Traditionally, 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 as www.SEC.GOV
free 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 to Polarity
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 are safe 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:
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Lack of evidence supporting additional patient benefits and
Polarity’s treatments over conventional methods;
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Perceived liability risks generally associated with the use of new
procedures; and
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Limited availability of reimbursement from third party
payers.
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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 technology through
patents and other means is uncertain and may be inadequate, which
could have 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
the intellectual
property rights of others, which could prohibit Polarity from
developing its
treatment, require Polarity to obtain licenses from third parties
or to develop non-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 healthcare reform.
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
control of the Company, the Company may be required to submit a new
application under NASDAQ’s original listing standards and if
such application is not approved, the Company’s common stock
may be delisted from The NASDAQ Capital Market.
In
connection with the Merger, the Company will issue 7,050 shares of
Series E Preferred Stock, which are convertible 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, if it is available, that it can be obtained 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:
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the right to receive a liquidation preference, prior to any
distribution of our assets to the holders of our common stock;
and
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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.
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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 practices for a wide
variety 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 of 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.
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Fiscal Year 2015
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First
Quarter
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$9.54
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$3.30
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Second
Quarter
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$14.22
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$5.64
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Third
Quarter
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$10.38
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$6.54
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Fourth
Quarter
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$11.52
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$6.48
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Fiscal Year 2016
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First
Quarter
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$13.68
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$3.66
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Second
Quarter
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$5.94
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$4.20
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Third
Quarter
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$6.30
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$3.66
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Fourth
Quarter
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$4.50
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$3.03
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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 Data
As
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% of
the issued and outstanding shares of capital stock of Polarity (the
“Seller”). The closing is subject to various closing
conditions.
Video Game Products
Net
Revenues. Our
revenues are principally derived from sales of our video
games.
Cost of
Sales. Cost of sales
includes amortization and impairment of capitalized software
development costs and license fees. Commencing upon the related
product’s release, capitalized software development and
intellectual property license costs are amortized 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 represent one of the largest
components of our general and administrative expenses. These fees
are partially attributable to our required activities as a publicly
traded company, such as SEC filings, 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, or NOL, carryforwards may be subject to a
substantial annual limitation due to the “change in
ownership” provisions of the Internal Revenue Code. The
annual limitation may result in the expiration of NOL carryforwards
before utilization. Due to our history of losses, a valuation
allowance sufficient to fully offset our NOL and other deferred tax
assets has been established under current accounting
pronouncements, and this valuation allowance will be maintained
unless sufficient positive evidence develops to support its
reversal.
Critical Accounting Estimates
Our
discussion and analysis of the financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America, or
GAAP.
The
preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results could differ materially from these
estimates under different assumptions or conditions.
We
have identified the policies below as critical to our business
operations and to the understanding of our financial results. The
impact and any associated risks related to these policies on our
business operations is discussed throughout management’s
discussion and analysis of financial condition and results of
operations 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 holders for the use of their
intellectual property rights in the development of our products.
Minimum guaranteed royalty payments for intellectual property
licenses are initially recorded as an asset (capitalized license
fees) and a current liability (accrued royalties payable) at the
contractual amount upon execution of the contract or when specified
milestones or events occur and when no significant performance
commitment remains with the licensor. Licenses are expensed to cost
of sales at the higher of (i) the contractual royalty rate
based on actual sales or (ii) an effective rate based upon
total projected revenue related to such license. Capitalized
software development costs are classified as non-current if they
relate to titles for which we estimate the release date to be more
than one year from the balance sheet date.
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 the year ended October 31,
2015
Net Revenues.
Net revenues for the year ended
October 31, 2016 decreased 77% to approximately $1.5 million from
$6.7 million for 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 transfer 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 all of our
new game development activities. In 2015, we transferred our retail
distribution activities to Zift 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 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
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.
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.
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, in connection with
amendments to the December Subscription Agreements.
On
April 30, 2015, pursuant to warrant exchange agreements, 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 issuable in connection with the exchange
agreements.
The
Series B Preferred Shares are convertible into shares of common
stock based on a conversion calculation equal to the stated value
($140.00 per share) 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% of
our issued and outstanding common stock, then such investor could
elect to receive shares of our 0% Series C Convertible Preferred
Stock (the “Series C Preferred Shares”), and a
three-year warrant (the “May Warrants”) to purchase one
share of the our common stock at an exercise price of $8.40 per
share (such sale 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
less than the conversion price then in effect, 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 and appoint
thereto, individuals deemed acceptable to the lead investor 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 funds and the corresponding
securities were released to the investors.
In
accordance with the aforementioned escrow release conditions, we
entered into exchange agreements with holders 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 receipt of the common stock hold 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, divided
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 version
of the Certificate of Designations, Preferences and Rights of our
0% Series D Convertible Preferred Stock in order to remove any
voting rights of the Series D Preferred Shares, except as otherwise
required by law.
Dividends
On
January 4, 2016, we 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
Preferred Shares; (iii) Series B Preferred Shares; (iv) Series C
Preferred Shares and (v) Series D Preferred Shares. The
holders of record 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 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.
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 relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our Company
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur. Controls can also be circumvented by
individual acts of some people, by collusion of two or more people,
or by management override of the controls. The design of any system
of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the
degree of compliance with its policies or procedures. Because of
the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.
Subject
to the limitations above, management believes that the consolidated
financial statements and other financial information contained in
this report, fairly present in all material respects our financial
condition, results of operations, and cash flows for the periods
presented.
Based
on the evaluation of the effectiveness of our disclosure controls
and procedures, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were
effective at a reasonable assurance level.
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.
|
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 SUBSIDIARY
|
|
|
|
|
|
By:
|
/s/
Denver Lough
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
|
Date: December 29, 2016
|
|
|
|
|
|
By:
|
/s/
John Stetson
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
|
|
Date: December 29, 2016
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Denver Lough
|
|
Chief Executive Officer and Chairman of the Board of
Directors
|
|
December 29, 2016
|
|
Denver Lough
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
John Stetson
|
|
Chief Financial Officer and Director (Principal
|
|
December 29, 2016
|
|
John Stetson
|
|
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Edward Swanson
|
|
Chief
Operating Officer and Director
|
|
December 29, 2016
|
|
Edward Swanson
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Brauser
|
|
Director
|
|
December 29, 2016
|
|
Michael Brauser
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael Beeghley
|
|
Director
|
|
December 29, 2016
|
|
Michael Beeghley
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Mohit Bhansali
|
|
Director
|
|
December 29, 2016
|
|
Mohit Bhansali
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Barry Honig
|
|
Director
|
|
December 29, 2016
|
|
Barry Honig
|
|
|
|
|
|
|
|
|
|
|
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 January 2016,
FASB issued
ASU 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
|
|
●
|
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
Disclosures provides
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 stock
|
|
|
$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
|
%
|
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 Equity and ASC
815-40 Contracts in an Entity’s
Own Equity to 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.