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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2011
 Commission File No. 000-51128
 Majesco Entertainment Company
  DELAWARE
    
    06-1529524(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 160 Raritan Center Parkway, Edison, NJ 08837
 (732) 225-8910
 
  þ o
 o o
  Large accelerated filer o   
    Accelerated filer o
    Non-accelerated filer o
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
January 31, 2011 QUARTERLY REPORT ON FORM 10-Q
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of January 31, 2011 (unaudited) and October 31, 2010
    
    
    3Condensed Consolidated Statements of Operations for the three months ended January 31, 2011 and 2010 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2011 and 2010 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. (Removed and Reserved)
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURE
    
    
    21EX-10.1EX-31.1EX-31.2EX-32EX-10.1EX-31.1EX-31.2EX-32
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share amounts)
 January 31,
    
    
    October 31,2011
    
    
    2010(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,889
    
    
    $
    8,004Due from factor
    
    
    13,769
    
    
    
    1,015Accounts and other receivables, net
    
    
    844
    
    
    
    725Inventory, net
    
    
    7,240
    
    
    
    8,418Advance payments for inventory
    
    
    643
    
    
    
    5,454Capitalized software development costs and license fees
    
    
    3,521
    
    
    
    4,903Prepaid expenses
    
    
    486
    
    
    
    921Total current assets
    
    
    34,392
    
    
    
    29,440Property and equipment, net
    
    
    551
    
    
    
    520Other assets
    
    
    69
    
    
    
    69Total assets
    
    $
    35,012
    
    
    $
    30,029LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    14,768
    
    
    $
    11,375Inventory financing payables
    
    
    84
    
    
    
    5,557Advances from customers
    
    
    555
    
    
    
    945Total current liabilities
    
    
    15,407
    
    
    
    17,877Warrant liability
    
    
    560
    
    
    
    144Commitments and contingenciesStockholders equity:Common stock  $.001 par value; 250,000,000 shares
authorized; 39,519,707 and 39,326,376 shares issued
and outstanding at January 31, 2011 and October 31,
2010, respectively
    
    
    40
    
    
    
    39Additional paid-in capital
    
    
    115,100
    
    
    
    114,824Accumulated deficit
    
    
    (95,571
    )
    
    
    (102,333
    )Accumulated other comprehensive loss
    
    
    (524
    )
    
    
    (522
    )Net stockholders equity
    
    
    19,045
    
    
    
    12,008Total liabilities and stockholders equity
    
    $
    35,012
    
    
    $
    30,029
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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, in thousands, except share amounts)
 Three Months EndedJanuary 312011
    
    
    2010Net revenues
    
    $
    48,466
    
    
    $
    29,206Cost of salesProduct costs
    
    
    20,823
    
    
    
    11,728Software development costs and license fees
    
    
    8,012
    
    
    
    7,867Loss on impairment of software development
costs and license fees-future releases
    
    
    
    
    
    
    90528,835
    
    
    
    20,500Gross profit
    
    
    19,631
    
    
    
    8,706Operating costs and expensesProduct research and development
    
    
    1,230
    
    
    
    934Selling and marketing
    
    
    7,009
    
    
    
    3,056General and administrative
    
    
    3,308
    
    
    
    2,124Depreciation and amortization
    
    
    45
    
    
    
    5311,592
    
    
    
    6,167Operating income
    
    
    8,039
    
    
    
    2,539Other expenses (income)Interest and financing costs, net
    
    
    710
    
    
    
    497Change in fair value of warrants
    
    
    416
    
    
    
    (202
    )Income before income taxes
    
    
    6,913
    
    
    
    2,244Income taxes
    
    
    151
    
    
    
    (1,563
    )Net income
    
    $
    6,762
    
    
    $
    3,807Net income per share:Basic
    
    $
    0.18
    
    
    $
    0.10Diluted
    
    $
    0.18
    
    
    $
    0.10Weighted average shares outstanding:Basic
    
    
    37,638,705
    
    
    
    36,808,062Diluted
    
    
    37,732,220
    
    
    
    36,829,239
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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Three Months EndedJanuary 31,2011
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    6,762
    
    
    $
    3,807Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    45
    
    
    
    53Change in fair value of warrants
    
    
    416
    
    
    
    (202
    )Non-cash compensation expense
    
    
    276
    
    
    
    522Loss on disposal of assets
    
    
    
    
    
    
    19Provision for price protection and customer allowances
    
    
    1,887
    
    
    
    1,169Amortization of software development costs and license fees
    
    
    2,784
    
    
    
    2,186Loss on impairment of software development costs and license fees
    
    
    25
    
    
    
    905Changes in operating assets and liabilities:Due from factor
    
    
    (14,238
    )
    
    
    (6,671
    )Accounts and other receivables
    
    
    (521
    )
    
    
    (645
    )Inventory
    
    
    1,178
    
    
    
    2,599Capitalized software development costs and license fees
    
    
    (1,427
    )
    
    
    (1,957
    )Advance payments for inventory
    
    
    4,811
    
    
    
    2,472Prepaid expenses and other assets
    
    
    435
    
    
    
    304Accounts payable and accrued expenses
    
    
    3,394
    
    
    
    2,741Advances from customers and other liabilities
    
    
    (391
    )
    
    
    (374
    )Net cash provided by operating activities
    
    
    5,436
    
    
    
    6,928CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (77
    )
    
    
    (4
    )Net cash used in investing activities
    
    
    (77
    )
    
    
    (4
    )CASH FLOWS FROM FINANCING ACTIVITIESInventory financing
    
    
    (5,472
    )
    
    
    (6,053
    )Net cash used in financing activities
    
    
    (5,472
    )
    
    
    (6,053
    )Effect of exchange rates on cash and cash equivalents
    
    
    (2
    )
    
    
    (7
    )Net (decrease) increase in cash and cash equivalents
    
    
    (115
    )
    
    
    864Cash and cash equivalents  beginning of period
    
    
    8,004
    
    
    
    11,839Cash and cash equivalents  end of period
    
    $
    7,889
    
    
    $
    12,703SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCash paid for interest
    
    $
    710
    
    
    $
    497
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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited, in thousands, except share amounts)
 1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
      Three Months Ended January 31,2011
    
    
    %
    
    
    2010
    
    
    %United States
    
    $
    48,300
    
    
    
    100
    %
    
    $
    27,959
    
    
    
    95.7
    %Europe
    
    
    166
    
    
    
    0
    %
    
    
    1,247
    
    
    
    4.3
    %Total
    
    $
    48,466
    
    
    
    100
    %
    
    $
    29,206
    
    
    
    100.0
    %
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Revenue Recognition.
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Customer Payments and Incentives
   Capitalized Software Development Costs and License Fees.
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Estimates.
 Income Per Share.
  Three Months EndedJanuary 31,2011
    
    2010Basic weighted average shares outstanding
    
    
    37,638,705
    
    
    
    36,808,062Common stock options
    
    
    47,785
    
    
    
    21,177Non-vested portion of restricted stock grants
    
    
    45,730
    
    
    
    Diluted weighted average shares outstanding
    
    
    37,732,220
    
    
    
    36,829,239
  January 31,
    
    January 31,2011
    
    2010Shares issuable under common stock warrants
    
    
    2,226,470
    
    
    
    2,201,469Shares issuable under stock options
    
    
    1,699,216
    
    
    
    1,462,752Non-vested portion of restricted stock grants
    
    
    1,878,917
    
    
    
    1,748,0225,804,603
    
    
    
    5,412,243
  Reclassifications.
 Commitments and Contingencies.
 Recent Accounting Pronouncements
 Amendments to Variable Interest Entity Guidance Accounting for Transfers of Financial Assets Transfers and Servicing
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Multiple-Deliverable Revenue Arrangements
 Certain Revenue Arrangements That Include Software Elements
 Fair Value Measuring Liabilities
at Fair Values
 3. FAIR VALUE
  Quoted prices
    
    
    
    
    
    
    Significantin active markets
    
    
    Significant other
    
    
    unobservablefor identical assets
    
    
    observable inputs
    
    
    inputsJanuary 31, 2011
    
    
    (level 1)
    
    
    (level 2)
    
    
    (level 3)Assets:Money market funds
    
    $
    7,045
    
    
    $
    7,045
    
    
    $
    
    
    
    $
    Bank- deposit
    
    $
    844
    
    
    $
    844
    
    
    $
    
    
    
    $
    Total financial assets
    
    $
    7,889
    
    
    $
    7,889
    
    
    $
    
    
    
    $
    Liabilities:Warrant liability
    
    $
    560
    
    
    $
    
    
    
    $
    
    
    
    $
    560Total financial liabilities
    
    $
    560
    
    
    $
    
    
    
    $
    
    
    
    $
    560
   Three months ended
    
    
    Three months endedJanuary 31, 2011
    
    
    January 31, 2010Estimated fair value of stock
    
    $
    0.62-$1.21
    
    
    $
    0.85-$1.02Expected warrant term
    
    2.1-2.4 years
    
    3.1-3.4 yearsRisk-free rate
    
    
    0.4%-0.6
    %
    
    
    1.4%-1.6
    %Expected volatility
    
    
    73.5%-75.5
    %
    
    
    76.1
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
  Three months ended
    
    
    Three months endedJanuary 31, 2011
    
    
    January 31, 2010Beginning balance
    
    $
    144
    
    
    $
    626Total loss (gain) included in net income
    
    
    416
    
    
    
    (202
    )Ending balance
    
    $
    560
    
    
    $
    424
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4. INCOME TAXES
   5. DUE FROM FACTOR
  January 31,
    
    
    October 31,2011
    
    
    2010Outstanding accounts receivable sold to factor
    
    $
    31,959
    
    
    $
    13,754Less: allowances
    
    
    (6,842
    )
    
    
    (3,298
    )Less: advances from factor
    
    
    (11,348
    )
    
    
    (9,441
    )$
    13,769
    
    
    $
    1,015
   Three Months EndedJanuary 31,2011
    
    
    2010Allowances  beginning of period
    
    $
    (3,298
    )
    
    $
    (4,380
    )Provision for price protection
    
    
    (1,889
    )
    
    
    (1,001
    )Amounts charged against allowance and other changes
    
    
    (1,655
    )
    
    
    442Allowances  end of period
    
    $
    (6,842
    )
    
    $
    (4,939
    )
 6. ACCOUNTS AND OTHER RECEIVABLES
  January 31,
    
    
    October 31,2011
    
    
    2010Accounts receivable
    
    $
    514
    
    
    $
    726Allowances
    
    
    (20
    )
    
    
    (25
    )Other
    
    
    350
    
    
    
    24$
    844
    
    
    $
    725
 7. PREPAID EXPENSES
  January 31,
    
    
    October 31,2011
    
    
    2010Prepaid media advertising
    
    $
    384
    
    
    $
    746Other
    
    
    102
    
    
    
    175$
    486
    
    
    $
    921
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8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
  January 31,
    
    
    October 31,2011
    
    
    2010Accounts payable  trade
    
    $
    4,846
    
    
    $
    4,856Royalties and software development
    
    
    6,960
    
    
    
    5,517Sales commissions
    
    
    327
    
    
    
    120Salaries, accrued bonuses and other compensation
    
    
    2,255
    
    
    
    592Other accruals
    
    
    380
    
    
    
    290$
    14,768
    
    
    $
    11,375
 9. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Three Months EndedJanuary 31,
    
    
    January 31,2011
    
    
    2010Net income
    
    $
    6,762
    
    
    $
    3,807Other comprehensive (loss)  foreign currency translation adjustments
    
    
    (2
    )
    
    
    (36
    )Total comprehensive income
    
    $
    6,760
    
    
    $
    3,771
 10. WORKFORCE REDUCTION
  Three Months EndedJanuary 31, 2010Product research and development
    
    $
    90Selling and Marketing
    
    
    243General and Administrative
    
    
    70Total
    
    $
    403
  11. RELATED PARTIES
  11




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Three Months EndedJanuary 31,2011
    
    
    2010Consulting
    
    $
    38
    
    
    $
    37Commissions and fees
    
    
    
    
    
    
    45Total
    
    $
    38
    
    
    $
    82
    12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
    Net Revenues
 Cost of Sales.
 Gross Profit.
 13




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Product Research and Development Expenses.
 Selling and Marketing Expenses.
 General and Administrative Expenses.
 Loss on Impairment of Software Development Costs and License Fees Cancelled Games.
 Interest and Financing Costs.
 Income Taxes
 Seasonality and Variations in Interim Quarterly Results
  Critical Accounting Estimates
   14




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Revenue Recognition.
  Price Protection and Other Allowances.
   Capitalized Software Development Costs and License Fees.
 15




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Inventory. Zumba Babysitting Mama
 Accounting for Stock-Based Compensation.
 Commitments and Contingencies.
 Results of operations
 Three months ended January 31, 2011 versus three months ended January 31, 2010
 Net Revenues. Babysitting Mama Zumba
Fitness Jillian Michaels Fitness Ultimatum Alvin and the Chipmunks: The
Squeakquel Zumba
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Three Months Ended January 31,2011
    
    
    %
    
    
    2010
    
    
    %(in thousands)
    
    
    
    
    
    
    (in thousands)Nintendo Wii
    
    $
    25,899
    
    
    
    53
    %
    
    $
    7,973
    
    
    
    27
    %Microsoft Xbox 360
    
    
    10,944
    
    
    
    23
    %
    
    
    176
    
    
    
    0
    %Nintendo DS
    
    
    9,018
    
    
    
    19
    %
    
    
    20,255
    
    
    
    70
    %Sony Playstation 3
    
    
    2,331
    
    
    
    5
    %
    
    
    0
    
    
    
    0
    %Other
    
    
    274
    
    
    
    0
    %
    
    
    802
    
    
    
    3
    %TOTAL
    
    $
    48,466
    
    
    
    100
    %
    
    $
    29,206
    
    
    
    100.0
    %
 Gross Profit. Zumba Fitness
 Product Research and Development Expenses.
 Selling and Marketing Expenses. Zumba Fitness Babysitting Mama
 General and Administrative Expenses.
 Operating Income.
 Change in Fair Value of Warrants.
 Income Taxes.
 Net Income.
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Liquidity and Capital Resources
   Factoring and Purchase Order Financing.
      Advances from Customers.
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Contingencies and Commitments
 Off-Balance Sheet Arrangements
  Cash Flows
  Operating Cash Flows.
  Investing Cash Flows.
 Financing Cash Flows.
 
 Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
  
 Item 4.
    
    Controls and Procedures
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Removed and Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Amended Directors Compensation Policy31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 20




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SIGNATURE
  MAJESCO ENTERTAINMENT COMPANY/s/ Jesse SuttonJesse SuttonChief Executive Officer  21