##### Table of Contents



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 July 31, 2010
 Commission File No. 000-51128
 Majesco Entertainment Company
  DELAWARE
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    06-1529524
(I.R.S. Employer
Identification No.)
 160 Raritan Center Parkway, Edison, NJ 08837
 (732) 225-8910
  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 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
July 31, 2010 QUARTERLY REPORT ON FORM 10-Q
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets as of July 31, 2010 (unaudited) and October 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2010 and 2009 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2010 and 2009 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4T. Controls and Procedures
    
    
    22PART II  OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. (Removed and Reserved)
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23SIGNATURES
    
    
    24CERTIFICATIONS
    
    
    25EX-4.1EX-10.1EX-10.2EX-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)
 July 31,
    
    
    October 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,549
    
    
    $
    11,839Due from factor
    
    
    
    
    
    
    1,172Accounts and other receivables, net
    
    
    613
    
    
    
    1,145Inventory, net
    
    
    3,503
    
    
    
    6,190Advance payments for inventory
    
    
    738
    
    
    
    3,126Capitalized software development costs and license fees
    
    
    5,457
    
    
    
    3,678Prepaid expenses
    
    
    973
    
    
    
    847Total current assets
    
    
    21,833
    
    
    
    27,997Property and equipment, net
    
    
    478
    
    
    
    447Other assets
    
    
    69
    
    
    
    83Total assets
    
    $
    22,380
    
    
    $
    28,527LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    7,219
    
    
    $
    9,586Inventory financing payables
    
    
    370
    
    
    
    6,053Due to factor
    
    
    961
    
    
    
    Advances from customers
    
    
    99
    
    
    
    543Total current liabilities
    
    
    8,649
    
    
    
    16,182Warrant liability
    
    
    214
    
    
    
    626Commitments and contingenciesStockholders equity:Common stock  $.001 par value; 250,000,000 shares
authorized; 38,611,151 and 38,553,740 shares issued
and outstanding at July 31, 2010 and October 31, 2009,
respectively
    
    
    39
    
    
    
    38Additional paid-in capital
    
    
    114,807
    
    
    
    113,484Accumulated deficit
    
    
    (100,804
    )
    
    
    (101,361
    )Accumulated other comprehensive loss
    
    
    (525
    )
    
    
    (442
    )Net stockholders equity
    
    
    13,517
    
    
    
    11,719Total liabilities and stockholders equity
    
    $
    22,380
    
    
    $
    28,527
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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited, in thousands, except share amounts)
 Three Months Ended
    
    
    Nine Months EndedJuly 31
    
    
    July 312010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    12,153
    
    
    $
    17,183
    
    
    $
    52,265
    
    
    $
    70,551Cost of salesProduct costs
    
    
    7,398
    
    
    
    7,549
    
    
    
    24,573
    
    
    
    27,196Software development costs and license fees
    
    
    1,975
    
    
    
    6,105
    
    
    
    12,074
    
    
    
    21,081Loss on impairment of software development costs
and license fees
    
    
    
    
    
    
    
    
    
    
    1,021
    
    
    
    1709,373
    
    
    
    13,654
    
    
    
    37,668
    
    
    
    48,447Gross profit
    
    
    2,780
    
    
    
    3,529
    
    
    
    14,597
    
    
    
    22,104Operating costs and expensesProduct research and development
    
    
    720
    
    
    
    1,201
    
    
    
    2,361
    
    
    
    3,906Selling and marketing
    
    
    1,641
    
    
    
    4,226
    
    
    
    6,225
    
    
    
    11,559General and administrative
    
    
    2,004
    
    
    
    2,211
    
    
    
    6,394
    
    
    
    6,692Depreciation and amortization
    
    
    43
    
    
    
    71
    
    
    
    140
    
    
    
    209Settlement of litigation and related charges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    404Loss on impairment of software development costs
and license fees  cancelled games
    
    
    116
    
    
    
    61
    
    
    
    276
    
    
    
    4414,524
    
    
    
    7,770
    
    
    
    15,396
    
    
    
    23,211Operating (loss)
    
    
    (1,744
    )
    
    
    (4,241
    )
    
    
    (799
    )
    
    
    (1,107
    )Other expenses (income)Interest and financing costs, net
    
    
    82
    
    
    
    204
    
    
    
    703
    
    
    
    884Change in fair value of warrants
    
    
    (183
    )
    
    
    843
    
    
    
    (412
    )
    
    
    1,858Loss before income taxes
    
    
    (1,643
    )
    
    
    (5,288
    )
    
    
    (1,090
    )
    
    
    (3,849
    )Income taxes
    
    
    
    
    
    
    (88
    )
    
    
    (1,647
    )
    
    
    (1,115
    )Net (loss) income
    
    $
    (1,643
    )
    
    $
    (5,200
    )
    
    $
    557
    
    
    $
    (2,734
    )Net (loss) income per share:Basic
    
    $
    (0.04
    )
    
    $
    (0.18
    )
    
    $
    0.02
    
    
    $
    (0.10
    )Diluted
    
    $
    (0.04
    )
    
    $
    (0.18
    )
    
    $
    0.01
    
    
    $
    (0.10
    )Weighted average shares outstanding:Basic
    
    
    36,934,987
    
    
    
    29,331,882
    
    
    
    36,838,981
    
    
    
    28,644,914Diluted
    
    
    36,934,987
    
    
    
    29,331,882
    
    
    
    37,142,649
    
    
    
    28,644,914
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MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months EndedJuly 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    557
    
    
    $
    (2,734
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    140
    
    
    
    209Change in fair value of warrants
    
    
    (412
    )
    
    
    1,858Share-based litigation settlement
    
    
    
    
    
    
    404Fair value of warrant issued for services
    
    
    20
    
    
    
    Non-cash compensation expense
    
    
    1,304
    
    
    
    1,255Loss on disposal of assets
    
    
    19
    
    
    
    Provision for price protection and customer allowances
    
    
    2,876
    
    
    
    3,088Amortization of software development costs and license fees
    
    
    3,629
    
    
    
    8,902Loss on impairment of software development costs and license fees
    
    
    1,297
    
    
    
    Changes in operating assets and liabilities:Due from/(to) factor
    
    
    (940
    )
    
    
    (3,065
    )Accounts and other receivables
    
    
    672
    
    
    
    1,498Inventory
    
    
    2,672
    
    
    
    2,706Capitalized software development costs and license fees
    
    
    (6,705
    )
    
    
    (10,396
    )Prepaid
expenses and other assets
    
    
    2,270
    
    
    
    83Accounts payable and accrued expenses
    
    
    (2,115
    )
    
    
    46Advances from customers and other liabilities
    
    
    (676
    )
    
    
    (1,365
    )Net cash provided by operating activities
    
    
    4,608
    
    
    
    2,489CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (192
    )
    
    
    (119
    )Net cash used in investing activities
    
    
    (192
    )
    
    
    (119
    )CASH FLOWS FROM FINANCING ACTIVITIESInventory financing
    
    
    (5,684
    )
    
    
    (1,540
    )Net cash used in financing activities
    
    
    (5,684
    )
    
    
    (1,540
    )Effect of exchange rates on cash and cash equivalents
    
    
    (22
    )
    
    
    (68
    )Net (decrease) increase in cash and cash equivalents
    
    
    (1,290
    )
    
    
    762Cash and cash equivalents  beginning of period
    
    
    11,839
    
    
    
    5,505Cash and cash equivalents  end of period
    
    $
    10,549
    
    
    $
    6,267SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCash paid for interest
    
    $
    710
    
    
    $
    871Litigation settlement costs paid in stock
    
    $
    
    
    
    $
    1,872
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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 July 31,
    
    
    Nine Months Ended July 31,2010
    
    
    %
    
    
    2009
    
    
    %
    
    
    2010
    
    
    %
    
    
    2009
    
    
    %United States
    
    $
    12,122
    
    
    
    99.7
    %
    
    $
    15,327
    
    
    
    89.2
    %
    
    $
    50,488
    
    
    
    96.6
    %
    
    $
    67,347
    
    
    
    95.5
    %Europe
    
    
    31
    
    
    
    0.3
    %
    
    
    1,856
    
    
    
    10.8
    %
    
    
    1,777
    
    
    
    3.4
    %
    
    
    3,204
    
    
    
    4.5
    %Total
    
    $
    12,153
    
    
    
    100.0
    %
    
    $
    17,183
    
    
    
    100.0
    %
    
    $
    52,265
    
    
    
    100.0
    %
    
    $
    70,551
    
    
    
    100.0
    %
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Revenue Recognition.
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##### Table of Contents



Inventory.
 Capitalized Software Development Costs and License Fees.
  Accounting for Collaborative
Arrangements
 Estimates.
 Income (loss) Per Share.
 Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2010
    
    2009
    
    2010
    
    2009Basic weighted average shares outstanding
    
    
    36,934,987
    
    
    
    29,331,882
    
    
    
    36,838,981
    
    
    
    28,644,914Common stock purchase warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock options
    
    
    
    
    
    
    
    
    
    
    303,668
    
    
    
    Non-vested portion of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    36,934,987
    
    
    
    29,331,882
    
    
    
    37,142,649
    
    
    
    28,644,914
 7




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##### Table of Contents



July 31,
    
    July 31,2010
    
    2009Shares issuable under common stock warrants
    
    
    2,241,470
    
    
    
    2,201,469Shares issuable under stock options
    
    
    1,483,929
    
    
    
    1,357,777Non-vested portion of restricted stock grants
    
    
    1,673,327
    
    
    
    2,058,8085,398,726
    
    
    
    5,618,054
  Recently issued accounting pronouncements
     Reclassifications.
 8




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##### Table of Contents



Commitments and Contingencies.
 3. FAIR VALUE
  
    
    Level 1Quoted prices in active markets for identical assets or liabilities.
 
    
    Level 2Observable inputs other than quoted prices included in Level 1, such as quoted
prices for markets that are not active or other inputs that are observable or can be
corroborated by observable market data.
 
    
    Level 3Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
  Quoted prices
    
    
    
    
    
    
    Significantin active markets
    
    
    Significant other
    
    
    unobservablefor identical assets
    
    
    observable inputs
    
    
    inputsJuly 31, 2010
    
    
    (level 1)
    
    
    (level 2)
    
    
    (level 3)Assets:Money market funds
    
    $
    9,545
    
    
    $
    9,545
    
    
    $
    
    
    
    $
    Bank- deposit
    
    $
    1,004
    
    
    $
    1,004
    
    
    $
    
    
    
    $
    Total financial assets
    
    $
    10,549
    
    
    $
    10,549
    
    
    $
    
    
    
    $
    Liabilities:Warrant liability
    
    $
    214
    
    
    $
    
    
    
    $
    
    
    
    $
    214Total financial liabilities
    
    $
    214
    
    
    $
    
    
    
    $
    
    
    
    $
    214
 , Distinguishing Liabilities
from Equity.
   Nine Months
    
    
    YearEnded
    
    
    EndedJuly 31,
    
    
    October 31,Description
    
    2010
    
    
    2009Beginning balance
    
    $
    626
    
    
    $
    211Purchases, issuances, and settlements
    
    
    
    
    
    
    Total loss (gain) included in net loss
    
    
    (412
    )
    
    
    415Ending balance
    
    $
    214
    
    
    $
    626
 9




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4. INCOME TAXES
   5. DUE FROM (TO) FACTOR
  July 31,
    
    
    October 31,2010
    
    
    2009Outstanding accounts receivable sold to factor
    
    $
    7,789
    
    
    $
    19,307Less: allowances
    
    
    (2,947
    )
    
    
    (4,380
    )Less: advances from factor
    
    
    (5,803
    )
    
    
    (13,755
    )$
    (961
    )
    
    $
    1,172
  Nine Months EndedJuly 31,2010
    
    
    2009Balance  beginning of period
    
    $
    (4,380
    )
    
    $
    (3,359
    )Add: provision
    
    
    (3,073
    )
    
    
    (3,088
    )Less: amounts charged against allowance
    
    
    4,506
    
    
    
    3,667Balance  end of period
    
    $
    (2,947
    )
    
    $
    (2,780
    )
  6. ACCOUNTS AND OTHER RECEIVABLES
  July 31,
    
    
    October 31,2010
    
    
    2009Accounts receivable
    
    $
    659
    
    
    $
    1,388Allowances
    
    
    (82
    )
    
    
    (295
    )Other
    
    
    36
    
    
    
    52$
    613
    
    
    $
    1,145
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7. PREPAID EXPENSES
  July 31,
    
    
    October 31,2010
    
    
    2009Prepaid media advertising
    
    $
    802
    
    
    $
    627Other
    
    
    171
    
    
    
    220$
    973
    
    
    $
    847
 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
  July 31,
    
    
    October 31,2010
    
    
    2009Accounts payable  trade
    
    $
    3,637
    
    
    $
    3,990Accrued expenses:Royalties  including accrued minimum guarantees
    
    
    1,994
    
    
    
    3,680Salaries and other compensation
    
    
    544
    
    
    
    648Other accruals
    
    
    1,044
    
    
    
    1,268$
    7,219
    
    
    $
    9,586
 9. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net (loss) income
    
    $
    (1,643
    )
    
    $
    (5,200
    )
    
    $
    557
    
    
    $
    (2,734
    )Other comprehensive (loss) income  foreign currency translation adjustments
    
    
    (4
    )
    
    
    151
    
    
    
    (83
    )
    
    
    (12
    )Total comprehensive (loss) income
    
    $
    (1,647
    )
    
    $
    (5,049
    )
    
    $
    474
    
    
    $
    (2,746
    )
 10. CONTINGENCIES AND COMMITMENTS
 Commitments
   11




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11. WORKFORCE REDUCTION
  Nine Months EndedJuly 31, 2010Product research and development
    
    $
    90Selling and Marketing
    
    
    243General and Administrative
    
    
    70Total
    
    $
    403
  12. RELATED PARTIES
   Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Consulting
    
    $
    38
    
    
    $
    38
    
    
    $
    113
    
    
    $
    175Business expenses
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    6Total
    
    $
    38
    
    
    $
    38
    
    
    $
    124
    
    
    $
    181
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Commissions
    
    $
    
    
    
    $
    23
    
    
    $
    131
    
    
    $
    172
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  12




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##### Table of Contents



Overview
       Net Revenues
 Cost of Sales.
 13




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##### Table of Contents



Gross Profit.
 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
  14




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Critical Accounting Estimates
     Revenue Recognition.
 Reserves for Price Protection and Other Allowances.
  15




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##### Table of Contents



Capitalized Software Development Costs and License Fees.
 Accounting for Collaborative Arrangements
      Inventory.
 Accounting for Stock-Based Compensation.
 Commitments and Contingencies.
 16




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##### Table of Contents



Revenue by platform
 The following Table sets forth our net revenues by platform:
 Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2010
    
    
    %
    
    
    2009
    
    
    %
    
    
    2010
    
    
    %
    
    
    2009
    
    
    %Nintendo Wii
    
    $
    4,624
    
    
    
    38.0
    %
    
    $
    6,223
    
    
    
    36.2
    %
    
    $
    15,275
    
    
    
    29.2
    %
    
    $
    37,636
    
    
    
    53.3
    %Nintendo DS
    
    
    7,139
    
    
    
    58.7
    %
    
    
    9,582
    
    
    
    55.8
    %
    
    
    35,396
    
    
    
    67.7
    %
    
    
    29,467
    
    
    
    41.8
    %Other
    
    
    390
    
    
    
    3.3
    %
    
    
    1,378
    
    
    
    8.0
    %
    
    
    1,594
    
    
    
    3.1
    %
    
    
    3,448
    
    
    
    4.9
    %TOTAL
    
    $
    12,153
    
    
    
    100.0
    %
    
    $
    17,183
    
    
    
    100.0
    %
    
    $
    52,265
    
    
    
    100.0
    %
    
    $
    70,551
    
    
    
    100.0
    %
 Results of operations
 Three months ended July 31, 2010 versus three months ended July 31, 2009
 Net Revenues. Tetris Night at the Museum; Battle for the Smithsonian Gardening
Mama Gardening Mama
 Gross Profit.
 Product Research and Development Expenses.
 Selling and Marketing Expenses. Go Play Night at the Museum
 General and Administrative Expenses.
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##### Table of Contents



Operating Loss.
 Interest and Financing Costs, Net.
 Change in Fair Value of Warrants. ,
Distinguishing Liabilities from Equity
  Income Taxes.
 Net Loss.
 Nine months ended July 31, 2010 versus nine months ended July 31, 2009
 Net Revenues. Jillian Michaels Fitness Ultimatum Cooking Mama: World Kitchen Jillian Michaels: Resolution, Cooking Mama Cooking Mama
 Gross Profit.
 Product Research and Development Expenses.
 18




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##### Table of Contents



Selling and Marketing Expenses.
 General and Administrative Expenses.
 Settlement of Litigation Charges.
 Operating Loss.
 Interest and Financing Costs, Net.
 Change in Fair Value of Warrants. ,
Distinguishing Liabilities from Equity
  Income Taxes.
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Net Income.
 Liquidity and Capital Resources
      Factoring and Purchase Order Financing.
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Advances from Customers.
 Contingencies and Commitments.
     Off-Balance Sheet Arrangements
  Cash Flows
  Operating Cash Flows.
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Investing Cash Flows.
 Financing Cash Flows.
 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Not Applicable.
 
 Item 4T. 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
 4.1
    
    Warrant to Purchase Common Stock dated March 29, 2010 issued to Gerald A. Amato.10.1
    
    Restricted Stock Agreement dated June 7, 2010 between Majesco Entertainment Company and Chris Gray.10.2
    
    Warrant Purchase Agreement dated March 29, 2010 between Majesco Entertainment Company and Gerald A. Amato.31.1
    
    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.
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SIGNATURE
  MAJESCO ENTERTAINMENT COMPANY
 /s/ Jesse Sutton

Jesse SuttonChief Executive OfficerDate: September 14, 2010
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