| MAJESCO ENTERTAINMENT CO Item 1A Risk Factors |
| 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 harm our business, financial condition or results of operations |
| If any of the following risks actually occur, our business, financial condition or results of operations could suffer |
| Our business activities may require additional financing that might not be obtainable on acceptable terms, if at all, which could have a material adverse effect on our financial condition, liquidity and our ability to operate going forward |
| As we continue to operate our business, we expect our expenditures to decrease |
| Although there can be no assurance, our management believes that based on our current plan there are sufficient capital resources from operations, including our factoring and purchase order financing arrangements, to finance our operational requirements through at least the next twelve months |
| If we continue to incur operating losses, or if unforeseen events occur that would require additional funding, we may need to raise additional capital or incur debt to fund our operations |
| We would expect to seek such capital through sales of additional equity or debt securities and/or loans from financial institutions, but there can be no assurance that funds will be available to us on acceptable terms, if at all, and any sales of additional securities will be dilutive to investors |
| Failure to obtain financing or obtaining financing on unfavorable terms could result in a decrease in our stock price and could have a material adverse effect on future operating prospects, or require us to significantly reduce operations |
| We have experienced recent net losses and we may incur future net losses which may cause a decrease in our stock price |
| In fiscal years 2003 and 2004, these net losses were principally related to our operations, and included impairment reserves, financing costs, litigation expense, and non-cash charges to reflect the change in the fair value of our warrants issued in our February 2004 private placement |
| For fiscal year 2005, the net loss was due to weak sales across all of our product lines, which resulted in significant reserves relating to capitalized costs, increased provisions in price protection and other allowances |
| Going forward, we may not again be able to generate revenues sufficient to offset our costs, and may sustain further net losses in future periods |
| In addition, if we do become profitable, we may not be able to sustain or increase our profitability |
| Continued losses, or an inability to sustain profitability, may have an adverse effect on our future operating prospects and stock price |
| We have experienced significant volatility in the price of our stock over the last twelve months |
| The price of our common stock has experienced significant volatility over the last twelve months, and such prices may be higher or lower than the price you paid for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance |
| gif] • price and volume fluctuations in the overall stock market from time to time; [spacer |
| gif] • actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; [spacer |
| gif] • our, or a competitorapstas, announcement of new products, services or technological innovations; [spacer |
| gif] • departures of key personnel; [spacer |
| gif] • general economic, political and market conditions and trends; [spacer |
| gif] • risks associated with possible disruption in our operations due to terrorism; or [spacer |
| gif] • other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings |
| 11 _________________________________________________________________ In addition, purchases or sales of large quantities of our stock could have an unusual effect on our market price |
| Anti-takeover provisions in our charter and by-laws may make it difficult for anyone to acquire us without approval of our board of directors |
| These measures may discourage offers to acquire us and may permit our board of directors to choose not to entertain offers to purchase us, even offers that are at a substantial premium to the market price of our stock |
| Our stockholders may therefore be deprived of opportunities to profit from a sale of our company |
| The volatility of our stock price could affect the value of an investment in our common stock |
| The market price of our stock has fluctuated widely over the last twelve months |
| Between November 1, 2004, and October 31, 2005, the closing sale price of our common stock ranged between a high of dlra16dtta25 and a low of dlra1dtta13, experiencing greater volatility over that time than most of the market did |
| The historic market price of our common stock may not be indicative of future market prices |
| We may not be able to sustain or increase the value of our common stock |
| Further declines in the market price of our stock could adversely affect our ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with or involving our common stock |
| In addition, we must maintain Nasdaq National Market continued listing standards, which includes a market price of at least dlra1dtta00 |
| Customer accommodations could materially and adversely affect our business, results of operations, financial condition, and liquidity |
| When demand for our offerings falls below expectations, we may negotiate accommodations to retailers or distributors in order to maintain our relationships with our customers and access to our sales channels |
| These accommodations include negotiation of price discounts and credits against future orders commonly refer to as price protection |
| At the time of product shipment, we establish reserves for price protection and other similar allowances |
| These reserves are established according to our estimates of the potential for markdown allowances based upon historical rates, expected sales, retailer inventories of products and other factors |
| We cannot predict with certainty whether existing reserves will be sufficient to offset any accommodations we will provide, nor can we predict the amount or nature of accommodations that we will provide in the future |
| If actual accommodations exceed our reserves, our earnings would be reduced, possibly materially |
| Any such reduction may have an adverse effect on our business, financial condition or results of operations |
| The granting of price protection and other allowance reduces our ability to collect receivables and impact availabilities for advances from our factor |
| The continue granting of substantial price protection and other allowances may require additional funding sources to fund operations but there can no assurance that such funds will be available to us on acceptable terms, if at all |
| Increased competition for limited shelf space and promotional support from retailers could affect the success of our business and require us to incur greater expenses to market our products |
| Retailers typically have limited shelf space and promotional resources, such as circulars and in-store advertising, to support any one product among an increasing number of newly introduced entertainment offerings |
| Competition for retail support and shelf space is expected to increase, which may require us to increase our marketing expenditures or reduce prices to retailers |
| Competitors with more extensive lines, popular products and financial resources frequently have greater bargaining power with retailers |
| Accordingly, we may not be able to achieve or maintain the levels of support and shelf space that our competitors receive |
| As a result, sales of our products may be less than expected, which would have a material and adverse effect on our business, financial condition and results of operations |
| The loss of any of our key customers could adversely affect our sales |
| Our sales to Wal-Mart and Toys ‘‘R’’ Us accounted for approximately 34prca, and 23prca of our net revenue for the fiscal year 2005, respectively |
| Although we seek to broaden our customer base, we anticipate that a small number of customers will continue to account for a large concentration of our 12 _________________________________________________________________ sales given the consolidation of the retail industry |
| We do not have written agreements in place with several of our major customers |
| Consequently, our relationship with these retailers could change at any time |
| Our business, results of operations and financial condition could be adversely affected if: [spacer |
| gif] • We lose any of our significant customers; [spacer |
| gif] • We experience any other adverse change in our relationship with any of these customers |
| Significant competition in our industry could continue to adversely affect our business |
| We cannot assure you that we will be able to successfully compete against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, results of operations or financial condition |
| The market for interactive entertainment products is highly competitive and relatively few products achieve significant market acceptance |
| We face significant competition with respect to our products, which may also result in price reductions, reduced gross margins and loss of market share |
| Many of our competitors have significantly greater financial, marketing and product development resources than we do |
| As a result, current and future competitors may be able to: [spacer |
| gif] • respond more quickly to new or emerging technologies or changes in customer preferences; [spacer |
| gif] • undertake more extensive marketing campaigns; [spacer |
| gif] • devote greater resources to secure rights to valuable licenses and relationships with leading software developers; [spacer |
| gif] • gain access to wider distribution channels; and [spacer |
| gif] • have better access to prime shelf space |
| With respect to our video game products, we compete with many other third party publishers in both our value and frontline market segments |
| In addition, console and handheld manufacturers, such as Microsoft, Nintendo and Sony, publish software for their respective platforms, and media companies and film studios are increasing their focus on the video game software market and may become significant competitors |
| We expect competition to increase as more competitors enter the video game market |
| We cannot assure you that competitors will not be able to also secure strong relationships with content providers on terms equal to or more favorable than we have |
| We are the subject of securities class action lawsuits which may result in substantial expenditures, and divert management’s attention In July 2005, four purported class action complaints were filed against the Company and several current and former directors and officers of the Company in the United States District Court for the District of New Jersey |
| On September 12, 2005, a fifth purported class action complaint was filed in the same court on behalf of a class of individuals who purchased shares of Majesco common stock in our January 26, 2005 offering of six million shares of common stock (the ‘‘Offering’’) |
| The complaint named as defendants Majesco, several current and former directors and officers of Majesco, and certain financial institutions who served as underwriters with respect to the Offering and our auditors |
| On October 11, 2005, the court consolidated the five cases and appointed a lead plaintiff |
| On December 14, 2005, Lead Plaintiff filed an amended consolidated complaint, which is now the operative complaint |
| The complaint alleges that the registration statement and prospectus filed with the SEC in connection with our Offering and certain of our press releases and other public filings contained material misstatements and omissions about our financial condition and prospects as well as our products |
| The lead plaintiff asserts a claim under Section 11 of the Securities Act against all the defendants on behalf of investors who purchased in the Offering |
| It asserts a Section 12(a) (2) claim against us and certain defendants |
| The lead plaintiff also asserts a claim under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against us and certain defendants and a claim 13 _________________________________________________________________ under Section 20(a) of the Exchange Act against these defendants |
| The operative complaint seeks damages in an unspecified amount |
| The proposed class period for the Exchange Act claims is December 8, 2004 through September 12, 2005 |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results |
| As a result, current and potential stockholders could lose confidence in our financial reporting, which could have a negative market reaction |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting |
| The deadline for us to become compliant with Section 404 was October 31, 2005 |
| As of such date, we were compliant and have implemented an ongoing program to perform the system and process evaluation and testing necessary to continue to comply with these requirements |
| Accordingly, we must continue to incur expenses and will devote management resources to Section 404 compliance as necessary |
| Further, effective internal controls and procedures are necessary for us to provide reliable financial reports |
| If our internal controls and procedures become ineffective, we may not be able to provide reliable financial reports, and our business and operating results could be harmed |
| We may be unable to develop and publish new products if we are unable to secure or maintain relationships with third party video game software developers |
| We utilize the services of independent software developers to develop our video games |
| Consequently, our success in the video game market depends on our continued ability to obtain or renew product development agreements with quality independent video game software developers |
| However, we cannot assure you that we will be able to obtain or renew these product development agreements on favorable terms, or at all, nor can we assure you that we will be able to obtain the rights to sequels of successful products which were originally developed for us by independent video game software developers |
| Many of our competitors have greater financial resources and access to capital than we do, which puts us at a competitive disadvantage when bidding to attract independent video game software developers to enter into publishing agreements with us |
| We may be unable to secure or maintain relationships with quality independent video game software developers if our competitors can offer them better shelf access, better marketing support, more development funding, higher royalty rates, more creative control or other advantages |
| Usually, our agreements with independent software developers are easily terminable if either party declares bankruptcy, becomes insolvent, ceases operations or materially breaches its agreement and fails to cure that breach within a designated time frame |
| In addition, many independent video game software developers have limited financial resources |
| Many are small companies with a few key individuals without whom a project may be difficult or impossible to complete |
| Consequently, we are exposed to the risk that these developers will go out of business before completing a project, lose key personnel or simply cease work on a project for which we have hired them |
| If we are unable to maintain or acquire licenses to intellectual property, we may publish fewer titles and our revenue may decline |
| Many of our video game titles, and all of our GBA Video titles are based on or incorporate intellectual property and other character or story rights acquired or licensed from third parties |
| We expect that many of our future products will also be based on intellectual property owned by others |
| The cost of acquiring these licenses is often high, and competition for these licenses is intense |
| Many of our competitors have greater resources to capitalize on licensing opportunities |
| Our licenses are generally limited in scope to specific platform and/or geographic territories and generally last for two to three years |
| We may not be able to obtain new licenses, renew licenses when they expire or include new offerings under existing licenses |
| If we are unable to obtain new licenses or maintain existing 14 _________________________________________________________________ licenses that have significant commercial value, at reasonable costs, we may be unable to sustain our revenue growth in the future other than through sales or licensing of our independently created material |
| If we are unable to successfully introduce new products on a timely basis, or anticipate and adapt to rapidly changing technology, including new hardware platform technology, our business may suffer |
| A significant component of our strategy is to continue to bring new and innovative products to market, and we expect to incur significant development, licensing and marketing costs in connection with this strategy |
| The process of introducing new products or product enhancements is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge |
| In the event we are not successful in developing new titles and other products that gain wide acceptance in the marketplace, we may not recoup our investment costs in these new products, and our business, financial condition and results of operations could be materially negatively affected |
| Furthermore, interactive entertainment platforms are characterized by rapidly changing technology |
| We must continually anticipate the emergence of, and adapt our products to, new interactive entertainment platforms and technologies |
| The introduction of new technologies, including new console and handheld technology, software media formats and delivery channels, could render our previously released products obsolete, unmarketable or unnecessary |
| In addition, if we incur significant expense developing products for a new system that is ultimately unpopular, sales of these products may be less than expected and we may not be able to recoup our investment |
| Conversely, if we choose not to publish products for a new system that becomes popular, our revenue growth, reputation and competitive position may be adversely affected |
| Even if we are able to accurately predict which video game platforms will be most successful, we must deliver and market offerings that are accepted in our extremely competitive marketplace |
| We intend to increase our revenues from our international operations, which may subject us to economic, political, regulatory and other risks |
| Historically, we have not devoted significant resources to our international operations |
| However, a component of our strategy is to expand our international operations in order to increase our revenues |
| Expanding our international operations, however, may subject us to many risks, including: [spacer |
| gif] • economic and political instability; [spacer |
| gif] • compliance with foreign and domestic laws and regulations; [spacer |
| gif] • changes in foreign and domestic legal and regulatory requirements or policies resulting in burdensome government controls, tariffs, restrictions, embargoes or export license requirements; [spacer |
| gif] • currency fluctuations; [spacer |
| gif] • difficulties in staffing and managing our international operations; [spacer |
| gif] • less favorable foreign intellectual property laws making it more difficult to protect our properties from appropriation by competitors; [spacer |
| gif] • potentially adverse tax treatment; [spacer |
| gif] • difficulties with distributors; and [spacer |
| gif] • difficulties collecting our accounts receivable |
| Termination or modification of our agreements with hardware manufacturers, who are also competitors and frequently control the manufacturing of our titles, 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 Sony to develop products for PlayStation, PlayStation 2 and PSP, from Nintendo to develop products for the GBA, GameCube, the Gameboy DS and Micro and from Microsoft to develop products for the Xbox and Xbox 360 |
| These 15 _________________________________________________________________ licenses are non-exclusive, and as a result, many of our competitors also have licenses to develop and distribute video game software for these systems |
| These licenses must be periodically renewed, and if they are not, or if any of our licenses are terminated or adversely modified, we may not be able to publish games for such platforms or we may be required to do so on less attractive terms |
| Our contracts with these manufacturers grant them approval rights over new products and often also grant them control over the manufacturing of our products |
| While we believe our relationships with these manufacturers are good, the potential for delay or refusal to approve or support our products exists, particularly since these manufacturers are also video game publishers and hence are also our competitors |
| We may suffer an adverse effect on our business if these manufacturers: [spacer |
| gif] • do not approve a project for which we have expended significant resources; [spacer |
| gif] • refuse or are unable to manufacture or ship our products; [spacer |
| gif] • increase manufacturing lead times or delay the manufacturing of our products; or [spacer |
| gif] • require us to take significant risks in prepaying and holding an inventory of products |
| Intellectual property claims may increase our product costs or require us to cease selling affected products which could adversely affect our earnings and sales |
| Development of original content, including publication and distribution, sometimes results in claims of intellectual property infringement |
| Although we make efforts to ensure our products do not violate the intellectual property rights of others, it is possible that third parties still may allege infringement |
| These claims and any litigation resulting from these claims, could prevent us from selling the affected product, or require us to redesign the affected product to avoid infringement or obtain a license for future sales of the affected product |
| Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and future business prospects |
| Any litigation resulting from these claims could require us to incur substantial costs and divert significant resources, including the efforts of our technical and management personnel |
| If our products contain defects, our business could be harmed significantly |
| The software products, and digital media products that employ software in their operations, that we publish and distribute are complex and may contain undetected errors when first introduced or when new versions are released |
| Despite extensive testing prior to release, we cannot be certain that errors will not be found in new products or releases after shipment, which could result in loss of or delay in market acceptance |
| This loss or delay could significantly harm our business and financial results |
| Our intellectual property is vulnerable to misappropriation and the effects of competitive, non-infringing technology, any of which could adversely affect our business prospects |
| Our business relies heavily on proprietary intellectual property, whether our own or licensed from third parties |
| We own or have rights to use proprietary technology that we believe affords us a current competitive advantage |
| This technology is not, however, fully protected from infringement by competitors or from the introduction of non-infringing technologies |
| Despite our efforts to protect our proprietary rights, unauthorized parties may try to copy our products, or obtain and use information that we regard as proprietary |
| In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as US law |
| Furthermore, our pending patent applications are provisional, and our pending and future patent and trademark applications may not issue as patents or trademarks, as the case may be, and even if they do issue, such patents or trademarks may not be of such sufficient scope or strength to provide meaningful economic or competitive value |
| Our rights and the additional steps we have taken to protect our intellectual property may not be adequate to deter misappropriation, particularly given the difficulty of effectively policing unauthorized use of our properties, and our proprietary position remains subject to the risk that our competitors or others will independently develop non-infringing 16 _________________________________________________________________ technologies substantially equivalent or superior to our technologies |
| If we are unable to protect our intellectual property, or if we are sued for infringing on another partyapstas intellectual property, our business, financial condition or results of operation could be materially adversely affected |
| Rating systems for digital entertainment software, potential legislation and consumer opposition could inhibit sales of our products |
| Trade organizations within the video game industry require digital entertainment software publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and impose penalties for noncompliance |
| Certain countries have also established similar rating systems as prerequisites for sales of digital entertainment software in such countries |
| In some instances, we may be required to modify our products to comply with the requirements of these rating systems, which could delay the release of those products in these countries |
| Some of our existing and proposed new titles have and will receive an ‘‘M’’ rating, meaning it is not recommended for children under 17 |
| We believe that we comply with such rating systems and properly display the ratings and content descriptions received for our titles |
| Several proposals have been made for legislation to regulate the digital entertainment software, broadcasting and recording industries, including a proposal to adopt a common rating system for digital entertainment software, television and music containing violence or sexually explicit material, and the Federal Trade Commission has issued reports with respect to the marketing of such material to minors |
| Consumer advocacy groups have also opposed sales of digital entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas, including legislation prohibiting the sale of certain ‘‘M’’ rated video games to minors, and by engaging in public demonstrations and media campaigns |
| Retailers may decline to sell digital entertainment software containing graphic violence or sexually explicit material, which may limit the potential market for our ‘‘M’’ rated products, and adversely affect our operating results |
| If any groups, whether governmental entities, hardware manufacturers or advocacy groups, were to target our ‘‘M’’ rated titles, we might be required to significantly change or discontinue a particular title, which in the case of one of our popular titles, could materially affect our business |