MAJESCO ENTERTAINMENT CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Statements in this quarterly report on Form 10-Q 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, or the
Exchange Act. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements. Those factors include, among other things, those
listed under "Risk Factors" and elsewhere in our annual report on Form 10-K for
the fiscal year ended October 31, 2013 and other filings with the Securities and
Exchange Commission ("SEC"). In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. Moreover,
neither we nor any other person assume 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 report to conform these
statements to actual results. References herein to "we," "us," "our," and the
"Company" are to Majesco Entertainment Company.
We are a provider of video game products primarily for the casual-game consumer.
We sell our products primarily to large retail chains, specialty retail stores,
and distributors. We publish video games for major current generation
interactive entertainment hardware platforms, including Nintendo's DS, DSi, 3DS,
Wii and WiiU, Sony's PlayStation 3, or PS3, Microsoft's Xbox 360 and Xbox One
and the personal computer, or PC. We also publish games for digital platforms
such as Xbox Live Arcade and PlayStation Network, or PSN, mobile platforms such
as the iOS and Android phones, and online sites such as Facebook and Steam.
Our 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, we focus on publishing more casual games
targeting casual-game consumers. In some instances, our titles are based on
licenses of well-known properties and, in other cases based on original
properties. We enter into agreements with content providers and video game
development studios for the creation of our video games.
Our 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, we operate in a single segment.
Net Revenues. Our revenues are principally derived from sales of our video
games. We provide video games primarily for the mass market and casual game
player. Our revenues are recognized net of estimated provisions for price
protection and other allowances.
Cost of Sales. Cost of sales consists of product costs and amortization and
impairment of software development costs and license fees. A significant
component of our cost of sales is product costs. Product costs are comprised
primarily of manufacturing and packaging costs of the disc or cartridge media,
royalties to the platform manufacturer and manufacturing and packaging costs of
peripherals. In cases where we act as a distributor for other publishers'
products, cost of sales may increase as we acquire products at a higher fixed
wholesale price. While the product costs as a percentage of revenue is higher on
these products, we do not incur upfront development and licensing fees or
resulting amortization of capitalized software development costs. Commencing
upon the related product's release, capitalized software development and
intellectual property license costs are amortized to cost of sales. 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. These expenses may be incurred prior to a game's
Gross Profit. Gross profit is the excess of net revenues over product costs and
amortization and impairment of capitalized 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. Product research and development
expenses relate principally to our cost of supervision of third party video game
developers, testing new products, development of social games and conducting
quality assurance evaluations during the development cycle that are not
allocated to games for which technological feasibility has been established.
Costs incurred are primarily employee-related, may include equipment, and are
not allocated to cost of sales.
Selling and Marketing Expenses. Selling and marketing expenses consist of
marketing and promotion expenses, including television advertising, the cost of
shipping products to customers and related employee costs. Credits to retailers
for trade advertising are a component of these expenses.
General and Administrative Expenses. General and administrative expenses
primarily represent employee related costs, including corporate executive and
support staff, general office expenses, professional fees and various other
overhead charges. Professional fees, including legal and accounting expenses,
typically represent the second largest component of our general and
administrative expenses. These fees are partially attributable to our required
activities as a publicly traded company, such as SEC filings.
Loss on Impairment of Capitalized Software Development Costs and License Fees-
Cancelled Games. Loss on impairment of capitalized software development costs
and license fees - cancelled games consists of contract termination costs, and
the write-off of previously capitalized costs, for games that were cancelled
prior to their release to market. We periodically review our games in
development and compare the remaining cost to complete each game to projected
future net cash flows expected to be generated from sales. In cases where we do
not expect the projected future net cash flows generated from sales to be
sufficient to cover the remaining incremental cash obligation to complete the
game, we cancel the game, and record a charge to operating expenses. While we
incur a current period charge on these cancellations, we believe we are limiting
the overall loss on a game project that is no longer expected to perform as
originally expected due to changing market conditions or other factors.
Significant management estimates are required in making these assessments,
including estimates regarding retailer and customer interest, pricing,
competitive game performance, and changing market conditions.
Interest and Financing Costs. Interest and financing costs are directly
attributable to our factoring and our purchase-order financing arrangements.
Such costs include commitment fees and fees based upon the value of customer
Income Taxes. Income taxes consists of our provision 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 until sufficient positive evidence exists to
support its reversal.
Seasonality and Variations in Interim Quarterly Results
Our quarterly net revenues, gross profit, and operating loss are impacted
significantly by the seasonality of the retail selling season, and the timing of
the release of new titles. Sales of our catalog and other products are generally
higher in the first and fourth quarters of our fiscal year (ending January 31
and October 31, respectively) due to increased retail sales during the holiday
season. Sales and gross profit as a percentage of sales also generally increase
in quarters in which we release significant new titles because of increased
sales volume as retailers make purchases to stock their shelves and meet initial
demand for the new release. These quarters also benefit from the higher selling
prices that we are able to achieve early in the product's life cycle. Therefore,
sales results in any one quarter are not necessarily indicative of expected
results for subsequent quarters during the fiscal year.
Critical Accounting Estimates
Our discussion and analysis of the financial condition and results of operations
is based upon our condensed 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 condensed 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
Revenue Recognition. We recognize revenue upon the shipment of our product when:
(1) risks and rewards of ownership are transferred; (2) persuasive evidence of
an arrangement exists; (3) we have no continuing obligations to the customer;
and (4) the collection of related accounts receivable is probable. Certain
products are sold to customers with a street date (the earliest date these
products may be resold by retailers). Revenue for sales of these products is not
recognized prior to their street date. Some of our software products provide
limited online features at no additional cost to the consumer. Generally, we
have considered such features to be incidental to our overall product offerings
and an inconsequential deliverable. Accordingly, we do not defer any revenue
related to products containing these limited online features. However, in
instances where online features or additional functionality is considered a
substantive deliverable in addition to the software product, such
characteristics will be taken into account when applying our revenue recognition
policy. To date, the Company has not earned significant revenues from such
features. In addition, some of 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
When we operate hosted online games in which players can play for free and
purchase virtual goods for use in the games, we recognize revenues from the sale
of virtual goods as service revenues over the estimated period in which players
use the game. We generally estimate these periods of use to be less than a year.
We periodically assess our estimates for this period of use and future increases
or decreases in these estimates will affect our recognized revenues
prospectively. We also recognize advertising revenue related to advertising
placed on our game sites as ads are displayed.
Price Protection and Other Allowances. We generally sell our products on a
no-return basis, although in certain instances, we provide price protection or
other allowances on certain unsold products in accordance with industry
practices. Price protection, when granted and applicable, allows customers a
partial credit with respect to merchandise unsold by them. Revenue is recognized
net of estimates of these allowances. Sales incentives and other consideration
that represent costs incurred by us for benefits received, such as the
appearance of our products in a customer's national circular advertisement, are
generally reflected as selling and marketing expenses. We estimate potential
future product price protection and other discounts related to current period
product revenue. In addition, some of 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).
Our provisions for price protection and other allowances fluctuate over periods
as a result of a number of factors including analysis of historical experience,
current sell-through of retailer inventory of our products, current trends in
the interactive entertainment market, the overall economy, changes in customer
demand and acceptance of our products and other related factors. Significant
management judgments and estimates must be made and used in connection with
establishing the allowance for returns and price protection in any accounting
period. However, actual allowances granted could materially exceed our estimates
as unsold products in the distribution channels are exposed to rapid changes in
consumer preferences, market conditions, technological obsolescence due to new
platforms, product updates or competing products. For example, the risk of
requests for allowances may increase as consoles pass the midpoint of their
lifecycle and an increasing number of competitive products heighten pricing and
competitive pressures. While management believes it can make reliable estimates
regarding these matters, these estimates are inherently subjective. Accordingly,
if our estimates change, this will result in a change in our provisions, which
would impact the net revenues and/or selling and marketing expenses we report.
Fluctuations in the provisions reflected our estimates of future price
protection based on the factors discussed above. We limit our exposure to credit
risk by factoring a portion of our receivables to a third party that buys
without recourse. For receivables that are not sold without recourse, we
analyze our aged accounts receivables, payment history and other factors to make
a determination if collection of receivables is likely, or a provision for
uncollectible accounts is necessary.
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. As of January 31, 2014, the net carrying value of our licenses and
capitalized software development costs was $2.1 million.
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.
Inventory. Inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. We estimate the net realizable
value of slow-moving inventory on a title-by-title basis and charge the excess
of cost over net realizable value to cost of sales. Some of our inventory items
are packaged with accessories. The purchase of these accessories involves
longer lead times and minimum purchase amounts, which may require us to maintain
higher levels of inventory than for other games. Therefore, these items have a
higher risk of obsolescence, which we review periodically based on inventory and
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.
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.
Results of Operations
Three months ended January 31, 2014 versus three months ended January 31, 2013
Net Revenues. Net revenues for the three months ended January 31, 2014 decreased
approximately 7% to $21.9 million from $23.5 million in the comparable quarter
last year. The decrease is primarily due to lower licensing fees for our Zumba
Fitness titles in Europe. Additionally, we have experienced a decline in sales
of our Zumba products domestically when compared to the same quarter last year.
However, the impact of this decline on our quarterly results is mitigated
somewhat by the timing of shipments and street dates of our new holiday releases
around our fiscal year end of October 31. We released Zumba World Party and
Zumba Kids during our first quarter of fiscal 2014. Comparatively, we released
Zumba Core during the fourth quarter of fiscal 2012. Therefore, launch sales of
Zumba Core of approximately $11 million, which include initial retailer
stock-up, were included in the fourth quarter of fiscal 2012, while launch
revenue for Zumba World Party and Zumba Kids was included in the first quarter
of 2014, affecting comparability. Net revenues in the European market decreased
to approximately $3.0 million from $6.1 million during the same period a year
ago. Overall Zumba sales accounted for 72% of our net revenues during the three
months ended January 31, 2014, compared to 67% in the prior-year period.
The following table sets forth our net revenues by platform:
Three months ended January31,
2014 % 2013 %
Nintendo Wii/WiiU $ 9,355 43 % $ 12,584 54 %
Microsoft Xbox 360/Xbox One 8,346 38 % 5,594 24 %
Nintendo DS/3DS 2,584 12 % 4,740 20 %
Sony Playstation 3 892 4 % 172 1 %
Accessories and other 757 3 % 382 1 %
TOTAL $ 21,934 100 % $ 23,472 100 %
Gross Profit. Gross profit for the three months ended January 31, 2014 was $3.4
million compared to a gross profit of $7.2 million in the same period last year.
The decrease in gross profit was primarily attributable to a lower gross profit
as a percentage of sales when compared to the same period last year. Gross
profit as a percentage of net sales was 15% for the three months ended January
31, 2014, compared to 30% for the three months ended January 31, 2013. The
decrease in gross profit as a percentage of sales primarily reflects higher
development and licensing costs of our current-period Zumba releases when
compared to prior releases. We incur fixed development and licensing fees to
develop a game sequel. These costs are amortized over expected sales of the
related product. Therefore, when the expected sales volume decreases for a
particular title, amortized development and licensing costs increase as a
percentage of revenue. We also developed our latest sequel, Zumba World Party,
for both current gen, and next gen console platforms. This resulted in a higher
development expense relative to our previous titles.
Product Research and Development Expenses. Research and development expenses
were $1.2 million for the three months ended January 31, 2014, compared to $2.1
million of expenses for the same period in 2013. The decrease reflects the
effects of the January 2013 workforce reduction, including the closing of our
social games studio, and decreased spending on other development projects.
Selling and Marketing Expenses. Total selling and marketing expenses were
approximately $4.1 million for the three months ended January 31, 2014,
comparable to $3.7 million for the three months ended January 31, 2013. Each
period included holiday-season advertising expenses for Zumba releases. The
increase was primarily due to marketing activities related to the Company's
mobile game releases in the current-year period.
General and Administrative Expenses. For the three-month period ended January
31, 2014, general and administrative expenses amounted to $2.1 million, compared
to $2.3 million for the three months ended January 31, 2013. Lower costs of
cash compensation costs and consulting and professional fees were partially
offset by higher share-based compensation charges.
Operating loss. Operating loss for the three months ended January 31, 2014 was
approximately $4.1 million, compared to an operating loss of $2.0 million in the
comparable period in 2013, primarily reflecting lower gross profits on sales in
Change in Fair Value of Warrant Liability. Prior to March 2013, we had
outstanding warrants that were recorded at fair value as liabilities and
remeasured on a quarterly basis. We recorded a nominal gain for the three
months ended January 31, 2013, reflecting a decrease in the fair value of the
Income Taxes. In the three months ended January 31, 2014 and 2013, our income
tax expense was not significant, representing primarily minimum state income
Liquidity and Capital Resources
As of January 31, 2014, our cash and cash equivalents balance was $12.3 million
and funds available to us under our factoring and purchase order financing
agreements were $3.6 million and $10.0 million, respectively. We expect
continued fluctuations in the use and availability of cash due to the
seasonality of our business, timing of receivables collections and working
capital needs necessary to finance our business. Capitalized software and
development costs and license fees amount to $2.1 million as of January 31,
2014, primarily reflecting unamortized costs incurred in the development of
games to be sold in future periods. We will incur additional costs to complete
games currently in development and purchase initial inventory.
Our current plan is to fund our operations through product sales and existing
cash balances from which we expect to have sufficient funds for the next twelve
months. However, our operating results may vary significantly from period to
period and we have incurred operating losses. We believe that sales of video
game software for casual games operating on dedicated handheld and console
platforms have declined industry-wide for the past two years due to the late
lifecycle of existing generation gaming platforms and the introduction of
competing platforms such as mobile gaming. The newly introduced next generation
console platforms have not yet demonstrated a large base of users in the casual
and fitness game segments from which we have derived the majority of our
revenues. Therefore, we do not currently plan to develop a new Zumba Fitness
console game during 2014. Rather we will promote our existing next gen title,
Zumba World Party, as the installed hardware base develops. As our Zumba Fitness
titles accounted for a significant portion of our revenues over the past three
years, we expect our revenues will decline in 2014. As a result, we expect to
incur a net operating loss in 2014 and have factored this into our planning. We
may be required to modify our plan, or seek outside sources of financing, and/or
equity sales, if our operating plan and sales targets are not met. There can be
no assurance that such funds will be available on acceptable terms, if at all.
In the event that we are unable to negotiate alternative financing, or negotiate
terms that are acceptable to us, we may be forced to modify our business plan
materially, including making reductions in game development and other
expenditures. Additionally, we are dependent on our purchase order financing and
account receivable factoring agreement to finance our working capital needs,
including the purchase of inventory. If the current level of financing was
reduced or we fail to meet our operational objectives, it could create a
material adverse change in the business.
Factoring and Purchase Order Financing.
We factor our receivables. Under our factoring agreement, we have the ability to
take cash advances against accounts receivable and inventory of up to $30.0
million, and the availability of up to $2.0 million in letters of credit. The
factor, in its sole discretion, can reduce the availability of financing at any
time. We had no outstanding advances against accounts receivable under our
factoring agreement at January 31, 2014. We also utilize financing to provide
funding for the manufacture of our products. Under an agreement with a finance
company, we have up to $10.0 million of availability for letters of credit and
purchase order financing. In connection with these arrangements, the finance
company and the factor have a security interest in substantially all of our
assets. We had no outstanding advances for purchase order financing at January
Under the terms of our factoring agreement, we sell our accounts receivable to
the factor. The factor, in its sole discretion, determines whether or not it
will accept the credit risk associated with a receivable. If the factor does not
accept the credit risk on a receivable, we may sell the accounts receivable to
the factor while retaining the credit risk. In both cases we surrender all
rights and control over the receivable to the factor. However, in cases where we
retain the credit risk, the amount can be charged back to us in the case of
non-payment by the customer. The factor is required to remit payments to us for
the accounts receivable purchased from us, provided the customer does not have a
valid dispute related to the invoice. The amount remitted to us by the factor
equals the invoiced amount, adjusted for allowances and discounts we have
provided to the customer, less factor charges of 0.45 to 0.5% of the invoiced
In addition, we may request that the factor provide us with cash advances based
on our accounts receivable and inventory. The factor may either accept or reject
our request for advances at its discretion. Generally, the factor allowed us to
take advances in an amount equal to 70% of net accounts receivable, plus 60% of
our inventory balance, up to a maximum of $2.5 million of our inventory balance.
Occasionally, the factor allows us to take advances in excess of these amounts
for short-term working capital needs. These excess amounts are typically repaid
within a 30-day period. At January 31, 2014, we had no excess advances
Amounts to be paid to us by the factor for any accounts receivable are offset by
any amounts previously advanced by the factor. The interest rate is prime plus
1.5%, annually, subject to a 5.5% floor. In certain circumstances, an additional
1.0% annually is charged for advances against inventory.
Manufacturers require us to present a letter of credit, or pay cash in advance,
in order to manufacture the products required under a purchase order. We utilize
letters of credit either from a finance company or our factor. The finance
company charges 1.5% of the purchase order amount for each transaction for 30
days, plus administrative fees. Our factor provides purchase order financing at
a cost of 0.5% of the purchase order amount for each transaction for 30 days.
Additional charges are incurred if letters of credit remain outstanding in
excess of the original time period and/or the financing company is not paid at
the time the products are received. When our liquidity position allows, we will
pay cash in advance instead of utilizing purchase order financing. This results
in reduced financing and administrative fees associated with purchase order
Advances from Customers. On a case by case basis, distributors and other
customers have agreed to provide us with cash advances on their orders. These
advances are then applied against future sales to these customers. In exchange
for these advances, we offer these customers beneficial pricing or other
Commitments and Contingencies.
On September 20, 2012, a complaint for patent infringement was filed in the
United States District Court for the Eastern District of Virginia by Intelligent
Verification Systems, LLC against Microsoft Corporation and the Company. The
complaint alleges that Kinect and certain Kinect games, including Zumba Fitness
Rush, infringe the plaintiff's patents relating to biometric facial recognition
and facial expression recognition technology. Intelligent Verification Systems
is seeking injunctive relief and monetary damages in an unspecified amount for
the alleged infringement. The Company intends, in conjunction with Microsoft, to
defend itself against the claim. The Company cannot currently estimate a
potential range of loss if the claim against the Company is successful.
In addition to the items above, we 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. We have not recorded a liability with
respect to the Intelligent Verification Systems, LLC matter above. While we
believe that we have valid defenses with respect to the legal matter pending and
intends to vigorously defend the matter, 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 under development agreements amounted to $1.5 million at January 31,
2014. In addition, certain agreements provide for minimum commitments for
Off-Balance Sheet Arrangements
As of January 31, 2014, we had no off-balance sheet arrangements.
Our management currently believes that inflation has not had, and does not
currently have, a material impact on continuing operations.
Cash and cash equivalents were $12.3 million as of January 31, 2014 compared to
$13.4 million at October 31, 2013 and $26.8 million at January 31, 2013. Working
capital as of January 31, 2014 was $11.6 million compared to $15.7 million at
October 31, 2013. Changes in cash and working capital balances reflected
operating results, as well as significant seasonal factors. Total cash and cash
equivalents, plus advances available to us under our factoring agreement were
$15.9 million and $18.2 million at January 31, 2014 and October 31, 2013,
Operating Cash Flows. Our principal operating source of cash is sales of our
interactive entertainment products. Our principal operating uses of cash are for
payments associated with third-party developers of our software, costs incurred
to manufacture, sell and market our video games and general and administrative
For the three months ended January 31, 2014, we generated approximately $1.0
million in cash flow from operating activities, compared to $8.8 million in the
same period last year. In addition to an increase in our net loss in the current
period, cash collections from sales of the preceding quarters decreased,
reflecting a decline in sales to $10.0 in the fourth fiscal quarter of 2013 from
$26.6 million in the fourth quarter of fiscal 2012.
Investing Cash Flows. Cash used in investing activities in the three months
ended January 31, 2014 amounted to $0.3 million, compared to less than $0.1
million in the three months ended January 31, 2013, primarily reflecting the
purchase of website assets.
Financing Cash Flows. Net cash used in financing activities for the three months
ended January 31, 2014 reflected cash used to reduce outstanding borrowings
under our purchase order financing agreement for seasonal inventory. We had no
outstanding borrowings at October 31, 2012 and, accordingly, there were no net
cash outflows for repayments in the three months ended January 31, 2013.
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