Majesco Entertainment Company Announces First Quarter Fiscal 2008 Financial Results

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Majesco Entertainment Company Inc. (NASDAQ:COOL) , an innovative provider of video games for the mass market, today reported financial results for the fiscal first quarter ended January 31, 2008.

Jesse Sutton, Chief Executive Officer of Majesco Entertainment, said, "We delivered an exceptional quarter across all financial metrics as we continued to execute our plan. Our performance was driven by our focus on the casual gaming market and the steps we have taken to improve our financial position and operating model over the past year. Further, we benefited from a strong domestic sales performance, driven by sales of our Cooking Mama games, which delivered a revenue increase of 47 percent versus the same period last year. In the quarter, total revenue increased 29 percent to $18.7 million compared to the same period in 2007, gross margins were 40.2 percent, and we reported net income of $2.7 million, or $0.10 per share, which includes a $0.8 million benefit from adjustments to warrants and our litigation accrual. This performance demonstrates the potential of our business model.

"Our strategy is working and we are executing on our business plan," continued Sutton. "We expect to continue to benefit from the improvements we have made in our operations throughout the rest of the year. Our new studio is open and is developing its first title, Our House for DS, which complements the previously announced Wii version and helps build our portfolio of intellectual property. We are focused on expanding the number of titles we publish and strengthening our retail distribution. Our management team remains committed to a disciplined financial approach, improving our profitability and driving increased value for shareholders over the long- term."

Generally Accepted Accounting Principles (GAAP) and Non-GAAP Metrics

To facilitate a comparison between the three months ended January 31, 2008 and 2007, the Company has presented both GAAP and non-GAAP financial results. GAAP financial measures, including gain on settlement of litigation and related charges net, change in fair value of warrants, operating income, net income, and basic and diluted earnings/loss per share, have been adjusted to report non-GAAP financial measures that exclude these charges and income related to gains on these settlements and warrants. These non-GAAP measures are provided to enhance investors’ overall understanding of the Company’s current financial performance and the Company’s prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to GAAP results.

In the fiscal year ended October 31, 2007, the Company recorded a $2.8 million charge in connection with the expected settlement of class action litigation. The charge was comprised of $2.5 million, representing the fair value, on the date the agreement was executed, of the common stock expected to be distributed when the settlement becomes effective and $0.3 million representing the increase in the value of the shares since that date.

The Company will adjust the fair value of the liability to the fair value of the shares expected to be distributed at each balance sheet date and record the resulting change as a non-cash charge, or gain, to earnings in each period until the shares are distributed. Due to fluctuations in the Company’s stock price, this resulted in a non-cash gain of $0.3 million during the quarter ended January 31, 2008. The settlement provides that if the fair value of the stock falls below $2.5 million, the Company will issue additional shares, subject to certain limitations, with a fair market value equal to the amount of the decrease. Therefore, the liability will not be adjusted below $2.5 million.

During the fourth quarter of 2007, the Company raised $5.9 million in an equity financing. As part of that transaction, the Company issued warrants that contain a provision that under certain circumstances in which the Company is sold, merged, or otherwise enters into a "fundamental transaction", as defined in the warrant agreement, with a company that is not publicly traded, the warrants may be settled by a cash payment. As a result the warrants were recorded as a liability at their fair value of $2.1 million, in accordance with FASB statement No. 150, Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity, and FASB Staff position 150-1 Issuers Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement 150. In addition, the Company will measure the fair value of the warrants at each balance sheet date, and record the change in fair value as a non cash charge or gain to earnings each period. The warrants were valued at $1.0 million at January 31, 2008. A reduction in the Company’s stock price since October 31, 2007 resulted in a non-cash gain of $0.5 million during the quarter ended January 31, 2008.

Comparison of Three Months Ended January 31, 2008 to January 31, 2007
-- Net revenue was $18.7 million in 2008, compared to $14.5 million
in 2007. The increase was primarily attributable to the strong
performance of our Cooking Mama games, including the introduction of
Cooking Mama 2: Dinner with Friends for the DS.
-- Net revenue for the first quarter of 2008 was comprised of 22 percent
from sales of games for console systems, including 20 percent
contributed from the Wii. Seventy-seven percent of net sales were from
games for handheld systems virtually all of which came from games for
DS. This compares to the first quarter of 2007 when 10 percent of
revenue was contributed from games for console systems and 63 percent
from handheld systems, including 51 percent from games developed for
DS.
-- In the first quarter of 2008, 99 percent of revenue came from Domestic
sales with 1 percent from International. This compares to the first
quarter of 2007 when 86 percent of revenue came from Domestic sales
with 14 percent from International. The change in revenue mix was
primarily driven by a strong Domestic sales performance, which recorded
a revenue increase of 47 percent, and lower International sales as a
result of several international releases shifting from the first
quarter to the second quarter of 2008.
-- Gross margin was 40.2 percent, compared to 31.1 percent in 2007,
reflecting the higher margins attributable to Wii games and Cooking
Mama 2, which was at a premium price point. Additionally, the Company
benefited from a larger mix of Domestic sales in the quarter, which
historically have had a higher margin than our International sales.
Last year’s margin was unfavorably impacted by the sale of low margin
Dance Dance Revolution (DDR) product, which the Company no longer
produces.
-- The GAAP operating income was $2.4 million, which included a $0.3
million non-cash gain related to the settlement of class action
litigation, compared to 2007 operating loss of $0.2 million. Non-GAAP
2008 operating income was $2.1 million, compared to a non-GAAP
operating loss of $0.2 million in 2007.
-- GAAP net income was $2.7 million, or $0.10 per share, which included a
$0.3 million non-cash gain related to the settlement of class action
litigation as well as a $0.5 million non-cash gain in the fair value of
warrants issued, compared to 2007 net loss of $0.9 million, or $0.04
per share. Non-GAAP net income was $1.9 million, or $0.07 per share,
compared to a non-GAAP net loss of $1.0 million, or $0.04 per share in
2007.
-- Interest expense and financing costs decreased 73.3 percent in 2008 to
$0.2 million from $0.7 million in 2007, as the Company benefited from
the additional capital and negotiating better terms with its financing
sources.
-- At January 31, 2008, the company had cash and cash equivalents of
$8.2 million.


Announced Product Line-up
First Quarter 2008 ending January 31, 2008:

All of the following titles were released in North America during the Company’s first quarter:

-- Cooking Mama 2: Dinner with Friends for DS is the sequel to the award-
winning original that includes 80 all-new recipes, extensive
customization and a tasting mode with friends.
-- Left Brain Right Brain for DS is the only brain game that promotes
ambidexterity through a series of mini-games that requires players to
flip the DS and play with both their dominant and non-dominant hands.
-- Furu Furu Park for Wii is a collection of 30 mini-games, including
arcade classics like Arkanoid and Bubble Bobble, that all take
advantage of the range of motion possible via Wii Remote(TM) play.
-- Mega Brain Boost for DS offers exceptional value by including three
full brain games designed to improve memory and concentration on one
cartridge.


Second Quarter 2008 ending April 30, 2008:

All of the following titles have, or are expected to be released in North America during the Company’s second quarter:

-- Pet Pals: Animals Doctor for DS invites players to step into the
challenging world of veterinary medicine by diagnosing and treating 30
different medical cases created by real vets.
-- Blokus Portable: Steambot Championship for the PSP(R)
(PlayStation(R)Portable), is based on the world-renowned Blokus board
game and blends its award-winning strategic gameplay with the anime
characters from the Steambot Chronicles series.
-- Eco-Creatures: Save The Forest for DS is a real-time strategy game in
which players must control units of woodland creatures through a unique
environmental adventure. An Eco-Creatures playable demo is currently
being featured through May in 10,000 Nintendo DS kiosks located at
retailers nationwide.
-- Nanostray 2 for DS is the sequel to the very first 3D shooter available
on DS and delivers thrilling non-stop shooting action combined with
stunning graphics.
-- Wild Earth: African Safari for Wii is a first person safari adventure
that challenges players to capture award-winning photos of the
continent’s exotic wild life.
-- Toy Shop for the DS puts players at the helm of a struggling toy shop
where they’ll need to create fun toys that sell, while managing store
inventory, customers and budget.


Fiscal 2008

To date, the Company has announced the following titles that are expected for release during the rest of fiscal 2008:

-- Blast Works: Build, Trade & Destroy for Wii, is an innovative
interpretation of a geometric shooter that lets players build their own
personalized game experiences and then share their creations with
friends via WiiConnect24.
-- Wonderworld Amusement Park for Wii brings to life a fully 3D world of
boardwalk games, rides and prizes across multiple themed areas that
players can explore with personalized avatars.
-- Cake Mania 2 for DS is the sequel to the best-selling DS game based on
Sandlot Games’ award-winning downloadable title. Players will lead Jill
through more than 200 different levels of baking and frosting madness
with an all-new customer base, exotic locations, kitchen upgrades and
multiple endings.
-- Nancy Drew: The Mystery of the Clue Bender Society for DS is the follow
up to The Deadly Secret of Olde World Park and offers mystery buffs and
Nancy Drew fans a fresh interactive caper with a wealth of new
features.
-- Cooking Mama: World Kitchen for Wii is the sequel to the best-selling
Cooking Mama Cook Off game for Wii that has sold more than 380,000
units and challenges players to use the Wii remote as the ultimate
cooking utensil.
-- Babysitting Mania for DS is based on the hit PC simulation from Gogii
Games and challenges players to manage unruly kids, lists of chores and
out-of-control houses without losing their cool.


First Quarter 2009 ending January 31, 2009:

To date, the Company has announced the following titles that are expected for release during the fiscal first quarter of 2009:

-- Major Minor’s Majestic March for Wii marks the return of the creative
team behind the renowned PaRappa the Rapper franchise-legendary game
designer and multimedia musician Masaya Matsuura and famed New York
artist Rodney Alan Greenblat. The game turns the Wii Remote into a
"special" baton the bandleader Major Minor uses to keep tempo, recruit
new band members and pick up valuable items, while marching through
eight whimsical locations that contain various hair-raising events.
-- We will continue to support the best-selling casual game from Sandlot
Games by publishing Cake Mania for Wii. The game will integrate motion-
based control with the series’ signature cake-baking gameplay.
-- Our House for Wii turns the Wii Remote into the ultimate creation tool
that lets players design, build and decorate their own personalized
trophy home, and then share it with friends in an online neighborhood
via WiiConnect24.
-- Our House for DS is the first game from Majesco Studios Santa Monica.
This companion game to the Wii version turns the DS stylus into the
ultimate creation tool. Players will work as contractors and then use
their work-for-hire earnings to design, build and decorate their own
personalized trophy home.


Fiscal 2008 Outlook

The Company reconfirmed its outlook for fiscal 2008 full year net revenue to be in the range of $53 million to $58 million. The Company expects 59 percent of its net revenue to be from handheld titles, with virtually all titles for DS, and 41 percent from console titles, with 40 percent from titles for Wii. In 2007, 64 percent of its net revenue was from handheld titles, with 56 percent from titles for DS, while 30 percent was from console titles and 20 percent from Wii titles. The Company also expects that its mix of International revenues for the year will approximate previous years and be in the neighborhood of 15 to 20 percent. In 2008, excluding Majesco Studios, cash fixed costs, which include general and administrative, product research, and the fixed portion of sales and marketing costs, are expected to be similar to 2007 in the range of $12 to $14 million. The Company expects 2008 gross margins to show continued modest expansion, improving over the 33.9 percent reported in 2007. The Company’s guidance assumes the release of approximately 28 titles in 2008 with approximately 11 Wii, 15 DS titles and 2 other. This compares to 19 titles in 2007, comprised of 2 Wii, 13 DS and 4 other. The Company’s results are impacted by seasonality from the December holiday period and variability based on release schedules.

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