Companies Management Can’t Fix: Majesco Entertainment (COOL)

Majesco Entertainment (COOL-NASDAQ) may have a very hard time surviving if it can’t find a way to recapitalize.   It recently added Gui Karyo, former president of Marvel (MVL) publishing, as VP of Operations.  Unfortunately the company is under an interim CEO.  Gui was a consultant and has helped redefine the strategy of the company, but the strategy is still unknown if it can work.  If the company focuses on Wii, DS, and other lower-budget and quick production games they may come out alright, but if they try to keep competing in Xbox, Xbox 360, PS3, and high-graphic PC games then they are going to have a hard time making it.

The company received a ‘Going Concern Note’ in its most recent audited financial statements from its auditors, and that is never a fun statement to get.  It has at least broken away from big budget games after the failure of Advent Rising to attract the attention it hoped for, even though it had one of the best gaming soundtracks out there.  2006 revenues did grow to $66.7 million and showed an operating loss of $3 million and a fully reported loss of $5.4 million. It claims that it posted $0.2 million in yearly operating cash flows, and its losses were far worse in 2005.

Here was the outlook for 2007:   "We are cautiously optimistic about 2007…. Based solely on our current release schedule, we expect fiscal 2007 revenue to decline approximately 10 percent to 15 percent as compared to fiscal 2006 revenue, with the fourth quarter being the strongest. That said, we expect to achieve higher gross margins and a lower break-even model………"

This really sounds like the Michigan auto market of shrinking to profitability to me, and it requires lots of patience during a time that the balance sheet is teetering.  The one exception is on the Wii and DS games, but their Xbox and other game titles just don’t get the draw that other game producers have (although they are going for lower-budget and faster game production intentionally now).  Too much capital and effort went into Advent Rising and the BloodRayne titles in the past.  Unfortunately, the graphics and gaming engine for an action game looked old-school and not modern compared to other high-end action games.

Majesco is not 100% doomed but it is in very difficult spot and the company is on survival mode rather than growth and expansion mode.  Did you ever hear of a "value play" in the video gaming sector?  Me neither.  This is supposed to be a growth sector, particularly after the launch of PS3, PSP, Wii, DS, and Xbox360 all within a fairly short time of each other.  They may even start selling more shares or warrants to stay alive, but this can be like robbing Peter to pay Paul after Peter also borrowed money from Paul.

We’ll have new financials soon, but the last balance sheet showed almost $3.8 million in cash, accounts receivable were $3.1 million, and its entire total assets were listed as $15 million.  Its current liabilities were $13.26 million.  Majesco’s market cap is still $37.5 million and the two analysts that cover it both carry an expected loss for this year.

Here is the good news: they really do appear to have the worst of the blow-ups behind them as far as making huge bad bets that don’t pay off and shares are up about 50% from their lows. If you went into this ahead of that Advent Rising game you were in the stock at $8.00, $10.00, or even $14.00. There are still a lot of shareholders that are long and wrong, and this name has sort of developed a mini cult status among micro-cap traders now.

Hopefully this company can get it back together, but even if they do succeed on their mini-game model it is not a strategy that sounds like they will ever back to their glory days.  The company may not be that attractive to a suitor either because its titles and gaming engine haven’t been as big as was hoped and they are behind the other game producers in the industry.  There is always the oddball chance too that one of their low-budget games end up being a smash hit.  If only the company was offering that feeling in their body language.

Jon C. Ogg
February 23, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.