Game Over For Majesco Shareholders

Summary

• March 30th vote could approve 100%+ dilution.
• Majesco only has 16 full time employees and no game developers.
• Another reverse split could be coming.

I will admit it, my previous article about Majesco (COOL) turned out to be not a very good bet. Majesco recently laid off the head of Midnight City and sold, for a loss, the stake in GMS/Pariplay. A recent 10K annual filing shows that Majesco is in dire straits as well. But it is about to get worse. I want to be very clear about what I am going to say - If you have any shares in Majesco, your investment is about to crash and I will explain why.

A 14A was just filed that details the upcoming annual shareholder meeting. There will be many items shareholders can vote on, including wrecking their own investment. Please see the following item to vote on:

Possible Effects on Rights of Existing Stockholders

We issued 8,823,537 Preferred Shares and Warrants exercisable for 8,823,537 shares of Common Stock. Any additional equity or convertible debt financings in the future could result in further dilution to our stockholders. Additionally, sales in the public market of shares of Common Stock or the shares of Common Stock acquired upon conversion of the Preferred Shares or the exercise of the Warrants, or the perception that such sales could occur, could adversely affect the prevailing market price of our Common Stock and impair our ability to raise funds in additional stock financings. The sale into the public market of these shares could also materially and adversely affect the market price of our Common Stock. The Preferred Shares and the Warrants could be converted into shares of Common Stock constituting more than 20% of our shares of Common Stock outstanding before the Private Placement. In addition, the initial conversion price of the Preferred Shares and the Warrants is $0.68 which is less than book value of our Common Stock (which is greater than the market value of our Common Stock on the Closing Date). Therefore, the Company is seeking stockholder approval under Nasdaq Marketplace Rule 5635(d).

To explain a little more, on November 6th, Majesco filed an 8-K report that told investors that the company is in trouble:

On October 31, 2014, we implemented a reduction of our workforce to reduce our fixed costs. The reduction includes development and game-testing, selling and marketing, and support personnel. We are currently not developing any significant new games for release in fiscal 2015. We expect to incur charges of approximately $0.3 million to $0.4 million through December 31, 2014 relating to this reduction in force, consisting primarily of one-time severance payments and other termination benefits.

As discussed in our quarterly report on Form 10-Q for the quarterly period ended July 31, 2014, we have suffered losses that raise substantial doubt about our ability to continue as a going concern. Accordingly, we are evaluating various alternatives, including reducing operating expenses and personnel costs, securing additional financing for future business activities, and other strategic alternatives including a sale or merger of our company.

Then on December 13th, another 8-K came out saying Majesco had some investors and had instant financing. Here is the highlight:

On December 17, 2014, Majesco Entertainment Company (the "Company") entered into separate subscription agreements (the "Subscription Agreement") with accredited investors (the "Investors") relating to the issuance and sale of $6,000,000 of units (the "Units") at a purchase price of $0.68 per Unit, with each Unit consisting of one share of the Company's 0% Series A Convertible Preferred Stock (the "Preferred Shares") and a five year warrant (the "Warrants") to purchase one share of the Company's common stock, par value $0.001 per share (the "Common Stock") at an initial exercise price of $0.68 per share (such sale and issuance, the "Private Placement").

Majesco got $1M up front and $5M in escrow to be released upon shareholder approval, netting them $6M total. But here is the catch, all of those Preferred Shares will convert to common shares at some point. The investors need to get paid, after all. As you can guess, this is the item I've described above that shareholders will be voting on.

The outstanding share count for Majesco is currently about 6.7M shares. As I showed above, there are almost 9M shares in preferred shares and warrants that can be converted if the votes say so. That would mean a dilution of over 130%. Think about what that means for a second. Majesco management is asking for shareholders to dilute their own shares over 130%. All of this for a few million dollars from investors. And that money won't even go to game creation. Why is that? From the annual 10k:

Employees

We had 22 full-time employees in the United States and 1 full-time employee in the United Kingdom as of October 31, 2014. We have not experienced any work stoppages and consider our relations with our employees to be good. We currently have 16 full time employees and may further reduce our workforce during 2015.

And I point you to a quote from that Nov 6th filing: "We are currently not developing any significant new games for release in fiscal 2015." This means Majesco has laid off the developers and are not making games right now. That should come as a giant red flag to anyone. A gaming company not making games is not really a gaming company anymore. So what are they going to do with that money from the preferred shares and warrants?

Well, first thing is first, once those shares convert, the stock price will tank. 130% dilution will do that to a stock. Majesco's share price should fall well below $1 again and they will need to take action. But they've already thought of this and will let the shareholder vote on their solution:

(shareholders will vote) To authorize the Board, without further action of the stockholders, to amend our Certificate of Incorporation to implement a reverse stock split of our capital stock, at a ratio within the range of 1-for-3 to 1-for-10 at any time prior to March 30, 2016;

So they know the share price will go down from the massive dilution and will reverse split (again) to stay listed. The outstanding shares will be at around 15M and Majesco will have about $6M in cash. Is that even a lot to keep going? Quick financials show Majesco had a net loss of $16.2M for the 2014 fiscal year. With no new significant games in 2015, it is not likely that the loss will be reversed. So $6M won't even really put a dent in their yearly loss. I think they may have something else up their sleeve. The following is a guess, of course, and be aware that this may not happen at all.

Perhaps Majesco is going to use this $6M to fund a reverse merger. If there is an unlisted company out there that wants an easy way onto Nasdaq, a reverse merger is the way to go. In the case of a reverse merger the company being acquired will have its private shares mix with Majesco's common shares and may or may not take on a new name. If the company being acquired has preferred shares or warrants, those may be converted to common shares of Majesco as well.

You may have just had an "a-ha" moment. Majesco, on the approval of shareholders, would dilute all shares 130% and THEN dilute more with a private companies preferred/common shares and warrants. Meanwhile, they have a reverse split in their back pocket (as voted on by the shareholders) to keep them listed. Meanwhile, investors get paid back from their preferred shares, a new company goes public and Majesco stays alive - all at the cost of the common shareholders.

Granted, the reverse split may not happen and may not be on the table. What IS going to happen, is shareholders are about to vote away the value of their investments. They will dilute their own holdings for a game company that isn't even making games anymore. That should tell you, if you are holding anything, sell everything now while the price is up. Sell now before the preferred shares and warrants convert. Get out before the bottom falls out and you are holding the very diluted bag.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in COOL over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.