DEF 14A 1 def14a.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

 

Filed by the Registrant [X]  
Filed by a Party other than the Registrant [  ]  

 

Check the appropriate box:
[  ] Preliminary Proxy Statement
[  ] Confidential, For Use of the Commission Only (as Permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[  ] Definitive Additional Materials
[  ] Soliciting Material Pursuant to § 240.14a-12

 

POLARITYTE, INC.

(Name of Registrant as Specified in its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):
 
[X] No fee required
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Fee computed on table below per Exchange Act Rules 14a-6(i) (1) and 0-11

 

(1) Title of each class of securities to which transaction applies:
   
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POLARITYTE, INC.

404I-T HADLEY ROAD

S. PLAINFIELD, NEW JERSEY 07080
TELEPHONE: (732) 225-8910

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

Dear Shareholder:

 

On behalf of the Board of Directors (the “Board”) and management, I invite you to attend the special meeting of stockholders (the “Special Meeting”) of PolarityTE, Inc. (the “Company” or “us” or “we” or “our” ) to be held at 615 Arapeen Drive, Suite 102, Salt Lake City, Utah 84108 on March 10, 2017 at 1:00 p.m. MST.

 

On December 1, 2016 we entered into an Agreement and Plan of Reorganization (the “Agreement”), as amended on December 16, 2016, with Majesco Acquisition Corp., a Nevada corporation and our wholly-owned subsidiary (“Merger Sub”), PolarityTE, Inc., a Nevada corporation (“PolarityTE NV”) and Dr. Denver Lough, the owner of 100% of the issued and outstanding shares of capital stock of Polarity (the “Seller”) pursuant to which, upon the effective time, we will acquire certain intellectual property rights owned by the Seller (the “Intellectual Property”) through the merger of Merger Sub with and into PolarityTE NV (the “Merger”) with PolarityTE NV surviving as our wholly-owned subsidiary. As a result of the Merger, among other effects, 100% of the issued and outstanding shares of capital stock of PolarityTE NV, or 10,000 shares of common stock, will be cancelled and exchanged for 7,050 shares of the Company’s newly designated Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). On December 1, 2016 the Company’s Board approved the Merger and the issuance of the Merger Consideration (defined below).

 

At the Special Meeting, we will ask you to:

 

  1. To approve, in accordance with NASDAQ Listing Rule 5635, the securities issued to the Seller under the Agreement whereby the Company will acquire the Intellectual Property from the Seller and the transactions contemplated thereunder (the “Intellectual Property Acquisition”), including the issuance of 7,050 shares of the Company’s newly designated Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s Common Stock (the “Merger Consideration”) as consideration for the Intellectual Property;
     
  2.

To approve a change in control in accordance with NASDAQ Listing Rule 5635 that will result from the issuance of the Merger Consideration to the Seller in as consideration for the Intellectual Property Acquisition;

     
  3. To approve the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) and the reservation of 3,450,000 shares of Common Stock for issuance thereunder; and
     
  4.

To approve an amendment to the Company’s Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the authorized number of shares of the Company’s blank check preferred stock, par value $0.001 per share (the “Authorized Blank Check Preferred Stock”) from 10,000,000 shares to 25,000,000 shares.

 

The Board unanimously recommends a vote FOR (i) the Merger and the issuance of the Merger Consideration, (ii) a change in control that will result from the issuance of the Merger Consideration, (iii) adoption of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder, and (iv) an amendment to the Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares.

 

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We have established the close of business on January 17, 2017, as the record date for determining shareholders entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof.

 

By Order of the Board of Directors of PolarityTE, Inc.

 

  Sincerely,
     
  By: /s/ Denver Lough
    Denver Lough, Chairman and Chief Executive Officer

 

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YOUR VOTE AT THE SPECIAL MEETING IS IMPORTANT

 

Your vote is important. Please vote as promptly as possible even if you plan to attend the Special Meeting.

 

For information on how to vote your shares, please see the instruction form from your broker or other fiduciary, as applicable, as well as “Information About the Special Meeting and Voting” in the proxy statement accompanying this notice.

 

We encourage you to vote by completing, signing, and dating the proxy card, and returning it in the enclosed envelope.

 

If you have questions about voting your shares, please contact our Corporate Secretary at PolarityTE, Inc., at 4041-T Hadley Road, S. Plainfield, New Jersey 07080, telephone number (732) 225-8910.

 

If you decide to change your vote, you may revoke your proxy in the manner described in the attached proxy statement at any time before it is voted.

 

We urge you to review the accompanying materials carefully and to vote as promptly as possible. Note that we have enclosed with this notice a Proxy Statement.

 

THE PROXY STATEMENT IS AVAILABLE AT WWW.EQUITYSTOCK.COM/ISSUERS/POLARITYTE

 

By Order of the Board of Directors,

 

  Sincerely,
     
  By: /s/ Denver Lough
    Denver Lough, Chairman and Chief Executive Officer

 

Important Notice Regarding the Availability of Proxy Materials for the SPECIAL Meeting OF STOCKHOLDERS to Be Held on MARCH 10, 2017 at 1:00 P.m. MST.

 

The Notice of Special Meeting of Stockholders and our Proxy Statement are available at: www.equitystock.com/issuers/polarityte

 

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REFERENCES TO ADDITIONAL INFORMATION

 

This proxy statement incorporates important business and financial information about PolarityTE, Inc. that is not included in or delivered with this document. You may obtain this information without charge through the Securities and Exchange Commission’s (“SEC”) website (www.sec.gov) or upon your written or oral request by contacting the Chief Executive Officer of PolarityTE, Inc., 4041-T Hadley Road, S. Plainfield, New Jersey 07080 or by calling (732) 225-8910.

 

To ensure timely delivery of these documents, any request should be made no later than March 8, 2017 to receive them before the Special Meeting.

 

For additional details about where you can find information about the Company, please see the section entitled “Where You Can Find More Information” in this proxy statement.

 

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POLARITYTE, INC.

404I-T HADLEY ROAD

S. PLAINFIELD, NEW JERSEY 07080
TELEPHONE: (732) 225-8910

 

PROXY STATEMENT FOR SPECIAL MEETING

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MARCH 10, 2017:

 

THE PROXY STATEMENT IS AVAILABLE AT: WWW.EQUITYSTOCK.COM/ISSUERS/POLARITYTE

 

STOCKHOLDERS CAN REQUEST A COPY OF THE PROXY STATEMENT AND FORM OF PROXY FOR THIS MEETING AND FUTURE MEETINGS BY CALLING (732) 225-8910.

 

This proxy statement provides information that you should read before you vote on the proposals that will be presented to you at the Special Meeting of Stockholders of PolarityTE, Inc.

 

The Special Meeting will be held at 615 Arapeen Drive, Suite 102, Salt Lake City, Utah 84108 on March 10, 2017 at 1:00 p.m. MST.

 

On or about February 27, 2017, we mailed this proxy statement in paper copy. For information on how to vote your shares of voting capital, see the instructions included on the proxy card, or the instruction form you receive from your broker or other fiduciary, as well as the information under “Information About the Special Meeting and Voting” in this proxy statement. Stockholders who, according to our records, owned shares of the Company’s Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (collectively, the “Preferred Stock”) at the close of business on January 17, 2017 will be entitled to vote at the Special Meeting.

 

If you would like to attend the Special Meeting and vote in person, please send call (732) 225-8910 and directions will be provided to you.

 

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Information About the Special Meeting and Voting

 

Why am I receiving these proxy materials?

 

The Board is asking for your proxy for use at the Special Meeting of Stockholders of the Company, to be held at 615 Arapeen Drive, Suite 102, Salt Lake City, Utah 84108 on March 10, 2017 at 1:00 p.m. MST, and at any adjournment or postponement of the meeting. As a stockholder, you are invited to attend the meeting and are entitled to and requested to vote on the items of business described in this proxy statement.

 

This proxy statement is furnished to stockholders of PolarityTE, Inc., a Delaware corporation, in connection with the solicitation of proxies by the Board for use at the Special Meeting.

 

Sharing the Same Last Name and Address

 

We are sending only one copy of the proxy statement to shareholders who share the same last name and address, unless they have notified us that they want to continue receiving multiple copies. This practice, known as “householding,” is designed to reduce duplicate mailings and save significant printing and postage costs.

 

If you received a householded mailing and you would like to have additional copies of our proxy statement mailed to you, or you would like to opt out of this practice for future mailings, we will promptly deliver such additional copies to you if you submit your request to our Corporate Secretary at, 4041-T Hadley Road, S. Plainfield, New Jersey 07080 or call us at (732) 225-8910. You may also contact us in the same manner if you received multiple copies of the Special Meeting materials and would prefer to receive a single copy in the future.

 

Who is soliciting my vote?

 

The Board is soliciting your vote.

 

When were the enclosed solicitation materials first given to shareholders?

 

We initially mailed this proxy statement to shareholders of the Company on or about February 27, 2017.

 

What is the purpose of the meeting?

 

You will be voting on:

 

  1. Approval of the Merger and the issuance of the Merger Consideration in connection with the Intellectual Property Acquisition in accordance with NASDAQ Listing Rule 5635;
     
  2.

Approval of a change in control in accordance with NASDAQ Listing Rule 5635 that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition;

     
  3. Approval of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder; and
     
  4.

Approval of an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares.

 

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What are the Board’s recommendations?

 

The Board recommends a vote:

 

  1. “FOR” the Merger and the issuance of the Merger Consideration;
     
  2.

FORa change in control that will result from the issuance of the Merger Consideration;

     
  3. “FOR” the adoption of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder; and
     
  4. “FOR” an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares.
     

Who is entitled to vote at the meeting, what is the “record date”, and how many votes do they have?

 

Holders of record of our Common Stock at the close of business on January 17, 2017 (the “Record Date”) will be entitled to vote at the Special Meeting. On the Record Date there were 4,251,067 shares of Common Stock outstanding and entitled to vote. In addition, 750,393 shares of the Company’s Common Stock underlying the shares of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock are entitled to vote at the Special Meeting.

 

Each share of Common Stock that you own entitles you to one vote.  The holders of Series A Preferred Shares shall vote together with the holders of Common Stock on all matters on an “as converted” basis, subject to beneficial ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share.  Holders of Series B Preferred Shares shall vote together with the holders of Common Stock on all matters on an “as converted” basis, subject to beneficial ownership limitations, based on a conversion price of $8.40 per share.  Holders of Series C Preferred Shares shall vote together with the holders of Common Stock on all matters on an “as converted” basis, subject to beneficial ownership limitations, based on a conversion price of $7.20 per share.

 

What is a quorum of stockholders?

 

In order to carry on the business of the Special Meeting, a quorum must be present. If a majority of the shares outstanding and entitled to vote on the Record Date are present, either in person or by proxy, we will have a quorum at the meeting. Any shares represented by proxies that are marked for, against, withhold, or abstain from voting on a proposal will be counted as present in determining whether we have a quorum. If a broker, bank, custodian, nominee, or other record holder of our voting capital indicates on a proxy card that it does not have discretionary authority to vote certain shares on a particular matter, and if it has not received instructions from the beneficial owners of such shares as to how to vote on such matters, the shares held by that record holder will not be voted on such matter (referred to as “broker non-votes”) but will be counted as present for purposes of determining whether we have a quorum. Since there were 4,251,067 shares of Common Stock, 5,924,307 shares of Series A Preferred Stock which are convertible into 987,384 shares of Common Stock of which 633,727 shares of Common Stock are entitled to vote, 48,109.25 shares of Series B Preferred Stock which are convertible into 801,820 shares of Common Stock of which 0 shares of Common Stock are entitled to vote and 24,614.84 shares of Series C Preferred Stock which are convertible into 410,247 shares of Common Stock of which 116,666 are entitled to vote outstanding on January 17, 2017 the presence of holders of 2,500,730 shares of voting capital will represent a quorum. We must have a quorum to conduct the meeting.

 

How many votes does it take to pass each matter?

 

Proposal 1: Approval of the Merger and the issuance of the Merger Consideration in Connection with the Intellectual Property Acquisition

The affirmative vote of a majority of the votes cast for this proposal is required to approve Merger and the issuance of the Merger Consideration in connection with the Intellectual Property Acquisition. Abstentions will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for this proposal. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of this vote.

 

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Proposal 2: Approval of a change in control that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition

 

The affirmative vote of a majority of the votes cast for this proposal is required to approve a change in control that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition. Abstentions will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for this proposal. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of this vote.

     
Proposal 3: Approval of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder  

The affirmative vote of a majority of the votes cast for this proposal is required to approve the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder. Abstentions will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for this proposal. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of this vote.

     

Proposal 4: Approval of an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares

 

The affirmative vote of the holders of shares representing a majority of all of the Company’s outstanding voting capital entitled to vote as of the Record Date is required to approve an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares. Abstentions will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for this proposal. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of this vote.

 

Who can attend the meeting?

 

All stockholders at the close of business on January 17, 2017, or their duly appointed proxies, may attend the meeting.

 

What do I need to attend the meeting?

 

In order to be admitted to the meeting, a stockholder must present proof of ownership of Common Stock or Preferred Stock as of the Record Date. If your shares are held in the name of a broker, bank, custodian, nominee, or other record holder (“street name”), you must obtain a proxy, executed in your favor, from the holder of record (that is, your broker, bank, custodian, or nominee) to be able to vote at the meeting. You will also be required to present a form of photo identification, such as a driver’s license.

 

What is a proxy?

 

A proxy is another person you authorize to vote on your behalf. We ask stockholders to instruct the proxy how to vote so that all voting capital may be voted at the meeting even if the holders do not attend the meeting.

 

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How are abstentions and broker non-votes treated?

 

Abstentions will be counted towards the tabulation of votes cast on the proposals and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for the proposals. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of the vote.

 

How do I vote?

 

If you are a stockholder of record, you may vote by mailing a completed proxy card or in person at the Special Meeting.

 

If you are a street name holder (meaning that your shares are held in a brokerage account by a bank, broker or other nominee), you may direct your broker or nominee how to vote your shares; however, you may not vote in person at the Special Meeting unless you have obtained a signed proxy from the record holder giving you the right to vote your beneficially owned shares.

 

You must be present, or represented by proxy, at the Special Meeting in order to vote your shares. You can submit your proxy by completing, signing, and dating your proxy card and mailing it in the accompanying pre-addressed envelope. YOUR PROXY CARD WILL BE VALID ONLY IF YOU COMPLETE, SIGN, DATE, AND RETURN IT BEFORE THE MEETING DATE.

 

How will my proxy vote my shares?

 

If your proxy card is properly completed and received, and if it is not revoked, before the Special Meeting, your shares will be voted at the meeting according to the instructions indicated on your proxy card. If you sign and return your proxy card, but do not give any voting instructions, your shares will be voted as follows:

 

  1. FOR” approval of the Merger and the issuance of the Merger Consideration in connection with the Intellectual Property Acquisition in accordance with NASDAQ Listing Rule 5635;
     
  2.

FOR” approval of a change in control in accordance with NASDAQ Listing Rule 5635 that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition;

     
  3. FOR” approval of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder; and
     
  4. FOR” approval of an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares.

 

To our knowledge, no other matters will be presented at the meeting. However, if any other matters of business are properly presented, the proxy holders named on the proxy card are authorized to vote the shares represented by proxies according to their judgment.

 

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

If your shares are held in a brokerage account, you will receive from your broker a full meeting package including a voting instruction form to vote your shares. Your brokerage firm may permit you to provide voting instructions by telephone or by the internet. Brokerage firms have the authority under NASDAQ rules to vote their clients’ unvoted shares on certain routine matters.

 

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The following matters are considered non-routine matters. NASDAQ rules do not permit brokerage firms to vote their clients’ unvoted shares for:

 

  Proposal 1: Approval of the Merger and the issuance of the Merger Consideration in connection with the Intellectual Property Acquisition in accordance with NASDAQ Listing Rule 5635;
     
  Proposal 2: Approval of a change in control in accordance with NASDAQ Listing Rule 5635 that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition;
     
  Proposal 3: Approval of the 2017 Plan and the reservation of 3,450,000 shares of Common Stock for issuance thereunder; and
     
  Proposal 4: Approval of an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares.

 

Therefore, if you do not vote on these proposals, your shares will remain unvoted on those proposals. We urge you to provide voting instructions to your brokerage firm so that your vote will be cast on those proposals.

 

What does it mean if I receive more than one proxy card or instruction form?

 

If you receive more than one proxy card or instruction form, it means that you have multiple accounts with our transfer agent and/or a broker or other nominee or fiduciary or you may hold your shares in different ways or in multiple names (e.g., joint tenancy, trusts, and custodial accounts). Please vote all of your shares.

 

How do I revoke my proxy and change my vote prior to the meeting?

 

If you are a registered stockholder (meaning your shares are registered directly in your name with our transfer agent) you may change your vote at any time before voting takes place at the meeting. You may change your vote by:

 

  1. Delivering another proxy card or voter instruction form to PolarityTE, Inc., ATTN: Corporate Secretary, 4041-T Hadley Road, S. Plainfield, New Jersey 07080, with a written notice dated later than the proxy you want to revoke stating that the proxy is revoked.
     
  2. You may complete and send in another proxy card or voting instruction form with a later date.
     
  3. You may attend the meeting and vote in person.

 

For shares you hold beneficially or in street name, you may change your vote by submitting new voting instructions to your bank, broker or other nominee or fiduciary in accordance with that entity’s procedures, or if you obtained a legal proxy form giving you the right to vote your shares, by attending the meeting and voting in person.

 

Who pays for the proxy solicitation and how will the Company solicit votes?

 

We will pay the costs of preparing, printing, and mailing the notice of Special Meeting, this proxy statement and the enclosed proxy card. We will also reimburse brokerage firms and others for reasonable expenses incurred by them in connection with their forwarding of proxy solicitation materials to beneficial owners. The solicitation of proxies will be conducted primarily by mail, but may also include telephone, facsimile, or oral communications by directors, officers, or regular employees of the Company acting without special compensation.

 

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Proposals to be Presented at the Special Meeting

 

We will present four proposals at the meeting. We have described in this proxy statement all of the proposals that we expect will be made at the meeting. If any other proposal is properly presented at the meeting, we will, to the extent permitted by applicable law, use your proxy to vote your shares of voting capital on such proposal in our best judgment.

 

Do any of the Company’s officers and directors have any interest in matters to be acted upon?

 

Dr. Denver Lough is the Company’s Chief Executive Officer, Chief Scientific Officer and Chairman of the Board. In addition, Dr. Lough is the owner of 100% of the issued and outstanding shares of capital stock of PolarityTE NV. Accordingly, Dr. Lough has a substantial interest in Proposals 1 and 2, approval of the Merger and Issuance of the Merger Consideration and approval of a change in control that will result from the issuance of the Merger Consideration in connection with the Intellectual Property Acquisition. In addition, members of the Board and our executive officers are eligible to receive up to 3,450,000 Common Stock grants pursuant to the terms of the 2017 Plan. Accordingly, members of the Board and our executive officers have a substantial interest in Proposal 3, adoption of the 2017 Plan. Other than the foregoing, members of the Board and our executive officers do not have any interest in any other proposal that is not shared by all other stockholders of the Company.

 

Where do I find the voting results of the Special Meeting?

 

We will announce voting results at the Special Meeting and also in our Current Report on Form 8-K, which we anticipate filing within four days of the Special Meeting.

 

Do I have dissenters’ right of appraisal?

 

Under the Delaware General Corporation Law and our charter documents, holders of our voting capital will not be entitled to statutory rights of appraisal, commonly referred to as dissenters’ rights or appraisal rights (i.e., the right to seek a judicial determination of the “fair value” of their shares and to compel the purchase of their shares for cash in that amount) with respect to the proposals.

 

A representative of EisnerAmper is not expected to be present in person but will attend the Special Meeting telephonically and will have an opportunity to make a statement if he or she desires to do so. It is also expected that such representative will be available to respond to appropriate questions.

 

PROPOSAL NO. 1

 

APPROVAL OF THE SECURITIES TO BE ISSUED TO THE SELLER UNDER THE AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN THE COMPANY, MERGER SUB, POLARITY AND THE SELLER WHEREBY THE COMPANY WILL ACQUIRE THE INTELLECTUAL PROPERTY FROM THE SELLER AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE ISSUANCE OF 7,050 SHARES OF SERIES E PREFERRED STOCK CONVERTIBLE INTO AN AGGREGATE OF 7,050,000 SHARES OF THE COMPANY’S COMMON STOCK AS CONSIDERATION FOR THE INTELLTUAL PROPERTY

 

Background

 

As previously reported in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 7, 2016 and December 16, 2016, on December 1, 2016, we entered into an Agreement and Plan of Reorganization, as amended on December 16, 2016, with Majesco Acquisition Corp., a Nevada corporation and our wholly-owned subsidiary (“Merger Sub”), PolarityTE, Inc., a Nevada corporation (“PolarityTE NV”) and Dr. Denver Lough, the owner of 100% of the issued and outstanding shares of capital stock of PolarityTE NV (the “Seller”) pursuant to which we will acquire PolarityTE NV and certain intellectual property owned by Dr. Denver Lough (the “Intellectual Property”).

 

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At the Effective Time (as defined in the Agreement) of the Merger, Merger Sub will be merged with and into PolarityTE NV, with PolarityTE NV surviving the Merger as the surviving corporation and an aggregate of 10,000 issued and outstanding shares of PolarityTE NV’s common stock held by the Seller will be converted into the right to receive 7,050 shares of the Company’s Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s Common Stock.

 

The Intellectual Property Acquisition is subject to the satisfaction of certain closing conditions, including approval of stockholders of the Company in accordance with Delaware General Corporation Law and NASDAQ Listing Rule 5635 and a minimum cash balance available to the Company.

 

The Company currently has no plans or understandings to discontinue or divest its current existing software business although the Company has received inquiries from prospective purchasers of various assets and the business, including from Jesse Sutton, the former founder of the Company and third parties. The Company may determine to dispose of such business in whole or in part, or discontinue such business, and may reevaluate from time to time although presently 4 employees continue to be employed in direct activities related to such software business and administration and the Company is continuing to generate significant revenue from its sales of digital online games. The Company is diversifying its business model in an attempt to mitigate risk associated with focusing on one industry and increase the overall value of the Company for its shareholders.

 

In December 2016, the Company closed a private placement of its securities in which it received gross proceeds of approximately $2.2 million. The Company used the proceeds of this financing principally to purchase lab equipment to support its research and development activities related to regenerative medicine and tissue engineering activities, as well as for general working capital and administrative expenses associated with its other businesses. There is no restriction on the use of proceeds of the private placement and the Company may apply the remainder of its funds at the discretion of the Board of Directors and officers of the Company.

 

Through its regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems, including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTETM, to regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including hair and glands. SkinTETM is preparing for clinical testing and market entry, and targeting a global wound care market of $40 billion. The platform provides a pipeline of products to follow in parallel, with plans for serial clinical and market entry, and each addressing separate and similarly sized potential markets. The Company’s approach seeks to benefit from fewer regulatory and capital barriers to market entry, avoiding the long timelines associated with three phase trials and their associated costs seen with other competing technologies and therapeutics. The regenerative medicine business model being pursued takes advantage of the smaller regulatory hurdles, with streamlined product development from cell/tissue in vitro and ex vivo testing, to small and large animal preclinical models, manufacturing technology transfer, and ultimately clinical application and market entry occurring in a mapped out stepwise fashion for each product. Although skin regeneration and wound care is a robust market in and of itself, the platform technology provides a base that the Company believes will support a strategy to build a company that can diversify and grow continuously.

 

Description of Series E Convertible Preferred Stock

 

Each share of Series E Preferred Stock is convertible into shares of Common Stock based on a conversion calculation equal to the stated value of such preferred stock, plus all accrued and unpaid dividends, if any, on such preferred stock, as of such date of determination, divided by the conversion price. The stated value of each Series E Preferred Stock is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Series E Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company’s Common Stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Series E Preferred Stock. Until converted, each share of Series E Preferred Stock is entitled to two votes for every share of Common Stock into which it is convertible on any matter submitted for a vote of stockholders.

 

Stockholders Agreement

 

On December 1, 2016, the Company entered into a Stockholders Agreement (the “Stockholders Agreement”) with Dr. Lough, Dr. Swanson (together with Dr. Lough, the “Restricted Stockholders”), PolarityTE NV and certain stockholders of the Company (the “Company Stockholders”). Pursuant to the terms of the Stockholders Agreement, the Company and Company Stockholders shall have the right to purchase from each Restricted Stockholder all of the Restricted Stockholder’s Seller Stock (as defined in the Stockholders Agreement) if such Restricted Stockholder’s employment with the Company is terminated for Cause (as defined in the Stockholders Agreement) or by the Restricted Stockholder without Good Reason (as defined in the Stockholders Agreement) at the fair market value as determined pursuant to the terms of the Stockholders Agreement. In addition, the Company shall have the right to purchase from each Restricted Stockholder all of the Restricted Stockholder’s Seller Stock if (i) such Restricted Stockholder breaches any material provisions of such Restricted Stockholder’s employment agreement with the Company (the “Employment Agreement”) or (ii) such Restricted Stockholder beaches any material provision of the Agreement, at a per share price of $0.001 per share. No Restricted Stockholder may sell any shares of Seller Stock to any third party unless the Company and the Company Stockholders are first offered the right to participate in any such offering on terms and conditions not less favorable to the Company and the Company stockholders than those applicable to the third party.

 

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Voting Agreement

 

On December 1, 2016, the Company entered into a Voting Agreement (the “Voting Agreement”) with Dr. Lough, Dr. Swanson, PolarityTE NV and certain stockholders of the Company (collectively, the “Stockholders”). Pursuant to the terms of the Voting Agreement, the Stockholders agreed to vote the voting securities held by such Stockholders at any annual or special meeting of stockholders of the Company, or execute a written consent in lieu of such meeting to vote: (i) in favor of: (1) approval of the Merger and the issuance of the Merger Consideration in such amount that exceeds 19.99% of the Company’s issued and outstanding Common Stock and (2) approval of any proposal to adjourn of postpone the stockholder’s Special Meeting to a later date if there are not sufficient votes for the approval of the Merger, the issuance of the Merger Consideration and transactions contemplated by the Agreement; and (ii) against any proposal which could be expected to result in a breach of any obligation of the Company which could be expected to result in any of the conditions of the Company’s obligations under the Agreement not being fulfilled. All securities that the Stockholders purchase or acquire the right to vote or otherwise acquire beneficial ownership after December 1, 2016 shall be subject to the terms of the Voting Agreement. Stockholders shall not deposit any of the securities in a voting trust, or grant any proxies with respect to the securities except as provided for in the Voting Agreement.

 

In connection with the approval of the Merger and the negotiation of the Merger Consideration in connection with the Intellectual Property Acquisition, prior to the closing, the Board will receive a Fairness Opinion that the Merger Consideration is fair to stockholders and the Company from a financial point of view, considering, among other things, the Intellectual Property.

 

The issuance of the Merger Consideration is full consideration for the acquisition of PolarityTE NV and the Intellectual Property and will not have any effect (other than a dilutive effect, as further discussed below) upon the rights of existing security holders. The issuance of the Merger Consideration will have a significant dilutive effect on our existing security holders. Subsequent to the consummation of the Merger, we will have outstanding: 4,251,067 shares of Common Stock; 5,924,307 shares of Series A Preferred stock convertible into 987,384 share of Common Stock; 48,109.25 shares of Series B Preferred stock convertible into 801,820 shares of Common Stock; 24,614.84 shares of Series C Preferred stock convertible into 410,247 shares of Common Stock; 94,666 shares of Series D Preferred stock convertible into 157,776 shares of Common Stock; 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of Common Stock; and options to purchase aggregate of 2,914,525 shares of Common Stock (of which 2,524,000 are subject to the approval of the 2017 Plan). Upon the closing of the Merger, the existing shareholders of the Company will hold approximately 100% of the issued and outstanding Common Stock of the Company and 40% of the issued and outstanding Common Stock of the Company on a fully diluted basis and the Seller will hold 7,050,000 shares of the Company’s Common Stock or approximately 42% of the outstanding Common Stock on a fully diluted basis, assuming the conversion of the Series E Preferred Stock issued pursuant to the Agreement.

 

The Company retained NOBLE Life Science Partners (“Noble”) to provide a recommendation of the fairness of the Merger Consideration to the Company. Assets acquired through a transaction which are expected to be accounted for as an acquisition of assets are measured based on the cash consideration paid plus either the fair value of non-cash consideration given or the fair value of assets acquired, whichever is more clearly evident.

 

In an opinion dated January 23, 2017, Noble concluded that the Merger Consideration is fair from a financial point of view to the Company.

 

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Noble assessed the value of the Merger Consideration using available quantitative as well as qualitative factors specific to the Company and PolarityTE NV including, but not limited to, financial statements of the Company for the fiscal years ended October 31, 2014, 2015 and 2016, the Company’s obligations pursuant to debt conversions, implications of national trends in the healthcare industry, financial characteristics and valuations of companies engaged in providing wound care treatments and financial and operating characteristics and valuations of transactions involving the sale of wound care treatments.

 

Reasons for this Proposal

 

Our Common Stock is currently listed on The NASDAQ Capital Market, and therefore we are subject to the NASDAQ Listing Rules. Pursuant to NASDAQ Stock Market Listing Rule 5635, if an issuer intends to issue securities in a transaction that could (i) result in the issuance of more than 20% of the issued and outstanding shares of the issuer’s common stock on a pre-transaction basis or (ii) common stock has or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding prior to the consummation of the transaction, the issuer must obtain the prior approval of its stockholders prior to such issuance. Approval by the Company’s stockholders holding a majority of the outstanding voting capital as of the Record Date is required to approve this Proposal and for issuance of the 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s Common Stock.

 

Other than the stockholder approval sought herein, no other federal or state regulatory approvals are required to consummate the Merger.

 

Vote Required for Approval

 

The affirmative vote of a majority of the votes cast for this proposal is required to approve Merger and the issuance of the Merger Consideration. Abstentions and broker non-votes will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted Shares held by the firms in street name on this proposal.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE MERGER AND THE ISSUANCE OF THE MERGER CONSIDERATION IN CONNECTION WITH THE INTELLECTUAL PROPERTY ACQUISITION

 

PROPOSAL NO. 2

 

APPROVAL OF A CHANGE IN CONTROL THAT WILL RESULT FROM THE ISSUANCE OF THE MERGER CONSIDERATION AS CONSIDERATION FOR THE INTELLECTUAL PROPERTY ACQUISITION

 

NASDAQ Listing Rule 5635(b) requires us to obtain stockholder approval prior to certain issuances with respect to Common Stock or securities convertible into Common Stock which will result in a change of control of the Company. This rule does not specifically define when a change in control of a Company may be deemed to occur. However, The NASDAQ Capital Market suggests in its guidance that a change of control would occur, subject to certain limited exceptions, if after a transaction a person or an entity will hold 20% or more of the Company’s then outstanding capital stock. For the purpose of calculating the holdings of such person or entity, The NASDAQ Capital Market would take into account, in addition to the securities received by such person or entity in the transaction, all of the shares owned by such person or entity unrelated to the transaction and would assume the conversion of any convertible securities held by such person or entity.

 

At closing, upon satisfaction of each of the closing conditions, the Seller will be issued 7,050 shares of the Company’s Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s Common Stock, expected to constitute approximately 42% of the issued and outstanding Common Stock of the Company on a fully diluted basis at closing. Proposal 1, if authorized by the stockholders, will result in a change in control. We are seeking stockholders’ approval on a change in control in accordance with NASDAQ Listing Rule 5635(b) that will result from the issuance of the Merger Consideration.

 

In the event the issuance of the Merger Consideration is not deemed a change of control the Company reserves the right to proceed with the closing of the Intellectual Property Acquisition.

 

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Stockholders should note that a change of control as described under NASDAQ Listing Rule 5635(b) applies only with respect to the application of such rule. Neither Delaware General Corporation Law nor our Certificate of Incorporation or bylaws require us to obtain stockholder approval of such change in control in accordance with NASDAQ Listing Rule 5635(b).

 
No Appraisal Rights

 

Under the Delaware General Corporation Law, our stockholders are not entitled to appraisal rights with respect to a change in control resulting from the issuance of the Merger Consideration, and we will not independently provide our stockholders with any such rights.

 

Vote Required for Approval

 

The affirmative vote of a majority of the votes cast for this proposal is required to approve a change in control that will result from the issuance of the Merger Consideration as consideration for the Intellectual Property Acquisition. Abstentions will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted shares held by the firms in street name for this proposal. As a result, any shares not voted by a beneficial owner will be treated as a broker non-vote. Such broker non-votes will have no effect on the results of this vote.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF A POTENTIAL CHANGE IN CONTROL THAT WILL RESULT FROM THE ISSUANCE OF THE MERGER CONSIDERATION AS CONSIDERATION FOR THE INTELLECTUAL PROPERTY ACQUISITION.

 

PROPOSAL NO. 3

 

APPROVAL OF THE COMPANY’S 2017 EQUITY INCENTIVE PLAN

 

Description of Our 2017 Equity Incentive Plan

 

On December 1, 2016, the Board adopted the 2017 Equity Incentive Plan (the “2017 Plan”), an omnibus equity incentive plan pursuant to which the Company may grant cash and equity-linked awards to certain officers, directors, consultants and others. The Board recommends adoption of the 2017 Plan as a means to offer incentives and attract, motivate and retain and reward persons eligible to participate in the 2017 Plan. Accordingly the Board unanimously approved and adopted the 2017 Plan.

 

Set forth below is a summary of the 2017 Plan, which is qualified in its entirety by reference to the full text of the 2017 Plan, a copy of which is included as Appendix A to this proxy statement.

 

Shares Available

 

The 2017 Plan authorizes issuance of 3,450,000 shares of the Company’s Common Stock which represents approximately 20% of the Company’s issued and outstanding Common Stock on a fully diluted basis.

 

As of the Record Date, 329,164 options and 329,164 shares of Common Stock were issued under the previously adopted 2016 Equity Incentive Plan.

 

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Administration

 

The 2017 Plan will be administered by the Board or by one or more committees of directors appointed by the Board or another committee (within its delegated authority) to administer all or certain aspects of the 2017 Plan (the “Administrator”). Any such committee shall be comprised solely of one or more directors or such number of directors as may be required under applicable law. Any committee delegated administrative authority under the 2017 Plan may further delegate its authority under the 2017 Plan to another committee of directors, and any such delegate shall be deemed to be an Administrator of the 2017 Plan. The Administrator comprised solely of directors may also delegate, to the extent permitted by Section 157 of the Delaware General Corporation Law and any other applicable law, to one or more officers of the Company, its powers under the 2017 Plan (a) to Eligible Persons (as defined below) who will receive grants of awards under the 2017 Plan and (b) to determine the number of shares subject to, and the other terms and conditions of, such awards. The Board may delegate different levels of authority to different committees with administrative and grant authority under the 2017 Plan. It is anticipated that the Administrator (either generally or with respect to specific transactions) will be constituted so as to comply, as necessary or desirable, with the requirements of Internal Revenue Code of 1986, as amended (the “Code”), Section 162(m) of the Code and Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.

 

Eligibility

 

Awards may be granted pursuant to the 2017 Plan only to persons who are eligible persons. Under the 2017 Plan, “Eligible Person” means any person who is either: (a) an officer (whether or not a director) or employee of the Company or one of its subsidiaries; (b) a director of the Company or one of its subsidiaries; or (c) an individual consultant who renders bona fide services (other than services in connection with the offering or sale of securities of the Company or one of its subsidiaries in a capital-raising transaction or as a market maker or promoter of securities of the Company or one of its subsidiaries) to the Company or one of its subsidiaries and who is selected to participate in the 2017 Plan by the Administrator; provided, however, that an Eligible Person may only participate in the 2017 Plan if such participation would not adversely affect either the Company’s eligibility to use Form S-8 to register, under the Securities Act of 1933, as amended, the offering and sale of shares issuable under the 2017 Plan by the Company or the Company’s compliance with any other applicable laws. As of the Record Date, the approximate number of Eligible Persons under the 2017 Plan included 12 officers or employees of the Company, 7 directors of the Company (3 of which are also officers), and 8 individual consultant to the Company.

 

Awards

 

The 2017 Plan permits the grant of: (a) stock options, which may be intended as an incentive stock option within the meaning of Section 422 of the Code (an “ISO”) or as a nonqualified stock option (an option not intended to be an ISO); (b) stock appreciation rights (“SARs”); (c) restricted shares; (d) restricted share units; (e) cash awards; or (f) other awards, including: (i) stock bonuses, performance stock, performance units, dividend equivalents, or similar rights to purchase or acquire shares, whether at a fixed or variable price or ratio related to the Common Stock (subject to certain requirements as discussed in the 2017 Plan and in compliance with applicable laws), upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof; or (ii) any similar securities with a value derived from the value of or related to the Common Stock and/or returns thereon. All of the reserved shares under the 2017 Plan may be issued as ISOs.

 

The Administrator may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments in accordance with the 2017 Plan. Shares shall be counted against those reserved to the extent such shares have been delivered and are no longer subject to a substantial risk of forfeiture. Accordingly, (i) to the extent that an award under the 2017 Plan, in whole or in part, is canceled, expired, forfeited, settled in cash, settled by delivery of fewer shares than the number of shares underlying the award, or otherwise terminated without delivery of shares to the participant, the shares retained by or returned to the Company will not be deemed to have been delivered under the 2017 Plan and will be deemed to remain or to become available under the 2017 Plan; and (ii) shares that are withheld from such an award or separately surrendered by the participant in payment of the exercise price or taxes relating to such an award shall be deemed to constitute shares not delivered and will be deemed to remain or to become available under the 2017 Plan. The foregoing adjustments to the share limit of the 2017 Plan are subject to any applicable limitations under Section 162(m) of the Code with respect to awards intended to qualify as performance-based compensation thereunder.

 

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The number of shares available for issuance under the 2017 Plan (as well as the number of shares that may be issued as ISOs, and the share limitations set forth below under the heading “— Performance Based Compensation”) are subject to proportionate adjustment by the Administrator in the event of any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split, or upon any merger, arrangement, combination, consolidation, or other reorganization, or upon any spin-off, split-up or similar extraordinary dividend distribution in respect of the Common Stock, or upon any exchange of Common Stock or other securities of the Company, or upon any similar unusual or extraordinary corporate transaction in respect of the Common Stock.

 

Option and SAR Awards. Option and SAR awards granted under the 2017 Plan must have an exercise price or base price of no less than 100% of the fair market value of a share of Common Stock on the date of grant of the option (or 110% of the fair market value on the date of grant, in the case of ISOs granted to certain ten percent stockholders of the Company). Options and SAR awards shall become exercisable upon such conditions as the Administrator may establish in its sole discretion. The exercise price of any option shall be paid in cash or by any of the methods set forth below under the heading “— Consideration for Awards.” Option and SAR awards are exercisable for a period established by the Administrator, which in no event shall exceed ten years from the date of grant (five years in the case of ISOs granted to certain ten percent stockholders of the Company). If the Administrator does not specify otherwise in an award agreement, upon termination of a participant’s employment or other service to the Company, option and SAR awards shall expire (1) three months after the last day that the participant is employed by or provides services to the Company or any subsidiary (provided, however, that in the event of the participant’s death during this period, those persons entitled to exercise the option or SAR pursuant to the laws of descent and distribution shall have one year following the date of death within which to exercise such option or SAR); (2) in the case of a participant whose termination of employment or services is due to death or disability (as defined in the applicable award agreement), twelve months after the last day that the participant is employed by or provides services to the Company or any subsidiary; and (3) immediately upon a participant’s termination for “cause.”

 

Restricted Shares. A participant that is granted restricted stock under the 2017 Plan shall have all of the rights of a shareholder, including the right to vote the shares of restricted stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirements imposed by the Administrator). As a condition to the grant of an award of restricted stock, subject to applicable law, the Administrator may require or permit a participant to elect that any cash dividends paid on a share of restricted stock be automatically reinvested in additional shares of restricted stock or applied to the purchase of additional awards under the 2017 Plan. Unless otherwise determined by the Administrator, stock distributed in connection with a stock split or stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the restricted stock with respect to which such stock or other property has been distributed.

 

Restricted Share Units. At the time an award of restricted share units is made, the Administrator shall determine the period of time during which the restricted share units shall vest and the timing of settlement. Subject to the 2017 Plan, the applicable award agreement and any other procedures established by the Administrator, the Administrator may determine to pay dividend equivalent rights with respect to restricted share units, in which case, the Company shall establish an account for the participant and reflect in that account any securities, cash or other property comprising any dividend or property distribution with respect to the shares of Common Stock underlying each restricted share unit. Each amount or other property credited to any such account shall be subject to the same vesting conditions as the restricted share unit to which it relates. The participant shall have the right to be paid the amounts or other property credited to such account upon vesting of the subject restricted share unit. Each participant receiving restricted share units shall have no rights as a shareholder with respect to such restricted share units until such time as shares of Common Stock are issued to the participant.

 

Director Compensation Policy. A portion of the shares available for issuance under the 2017 Plan will be available for issuance in connection with the Company’s director compensation policy, described below.

 

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Annual Retainer $5,000  To be paid in cash at first Board Meeting following the initial election of directors (annually) not to be adjusted for any pro rata period.
Stock Options  $10,000   To be calculated by dividing $10,000 by the closing stock price the day the Stock Options are awarded; and at the first Board Meeting immediately following election (and annually thereafter). The Options will vest in full six months following award provided the director is then serving on the Board, and will be exercisable for a period of five (5) years.
Board Meeting Fees  $2,500   To be paid for all in-person Board Meetings. Members must be present to be paid.
Committee Meeting Fees  $800   To be paid for all in-person Committee Meetings. Members must be present to be paid.
Teleconference Fees  $300   To be paid for all teleconferences called by either the Chairman of the Board, the President, or by the Chairman of the relevant Committee. Members must be on-line to be paid.
Additional Retainer  $5,000   To be paid to the Chairman of the Board upon election annually.
Additional Retainer  $1,000   To be paid to the Chairman of the Audit and any other Committee upon election annually.

 

Performance Based Compensation

 

The 2017 Plan provides for the grant of certain awards, the vesting or payment of which may be contingent on the satisfaction of certain performance criteria. Such performance-based awards are designed to be exempt from the limitations of Section 162(m) of the Code, as described below under “—Certain Federal Tax Consequences.” The maximum number of shares that may be issued to any single participant pursuant to options and SARs during the term of the 2017 Plan shall not exceed 3,450,000 shares. The maximum number of shares of Common Stock which may be delivered pursuant to other performance-based equity awards granted during the 162(m) Term (as defined below) may not exceed 3,450,000 shares, and the maximum amount of cash compensation payable pursuant to performance-based cash awards granted during the 162(m) Term (as defined below) may not exceed $1,000,000. The 162(m) Term is the period beginning on the effective date of the 2017 Plan and ending on the date of the first stockholder meeting that occurs in the fifth year following the year in which the Company’s stockholders first approve this 2017 Plan (the “162(m) Term”).

 

The 2017 Plan includes the following performance criteria that may be used by the Administrator when granting performance-based awards: (1) earnings per share, (2) cash flow (which means cash and cash equivalents derived from either (i) net cash flow from operations or (ii) net cash flow from operations, financing and investing activities, (3) total stockholder return, (4) price per share of Common Stock, (5) gross revenue, (6) revenue growth, (7) operating income (before or after taxes), (8) net earnings (before or after interest, taxes, depreciation and/or amortization), (9) return on equity, (10) capital employed, or on assets or on net investment, (11) cost containment or reduction, (12) cash cost per ounce of production, (13) operating margin, (14) debt reduction, (15) resource amounts, (16) production or production growth, (17) resource replacement or resource growth, (18) successful completion of financings, or (19) any combination of the foregoing.

 

Fair Market Value

 

Under the 2017 Plan, “Fair Market Value” means, unless otherwise determined or provided by the Administrator under the circumstances, the closing price for a share of Common Stock on the trading day immediately before the grant date, as furnished by The NASDAQ Capital Market or other principal stock exchange on which the Common Stock is then listed for the date in question, or if the Common Stock is no longer listed on a principal stock exchange, then by the OTC Markets. If the Common Stock is no longer listed on The NASDAQ Capital Market or listed on a principal stock exchange or is no longer actively traded on the OTC Markets as of the applicable date, the Fair Market Value of the Common Stock shall be the value as reasonably determined by the Administrator for purposes of the award under the circumstances.

 

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Consideration for Awards

 

The purchase price for any award granted under the 2017 Plan or the Common Stock to be delivered pursuant to any such award, as applicable, may be paid by means of any lawful consideration as determined by the Administrator, including, without limitation, one or a combination of the following methods:

 

services rendered by the recipient of such award;
   
cash, check payable to the order of the Company, or electronic funds transfer;
   
notice and third party payment in such manner as may be authorized by the Administrator;
   
the delivery of previously owned shares of Common Stock that are fully vested and unencumbered;
   
by a reduction in the number of shares otherwise deliverable pursuant to the award; or
   
subject to such procedures as the Administrator may adopt, pursuant to a “cashless exercise” with a third party who provides financing for the purposes of (or who otherwise facilitates) the purchase or exercise of awards.

 

In the event that the Administrator allows a participant to exercise an award by delivering shares of Common Stock previously owned by such participant and unless otherwise expressly provided by the Administrator, any shares delivered which were initially acquired by the participant from the Company (upon exercise of a stock option or otherwise) must have been owned by the participant at least six months as of the date of delivery (or such other period as may be required by the Administrator in order to avoid adverse accounting treatment). Shares of Common Stock used to satisfy the exercise price of an option shall be valued at their fair market value on the date of exercise. The Company will not be obligated to deliver any shares unless and until it receives full payment of the exercise or purchase price therefor and any related withholding obligations and any other conditions to exercise or purchase, as established from time to time by the Administrator, have been satisfied. Unless otherwise expressly provided in the applicable award agreement, the Administrator may at any time eliminate or limit a participant’s ability to pay the purchase or exercise price of any award or shares by any method other than cash payment to the Company.

 

Change in Control

 

Upon a Change in Control (as defined below), each then-outstanding option and SAR shall automatically become fully vested, all restricted shares then outstanding shall automatically fully vest free of restrictions, and each other award granted under the 2017 Plan that is then outstanding shall automatically become vested and payable to the holder of such award unless the Administrator has made appropriate provision for the substitution, assumption, exchange or other continuation of the award pursuant to the Change in Control. Notwithstanding the foregoing, the Administrator, in its sole and absolute discretion, may choose (in an award agreement or otherwise) to provide for full or partial accelerated vesting of any award upon a Change in Control (or upon any other event or other circumstance related to the Change in Control, such as an involuntary termination of employment occurring after such Change in Control, as the Administrator may determine), irrespective of whether such any such award has been substituted, assumed, exchanged or otherwise continued pursuant to the Change in Control.

 

For purposes of the 2017 Plan, “Change in Control” shall be deemed to have occurred if:

 

(i) a tender offer (or series of related offers) shall be made and consummated for the ownership of 50% or more of the outstanding voting securities of the Company, unless as a result of such tender offer more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to the commencement of such offer), any employee benefit plan of the Company or its subsidiaries, and their affiliates;

 

(ii) the Company shall be merged or consolidated with another entity, unless as a result of such merger or consolidation more than 50% of the outstanding voting securities of the surviving or resulting entity shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its subsidiaries, and their affiliates;

 

(iii) the Company shall sell substantially all of its assets to another entity that is not wholly owned by the Company, unless as a result of such sale more than 50% of such assets shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries and their affiliates; or

 

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(iv) a person shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), unless as a result of such acquisition more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to the first acquisition of such securities by such person), any employee benefit plan of the Company or its subsidiaries, and their affiliates.

 

Notwithstanding the foregoing, (1) the Administrator may waive the requirement described in paragraph (iv) above that a person must acquire more than 50% of the outstanding voting securities of the Company for a Change in Control to have occurred if the Administrator determines that the percentage acquired by a person is significant (as determined by the Administrator in its discretion) and that waiving such condition is appropriate in light of all facts and circumstances, and (2) no compensation that has been deferred for purposes of Section 409A of the Code shall be payable as a result of a Change in Control unless the Change in Control qualifies as a change in ownership or effective control of the Company within the meaning of Section 409A of the Code.

 

The “spread” under an ISO—i.e., the difference between the fair market value of the shares at exercise and the exercise price—is classified as an item of adjustment in the year of exercise for purposes of the alternative minimum tax. If a participant’s alternative minimum tax liability exceeds such participant’s regular income tax liability, the participant will owe the alternative minimum tax liability.

 

Restricted Stock. Restricted stock is generally taxable to the participant as ordinary compensation income on the date that the restrictions lapse (i.e. the date that the stock vests), in an amount equal to the excess of the fair market value of the shares on such date over the amount paid for such stock (if any). If the participant is an employee, this income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the ordinary income recognized by the participant, subject to possible limitations imposed by the Code, including Section 162(m) thereof. Any gain or loss on the participant’s subsequent disposition of the shares will be treated as long-term or short-term capital gain or loss treatment depending on the sales price and how long the stock has been held since the restrictions lapsed. The Company does not receive a tax deduction for any subsequent gain.

 

Participants receiving restricted stock awards may make an election under Section 83(b) of the Code (“Section 83(b) Election”) to recognize as ordinary compensation income in the year that such restricted stock is granted, the amount equal to the excess of the fair market value on the date of the issuance of the stock over the amount paid for such stock. If such an election is made, the recipient recognizes no further amounts of compensation income upon the lapse of any restrictions and any gain or loss on subsequent disposition will be long-term or short-term capital gain or loss to the recipient. The Section 83(b) Election must be made within 30 days from the time the restricted stock is issued.

 

Other Awards. Other awards (such as restricted stock units) are generally treated as ordinary compensation income as and when Common Stock or cash are paid to the participant upon vesting or settlement of such awards. If the participant is an employee, this income is subject to withholding for income and employment tax purposes. The Company is generally entitled to an income tax deduction equal to the amount of ordinary income recognized by the recipient, subject to possible limitations imposed by the Code, including Section 162(m) thereof.

 

Section 162(m) of the Internal Revenue Code. Under Code Section 162(m), no deduction is allowed in any taxable year of the Company for compensation in excess of $1 million paid to the Company’s “covered employees.” A “covered employee” is the Company’s chief executive officer and the three other most highly compensated officers of the Company other than the chief financial officer. An exception to this rule applies to “qualified performance based compensation,” which generally includes stock options and stock appreciation rights granted under a stockholder approved plan, and other forms of equity incentives, the vesting or payment of which is contingent upon the satisfaction of certain stockholder approved performance goals. The Company intends that the 2016 Plan allow for the grant of options and stock appreciation rights that may be treated as “qualified performance based compensation” that is exempt from the limitations of Code Section 162(m), and for the grant of other performance-based awards that may be treated as “qualified performance based compensation,” but it makes no assurance that either such type of award will be so treated.

 

 20 
 

 

Certain Federal Tax Consequences

 

The following summary of the federal income tax consequences of the 2017 Plan transactions is based upon federal income tax laws in effect on the date of this Proxy Statement. This summary does not purport to be complete, and does not discuss state, local or non-U.S. tax consequences.

 

Nonqualified Stock Options. The grant of a nonqualified stock option under the 2017 Plan will not result in any federal income tax consequences to the participant or to the Company. Upon exercise of a nonqualified stock option, the participant will recognize ordinary compensation income equal to the excess of the fair market value of the shares of Common Stock at the time of exercise over the option exercise price. If the participant is an employee, this income is subject to withholding for federal income and employment tax purposes. The Company is entitled to an income tax deduction in the amount of the income recognized by the participant, subject to possible limitations imposed by the Code, including Section 162(m) thereof. Any gain or loss on the participant’s subsequent disposition of the shares will be treated as long-term or short-term capital gain or loss, depending on the sales proceeds received and whether the shares are held for more than one year following exercise. The Company does not receive a tax deduction for any subsequent capital gain.

 

Incentive Options. The grant of an ISO under the 2017 Plan will not result in any federal income tax consequences to the participant or to the Company. A participant recognizes no federal taxable income upon exercising an ISO (subject to the alternative minimum tax rules discussed below), and the Company receives no deduction at the time of exercise. In the event of a disposition of stock acquired upon exercise of an ISO, the tax consequences depend upon how long the participant has held the shares. If the participant does not dispose of the shares within two years after the ISO was granted, nor within one year after the ISO was exercised, the participant will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price. The Company is not entitled to any deduction under these circumstances.

 

If the participant fails to satisfy either of the foregoing holding periods (referred to as a “disqualifying disposition”), he or she will recognize ordinary compensation income in the year of the disposition. The amount of ordinary compensation income generally is the lesser of (i) the difference between the amount realized on the disposition and the exercise price or (ii) the difference between the fair market value of the stock at the time of exercise and the exercise price. Such amount is not subject to withholding for federal income and employment tax purposes, even if the participant is an employee of the Company. Any gain in excess of the amount taxed as ordinary income will generally be treated as a short-term capital gain. The Company, in the year of the disqualifying disposition, is entitled to a deduction equal to the amount of ordinary compensation income recognized by the participant, subject to possible limitations imposed by the Code, including Section 162(m) thereof.

 

New Plan Benefits

 

SEC rules require us to disclose any amounts that we currently are able to determine will be allocated to our named executive officers, directors and other employees following approval of the 2017 Plan. Set forth below is information on option grants under the 2017 Plan to the named executive officers, all current executive officers as a group, all current directors who are not executive officers as a group, and all employees who are not executive officers as a group. Awards granted under the 2017 Plan will not vest prior to shareholder approval of the 2017 Plan.

 

Name and Position   Number of
Options
 
Denver Lough
Chief Executive Officer, Chief Scientific Officer and Chairman
    1,000,000  
Edward Swanson
Chief Operating Officer and director
    846,000  
Michael Neumeister
Chief Medical Officer
    141,000  
Jeff Dyer
Consultant
    141,000  
Matthew Swanson     141,000  
Stephen Milner     50,000  
Anthony Blum
Laboratory Manager
    10,000  
Nicholas Baetz     50,000  
Devin Miller
Director of Translational Medicine and Regulatory Strategy
    75,000  
Christine Hashimoto     10,000  
Mary Dyer Lough
Clinical Research Coordinator
    10,000  

Steve Gorlin

Director

   50,000 

Jon Mogford

Director

    50,000  

 

Name and Position  Number of
Restricted Stock Awards
 
Barry Honig
Former Chief Executive Officer and Chairman
   125,000 
John Stetson
Chief Financial Officer and Director
   175,000 
Michael Brauser
Former Director
   75,000 
Michael Beeghley
Director
   15,000 
Andrew Kaplan
Former Director
   15,000 
Edward Karr
Former Director
   15,000 
Mohit Bhansali
Director
   15,000 
David Rector
Former Director
   15,000 

Steve Gorlin

Director

   50,000 

Jon Mogford

Director

    50,000  

 

 21 
 

 

No Appraisal Rights

 

Under the Delaware General Corporation Law, our stockholders are not entitled to appraisal rights with respect to the approval of the 2017 Plan, and we will not independently provide our stockholders with any such rights.

 

Vote Required

 

The affirmative vote of a majority of the votes cast for this proposal is required to approve the 2017 Plan and the reservation of 3,450,000 shares of Common Stock reserved for issuance thereunder. Abstentions and broker non-votes will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ un-voted Shares held by the firms in street name on this proposal.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE 2017 EQUITY INCENTIVE PLAN AND THE RESERVATION OF 3,450,000 SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The following table provides certain information with respect to all of the Company’s equity compensation plans in effect as of October 31, 2016.

 

   (a)   (b)   (c) 
Plan Category  Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
   Weighted-
average
Exercise
Price of
Outstanding
Options,
Warrants and Rights
   Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a)
 
Equity compensation plans approved by security holders   

390,525

(1)  $6.02    0 
Equity compensation plans not approved by security holders   0    0    0 
Total   390,525 (1)  $6.02    0 

 

  (1) 18,947 securities are pursuant to the 2004 Plan, 11,490 securities are pursuant to the 2014 Plan, 30,924 securities are issued pursuant to the 2015 Plan and 329,164 securities are issued pursuant to the 2016 Plan.

 

 22 
 

 

EXECUTIVE COMPENSATION

 

The following Summary Compensation Table sets forth summary information as to compensation paid or accrued during the last two fiscal years ended October 31, 2016 and October 31, 2015. During the last two fiscal years ended October 31, 2016 and October 31, 2015, none of our other executive officers earned compensation in excess of $100,000.

 

Name and Principal Position  Year   Salary ($)   Bonus ($)   Stock Awards (1) ($)   Option Awards (2) ($)   Non-Equity Incentive Plan Compensation (3) ($)   All Other Compensation (4) ($)   Total ($) 
Barry Honig,   2016    55,385    -0-    451,500(11)   293,125(19)   -0-    -0-    800,010 
Former Chief Executive Officer and Co-Chairman of the Board (5)   2015    8,308    -0-    496,000 (12)   -0-    -0-    -0-    504,308 
                                         
John Stetson   2016    151,385    -0-    451,500 (11)   293,125 (19)   -0-    -0-    896,010 
Chief Financial Officer (6)   2015    8,308    -0-    372,000 (13)   14,684(20)   -0-    -0-    394,992 
                                         
David Rector   2016    -0-    -0-    42,998 (14)   32,782 (20)   -0-    -0-    75,780 
Former Chief Executive Officer (7)   2015    6,708    -0-    116,000 (15)   6,273(21)   -0-    -0-    128,981 
                                         
Jesse Sutton   2016    -0-    -0-    -0-         -0-    -0-    -0- 
Former Chief Executive Officer (8)   2015    273,646    -0-    15,841 (16)   30,546(22)   -0-    513,859 (24)   833,892 
                                         
Michael Vessey   2016    -0-    -0-    -0-    -0-    -0-    -0-    -0- 
Former Chief Financial Officer (9)   2015    140,770    -0-    46,560 (17)   14,684(23)   -0-    305,900 (25)   507,914 
                                         
Gary Anthony   2016    -0-    -0-    -0-         -0-    -0-    -0- 
Former Chief Financial Officer (10)   2015    89,200    30,000    28,000 (18)        -0-    -0-    147,200 

 

(1) Represents the aggregate grant date fair value for restricted stock awards granted during fiscal years 2015 and 2016, respectively, computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2016 for details as to the assumptions used to determine the grant date fair value of the restricted stock awards.

 

(2) Represents the aggregate grant date fair value for option awards granted during fiscal years 2015 and 2016, respectively, computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for our fiscal year ended October 31, 2016 for details as to the assumptions used to determine the grant date fair value of the option awards.

 

(3) Represents amounts paid to named executive officers in the applicable year pursuant to the Company’s STI Plan.

 

(4) Represents health and dental insurance premiums in excess of coverage provided to other employees.

 

(5) Appointed on September 25, 2015. Resigned as Chief Executive Officer and Chairman on December 1, 2016.

 

(6) Appointed on September 25, 2015.

 

(7) Served as Chief Executive Officer from July 27, 2015 until September 25, 2015.

 

(8) Resigned on July 27, 2015.

 

(9) Resigned on March 17, 2015.

 

(10) Served as Chief Accounting Officer from April 1, 2015 to September 25, 2015, prior to this beginning May 2011, he served as the Company’s Corporate Controller.

 

(11) Represents 87,500 shares at a grant date fair value of $5.16 per common share.

 

 23 
 

 

(12) Represents 66,666 shares at a grant date fair value of $7.44 per common share.

 

(13) Represents 50,000 shares at a grant date fair value of $7.44 per common share.

 

(14) Represents 8,333 shares at a grant date fair value of $5.16 per common share.

 

(15) Represents 16,667 shares at a grant date fair value of $6.96 per common share.

 

(16) Represents 3,882 shares at a grant date fair date value of $4.08 per common share.

 

(17) Represents 2,588 shares at a grant date fair value of $4.08 per common share and 5,000 shares at a grant date fair value of $7.20 per common share.

 

(18) Represents 3,333 shares at a grant date fair value of $8.04 per common share.

 

(19) Represents stock options to purchase 87,500 common shares at an exercise price of $4.80 per common share.

 

(20) Represents stock options to purchase 8,333 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(21) Represents stock options to purchase 1,166 common shares at an exercise price of $8.58 per common share.

 

(22) Represents stock options to purchase 11,958 shares of common stock at an exercise price of $4.08 per common share.

 

(23) Represents stock options to purchase 5,745 common shares at an exercise price of $4.08 per common share.

 

(24) Represents $13,859 paid for health and dental insurance premiums in excess of coverage provided to other employees as well as $500,000 paid in severance payments paid to Zift Interactive, LLC.

 

(25) Represents $5,900 paid for health and dental insurance premiums in excess of coverage provided to other employees and $300,000 in severance payments.

 

Narrative Disclosure to Summary Compensation Table

 

Incentive Bonus Opportunity

 

The Compensation Committee has the authority to award incentive bonuses to our executives. The incentive bonus program is based on the Company’s fiscal year performance.

 

The incentive bonus program is an important component of total cash compensation because it rewards our executives for achieving annual financial and operational goals and emphasizes variable or “at risk” compensation.

 

On April 19, 2013, the Compensation Committee approved the adoption of a new annual short-term incentive plan for fiscal year 2013 and subsequent years (the “STI Plan”). In 2013, under the STI Plan, each of the named executive officers was eligible to receive an incentive bonus based upon a targeted percentage of his base salary, which was 100% for the Chief Executive Officer and 50% for the Chief Financial Officer. The incentives could be earned based on our performance relative to a mix of strategic objectives, such as (i) growing cash flow from our console business, (ii) expanding our digital games business, measured in terms of revenue, infrastructure and talent acquisitions, business acquisitions, and product pipeline, and (iii) managing to adjusted operating income, cash flow and liquidity goals, eliminating operating losses on certain platforms, and repositioning the Company to invest in growth areas. In addition, in determining the eligibility for bonuses under the plan, the payout level for the strategic objectives was based on the Committee’s discretionary assessment of each officer’s performance relative to the overall mix of objectives. Based on its review of overall performance, the Compensation Committee approved an incentive payout of $150,000 for the Chief Executive Officer and $84,000 for the Chief Financial Officer.

 

No incentive plan was offered for fiscal year 2016.

 

 24 
 

 

Long-Term Incentives

 

We believe that long-term performance will be enhanced through equity awards that reward our executives and other employees for maximizing stockholder value over time and that align the interests of our executives and other employees with those of stockholders. The Compensation Committee believes that the use of equity awards offers the best approach to achieving our compensation goals because equity ownership ties a significant portion of an individual’s compensation to the performance of our stock.

 

On March 30, 2015, at our 2015 annual meeting, our stockholders approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”) and the reservation of 2,250,000 shares of our Common Stock thereunder. On May 10, 2016, at our 2016 annual meeting, our stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan” and together with the 2014 Plan, the “Plans”) and the reservation of 4,000,000 shares of our Common Stock thereunder. Awards under the Plans may be granted pursuant to the Plans only to persons who are eligible persons. Under the Plans, “Eligible Person” means any person who is either: (a) an officer (whether or not a director) or employee of the Company or one of its subsidiaries; (b) a director of the Company or one of its subsidiaries; or (c) an individual consultant who renders bona fide services (other than services in connection with the offering or sale of securities of the Company or one of its subsidiaries in a capital-raising transaction or as a market maker or promoter of securities of the Company or one of its subsidiaries) to the Company or one of its subsidiaries and who is selected to participate in the Plans by the Plan administrator; provided, however, that an Eligible Person may only participate in the Plans if such participation would not adversely affect either the Company’s eligibility to use Form S-8 to register, under the Securities Act, the offering and sale of shares issuable under the Plans by the Company or the Company’s compliance with any other applicable laws.

 

On December 17, 2014, the Company granted restricted stock shares to certain of its executive officers and directors in consideration for their respective roles in the Company. These restricted stock awards, were granted under the Company’s Amended and Restated 2004 Employee, Director and Consultant Incentive plan and were subject to a trigger event that occurred on September 30, 2015, which vested the shares in full.

 

The shares granted to our officers and directors under these stock awards are as follows:

 

Name  Shares 
Jesse Sutton   3,883 
Michael Vesey   2,589 
Laurence Aronson   3,883 
Stephen Wilson   2,589 
Trent Davis   1,079 
Mohit Bhansali   1,079 
Adam Sultan   2,157 

 

On December 17, 2014, the Company granted options to purchase Common Stock to certain of its executive officers and directors in consideration for their respective roles in the Company. The stock options were granted with an exercise price of $4.08 per share and would fully vest upon a trigger event, which occurred on September 30, 2015, and are exercisable until December 17, 2019. They were granted under the 2014 Plan.

 

The shares granted to our officers and directors under these stock awards are as follows:

 

Name  Option Award 
Jesse Sutton   11,951 
Michael Vesey   5,745 
Laurence Aronson   11,951 
Stephen Wilson   10,745 
Trent Davis   9,339 
Mohit Bhansali   9,339 
Adam Sultan   2,010 

 

 25 
 

 

On April 23, 2015, Laurence Aronson, Mohit Bhansali and Trent Davis were each granted options to purchase 1,191 shares of Common Stock with an exercise price of $8.40 per share. These awards were granted pursuant to the 2014 Plan. The options fully vested on October 23, 2015, and they are exercisable until April 23, 2020.

 

On June 27, 2015, David Rector was granted 16,667 restricted stock units. The vesting on this grant was accelerated on January 12, 2016. These awards were granted under the 2014 Plan.

 

On July 27, 2015, David Rector was granted options to purchase 1,166 shares of Common Stock with an exercise price of $8.58 per share. These awards were granted under the 2014 Plan.

 

On September 30, 2015, we entered into Restricted Stock Agreements with certain of our executive officers and directors. The stock awards provide for grants of Common Stock to our officers and directors under the 2014 Plan. The stock awards all vested on December 1, 2016.

 

The shares of Common Stock granted to our officers and directors under these stock awards are as follows:

 

Name  Shares 
Barry Honig   66,666 
John Stetson   50,000 
Michael Brauser   66,666 
Mohit Bhansali   4,166 
Edward Karr   8,333 
Andrew Kaplan   8,333 

 

On December 18, 2015, we entered into Restricted Stock Agreements with certain of our executive officers and directors. The stock awards provide for grants of common stock to our officers and directors under the 2014 Plan. The stock awards all vested on December 1, 2016.

 

The shares of Common Stock granted to our officers and directors under these stock awards are as follows:

 

Name  Shares 
Michael Beeghley   8,333 

 

Additionally, on December 18, 2015, Michael Brauser, Andrew Kaplan, Edward Karr, and Michael Beeghley were granted option to purchase 1,587 stock shares of Common Stock with an exercise price of $6.30 per share. These options fully vested six months from the grant date.

 

On June 1, 2016, Michael Brauser, Michael Beeghley, Andrew Kaplan, Edward Karr, Mohit Bhansali and David Rector were granted options to purchase 1,915 shares of Common Stock at an exercise price of $5.22 per share which options vested in full six months from the date of grant.

 

On December 7, 2016, the Company granted options with an exercise price of $3.12 per share to the individuals listed below pursuant to the 2017 Plan. The 2017 Plan and options are subject to stockholder approval.

 

Name and Position  Number of
Options
 
Denver Lough
Chief Executive Officer, Chief Scientific Officer and Chairman
   1,000,000 
Edward Swanson
Chief Operating Officer and director
   846,000 
Michael Neumeister
Chief Medical Officer
   141,000 
Jeff Dyer
Consultant
   141,000 
Matthew Swanson   141,000 
Stephen Milner   50,000 
Anthony Blum
Laboratory Manager
   10,000 
Nicholas Baetz   50,000 
Devin Miller
Director of Translational Medicine and Regulatory Strategy
   75,000 
Christine Hashimoto   10,000 
Mary Dyer Lough
Clinical Research Coordinator
   10,000 

Steve Gorlin

Director

    50,000  

Jon Mogford

Director

    50,000  

 

Name and Position  Number of
Restricted Stock Awards
 
Barry Honig
Former Chief Executive Officer and Chairman
   125,000 
John Stetson
Chief Financial Officer and Director
   175,000 
Michael Brauser
Former Director
   75,000 
Michael Beeghley
Director
   15,000 
Andrew Kaplan
Former Director
   15,000 
Edward Karr
Former Director
   15,000 
Mohit Bhansali
Director
   15,000 
David Rector
Former Director
   15,000 

Steve Gorlin

Director

   50,000 

Jon Mogford

Director

   50,000 

 

 

 26 
 

 

Employment and Separation Agreements

 

During 2015 and 2016, we had employment agreements with each of the named executive officers.

 

Denver Lough’s Employment Agreement

 

On December 1, 2016, the Company entered into an employment agreement with Dr. Denver Lough (the “Lough Employment Agreement”). Pursuant to the terms of the Lough Employment Agreement, Dr. Lough will serve as Chairman of the Board and as Chief Executive Officer and Chief Scientific Officer of the Company for a term of one year which shall be automatically renewed for successive one year periods thereafter unless earlier terminated. Pursuant to the Lough Employment Agreement, the Company shall pay Dr. Lough (i) a one-time signing bonus of $100,000, (ii) an annual base salary of $350,000, (iii) an annual discretionary bonus, as determined by the Board, in an amount up to 100% of Dr. Lough’s then current base salary and (iv) 10 year options (the “Lough Options”) to purchase up to 1,000,000 shares of the Company’s Common Stock at an exercise price of $3.15 per share (equal to 100% of the market price as defined by NASDAQ (“Fair Market Value”)) which Options shall vest in 24 equal installments commencing on the one month anniversary of the Lough Employment Agreement. The Lough Options were granted pursuant to the 2017 Plan and the exercise of the Lough Options and the 2017 Plan are subject to stockholder approval.

 

Edward Swanson’s Employment Agreement

 

On December 1, 2016, the Company entered into an employment agreement with Edward Swanson (the “Swanson Employment Agreement”). Pursuant to the terms of the Swanson Employment Agreement, Dr. Swanson will serve as Chief Operating Officer of the Company for a term of one year which shall be automatically renewed for successive one year periods thereafter unless earlier terminated. Pursuant to the Swanson Agreement, the Company shall pay Dr. Swanson (i) a one-time signing bonus of $100,000, (ii) an annual base salary of $300,000, (iii) an annual discretionary bonus, as determined by the Board, in an amount up to 100% of Dr. Swanson’s then current base salary and (iv) 10 year options (the “Swanson Options”) to purchase up to 846,000 shares of the Company’s Common Stock pursuant to the 2017 Plan at Fair Market Value which Swanson Options shall vest in 24 equal installments commencing on the one month anniversary of the Swanson Employment Agreement and are subject to stockholder approval.

 

Jesse Sutton’s Employment Agreement and Separation Agreement

 

Mr. Sutton’s employment agreement provided for an annual base salary of $363,000 and a discretionary bonus of up to 100% of his base salary. On July 27, 2015, Mr. Sutton resigned from his position as Chief Executive Officer of the Company and the Company entered into a separation agreement with Mr. Sutton (the “Sutton Separation Agreement”). Pursuant to the terms of the Sutton Separation Agreement, for a period of 24 months following Mr. Sutton’s resignation, Mr. Sutton will provide consulting and support services (the “Services”) to the Company’s Download Business (as defined in the Separation Agreement). In addition, Mr. Sutton is expected to receive a severance payment, which will include 50% of the Net Monthly Revenues (as defined in the Sutton Separation Agreement) generated by the Company from the Download Business (as defined in the Sutton Separation Agreement), but in no event more than $10,000 per month; provided that Mr. Sutton is still providing the Services. In addition, the Company continued its contributions towards Mr. Sutton’s health care benefits until the earlier of (i) 12 months following Mr. Sutton’s resignation or (ii) until Mr. Sutton becomes covered by an equivalent benefit. Lastly, Mr. Sutton shall has 18 months from his date of resignation to exercise any previously issued stock options, except that the original expiration date of any such options shall not be extended.

 

 27 
 

 

Michael Vesey’s Employment Agreement and Separation Agreement

 

Mr. Vesey’s employment agreement provided for an annual base salary of $300,000 and an annual cash bonus to be determined in the sole discretion of the Company. On February 17, 2015, Mr. Vesey entered into a separation agreement (the “Vesey Separation Agreement”) with the Company pursuant to which Mr. Vesey resigned as the Company’s Chief Financial Officer effective March 17, 2015. Pursuant to the Vesey Separation Agreement, Mr. Vesey provided general business and consulting services to the Company to assist in transitional needs and activities of the Company for a period of six months following his resignation. In addition, upon his resignation and in addition to the other benefits as outlined his employment agreement, Mr. Vesey received a lump sum payment of $200,000 and an additional payment of $100,000 thereafter payable in six equal monthly installments. Moreover, the Company agreed to vest all of Mr. Vesey’s previously unvested securities, other than securities granted pursuant to the Company’s 2014 Plan and, in consideration for Mr. Vesey’s consulting services, the Company granted Mr. Vesey 5,000 shares of restricted Common Stock under the 2014 Plan.

 

Barry Honig’s Employment Agreement

 

Mr. Honig’s employment agreement provides for an annual base salary of $120,000 and a discretionary bonus to be determined by the Compensation Committee. Pursuant to the terms of the employment agreement, Mr. Honig would be entitled to certain payments and benefits if the Company terminated the executive’s employment without “cause” or the executive terminated his employment for “good reason”. Benefits are also provided if the executive is terminated in connection with a change in control. The benefit levels under the employment agreement generally include continued payment of base salary, a bonus for the year of termination, accelerated vesting of equity awards and continued welfare benefits, and are described in more detail under the “Potential Payments Upon Termination or Change-In-Control” below. Mr. Honig resigned as Chief Executive Officer on December 1, 2016.

 

John Stetson’s Employment Agreement

 

Mr. Stetson’s employment agreement provides for an annual base salary of $120,000 and a discretionary bonus to be determined by the Compensation Committee. Pursuant to the terms of the employment agreement, Mr. Stetson would be entitled to certain payments and benefits if the Company terminated the executive’s employment without “cause” or the executive terminated his employment for “good reason”. Benefits are also provided if the executive is terminated in connection with a change in control. The benefit levels under the employment agreements generally include continued payment of base salary, a bonus for the year of termination, accelerated vesting of equity awards and continued welfare benefits, and are described in more detail under the “Potential Payments Upon Termination or Change-In-Control” below.

 

Potential Payments Upon Termination or Change-In-Control

 

We have entered into agreements that require us to make payments and/or provide benefits to certain of our executive officers in the event of a termination of employment or a change of control. The following summarizes the potential payments to each named executive officer for which we have entered into such an agreement assuming that one of the events identified below occurs.

 

Dr. Denver Lough, Chief Executive Officer and Chief Scientific Officer

 

If Dr. Lough terminates the Lough Employment Agreement for Good Reason (as defined in the Lough Employment Agreement) or a Change of Control (as defined in the Lough Employment Agreement) or the Company terminates the Lough Employment Agreement without Cause (as defined in the Lough Employment Agreement), then Dr. Lough shall be entitled to receive (i) the sum of his then base salary from the date of termination, (ii) reasonable expenses incurred by Dr. Lough in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and (v) all Share Awards (as defined in the Lough Employment Agreement) earned and vested prior to the date of termination. In addition, Dr. Lough shall have the right to Participation Payments (as defined in the Lough Employment Agreement) from commercial transactions associated with the Patents (as defined in the Lough Employment Agreement) and intellectual property rights associated with such Patents. If the Company terminates the Lough Employment Agreement for Cause, the Company will have no further obligations or liability to Dr. Lough except for the obligation to (i) pay Dr. Lough his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Lough Employment Agreement, (iii) reasonable expenses incurred by Dr. Lough in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.

 

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Dr. Swanson, Chief Operating Officer

 

If Dr. Swanson terminates the Swanson Employment Agreement for Good Reason (as defined in the Swanson Employment Agreement) or a Change of Control (as defined in the Swanson Employment Agreement) or the Company terminates the Swanson Employment Agreement without Cause(as defined in the Swanson Employment Agreement), then Dr. Swanson shall be entitled to receive (i) the sum of his then base salary from the date of termination, (ii) reasonable expenses incurred by Dr. Swanson in connection with the performance of his duties, (iii) accrued but unused vacation time through the date of termination, (iv) the sum of this then annual bonus and (v) all Share Awards (as defined in the Swanson Employment Agreement) earned and vested prior to the date of termination. If the Company terminates the Swanson Employment Agreement for Cause, the Company will have no further obligations or liability to Dr. Swanson except for the obligation to (i) pay Dr. Swanson his then annual salary through the date of termination, (ii) unpaid annual bonus pursuant to the terms of the Swanson Employment Agreement, (iii) reasonable expenses incurred by Dr. Swanson in connection with the performance of his duties and (v) accrued but unused vacation time through the date of termination.

 

Mr. John Stetson, Chief Financial Officer

 

Pursuant to his employment agreement, if the Company terminates Mr. Stetson’s employment without “cause” (as such term is defined Mr. Steton’s employment agreement) or Mr. Stetson resigns for “good reason” or following a “Change of Control” (as such terms are defined in Mr. Stetson’s employment agreement), he will receive severance benefits from the Company, including a cash amount equal to 100% of Mr. Stetson’s base salary, annual bonus and share awards during the preceding year.

 

Mr. Barry Honig, Former Chief Executive Officer

 

Pursuant to his employment agreement, if the Company terminates Mr. Honig’s employment without “cause” (as such term is defined in Mr. Honig’s employment agreement) or Mr. Honig resigns for “good reason” or following a “Change of Control” (as such terms are defined in Mr. Honig’s employment agreement), he will receive severance benefits from the Company, including a cash amount equal to 100% of Mr. Honig’s base salary, annual bonus and share awards during the preceding year. Mr. Honig resigned as Chief Executive Officer on December 1, 2016.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows grants of stock options and grants of unvested stock awards outstanding on the last day of the fiscal year ended October 31, 2016, to each of the then executive officers and directors named in the Summary Compensation Table.

 

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           Option Awards   Stock Awards     
Name  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
   Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
   Option
Exercise
Price ($)
   Option
Expiration
Date
   Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(1)
 
Michael Brauser   1,587 (2)      $6.30    December 18, 2020    66,666(6)  $238,664 
    43,750 (3)   43,750 (3)  $4.80    April 24, 2026    43,750 (7)  $156,625 
        1,916 (4)  $5.22    June 1, 2021       $ 
Barry Honig   43,750 (3)   43,750 (3)  $4.80    April 24, 2026    66,666(6)  $238,664 
                    43,750(7)  $156,625 
John Stetson   43,750 (3)   43,750(3)  $4.80    April 24, 2026    50,000(6)  $179,000 
                    43,750(7)  $156,625 
David Rector   1,166 (5)      $8.58    July 27, 2020    4,167(7)  $14,918 
    4,167 (3)    4,166 (3)  $4.80    April 24, 2026       $ 
         1,916 (4)  $5.22    June 1, 2021       $ 
Michael Beeghley   1,587 (5)      $6.30    December 18, 2020    8,333(6)  $29,832 
    2,604 (3)    2,604 (3)  $4.80    April 24, 2026    2,604(7)  $9,322 
        1,916 (4)  $5.22    June 1, 2021       $ 
Andrew Kaplan   1,587 (5)      $6.30    December 18, 2020    8,333 (6)  $29,832 
    3,646 (3)   3,646 (3)  $4.80     April 24, 2026    3,646(7)  $13,053 
        1,916 (4)  $5.22     June 1, 2021       $ 
Mohit Bhansali   12,500 (3)   12,500 (3)  $4.80     April 24, 2026     4,166 (6)  $14,914 
        1,916 (4)  $5.22     June 1, 2021     12,500 (7)  $44,750 
Edward Karr   1,587 (2)      $6.30     December 18, 2020     8,333 (6)  $29,832 
    8,334 (3)   8,333 (3)  $4.80     April 24, 2026     8,334(7)  $29,836 
        1,916 (4)  $5.22     June 1, 2021       $ 

 

(1) Market value based on closing stock price of $1.22 on October 31, 2016.
   
(2) Option was exercisable 6 months following the grant date of December 18, 2015.
   
(3) Option was 50% exercisable on May 10, 2016 and 50% exercisable upon the occurrence of a performance condition.

 

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(4) Option was exercisable on November 30, 2016.
   
(5) Option was exercisable on January 27, 2016.
   
(6) Vests at the end of each calendar month, at a rate of 1/24 of such shares per month.
   
(7) Stock grant was 50% vested on May 10, 2016 and amount represents the 50% vested upon the occurrence of a performance condition.

 

Director Compensation

 

The following table shows the total compensation paid or accrued during the fiscal year ended October 31, 2016 to each of our directors, current and former.

 

Name  Fees
Earned
or Paid in
Cash
($)
   Stock
Awards
($) (1)
    Option
Awards
($) (2)
    All
Other
Compensation
($)
   Total
($)
 
Barry Honig (16)  $-   $ 451,500(3)   $ 293,125(9)   $-   $744,625 
Michael Brauser (17)  $6,200   $ 451,500 (3)   $ 297,992(10)   $-   $755,692 
Mohit Bhansali  $900   $ 129,000(4)   $ 172,367(11)   $-   $302,267 
Edward Karr (18)  $6,500   $ 86,002(5)   $ 60,701(12)   $-   $153,203 
Andrew Kaplan (19)  $6,500   $ 37,627(6)   $ 29,295(13)   $-   $73,422 
Michael Beeghley  $6,500   $ 26,873(7)   $ 22,313(14)   $-   $55,686 
David Rector (20)  $900   $ 42,998(9)   $ 32,782(15)   $-   $76,680 

 

(1) Represents the aggregate grant date fair value for stock awards granted by us in fiscal year 2016 computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for fiscal year ended October 31, 2016 for details as to the assumptions used to determine the fair value of the stock awards.

 

(2) Represents the aggregate grant date fair value for options granted by us in fiscal year 2016 computed in accordance with FASB ASC Topic 718. See Note 9 to our consolidated financial statements reported in our Annual Report on Form 10-K for fiscal year ended October 31, 2016 for details as to the assumptions used to determine the fair value of the option awards.

 

(3) Represents 87,500 shares at a grant date fair value of $5.16 per common share.

 

(4) Represents 25,000 shares at a grant date fair value of $5.16 per common share.

 

(5) Represents 16,667 shares at a grant date fair value of $5.16 per common share.

 

(6) Represents 7,292 shares at a grant date fair value of $5.16 per common share.

 

(7) Represents 5,208 shares at a grant date fair value of $5.16 per common share.

 

(8) Represents 8,333 shares at a grant date fair value of $5.16 per common share.

 

(9) Represents stock options to purchase 87,500 common shares at an exercise price of $4.80 per common share.

 

(10) Represents stock options to purchase 87,500 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

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(11) Represents stock options to purchase 50,000 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(12) Represents stock options to purchase 16,667 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(13) Represents stock options to purchase 7,292 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(14) Represents stock options to purchase 5,208 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(15) Represents stock options to purchase 8,333 common shares at an exercise price of $4.80 per common share and to purchase 1,916 common shares at an exercise price of $5.22 per common share.

 

(16) Resigned as Co-Chairman on December 1, 2016 but remained a director of the Company until February 8, 2017.

 

(17) Resigned as Co-Chairman on December 1, 2016 but remained a director of the Company until February 8, 2017.

 

(18) Resigned on December 1, 2016.

 

(19) Resigned on December 1, 2016.

 

(20) Resigned on December 1, 2016.

 

Name  Number of
Stock Options
Held at Fiscal
Year-End
   Number of
Shares of
Restricted
Stock Held
at Fiscal
Year-End
 
Michael Brauser (7)   1,587 (1)   66,666 (5)
    87,500 (2)   43,750 (6)
    1,916 (3)     
Barry Honig (8)   87,500 (2)   66,666 (5)
         43,750 (6)
John Stetson (9)   87,500 (2)   50,000 (5)
         43,750 (6)
David Rector (10)   1,166 (4)   4,167 (6)
    8,333 (2)     
    1,916 (3)     
Michael Beeghley   1,587 (1)   8,333 (5)
    5,208 (2)   2,604 (6)
    1,916 (3)     
Andrew Kaplan (11)   1,587 (1)  8,333 (5)
    7,292 (2)   3,646 (6)
    1,916 (3)     
Mohit Bhansali   25,000 (2)   4,166 (5)
    1,916 (3)   12,500 (6)
Edward Karr (12)   1,587 (1)   8,333 (5)
    16,667 (2)   8,334 (6)
    1,916 (3)     

 

(1) Option has an exercise price of $6.30 per share and was exercisable 6 months following the grant date of December 18, 2015.

 

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(2) Option has an exercise price of $4.80 per share and was 50% exercisable on May 10, 2016 and 50% exercisable upon the occurrence of a performance condition.
   
(3) Option has an exercise price of $5.22 per share and was exercisable on November 30, 2016.
   
(4) Option has an exercise price of $8.58 per share and was exercisable on January 27, 2016.
   
(5) Vests at the end of each calendar month, at a rate of 1/24 of such shares per month, starting on the grant date of September 30, 2015.
   
(6) Stock grant was 50% vested on May 10, 2016 and amount represents the 50% vested upon the occurrence of a performance condition.
   
(7) Resigned as Co-Chairman on December 1, 2016 but remained a director of the Company until February 8, 2017.
   
(8) Resigned as Co-Chairman on December 1, 2016 but remained a director of the Company until February 8, 2017.
   
(9) Appointed on December 1, 2016.
   
(10) Resigned on December 1, 2016.
   
(11) Resigned on December 1, 2016.
   
(12) Resigned on December 1, 2016.

  

Director Compensation Policy

 

During the fiscal year ended October 31, 2016, our directors were compensated in accordance with the following terms. Each non-employee director received an annual cash retainer of $5,000, other than the Chair of the Company’s Audit Committee, who received $6,000. In addition, the Chairman of the Board received an additional annual cash retainer of $10,000.

 

Each non-employee director was also entitled to receive 5-year options to purchase shares of the Company’s Common Stock valued at $10,000, calculated by dividing $10,000 by the closing stock price on the date the award was granted. The options vest in full six months after the grant date, provided the applicable director is still serving on the Board.

 

Each non-employee director was entitled to a fee of $2,500 for each Board meeting at which the director was present in person, and each member of our Board committees was entitled to a fee of $800 for each committee meeting at which the director was present in person. Each non-employee director was entitled to a fee of $300 for each teleconference called by either the Chairman of the Board, the President of the Company or the Chairman of a Board committee.

 

Compensation Committee; Compensation Committee Interlocks and Insider Participation.

 

The Compensation Committee of the Board is composed entirely of directors who are not our current or former employees, each of whom meets the applicable definition of “independent” as defined by the rules of The NASDAQ Capital Market. None of the members of the Compensation Committee during fiscal 2016 (i) had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of related party transactions or (ii) was an executive officer of a company of which an executive officer of the Company is a director. The current members of the Compensation Committee as of February 8, 2017 are Michael Beeghley (Chairman), Steve Gorlin and Mohit Bhansali. Michael Brauser served on the Compensation Committee until February 8, 2017 when he resigned from the Board and Steve Gorlin was appointed. Prior to that, our Compensation Committee consisted of Andrew Kaplan (Chairman), and Edward Karr. The Compensation Committee has no interlocks with other companies. The Compensation Committee held 3 meetings during fiscal year 2016. The charter of the Compensation Committee can be found on our website at www.polarityte.com.

 

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The Compensation Committee is responsible for establishing and administering our executive compensation policies. The role of the Compensation Committee is to (i) formulate, evaluate and approve compensation of the Company’s directors, executive officers and key employees, (ii) oversee all compensation programs involving the use of the Company’s stock, and (iii) produce, if required under the securities laws, a report on executive compensation for inclusion in the Company’s proxy statement for its annual meeting of stockholders. The duties and responsibilities of the Compensation Committee under its charter include:

 

  Annually reviewing and setting compensation of executive officers;
     
  Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors;
     
  Reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting the Chief Executive Officer’s compensation levels based on this evaluation;
     
  Reviewing competitive practices and trends to determine the adequacy of the executive compensation program;
     
  Approving and overseeing incentive compensation and equity-based plans for executive officers that are subject to Board approval;
     
  Making recommendations to the Board as to the Company’s compensation philosophy and overseeing the development and implementation of compensation programs;
     
  Periodically reviewing and making recommendations to the Board with respect to compensation of non-employee directors;
     
  Reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives, and setting the Chief Executive Officer’s compensation levels based on this evaluation;

 

When appropriate, the Compensation Committee may, in carrying out its responsibilities, form and delegate authority to subcommittees. The Chief Executive Officer plays a role in determining the compensation of our other executive officers by evaluating the performance of those executive officers. The Chief Executive Officer’s evaluations are then reviewed by the Compensation Committee. This process leads to a recommendation for any changes in salary, bonus terms and equity awards, if any, based on performance, which recommendations are then reviewed and approved by the Compensation Committee.

 

The Compensation Committee has the authority, at the Company’s expense, to select, retain, terminate and set the fees and other terms of the Company’s relationship with any outside advisors who assist it in carrying out its responsibilities, including compensation consultants or independent legal counsel.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information known to us concerning the beneficial ownership of the Company’s Common Stock as of February 20, 2017 for:

 

  each person known by us to beneficially own more than 5% of the Company’s Common Stock;
     
  each of our directors;
     
  each of our executive officers; and
     
  all of our directors and executive officers as a group.

 

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Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In general, a person is deemed to be the beneficial owner of (i) any shares of the Company’s Common Stock over which such person has sole or shared voting power or investment power, plus (ii) any shares which such person has the right to acquire beneficial ownership of within 60 days of the above date, whether through the exercise of options, warrants or otherwise. Applicable percentages are based on 4,250,617 shares of Common Stock outstanding on the date above, adjusted as required by rules promulgated by the SEC. Except as otherwise indicated, addresses are c/o PolarityTE, Inc., 4041-T Hadley Road, S. Plainfield, New Jersey 07080.

 

Common Stock  Number of
Shares of
Common Stock
Beneficially
Owned
   Percentage
of
Common Stock
 
Executive Officers and Directors:          
Denver Lough (13)   83,334(14)   1.9%
Edward Swanson   70,500(14)   1.6%
Steve Gorlin   2,000(14)   * 
Jon Mogford   4,000(14)   * 
John Stetson (5)(6)   283,823    6.54%
Michael Beeghley (7)   48,011    1.12%
Mohit Bhansali (8)   96,879    2.26%
Michael Neumeister   11,750(14)    *  
Current Executive Officers and Directors as a Group(8 persons)   600,297    13.42%
           
Greater than 5% Holders:          
Mark Groussman (9)(10) 5154 La Gorce Drive Miami Beach, FL 33140   423,013    9.7%
Frost Gamma Investments Trust (11) (12) 4400 Biscayne Blvd. Miami, FL 33137   444,928    9.99%
Barry Honig (1)(2)   318,238    7.34%
Michael Brauser (3)(4)   271,031    6.24%

  

  * Represents beneficial ownership of less than 1% of the shares of Common Stock.

 

(1) Barry Honig is the Trustee of GRQ Consultants, Inc. 401K (“401K”) and GRQ Consultants, Inc. Roth 401K FBO Barry Honig (“Roth 401K”), and he is the managing member of Marlin Capital Investments, LLC (“Marlin”). In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.

 

(2) Represents (i) 197,148 shares of Common Stock held by Barry Honig, (ii) 15,179 shares of Common Stock held by 401K, (iii) 18,411 shares of Common Stock held by Roth 401K and (iv) an option to purchase 87,500 shares of common stock pursuant to the 2016 Plan. Excludes (i) 367,647 shares of Common Stock underlying Series A Convertible Preferred Stock held by Mr. Honig, (ii) 25,776 shares of Common Stock underlying Series A Convertible Preferred Stock held by Roth 401K, (iii) 19,608 shares of Common Stock underlying Series A Convertible Preferred Stock held by Marlin, (iv)262,605 shares of Common Stock underlying shares of Series B Convertible Preferred Stock held by Mr. Honig, (v) 14,006 shares of Common Stock underlying shares of Series B Convertible Preferred Stock held by Marlin, (vi) 138,889 shares of Common Stock underlying shares of Series C Convertible Preferred Stock held by 401K and (vii) 55,555 shares of Common Stock underlying shares of Series D Convertible Preferred Stock held by 401K. Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding Common Stock together with all shares owned by the holder and its affiliates.

 

 35 
 

 

(3) Michael Brauser is Chairman of the Betsy & Michael Brauser Charitable Family Foundation (“Family Foundation”), Trustee of Grander Holdings, Inc. 401K (“Grander 401K”) and a Manager of Marlin. In such capacities he is deemed to hold voting and dispositive power over the securities held by such entities.

 

(4) Represents (i) 154,166 shares of Common Stock held by Michael Brauser, (ii) 5,030 shares of Common Stock held by Grander 401K, (iii) 20,833 shares of Common Stock held by Family Foundation and (iv) an option to purchase 87,500 shares of Common Stock pursuant to the 2016 Plan, (v) an option to purchase 1,587 shares of Common Stock and (vi) an option to purchase 1,915 shares of Common Stock. Excludes (i) 367,647 shares of Common Stock underlying Series A Convertible Preferred Stock held by Michael Brauser, (iii) 19,608 shares of Common Stock underlying Series A Convertible Preferred Stock held by Marlin, (iv) 262,605 shares of Common Stock underlying shares of Series B Convertible Preferred Stock held by Michael Brauser, (v) 14,006 shares of Common Stock underlying shares of Series B Convertible Preferred Stock held by Marlin, (vi) 85,247 shares of Common Stock underlying shares of Series C Convertible Preferred Stock held by Grander 401K, (vii) 8,333 shares of Common Stock underlying shares of Series D Convertible Preferred Stock held by Family Foundation and (viii) 36,112 shares of Common Stock underlying shares of Series D Convertible Preferred Stock held by Grander 401K. Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding Common Stock together with all shares owned by the holder and its affiliates.

 

(5) John Stetson is the President of Stetson Capital Investments, Inc. (“Stetson Capital”), and the Trustee of Stetson Capital Investments, Inc. Retirement Plan (“Stetson Retirement Plan”). In these capacities, he has voting and dispositive control over the securities held by such entities. In addition, John Stetson is the Chief Financial Officer of the Company.

 

(6) Represents (i) 157,423 shares of Common Stock held by John Stetson, (ii) 19,444 shares of Common Stock held by Stetson Capital, (iii) 19,444 shares of Common Stock held by Stetson Retirement Plan and (iv) an option to purchase 87,500 shares of Common Stock pursuant to the 2016 Plan.

 

(7) Represents (i) 13,541 shares of Common Stock, (ii) an option to purchase 1,587 shares of Common Stock, (iii) an option to purchase 5,208 shares of Common Stock pursuant to the 2016 Plan, (iv) an option to purchase 1,915 shares of Common Stock, (v) a restricted stock grant of 8,333 shares of Common Stock, (vi) a restricted stock grant of 5,208 shares pursuant to the 2016 Plan and (vii) a restricted stock grant of 15,000 shares of Common Stock.

 

(8) Represents (i) 30,244 shares of Common Stock, (ii) an option to purchase 9,338 shares of Common Stock, (iii) an option to purchase 1,190 shares of Common Stock, (iv) an option to purchase 25,000 shares of Common Stock pursuant to the 2016 Plan, (v) an option to purchase 1,915 shares of Common Stock, (vi) a restricted stock grant of 1,078 shares of Common Stock, (vii) a restricted stock grant of 4,166 shares of Common Stock and (viii) a restricted stock grant of 25,000 shares pursuant to the 2016 Plan.

 

(9) Mark Groussman is the President of Melechdavid, Inc. (“Melechdavid”), and the Trustee of each of the Erica and Mark Groussman Foundation, Inc. (“Groussman Foundation”), and the Melechdavid Inc., Retirement Plan (“Melechdavid Retirement Plan”). In such capacities, he has voting and dispositive control over the securities held by such entities.

 

(10) Represents (i) 178,111 shares of common stock held by Melechdavid, (ii) 25,000 shares of common stock held by the Groussman Foundation Inc., (iii) 108,791 shares of common stock held by Melechdavid Retirement Plan and (iv) 111,111 shares of common stock underlying Series C Preferred Stock held by Melechdavid.

 

(11) Dr. Phillip Frost, M.D. is the trustee of Frost Gamma Investments Trust (“FGIT”). Frost Gamma L.P. is the sole and exclusive beneficiary of FGIT. Dr. Frost is one of two limited partners of Frost Gamma L.P. The general partner of Frost Gamma L.P. is Frost Gamma, Inc., and the sole shareholder of Frost Gamma, Inc. is Frost-Nevada Corporation. Dr. Frost is the sole shareholder of Frost-Nevada Corporation. Dr. Frost disclaims beneficial ownership of these securities, except to the extent of any pecuniary interest therein and this report shall not be deemed an admission that Dr. Frost is the beneficial owner of these securities for purposes of Section 16 or for any other purpose.

 

 36 
 

 

(12) Represents (i) 242,640 shares of Common Stock, (ii) 194,451 shares of Common Stock underlying shares of Series A Convertible Preferred Stock and (iii) 7,837 shares of Common Stock underlying shares of Series B Convertible Preferred Stock. Excludes (i) 254,768 shares of Common Stock underlying shares of Series B Convertible Preferred Stock, (ii) 69,444 shares of Common Stock underlying shares of Series C Convertible Preferred Stock and (iii) 55,555 shares of Common Stock underlying shares of Series D Convertible Preferred Stock. Each of the forgoing classes of preferred stock contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion would result in the holder’s beneficial ownership being in excess of 9.99% of the Company’s issued and outstanding Common Stock together with all shares owned by the holder and its affiliates.

 

(13) Upon closing of the Merger, Dr. Lough will be issued 7,050 shares of Series E Preferred Stock, which are convertible into an aggregate of 7,050,000 shares of Common Stock and which are entitled to 2 votes for every 1 share of Common Stock into which such shares of Series E Preferred Stock are convertible.  Based on 4,250,617 shares of Common Stock outstanding, at closing, Dr. Lough will beneficially own approximately 62% of the issued and outstanding Common Stock (or 42% of the outstanding Common Stock on a fully diluted basis assuming full conversion of shares of outstanding preferred stock) and will own approximately 68.61% of the outstanding voting power (without regard to any ownership limitations with regards to holders of outstanding shares of Series A, B and C convertible preferred stock).

 

(14) Represents options to purchase common stock that may be exercisable within 60 days.

 

PROPOSAL NO. 4

 

APPROVAL OF AN AMENDMENT TO THE COMPANY’S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED BLANK CHECK PREFERRED STOCK FROM 10,000,000 TO 25,000,000 SHARES.

 

Increase in Authorized Blank Check Preferred Stock

 

On December 15, 2016 the Board approved an amendment to the Company’s Certificate of Incorporation that would increase the number of Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares. We are asking stockholders to approve this amendment in the form attached hereto as Appendix B.

 

On the Record Date, we had 5,924,307 shares of Series A Preferred Stock, 48,109.25 shares of Series B Preferred Stock, 24,614.84 shares of Series C Preferred Stock and 94,666 shares of Series D Preferred Stock issued and outstanding and 921,750 shares of preferred stock that were authorized but unissued. Pursuant to Proposal 1, we have reserved 7,050 shares of Series E Preferred Stock to be issued pursuant to the terms of the Agreement.

 

The Board believes that the availability of additional authorized shares of preferred stock will provide the Company with additional flexibility to issue preferred stock for a variety of general corporate purposes as the Board may determine to be desirable including, without limitation, stock splits (including splits effected through the declaration of stock dividends), raising capital, future financings, investment opportunities, licensing agreements, acquisitions, or other distributions. The Board has not authorized the Company to take any action with respect to the shares that would be authorized under this proposal, and the Company currently does not have any definitive plans, arrangements or understandings with respect to the issuance of the additional shares of preferred stock authorized by the proposed amendment to the Certificate of Incorporation.

 

The proposed amendment to increase the Authorized Blank Check Preferred Stock could, under certain circumstances, have an anti-takeover effect or delay or prevent a change in control of the Company by providing the Company the capability to engage in actions that would be dilutive to a potential acquiror, to pursue alternative transactions or to otherwise increase the potential cost to acquire control of the Company. Thus, while the Company currently has no intent to employ the additional unissued Authorized Blank Check Preferred Stock as an anti-takeover device, the proposed amendment may have the effect of discouraging future unsolicited takeover attempts. The Board is not aware of any such attempt to take control of the Company, and would act in the best interest of shareholders if any attempt was made. The proposed amendment has been prompted by business and financial considerations.

 

The proposed increase in the number of Authorized Blank Check Preferred Stock will not change the number of shares of preferred stock outstanding, nor will it have any immediate dilutive effect or change the rights of current holders of the Company’s preferred stock. However, the issuance of additional shares of preferred stock authorized by this amendment to the Certificate of Incorporation may occur at times or under circumstances as to have a dilutive effect on earnings per share, book value per share or the percentage voting or ownership interest of the present holders of the Company’s Common Stock.

 

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Once the proposed amendment is approved, no further action by the stockholders would be necessary prior to the issuance of additional shares of preferred stock unless required by law or the rules of any stock exchange or national securities association on which the preferred stock is then listed or quoted. Under the proposed amendment, each of the newly authorized shares of preferred stock will have such powers, preferences and rights and qualifications, limitations or restrictions as set forth in a certificate of designations, preferences and rights to be filed with the Delaware Secretary of State.

 

If the proposed amendment is adopted, it will become effective upon filing of an amendment to the Company’s Certificate of Incorporation with the Delaware Secretary of State.

 

Vote Required for Approval

 

The affirmative vote of the holders of shares representing a majority of all of the Company’s outstanding voting capital entitled to vote as of the Record Date is required to approve an amendment to the Company’s Certificate of Incorporation to increase the Authorized Blank Check Preferred Stock from 10,000,000 to 25,000,000 shares. Abstentions and broker non-votes will be counted towards the tabulation of votes cast on this proposal and will have the same effect as a negative vote. Brokerage firms do not have authority to vote customers’ unvoted Shares held by the firms in street name on this proposal

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF AN AMENDMENT TO THE COMPANY’S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED BLANK CHECK PREFERRED STOCK FROM 10,000,000 TO 25,000,000 SHARES.

 

DESCRIPTION OF SECURITIES

 

The following description of our capital stock summarizes the material terms and provisions of our Common Stock and preferred stock.

 

Authorized Capital Stock

 

Our authorized capital stock consists of 250,000,000 shares of Common Stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001 par value. As of January 17, 2017, there were 4,250,617 shares of Common Stock outstanding, 5,924,307 shares of Series A Preferred Stock outstanding convertible into 987,384 shares of Common Stock, 48,109.25 shares of Series B Preferred Stock outstanding convertible into 801,820 shares of Common Stock, 24,614.84 shares of Series C Preferred Stock outstanding convertible into 410,247 shares of Common Stock and 94,666 shares of Series D Preferred Stock outstanding convertible into 157,776 shares of Common Stock.

 

Common Stock

 

Holders of our Common Stock are entitled to one vote per share. Our Restated Certificate of Incorporation does not provide for cumulative voting. Holders of our Common Stock are entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available funds. However, the current policy of our Board is to retain earnings, if any, for the operation and expansion of our Company. Upon liquidation, dissolution or winding-up, the holders of our Common Stock are entitled to share ratably in all of our assets which are legally available for distribution, after payment of or provision for all liabilities. The holders of our Common Stock have no preemptive, subscription, redemption or conversion rights.

 

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Preferred Stock

 

Series A Preferred Stock

 

The Series A Preferred Stock are convertible into shares of Common Stock based on a conversion calculation equal to the stated value of such Series A Preferred Stock, plus all accrued and unpaid dividends, if any, on such Series A Preferred Stock, as of such date of determination, divided by the conversion price. The stated value of each Series A Preferred Stock is $4.08 and the initial conversion price is $0.68 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of Common Stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the Series A Preferred Stock to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series A Preferred Stock, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99% (the “Series A Limit”).

 

Each holder of Series A Preferred Stock is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of Common Stock issuable upon conversion of such holder’s Series A Preferred Stock, provided that a holder is only entitled to vote shares of Common Stock underlying the Preferred A Shares to the extent such shares do not result in the holder exceeding the Series A Limit and provided further that in no event shall the holders be entitled to cast votes in excess of the number of votes that holders would be entitled to cast if the Series A Preferred Stock were converted at $3.54 per share (equal to the market price as determined by NASDAQ on the trading date immediately prior to closing) (the “Voting Floor”). The Voting Floor shall only be removed in accordance with applicable Nasdaq Listing Rules. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of the Company, the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the Lead Investor (as defined in the Subscription Agreements dated December 17, 2014). The Preferred A Shares bear no interest or dividends.

 

Series B Preferred Stock

 

The Series B Preferred Stock are convertible into shares of Common Stock based on a conversion calculation equal to the stated value of such Series B Preferred Stock, plus all accrued and unpaid dividends, if any, on such Series B Preferred Stock, as of such date of determination, divided by the conversion price. The stated value of each Series B Preferred Stock is $140 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Stock to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series B Preferred Stock, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99% (the “Series B Limit”).

 

Each holder of Series B Preferred Stock is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of Common Stock issuable upon conversion of such holder’s Series B Preferred Stock based on a conversion price of $8.40 per share, provided that a holder is only entitled to vote shares of Common Stock underlying the Series B Preferred Stock to the extent such shares do not result in the holder exceeding the Series B Limit. The Series B Preferred Stock bear no interest or dividends.

 

Series C Preferred Stock

 

The Series C Preferred Stock are convertible into shares of Common Stock based on a conversion calculation equal to the stated value of such Series C Preferred Stock, plus all accrued and unpaid dividends, if any, on such Series C Preferred Stock, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Stock is $120 per share, and the initial conversion price is $7.20 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series C Preferred Stock to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series C Preferred Stock, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99% (the “Series C Limit”).

 

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Subject to the Series C Limit, each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of Common Stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.20 per share. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series C Convertible Preferred Stock of the Company, the Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Stock but senior to the Company’s Series B Preferred Stock.

 

Series D Preferred Stock

 

The Series D Preferred Stock are convertible into shares of Common Stock based on a conversion calculation equal to the stated value of such Series D Preferred Stock, plus all accrued and unpaid dividends, if any, on such Series D Preferred Stock, as of such date of determination, divided by the conversion price. The stated value of each Series D Preferred Stock is $1,000.00 and the initial conversion price is $600 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series D Preferred Stock. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Stock shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no interest or dividends and shall rank senior to the Company’s other classes of capital stock.

 

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Pro Forma Balance Sheet

(in thousands)

 

   October 31, 2016 
   Actual   Pro Forma 
       (Unaudited) 
Balance Sheet Data:          
Current assets  $6,733   $6,733 
Goodwill   -    25,239 
Total assets   6,751    31,990 
Current liabilities   1,354    1,354 
Total liabilities   1,354    1,354 
Convertible preferred stock   10,153    35,392 
Common Stock, $.001 par value   3    3 
Additional paid-in-capital   123,417    123,417 
Accumulated deficit   (128,176)   (128,176)
Total stockholders' equity   5,397    30,636 
Total liabilities and stockholders' equity   6,751    31,990 

 

F-1
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts) 

 

   

October 31, 2016 

   

October 31, 2015

 
             
ASSETS                
Current assets:                
Cash and cash equivalents   $ 6,523     $ 17,053  
Accounts receivable, net     113       283  
Capitalized software development costs and license fees     50       179  
Prepaid expenses and other current assets     47       101  
Total current assets     6,733       17,616  
Property and equipment, net     18       45  
Total assets   $ 6,751     $ 17,661  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued expenses   $ 1,284     $ 1,686  
Warrant liability     70       -  
Payable to Zift     -       318  
Total current liabilities     1,354       2,004  
Total liabilities     1,354       2,004  
                 
Commitments and contingencies                
                 
Stockholders’ equity:                
Convertible Preferred stock - 10,000,000 shares authorized, 7,374,454 and 9,025,265 shares issued and outstanding at October 31, 2016 and 2015, respectively, aggregate liquidation preference $4,854 and $5,968, respectively     10,153       10,694  
Common stock - $.001 par value; 250,000,000 shares authorized; 2,782,963 and 1,851,503 shares issued and outstanding at October 31, 2016 and 2015, respectively     3       2  
Additional paid-in capital     123,417       128,497  
Accumulated deficit     (128,176 )     (123,536 )
Total stockholders’ equity     5,397       15,657  
Total liabilities and stockholders’ equity   $ 6,751     $ 17,661  

 

See accompanying notes

 

F-2
   

 

Table of Contents

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

   

Years Ended October 31,

 

 
    2016     2015  
Net revenues   $ 1,542     $ 6,693  
Cost of sales                
Product costs     1       2,328  
Software development costs and license fees     285       1,095  
      286       3,423  
Gross profit     1,256       3,270  
Operating costs and expenses                
Product research and development     90       174  
Selling and marketing     14       771  
General and administrative     6,031       5,350  
Workforce reduction     -       840  
Depreciation and amortization     27       61  
      6,162       7,196  
Operating loss     (4,906 )     (3,926 )
Other expenses (income)                
Interest and financing costs (income)     (18 )     45  
Gain on extinguishment of liabilities     -       (1,465 )
Gain on asset sales, net     -       (50 )
Other non-operating gains, net     -       (198 )
Change in fair value of warrant liability     (248 )     1,548  
Loss before income taxes     (4,640 )     (3,806 )
Income taxes     -       3  
Net loss     (4,640 )     (3,809 )
Special cash dividend attributable to preferred stockholders     (6,002 )     -  
Conversion features accreted as dividends     -       (2,252 )
Net loss attributable to common shareholders   $ (10,642 )   $ (6,061 )
                 
Net loss per share, basic and diluted   $ (5.08 )   $ (4.93 )
Weighted average shares outstanding, basic and diluted     2,096,022       1,228,275  

 

See accompanying notes

 

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Table of Contents

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

 

                Additional           Net  
   

Preferred Stock

 

    Common Stock     Paid-In     Accumulated     Stockholders’  
    Number     Amount     Number     Amount     Capital     Deficit     Equity  
Balance - October 31, 2014                   $ 1,103,397     $ 7     $ 125,271     $ (119,727 )   $ 5,551  
Reverse split par value adjustment     -       -       -       (6 )     6       -       -  
Issuance of common stock in connection with:                                                        
Restricted stock grants     -       -       323,241       1       1,060       -       1,061  
Non-cash compensation charges - stock options     -       -       -       -       375       -       375  
Shares withheld for taxes     -       -       (1,953 )     -       (15 )     -       (15 )
Private placement of units, December 2014     8,823,537       2,156       -       -       -       -       2,156  
Exchange agreement, April 2015     54,201       4,569       147,059       -       744       -       5,313  
Private placement of units, May 2015     25,763       2,010       271,997       -       3,015       -       5,025  
Exchange agreement, September 2015     168,333       1,969       -       -       (1,969 )     -       -  
Conversion of Series A preferred stock     (46,569 )     (10 )     7,762       -       10       -       -  
Net loss     -       -       -       -       -       (3,809 )     (3,809 )
Balance - October 31, 2015       9,025,265.      $ 10,694       1,851,503     $ 2     $ 128,497     $ (123,536 )   $ 15,657  
Issuance of common stock in connection with:                                                        
Restricted stock grants     -       -       356,666       1       (1 )     -       -  
Conversion of Series A preferred stock     (1,638,810 )     (401 )     273,135       -       401       -       -  
Conversion of Series D preferred stock     (12,001 )     (140 )     20,002       -       140       -       -  
Proceeds from stock option exercise     -       -       31,657       -       129       -       129  
Stock based compensation expense     -       -       -       -       3,142       -       3,142  
Shares issued for cash     -       -       250,000       -       1,406       -       1,406  
Warrant liability     -       -       -       -       (318 )     -       (318 )
Allocation of warrant offering cost     -       -       -       -       21       -       21  
Special cash dividend     -       -       -       -       (10,000 )     -       (10,000 )
Net loss     -       -       -       -       -       (4,640 )     (4,640 )
Balance - October 31, 2016       7,374,454.      $ 10,153       2,782,963     $ 3     $ 123,417     $ (128,176 )   $ 5,397  

 

See accompanying notes

 

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Table of Contents

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Year Ended October 31,  
    2016     2015  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (4,640 )   $ (3,809 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of warrant liability     (248 )     1,548  
Depreciation and amortization     27       61  
Non-cash compensation expense     3,142       1,436  
Provision for price protection     -       41  
Amortization of capitalized software development costs and license fees     150       432  
Capital software impairment losses     -       148  
Provision for excess inventory     -       65  
Gain on extinguishment of liabilities     -       (1,465 )
Gain on asset sales     -       (50 )
Other non-operating gains     -       (198 )
Offering costs expensed     21       -  
Changes in operating assets and liabilities:                
Accounts receivable     170       1,273  
Inventory     -       1,227  
Capitalized software development costs and license fees     (21 )     (85 )
Advance payments for inventory     -       57  
Prepaid expenses and other current assets     54       91  
Accounts payable and accrued expenses     (402 )     (2,194 )
Payable to Zift     (19 )     -  
Customer credits     -       (171 )
Advances from customers and deferred revenue     -       (21 )
Net cash used in operating activities     (1,766 )     (1,614 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Repayment from GMS Entertainment Limited     -       250  
Proceeds from sale of assets     -       290  
Net cash provided by investing activities     -       540  
CASH FLOWS FROM FINANCING ACTIVITIES                
Special cash dividend     (10,000 )     -  
Proceeds from stock options exercised     129       -  
Net proceeds from the sale of common stock and warrants     1,406       -  
Payments to Zift     (299 )     -  
Net proceeds from sale of units     -       10,946  
Income tax withholding from exercise of options and warrants     -       (15 )
Net cash (used in) provided by financing activities     (8,764 )     10,931  
Net (decrease) increase in cash and cash equivalents     (10,530 )     9,857  
Cash and cash equivalents - beginning of year     17,053       7,196  
Cash and cash equivalents - end of year   $ 6,523     $ 17,053  
SUPPLEMENTAL CASH FLOW INFORMATION                
Cash paid during the year for interest and financing costs   $ -     $ 141  
Cash paid during the year for income taxes   $ -     $ -  
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES                
Warrant liability settled under exchange agreement   $ -     $ 5,313  
Other warrants settled under exchange agreement   $ -     $ 1,969  
Conversion of preferred stock into common stock   $ -     $ 10  
Conversion of Series A preferred to common stock   $ 401     $ -  
Conversion of Series D preferred to common stock   $ 140     $ -  
Common stock shares and warrants issued for offering costs   $ 75     $ -  

 

See accompanying notes

 

F-5
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

 

The accompanying financial statements present the financial results of Majesco Entertainment Company and Majesco Europe Limited, its wholly-owned subsidiary, (together, “Majesco” or the “Company”) on a consolidated basis. Prior to the November 2014 sale of its equity investment, the Company had 50% of the voting control of GMS Entertainment Limited (“GMS”) and the right to appoint one-half of the directors of GMS. Accordingly, the Company accounted for GMS on the equity method as a corporate joint venture.

 

The Company is a provider of video game products primarily for the casual-game consumer and has published video games for interactive entertainment hardware platforms, including Nintendo’s DS, 3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and PS4, Microsoft’s Xbox 360 and Xbox One and the personal computer, or PC. It has historically sold its products through two sales channels, retail and digital. It has sold packaged software to large retail chains, specialty retail stores, video game rental outlets and distributors and through digital distribution for platforms such as Xbox Live Arcade, PlayStation Network, or PSN, and Steam, and for mobile devices and online platforms. In July 2015, the Company transferred retail distribution activities, assets and obligations to a company owned by its former chief executive officer (see Note 15).

 

The Company’s 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, the Company has focused on publishing more lower-cost games targeting casual-game consumers and independent game developer fans. In some instances, the Company’s titles are based on licenses of well-known properties and, in other cases, original properties. The Company enters into agreements with content providers and video game development studios for the creation of our video games.

 

The Company’s 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, it operates in a single segment.

 

Reverse stock-split. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment (the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).

 

The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, is acting as exchange agent for the Reverse Stock Split.

 

As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.

 

All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.

 

NASDAQ listing. On March 3, 2016, the Company was notified by The NASDAQ Stock Market, LLC (“Nasdaq”) that it was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Rule”) because the Company’s common stock failed to maintain a minimum closing bid price of $1.00 per share for the prior 30 consecutive business days. The notice had no immediate effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market.

 

The Company had a period of 180 calendar days, or until August 30, 2016, to achieve compliance with the Rule. The Company regained compliance with the Rule in August 2016 by effecting the Reverse Stock Split.

 

Major customers. Sony, Microsoft and Valve accounted for 47%, 37%, and 13%, respectively, of sales for the year ended October 31, 2016. Sony, Sidekick and Microsoft accounted for 41%, 25% and 20%, respectively, of accounts receivable as of October 31, 2016. Sales to GameStop represented approximately 10% of net revenues in 2015. In 2015, Alliance Distributors and Microsoft Corporation represented approximately 10% and 13% of total revenue, respectively. Sony, Microsoft, Valve and Nintendo accounted for 37%, 20%, 18% and 13% of total accounts receivable as of October 31, 2015, respectively.

 

Concentrations. The Company develops and distributes video game software for proprietary platforms under licenses from Nintendo, Sony and Microsoft, which must be periodically renewed. The Company’s agreements with these manufacturers also grant them certain control over the Company’s products. In addition, for the years ended October 31, 2016 and 2015 sales of the Company’s Zumba Fitness games accounted for approximately 9% and 28% of net revenues, respectively.

 

F-6
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary located in the United Kingdom. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition. Since July 2015 when retail distribution activities were transferred and retail sales ceased, the Company’s 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).

 

Prior to July 2015, when the Company entered into license or distribution agreements that provided for multiple copies of games in exchange for guaranteed amounts, revenue was recognized in accordance with the terms of the agreements, generally upon delivery of a master copy, assuming our performance obligations were complete and all other recognition criteria were met, or as per-copy royalties are earned on sales of games.

 

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

 

Accounts and Other Receivables and Accounts Payable and Accrued Expenses. The carrying amounts of accounts and other receivables and accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.

 

Allowance for doubtful accounts. The Company recognizes an allowance for losses on accounts receivable for estimated probable losses. The allowance is based on historical experiences, current aging of accounts, and other expected future write-offs, including specific identifiable customer accounts considered at risk or uncollectible. Any related expense associated with an allowance for doubtful accounts is recognized as general and administrative expense.

 

Capitalized Software Development Costs and License Fees. Software development costs include fees in the form of milestone payments made to independent software developers and licensors. 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 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 owners for the use of their intellectual property rights in the development of the Company’s products. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid 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 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 and prepaid license fees are classified as non-current if they relate to titles for which the Company estimates the release date to be more than one year from the balance sheet date.

 

The amortization period for capitalized software development costs and prepaid 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 prepaid 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, the Company expenses these capitalized costs to “cost of sales-software development costs and license fees,” in the period such a determination is made. These expenses may be incurred prior to a game’s release for games that have been developed. If a game is cancelled prior to completion of development and never released to market, the amount is expensed to operating costs and expenses. If the Company was required to write off licenses, due to changes in market conditions or product acceptance, its results of operations could be materially adversely affected.

 

F-7
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Costs of developing online free-to-play social games, including payments to third-party developers, are expensed as research and development expenses. Revenue from these games is largely dependent on players’ future purchasing behavior in the game and currently the Company cannot reliably project that future net cash flows from developed games will exceed related development costs.

 

Prepaid license fees and milestone payments made to the Company’s 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.

 

Property and equipment. Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

 

Income taxes. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

 

Stock Based Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative expenses. Compensation expense for stock options is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant.

 

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.

 

The value of restricted stock grants are measured based on the fair market value of the Company’s common stock on the date of grant and amortized over the vesting period of, generally, six months to three years.

 

Extinguishment of Liabilities. During the year ended October 31, 2015, the Company recognized a gain on extinguishment of liabilities of $1.5 million. The Company determined that certain accounts payable balances and claims for license fees and services would never be paid because they were no longer being pursued for payment and had passed the statute of limitations as of October 31, 2015.

 

Loss Per Share. Basic loss per share of common stock is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive.

 

Commitments and Contingencies. We are subject to claims and litigation in the ordinary course of our business. We record a liability for commitments and contingencies when the amount is both probable and reasonably estimable.

 

Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

 

F-8
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Change in fair value of warrant liability. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that such instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in the fair value of warrant liabilities” in the consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 3).

 

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements are price protection and customer allowances, the valuation of inventory, the recoverability of advance payments for capitalized software development costs and intellectual property licenses, and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.

 

Other Nonoperating Gains, Net. In the year ended October 31, 2015, in connection with the expiration of its prior facilities lease and its relocation, the Company disposed of property and equipment with a net book value of $92 and received proceeds of $20 from the sale of certain of the property and equipment. The $72 loss on the disposals is included in other non-operating gains, net. In addition, the Company recorded a gain of $270 on the transfer of certain game rights.

 

Recent Accounting Pronouncements.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) creating a new Topic 606, Revenue from Contracts with Customers, which broadly establishes new standards for the recognition of certain revenue and updates related disclosure requirements. The update becomes effective for the Company on November 1, 2018. The Company is reviewing the potential impact of the statement on its financial position, results of operations, and cash flows.

 

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU No. 2016-01 will have on its consolidated financial statements and related disclosures.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material impact on our financial statements.

 

F-9
   

 
MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. For public entities, the amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU No. 2016-08 on its consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact that ASU No. 2016-09 will have on its consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers. The new guidance is an update to ASC 606 and provides clarity on: identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact that ASU No. 2016-10 will have on its consolidated financial statements.

 

3. FAIR VALUE

 

In accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

 

  Level 1: Observable inputs such as quoted prices in active markets for identical instruments
  Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market
  Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.

 

Prior to the April 2015 exchange transaction described in Note 8, the Company had outstanding warrants, the December warrants, that contained re-pricing provisions for “down-round” issuances and other events not indexed to the Company’s own stock and were classified as liabilities in the Company’s consolidated balance sheets. The Company recognized these warrants as liabilities at their fair value and re-measured them through the date of their exchange in April 2015. ASC 820, Fair Value Measurements and Disclosures provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition.

 

The Company uses Level 3 inputs for its valuation methodology for the warrant liabilities. The estimated fair values were determined using a binomial option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models the Company uses to value the warrants, including the Company’s current common stock price, the remaining life of the warrants, the volatility of the Company’s common stock price, and the risk-free interest rate. In addition, as of the valuation dates, management assessed the probabilities of future financing and other re-pricing events in the binominal valuation models.

 

F-10
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the changes to the Company’s warrant liability, as measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the year ended October 31, 2015 is presented below:

 

Beginning balance - November 1, 2014   $ -  
Issuance of warrants     3,765  
Change in fair value of warrant liability     1,548  
Settlement of warrants     (5,313 )
Ending balance - October 31, 2015   $ -  

 

Assumptions used to determine the fair value of the warrants during the year ended October 31, 2015 were:

 

Market price of common stock         $3.54-$7.56    
Expected warrant term         4.5-5.0 years    
Risk-free rate         1.0% -1.7 %  
Expected volatility     80 %
Dividend yield     0 %
Probability of certain litigation costs at each of three pricing thresholds         0-33 %
Probability of future down-round financing         0-50 %
Stock price discount         0-41 %

 

In connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares of common stock. These warrants are exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

 

The fair value of these warrants at April 19, 2016 and October 31, 2016 was determined to be approximately $318,000 and $70,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $4.74 and $3.58, respectively; (2) a risk free rate of 0.77% and 0.75%, respectively; and (3) an expected volatility of 86% and 61%, respectively.

 

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At October 31, 2016, the warrant liability balance of $70,000 was classified as a Level 3 instrument.

 

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (from April 19, 2016 through October 31, 2016) (in thousands):

 

   

 

Warrants

 

 
Fair value - November 1, 2015   $ -  
Additions     318  
Change in fair value     (248 )
Fair value - October 31, 2016   $ 70  

 

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

The following table presents the major components of prepaid expenses and other current assets (in thousands):

 

 

    October 31,    
   

 

2016

 

   

 

2015

 

 
Prepaid insurance   $ 22     $ 61  
Tax receivable     18       -  
Other     7       40  
Total prepaid expenses and other current assets   $ 47     $ 101  

 

5. PROPERTY AND EQUIPMENT, NET

 

The following table presents the components of property and equipment, net (in thousands):

 

    October 31,    
   

 

2016

 

   

 

2015

 

 
Computers and software   $ 61     $ 61  
Furniture and equipment     78       78  
      139       139  
Accumulated depreciation     (121 )     (94 )
    $ 18     $ 45  

 

Depreciation expense was approximately $27,000 and $61,000 for the year ended October 31, 2016 and 2015, respectively.

 

F-11
   

 

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

The following table presents the major components of accounts payable and accrued expenses (in thousands):

 

    October 31,    
   

 

2016

 

   

 

2015

 

 
Accounts payable-trade   $ 130     $ 479  
Royalties, fees and development     680       681  
Salaries and other compensation     463       510  
Other accruals     11       16  
Total accounts payable and accrued expenses   $ 1,284     $ 1,686  

 

During the year ended October 31, 2015, the Company recognized a gain on the extinguishment of liabilities for approximately $1.5 million related to certain accounts payable balances and claims for license fees and services that the Company determined would never be paid because they were no longer being pursued for payment and had passed the statute of limitations.

 

Salaries and other compensation includes accrued payroll expense and estimated employer 401K plan liabilities.

 

7. SHORT-TERM FINANCING ARRANGEMENTS

 

Accounts receivable and inventory

 

Prior to July 31, 2015, the Company used a factor to approve credit and to collect the proceeds from a substantial portion of its sales. Under the terms of the agreement, the Company sold to the factor and the factor purchased from the Company, eligible accounts receivable.

 

The factor, in its sole discretion, determined whether or not it would accept the credit risk associated with a receivable. If the factor did not accept the credit risk on a receivable, the Company sold the accounts receivable to the factor while retaining the credit risk. In both cases, the Company surrendered all rights and control over the receivable to the factor. However, in cases where the Company retained the credit risk, the amount could be charged back to the Company in the case of non-payment by the customer. The factor was required to remit payments to the Company for the accounts receivable purchased from it, provided the customer did not have a valid dispute related to the invoice. The amount remitted to the Company by the factor equaled the invoiced amount, adjusted for allowances and discounts the Company provided to the customer, less factor charges.

 

The Company reviewed the collectability of accounts receivable for which it held the credit risk quarterly, based on a review of an aging of open invoices and payment history, to make a determination if any allowance for bad debts was necessary.

 

In addition, the Company could request that the factor provide it with cash advances based on its accounts receivable and inventory, up to a maximum amount.

 

Amounts to be paid to the Company by the factor for any accounts receivable were offset by any amounts previously advanced by the factor. The interest rate was prime plus 1.5%, annually, subject to a 5.5% floor. In certain circumstances, an additional 1.0% annually was charged for advances against inventory.

 

The Company also maintained purchase order financing, up to a maximum of $2,500, to provide funding for the manufacture of its products. In connection with these arrangements, the factor had a security interest in substantially all of the Company’s assets. The factor charged 0.5% of invoiced amounts, subject to certain minimum charges per invoice.

 

Inventory purchases

 

Prior to July 31, 2015, certain manufacturers required the Company to prepay or present letters of credit upon placing a purchase order for inventory. The Company had arrangements with a finance company which provided financing secured by the specific goods underlying the goods ordered from the manufacturer. The finance company made the required payment to the manufacturer at the time a purchase order is placed, and was entitled to demand payment from the Company when the goods are delivered. The Company paid a financing fee equal to 1.5% of the purchase order amount for each transaction, plus administrative fees. Additional charges of 0.05% per day (18% annualized) were incurred if the financing remained open for more than 30 days.

 

The agreements were terminated in the year ended October 31, 2015.

 

F-12
   

 

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8. STOCKHOLDERS’ EQUITY

 

Preferred stock

 

Under the Company’s Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of shares: preferred and common stock. The preferred stock is issuable in series, and the Company’s Board of Directors is authorized to determine the rights, preferences, and terms of each series.

 

Convertible preferred stock as of October 31, 2016 consisted of the following:

 

   

 

Shares Authorized

 

   

 

Shares Issued and Outstanding

 

   

 

Net Carrying Value

 

   

 

Aggregate Liquidation Preference

 

   

 

Common Shares Issuable Upon Conversion

 

 
Series A     8,830,000       7,138,158     $ 1,745     $ 4,854       1,189,693  
Series B     54,250       54,201       4,569       -       903,362  
Series C     26,000       25,763       2,010       -       429,392  
Series D     170,000       156,332       1,829       -       260,553  
Other authorized, unissued     919,750       -       -       -       -  
Total     10,000,000       7,374,454     $ 10,153     $ 4,854       2,783,000  

 

Convertible preferred stock as of October 31, 2015 consisted of the following:

 

   

 

Shares Authorized

 

   

 

Shares Issued and Outstanding

 

   

 

Net Carrying Value

 

   

 

Aggregate Liquidation Preference

 

   

 

Common Shares Issuable Upon Conversion

 

 
Series A     8,830,000       8,776,968     $ 2,146     $ 5,968       1,462,828  
Series B     54,250       54,201       4,569       -       903,362  
Series C     26,000       25,763       2,010       -       429,392  
Series D     170,000       168,333       1,969       -       280,555  
Other authorized, unissued     919,750       -       -       -       -  
Total     10,000,000       9,025,265     $ 10,694     $ 5,968       3,076,137  

 

December Units and Series A Preferred Shares

 

On December 17, 2014, pursuant to subscription agreements (the “December Subscription Agreements”) entered into with certain accredited investors (the “December Investors”) the Company completed a private placement of $6.0 million of units (the “December Units”) at a purchase price of $0.68 per Unit, with each December Unit consisting of one share of the Company’s 0% Series A Convertible Preferred Stock (each a “Series A Preferred Share”) and a five-year warrant (each a “December Warrant”) to purchase one sixth of a share of the Company’s common stock at an initial exercise price of $4.08 per share (such issuance and sale, the “December Private Placement”). The December Warrants were subsequently exchanged for shares of the Company’s 0% Series B Convertible Preferred Stock (the “Series B Preferred Shares”) and shares of the Company’s common stock (see below). The offering was made in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

 

The Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $4.08 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of Majesco Entertainment Company, the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.

 

F-13
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.

 

Prior to the exchange transaction described below, the December Warrants were exercisable at any time at a price of $4.08 per share, subject to adjustment, and expired five years from the date of issuance. The holders could exercise the December Warrants for shares of common stock on a cashless basis if there was no effective registration statement or no current prospectus available for resale of the underlying shares of common stock. The December Warrants were subject to certain adjustments upon certain actions by the Company as outlined in the December Warrants, including, for twenty-four months following the initial issuance date, the issuance or sale, or deemed issuance or sale, by the Company of shares of its common stock at a per share price that is less than the exercise price then in effect.

 

The proceeds of the offering and certificates representing the Series A Preferred Shares and December Warrants underlying the December Units issued in the offering were deposited into escrow accounts. Upon the closing of the December Private Placement on December 17, 2014 (such date, the “December Closing Date”), $1.0 million of the December Escrow Amount was released to the Company and $1.0 million of December Units to the December Investors, on a pro rata basis. Effective upon the approval of the Company’s stockholders on March 30, 2015, in one or multiple tranches, the remaining $5.0 million became eligible to be released to the Company and $5.0 million of December Units became eligible to be released to the December Investors from their respective escrow accounts, if either, (i) the lead investor has approved the release, (ii) the approval of the requisite number of December Investors has been obtained, (iii) the Company has executed definitive binding documents for certain transactions, as described in the December Subscription Agreements, and such transaction(s) are to close contemporaneously with the release, following approval by the Company’s stockholders or (iv) the following conditions are present: (a) nine months has elapsed from the December Closing Date and release is approved by each of the directors appointed at closing (being the non-continuing directors); (b) no subsequent release of the December Escrow Amount has been consummated; and (c) no more than $1.0 million is released (the “December Release Conditions”). In the event that on and as of the twelve month anniversary of the December Closing Date none of the December Release Conditions have been satisfied, $5.0 million would be returned on a pro rata basis to the December Investors, without interest or deduction, and $5,000 of December Units would be returned to the Company for cancellation. On September 25, 2015, the lead investor approved the release and the escrow agent released all funds and corresponding December Units remaining in escrow.

 

The Company received net proceeds of $801,000 for the December Units released from escrow, net of offering costs, and has accounted for each of the Series A Preferred Shares released from escrow, the December Warrants released from escrow and the Series A Preferred Shares and December Warrants remaining in escrow as freestanding instruments.

 

The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. Prior to the exchange described below, the exercise price of the released December Warrants could be adjusted downward if the Company issued securities at a price below the initial exercise price and in certain other circumstances outside the control of the Company and therefore contain contingent settlement terms not indexed solely to the Company’s own shares of common stock. Accordingly, $603,000 of proceeds were recorded as a derivative liability representing the fair value of the December Warrants released from escrow at issuance and $120,000 of offering costs allocated to the December Warrants were expensed. As a result of the allocations, described above, the Series A Preferred Shares released were deemed to have a beneficial conversion feature at issuance amounting to $397,000, which was recorded in stockholders’ equity and immediately charged as a dividend in determining net loss attributable to common stockholders.

 

The remaining net proceeds of $318,000 were allocated to the Series A Preferred Shares net of $79,000 of offering costs. The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

 

F-14
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Upon stockholder approval in March 2015 of full conversion provisions of the escrowed December Warrants, the Company recorded a warrant liability and a discount on the Series A Preferred Shares amounting to $3,162, based on the estimated fair value of the warrants. In addition, upon shareholder approval of the full conversion provisions of the escrowed Series A Preferred Shares, the carrying value of such Series A Preferred Shares, net of proceeds remaining in escrow was reclassified from temporary equity to paid-in capital. The Company recorded a beneficial conversion feature and a discount on the Series A Preferred Shares amounting to $1.8 million, which was immediately recognized as a deemed dividend in determining net loss attributable to common shareholders.

 

In connection with the December Private Placement, the Company also entered into separate Registration Rights Agreements with each December Investor, (as amended on January 30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the Series A Preferred Shares and December Warrants and to maintain its effectiveness until all such securities have been sold or may be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under the December Registration Rights Agreements, the Company is required to pay to the December Investors on a monthly basis an amount equal to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of December Units amended the registration rights agreement to extend the filing deadline for the registration statement to June 30, 2015.

 

April 2015 Exchange and Series B Preferred Shares

 

On April 30, 2015, pursuant to warrant exchange agreements, the Company retired the 1,470,590 December Warrants issued in the December Private Placement, including those subject to the escrow conditions and those released from escrow, in exchange for shares of the Company’s common stock, or shares of 0% Series B Convertible Preferred Stock (the “Series B Preferred Shares”), in lieu of shares of common stock equal, on an as-converted basis, to the number of shares of common stock that would have otherwise been received by the holder, if such issuance would result in the recipient holder exceeding certain thresholds. An aggregate of 1,050,421 shares of common stock, which amount includes the shares of common stock issuable upon conversion of the Series B Preferred Shares, were issuable in connection with the exchange agreements. The Company re-measured the fair value of the December Warrants through the date of their exchange and recorded related losses in its statement of operations. In the year ending October 31, 2015, the Company recorded a change in fair value of $1.5 million related to the increase in the fair value of the December Warrants during the period outstanding. Upon exchange, the contingent-conversion features of the December Warrants expired and the carrying value of the warrant liability of $5.3 million was reclassified to paid-in capital and allocated to the Series B Preferred Shares and the common shares distributed. Such Series B Shares and shares of common stock exchanged for the December Warrants are not held in escrow and as such are not subject to the December Release Conditions.

 

The Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series B Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an as converted basis, based on a conversion price of $8.40 per share. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’ equity.

 

F-15
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

May 2015 Units and Series C Preferred Shares

 

On May 15, 2015 (the “May Closing Date”), the Company completed a private placement pursuant to separate subscription agreements (the “May Subscription Agreements”) with accredited investors (the “May Investors”) of $5,050 of units (the “May Units”), at a purchase price of $7.20 per Unit, resulting in net proceeds to the Company of $5.0 million. Each May Unit consists of one share of the Company’s common stock, provided that, if the issuance of any such shares of common stock would have resulted in the recipient May Investor owning in excess of 4.99% of the Company’s issued and outstanding common stock, then such May Investor could elect to receive shares of the Company’s 0% Series C Convertible Preferred Stock (the “Series C Preferred Shares”) in lieu of common stock that are, on an as converted basis, equal to one share of common stock for every May Unit purchased, and a three-year warrant (the “May Warrants”) to purchase one share of the Company’s common stock at an exercise price of $8.40 per share (such sale and issuance, the “May Private Placement”). An aggregate of 25,763 Series C Preferred Shares, 271,997 shares of common stock and 701,390 May Warrants were issued under the May Units. The offering was made in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

 

The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share, and the initial conversion price is $7.20 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until such time as the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.20 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.

 

The May Warrants are exercisable, at any time, following the date the May Warrants are issued, at a price of $8.40 per share, subject to adjustment, and expire three years from the date of issuance. The holders may, subject to certain limitations, exercise the May Warrants on a cashless basis. The Company is prohibited from effecting an exercise of any May Warrant to the extent that, as a result of any such exercise, the holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon exercise of such May Warrant, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%.

 

In connection with the sale of the May Units, the Company also entered into separate registration rights agreements (the “May Registration Rights Agreement”) with each May Investor. The Company agreed to use its best efforts to file a registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares, within thirty days following the May Closing Date, to cause such registration statement to be declared effective within ninety days of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company is obligated to pay to the May Investors on a monthly basis, an amount equal to 1% of the May Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline of the registration statement, the Company obtained the requisite approval from the May Investors for the waiver of its obligations under the May Registration Rights Agreement.

 

The proceeds of the May Private Placement were deposited into an escrow account (the “May Escrow Amount”) with Signature Bank, as escrow agent (the “May Escrow Agent”) pursuant to an escrow agreement (the “May Escrow Agreement”), entered into by and between the Company, the lead investor (as defined in the May Subscription Agreements) and the May Escrow Agent, and certificates representing the May Warrants and a record of the Shares and Series C Preferred Shares, sold in the May Private Placement were deposited and recorded with the Company’s corporate secretary (the “May Securities Escrow Agent”) to be held in escrow. On the May Closing Date, twenty percent (20%) of the May Escrow Amount ($1.0 million) was released by the May Escrow Agent to the Company in exchange for the release of twenty percent (20%) of May Units by the May Securities Escrow Agent to the May Investors. The remaining eighty percent (80%) of the May Escrow Amount ($4.0 million) was released by the May Escrow Agent to the Company and the corresponding percentage of May Units were released to the May Investors, under amendments to the May subscription agreements. On September 25, 2015, the lead investor approved the release and the May Escrow Agent and the May Securities Escrow Agent released all funds and May Units remaining in escrow.

 

F-16
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity. The May Warrants do not contain contingent settlement terms not indexed solely to the Company’s own shares of common stock and, accordingly, were also recorded in stockholders’ equity. The Company allocated $2.0 million, $1.3 million and $1.8 million of gross proceeds to the Series C Preferred Stock, the common stock and the warrants, respectively, based on their relative fair values. The Company incurred $25,000 of offering expenses.

 

September 2015 Exchange and Series D Preferred Shares

 

On September 25, 2015, the Company entered into Amendment Agreements (the “Amendments”) which amended the terms of the December Subscription Agreements and May Subscription Agreements. Under the Amendments, the lead investors under the subscription agreements agreed to release all funds remaining held in escrow ($5.0 million under the December 17, 2014 closing and $4.0 million under the May 15, 2015 closing) upon the appointment of certain persons as officers and directors of the Company.

 

In connection with the Amendments, the Company also entered into Exchange Agreements with the holders of the May Warrants (the “September Exchange Agreements”) and authorized the issuance of .4 shares of common stock for each share of our Common Stock into which the May Warrants was then convertible, in exchange for cancellation of the May Warrants. The Company agreed that holders of the May Warrants could exchange their May Warrants and receive either: (1) .4 shares of common stock for each share of common stock into which the May Warrant was exercisable immediately, or (2) at the election of any holder who would, as a result of receipt of the common stock hold in excess of 4.99% of the Company’s issued and outstanding common stock, shares of 0% Series D Convertible Preferred Stock (the “Preferred D Shares”) exercisable for common stock on the same basis, but subject to 4.9% beneficial ownership blocker provisions which at the election of the holder, could be reduced to 2.49%. Under the agreement, the Company exchanged all of its May Warrants for an aggregate of 168,333 new shares of 0% Series D Convertible Preferred Stock, which upon full conversion on a fully-diluted basis, convert into 280,555 shares of newly issued common stock.

 

The Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred D Share, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred D Share is $1,000.00 per share and the initial conversion price is $600.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no interest and shall rank senior to the Company’s other classes of capital stock. The Company accounted for the exchange as a redemption of the warrants and recorded the estimated fair value of Series D Convertible Preferred Stock issued, amounting to $1,969 with a charge to paid-in capital. As the value of the preferred shares issued was less than the value of the warrants redeemed, no excess value needed to be attributed and no portion of the redemption was deemed a dividend.

 

April 2016 Registered Common Stock and Warrant Offering

 

On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the warrant shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.

 

Each warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The warrants require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement by the holder. The warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Consolidated Statements of Operations in other expenses (income). The initial recognition of the warrants resulted in an allocation of the net proceeds from the offering to a warrant liability at fair value of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.

 

F-17
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Preferred Share Conversion Activity

 

During the year ended October 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.

 

Warrants

 

A summary of the status of the Company’s outstanding warrants as of October 31 and changes during the years then ended is presented below:

 

    October 31,  
    2016     2015  
Outstanding at beginning of year     -       1,191  
Issued in offerings of units     187,500       2,171,979  
Settled under exchange agreements     -       (2,171,979 )
Expired     -       (1,191 )
Outstanding at end of year     187,500       -  

 

Special Cash Dividend

 

On January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately, $6.0 million of the special cash dividend relates to Preferred Stock shares.

 

9. STOCK-BASED COMPENSATION

 

In the years ended October 31, 2016 and 2015, the Company recorded stock-based compensation expense amounting to $3.1 million and $1.4 million, respectively, related to restricted stock awards and stock options.

 

Incentive Compensation Plans

 

In the fiscal years ended October 31, 2016 and 2015, the Company made stock-based compensation awards under its 2016 Equity Incentive Plan (the “2016 Plan”), 2014 Equity Incentive Plan (the “2014 Plan”) and its Amended and Restated 2004 Employee, Director and Consultant Incentive Plan (the “2004 Plan”).

 

2016 Plan

 

In the fiscal year ended October 31, 2016, the Company adopted the 2016 Plan, an omnibus equity incentive plan administered by the Company’s board of directors, or by one or more committees of directors appointed by the Board, pursuant to which the Company may issue up to 666,665 shares of the Company’s common stock under equity-linked awards to certain officers, employees, directors and consultants. The 2016 Plan permits the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, cash awards, or other awards, whether at a fixed or variable price, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof. As of October 31, 2016, the Company had zero shares available for future issuances under the 2016 Plan.

 

2014 Plan

 

In the fiscal year ended October 31, 2015, the Company adopted the 2014 Plan, an omnibus equity incentive plan administered by the Company’s board of directors, or by one or more committees of directors appointed by the Board, pursuant to which the Company may issue up to 375,000 shares of the Company’s common stock under equity-linked awards to certain officers, employees, directors and consultants. The 2014 Plan permits the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, cash awards, or other awards, whether at a fixed or variable price, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof. As of October 31, 2016, the Company had approximately 83,262 shares available for future issuances under the 2014 Plan.

 

F-18
   

 

MAJESCO ENTERTAINMENT COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2004 Plan

 

The 2004 Plan covers employees, directors and consultants and also provides for the issuance of restricted stock, non-qualified stock options, incentive stock options and other awards under terms determined by the Company. In April 2014, the Company’s stockholders and Board of Directors approved an amendment to the Plan to increase the number of common shares available for issuance under the Plan by 71,429 shares. As of October 31, 2016, the Company had approximately 19,217 shares available for future issuances under the 2004 Plan.

 

Stock Options

 

Stock-option activity in the fiscal year ended October 31, 2016:

 

   

 

Number Of

Shares

 

   

 

Weighted
Average

Exercise
Price

 

 
Outstanding, November 1, 2014     71,533     $ 39.24  
Granted     55,070     $ 4.44  
Forfeited     (14,188 )   $ 31.98  
Expired     (15,834 )   $ 61.08  
Outstanding, October 31, 2015     96,581     $ 16.92  
Granted     347,010     $ 4.84  
Forfeited     (12,258 )   $ 36.97  
Exercised     (31,657 )   $ 4.08  
Expired     (17,656 )   $ 30.72  
Outstanding, October 31, 2016     382,020     $ 5.73  
Options exercisable, October 31, 2016