PolarityTE Inc (PTE) 2007 Q4 法說會逐字稿

Welcome to the Majesco Entertainment Company's fourth quarter and fiscal year end 2007 earnings conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). For your information, this conference is being recorded. At this time, I would like to turn the conference over to Mike Smargiassi with Brainerd Communicators. Sir, you may begin.

Good afternoon. This is Mike Smargiassi with Brainerd Communicators, I would like to welcome you to Majesco Entertainment's conference call today. Before we get started I would like to remind you this call is being recorded and the audio broadcast and replay of this teleconference will be available in the investor relations section on the company's website. As a reminder, this call may contain forward-looking statements including statements regarding management's intentions, hopes, expectations, representations, plans, or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results or actual future results to differ materially from the expectations set forth in the forward-looking statements.

Factors that could cause actual results to differ materially are specified in the company's annual report on form 10-K for the year ended October 31, 2006, and its other filings with the SEC. The company does not undertake and specifically disclaims any obligation to release publicly the results of any revisions that that may be made to any forward-looking statements to reflect occurrences of anticipated or unanticipated events or circumstances after the date of such statements.

During the twelve months ended October 31, 2007, the company recorded a $2.8 million charge in connection with the expected settlement of a class action litigation. The charge is comprised of $2.5 million, representing the fair value on the date the agreement was executed, of the common stock expected to be distributed when the settlement becomes effective, and $0.3 million representing the increase of the value of the shares since that date. The company will adjust the fair value of the liability to the fair value of the shares expected to be distributed at each balance sheet date, and record the resulting change as a noncash charge to earnings in each period until the shares are distributed. The settlement provides that if the fair value of the stock falls below $2.5 million the company will issue additional shares, subject to certain limitations with a fair market value equal to the amount of the decrease. Therefore, the liability will not be adjusted below $2.5 million.

In addition, during the twelve months ended October 31, 2006, and 2007, the company recorded gains related to settlements of $4.8 million and $266,000 respectively. Also during the fourth quarter of 2007, the company raised $5.9 million in capital. As part of that transaction warrants of the purchase shares of the company's common stock were issued that contain a provision that under certain circumstances in which the company is sold, merged or otherwise enters into a fundamental transaction as defined in the warrant agreement with a company that is not publicly traded, the warrants may be settled by a cash payment. Therefore the warrants we recorded as a liability at fair value of $2.1 million. The company will measure the fair value of the warrants at each balance sheet date and record the change in fair value as a noncash charge or gain to earnings each period. The warrants were valued at $1.5 million on October 31, 2007. Due to fluctuations in the company's stock price, this resulted in a noncash gain of $0.6 million during the quarter ended October 31, 2007.

To facilitate a comparison between these periods, the company has presented both GAAP and non-GAAP financial results. GAAP financial measures, including gain on settlement of liabilities and other gain, settlement of litigation related charges net, change in fair value of warrants, operating income, net income, and basic and diluted loss per share have been adjusted to report non-GAAP financial measures that exclude these charge, and income related to gains on these settlement and warrants. These non-GAAP measures are provided to enhance investors overall understanding of the company's current financial performance and the company's prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for, or superior to GAAP results. A reconciliation between GAAP and non-GAAP financial measures is included in the press release issued earlier today.

On the call today we have Jesse Sutton, Chief Executive Officer; John Gross, Chief Financial Officer; Gui Karyo, Executive Vice President of Operations. I would now like to turn the call over to Jesse Sutton.

Thanks, Mike. Good afternoon, everyone. Thank you for joining us today. I will open the call with some highlights and a strategic overview of our performance in 2007. Then, John will provide the financial review for our fiscal fourth quarter and full year ended October 31st and our outlook for our upcoming year. I will then comment on our 2008 release schedule and provide some summary remarks after which we will be happy to take your questions.

2007 was our first full year of operations under our new mass market casual game strategy. At the core of this strategy, it is our focus on producing intuitive and fun to play games that capitalize on the broad appeal and reach of more casual gain platforms such as the Nintendo DS and Wii console. This new strategy is aligned with our core strengths which include the identification, development, and marketing of product for the casual gamer. For the full year, we reported net revenue of $51 million, in line with our updated guidance and made significant progress towards our goal of achieving profitability. We improved our gross margin 420 basis points to 33.9%, and our financing costs declined by $819,000 or 35%. We made substantial improvements and on a non-GAAP basis we reduced our operating loss by 84% to $1.3 million and our net loss by 72% to $2.8 million. This represents a $6.5 million improvement at the operating line and $7.3 million improvement on the net income line.

This is on net sales, which were almost $16 million below last year. This is a clear indication that we have gotten our cost structure under control and are executing on our strategy and moving the company towards profitability. We're extremely pleased with the progress we have made over the last year as we completed the transition to our new strategy and in the process established a performance baseline for our company moving forward. We have streamlined our overall operations and implemented a focused and disciplined business model which has reduced our development in marketing expenses and driven our improved financial results, specifically our margin and profitability performance.

We brought $6 million in additional capital into the company to enable us to increase the number of titles we bring to market each year. We moved forward in resolving outstanding litigation, and we have laid the ground work to achieve continued improvement in our financial and operating results in the years ahead. We released 19 titles in 2007 with 13 titles for the DS handheld, our first two titles for Nintendo's Wii console, and four titles for other platforms. During 2007, revenue from new releases comprised 58% of our total net revenue, with 20% coming from the sale of games on the Wii platform. 56% from DS, and 24% from other platforms. This compares to 2006, when revenue from new releases comprised 57% of our total net revenue with 16% coming from JAWS Unleashed. In 2006, 24% of total net revenue came from the DS.

Cooking Mama had an incredible year with solid performances on both the Wii and DS platforms and was among the best-selling new third party DS titles. It delivered another solid performance in the fourth quarter, ending the year as our most successful title. Thus far, the Cooking Mama franchise has sold more than 1.4 million units for both the DS and Wii. With the release of Cooking Mama 2: Dinner With Friends, for the DS in the first quarter and the Wii sequel set to launch later this year, we expect this franchise will remain the anchor of our portfolio.

In 2007 we also benefited from solid performances from Bust a Move bash, our Brain Boost titles, Cake Mania, and the catalog performance of JAWS Unleashed. We were also pleased with the performance of our fourth quarter releases, Zoo Hospital, and Nancy Drew. We strengthened our international operations with the new distribution agreement which launched in the third quarter with the shipping of six titles. In the fourth quarter we added four titles: Cake Mania, New York Times Crosswords, Operation Vietnam, and Toondoku. International sales comprised 15% of our 2007 total revenue. We are pleased with this distribution relationship, which has enhanced our international market exposure.

We continue to focus on securing international rights for all of our titles and further developing this important distribution channel and revenue stream. In November, we announced the launch of Majesco Studios, an internal development facility based in the L.A. area that focuses on products and properties that target the casual gamer market. We believe this is an attractive and low-risk opportunity that has the potential to create significant value for the company over the long-term. The studio allows us the opportunity to create our own intellectual property, and provide greater control over the development process, with similar or reduced costs as we essentially transfer a portion of our development efforts from third parties to the studio. While the studio will be focusing on our own titles, we will opportunistically pursue third party projects as well.

The studio is headed by Bill Petro, Vice President of Internal Development, who is responsible for building and overseeing studio operations. Bill is a proven leader, an industry veteran, with extensive knowledge of the mass market gaming sector, and an ideal leader for our studio. Initially, we expect the studio to produce a small percentage of the total titles we bring to market. While we are still finalizing our initial project list, we currently expect the studio to deliver one to three titles in its first year, depending on the platform mix. We would expect all internal projects to be completed in line with our current product development cycle, which ranges from six to nine months for the DS and twelve to eighteen months for the Wii. Given the development lead times, we would expect to see the financial benefit from our initial titles starting in the first quarter of 2009. Longer term, as we build out the studio's capabilities, our goal would be to generate 10 to 15% of our annual releases through the studio.

Finally, our recent equity financing provides the necessary growth capital to expand our product pipeline. Given the product development lead times, we would expect to see the full financial benefit from putting this capital to work in 2009. In addition, this financing allowed us to significantly reduce our financing costs. In fact, we should see our 2008 interest expense cut in half from the 2006 levels.

In summary, 2007 was a very active year for Majesco as we made significant progress in the execution of our strategic plan. Our improving financial performance is proof that we have successfully implemented our new infrastructure and cost structure. We strongly believe that our strategy to target the casual gaming market expands our product offerings and focuses on the nintendo platforms places us in a strong position to further improve our financial performance and create additional value for our shareholders over the long-term.

I would now like to pass the call to John Gross, Majesco's Chief Financial Officer, to provide the financial review of our fiscal fourth quarter and our full year ended October 31st. John?

Thanks, jesse. Net revenue for the fourth quarter of 2007 was $11.9 million compared to $21.5 million reported for the same period last year. The decline was primarily attributable to the strong performance of JAWS Unleashed and the launch of Cooking Mama One for DS introduced in Q3 and Q4 of last year respectively and a very strong fourth quarter value pricing program last year.

In the fourth quarter of 2007, 68% of our net revenue was from new releases, and 32% from our catalog. 21% of net revenue was from sales for console systems which included 8% contributed from the Wii. In the fourth quarter 79% of our net sales was from games for handheld systems which included 72% from games for the DS. In the fourth quarter of 2006, 65% of our revenue was from sales of games for new releases, with 30% from catalog product. Console systems, principally for JAWS Unleashed provided 30% of net revenues. This compares to 70% in the fourth quarter of 2006 for handheld systems, which included only 36% from games developed for the DS.

The split between domestic and international revenues in the fourth quarter was 81% and 19% respectively. This compares to 86% domestically and 14% internationally in the same quarter last year. Cost of sales was $8.2 million in the quarter, which compares to $17.3 million in the fourth quarter of 2006, reflecting a combination of lower revenues and improved margins. As we executed on our business model, we continued to reduce our development and licensing costs as a percentage of sales, to 17.3% in the fourth quarter, compared to 25.8% in the fourth quarter of 2006. Gross margin was 31.2% for the quarter compared to 19.8 for the same quarter last year. The increase was primarily attributable to lower margins in some of our value programs last year, compared to the higher margins of our Wii titles and the success of Cooking Mama in the fourth quarter of 2007.

Our expenses remain under control. Looking at our operating expenses, product research and development costs for the quarter fell slightly to $624,000 compared to $654,000 in the fourth quarter of 2006. This is comprised of the fixed costs of the quality assurance department that principally evaluates, tests and oversees the development of our products. Selling and marketing expenses were $1.7 million compared to $2.4 million in the fourth quarter of 2006. The decrease was volume driven, and primarily a result of the lower variable selling and marketing expenses on 2007's lower revenue. Remember that total selling and marketing expenses include both fixed costs, primarily for employees, as well as variable selling and marketing costs associated with titles launched during the quarter.

G&A decreased to $2.3 million in the fourth quarter of 2007 compared to $3.2 million in the same period last year. The decrease reflects our ongoing cost control efforts as well as lower professional and legal expenses. Our G&A includes $493,000 of stock-based compensation expense during the quarter, compared to $1.2 million in the fourth quarter of 2006. Total cash fixed costs for the quarter, which includes G&A, product research, and the fixed portion of selling and marketing, which relates to employee costs was within our expectation of $3 million to $3.5 million.

Our GAAP operating loss was $1.5 million compared to $1.9 million in the fourth quarter of 2006. Non-GAAP operating loss for the fourth quarter was $1.2 million compared to a non-GAAP operating loss of $2.1 million in the fourth quarter of 2006. The improved performance reflects improved gross margins and ongoing efforts to manage and reduce expenses. Financing costs increased -- decreased 92% to $75,000 from almost $1 million in the fourth quarter of 2006, as we benefited from the $6 million in added capital, making us less reliant on financing our product purchases and for negotiating better terms with our financing sources. The GAAP net loss was $961,000 or $0.04 per share, compared to a loss of $2.9 million or $0.13 per share in the fourth quarter of last year. Our fourth quarter 2007 non-GAAP net loss was $1.2 million or $0.05 per share compared to the fourth quarter of 2006 non-GAAP net loss of $3.1 million or $0.14 per share.

In addition, as previously announced during the quarter, the company entered into agreements to settle certain litigations pending in the United States District Court District of New Jersey. A securities class action brought on behalf of a purported class of purchasers of the company's securities, a private securities action filed by Trinad Capital Master Fund Limited and a second action filed by Trinad, reportedly on behalf of the company. Under the terms of the settlement agreement in the securities class action which is subject to notice to the shareholder class and court approval, the company's insurance carrier will make a cash payment, and the company will contribute shares of its common stock with a market value of $2.475 million. The shares being contributed to the settlement will be distributed to the settlement class if and when the court grants final approval for the settlement and the settlement becomes effective.

At this time, the company cannot estimate the exact number of shares that will be contributed to the settlement. However, it will not be less than 1.8 million shares. Further, if the average closing bid price of the company's common stock for the 20 days prior to the settlement becoming effective is less than $1.37, the company would have to issue additional shares to fulfill its obligation under the settlement, or could under certain circumstances, determine not to conclude the settlement and revert back to disputing the class claims.

Also during the quarter, the company raised approximately $6 million in gross proceeds from a group of institutional and accredited investors in exchange for shares of common stock and warrants to purchase additional shares of common stock at $2.04 per share. The warrants contain the provision that under certain circumstances under which the company is sold, merged, or otherwise enters into a fundamental transaction as defined in the warrant agreement, the warrants may be settled by a cash payment. Therefore, the warrants were recorded as a liability at their fair value of $2 million in accordance with FASB statement 150, accounting with certain financial instruments with characteristics of both liabilities and equity, and FASB staff position 150.1, issuers accounting for freestanding financial instruments composed of more than one option or forward contract embodying obligations under FASB statement 150. The company will measure the fair value of the warrants at each balance sheet date and record the change in fair value as a noncash charge or gain to earnings each period. The warrants were valued at at $1.3 million at October 31st, 2007, due to fluctuations in the company's stock price, this resulted in a non-cash gain of $600,000 during the quarter ended October 31, 2007.

Turning to our results for the full year ended October 31, 2007, net revenue was $51 million, consistent with our most recent guidance, and compared to $66.7 million last year. The decrease in revenue was primarily attributable to the company's shift away from publishing higher price premium games in 2007. In 2007, 58% of our net revenue was from new releases, and 36% from our catalog. 30% of net revenue was from sales of games for console systems, which included 20% contributed for the Wii. For the year, 64% of our net sales was from games for handheld systems which included 56% from games for the DS. In 2006, 57% of our net revenue was from new releases, and 33% from our catalog. 34% of net revenue is from sales for console systems which included PS2, and XBox. 56% of our net sales was from games for handheld systems, which included 24% from games for the DS.

In 2007, we made substantial progress across virtually all of our reporting metrics, driven by our ability to implement and execute on our new strategy. Cost of sales was $33.7 million for the year, compared to $46.9 million in 2006. The development and licensing costs as a percentage of sales were 15.2% in 2007 versus 21.9% in the year ago period. We drove our gross margins from 29.7 in 2006 to 33.9% this year, which reflects our focus to improve profitability. Product research and development costs for 2007 were $2.3 million compared to $2.6 million in 2006. Selling and marketing expenses were $7.6 million compared to $10.9 million in 2006, a reduction of 31%. The 2006 costs were driven by higher variable, selling, and marketing costs associated with 2006 higher sales and 2006 media and marketing campaigns for the last of the premium priced big budget games published in the first quarter of last year.

G&A decreased 25.7% to $8.4 million in 2007 compared to $11.3 million in 2006. The decrease was primarily driven by lower legal expenses. Our G&A includes $1.5 million of stock-based compensation in 2007 compared to $2.2 million in 2006. Our GAAP operating loss was $3.8 million, compared to a loss of $3 million in 2006. We generated a non-GAAP operating loss of $1.3 million in 2007 compared to a non-GAAP operating loss of $7.7 million in 2006, an improvement of $6.4 million which puts us on pace to reach break even slightly above $50 million in sales at similar cost levels.

Interest expense and financing costs decreased 35% in 2007 to $1.6 million from $2.4 million in 2006, as we benefited from the capital infusion in the fourth quarter which enabled us to be less reliant on our financing of product purchases, and from negotiating better term from our financing sources. The GAAP net loss in 2007 was $4.8 million or $0.20 per share compared to a net loss of $5.4 million or $0.24 per share in 2006. Our 2007 non-GAAP net loss was $2.8 million or $0.12 per share compared to a 2006 non-GAAP net loss of $10.1 million or $0.45 per share, an improvement of 72%, or over $7 million.

Throughout the year ,we executed on a number of initiatives to strengthen our balance sheet, including improving our cash balance and reducing inventory. As of October 31, 2007, we had cash and cash equivalents of $7.3 million. This included the benefit of the $6 million in capital we raised in September. Payable to the factor was $1.5 million which represents gross receivables sold to the factor of $7 million less allowances of $3.1 million net of advances from the factor of $5.4 million. Our receivables are in good shape, and the increase in our inventory is virtually all related to purchases of Cooking Mama titles made in October, subsequently sold in the first quarter of 2008. The increase in our capitalized software and licensing costs is largely the result of costs related to development and licensing costs for Cooking Mama and other products launched or to be launched after October 31, 2007. Accounts payable and accrued expenses were $10.3 million at year end, including a $2.8 million accrual related to the expected settlement of our class action lit litigation.

Turning to our outlook for 2008, we expect full year net revenue in the range of 53 to $58 million. In addition, as we previously discussed due to our product lead times, we do not expect to see the full financial benefit from expanded product line until 2009 which will be driven by the growth capital we raised in 2007 and our new studio. We expect to see a continued improvement in our gross margin as we remain disciplined in our approach to the business.

In terms of cash fixed costs which includes our general and administrative, product research and the fixed portion of sales and marketing costs, we expect that number to once again fall towards the higher end of the range of 3 to $3.5 million per quarter in 2008 excluding the costs of our recently announced studio. The majority of the studio costs will be reflected in development with the remainder included in product research or G&A. We currently anticipate 41% of revenue will be generated from console systems and 59% from handheld systems.

From a profitability perspective, for the full year we would expect to break even or better -- be break even or better on an operating basis. Our guidance assumes the release of approximately 25 titles in 2008 with approximately nine Wii and 15 DS titles. Overall, we're very pleased with the financial progress we made in 2007. Today we are significantly more profitable company than a year ago, and we expect to continue to expand our margins in 2008. We are executing on our new strategy, growing the business, improving our financial position, and are on a clear path to reach sustainable growth and profitability. I will now turn the call back to jesse. Jesse?

Thanks, John. In the new year we look to build on the operating and financial progress of 2007. We have implemented a strategy that plays to our strength and are executing with a disciplined financial approach that is driving our performance.

Over the past several years, the fastest-growing segment of the industry has been the casual game market. The Nintendo Wii and DS platforms with their mass market appeal had an outstanding holiday season as they continue to broaden their install base both in the U.S. and globally. Consumer demand for the Nintendo platforms remained strong and is expected to continue into 2008. According to NPD, as of November 2007, in the U.S. the DE had a base of more than 15 million units and the Wii with more than 6 million units. Globally, the DS has an install base of more than 61 million units, and the Wii approximately 17 million units. Given our specific focus on this segment, we expect to continue to benefit from this trend.

Our core focus remains the identification, development, and publishing of mass market games that are innovative, intuitive, and fun to play. We will continue to aggressively pursue new casual gaming products and opportunistically target core game titles that meet our financial criteria. We are prudently expanding our total number of annual title releases and expect to increase our new titles by 30% in 2008. We expect to increase the number of titles in subsequent years driven by the growth capital we raised in 2007 and the launch of majesco studios, which will provide development capacity and allow us the opportunity to build a company-owned library of valuable proprietary, intellectual property.

Looking at the first quarter of 2008, we were pleased with our holiday performance which was led by our Cooking Mama titles. In the quarter, we had a solid lineup of new releases consisting of one Wii game and two DS. Our first quarter releases include Cooking Mama 2: DinneR With Friends for the DS, which is a sequel to the award-winning original that includes 80 all new recipes, extensive customization, and a tasting mode with friends. Left Brain, Right Brain for the DS is the only brain game that promotes ambidexterity through a series of mini-games that requires players to flip the DS and play with both their dominant and nondominant hands. FuR Fur Park for the Wii, originally slated for release in the fourth quarter of 2007, is a collection of 30 mini-games, including arcade classics like Arachnoid and Bubble Bobble that all take advantage of range of motion possible via Wii remote play.

To date, we have announced the following titles for the rest of fiscal 2008: Pet Pals, Animal Doctor for the DS invites players to step into the challenging world of veterinary medicine by diagnosing and treating 30 different medical cases created by real vets. Mega Brain Boost for the DS offers exceptional value by offering three full brain games designed to improve memory and concentration on one cartridge. Nano Stray 2 for the DS is a sequel to the very first 3D shooter available on the DS and delivers thrilling nonstop shooting action combined with stunning graphics. Blokus Portable: Steambot Championship for the PSP is based on the world-renowned Blokus board game and blends its award-winning strategic game plate with the add-on anime character from the Steambot Chronicle series. Cake Mania 2 for DS is the sequel to the best-selling DS game based on Sandlot Game's award-winning downloadable title. Players will lead Jill through more than 200 different levels of baking and frosting madness with all new customer base, exotic locations, kitchen upgrades, and multiple endings.

Chosen for Nintendo's DS download stations located in more than 10,000 retailers nationwide, Eco-creatures, Save the Forest for the DS, is a realtime strategy game in which players must control units of woodland creatures through a unique environmental adventure. Wild Earth:African Safari for the Wii is a first-person safari adventure that challenges players to capture award-winning photos of the continent's exotic wildlife. Wonder World Amusement Park for the Wii brings to life a fully 3D world of boardwalk games, rides, and prizes, across multiple themed areas that players can explore with personalized avatars. The sequel to the best-selling Cooking Mama cook-off game for the Wii that sold more than 300,000 units and challenges players to use the Wii remote as the ultimate cooking utensil.

We have adjusted our release of Blast Works, Build, Trade and Destroy for the Wii to May in order to fully incorporate a number of enhancements that we believe will dramatically improve the title's overall appeal. Blast Works is a unique geometric shooter that lets players build their own shooter experiences via intuitive ship and level editors, and then share their creations online with friends via Wii Connect 24. The following titles are expected to be released during the company's first quarter of 2009: Our House for the Wii turns the Wii remote into the ultimate creation tool that lets players design, build, and decorate their own personalized trophy home, and then share it with friends on in an online neighborhood via Wii Connect 24.

A to-be-titled original music-based videogame, scheduled for release in late 2008, from legendary game designer and multi-media musician Masaya Matsuura, a famed New York artist Rodney Alan Greenblat, creators of the highly acclaimed best-selling Parappa the Rapper series, Matsuura and Greenblat will bring their engaging game play and distinctive art style to the Wii home videogame system for the first time. Finally, we will continue to support the best-selling franchise from Sandlot games by publishing Cake Mania for the Wii. The game will integrate motion-based control with a series signature cake-baking game play.

In closing, we've made great progress towards improving the company, both financially and operationally. The next logical question is, how do we grow the company? Beyond the obvious answer of more titles, here is one answer. With Cooking Mama, we've proven our ability to identify and develop a hit for the DS and Wii. The consumer is looking for fun games, unique to these platforms, which utilize a stylus and Wii controller. Our experience with Cooking Mama has shown us it is not about the brand but about the game play. This leads to a more level playing field for all publishers. While we do not plan for hits as we expand our product line, we are confident in our ability to identify and bring additional hit titles to market.

I would like to once again thank you all for joining our call today and would now like to turn the call over to the operator for the Q&A. Operator?

(OPERATOR INSTRUCTIONS). The first question comes from Edward Woo from Wedbush Morgan. Please go ahead with your question or comment.

Good job on making progress towards getting back on track. The question I had is, it seems like you guys are putting out more titles in fiscal '08 than you guys are doing in fiscal '07, does that imply lower revenues per title, or is that still an effect of having a lot of catalog sales in the prior year?

This is Gui. That's an interesting question. It is not easy to do a title by title comparison year-over-year, but certainly within 2007 there were things such as the continued catalog sale of JAWS and the sales of the DDR product that isn't one for one matches to the tracks we're launching in 2008.

Our next question comes from John Taylor from Arcadia.

Hi. I have a couple of questions here if you work with me. Let's see. John, I wonder if you could give us what the accounts receivable reserves were that you've got on the books at the end of the year?

Talking about the reserve?

Yes. Markdowns, price protection, that sort of thing.

Bear with me one second here.

Okay. While you're looking for that, you know offhand what your NOL stands at right now, the U.S. NOL?

Hold on a second, John.

Okay.

The allowances at the end of 2007 were $3.1 million, and at the end of 2006 they were a little over $4 million.

All right. Okay. And then --

The NOL, certainly more detail on the 10-K, but we can provide that off line.

Okay. And then I wonder if you could talk a little bit about the studio and the implications? I know you're working hard to keep fixed cash expenses in that range that you specified, but by the same token, it sounds like your guidance is kind of prior to that. Can you bracket for us kind of how much you're thinking the annual budget of the studio might look like this year, next year, or kind of a going run rate in a little while?

I will take a shot at it and maybe Gui can jump in afterwards, but basically the way that we're looking at it is that this is really almost a swap out of development costs that were external coming internally, and so expenses for the studio that are related specifically to the production of specific games will end up showing up in the development cost area. Only those that would be considered R&D would show up down below in G&A.

So overall you don't expect any significant increase in the amount of development resource on an annual basis, cash expenses, whether they're run through the P&L or put on the balance sheet, don't expect much change there?

This is Gui. We do not expect much if any change in the overall developmental location. It is just about where it is going to fall in the accounting of it all. Some portions, as you can imagine, will be exactly like carb dealt with exactly like we deal with a third party developer in terms of capitalization. Other will fall into G&A, and some may fall into our normal product research line, but in aggregate, the strategy behind the studio is to be able to produce equivalent or better product for the same exact cost.

Okay. Great. And then, John, do you know offhand what the fully diluted share count is going to be in a profitable quarter at this point?

You don't mean currently in a profitable quarter?

Yeah, because you've been reporting losses, so I am assuming you're using kind of a basic share count instead of a fully diluted share count, so what's my denominator going to be if you report $1 million say in some quarter of profitability, what's my share count going to be?

Give or take probably up about 4 million shares or so from where we are.

4 million. Okay. Great. And then last question, I will let somebody else ask and get back in queue. The foreign -- the international revenue piece. Was that -- can you talk about how you book that? Did you guys get a guarantee on that? Was there any up front money paid you got booked into revenue or is that purely an earn as you go kind of thing?

There is multiple questions there. From an accounting point of view, it is like any other sale. In terms of the mechanics of the agreement, there is an up front minimum guarantee, but we don't book that until we actually ship it.

Okay. Very good. Okay. I will get back in queue. Thanks.

(OPERATOR INSTRUCTIONS). At this time, I would like to turn the conference call back over to management. Mr. Sutton, you may make any closing remarks you would like to make.

Just thanks again for joining us today. Thank you very much.

We would like to thank you all very much for participating in the Majesco Entertainment Company's fourth quarter and fiscal year end 2007 earnings conference call. This does conclude today's event. You may now disconnect your telephone lines.