MAD CATZ INTERACTIVE INC 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period Ended June 30, 2009
For the Transition Period from to
Commission File No. 001-14944
MAD CATZ INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 55,098,549 shares of the registrants common stock issued and outstanding as of July 31, 2009.
MAD CATZ INTERACTIVE, INC.
FOR THE PERIOD ENDED JUNE 30, 2009
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
See accompanying notes to unaudited condensed consolidated financial statements.
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars, except share and per share data)
See accompanying notes to unaudited condensed consolidated financial statements.
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
MAD CATZ INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated balance sheets and related condensed consolidated statements of operations and cash flows contained in this Quarterly Report on Form 10-Q, which are unaudited, include the accounts of Mad Catz Interactive, Inc. (the Company) and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such condensed consolidated financial statements have been included. These entries consisted only of normal recurring items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company generates a substantial percentage of net sales in the last three months of every calendar year.
The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Please refer to the Companys audited consolidated financial statements and related notes for the fiscal year ended March 31, 2009 contained in the Companys Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (the SEC).
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, reserves for accounts receivable and inventories, contingencies and litigation, valuation and recognition of share-based payments and income taxes. Illiquid credit markets, volatile equity markets, foreign currency, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ from those estimates.
The Company has evaluated subsequent events through the time of filing this Form 10-Q with the SEC on August 12, 2009.
Recently Adopted Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 is for interim or annual periods ending after June 15, 2009. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. The Company adopted SFAS No. 165 during the quarter ended June 30, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and Accounting Principles Board (APB) APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends Statement 107 and Opinion 28 by requiring disclosures of the fair value of financial instruments included within the scope of Statement 107 whenever a public company issues summarized financial information for interim reporting periods. FSP FAS 107 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 during the quarter ended June 30, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value using generally accepted accounting principles, and expands disclosures related to fair value measurements. Subsequent to the issuance of SFAS No. 157, the FASB issued FASB Staff Position 157-2 (FSP 157-2). FSP 157-2 delayed the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company adopted the provisions of SFAS No. 157 as of April 1, 2008 with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities, which the Company adopted on April 1, 2009. This adoption did not have an impact on the Companys unaudited condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company adopted FSP 157-4 on April 1, 2009 and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R Business Combinations (SFAS No. 141R). SFAS No. 141R establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In April 2009, the FASB issued FSP FAS 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141R-1), which amends the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. SFAS No. 141R and FSP FAS 141R-1 are effective beginning with the Companys fiscal 2010. The impact of the adoption of SFAS No. 141R and FSP FAS 141R-1 on the Companys results of operations and financial position will depend on the nature and extent of business combinations that it completes, if any, in or after fiscal 2010.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1), which applies to all convertible debt instruments that have a net settlement feature, which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. FSP APB 14-1 requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company adopted FSP APB 14-1 on April 1, 2009, but it did not have an impact on its unaudited condensed consolidated financial statements as the Companys convertible debt instrument does not contain a net settlement feature.
In April 2008, the FASB issued FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS No. 142-3). FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets, to include an entitys historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, even when there is likely to be substantial cost or material modifications. FSP FAS No. 142-3 states that in the absence of historical experience an entity should use assumptions that market participants would make regarding renewals or extensions, adjusted for entity-specific factors. The guidance for determining the useful life of intangible assets included in FSP FAS No. 142-3 will be applied prospectively to intangible assets acquired after the effective date of April 1, 2009. The Company adopted FSP No. FAS 142-3 beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
In November 2008 the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-7, Accounting for Defensive Intangible Assets (EITF 08-7). EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the intangible asset will directly or indirectly affect the entitys cash flows. Defensive intangible assets must be recognized at fair value in accordance with SFAS No. 141R and SFAS No. 157. EITF 08-7 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted FSP No. FAS 142-3 beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (EPS) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted FSP EITF 03-6-1 on April 1, 2009, but it did not have an impact on its consolidated financial statements as the Companys unvested equity awards are not participating securities as defined by FSP EITF 03-6-1.
In June 2008, the EITF reached a consensus in Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entitys own stock, which is the first part of the scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The Company adopted EITF 07-5 beginning April 1, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
Inventories consist of the following (in thousands):
(3) Bank Loan
The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia) to borrow funds under a revolving line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. On June 23, 2009, the Company extended the term of the Credit Facility through October 31, 2012. As part of extending the term, the Company chose to reduce the amount of the Credit Facility from $35.0 million to $30.0 million. The line of credit accrued interest on the daily outstanding balance at the U.S. prime rate plus 0.75% per annum through June 30, 2009, after which interest accrues at the U.S. prime rate plus 2.00% or, at the Companys option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. At June 30, 2009, the interest rate was 4.0%. The Company is also required to pay a monthly service fee of $1,000, which increased to $2,000 as of July 1, 2009, and an unused line fee equal to 0.25% of the unused portion of the loan, which increased to 0.50% on July 1, 2009. Borrowings under the Credit Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. (MCI) and by a pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company. The Company is required to meet a quarterly financial covenant based on the Companys trailing four quarters coverage of fixed charges. The Company was in compliance with the current fixed charge coverage ratio covenant as of June 30, 2009.
(4) Convertible Notes Payable
On November 20, 2007, the Company issued to the seller of Saitek $14,500,000 of convertible notes (Saitek Notes) as part of the consideration relating to that acquisition. On June 24, 2009, the terms of the Saitek Notes were amended as follows. The maturity of the Saitek Notes was extended to March 31, 2019 with annual principal and interest payments of $2,400,000 due beginning March 31, 2011 until the Saitek Notes are retired. The Saitek Notes will bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. Quarterly cash payments for partial interest in the amount of approximately $45,000 are due beginning June 30, 2009, in addition to an interest payment of $500,000 due on October 31, 2009, and an interest payment of $596,035 due on March 31, 2010. The Saitek Notes are convertible into Mad Catz common stock at the exercise price of $1.419 per share.
(5) Completion Note
Pursuant to the Saitek purchase agreement, a working capital adjustment in the amount of $847,000 was made to the purchase price based on the completion of the final balance sheet, and the Company financed this amount with a note payable to The Winkler Atlantic Trust. The note is unsecured, was originally due August 1, 2011 including all accrued interest, and bears interest at 7% per annum compounded annually. As part of restructuring the Saitek Notes described above, the Company is required to repay this note in full, plus accrued interest, on March 31, 2010.
(6) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires classification of other comprehensive income (loss) in a financial statement and display of other comprehensive income separately from retained earnings and additional paid-in capital. Other comprehensive income (loss) consists of foreign currency translation adjustments.
Comprehensive income (loss) for the three months ended June 30, 2009 and 2008 consists of the following components (in thousands):
(7) Basic and Diluted Net Loss per Share
Basic earnings per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share includes the impact of potentially dilutive common stock-based equity instruments.
Outstanding options to purchase an aggregate of 6,896,274 and 3,685,334 shares of the Companys common stock for the three months ended June 30, 2009 and 2008, respectively, were excluded from diluted net loss per share calculations because inclusion of such options would have an anti-dilutive effect on losses in these periods. Weighted average shares of 10,217,744 related to the convertible notes payable were excluded from the calculation for each of the three month periods ended June 30, 2009 and 2008 because of their anti-dilutive effect during the period.
(8) Geographic Data
The Companys sales are attributed to the following geographic regions (in thousands):
Revenue is attributed to geographic regions based on the location of the customer. During the three months ended June 30, 2009 and 2008, one customer individually accounted for approximately 25% and 23% of the Companys gross sales, respectively.
(9) Subsequent Events
In accordance with SFAS No. 165, management has evaluated any events or transactions occurring after June 30, 2009, the balance sheet date, through August 12, 2009, the date that the Companys unaudited condensed consolidated financial statements were issued, and identified no events or transactions which would impact its unaudited condensed consolidated financial statements for the three month period ended June 30, 2009 or require disclosure.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This section contains forward-looking statements and forward looking information (collectively forward-looking statements) as defined in applicable securities legislation involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including those set out under Forward-looking Statements herein and in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and in Part II Other Information Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
We design, manufacture (primarily through third parties in Asia), market and distribute accessories for all major videogame platforms, the PC and, to a far lesser extent the iPod and other audio devices. Our accessories are marketed primarily under the Mad Catz, Saitek, Joytech, GameShark and AirDrives brands; we also produce for selected customers a limited range of products which are marketed on a private label basis. Our products include videogame, PC and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also market videogame enhancement products and publish videogames.
Seasonality and Fluctuation of Sales
We generate a substantial percentage of our net sales in the last three months of every calendar year, our fiscal third quarter. Our quarterly results of operations can be expected to fluctuate significantly in the future, as a result of many factors, including: seasonal influences on our sales; unpredictable consumer preferences and spending trends; the introduction of new videogame platforms; the need to increase inventories in advance of our primary selling season; and timing of introductions of new products.
Potential Fluctuations in Foreign Currency
During the first quarter of fiscal 2010, approximately 39% of total net sales was transacted outside of the United States. The majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction
gains and losses, which we have experienced in the past and continue to experience. Due to the volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. To date we have not hedged against foreign currency exposure.
Critical Accounting Policies
Our critical accounting principles and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended March 31, 2009, as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
From a geographical perspective, our net sales for the three months ended June 30, 2009 and 2008 were as follows (in thousands):
For the three months ended June 30, 2009, consolidated net sales decreased 4% as compared to the three month period ended June 30, 2008. Net sales in the first quarter of fiscal year 2009 decreased primarily due to the strength of the U.S. dollar relative to the British pound (GBP) and the Euro, which led to a decrease of approximately $1.7 million for GBP and Euro-denominated sales when translated into U.S. dollars . Also contributing to the decrease were lower sales of products for the Wii platform in the 2009 period as compared to the 2008 period when the Wii products were launched.
Our sales by product group as a percentage of gross sales are as follows:
The increases in Xbox 360 and PlayStation 3 as a percentage of total gross sales primarily relate to sales of the Street Fighter IV FightStick and Street Fighter IV Tournament Edition FightStick which were released in the fourth quarter of fiscal 2009. The decrease in PC sales as a percentage of total gross sales is primarily related to lower keyboard, flight control and mice sales.
Our sales by product category as a percentage of gross sales are as follows:
The increase in fight sticks as a percentage of total gross sales primarily relates to sales of the Street Fighter IV FightStick and Street Fighter IV Tournament Edition FightStick, which were released in the fourth quarter of fiscal 2009. The increase in control pads is primarily related to the sales of the Street Fighter IV Fight Pad , also released in the fourth quarter of fiscal 2009.
Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including depreciation and other overhead.
The following table presents net sales, cost of sales and gross profit for the three months ended June 30, 2009 and 2008 (in thousands):
Gross profit for the three months ended June 30, 2009 decreased 22%, while gross profit as a percentage of net sales, or gross profit margin, decreased from 35% to 28%, the vast majority of which reduction was caused by exchange rate fluctuations, specifically the strengthening of the U.S. dollar compared to the Euro and the GBP in the quarter ended June 30, 2009. Absent significant changes in the value of the U.S. dollar, we expect our gross profit margin to stay within a range of plus or minus two and one-half points of our fiscal 2009 gross margin.
Operating expenses for the three months ended June 30, 2009 and 2008 were as follows (in thousands):
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising expense and costs of operating our websites. The decrease in sales and marketing expense is primarily due to exchange rate fluctuations which accounted for $325,000 of the decrease. Decreased advertising, co-op, third-party commissions, and public relations expenses accounted for the remainder of the decrease. We expect sales and marketing expenses as a percentage of net sales in fiscal 2010 to continue to decline modestly.
General and Administrative. General and administrative expenses include salaries and benefits for our executive and administrative personnel, facilities costs and professional services, such as legal and accounting. The decrease in general and administrative expenses is primarily due to acquisition-related audit and professional fees which were included in the first quarter of fiscal year 2009 which accounted for approximately $1,000,000 of the decrease. Also contributing to the decrease were reductions in bonus expense, salary expense and travel and entertainment expense. We expect general and administrative expenses as a percentage of net sales in fiscal 2010 to decline by a few percentage points.
Research and Development. Research and development expenses include the costs of developing and enhancing new and existing products. The decrease in research and development expenses relates to on-going cost reduction efforts.
Amortization. Amortization expenses consist of the amortization of the acquired intangible assets from Saitek and Joytech, and the expense remained fairly consistent period to period.
Interest Expense, net, Foreign Exchange Loss and Other Income
Interest expense, foreign exchange gain and other income for the three months ended June 30, 2009 and 2008 were as follows (in thousands):
Interest expense has remained relatively unchanged from prior year. However, due to the higher interest rate on our bank loan beginning July 1, 2009, it is expected that interest expense in fiscal year 2010 may be higher than it was in 2009.
The foreign exchange loss in the three months ended June 30, 2009 compared to the quarter ended June 30, 2008 is due primarily to the rise in value of the U.S. dollar versus the GBP and the Euro. The loss primarily relates to the revaluation of intercompany payables arising from product purchases at the Companys foreign subsidiaries.
Other income recorded in the three months ended June 30, 2009 and 2008 primarily relates to advertising income from our GameShark.com website which decreased in the 2009 period.
Income Tax Expense (Benefit)
Income tax expense (benefit) for the three months ended June 30, 2009 and 2008 was as follows (in thousands):
The Companys effective tax rate is a blended rate for different jurisdictions in which the Company operates. The effective tax rate fluctuates depending on the taxable income in each jurisdiction and the statutory income tax rates in those jurisdictions. Our U.S., Canadian and French operations are excluded from the effective tax rate calculation due to the full valuation allowances against their deferred tax assets. The decrease in the effective tax rate in the first quarter of fiscal 2010 versus the first quarter of fiscal 2009 is primarily due the loss of tax benefits related to the U.S. operating companys 2010 pre-tax loss which were required to be fully reserved against.
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2009, available cash was approximately $2.4 million compared to cash of approximately $2.9 million at March 31, 2009 and $2.0 million at June 30, 2008. Our primary sources of liquidity include a revolving line of credit (as discussed below under Cash Flows from Financing Activities), cash on hand at the beginning of the year and cash flows generated from operations.
Cash Flows from Operating Activities
Our cash flows from operating activities have typically included the collection of customer receivables generated by the sale of our products, offset by payments to vendors for materials and manufacture of our products. For the three months ended June 30, 2009, cash provided by operating activities was $1.4 million compared to cash used of $4.5 million for the three months ended June 30, 2008. Cash provided by operations for the three months ended June 30, 2009 primarily resulted from a decrease in accounts receivable due to increased focus on collections, partially offset by an increase in inventories related to increased purchases in preparation for our holiday season. The increase in inventories in the fiscal year 2010 period is greater than that in the fiscal year 2009 primarily due to
our efforts to front-load our inventory purchases in order to reduce our shipping costs. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses and managing our accounts receivable collection efforts. Cash used in operations for the three months ended June 30, 2008 primarily reflects a decrease in accounts payable and an increase in inventory, partially offset by a decrease in accounts receivable.
Cash Flows from Investing Activities
Cash used in investing activities was $635,000 during the three months ended June 30, 2009 and $275,000 during the three months ended June 30, 2008. Investing activities consist of capital expenditures to support our operations and were made up primarily of production molds, and to a lesser extent, computers and machinery and equipment.
Cash Flows from Financing Activities
Cash used in financing activities during the three months ended June 30, 2009 of $1.6 million was a result of net repayments of $1.5 million under our line of credit and $50,000 of payments related to financing fees. For the three months ended June 30, 2008, cash provided by financing activities was $1.5 million, consisting of net borrowings on our line of credit.
We maintain a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia) to borrow up to $30 million under a revolving line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate plus 2.0% per annum. This facility expires on October 31, 2012. At June 30, 2009, the interest rate was 4.00%. We are also required to pay a monthly service fee of $2,000 and an unused line fee equal to 0.50% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. and by a pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company. We are required to meet a quarterly covenant based on the Companys free cash flow. We were in compliance with this covenant as of June 30, 2009.
We believe that our available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy our operating needs for at least the next twelve months. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations from the information provided in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
As of June 30, 2009 and March 31, 2009, we did not have any relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
EBITDA, a non-GAAP financial measure, represents net income before interest, taxes, depreciation and amortization. Prior to the third quarter of fiscal 2009, we had not recorded any goodwill impairment charges. To address the goodwill impairment charge recorded in fiscal 2009, we modified the calculation to exclude this non-operating, non-cash charge and defined the result as Adjusted EBITDA. We believe this to be a more meaningful measurement of performance than the previously calculated EBITDA. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating or net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. As defined, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe, however, that in addition to the performance measures found in our financial statements, Adjusted EBITDA is a useful financial performance measurement for assessing our Companys operating performance. Our management uses Adjusted EBITDA as a measurement of operating performance in comparing our performance on a consistent basis over prior periods, as it removes from operating results the impact of our capital structure, including the interest expense resulting from our outstanding debt, and our asset base, including depreciation and amortization of our capital and intangible assets. In addition, Adjusted EBITDA is an important measure for our lender. Due to the fact that there were no non-operating, non-cash charges in either of the periods ended June 30, 2009 or 2008, we reverted back to EBITDA for these periods and will return to using Adjusted EBITDA when applicable. We calculate EBITDA as follows (in thousands):
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles A Replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 establishes the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS No. 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Following the effectiveness of SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the Codification. The adoption of SFAS 168 will not have an impact on our consolidated financial statements upon adoption other than current reference to GAAP guide would be replaced with reference to the applicable codification paragraphs.
Certain statements in this Quarterly Report on Form 10-Q are not historical fact and constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended and constitute forward-looking information as defined in applicable Canadian securities legislation (collectively forward-looking statements). These forward-looking statements may address, among other things, our strategy for growth, business development, market and competitive position, financial results, expected revenue, expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. These statements relate to our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future, and may be identified by the use of words or phrases such as believe, expect, anticipate, should, plan, estimate, and potential, among others. Specifically this document contains forward-looking statements regarding, among other things, the continuance of seasonal fluctuations in the Companys sales, inventories, receivables, payables and cash; the continued success of management initiatives to achieve operation synergies; the effect of currency exchange rate fluctuations; the sufficiency of funds available to meet operational needs; and our expectations for fiscal 2010 in respect of our gross profit margin and operating expenses for fiscal 2010.
The forward-looking statements contained herein reflect managements current beliefs and expectations and are based on information currently available to management, as well as its analysis made in light of its experience, perception of trends, current conditions, expected developments and other factors and assumptions believed to be reasonable and relevant in the circumstances. These assumptions include, but are not limited to: continuing demand by consumers for videogames and accessories, continued financial viability of our largest customers, continued access to capital to finance our working capital requirements and the continuance of open trade with China, where the preponderance of our products are manufactured.
Forward-looking statements are not guarantees of performance and are subject to important factors and events that could cause our actual business, prospects and results of operations to differ materially from the historical information contained in this Form 10-Q, and from those that may be expressed or implied by the forward-looking statements. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations expressed in these forward-looking statements for the reasons detailed in Part I Item 1A. Risk Factors of our most recent Annual Report on Form 10-K, and in Part II Other Information Item 1A. We believe that many of the risks detailed in our other SEC filings are part of doing business in the industry in which we operate, and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
For the first quarter of fiscal 2010, our management with the participation of our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2009. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission.
Although we believe we have remediated the 2008 material weakness, in 2009 we identified significant deficiencies in our internal control over financial reporting related to (1) our reviews over sales reserve estimates and (2) information technology general controls, and we will continue to implement further measures to remediate these deficiencies in fiscal 2010 and further improve our internal controls.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting other than the steps taken by us to remediate the significant deficiencies described in our Annual Report on Form 10-K for the year ended March 31, 2009, relating to our sales reserve estimation process and our information technology general controls.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On or about January 23, 2009, Michele Graham, a former employee of MCI, filed an action in the Superior Court of California in the County of San Diego, styled, Michele Graham v. Mad Catz, Inc., Case No. 37-2009-00081888 CU-WT-CTL. In her complaint, Ms. Graham claims she was improperly terminated based on her age. Ms. Graham has requested $73,500 in special damages and $5.56 million in punitive damages. Mad Catz disputes Ms. Grahams claims and intends to vigorously defend the action.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
Item 6. Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.