MAD CATZ INTERACTIVE INC 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period Ended June 30, 2010
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 30, 2010.
MAD CATZ INTERACTIVE, INC.
FOR THE PERIOD ENDED JUNE 30, 2010
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, 2010 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, purchase price allocation, contingent consideration 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.
On May 28, 2010, the Company acquired all of the outstanding stock of Tritton Technologies Inc. (Tritton), a private corporation incorporated under the laws of Delaware. Tritton is in the business of designing, developing, manufacturing (through third parties in Asia), marketing and selling videogame and PC accessories, most notably gaming audio headsets. We acquired all of Trittons net tangible and intangible assets, including trade names, customer relationships and product lines. Cash paid for the acquisition was approximately $1.4 million, subject to a working capital adjustment currently estimated to be $735,000. The Company is required to make additional cash payments to former Tritton shareholders of up to an aggregate of $8.7 million based on the achievement of certain specified performance measures. As a result of the acquisition, Tritton became a wholly-owned subsidiary of the Company and accordingly, the results of operations of Tritton are included in the Companys consolidated financial statements from the acquisition date. The Company financed the acquisition through borrowings under the Companys working capital facility. The acquisition was done in order to expand the Companys product offerings in the high growth gaming audio market and to further leverage the Companys assets, infrastructure and capabilities.
The purchase price allocation for the acquisition of Tritton set forth below is preliminary and subject to change as more detailed analysis is completed and additional information with respect to the fair value of the assets and liabilities acquired becomes available. Fair-value measurements have been determined based on assumptions that market participants would use in the pricing of the asset or liability. The Company expects to finalize the purchase price allocation within this fiscal year. The following table summarizes the consideration for Tritton and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands):
The $4.6 million purchase price for Tritton exceeded the value of the acquired tangible and identifiable intangible assets, and therefore the Company allocated $1.3 million to non tax deductible goodwill.
Recognized amounts of identifiable assets acquired and liabilities assumed
The fair values of the acquired identifiable intangible assets with definite lives are as follows (in thousands):
The contingent consideration arrangement requires the Company to pay the former owners of Tritton additional consideration based on a percentage of future sales of Tritton products, subject to maximum annual amounts. The fair value of the contingent consideration arrangement has been determined primarily by using the income approach and using a discount rate of approximately 19 percent. The amount paid for contingent consideration will be reduced by the amount of any working capital adjustment. As of June 30, 2010, the liability for contingent consideration is shown net of the estimated working capital adjustment and holdback of $735.
The amortization periods for the acquired intangible assets with definite lives are 8 years for customer relationships and 12 years for trademarks and trade names and the Company is amortizing the acquired intangible assets using the straight line method of amortization. The Company will monitor and assess the acquired intangible assets and will adjust, if necessary, the expected life, amortization method or carrying value of such assets to best match the underlying economic value.
The fair value assigned to trademarks and trade names has been determined primarily by using the income approach, which estimates the future royalties which would have to be paid to the owner of the brand for its current use. Tax is deducted and a discount rate is used to determine the present value of future cash flows. This is based on the brand in its current use and is based on savings from owning the brand, or relief from royalties that would otherwise be paid to the brand owner. The fair value assigned to customer relationships has been determined primarily by using the income approach, which estimates the value of an asset based on discounted future earnings specifically attributed to that asset, that is, in excess of returns for other assets that contributed to those earnings. The discount rates used in these valuation methods is approximately 19 percent.
The estimated amortization expense for these assets over future periods is as follows (in thousands):
Changes in goodwill
Changes in goodwill for the three months ended June 30, 2010 were as follows (in thousands):
Accumulated goodwill impairment charges as of June 30, 2010 and March 31, 2010 were $27.9 million.
(3) Notes Payable
On May 28, 2010 in connection with the Tritton acquisition, the Company assumed two notes payable. The first note is in the amount of $333,000, accrues interest at 10%, and monthly interest payments are due on the first business day of each month and the remaining balance is due May 28, 2011. The second note is in the amount of $370,000, accrues interest at 10%, and $185,000 plus accrued interest is due on August 27, 2010 with the remaining balance including accrued interest due on November 29, 2010.
Inventories consist of the following (in thousands):
(5) Comprehensive Income (Loss)
Authoritative guidance 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, 2010 and 2009 consists of the following components (in thousands):
(6) 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 7,585,971 and 6,896,274 shares of the Companys common stock for the three months ended June 30, 2010 and 2009, 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, 2010 and 2009 because of their anti-dilutive effect during the period.
(7) 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, 2010 and 2009, one customer individually accounted for approximately 23% and 25% of the Companys gross sales, respectively.
Unless the context otherwise requires, all references in this section to the Company, we, us or our refer, collectively, to Mad Catz Interactive Inc. and all of its subsidiaries, and all references in this section to Mad Catz refer to Mad Catz Interactive Inc.
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, 2010 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, 2010.
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, Tritton 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 2011, approximately 48% 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, 2010, 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, 2010 and 2009 were as follows (in thousands):
For the three months ended June 30, 2010, consolidated net sales decreased 11% as compared to the three month period ended June 30, 2009. In the United States and Canada, net sales in the first quarter of fiscal year 2011 decreased primarily due to lower sales of the Street Fighter IV products, which were released during the fiscal fourth quarter of 2009 and had high sales in the fiscal first quarter of 2010. In Europe, net sales in the first quarter of fiscal year 2011 increased primarily due to the success of sales of third party products on a distribution basis, partially offset by a decline in sales of products for the PC platform.
Our sales by platform as a percentage of gross sales were as follows:
(a) Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS Lite, DSi and Micro.
The increase in PlayStation 3 as a percentage of total gross sales was primarily driven by Mad Catz audio product sales. The decrease in PC sales as a percentage of total gross sales was primarily related to the phase-out of older product lines with a delay experienced in the release of the new product lines. The decrease in Xbox 360 as a percentage of total gross sales primarily related to sales of the Street Fighter IV products which were released in the fiscal fourth quarter of fiscal 2009 and had strong sales in the fiscal first quarter of 2010.
Our sales by product category as a percentage of gross sales were as follows:
The increase in audio products primarily related to the Tritton acquisition and the success of sales of third party products pursuant to a distribution agreement which commenced in the second quarter of fiscal 2010. The decrease in specialty controllers as a percentage of total gross sales primarily related to sales of the Street Fighter IV products, which were released in the fiscal fourth quarter of 2009 and had strong sales during the fiscal first quarter of 2010. The increase in controllers was primarily related to the continued success of products released in prior quarters. The decrease in accessories was due to continuing declines in the Wii Fit accessories range, charging solutions and sales related to handheld platforms.
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, 2010 and 2009 (in thousands):
Gross profit for the three months ended June 30, 2010 decreased 7%, while gross profit as a percentage of net sales, or gross profit margin, increased from 28% to 30%, due primarily to changes in the product mix. 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 2010 gross margin of 31%.
Operating expenses for the three months ended June 30, 2010 and 2009 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 slight increase in sales and marketing expense was primarily due to increased marketing spending, partially offset by benefits from exchange rate fluctuations. We expect sales and marketing expenses as a percentage of net sales in fiscal 2011 to approximate fiscal year 2010 levels.
General and Administrative Expenses. 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 increase in general and administrative expenses was primarily due to transaction expenses related to the Tritton acquisition and to a lesser extent higher bonus expense. We expect general and administrative expenses as a percentage of net sales in fiscal 2011 to be modestly lower than fiscal year 2010 levels.
Research and Development Expenses. Research and development expenses include the costs of developing and enhancing new and existing products. The increase in research and development expenses relates to additional headcount and activity related to this function.
Amortization Expenses. Amortization expenses consist of the amortization of the acquired intangible assets from Saitek, Joytech and Tritton. The decline in amortization was due to expiration of the life of certain categories of amortization from these transactions, somewhat offset by an increase in amortization due to the Tritton acquisition.
Interest Expense, net, Foreign Exchange Loss and Other Income
Interest expense, foreign exchange loss and other income for the three months ended June 30, 2010 and 2009 were as follows (in thousands):
Interest expense has remained relatively unchanged from prior year. The slight increase was due to the higher interest rate on our bank loan beginning July 1, 2009.
The decrease in foreign exchange loss in the three months ended June 30, 2010 compared to the quarter ended June 30, 2009 was due primarily to the rise in value of the U.S. dollar versus the British Pound Sterling and the Euro. The loss primarily relates to the revaluation of receivables arising from sales made at the Companys foreign subsidiaries in non local currencies and the revaluation of intercompany payables arising from product purchases at the Companys foreign subsidiaries.
Other income recorded in the three months ended June 30, 2010 and 2009 primarily relates to advertising income from our GameShark.com website which increased in the 2010 period.
Income Tax Expense (Benefit)
Income tax expense (benefit) for the three months ended June 30, 2010 and 2009 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 Canadian operations are excluded from the effective tax rate calculation due to the full valuation allowance against its deferred tax assets. The change in the effective tax rate in the first quarter of fiscal 2011 versus the first quarter of fiscal 2010 was primarily due to the book losses in certain jurisdictions in the first quarter of fiscal 2011 as compared to income in those jurisdictions in the first quarter of fiscal 2010.
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2010, cash was approximately $5.8 million compared to cash of approximately $2.2 million at March 31, 2010 and $2.4 million at June 30, 2009. 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, 2010, cash used in operating activities was $7.2 million compared to cash provided by operating activities of $1.4 million for the three months ended June 30, 2009. Cash used in operations for the three months ended June 30, 2010 primarily related to increased inventory as a result of typical holiday season ramp up and inventory of Tritton products purchased subsequent to the acquisition. 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. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses and managing our accounts receivable collection efforts.
Cash Flows from Investing Activities
Cash used in investing activities was $1.7 million during the three months ended June 30, 2010 and $635,000 during the three months ended June 30, 2009. In the three months ended June 30, 2010, $1.2 million of the cash used in investing activities related to the purchase of Tritton and the remainder consisted 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. In the three months ended June 30, 2009, all cash used in investing activities related to capital expenditures.
Cash Flows from Financing Activities
Cash provided by financing activities during the three months ended June 30, 2010 of $12.5 million was a result of net borrowings under our line of credit. For the three months ended June 30, 2009, cash used in financing activities was $1.6 million, consisting of net repayments 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, 2010, the interest rate was 5.25%. 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, 2010.
We have $14,500,000 of convertible notes outstanding payable to the seller of Saitek (Saitek Notes) which mature on March 31, 2019. An interest payment of $2,400,000 is due March 31, 2011 with annual principal and interest payments of $2,400,000 due beginning March 31, 2012 and quarterly cash payments for partial interest in the amount of approximately $45,000 until the Saitek Notes are retired. The Saitek Notes bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. The Saitek Notes are convertible into Mad Catz common stock at the exercise price of $1.419 per share.
On May 28, 2010 in connection with the Tritton acquisition, the Company assumed two notes payable. The first note is in the amount of $333,000, accrues interest at 10%, and monthly interest payments are due on the first business day of each month and the remaining balance is due May 28, 2011. The second note is in the amount of $370,000, accrues interest at 10%, and $185,000 plus accrued interest is due on August 27, 2010 with the balance plus accrued interest due on November 29, 2010.
In connection with the Companys acquisition of Tritton, the Company is obligated to make certain payments to former Tritton shareholders of up to $8.7 million based on the achievement of certain specific performance measures. The aggregate fair value of these payments was $4.0 million as of June 30, 2010, and is reflected in the Companys consolidated balance sheets.
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, including any payments due for contingent consideration and notes payable related to the Tritton acquisition. 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, 2010.
As of June 30, 2010 and March 31, 2010, 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. 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, 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, EBITDA is a useful financial performance measurement for assessing our Companys operating performance. Our management uses 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, EBITDA is an important measure for our lender. We calculate EBITDA as follows (in thousands):
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, including contingency payments related to the Tritton acquisition and notes payable; and our expectations for fiscal 2011 in respect of our gross profit margin and operating expenses for fiscal 2011.
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, except as may be required by applicable law.
Evaluation of Disclosure Controls and Procedures
For the first quarter of fiscal 2011, 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, 2010. 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 our fiscal 2009 significant deficiencies, we identified deficiencies in our internal control over financial reporting in 2010 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 2011 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, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Companys business. Regardless of their merits, these matters may force the Company to expend significant financial resources. The Company is not aware of any material pending legal proceedings to which it or its subsidiaries is a party or of which any of their property is subject.
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, 2010.
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.