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MAD CATZ INTERACTIVE INC 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

  

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from            to            

Commission File No. 001-14944

 

 

MAD CATZ INTERACTIVE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Canada   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7480 Mission Valley Road, Suite 101

San Diego, California

  92108
(Address of principal executive offices)   (Zip Code)

(619) 683-9830

(Registrant’s 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  x    NO  ¨

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  x    No  ¨

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):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 63,448,231 shares of the registrant’s common stock issued and outstanding as of November 4, 2011.

 

 

 


MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

  
Item 1.    Condensed Consolidated Financial Statements (unaudited)   
   Condensed Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011      3   
   Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2011 and 2010      4   
   Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010      5   
   Notes to Condensed Consolidated Financial Statements      6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      9   
Item 4.    Controls and Procedures      18   

PART II — OTHER INFORMATION

     19   
Item 1.    Legal Proceedings      19   
Item 1a.    Risk Factors      19   
Item 6.    Exhibits      20   
SIGNATURES      20   

 

2


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)

(Unaudited)

 

     September 30,
2011
    March 31,
2011
 
Assets     

Current assets:

    

Cash

   $ 2,715      $ 3,734   

Accounts receivable, net

     15,737        19,846   

Other receivables

     738        329   

Inventories

     33,593        27,978   

Deferred tax assets

     80        85   

Prepaid expenses and other current assets

     2,715        2,343   
  

 

 

   

 

 

 

Total current assets

     55,578        54,315   

Deferred tax assets

     573        590   

Other assets

     745        639   

Property and equipment, net

     4,419        3,921   

Intangible assets, net

     5,101        5,606   

Goodwill

     10,457        10,463   
  

 

 

   

 

 

 

Total assets

   $ 76,873      $ 75,534   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current liabilities:

    

Bank loan

   $ 17,036      $ 5,408   

Accounts payable

     20,355        13,700   

Accrued liabilities

     6,129        11,048   

Convertible notes payable

     —          14,500   

Contingent consideration, current

     1,410        1,542   

Income taxes payable

     790        1,918   
  

 

 

   

 

 

 

Total current liabilities

     45,720        48,116   

Contingent consideration

     2,482        2,897   

Warrant liability

     716        —     

Other long-term liabilities

     391        424   
  

 

 

   

 

 

 

Total liabilities

     49,309        51,437   

Shareholders’ equity:

    

Common stock, no par value, unlimited shares authorized; 63,448,231 and 57,029,350 shares issued and outstanding at September 30, 2011 and March 31, 2011

     59,057        50,648   

Accumulated other comprehensive loss

     (989     (10 )

Accumulated deficit

     (30,504     (26,541
  

 

 

   

 

 

 

Total shareholders’ equity

     27,564        24,097   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 76,873      $ 75,534   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


MAD CATZ INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands of U.S. dollars, except share and per share data)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2011     2010     2011     2010  

Net sales

   $ 25,757      $ 37,409      $ 42,221      $ 57,320   

Cost of sales

     18,321        26,904        30,838        40,873   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,436        10,505        11,383        16,447   

Operating expenses:

        

Sales and marketing

     3,748        3,562        7,012        6,047   

General and administrative

     3,260        3,295        6,601        6,518   

Research and development

     1,499        950        3,191        1,691   

Acquisition related items

     267        546        592        606   

Amortization of intangible assets

     241        224        486        465   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     9,015        8,577        17,882        15,327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,579     1,928        (6,499     1,120   

Interest expense, net

     (285     (713     (447     (1,238

Foreign exchange gain, net

     183        909        198        695   

Change in fair value of warrant liability

     1,540        —          2,534        —     

Other income

     4        117        32        177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (137     2,241        (4,182     754   

Income tax expense (benefit)

     343        1,113        (219     1,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (480   $ 1,128      $ (3,963   $ (248
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ (0.01   $ 0.02      $ (0.06   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

   $ (0.01   $ 0.02      $ (0.06   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares — basic

     63,444,069        55,098,549        62,731,643        55,098,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares — diluted

     63,444,069        55,116,359        62,731,643        55,098,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


MAD CATZ INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands of U.S. dollars)

 

     Six Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net loss

   $ (3,963   $ (248

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     1,633        1,346   

Amortization of deferred financing fees

     74        74   

Provision for deferred income taxes

     23        49   

Loss on disposal or sale of assets

     22        1   

Stock-based compensation

     279        330   

Contingent consideration

     592        —     

Change in fair value of warrant liability

     (2,534 )     —     

Changes in operating assets and liabilities, net of effects from acquisition:

    

Accounts receivable

     3,945        (13,324

Other receivables

     (425     (1,873

Inventories

     (5,838     (32,389

Prepaid expenses and other current assets

     (387 )     (124 )

Other assets

     (19 )     (37

Accounts payable

     6,593        24,097   

Accrued liabilities

     (5,114 )     1,048   

Income taxes receivable/payable

     (1,173     561   
  

 

 

   

 

 

 

Net cash used in operating activities

     (6,292     (20,489
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,667     (1,020

Cash paid for acquisition, net of cash received

     —          (1,189
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,667     (2,209
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payment of contingent consideration

     (1,546     —     

Payment of financing fees

     —          (100

Repayments on notes payable

     (14,500     (279

Proceeds from issuance of common stock and warrants, net of issuance costs of $820

     11,351        —     

Repayments on bank loan

     (50,837     (39,157

Borrowings on bank loan

     62,465        63,592   

Proceeds from exercise of stock options

     29        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,962        24,056   
  

 

 

   

 

 

 

Effects of foreign exchange on cash

     (22     83   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (1,019     1,441   

Cash, beginning of period

     3,734        2,245   
  

 

 

   

 

 

 

Cash, end of period

   $ 2,715      $ 3,686   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Income taxes paid

   $ 899      $ 453   
  

 

 

   

 

 

 

Interest paid

   $ 392      $ 441   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

    

Fair value of warrants issued

     3,250        —     

Acquisitions:

    

Fair value of assets acquired in acquisition, net of cash received

     —          2,772   

Goodwill

     —          2,928   

Intangible assets

     —          3,700   

Liabilities assumed in acquisition

     —          (4,155

Notes payable assumed in acquisition

     —          (803

Contingent consideration liability, net of $947 working capital adjustment

     —          (3,253
  

 

 

   

 

 

 

Net cash paid for acquisition

   $ —        $ 1,189   
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


MAD CATZ INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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, its fiscal third quarter.

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 Company’s audited consolidated financial statements and related notes for the fiscal year ended March 31, 2011 contained in the Company’s 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, contingent consideration, warrant liability and income taxes. Illiquid credit markets, volatile equity markets, foreign currency fluctuations, 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.

(2) Recently Issued Accounting Standards

The Company recently adopted the following new accounting standards:

Improving Disclosures about Fair Value Measurements: In January 2010, the Financial Accounting Standards Board (“FASB”) issued an update which provides guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as previously required. This update also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This update did not have a material impact on the Company’s financial statements.

Effect of Denominating the Exercise Price of a Share-Base Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades: In March 2010, the FASB issued an update to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify an award with such a feature as a liability if it otherwise qualifies as equity. Affected entities are required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This update did not have a material impact on the Company’s financial statements.

The following new accounting standards have been issued, but not adopted by the Company as of September 30, 2011:

Amendment to Fair Value Measurement: In May 2011, the FASB revised the fair value measurement and disclosure requirements to align the requirements under accounting principles generally accepted in the United States of America (“GAAP”) and International Financial Reporting Standards (“IFRS”). The guidance clarifies the FASB’s intent regarding the application of existing fair value measurements and requires enhanced disclosures, most significantly related to unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance is effective prospectively during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

Presentation of Comprehensive Income: In June 2011, the FASB issued ASU No. 2011-05, requiring entities to report components of other comprehensive income in either a single continuous statement or in two separate but consecutive statements of net income. The guidance is effective during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial statements.

 

6


Testing Goodwill for Impairment: In September 2011, the FASB issued ASU No. 2011-08, that allows companies to assess qualitative factors to determine whether they need to perform the two-step quantitative goodwill impairment test. Under the option, an entity no longer would be required to calculate the fair value of a reporting unit unless it determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 although early adoption is permitted. As of September 30, 2011, the Company has not elected to adopt the new guidance early, and when adopted, this guidance is not expected to have a significant impact on the Company’s financial statements.

(3) Fair Value Measurement

The following tables provide a summary of the recognized assets and liabilities carried at fair value on a recurring basis as of September 30, 2011 and March 31, 2011 (in thousands):

 

    

Balance as of

September 30,
2011

    Basis of Fair Value Measurements  
       Level 1      Level 2      Level 3  

Liabilities:

          

Contingent consideration, net of working capital (Note 4)

   $ (3,892   $ —         $ —         $ (3,892

Warrant liability (Note 6)

   $ (716   $ —         $ —         $ (716
  

 

 

   

 

 

    

 

 

    

 

 

 
   $ (4,608   $ —         $ —         $ (4,608
  

 

 

   

 

 

    

 

 

    

 

 

 
     Balance as  of
March 31,
2011
    Basis of Fair Value Measurements  
       Level 1      Level 2      Level 3  

Liabilities:

          

Contingent consideration, net of working capital (Note 4)

   $ (4,439   $ —         $ —         $ (4,439

The following tables provide a roll forward of the Company’s level three fair value measurements during the six months ended September 30, 2011, which consist of the Company’s contingent consideration liability and warrant liability (in thousands):

 

Balance at March 31, 2011

   $ 4,439   

Contingent consideration payment

     (1,546

Changes in working capital adjustment

     407   

Change in fair value of contingent consideration

     592   
  

 

 

 

Balance at September 30, 2011

   $ 3,892   
  

 

 

 

Balance at March 31, 2011

   $ —     

Securities purchase agreement – warrant liability

     3,250   

Change in fair value of warrant liability

     (2,534
  

 

 

 

Balance at September 30, 2011

   $ 716   
  

 

 

 

(4) Contingent Consideration

On May 28, 2010, the Company acquired all of the outstanding stock of Tritton Technologies Inc. (“Tritton”). Tritton designs, develops, manufactures (through third parties in Asia), markets and sells videogame and PC accessories, most notably gaming audio headsets. The Company acquired all of Tritton’s 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 $10,000. 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 Company’s consolidated financial statements from the acquisition date. The Company financed the acquisition through borrowings under the Company’s working capital facility. The acquisition expanded the Company’s product offerings in the high growth gaming audio market and further leveraged the Company’s assets, infrastructure and capabilities.

The contingent consideration arrangement requires the Company to pay the former shareholders of Tritton additional consideration based on a percentage of future sales of Tritton products over a five year period, subject to maximum annual amounts up to an aggregate of $8.7 million. The fair value of the contingent consideration

 

7


arrangement has been determined primarily by using the income approach and using a discount rate of approximately 17 percent. The amount paid for contingent consideration is expected to be reduced by the amount of any working capital adjustment. In May 2011, the Company paid $1,546,000 under this arrangement. As of September 30, 2011, the liability for contingent consideration is shown net of the estimated working capital adjustment and holdback of $10,000.

(5) Inventories

Inventories consist of the following (in thousands):

 

     September 30,
2011
     March 31,
2011
 

Raw materials

   $ 1,531       $ 749   

Semi finished goods

     362         195   

Finished goods

     31,700         27,034   
  

 

 

    

 

 

 

Inventories

   $ 33,593       $ 27,978   
  

 

 

    

 

 

 

(6) Securities Purchase Agreement

On May 3, 2011 the Company filed a Registration Statement registering up to 8,893,211 common shares of the Company comprised of: (i) 6,352,293 common shares and (ii) 2,540,918 common shares issuable upon exercise of 2,540,918 warrants. In April 2011 the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company sold (a) an aggregate of 6,352,293 shares of its common stock (the “Shares”) and (b) warrants to purchase an aggregate of 2,540,918 shares of common stock of the Company (“Warrants” and, together with the Shares, the “Securities”). The Securities were issued at a price equal to $1.92 for aggregate gross proceeds of approximately $12,196,000. The Warrants became exercisable on October 21, 2011 at a per share exercise price equal to $2.56. The Warrants contain provisions that adjust the exercise price in the event the Company pays stock dividends, effects stock splits or issues additional shares of common stock at a price per share less than the exercise price of the Warrants. The Warrants will remain exercisable October 21, 2016.

The Company accounts for the Warrants with exercise price reset features in accordance with the applicable FASB guidance. Under this guidance, warrants with these reset features are accounted for as liabilities and carried at fair value, with changes in fair value included in net earnings (loss) until such time as the Warrants are exercised or expire.

The fair value of the Warrants decreased from $3,250,000 as of the initial valuation date to $716,000 as of September 30, 2011, which resulted in a $2,534,000 gain from the change in fair value of warrants for the six months ended September 30, 2011.

These Warrants are not traded in an active securities market, and as such, the Company estimates the fair value of the Warrants using the Black-Scholes option pricing model using the following assumptions:

 

     As of
September 30,
2011
 

Expected term

     5.00 years   

Common stock market price

   $ 0.61   

Risk-free interest rate

     0.96

Expected volatility

     92.08

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the Warrants. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these Warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these Warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the Warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is closest to the expected term of the Warrants.

 

8


(7) Comprehensive Income (Loss)

Comprehensive income (loss) for the three and six months ended September 30, 2011 and 2010 consists of the following components (in thousands):

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2011     2010      2011     2010  

Net income (loss)

   $ (480   $ 1,128       $ (3,963   $ (248

Foreign currency translation adjustment

     (1,064     876         (979     444   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,544   $ 2,004       $ (4,942   $ 196   
  

 

 

   

 

 

    

 

 

   

 

 

 

The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.

(8) Basic and Diluted Net Earnings per Share

Basic earnings per share is calculated by dividing the net earnings 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.

 

     Three Months Ended
September 30,
     Six months Ended
September 30,
 
     2011     2010      2011     2010  

Numerator:

         

Net income (loss)

   $ (480   $ 1,128       $ (3,963   $ (248

Effect of convertible notes payable

     —          305         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Numerator for diluted net earnings per share

     (480     1,433         (3,963     (248
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator:

         

Weighted average shares used to compute basis EPS

     63,444,069        55,098,549         62,731,643        55,098,549   

Effect of convertible debt

     —          —           —          —     

Effect of dilutive share share-based awards

     —          17,810         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator for diluted net earnings per share

     63,444,069        55,116,359         62,731,643        55,098,549   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share

   $ (0.01   $ 0.02       $ (0.06   $ 0.00   

Diluted earnings per share

   $ (0.01   $ 0.02       $ (0.06   $ 0.00   

Outstanding options to purchase an aggregate of 7,238,110 and 6,816,657 shares of the Company’s common stock for the three and six months ended September 30, 2011, respectively, and 7,730,227 and 7,667,004 shares of the Company’s common stock for the three and six months ended September 30, 2010, respectively, were excluded from diluted net loss per share calculations because inclusion of such options would have an anti-dilutive effect during these periods. Outstanding warrants to purchase an aggregate of 2,540,918 and 2,082,720 of the Company’s common stock for the three and six months ended September 30, 2011, respectively, were excluded from the diluted net loss per share calculations because of their anti-dilutive effect during the period. Weighted average shares of 949,189 for the six month period ended September 30, 2011 and 10,217,744 for the three and six month periods ended September 30, 2010 related to $14,500,000 of convertible notes payable were excluded from the calculation because of their anti-dilutive effect during the period.

(9) Geographic Data and Concentrations

The Company’s sales are attributed to the following geographic regions (in thousands):

 

     Three months ended
September 30,
     Six months ended
September 30,
 
     2011      2010      2011      2010  

Net sales:

           

United States

   $ 11,115       $ 23,971       $ 20,110       $ 34,403   

Europe

     12,691         12,235         19,068         20,579   

Canada

     881         434         1,519         803   

Other countries

     1,070         769         1,524         1,535   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,757       $ 37,409       $ 42,221       $ 57,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

        Revenue is attributed to geographic regions based on the location of the customer. During the three and six months ended September 30, 2011, one customer individually accounted for approximately 24% and 22% of the Company’s gross sales, respectively, and one other customer individually accounted for approximately 12% and 11% of the Company’s gross sales, respectively. During the three and six months ended September 30, 2010, one customer individually accounted for approximately 34% and 30% of the Company’s gross sales, respectively and one other customer individually accounted for approximately 12% and 11%, respectively. At September 30, 2011, one customer represented 32% of accounts receivable and another customer represented 13% of accounts receivable. At September 30, 2010, one customer represented 39% of accounts receivable and another customer represented 12% of accounts receivable. At September 30, 2011 and 2010, there were no other customers which accounted for greater than 10% of accounts receivable or gross sales.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 informatio—n (collectively “forward-looking statements”) as

 

9


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, 2011 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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Overview

Our Business

We design, manufacture (primarily through third parties in Asia), market and distribute products 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, Tritton, Saitek, Joytech, Cyborg, Eclipse, 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, flight simulators, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also publish and distribute videogames.

Securities Purchase Agreement

In April 2011, the Company entered into a Securities Purchase Agreement with certain accredited investors, pursuant to which the Company sold (a) an aggregate of 6,352,293 shares of its common stock (the “Shares”) and (b) warrants to purchase an aggregate of 2,540,918 shares of common stock of the Company (“Warrants” and, together with the Shares, the “Securities”). The Securities were issued at a price equal to $1.92 for aggregate gross proceeds of approximately $12.2 million. The Warrants became exercisable on October 21, 2011 at a per share price equal to $2.56, subject to certain adjustments as specified in the Warrants, and will remain exercisable until October 21, 2016.

Convertible Notes Payable

On May 5, 2011, the Company repaid all remaining principal and interest related to the $14.5 million Saitek Notes. The repayment was partially funded with the net proceeds of the Securities Purchase Agreement, which occurred in April 2011.

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 three and six month periods ended September 30, 2011, approximately 57% and 52% of total net sales were transacted outside of the United States, respectively. 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, 2011, as filed with the SEC.

 

10


RESULTS OF OPERATIONS

Net Sales

From a geographical perspective, our net sales for the three and six months ended September 30, 2011 and 2010 were as follows (in thousands):

 

     Three months ended September 30,     $
Change
    %
Change
 
     2011      % of total     2010      % of total      

United States

   $ 11,115         43   $ 23,971         64   $ (12,856 )     (54 )% 

Europe

     12,691         49     12,235         33     456        4

Canada

     881         4     434         1     447        103

Other countries

     1,070         4     769         2     301        39
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Consolidated net sales

   $ 25,757         100   $ 37,409         100   $ (11,652     (31 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
     Six months ended September 30,     $
Change
    %
Change
 
     2011      % of total     2010      % of total      

United States

   $ 20,110         48   $ 34,403         60   $ (14,293 )     (42 )% 

Europe

     19,068         45     20,579         36     (1,511 )     (7 )% 

Canada

     1,519         3     803         1     716        89

Other countries

     1,524         4     1,535         3     (11 )     (1 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Consolidated net sales

   $ 42,221         100   $ 57,320         100   $ (15,099 )     (26 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

For the three months ended September 30, 2011, consolidated net sales decreased 31% as compared to the three month period ended September 30, 2010. In the United States, the decrease in net sales is primarily attributable to sales of our Rock Band 3 products in the second fiscal quarter of 2011, which was released in September 2010. In Europe the increase is largely attributable to foreign exchange fluctuations. In Canada the increase in net sales primarily relates to increased sales of Tritton and Cyborg lines of products.

For the six months ended September 30, 2011, consolidated net sales decreased 26% as compared to the six months ended September 30, 2010. In the United States, the preponderance of the decrease in net sales occurred during the latter part of the six month period for the reasons described above. In Canada the increase in net sales primarily relates to increased sales of Tritton and Cyborg lines of products.

 

11


Our sales by product group as a percentage of gross sales for the three and six months ended September 30, 2011 and 2010 were as follows:

 

     Three months ended
September 30,
    Six months ended
September 30,
 
     2011     2010     2011     2010  

Xbox 360

     36     37     31     34

PC

     28     17     29     17

PlayStation 3

     7     12     7     16

Wii

     2     11     3     11

Handheld Consoles(a)

     2     4     2     3

GameCube

     1     1     1     2

All others

     24     18     27     17
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Handheld consoles include Sony PSP and Nintendo DS, DS Lite, DSi, DSi XL and 3DS.

Sales of products designed for use with the PlayStation 3 platform, and especially Mad Catz branded audio products were negatively impacted by a Play Station Network outage during the first quarter of fiscal 2012. Sales of products designed for use with the Wii platform continued to decline in anticipation of the release of a successor platform next year. Sales of PC products increased primarily due to sales of the Cyborg line of products. The increase in All others is primarily related to universal audio products.

Our sales by product category as a percentage of gross sales for the three and six months ended September 30, 2011 and 2010 were as follows:

 

     Three months ended
September 30,
    Six months ended
September 30,
 
     2011     2010     2011     2010  

Audio

     43     27     38     29

Specialty controllers

     22     23     23     16

PC Input Devices

     14     8     14     7

Controllers

     11     12     13     15

Accessories

     9     14     11     15

Games

     1     15     1     17

All others

     0     1     0     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The increase in audio products primarily related to increased distribution of Tritton products. The decrease in games as a percentage of total gross sales primarily related to lower sales of bundled products of the Rock Band 3 game. The decrease in controllers was primarily related to products compatible with the Wii and PlayStation 3. Sales of PC input device products increased primarily due to higher sales of the Cyborg line of products

Our sales by brand as a percentage of gross sales for the three and six months ended September 30, 2011 and 2010 were as follows:

 

     Three months ended
September 30,
    Six months ended
September 30,
 
     2011     2010     2011     2010  

Mad Catz

     38     59     40     60

Tritton

     33     11     29     9

Cyborg

     16     8     16     7

Saitek

     10     7     11     7

Eclipse

     3     4     3     4

All others

     0     11     1     13
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The decrease in Mad Catz-branded products primarily related to lower sales of Rock Band 3 products. The increase in Tritton-branded products as a percentage of total gross sales primarily related to increased distribution. The increase in Cyborg-branded products primarily related to increased product offerings. The decrease in all other branded products primarily related to the termination of a distribution agreement under which the company sold third party products.

 

12


Gross Profit

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 and six months ended September 30, 2011 and 2010 (in thousands):

 

     Three months ended September 30,              
     2011      % of Net
Sales
    2010      % of Net
Sales
    $
Change
    %
Change
 

Net sales

   $ 25,757         100   $ 37,409         100   $ (11,652 )     (31 )% 

Cost of sales

     18,321         71     26,904         72     (8,583     (32 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Gross profit

   $ 7,436         29   $ 10,505         28   $ (3,069 )     (29 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

     Six months ended September 30,              
     2011      % of Net
Sales
    2010      % of Net
Sales
    $
Change
    %
Change
 

Net sales

   $ 42,221         100   $ 57,320         100   $ (15,099 )     (26 )% 

Cost of sales

     30,838         73     40,873         71     (10,035 )     (25 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Gross profit

   $ 11,383         27   $ 16,447         29   $ (5,064 )     (31 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Gross profit for the three months ended September 30, 2011 decreased 29%, while gross profit as a percentage of net sales, or gross profit margin, increased from 28% to 29%. Gross profit for the six months ended September 30, 2011 decreased 31%, while gross profit as a percentage of net sales, decreased from 29% to 27%. We expect the gross profit margins to remain in the current range, although the gross profit margins may fluctuate due to factors such as changes in product mix and exchange rate fluctuations.

Operating Expenses

Operating expenses for the three and six months ended September 30, 2011 and 2010 were as follows (in thousands):

 

     Three months ended September 30,              
     2011      % of Net
Sales
    2010      % of Net
Sales
    $
Change
    %
Change
 

Sales and marketing

   $ 3,748         14   $ 3,562         10   $ 186       

General and administrative

     3,260         13     3,295         9     (35 )     (1)

Research and development

     1,499         6     950         2     549        58 

Acquisition related items

     267         1     546         1     (279     (51)

Amortization

     241         1     224         1     17       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total operating expenses

   $ 9,015         35   $ 8,577         23   $ 438       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

     Six months ended September 30,              
     2011      % of Net
Sales
    2010      % of Net
Sales
    $
Change
    %
Change
 

Sales and marketing

   $ 7,012         16   $ 6,047         11   $ 965        16 

General and administrative

     6,601         16     6,518         11     83       

Research and development

     3,191         8     1,691         3     1,500        89 

Acquisition related items

     592         1     606         1     (14     (2)

Amortization

     486         1     465         1     21        %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total operating expenses

   $ 17,882         42   $ 15,327         27   $ 2,555        17 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Sales and Marketing. 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 increase in sales and marketing expense was primarily due to increased headcount, marketing spending and exchange rate fluctuations. We expect sales and marketing expenses in fiscal 2012 to increase, on an absolute dollar basis, over fiscal year 2011 levels.

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 slight increase in general and administrative expenses for the six month period was primarily related to increased legal fees related to defending the Company in legal actions arising in the ordinary course of its business. We expect general and administrative expenses in fiscal 2012 to approximate fiscal year 2011 levels on an absolute dollar basis.

Research and Development. Research and development expenses include the costs of developing and enhancing new and existing products. The increase in research and development expenses relates to expanded research and development activities related to our audio products and software development. We expect research and development expenses in fiscal 2012 to increase, on an absolute dollar basis, over fiscal year 2011 levels.

 

13


Amortization. Amortization expenses consist of the amortization of the acquired intangible assets from Saitek, Joytech and Tritton. These acquisitions occurred in the third and second quarters of fiscal 2008 and first quarter of fiscal 2011, respectively. The slight increase in amortization expense was due to the amortization related to intangibles acquired in the Tritton acquisition. This increase was partially offset by a decrease related to intangibles acquired in the Joytech and Saitek acquisitions that became fully amortized.

Interest Expense, net, Foreign Exchange Gain, Change in Fair Value of Warrant Liability and Other Income

Interest expense, net, foreign exchange gain, change in fair value of warrant liability and other income for the three and six months ended September 30, 2011 and 2010 were as follows (in thousands):

 

     Three months ended September 30,              
     2011     % of Net
Sales
    2010     % of Net
Sales
    $
Change
    %
Change
 

Interest expense, net

   $ (285     1   $ (713     2   $ 428        60

Foreign exchange gain

   $ 183        1   $ 909        2   $ (726     (80 )% 

Change in fair value of warrant liability

   $ 1,540        6     —          —        $ 1,540        100

Other income

   $ 4        0   $ 117        0   $ (113 )     (96 )% 

 

     Six months ended September 30,              
     2011     % of Net
Sales
    2010     % of Net
Sales
    $
Change
    %
Change
 

Interest expense, net

   $ (447     1   $ (1,238     2   $ 791        64

Foreign exchange gain

   $ 198        1   $ 695        1   $ (497     (72 )% 

Change in fair value of warrant liability

   $ 2,534        6     —          —        $ 2,534        100

Other income

   $ 32        0   $ 177        0   $ (145 )     (82 )% 

The decrease in interest expense during the three and six month periods ended September 30, 2011 is related to lower debt balances as a result of the repayment of the convertible note.

The foreign exchange gains in all periods are due primarily to the rise in value of the U.S. dollar and Hong Kong dollar versus the Great British Pound and the Euro during those periods.

The change in fair value of warrant liability recorded in the three and six month period ended September 30, 2011 represents the change in fair value of the Warrants issued in connection with the Securities Purchase Agreement. Specifically, the decrease in the Company’s stock price at September 30, 2011 reduced the value of the warrant liability and resulted in income during the three and six month periods.

Other income during the three and six month periods ended September 30, 2011 primarily relates to advertising income from our GameShark.com website. Other income in the three and six months ended September 30, 2010 included an insurance recovery that did not recur in the fiscal 2012 period.

 

14


Income Tax Expense (Benefit)

Income tax expense (benefit) for the three and six months ended September 30, 2011 and 2010 was as follows (in thousands):

 

     Three months ended September 30,              
     2011     Effective
Tax Rate
    2010      Effective
Tax Rate
    $
Change
    %
Change
 

Income tax expense

   $ 343        250   $ 1,113         50   $ (770     (69 )% 
     Six months ended September 30,              
     2011     Effective Tax
Rate
    2010      Effective Tax
Rate
    $
Change
    %
Change
 

Income tax expense (benefit)

   $ (219     (5 )%    $ 1,002         133   $ (1,221     (122 )% 

The Company’s 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 in which we do business, including our U.S. operating company, and our Canadian parent company for which we continue to provide a full valuation allowances against its losses. The Company will continue to evaluate the realizability of its net deferred tax asset on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets and expects to release the valuation allowance when it has sufficient positive evidence, including but not limited to cumulative earnings in successive recent periods, to overcome such negative evidence. Accordingly, it is reasonably possible that all or a portion of the U.S. valuation allowance could be released in the next twelve months and the effect could be material to the company’s financial statements. The change in the effective tax rate in the second quarter of fiscal 2012 versus the second quarter of fiscal 2011 was primarily due to the book income in certain jurisdictions in the second quarter of fiscal 2011 as compared to losses in those jurisdictions in the second quarter of fiscal 2012.

For fiscal 2012, we project a 30% effective tax rate. Our current projected tax rate for fiscal 2012 could change significantly if actual results differ from our current outlook-based projections.

Liquidity and Capital Resources

Sources of Liquidity

 

     As of and for the
six months ended
September 30,
       
(in thousands)    2011     2010     Change  

Cash

   $ 2,715      $ 3,686      $ (971
  

 

 

   

 

 

   

 

 

 

Percentage of total assets

     4     3  

Cash used in operating activities

   $ (6,292   $ (20,489   $ 14,197   

Cash used in investing activities

     (1,667     (2,209     542   

Cash provided by financing activities

     6,962        24,056        (17,094

Effects of foreign exchange on cash

     (22     83        (105
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

   $ (1,019   $ 1,441        (2,460
  

 

 

   

 

 

   

 

 

 

At September 30, 2011, available cash was approximately $2.7 million compared to cash of approximately $3.7 million at March 31, 2011 and $3.7 million at September 30, 2010. 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 during the year.

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 six months ended September 30, 2011, cash used in operating activities was $6.3 million compared to cash used of $20.5 million for the six months ended September 30, 2010. Cash used in operations for the six months ended September 30, 2011 and 2010 primarily resulted from an increase of inventories due to the build-up in preparation for the peak annual sales season, partially offset by the correlating increase in accounts payable. The decrease in cash usage during the fiscal year 2012 compared to the 2011 period is mainly due to a later scheduled peak season forecast which required less inventory build-up during the second fiscal quarter. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses, inventory levels and managing our accounts receivable collection efforts.

Due to the seasonality of our business, we typically experience a large build-up in inventories beginning during our second fiscal quarter ending September 30, with corresponding increases in accounts payable and our bank loan balance. These increases are in

 

15


anticipation of the holiday selling season, which occurs during our third fiscal quarter ending December 31. During the third quarter our inventories decrease and accounts receivable increase as a result of the annual holiday selling. A large percentage of our annual revenue is generated during our third quarter. During our fourth quarter ending March 31, the sales cycle completes with decreases in accounts receivable, inventory, accounts payable and bank loan and net increase in cash. We forecast the expected demand for the holiday selling season months in advance to ensure adequate quantities of inventory. Our sales personnel forecast holiday sales based on information received from our major customers as to expected product purchases for the holiday season, and we also utilize mathematical modeling techniques to forecast demand based on recent point-of-sale activity. If demand does not meet expectations, the result will be excess inventories, reduced sales and the overall effect could result in a reduction to cash flows from operating activities following payment of accounts payable.

Cash Flows from Investing Activities

Cash used in investing activities was $1.7 million during the six months ended September 30, 2011 and $2.2 million during the six months ended September 30, 2010. In the six months ended September 30, 2011, net cash used in investing activities 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 six months ended September 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 purchases of production molds, and to a lesser extent, computers and machinery and equipment.

Cash Flows from Financing Activities

Cash provided by financing activities during the six months ended September 30, 2011 of $7.0 million was a result of net borrowings under our line of credit and net proceeds received for the issuance of common stock, partially offset by repayment of the convertible notes. For the six months ended September 30, 2010, cash provided by financing activities of $24.1 was a result of net borrowings under our line of credit.

We maintain a Credit Facility with Wells Fargo Capital Finance, LLC 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. The Company is currently in negotiations to amend and extend the line of credit. At September 30, 2011, 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 Company’s subsidiaries and is guaranteed by the Company. We are required to meet a quarterly covenant based on the Company’s free cash flow. We were in compliance with this covenant as of September 30, 2011.

At March 31, 2011 we had $14.5 million of convertible notes outstanding payable to the seller of Saitek (“Saitek Notes”) that were scheduled to mature on March 31, 2019. The Saitek Notes bore interest at 7.5% through March 31, 2014 and 9.0% thereafter. The Saitek Notes and all accrued interest were repaid in full in May 2011.

In connection with the Company’s 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. In May 2011, the Company made the first payment for $1.5 million. The aggregate fair value of the remaining payments was $3.9 million as of September 30, 2011, and is reflected in the Company’s consolidated balance sheet.

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

On May 5, 2011, the Company repaid all principal and interest related to the $14.5 million Saitek Notes.

There have been no other material changes to our contractual obligations from the information provided in Item 7, “Management’s 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, 2011.

As of September 30, 2011 and March 31, 2011, 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.

 

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EBITDA

EBITDA, a non-GAAP financial measure, represents net income before interest, taxes, depreciation and amortization. To address the Warrants issued in the first quarter of fiscal 2012 and the resulting gain/loss on the change in the related warrant liability, we have excluded 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 Company’s 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. We calculate Adjusted EBITDA as follows (in thousands):

 

     Three months ended
September 30,
     Six months ended
September 30,
 
     2011     2010      2011     2010  

Net income (loss)

   $ (480   $ 1,128       $ (3,963   $ (248

Adjustments:

         

Interest expense

     285        713         447        1,238   

Income tax expense (benefit)

     343        1,113         (219     1,002   

Depreciation and amortization

     832        680         1,633        1,346   
  

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA (loss)

   $ 980      $ 3,634       $ (2,102 )   $ 3,338   

Change in fair value of warrant liability

     (1,540     —           (2,534     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA (loss)

   $ (560 )   $ 3,634       $ (4,636 )   $ 3,338   
  

 

 

   

 

 

    

 

 

   

 

 

 

Forward-Looking Statements

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 Company’s sales, inventories, receivables, payables and cash; the effect of currency exchange rate fluctuations; the sufficiency of funds available to meet operational needs; and our expectations for fiscal 2012 in respect of our gross profit margin, operating expenses and effective tax rate.

The forward-looking statements contained herein reflect management’s 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.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

For the second quarter of fiscal 2012, 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 September 30, 2011. 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 SEC.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during the process.

 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Circuit City Stores, Inc., et al., Debtors, Alfred H. Siegel, as Trustee for Circuit City, Inc., Liquidating Trust v. Mad Catz, Inc. and Saitek Industries Limited, Mad Catz, Inc., dba Saitek Industries Limited. Ch. 11 Case No. 08-35653 (KRH) (Bankr. E.D. Va. 2008 proceeding numbers 10-03763 and 10-03255). On or about December 23, 2010, Mad Catz, Inc. (“MCI”), along with approximately 500 other defendants who had rendered goods and services to Circuit City Stores, Inc. (“Circuit City”) prior to its bankruptcy, was served with a complaint alleging that payments to MCI from Circuit City made within the 90 day period prior to Circuit City’s bankruptcy filing (in the amount of $745,953.55) were voidable preferences, and therefore should be returned to the Trustee of the Bankruptcy Trust. The Bankruptcy Trust also alleged that it was entitled to certain offsets against MCI’s bankruptcy claims against Circuit City. The Bankruptcy Trust also filed a similar suit against Saitek Industries Limited to void alleged preferential payments in the amount of $82,951.87. MCI has entered into a settlement agreement with Circuit City, under which all claims by both parties would be dismissed in exchange for payment by Circuit City to MCI in the amount of $135,000.

Ogma LLC. v. Activision Blizzard, Inc., et al., Civ. 2:11-cv-75-TJW (E.D. Texas 2011). On March 3, 2011, Ogma LLC (“Ogma”) filed an amended complaint against MCI and approximately 18 other defendants alleging infringement of United States patent number 6,150,947 by MCI’s remote for the Nintendo Wii video game console. On May 13, 2011, the United States International Trade Commission (“ITC”) issued a Notice of Investigation regarding the matter. On July 11, 2011, the parties agreed to settle the matter and the District Court dismissed the matter with prejudice on the same day. As a result of the settlement, on July 25, 2011, the ITC issued document entitled “Initial Determination Granting MCI’s and Ogma’s Joint Motion to Terminate the ITC’s Investigation of Mad Catz”. There has been no further action in this matter and therefore all claims against MCI have been resolved.

We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record reserves in our financial statements for pending litigation. Litigation is expensive and is subject to inherent uncertainties, and an adverse result in any such matters could adversely impact our operating results or financial condition. Additionally, any litigation to which we may become subject could also require significant involvement of our senior management and may divert management’s attention from our business and operations. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of any current pending matters will not have a material adverse effect on our business, financial condition, results of operations or liquidity taken as a whole.

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, 2011.

 

19


Item 6. Exhibits

 

  31.1    Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
  32.2    Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
101    The following materials from Mad Catz Interactive, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

SIGNATURES

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.

 

  MAD CATZ INTERACTIVE, INC.
November 9, 2011  

/s/ Darren Richardson

  Darren Richardson
  President and Chief Executive Officer
November 9, 2011  

/s/ Allyson Evans

  Allyson Evans
  Chief Financial Officer

 

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