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MAD CATZ INTERACTIVE INC 10-Q 2013
Form 10-Q
Table of Contents

 

 

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 June 30, 2013

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 63,477,399 shares of the registrant’s common stock issued and outstanding as of July 30, 2013.

 

 

 


Table of Contents

MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION   
Item 1.   Financial Statements (unaudited)   
  Consolidated Balance Sheets—June 30, 2013 and March 31, 2013    3
  Consolidated Statements of Operations—Three Months Ended June 30, 2013 and 2012    4
  Consolidated Statements of Comprehensive Loss—Three Months Ended June 30, 2013 and 2012    5
  Consolidated Statements of Cash Flows—Three Months Ended June 30, 2013 and 2012    6
  Notes to Unaudited Consolidated Financial Statements    7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    9
Item 4.   Controls and Procedures    14
PART II — OTHER INFORMATION    16
Item 1.   Legal Proceedings    16
Item 1a.   Risk Factors    16
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    16
Item 3.   Defaults Upon Senior Securities    16
Item 4.   Mine safety disclosure    16
Item 5.   Other Information    16
Item 6.   Exhibits    17
SIGNATURES    18

 

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

     June 30,
2013
    March 31,
2013
 
ASSETS     

Current assets:

    

Cash

   $ 2,398      $ 2,773   

Accounts receivable, net

     8,979        13,884   

Other receivables

     2,036        1,374   

Inventories

     25,301        23,795   

Deferred tax assets

     247        257   

Income tax receivable

     467        344   

Prepaid expenses and other current assets

     2,740        2,711   
  

 

 

   

 

 

 

Total current assets

     42,168        45,138   

Deferred tax assets

     365        370   

Other assets

     353        359   

Property and equipment, net

     2,866        2,977   

Intangible assets, net

     3,448        3,679   
  

 

 

   

 

 

 

Total assets

   $ 49,200      $ 52,523   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Bank loan

   $ 10,757      $ 8,888   

Accounts payable

     15,372        15,573   

Accrued liabilities

     5,359        6,652   

Contingent consideration

     1,241        1,650   

Income taxes payable

     —          258   
  

 

 

   

 

 

 

Total current liabilities

     32,729        33,021   

Contingent consideration

     1,072        2,214   

Warrant liability

     166        149   

Deferred tax liabilities

     152        152   

Other long-term liabilities

     81        109   
  

 

 

   

 

 

 

Total liabilities

     34,200        35,645   

Shareholders’ equity:

    

Common stock, no par value, unlimited shares authorized; 63,477,399 shares issued and outstanding at June 30, 2013 and March 31, 2013

     60,255        60,102   

Accumulated other comprehensive loss

     (3,667 )     (3,701 )

Accumulated deficit

     (41,588     (39,523
  

 

 

   

 

 

 

Total shareholders’ equity

     15,000        16,878   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 49,200      $ 52,523   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

 

      Three Months Ended
June 30,
 
     2013     2012  

Net sales

   $ 18,684      $ 21,822   

Cost of sales

     13,319        15,547   
  

 

 

   

 

 

 

Gross profit

     5,365        6,275   

Operating expenses:

    

Sales and marketing

     2,906        3,239   

General and administrative

     3,233        2,956   

Research and development

     1,011        1,021   

Acquisition related items

     99        518   

Amortization of intangible assets

     234        233   
  

 

 

   

 

 

 

Total operating expenses

     7,483        7,967   
  

 

 

   

 

 

 

Operating loss

     (2,118     (1,692
  

 

 

   

Other (expense) income:

    

Interest expense, net

     (118     (269

Foreign currency exchange (loss) gain, net

     (24     256   

Change in fair value of warrant liability

     (17     190   

Other income

     71        65   
  

 

 

   

 

 

 

Total other (expense) income

     (88 )     242   
  

 

 

   

 

 

 

Loss before income taxes

     (2,206     (1,450

Income tax benefit (expense)

     141        (267
  

 

 

   

 

 

 

Net loss

   $ (2,065   $ (1,717
  

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.03   $ (0.03
  

 

 

   

 

 

 

Shares used in calculating basic and diluted net loss per share

     63,477,399        63,462,399   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands of U.S. dollars)

 

      Three Months Ended
June  30,
 
     2013     2012  

Net loss

   $ (2,065   $ (1,717

Other comprehensive loss, before tax:

    

Foreign currency translation adjustments

     34        (1,160 )
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     34        (1,160 )
  

 

 

   

 

 

 

Comprehensive loss

   $ (2,031 )   $ (2,877 )
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands of U.S. dollars)

 

      Three Months Ended
June 30,
 
     2013     2012  

Operating activities:

    

Net loss

   $ (2,065   $ (1,717

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     686        779   

Amortization of deferred financing fees

     8        37   

Provision for deferred income taxes

     16        (1

Stock-based compensation

     153        147   

Contingent consideration, net of payments

     (764     194   

Change in fair value of warrant liability

     17        (190

Changes in operating assets and liabilities:

    

Accounts receivable

     4,915        3,078   

Other receivables

     (661     (421

Inventories

     (1,503     4,066   

Prepaid expenses and other current assets

     (29 )     (93 )

Other assets

     (31 )     (31 )

Accounts payable

     (379 )     (745 )

Accrued liabilities

     (1,292 )     (1,118 )

Income taxes receivable/payable

     (380     (705
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (1,309     3,280   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property and equipment

     (160     (257
  

 

 

   

 

 

 

Net cash used in investing activities

     (160     (257
  

 

 

   

 

 

 

Financing activities:

    

Payment of contingent consideration

     (787     (518

Repayments on bank loan

     (17,022     (20,331

Borrowings on bank loan

     18,891        17,352   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,082        (3,497
  

 

 

   

 

 

 

Effects of foreign currency exchange rate changes on cash

     12        (186
  

 

 

   

 

 

 

Net decrease in cash

     (375     (660

Cash, beginning of period

     2,773        2,474   
  

 

 

   

 

 

 

Cash, end of period

   $ 2,398      $ 1,814   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Income taxes paid

   $ 631      $ 885   
  

 

 

   

 

 

 

Interest paid

   $ 99      $ 225   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

MAD CATZ INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

Nature of Operations

Mad Catz Interactive, Inc. designs, manufactures (primarily through third parties in Asia), markets and distributes for all major console based videogame platforms, the personal computer (“PC”) and Mac and, to a lesser extent the iPhone and other mobile devices. Mad Catz Interactive Inc.’s 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. Mad Catz Interactive, Inc. also develops flight simulation software and also publishes and distributes videogames.

Basis of Accounting

The accompanying unaudited consolidated financial information has been prepared by management, without audit, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated balance sheet at March 31, 2013 was derived from the audited consolidated financial statements at that date; however, it does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”).

In the opinion of management, the unaudited consolidated financial statements for the interim period presented reflect all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These unaudited consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. These consolidated financial statements refer to the Company’s fiscal years ending March 31 as its “fiscal” years. The Company generates a substantial percentage of net sales in the last three months of every calendar year, its fiscal third quarter. Results for the interim periods presented herein are not necessarily indicative of results that may be reported for any other interim period or for the fiscal year ending March 31, 2014.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Mad Catz Interactive, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. References to the “Company,” “we,” “us,” “our” and other similar words refer to Mad Catz Interactive, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.

Use of Estimates

The unaudited consolidated financial statements have been prepared in conformity with U.S. GAAP. Applying these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of sales and expenses during the reporting periods. 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, the liability for contingent consideration, warrant liability and income taxes. As future events and their effects cannot be determined with precision, actual results could differ from these estimates.

(2) Fair Value Measurements

For a description of the fair value hierarchy, see Note 2 to the Company’s 2013 consolidated financial statements contained in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2013.

The following tables provide a summary of the recognized assets and liabilities carried at fair value on a recurring basis as of June 30, 2013 and March 31, 2013 (in thousands):

 

           Basis of Fair Value Measurements  
     June 30, 2013     Level 1      Level 2      Level 3  

Liabilities:

          

Contingent consideration (Note 3)

   $ (2,313   $ —         $ —         $ (2,313

Warrant liability (Note 5)

   $ (166   $ —         $ —         $ (166

 

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Table of Contents
           Basis of Fair Value Measurements  
     March 31,
2013
    Level 1      Level 2      Level 3  

Liabilities:

          

Contingent consideration (Note 3)

   $ (3,864   $ —         $ —         $ (3,864

Warrant liability (Note 5)

   $ (149   $ —         $ —         $ (149

The following tables provide a roll forward of the Company’s level three fair value measurements during the three months ended June 30, 2013, which consist of the Company’s contingent consideration liability and warrant liability (in thousands):

 

Contingent consideration:

  

Balance at March 31, 2013

   $ (3,864

Contingent consideration payment

     1,650   

Increases during the year – acquisition related expense

     (99
  

 

 

 

Balance at June 30, 2013

   $ (2,313
  

 

 

 

Warrant liability:

  

Balance at March 31, 2013

   $ (149

Change in fair value of warrant liability

     (17
  

 

 

 

Balance at June 30, 2013

   $ (166
  

 

 

 

(3) Contingent Consideration

In connection with the fiscal year 2011 acquisition of Tritton Technologies Inc. (“Tritton”), the Company has a contingent consideration arrangement that requires the Company to pay the former owners of Tritton additional consideration based on a percentage of sales of Tritton products over a five year period following the acquisition, subject to maximum annual amounts, up to an aggregate of $8.7 million. The fair value of the contingent consideration arrangement has been determined primarily by using the income approach and using a discount rate of approximately 11.8%. The amount paid for contingent consideration has been reduced by the amount of any working capital adjustment. The Company paid $1,650,000, $1,592,000, and $1,546,000 under this arrangement for fiscal 2013, 2012 and 2011, respectively. The remaining annual payments will be made in May of 2014 and 2015.

Fluctuations in the fair value of contingent consideration are impacted by unobservable inputs, most significantly estimated future sales of Tritton products and the estimated discount rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for estimated future sales of Tritton products is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption used for the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.

The Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration on a quarterly basis and any changes in estimated fair value are recorded in ‘acquisition related items’ in the Company’s statement of operations.

(4) Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2013
     March 31,
2013
 

Raw materials

   $ 1,324       $ 1,789   

Finished goods

     23,977         22,006   
  

 

 

    

 

 

 
   $ 25,301       $ 23,795   
  

 

 

    

 

 

 

(5) Securities Purchase Agreement

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”). 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. 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 until October 21, 2016.

The Company accounts for the Warrants with exercise price reset features in accordance with the applicable Financial Accounting Standards Board (“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 increased from $149,000 as of March 31, 2013 to $166,000 as of June 30, 2013, which resulted in a $17,000 loss from the change in fair value of warrants for the three months ended June 30, 2013.

 

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Table of Contents

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

 

     June 30,
2013
    March 31,
2013
 

Expected term

     3.25 years        3.5 years   

Common stock market price

   $ 0.43      $ 0.38   

Risk-free interest rate

     0.75     0.46

Expected volatility

    
79.23

   
79.65

Expected volatility was 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.

Fluctuations in the fair value of the Warrants are impacted by unobservable inputs, most significantly the assumption with regards to future equity issuances and their impact to the down-round protection feature. Significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.

(6) Basic and Diluted Net Loss per Share

Basic net loss per share is calculated by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share includes the impact of potentially dilutive securities unless inclusion of such securities would be anti-dilutive.

Outstanding options to purchase an aggregate of 8,208,074 and 6,826,091 shares of the Company’s common stock for the three months ended June 30, 2013 and 2012, respectively, and outstanding warrants to purchase an aggregate of 2,540,918 shares of the Company’s common stock for each of the three months ended June 30, 2013 and 2012 were excluded from the diluted net loss per share calculations because of their anti-dilutive effect during these periods.

(7) Geographic Data and Concentrations

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

 

     Three Months Ended  
     June 30,  
     2013      2012  

Europe

   $ 10,115       $ 9,796   

United States

     5,980         9,482   

APAC

     1,969         1,587   

Canada

     620         957   
  

 

 

    

 

 

 
   $ 18,684       $ 21,822   
  

 

 

    

 

 

 

Revenue is attributed to geographic regions based on the location of the customer. During the three months ended June 30, 2013 one customer accounted for approximately 13% of the Company’s gross sales. During the three months ended June 30, 2012, one customer accounted for approximately 26% of the Company’s gross sales. At June 30, 2013, one customer represented 14% of accounts receivable and another customer represented 13% of accounts receivable. At March 31, 2013, one customer represented 15% of accounts receivable and another customer represented 12% of accounts receivable. At June 30, 2013 and 2012, no other customers accounted for greater than 10% of gross sales. At June 30, 2013 and March 31, 2013, no other customers accounted for greater than 10% of accounts receivable.

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 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, 2013 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 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, 2013.

 

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Table of Contents

OVERVIEW

Our Business

We design, manufacture (primarily through third parties in Asia), market and distribute for all major console based videogame platforms, the personal computer (“PC”) and Mac and, to a lesser extent the iPhone and other mobile devices. 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 develop flight simulation software and also publish and distribute 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 or titles; the need to increase inventories in advance of our primary selling season; and timing of introductions of new products.

Potential Fluctuations in Foreign Currency Exchange Rates

During the first quarter of fiscal 2014, approximately 68% of total net sales were 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 foreign currency exchange gains and losses, which we have experienced in the past and continue to experience. Due to the volatility of foreign currency exchange rates, among other factors, we cannot predict the effect of foreign currency exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience foreign currency exchange losses in the future. To date, we have not hedged against foreign currency exposure.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies and estimates remain consistent with those reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

RESULTS OF OPERATIONS

Net Sales

For the three months ended June 30, 2013, consolidated net sales decreased 14% as compared to the three month period ended June 30, 2012. We experienced a decline in net sales in the United States and Canada due primarily to decreased demand, as expected, ahead of the upcoming gaming console transitions particularly with our larger retail customers. We are experiencing growth in Europe and APAC, particularly in audio products, as we continue to successfully increase our sales and marketing efforts in these regions. We are also experiencing strong growth in devices designed for use with PC and Mac, including gaming keyboards, gaming mice and audio products.

From a geographical perspective, our net sales for the three months ended June 30, 2013 and 2012 were as follows (in thousands):

 

      June 30,
2013
     % of total     June 30,
2012
     % of total     $
Change
    %
Change
 

Europe

   $ 10,115         54   $ 9,796         45   $ 319        3

United States

     5,980         32     9,482         44     (3,502 )     (37 )% 

APAC

     1,969         11     1,587         7     382        24

Canada

     620         3     957         4     (337     (35 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
   $ 18,684         100   $ 21,822         100   $ (3,138 )     (14 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Our sales by platform as a percentage of gross sales were as follows:

 

     Three Months Ended
June  30,
 
     2013     2012  

PC and Mac

     47     34 %

Universal

     26     28

Xbox 360

     17     28

PlayStation 3

     9     7

All others

     1     3
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

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Our sales by product category as a percentage of gross sales were as follows:

 

     Three Months Ended  
     June 30,  
     2013     2012  

Audio

     44     44

Mice and Keyboards

     30     21

Specialty Controllers

     17     16

Accessories

     6     8

Controllers

     2     9

Games and other

     1     2
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Our sales by brand as a percentage of gross sales were as follows:

 

     Three Months Ended  
     June 30,  
     2013     2012  

Mad Catz

     47     46

Tritton

     39     41

Saitek

     11     10

Other

     3     3
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

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 months ended June 30, 2013 and 2012 (in thousands):

 

     June 30,      % of Net     June 30,      % of Net     $     %  
     2013      Sales     2012      Sales     Change     Change  

Net sales

   $ 18,684         100   $ 21,822         100   $ (3,138     (14 )% 

Cost of sales

     13,319         71     15,547         71     (2,228     (14 )% 

Gross profit

     5,365         29     6,275         29     (910     (15 )% 

Gross profit for the three months ended June 30, 2013 decreased 15% due to the decrease in net sales, while gross profit margin remained flat at 29%.

Operating Expenses

Operating expenses for the three months ended June 30, 2013 and 2012 were as follows (in thousands):

 

     June 30,      % of     June 30,      % of     $     %  
     2013      Net sales     2012      Net sales     Change     Change  

Sales and marketing

   $ 2,906         16   $ 3,239         15   $ (333     (10 )% 

General and administrative

     3,233         17     2,956         14     277        9

Research and development

     1,011         5     1,021         5     (10     (1 )% 

Acquisition related items

     99         1     518         2     (419     (81 )% 

Amortization

     234         1     233         1     1        (0 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   
   $ 7,483         40   $ 7,967         37   $ (484     (6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

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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 GameShark.com website. The decrease in sales and marketing expense was primarily due to decreases in variable cooperative advertising expense as a result of decreased sales. We expect sales and marketing expenses as a percentage of net sales in fiscal 2014 to remain approximately the same as that of fiscal 2013.

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 related to an increase in professional fees. We expect general and administrative expenses as a percentage of net sales in fiscal 2014 to slightly increase from fiscal 2013 levels.

Research and Development Expenses. Research and development expenses, which remained relatively flat compared to prior year, include the costs of developing and enhancing new and existing products. We expect research and development expenses in fiscal 2014 to decrease slightly, on an absolute dollar basis, from fiscal 2013 levels.

Acquisition Related Items. Acquisition related items represent adjustments to the contingent consideration valuation related to the Tritton acquisition, which will continue to be adjusted through fiscal 2015 when the contingent consideration will be fully paid.

Amortization Expenses. Amortization expenses consist of the amortization of the acquired intangible assets from Saitek, Joytech and Tritton.

Other (Expense) Income.

Other (expense) income consists primarily of interest expense on our outstanding debt, foreign currency exchange gains or losses associated with fluctuations in the value of the functional currencies of our foreign subsidiaries against the U.S. Dollar, change in fair value of the Warrants issued in connection with the Securities Purchase Agreement and other items that may be specific to a reporting period. Other expense was $88,000 for the three months ended June 30, 2013 compared to other income of $242,000 for the three months ended June 30, 2012. The change is primarily due to foreign currency exchange losses of $24,000 for the three months ended June 30, 2013 compared to foreign currency exchange gains of $256,000 for the same period in the prior year. Additionally, the change in the fair value of the warrant liability resulted in $17,000 of expense for the three months ended June 30, 2013 compared to $190,000 of income for the three months ended June 30, 2012. Interest expense, net, decreased to $118,000 for the three months ended June 30, 2013 from $269,000 in the same period last year due to a reduction in the average debt balance during the current year period.

Income Tax Benefit (Expense)

Income tax benefit of $141,000 and income tax expense of $267,000 reflect effective tax rates of 6% and (18%) for the three months ended June 30, 2013 and 2012, respectively. Our effective tax rate is a blended rate for the different jurisdictions in which we operate. 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 allowance against the deferred tax asset attributable to the net operating loss carryforwards. We will continue to evaluate the realizability of our 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. The change in the effective tax rate in the first quarter of fiscal 2014 versus the first quarter of fiscal 2013 was primarily due to income in certain jurisdictions in the first quarter of fiscal 2013 compared to losses in those jurisdictions in the first quarter of fiscal 2014.

MCII does not record deferred income taxes on the approximate $43.0 million of undistributed earnings of its non-Canadian subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings. MCII may be subject to income and withholding taxes if earnings of the non-Canadian subsidiaries were distributed. Considering the MCII tax loss carry forward and related valuation allowance, the deferred tax liability on the Company’s undistributed earnings would be no more than $2.4 million at June 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

A summary of cash (used in) provided by operating, investing and financing activities were as follows during the three months ended June 30, 2013 and 2012 (in thousands):

 

     As of and for the
Three months ended June 30,
       
     2013     2012     Change  

Net cash (used in) provided by operating activities

   $ (1,309   $ 3,280      $ (4,589

Net cash used in investing activities

     (160     (257     97   

Net cash provided by (used in) financing activities

     1,082        (3,497     4,579   

Effect of foreign currency exchange rate changes on cash and cash equivalents

     12        (186     198   
  

 

 

   

 

 

   

 

 

 

Net decrease in cash

   $ (375   $ (660   $ 285   
  

 

 

   

 

 

   

 

 

 

Our cash balance was $2.4 million and $2.8 million at June 30, 2013 and March 31, 2013, respectively. Our primary sources of liquidity include a revolving line of credit (as discussed below under Financing Activities), cash on hand and cash flows generated from operations.

 

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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. Net cash used in operating activities for the three months ended June 30, 2013 primarily reflects the net loss for the period before non-cash items (i.e. depreciation, amortization, stock-based compensation and provision for deferred income taxes), an increase in inventory of $1.5 million as we start to build inventory in our foreign locations due to demand, and a decrease in accrued liabilities of $1.3 million due to timing of payments. These decreases in operating cash flow were offset partially by a $4.9 million decrease in accounts receivable resulting primarily from the decrease in net sales as well as improved collections. Net cash provided by operating activities for the three months ended June 30, 2012 primarily related to decreases in inventory. 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 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 fiscal 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, and/or reduced sales and the overall effect could result in a reduction to cash flows from operating activities following payment of accounts payable.

Investing Activities

Net cash used in investing activities, which 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, was $0.2 million and $0.3 million during the three months ended June 30, 2013 and June 30, 2012, respectively.

Financing Activities

Net cash provided by financing activities during the three months ended June 30, 2013 of $1.1 million was a result of net borrowings under our line of credit. For the three months ended June 30, 2012, net cash used in financing activities of $3.5 million was a result of net repayments under our line of credit.

We maintain a Credit Facility with Wells Fargo Capital Finance, LLC (“Wells Fargo”) 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 Credit Facility expires on October 31, 2015. Under the line of credit, interest accrues on the daily outstanding balance at an interest rate that ranges from U.S. prime rate plus 0.5% or, at the Company’s option, LIBOR plus 2.50% with a LIBOR floor of 1.50%. At June 30, 2013, the interest rate was 3.75%. We are also required to pay a monthly service fee of $1,500 and an unused line fee equal to 0.25% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority security interest in the inventories, equipment, and accounts receivable of certain subsidiaries and by a pledge of all of the capital stock of our subsidiaries and is guaranteed by the Company. We are required to meet a quarterly financial covenant based on our trailing four quarter’s coverage of fixed charges. We were in compliance with this covenant at June 30, 2013.

In connection with the Company’s acquisition of Tritton, we are 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 Company paid $1,650,000, under this arrangement during the three months ended June 30, 2013, of which $0.8 million is reflected in financing activities and $0.8 million is reflected in operating activities. The aggregate fair value of the remaining payments was $2.3 million as of June 30, 2013, 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, and in the longer term, including any payments due for contingent consideration. 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, “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, 2013.

As of June 30, 2013 and March 31, 2013, 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, AND ADJUSTED EBITDA

EBITDA, a non-GAAP financial measure, represents net loss 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 in the United States. 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. We calculate Adjusted EBITDA as follows (in thousands):

 

     Three months ended
June 30,
 
     2013     2012  

Net loss

   $ (2,065   $ (1,717

Adjustments:

    

Interest expense, net

     118        269   

Income tax (benefit) expense

     (141     267   

Depreciation and amortization

     686        779   
  

 

 

   

 

 

 

EBITDA (loss)

   $ (1,402 )   $ (402 )

Change in fair value of warrant liability

     17        (190
  

 

 

   

 

 

 

Adjusted EBITDA (loss)

   $ (1,385   $ (592
  

 

 

   

 

 

 

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, including contingent payments related to the Tritton acquisition; and our expectations for fiscal 2014 in respect of our gross margin and operating expenses.

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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

For the first quarter of fiscal 2014, 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, 2013. In designing and evaluating the disclosure

 

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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.

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, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our 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

On January 14, 2013, the Company filed a complaint in San Diego Superior Court (Case No. 37-2013-00030075-CU-BT-CTL) against an unknown John Doe and 2-20 additional unknown Does that have posted statements on on-line message boards that were disparaging, false and untrue about the Company, its products, services and employees, as well as contained non-public information about the Company, its products, its internal workings and its financial condition. The Company is seeking compensatory and punitive damages from the statements occurring on the message boards. At a hearing held June 14, 2013, the court granted a motion brought by one of the unknown John Does to quash a subpoena issued by the Company. The Company strongly disagrees with and intends to appeal the court’s ruling. Additionally, one of the Doe defendants has filed a motion for attorneys’ fees and costs. The Company intends to vigorously oppose this motion, which will be heard on August 16, 2013.

On July 6, 2012, the Company’s subsidiaries Mad Catz Inc., and Mad Catz Interactive Asia Limited filed a complaint styled Mad Catz, Inc. et. al. v. KnowledgeTech Corp., Case No. 37-2012-00100125-CU-BC-CTL, in the Superior Court of California, County of San Diego. The complaint alleges that KnowledgeTech Corp. breached its contract with the plaintiffs for failing to issue credits for returned product. The plaintiffs are seeking damages in the amount to be determined at trial. KnowledgeTech has filed a cross-complaint against Mad Catz Interactive Asia Limited and Mad Catz, Inc., and a complaint against Mad Catz Interactive, Inc., Tritton Technologies, Inc., and Mad Catz Europe Limited seeking payment for goods produced without any set off for returned goods. The parties engaged in mediation efforts on July 26, 2013, at which the parties were unable to resolve the matter. If no prior resolution is reached between the parties, trial in the matter is set for January 17, 2014. The Company believes that the allegations in the cross-complaint lack merit and intends to vigorously defend all cross-claims asserted.

In addition to the foregoing matters, 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 Part I — Item 1A. — Risk Factors our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On August 5, 2013, the Company and its wholly-owned subsidiary Mad Catz, Inc. entered into an Employment Agreement with Karen McGinnis (the “Agreement”). Pursuant to the Agreement, Ms. McGinnis will serve as Chief Financial Officer and receive an initial base salary of $275,000. The Agreement has an initial term of three years, and unless earlier terminated, automatically extends on the same terms and conditions for additional one-year periods until terminated. Ms. McGinnis will also be eligible to participate in the Company’s stock option and incentive compensation programs based on such vesting or performance targets as may be established from time to time by the Company’s Board of Directors or a committee thereof. The Agreement specifies that during Ms. McGinnis’ employment, the Company shall provide other benefits in accordance with the Company’s employee benefits programs provided to its executive level employees. If the Company terminates Ms. McGinnis’ employment without cause, or Ms. McGinnis terminates her employment for good reason, the Agreement provides for severance equal to one year of her regular base salary plus any additional severance benefits that may be negotiated at the time. If Ms. McGinnis’ employment is terminated due to death or disability that prevents the performance of her duties for a period of 120 consecutive days or 180 days in a consecutive 12 month period, the Company shall pay Ms. McGinnis’ full base salary through the date of termination.

The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement which is attached as Exhibit 10.2 hereto and incorporated by reference.

 

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Item 6. Exhibits

 

10.1    Amendment, dated June 5, 2013, to Fourth Amended and Restated Loan Agreement. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 6, 2013.
10.2    Employment Agreement effective June 10, 2013, by and between Mad Catz Interactive, Inc., Mad Catz, Inc. and Karen McGinnis.
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.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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.
August 8, 2013     /s/ Darren Richardson
    Darren Richardson
    President and Chief Executive Officer
August 8, 2013     /s/ Karen McGinnis
    Karen McGinnis
    Chief Financial Officer

 

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