Form 10-Q MAD CATZ INTERACTIVE For: Dec 31

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February 5, 2015 4:32 PM EST

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�

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 December�31, 2014

�

�	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.)

�

10680 Treena Street, Suite�500

San Diego, California

�

92131

(Address of principal executive offices)

�

(Zip Code)

(858)�790-5008

(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 64,488,798 shares of the registrant�s common stock issued and outstanding as of January�30, 2015.

�

MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

�


PART I � FINANCIAL INFORMATION		�	3	��
Item�1.	Financial Statements (unaudited)	�	3	��
	Consolidated Balance Sheets�December�31, 2014 and March�31, 2014	�	3	��
	Consolidated Statements of Operations�Three and Nine Months Ended December�31, 2014 and 2013	�	4	��
	Consolidated Statements of Comprehensive Loss�Three and Nine Months Ended December�31, 2014 and 2013	�	5	��
	Consolidated Statements of Cash Flows�Nine Months Ended December�31, 2014 and 2013	�	6	��
	Notes to Unaudited Consolidated Financial Statements	�	7	��
Item�2.	Management�s Discussion and Analysis of Financial Condition and Results of Operations	�	11	��
Item�4.	Controls and Procedures	�	19	��
PART II � OTHER INFORMATION		�	20	��
Item�1.	Legal Proceedings	�	20	��
Item�1A.	Risk Factors	�	21	��
Item�2.	Unregistered Sales of Equity Securities and Use of Proceeds	�	21	��
Item�3.	Defaults Upon Senior Securities	�	21	��
Item�4.	Mine Safety Disclosure	�	21	��
Item�5.	Other Information	�	21	��
Item�6.	Exhibits	�	21	��
SIGNATURES		�	21	��

�

PART I � FINANCIAL INFORMATION

�

Item�1.

Financial Statements

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

�


�	��	December�31, 2014		�	�	March�31, 2014		�
ASSETS	��				�
Current assets:	��				�
Cash	��	$	3,890	��	�	$	1,496	��
Accounts receivable, net	��	�	14,471	��	�	�	8,059	��
Other receivables	��	�	936	��	�	�	1,531	��
Inventories	��	�	18,469	��	�	�	17,189	��
Deferred tax assets	��	�	905	��	�	�	926	��
Income tax receivable	��	�	1,083	��	�	�	895	��
Prepaid expenses and other current assets	��	�	1,648	��	�	�	1,605	��
	��	�	�	�	�	�	�	�
Total current assets		�	41,402	��		�	31,701	��
Deferred tax assets		�	1,229	��		�	1,334	��
Other assets		�	450	��		�	499	��
Property and equipment, net		�	3,233	��		�	2,737	��
Intangible assets, net		�	2,694	��		�	3,022	��
	��	�	�	�	�	�	�	�
Total assets		$	49,008	��		$	39,293	��
	��	�	�	�	�	�	�	�
LIABILITIES AND SHAREHOLDERS� EQUITY
Current liabilities:
Bank loan		$	14,627	��		$	5,612	��
Accounts payable		�	16,723	��		�	13,661	��
Accrued liabilities		�	4,618	��		�	4,874	��
Note payable		�	1,059	��		�	1,336	��
Income taxes payable		�	521	��		�	330	��
	��	�	�	�	�	�	�	�
Total current liabilities		�	37,548	��		�	25,813	��
Note payable, less current portion		�	589	��		�	1,023	��
Warrant liability		�	19	��		�	75	��
Deferred tax liabilities		�	166	��		�	178	��
Deferred rent		�	722	��		�	78	��
	��	�	�	�	�	�	�	�
Total liabilities		�	39,044	��		�	27,167	��
Shareholders� equity:
Common stock, no par value, unlimited shares authorized; 64,488,798 and 63,931,506 shares issued and outstanding at December�31, 2014 and March�31, 2014, respectively		�	61,459	��		�	60,847	��
Accumulated other comprehensive loss		�	(3,722	)�		�	(1,757	)�
Accumulated deficit		�	(47,773	)�		�	(46,964	)�
	��	�	�	�	�	�	�	�
Total shareholders� equity		�	9,964	��		�	12,126	��
	��	�	�	�	�	�	�	�
Total liabilities and shareholders� equity		$	49,008	��		$	39,293	��
	��	�	�	�	�	�	�	�

See accompanying notes to unaudited consolidated financial statements.

�

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

�

��

Three Months Ended
December�31,

�

Nine Months Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Net sales

��

30,451

��

�

32,889

��

�

69,665

��

�

69,412

��

Cost of sales

��

�

22,273

��

�

24,964

��

�

49,693

��

�

51,352

��

�

Gross profit

�

8,178

��

�

7,925

��

�

19,972

��

�

18,060

��

Operating expenses:

Sales and marketing

�

2,673

��

�

3,189

��

�

8,562

��

�

10,018

��

General and administrative

�

2,337

��

�

2,655

��

�

8,210

��

�

8,903

��

Research and development

�

852

��

�

1,062

��

�

2,220

��

�

3,240

��

Acquisition related items

�

��

�

(53

)�

�

��

�

��

Amortization of intangible assets

�

109

��

�

170

��

�

328

��

�

633

��

�

Total operating expenses

�

5,971

��

�

7,023

��

�

19,320

��

�

22,893

��

�

Operating income (loss)

�

2,207

��

�

902

��

�

652

��

�

(4,833

)�

��

�

Other (expense) income:

Interest expense, net

�

(238

)�

�

(223

)�

�

(563

)�

�

(476

)�

Foreign currency exchange loss, net

�

(83

)�

�

(292

)�

�

(500

)�

�

(708

)�

Change in fair value of warrant liability

�

��

�

324

��

�

��

�

(10

)�

Other income

�

��

�

��

�

��

�

101

��

�

Total other expense

�

(307

)�

�

(187

)�

�

(915

)�

�

(1,093

)�

��

�

Income (loss) before income taxes

�

1,900

��

�

715

��

�

(263

)�

�

(5,926

)�

Income tax expense

�

(542

)�

�

(1,281

)�

�

(546

)�

�

(1,250

)�

��

�

Net income (loss)

1,358

��

(566

)�

(809

)�

(7,176

)�

��

�

Net income (loss) per share:

Basic

0.02

��

(0.01

)�

(0.01

)�

(0.11

)�

��

�

Diluted

0.02

��

(0.01

)�

(0.01

)�

(0.11

)�

��

�

Shares used in per share computations:

Basic

�

64,488,798

��

�

63,931,506

��

�

64,240,446

��

�

63,700,413

��

�

Diluted

�

64,644,470

��

�

63,931,506

��

�

64,240,446

��

�

63,700,413

��

�

See accompanying notes to unaudited consolidated financial statements.

�

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Net income (loss)

��

1,358

��

�

(566

)�

�

(809

)�

�

(7,176

)�

Foreign currency translation adjustments

��

�

(1,170

)�

�

949

��

�

(1,965

)�

�

1,905

��

�

Comprehensive income (loss)

188

��

383

��

(2,774

)�

(5,271

)�

��

�

See accompanying notes to unaudited consolidated financial statements.

�

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

�


�	��	Nine Months Ended December�31,						�
�	��	2014		�	�	2013		�
Cash flows from operating activities:	��				�
Net loss	��	$	(809	)�	�	$	(7,176	)�
Adjustments to reconcile net loss to net cash used in operating activities:	��				�
Depreciation and amortization	��	�	1,549	��	�	�	2,017	��
Accrued and unpaid interest expense on note payable	��	�	10	��	�	�	��	��
Amortization of deferred financing fees	��	�	57	��	�	�	26	��
Loss on disposal of assets	��	�	8	��	�	�	��	��
Stock-based compensation	��	�	376	��	�	�	501	��
Change in fair value of contingent consideration	��	�	��	��	�	�	(764	)�
Change in fair value of warrant liability	��	�	(56	)�	�	�	10	��
Provision for deferred income taxes	��	�	114	��	�	�	12	��
Changes in operating assets and liabilities:	��				�
Accounts receivable	��	�	(7,314	)�	�	�	789	��
Other receivables	��	�	511	��	�	�	(1,009	)�
Inventories	��	�	(1,460	)�	�	�	3,833	��
Prepaid expenses and other current assets	��	�	(49	)�	�	�	124	��
Other assets	��	�	36	��	�	�	(111	)�
Accounts payable	��	�	2,585	��	�	�	(1,937	)�
Accrued liabilities	��	�	(292	)�	�	�	(328	)�
Deferred rent	��	�	553	��	�	�	��	��
Income taxes receivable/payable	��	�	(50	)�	�	�	612	��
	��	�	�	�	�	�	�	�
Net cash used in operating activities		�	(4,231	)�		�	(3,401	)�
	��	�	�	�	�	�	�	�
Cash flows from investing activities:
Purchases of property and equipment		�	(1,604	)�		�	(994	)�
Purchases of intangible assets		�	��	��		�	(80	)�
	��	�	�	�	�	�	�	�
Net cash used in investing activities		�	(1,604	)�		�	(1,074	)�
	��	�	�	�	�	�	�	�
Cash flows from financing activities:
Borrowings on bank loan		�	53,839	��		�	57,535	��
Repayments on bank loan		�	(44,824	)�		�	(51,791	)�
Payment of financing fees		�	(50	)�		�	(40	)�
Repayments on note payable		�	(791	)�		�	��	��
Proceeds from exercise of stock options		�	236	��		�	188	��
Payment of contingent consideration		�	��	��		�	(787	)�
	��	�	�	�	�	�	�	�
Net cash provided by financing activities		�	8,410	��		�	5,105	��
	��	�	�	�	�	�	�	�
Effects of foreign currency exchange rate changes on cash		�	(181	)�		�	137	��
	��	�	�	�	�	�	�	�
Net increase in cash		�	2,394	��		�	767	��
Cash, beginning of period		�	1,496	��		�	2,773	��
	��	�	�	�	�	�	�	�
Cash, end of period		$	3,890	��		$	3,540	��
	��	�	�	�	�	�	�	�
Supplemental cash flow information:
Income taxes paid		$	578	��		$	941	��
	��	�	�	�	�	�	�	�
Interest paid		$	350	��		$	397	��
	��	�	�	�	�	�	�	�

See accompanying notes to unaudited consolidated financial statements.

�

MAD CATZ INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)�Basis of Presentation

Nature of Operations

Mad Catz Interactive, Inc. (�Mad Catz�) designs, manufactures (primarily through third parties in Asia), markets and distributes innovative interactive entertainment products marketed under its Mad Catz^� (gaming), Tritton^� (audio), and Saitek^� (simulation) brands.�Mad Catz products, which primarily include headsets, mice, keyboards, controllers, specialty controllers, and other accessories, cater to passionate gamers across multiple platforms including in-home gaming consoles, handheld gaming consoles, Windows^� PC and Mac^� computers, smart phones, tablets and other mobile devices.�Mad Catz distributes its products through its online store as well as through many leading retailers around the globe.�Operationally headquartered in San Diego, California, Mad Catz also maintains offices in Europe and Asia.

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, 2014 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, 2014. 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, 2015. All currency amounts are presented in U.S. dollars.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of Mad Catz 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, warrant liability and income taxes. As future events and their effects cannot be determined with precision, actual results could differ from these estimates.

Recently Issued Accounting Standards

The following new accounting standards have been issued, but not adopted by the Company as of December�31, 2014:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The effective date of ASU 2014-09 is for annual reporting periods beginning after December�15, 2016.�The Company is currently evaluating the impact of adopting ASU 2014-09.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity�s Ability to Continue as a Going Concern. ASU 2014-15 requires management to perform interim and annual assessments of an entity�s ability to continue as a going concern for a one year period subsequent to the date of the financial statements. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity�s ability to continue as a going concern. The guidance is effective for all entities for the first annual period ending after December�15, 2016 and interim periods thereafter, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company�s financial statements.

�

(2) Fair Value Measurements

The carrying values of the Company�s financial instruments, including cash, accounts receivable, other receivables, accounts payable, accrued liabilities and income taxes receivable/payable approximate their fair values due to the short maturity of these instruments. The carrying value of the bank loan approximates its fair value as the interest rate and other terms are that which is currently available to the Company. The carrying value of the note payable approximates fair value as it represents the present value of the fixed payment schedule using an effective interest rate of 5.25%, which approximates the interest rate on the Company�s bank loan.

For a description of the fair value hierarchy, see Note 2 to the Company�s 2014 consolidated financial statements contained in the Company�s Annual Report on Form 10-K for its fiscal year ended March�31, 2014.

The following tables provide a summary of the recognized assets and liabilities carried at fair value on a recurring basis as of December�31, 2014 and March�31, 2014 (in thousands):

�

��

�

��

Basis�of�Fair�Value�Measurements

�

��

December�31,
2014

�

��

Level�1

�

��

Level�2

�

��

Level 3

�

Liabilities:

��

Warrant liability

��

�(19)

��

(19)

��

�

��

�

��

Basis�of�Fair�Value�Measurements

�

��

March�31,
2014

�

��

Level�1

�

��

Level�2

�

��

Level�3

�

Liabilities:

��

Warrant liability

��

�(75)

��

�

��

(75)

��

The following tables provide a roll forward of the Company�s level three fair value measurements during the nine months ended December�31, 2014, which consist of the Company�s warrant liability (in thousands):

�


Warrant liability:	��
Balance at March�31, 2014	��	$	(75	)�
Change in fair value of warrant liability	��	�	56	��
	��	�	�	�
Balance at December�31, 2014		$	(19	)�
	��	�	�	�

(3) Inventories

Inventories consist of the following (in thousands):

�


�	��	December�31, 2014		�	��	March�31, 2014		�
Raw materials	��	$	1,045	��	��	$	1,032	��
Finished goods	��	�	17,424	��	��	�	16,157	��
	��	�	�	�	��	�	�	�
		$	18,469	��		$	17,189	��
	��	�	�	�	��	�	�	�

(4)�Basic and Diluted Net Income (Loss) per Share

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

�

��

Three�Months�Ended
December�31,

�

Nine months Ended
December�31,

�

��

2014

�

��

2013

�

2014

�

2013

�

Numerator:

��

�

Net income (loss)

��

1,358

��

(566

)�

�

(809

)�

�

(7,176

)�

��

�

��

�

Denominator:

Weighted average shares used to compute basic loss per share

�

64,488,798

��

�

63,931,506

��

�

64,240,446

��

�

63,700,413

��

Effect of dilutive share-based awards

�

155,672

��

�

��

�

��

�

��

�

��

�

Denominator for diluted net income (loss) per share

�

64,644,470

��

�

63,931,506

��

�

64,240,446

��

�

63,700,413

��

�

��

�

Basic income (loss) per share

0.02

��

(0.01

)�

(0.01

)�

(0.11

)�

Diluted income (loss) per share

0.02

��

(0.01

)�

(0.01

)�

(0.11

)�

Outstanding options to purchase an aggregate of 7,749,132 and 7,310,704 shares of the Company�s common stock for the three and nine months ended December�31, 2014, respectively, and 7,391,006 and 7,772,752 shares of the Company�s common stock for the three and nine months ended December�31, 2013, respectively, were excluded from the diluted net income (loss) per share calculations because of their anti-dilutive effect during these periods. Outstanding warrants to purchase an aggregate of 2,540,918 shares of the Company�s common stock for each of the three and nine months ended December�31, 2014 and 2013, were excluded from the diluted net income (loss) per share calculations because of their anti-dilutive effect during these periods.

(5)�Geographic and Product Line Data and Concentrations

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

�

��

Three Months Ended
December�31,

�

��

Nine Months Ended
December�31,

�

��

2014

�

��

2013

�

��

2014

�

��

2013

�

EMEA

��

17,825

��

20,983

��

37,104

��

40,575

��

Americas

��

�

9,573

��

�

9,877

��

�

22,281

��

�

23,195

��

APAC

��

�

3,053

��

�

2,029

��

�

10,280

��

�

5,642

��

�

��

�

��

�

��

�

30,451

��

32,889

��

69,665

��

69,412

��

�

��

�

��

�

��

�

Revenue is attributed to geographic regions based on the location of the customer. �EMEA� includes Europe, the Middle East and Africa. During the three and nine months ended December�31, 2014, one customer accounted for approximately 15% and 13% of the Company�s gross sales, respectively, another customer accounted for approximately 11% and 10% of the Company�s gross sales, respectively, and one other customer accounted for approximately 10% and 9% of the Company�s gross sales, respectively. During the three and nine months ended December�31, 2013 one customer accounted for approximately 15% and 13% of the Company�s gross sales, respectively, and one other customer accounted for approximately 12% and 11% of the Company�s gross sales, respectively. At December�31, 2014, one customer represented 18% of accounts receivable, another customer represented 12% of accounts receivable and another customer represented 11% of accounts receivable. At March�31, 2014, one customer represented 15% of accounts receivable. During the three and nine months ended December�31, 2014 and 2013, no other customers accounted for greater than 10% of gross sales. At December�31, 2014 and March�31, 2014, no other customers accounted for greater than 10% of accounts receivable.

The Company�s sales by platform as a percentage of gross sales were as follows:

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

PC and Mac

��

�

%�

�

%�

�

%�

�

%�

Next gen consoles (a)

��

�

%�

�

%�

�

%�

�

%�

Universal

��

�

%�

�

%�

�

%�

�

%�

Smart devices

��

�

%�

�

%�

�

%�

�

%�

Legacy consoles (b)

��

�

%�

�

%�

�

%�

�

%�

All others

��

�

��

%�

�

%�

�

��

%�

�

%�

��

�

100

%�

�

100

%�

�

100

%�

�

100

%�

��

�

(a)	Includes products developed for Xbox One, PlayStation 4 and Wii U.

(b)	Includes products developed for Xbox 360, PlayStation 3 and Wii.

The Company�s sales by product category as a percentage of gross sales were as follows:

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Audio

��

�

%�

�

%�

�

%�

�

%�

Specialty controllers

��

�

%�

�

%�

�

%�

�

%�

Mice and keyboards

��

�

%�

�

%�

�

%�

�

%�

Controllers

��

�

%�

�

%�

�

%�

�

%�

Accessories

��

�

%�

�

%�

�

%�

�

%�

Games and other

��

�

��

%�

�

%�

�

%�

�

%�

��

�

100

%�

�

100

%�

�

100

%�

�

100

%�

��

�

The Company�s sales by brand as a percentage of gross sales were as follows:

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Tritton

��

�

%�

�

%�

�

%�

�

%�

Mad Catz

��

�

%�

�

%�

�

%�

�

%�

Saitek

��

�

%�

�

%�

�

%�

�

%�

Other

��

�

%�

�

%�

�

%�

�

%�

��

�

100

%�

�

100

%�

�

100

%�

�

100

%�

��

�

(6)�Subsequent Event Footnote

The Company maintains a Credit Facility with Wells Fargo Capital Finance, LLC (�Wells Fargo�) to borrow up to $25�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. The Company is currently in discussions to amend and extend the line of credit. The Company is required to meet a monthly financial covenant based on a trailing twelve months� Adjusted EBITDA, as defined. The Company�s trailing twelve months� Adjusted EBITDA as of December�31, 2014 was lower than the required threshold and, accordingly, the Company was not in compliance with this covenant as of December�31, 2014. On February�2, 2015, the Company received a waiver of the covenant default from Wells Fargo and entered into an amendment to the Credit Facility that modifies the trailing twelve months� Adjusted EBITDA covenant, as defined, from January 2015 through June 2015.

�

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, 2014 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, 2014.

OVERVIEW

Our Business

We design, manufacture (primarily through third parties in Asia), market and distribute innovative interactive entertainment products marketed under our Mad Catz^� (gaming), Tritton^� (audio), and Saitek^� (simulation) brands.�Our products, which primarily include headsets, mice, keyboards, controllers, specialty controllers, and other accessories, cater to passionate gamers across multiple platforms including in-home gaming consoles, handheld gaming consoles, Windows^� PC and Mac^� computers, smart phones, tablets and other mobile devices.�We distribute our products through our online store as well as through many leading retailers around the globe.�Operationally headquartered in San Diego, California, we also maintain offices in Europe and Asia.

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.

Foreign Currency

During each of the three and nine month periods ended December�31, 2014, approximately 73% 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 and we cannot predict the effect foreign currency fluctuations will have on us in the future.

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, 2014.

RESULTS OF OPERATIONS

Net Sales

For the three and nine months ended December�31, 2014, net sales decreased 7% and increased less than 1%, respectively, compared to the three and nine months ended December�31, 2013. The decrease in net sales during the current quarter was driven primarily by a decrease in sales of our products, primarily audio, designed for legacy consoles and universal platforms due to the launch of the Playstation 4 and Xbox One consoles in November 2013. Although we are experiencing strong growth in products developed for these new consoles, which represented 21% and 19%, respectively, of our sales during the three and nine months ended December�31, 2014, the decline in sales of products related to the legacy consoles has been greater than we and others in the industry anticipated.

�

Our sales of products designed for the PC and Mac, which represented 43% and 44% of our sales during the three and nine months ended December�31, 2014, respectively, have been driven by growth in sales of our Saitek flight simulation products due to new product introductions and increased marketing activities, offset partially by declines in sales of our gaming mice and keyboards. The decline in sales of gaming mice and keyboards was driven primarily by a planned reduction in product placement at some U.S. accounts and an increase in aggressive pricing competition within this space.

We also experienced an increase in sales of products developed for smart devices, which represented 5% and 8% of our net sales during the three and nine months ended December�31, 2014, respectively, driven primarily by controllers sold to a customer in APAC under a private label program.

From a geographical perspective, our net sales for the three and nine months ended December�31, 2014 and 2013 were as follows (in thousands):

�

��

Three Months Ended December�31,

�

��

2014

�

��

%�of�total

�

2013

�

��

%�of�total

�

$
Change

�

%
Change

�

EMEA

��

17,825

��

�

%�

�

20,983

��

�

%�

�

(3,158

)�

�

(15

)%�

Americas

��

�

9,573

��

�

%�

�

9,877

��

�

%�

�

(304

)�

�

)%�

APAC

��

�

3,053

��

�

%�

�

2,029

��

�

%�

�

1,024

��

�

%�

��

�

��

�

��

�

30,451

��

�

100

%�

32,889

��

�

100

%�

(2,438

)�

�

)%�

��

�

��

�

��

�

��

Nine Months Ended December�31,

�

��

2014

�

��

%�of�total

�

2013

�

��

%�of�total

�

$
Change

�

%
Change

�

EMEA

��

37,104

��

�

%�

�

40,575

��

�

%�

�

(3,471

)�

�

)%�

Americas

��

�

22,281

��

�

%�

�

23,195

��

�

%�

�

(914

)�

�

)%�

APAC

��

�

10,280

��

�

%�

�

5,642

��

�

%�

�

4,638

��

�

%�

��

�

��

�

��

�

69,665

��

�

100

%�

69,412

��

�

100

%�

253

��

�

%�

��

�

��

�

��

�

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

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

PC and Mac

��

�

%�

�

%�

�

%�

�

%�

Next gen consoles (a)

��

�

%�

�

%�

�

%�

�

%�

Universal

��

�

%�

�

%�

�

%�

�

%�

Smart devices

��

�

%�

�

%�

�

%�

�

%�

Legacy consoles (b)

��

�

%�

�

%�

�

%�

�

%�

All others

��

�

��

%�

�

%�

�

��

%�

�

%�

��

�

100

%�

�

100

%�

�

100

%�

�

100

%�

��

�

(a)	Includes products developed for Xbox One, PlayStation 4 and Wii U.

(b)	Includes products developed for Xbox 360, PlayStation 3 and Wii.

�

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

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Audio

��

�

%�

�

%�

�

%�

�

%�

Specialty controllers

��

�

%�

�

%�

�

%�

�

%�

Mice and keyboards

��

�

%�

�

%�

�

%�

�

%�

Controllers

��

�

%�

�

%�

�

%�

�

%�

Accessories

��

�

%�

�

%�

�

%�

�

%�

Games and other

��

�

��

%�

�

%�

�

%�

�

%�

��

�

100

%�

�

100

%�

�

100

%�

�

100

%�

��

�

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

�

��

Three�Months�Ended
December�31,

�

Nine�Months�Ended
December�31,

�

��

2014

�

2013

�

2014

�

2013

�

Tritton

��

�

%�

�

%�

�

%�

�

%�

Mad Catz

��

�

%�

�

%�

�

%�

�

%�

Saitek

��

�

%�

�

%�

�

%�

�

%�

Other

��

�

%�

�

%�

�

%�

�

%�

��

�

100

%�

�

100

%�

�

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, write-downs of inventory, cost of freight-in and freight-out and distribution center costs, including depreciation and other overhead costs.

The following table presents net sales, cost of sales and gross profit for the three and nine months ended December�31, 2014 and 2013 (in thousands):

�

��

Three Months Ended December�31,

�

��

2014

�

��

%�of�Net
Sales

�

2013

�

��

%�of�Net
Sales

�

$
Change

�

%
Change

�

Net sales

��

30,451

��

�

100

%�

�

32,889

��

�

100

%�

�

(2,438

)�

�

)%�

Cost of sales

��

�

22,273

��

�

%�

�

24,964

��

�

%�

�

(2,691

)�

�

(11

)%�

��

�

��

�

��

�

Gross profit

8,178

��

�

%�

7,925

��

�

%�

253

��

�

%�

��

�

��

�

��

�

��

Nine Months Ended December�31,

�

��

2014

�

��

%�of�Net
Sales

�

2013

�

��

%�of�Net
Sales

�

$
Change

�

%
Change

�

Net sales

��

69,665

��

�

100

%�

�

69,412

��

�

100

%�

�

253

��

�

��

%�

Cost of sales

��

�

49,693

��

�

%�

�

51,352

��

�

%�

�

(1,659

)�

�

)%�

��

�

��

�

��

�

Gross profit

19,972

��

�

%�

18,060

��

�

%�

1,912

��

�

%�

��

�

��

�

��

�

Although sales decreased 7% for the three months ended December�31, 2014 and increased less than 1% for the nine months ended December�31, 2014, gross profit increased 3% and 11% for the three and nine months ended December�31, 2014, respectively, due to an increase in gross margin to 27% and 29%, respectively. The increase in gross margin in both the three and nine month periods was due primarily to decreases in sales returns and discounts, inventory write-downs and royalties and licenses as a percentage of net sales. These improvements to gross margin were offset partially by an increase in freight expense as a percentage of net sales. We expect gross profit dollars and gross margin for the full year fiscal 2015 to increase from fiscal 2014 levels.

�

Operating Expenses

Operating expenses for the three and nine months ended December�31, 2014 and 2013 were as follows (in thousands):

�

��

Three Months Ended December�31,

�

��

2014

�

��

%�of�Net
Sales

�

2013

�

%�of�Net
Sales

�

$
Change

�

%
Change

�

Sales and marketing

��

2,673

��

�

%�

�

3,189

��

�

%�

�

(516

)�

�

(16

)%�

General and administrative

��

�

2,337

��

�

%�

�

2,655

��

�

%�

�

(318

)�

�

(12

)%�

Research and development

��

�

852

��

�

%�

�

1,062

��

�

%�

�

(210

)�

�

(20

)%�

Acquisition related items

��

�

��

�

��

�

��

%�

�

(53

)�

�

%�

�

��

�

100

%�

Amortization of intangibles

��

�

109

��

�

��

%�

�

170

��

�

%�

�

(61

)�

�

(36

)%�

��

�

��

�

5,971

��

�

%�

7,023

��

�

%�

(1,052

)�

�

(15

)%�

��

�

��

�

��

Nine Months Ended December�31,

�

��

2014

�

��

%�of�Net
Sales

�

2013

�

��

%�of�Net
Sales

�

$
Change

�

%
Change

�

Sales and marketing

��

8,562

��

�

%�

�

10,018

��

�

%�

�

(1,456

)�

�

(15

)%�

General and administrative

��

�

8,210

��

�

%�

�

8,903

��

�

%�

�

(693

)�

�

)%�

Research and development

��

�

2,220

��

�

%�

�

3,240

��

�

%�

�

(1,020

)�

�

(31

)%�

Acquisition related items

��

�

��

�

��

�

��

%�

�

��

�

%�

�

(99

)�

�

(100

)%�

Amortization of intangibles

��

�

328

��

�

%�

�

633

��

�

%�

�

(305

)�

�

(48

)%�

��

�

��

�

��

�

19,320

��

�

%�

22,893

��

�

%�

(3,573

)�

�

(16

)%�

��

�

��

�

��

�

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising expense and costs of operating our websites. The decrease in sales and marketing expense in both the three and nine months ended December�31, 2014, compared to the same prior year periods, was primarily due to a concerted effort to reduce overall operating expenses as well as timing of certain marketing activities compared to the prior year. We expect sales and marketing expenses for the full year fiscal 2015, on an absolute dollar basis, to decrease from fiscal 2014 levels.

General and Administrative Expenses. General and administrative expenses include salaries and benefits for our executive and administrative personnel, and facilities costs and professional services, such as legal and accounting. The decrease in general and administrative expenses in both the three and nine months ended December�31, 2014, compared to the same prior year periods, was primarily related to a concerted effort to reduce overall operating expenses and a decrease in incentive compensation expense. We expect general and administrative expenses for the full year fiscal 2015, on an absolute dollar basis, to decrease slightly from fiscal 2014 levels.

Research and Development Expenses. Research and development expenses include the costs of developing and enhancing new and existing products. The decrease in research and development expenses in both the three and nine months ended December�31, 2014, compared to the same prior year periods, was primarily related to a reduction in software development expenses compared to the prior year. Additionally, during the nine months ended December�31, 2014, we received a reimbursement of engineering work performed on behalf of a third party. We expect research and development expenses for the full year fiscal 2015, on an absolute dollar basis, to decrease compared to fiscal 2014.

Acquisition Related Items Expenses. Acquisition related items represent adjustments to the contingent consideration valuation related to the Tritton acquisition. As the contingent consideration was converted to a note payable in fiscal 2014, amounts related to the Tritton acquisition will be zero in fiscal 2015.

�

Amortization of Intangibles Expenses. Amortization of intangibles expenses consist of the amortization of the acquired intangible assets from prior acquisitions. We expect amortization of intangibles for the full year fiscal 2015, on an absolute dollar basis, to decrease compared to fiscal 2014.

�

Other Expense

Other expense consists primarily of interest expense on our outstanding debt, foreign currency exchange gains or losses, change in fair value of the Warrants issued in connection with the Securities Purchase Agreement entered into by the Company in 2011 and other items that may be specific to a reporting period. The foreign currency exchange gains or losses are associated with fluctuations in the value of the functional currencies of our foreign subsidiaries, which include the Pound�Sterling, the Euro, the Canadian dollar, the Hong Kong dollar, the Japanese yen, and the Chinese Yuan Renminbi (�CNY�), against the U.S. Dollar. Other expense was $307,000 and $915,000 for the three and nine months ended December�31, 2014, respectively, compared to other expense of $187,000 and $1,093,000 for the three and nine months ended December�31, 2013, respectively. The change is primarily due to gains on the fair value of the warrant liability of $1,000 and $56,000 for the three and nine months ended December�31, 2014, respectively, compared to $324,000 of income and $10,000 of expense for the three and nine months ended December�31, 2013, respectively. Additionally, foreign currency exchange losses resulted in $83,000 and $500,000 of expense for the three and nine months ended December�31, 2014, respectively, compared to $292,000 and $708,000 of expense during the three and nine months ended December�31, 2013. Interest expense, net, increased to $238,000 and $563,000 for the three and nine months ended December�31, 2014, respectively, from $223,000 and $476,000, respectively, in the same periods last year due primarily to interest expense associated with the note payable which did not exist in the prior year, offset partially by a decrease in the average balance under our bank loan.

Income Tax Expense

Income tax expense of $542,000 and $1,281,000 reflect effective tax rates of 29% and 179%�for the three months ended December�31, 2014 and 2013, respectively. Income tax expense of $546,000 and $1,250,000 reflect effective tax rates of (208)% and (21)%�for the nine months ended December�31, 2014 and 2013, respectively. Our effective tax rate is a blended rate for the different jurisdictions in which we operate. Our 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 its net operating losses. We will continue to evaluate our ability to realize our deferred tax assets on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the ability to realize our deferred tax assets and expect to release the valuation allowance when we have sufficient positive evidence, including but not limited to cumulative earnings in successive recent periods, to overcome such negative evidence. Changes in future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets, which would impact our income tax expense in the period we determine these factors to have changed. We are in the process of completing a transfer pricing study, which may affect taxable income by jurisdiction, the effective tax rate and the evaluation of our ability to realize certain deferred tax assets.

We do not record deferred income taxes on the approximate $42.8 million of undistributed earnings of our non-Canadian subsidiaries based upon our intention to permanently reinvest undistributed earnings. We may be subject to income and withholding taxes if earnings of the non-Canadian subsidiaries were distributed. Considering the tax loss carryforward and related valuation allowance, the deferred tax liability on our undistributed earnings would be no more than $3.0 million at December�31, 2014.

LIQUIDITY AND CAPITAL RESOURCES

The table below provides a summary of cash (used in) provided by operating, investing and financing activities during the nine months ended December�31, 2014 and 2013 (in thousands):

�

��

Nine�Months�Ended�December�31,

�

��

�

��

2014

�

��

2013

�

��

Change

�

Net cash used in operating activities

��

(4,231

)�

��

(3,401

)�

��

(830

)�

Net cash used in investing activities

��

�

(1,604

)�

��

�

(1,074

)�

��

(530

)�

Net cash provided by financing activities

��

�

8,410

��

�

5,105

��

�

3,305

��

Effect of foreign currency exchange rate changes on cash

��

�

(181

)�

��

�

137

��

�

(318

)�

��

�

��

�

��

�

Net increase in cash

2,394

��

767

��

1,627

��

�

��

�

��

�

Our cash balance was $3.9 million and $1.5 million at December�31, 2014 and March�31, 2014, 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.

�

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 nine months ended December�31, 2014 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), a $7.3 million increase in accounts receivable resulting from the increase in net sales and an increase in inventory of $1.5�million due to sales being less than originally forecasted during the holiday selling season. The decreases in operating cash flow were offset partially by a $2.6 million increase in accounts payable related to inventory purchases and timing of payments. Net cash used in operating activities for the nine months ended December�31, 2013 primarily reflects the net loss for the period before non-cash items (i.e. depreciation, amortization, provision for deferred income taxes, stock-based compensation, contingent consideration, and change in the fair value of warrant liability). These decreases in operating cash flow were offset partially by a decrease in inventory of $3.8�million as inventory sold through during the holiday season. We are focused on effectively managing our overall liquidity position by continuously monitoring inventory levels and expenses, 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. A large percentage of our annual revenue is generated during our third fiscal quarter and, typically, our inventories decrease and accounts receivable increase as a result of the annual holiday selling. During our fourth fiscal 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, leasehold improvements, and to a lesser extent, computers and machinery and equipment, was $1.6 million and $1.1 million during the nine months ended December�31, 2014 and December�31, 2013, respectively.

Financing Activities

Net cash provided by financing activities during the nine months ended December�31, 2014 and December�31, 2013 of $8.4 million and $5.1 million, respectively, was primarily the result of net borrowings under our line of credit described below.

We maintain a Credit Facility with Wells Fargo Capital Finance, LLC (�Wells Fargo�) to borrow up to $25 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. The Company is currently in discussions to amend and extend the line of credit. Under the line of credit, interest accrues on the daily outstanding balance at an interest rate that ranges from U.S. prime rate plus 0.50% to 2.00% or, at the Company�s option, LIBOR plus 2.50% to 3.50% with a LIBOR floor of 1.50%. At December�31, 2014, the interest rate was 5.25%. 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. From June 2014 through June 2015, we are required to meet a monthly financial covenant based on a trailing twelve months� Adjusted EBITDA, as defined. The Company�s trailing twelve months� Adjusted EBITDA as of December�31, 2014 was lower than the required threshold and, accordingly, the Company was not in compliance with this covenant as of December�31, 2014. On February 2, 2015, the Company received a waiver of the covenant default from Wells Fargo and entered into an amendment to the Credit Facility that modifies the trailing twelve months� Adjusted EBITDA covenant, as defined, from January 2015 through June 2015. For periods subsequent to December�31, 2014, we believe we will be able to meet the covenants. However, there can be no assurance that we will be able to meet the covenants, as amended, subsequent to December�31, 2014 or that we would be able to obtain waivers from Wells Fargo to the extent we are not in compliance with the covenants.

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 on the note payable. 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. We depend upon the availability of capital under our Credit Facility, which expires on October�31, 2015, to finance our operations. We believe we will be able to amend and extend the line of credit with Wells

�

Fargo; however, there can be no assurances that we will be able to do so. If we are unable to comply with the monthly financial covenant contained in the Credit Facility, Wells Fargo may declare the outstanding borrowings under the facility immediately due and payable. If we need to obtain additional funds as a result of the termination of the Credit Facility or the acceleration of amounts due thereunder, there can be no assurance that alternative financing can be obtained on substantially similar or acceptable terms, or at all. Our failure to promptly obtain alternate financing could limit our ability to implement our business plan and have an immediate, severe and adverse impact on our business, results of operations, financial condition and liquidity. In the event that no alternative financing is available, we would be forced to drastically curtail operations, or dispose of assets, or cease operations altogether.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

In July 2014, we entered into a new office lease agreement for our headquarters. Beginning in October 2014, we reduced the annual rent expense by approximately $259,000 per year. In connection with this new facilities lease, we received a reimbursement for leasehold improvements of $558,000, which has been recognized as a liability in deferred rent and is being amortized to rent expense on a straight-line basis over the lease term. Additionally, the terms of the lease provide for periods of free rent, and rent escalations, for which we have established a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized. This deferred rent liability is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense. The new office lease expires in November 2020. There have not been any 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, 2014.

As of December�31, 2014 and March�31, 2014, 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.

ADJUSTED EBITDA (Loss)

Adjusted EBITDA (loss), a non-GAAP (�Generally Accepted Accounting Principles�) financial measure, represents net income (loss) before interest, taxes, depreciation and amortization, stock-based compensation, gain/loss on the change in the fair value of the related warrant liability, goodwill impairment, if any, and acquisition related items. 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 (loss) 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 GAAP. 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. Our management believes, 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
December�31,

�

��

Nine Months Ended
December�31,

�

��

2014

�

��

2013

�

��

2014

�

��

2013

�

Net income (loss)

��

1,358

��

(566

)�

��

(809

)�

��

(7,176

)�

Adjustments:

��

Depreciation and amortization

��

�

440

��

�

618

��

�

1,536

��

�

2,043

��

Stock-based compensation

��

�

136

��

�

154

��

�

376

��

�

501

��

Change in fair value of warrant liability

��

�

)�

��

�

(324

)�

��

�

(56

)�

��

�

��

Acquisition related items

��

�

��

�

��

�

(53

)�

��

�

��

�

��

�

��

Interest expense, net

��

�

238

��

�

223

��

�

563

��

�

476

��

Income tax expense

��

�

542

��

�

1,281

��

�

546

��

�

1,250

��

�

��

�

��

�

��

�

Adjusted EBITDA (loss)

2,713

��

1,333

��

2,156

��

(2,797

)�

��

�

��

�

��

�

��

�

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 (the �Exchange Act�) 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 significant seasonal fluctuations in our quarterly results of operations, inventories, receivables, payables and cash; the sufficiency of funds available to meet operational needs, including payments under our note payable; the ability to meet the financial covenants under our existing credit facility; the effect of foreign currency exchange rate fluctuations; the possible use of financial hedging techniques; our expectations regarding sales, gross margins and operating expenses; and the potential release of the valuation allowance against our deferred tax assets.

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

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes 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 necessarily is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rules 13a-15(b) we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (who is also the Chief Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended December�31, 2014 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.

�

PART II � OTHER INFORMATION

�

Item�1.

Legal Proceedings

On October�3, 2013, the Company filed a complaint for patent infringement styled Mad Catz Interactive, Inc. v. Razer USA, Ltd., Case No.�13-cv-02371-GPC-JLB, in the United States District Court for the Southern District of California against Razer USA, Ltd. (�Razer�). The complaint alleges that the Company holds an exclusive license, within the United States, to make, use, sell, offer for sale, import, gift or otherwise dispose of the any product falling within the scope of one or more claims of U.S. Patent No.�6,157,370 (the ��370 Patent�), including all right, power and interest to enforce the �370 Patent against any and all third parties, as well as exclusive standing to bring suit against any third party infringing the �370 Patent. The complaint further alleges that Razer has infringed and continues to infringe the �370 Patent by making, using, offering for sale, selling, and/or importing in the United States certain products covered by one of more claims of the �370 Patent, including Razer�s �Ouroboros� computer mouse. On January�10, 2014, Razer filed a counterclaim against the Company for alleged infringement of U.S. Patent No.�8,605,063 (the ��063 Patent�). Razer further contends that the �370 Patent is invalid and unenforceable, and denies infringement. Mad Catz also contends that the �063 Patent is invalid and unenforceable, and denies infringement. No trial date has been set in the matter. On August�22, 2014, the Court heard oral argument regarding the parties� patent claims construction positions and took the matter of patent claims construction under submission at that time. The Court has not yet issued an order regarding claims construction. The parties are currently conducting discovery. The Company believes that Razer�s allegations lack merit and intends to vigorously defend all claims asserted. We have not recorded any accrual for a contingent liability associated with this legal proceeding based on our belief that a liability is not probable and any range of potential future charge cannot be reasonably estimated at this time.

On March�11, 2014, the Better Mouse Company, LLC (�BMC�) filed a complaint against the Company and its subsidiary, Mad Catz, Inc., for patent infringement in the United States District Court for the Eastern District of Texas. The action is styled Better Mouse Company, LLC v. Steelseries Aps et al, Lead Civil Action No.�2:14-CV-198. By its complaint, the plaintiff alleges that the Company and its subsidiary have infringed and continue to infringe U.S. Patent No.�7,532,200. The Company answered the complaint on July�17, 2014 and has denied all substantive allegations of infringement and damage. The parties are currently conducting discovery and the Court has set oral argument regarding the parties� patent claims construction positions for June�2, 2015. Trial in the matter is set for December�12, 2015. The Company believes that BMC�s allegations lack merit and intends to vigorously defend all claims asserted. We have not recorded any accrual for a contingent liability associated with this legal proceeding based on our belief that a liability is not probable and any range of potential future charge cannot be reasonably estimated at this time.

On November�21, 2014, Samsung Electronics Co., Ltd. and Samsung Austin Semiconductor, LLC (collectively, �Samsung�) filed a complaint against the Company (and numerous third parties, including Nvidia Corporation) for patent infringement in the United States International Trade Commission.�The complaint is styled In the Matter of Certain Graphics Processing Chips, Systems on a Chip, and Products Containing the Same, Investigation No.�377-TA-941 and alleges that the defendants have infringed and continue to infringe U.S. Patent Nos.�6,147,385, 6,173,349, 7,056,776, 7,804,734 by offering for sale, selling, and/or importing in the United States certain graphics processing units, systems on a chip, and products containing the same that, allegedly, are covered by one of more claims of the above-cited patents.�Specifically, as to the Company, Samsung alleges that the Company�s M.O.J.O. micro-console for Android product, which utilizes the Nvidia Tegra 4 T40S systems on a chip, directly infringes one of more claims of at least one of the patents at issue.�On December�30, 2014, the United States International Trade Commission instituted an investigation into the matter to determine whether there is a violation of the Tariff Act of 1930, as amended, by reason of the alleged infringement of the above-cited patents.�The Commission�s initial determination is due on December�22, 2015 and the target date for completion of the Commission�s investigation is April�22, 2016.�The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. It is impossible at this time to assess whether the outcome of this proceeding will have a material adverse effect on the Company. We have not recorded any accrual for a contingent liability associated with this legal proceeding based on our belief that a liability, while possible, is not probable and any range of potential future charge cannot be reasonably estimated at this time.

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, 2014.

�

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

None.

�

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.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

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.

February 5, 2015				/s/ Darren Richardson
				Darren Richardson
				President and Chief Executive Officer

February 5, 2015				/s/ Karen McGinnis
				Karen McGinnis
				Chief Financial Officer

�

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section�302 of the Sarbanes-Oxley Act of 2002

I, Darren Richardson, certify that:

�

1.	I have reviewed this quarterly report on Form 10-Q of Mad Catz Interactive, Inc.;

�

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

�

The registrant�s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a�15(f) and 15d�15(f)) for the registrant and have:

�

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

�

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

�

evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

�

disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�s most recent fiscal quarter (the registrant�s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control over financial reporting; and

�

5.	The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of the registrant�s board of directors (or persons performing the equivalent functions):

�

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant�s ability to record, process, summarize and report financial information; and

�

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.

�

Date: February�5, 2015

/s/ Darren Richardson

Darren Richardson, President and Chief Executive

Officer

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section�302 of the Sarbanes-Oxley Act of 2002

I, Karen McGinnis, certify that:

�

1.	I have reviewed this quarterly report on Form 10-Q of Mad Catz Interactive, Inc.;

�

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

�

5.	The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of the registrant�s board of directors (or persons performing the equivalent functions):

�

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.

�


Date: February�5, 2015						/s/ Karen McGinnis
						Karen McGinnis, Chief Financial Officer

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to Section�906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. �1350, as created by Section�906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mad Catz Interactive, Inc. (the �Company�) hereby certifies, to such officer�s knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the period ended December�31, 2014 (the �Report�) fully complies with the requirements of Section�13(a) or Section�15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

�


Date: February�5, 2015				/s/ Darren Richardson
				Darren Richardson, President and Chief Executive Officer

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. �1350, and are not being filed for purposes of Section�18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to Section�906 of the Sarbanes-Oxley Act of 2002

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

�


Date: February�5, 2015						/s/ Karen McGinnis
						Karen McGinnis, Chief Financial Officer

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Form 10-Q MAD CATZ INTERACTIVE For: Dec 31

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