| Summary of Significant Accounting Policies | (2) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Mad Catz Interactive, Inc. and its wholly-owned subsidiaries, collectively, the Company. All intercompany transactions and balances have been eliminated in consolidation. The Company refers to its fiscal years based on the fiscal year ending date. For instance, fiscal year 2016 refers to the fiscal year ending March 31, 2016. All currency amounts are presented in U.S. dollars. Liquidity and Capital Resources The Company has incurred recurring losses from operations in each of the years in the three-year period ended March 31, 2016, generated negative cash flows from operations in the year ended March 31, 2016 and has negative working capital as of March 31, 2016. The Company expects to generate income from operations and cash flow in fiscal 2017 by growing net sales of its core product lines, which excludes sales of Rock Band 4 products, improving gross margin and reducing its operating expenses as a result of the restructuring plan executed in the fourth quarter of fiscal 2016 (as disclosed in Note 11). To meet its capital needs, the Company is also considering multiple alternatives, including, but not limited to, equity sales under its “at-the-market” (“ATM”) equity offering program (as disclosed below), additional equity financings, debt financings and other funding transactions. There can be no assurance that the Company will be able to achieve its fiscal 2017 financial plan or complete financing transactions on acceptable terms or otherwise. If the Company is unable to become cash-flow positive or to raise additional capital as and when needed, or upon acceptable terms, such failure would have a significant negative impact on our financial condition. The Company also depends upon the availability of capital under the Loan Agreement and Facilities Agreement to finance operations, as disclosed in Note 7. Compliance with the monthly Adjusted EBITDA covenants in the Loan Agreement are closely tied to our fiscal 2017 financial plan. The Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future sales and expenses. If the Company is unable to comply with the Adjusted EBITDA covenants contained in the Loan Agreement, as amended from time to time, SNB could declare the outstanding borrowings under the agreement immediately due and payable. Additionally, the Facilities Agreement may be terminated at any time upon at least three months’ notice. If the Company needs to obtain additional funds as a result of the termination of the Loan Agreement or Facilities Agreement 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. The Company’s 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, the Company would be forced to drastically curtail operations, or dispose of assets, or cease operations altogether. The uncertainties described above raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, reserves for accounts receivable and inventory, contingencies and litigation, valuation and recognition of share-based payments, warrant liabilities and income taxes. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ from those estimates. Concentration of Credit Risk The Company’s credit risk is primarily concentrated in accounts receivable. The Company generally does not require collateral on accounts receivable because a majority of its customers are large, well-capitalized, established retail entities with operations throughout the United States, Canada and Europe, but does purchase credit insurance on certain accounts receivable balances. The Company maintains an allowance for doubtful accounts. For the year ended March 31, 2016, sales to the largest customer constituted 24% of gross sales and sales to the second largest customer constituted 16% of gross sales. For the year ended March 31, 2015, sales to the largest customer constituted 14% of gross sales and sales to the second largest customer constituted 10% of gross sales. For the year ended March 31, 2014, sales to the largest customer constituted 13% of gross sales and sales to the second largest customer constituted 11% of gross sales. At March 31, 2016, one customer represented 26%, of accounts receivable, another customer represented 12% of accounts receivable and another customer represented 8% of accounts receivable. At March 31, 2015, two customers each represented 14% of accounts receivable and another customer represented 11% of accounts receivable. For the years ended March 31, 2016, 2015 and 2014, there were no other customers which accounted for greater than 10% of gross sales and at March 31, 2016 and 2015, there were no other customers which represented greater than 10% of accounts receivable. Fair Value of Financial Instruments and 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 loans and the notes payable approximates their fair value as the interest rate and other terms are that which is currently available to the Company. Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. The Company follows a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below:
·
Level 1: Quoted prices in active markets for identical assets or liabilities.
·
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
·
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets. The following table provides a summary of the recognized assets and liabilities carried at fair value on a recurring basis (in thousands):
Balance as of
Basis of Fair Value Measurements
March 31, 2016
Level 1
Level 2
Level 3
Liabilities:
Warrant liabilities (Note 10)
$
(300
)
$
—
$
—
$
(300
)
Balance as of
Basis of Fair Value Measurements
March 31, 2015
Level 1
Level 2
Level 3
Liabilities:
Warrant liabilities (Note 10)
$
(1,187
)
$
—
$
—
$
(1,187
) The following tables provide a roll forward of the Company’s level three fair value measurements, which consist of the Company’s warrant liabilities, during the three years ended March 31, 2016 (in thousands):
Warrant liabilities:
Balance at March 31, 2013
$
(149
)
Change in fair value of warrant liabilities
74
Balance at March 31, 2014
$
(75
)
Securities purchase agreement
(1,710
)
Change in fair value of warrant liabilities
598
Balance at March 31, 2015
$
(1,187
)
Change in fair value of warrant liabilities
887
Balance at March 31, 2016
$
(300
) Revenue Recognition The Company recognizes revenue when (1) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, (2) the products are delivered and risk of loss has been transferred to the customer, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed reasonably assured. The Company’s payment arrangements with customers typically provide net 30- and 60-day terms. All of the Company’s arrangements are single element arrangements and there are no undelivered elements after the point of shipment. Amounts billed to customers for shipping and handling are included in net sales, and costs incurred related to shipping and handling is included in cost of sales. The Company excludes sales and other taxes collected from customers from net sales. Allowance for Doubtful Accounts and Other Allowances Accounts receivable are recorded net of an allowance for doubtful accounts and other sales related allowances. When evaluating the adequacy of the allowance for doubtful accounts, the Company analyzes known uncollectible accounts, the aging of accounts receivable, historical bad debts, customer credit-worthiness and current economic trends. The Company performs ongoing credit evaluations of its customers, obtains credit insurance for certain accounts receivable balances, but generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. To date, the Company has not experienced significant credit related losses. The Company records allowances for customer marketing programs, including certain rights of return, price protection, volume-based cash incentives and cooperative advertising. The estimated cost of these programs is accrued as a reduction to revenue when they are customer payments or incentives, or as an operating expense when they represent shared marketing expenses, in the later of the period the Company sells the product or commits to the program. Such amounts are estimated, based on historical experience and contractual terms, and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors. Inventories Raw materials, packaging materials and accessories are valued at the lower of cost, determined by the first-in, first-out method, or market. Finished goods are valued at the lower of cost or market, with cost being determined on an average cost basis. The Company regularly reviews inventory quantities on hand and in the retail channel, consumer demand and seasonality factors in order to recognize any loss of utility in the period incurred. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated or amortized using the straight-line method over the estimated useful lives of the assets as follows:
Molds
3 years
Computer equipment and software
3 years
Manufacturing and office equipment
3 – 5 years
Furniture and fixtures
5 – 6 years
Leasehold improvements
Shorter of estimated useful life or remaining life of lease Major improvements and betterments are capitalized. Intangible Assets Intangible assets are stated at cost less accumulated amortization and are amortized over the estimated useful lives of the assets on a straight-line basis. The range of useful lives is as follows:
Useful Life (Years)
Trademarks
6 - 15
Customer relationships
6 - 8 Impairment of Long-Lived Assets Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company did not record impairment of long-lived assets in fiscal years 2016, 2015 and 2014. Royalties and Intellectual Property Licenses Royalty and license expenses consist of royalties and license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of the Company’s products. Royalty-based payments that are paid in advance are generally capitalized and expensed to cost of sales at the greater of the contractual or effective royalty rate based on net product sales. Advertising Advertising costs, which totaled $4,853,000, $2,132,000, and $2,575,000 for the years ended March 31, 2016, 2015 and 2014, respectively, are expensed as incurred. Cooperative advertising with retailers is recorded when revenue is recognized and such amounts are included in sales and marketing expense if there is a separate identifiable benefit with a fair value. Otherwise, such costs are recognized as a reduction of sales. Research and Development Research and development costs, which totaled $3,699,000, $2,995,000 and $4,238,000 for the years ended March 31, 2016, 2015 and 2014, respectively, are expensed as incurred. Income Taxes Income taxes are accounted for using the asset and liability method. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that it is not “more likely than not” that a deferred tax asset will be realized, a valuation allowance is provided. Significant management judgment is required in assessing the ability to realize the Company’s deferred tax assets. In performing this assessment, management considers whether it is more likely than not that some portion or all of the assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income in each tax jurisdiction during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred liabilities, projected future taxable income, and tax planning strategies in making this assessment. Foreign Currency Translation For each of the Company’s foreign operating subsidiaries the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using month-end exchange rates, and revenue and expenses are translated into U.S. dollars using monthly average exchange rates. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive loss in shareholders’ equity. Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. At the Market Offering Agreement On November 4, 2015, the Company established an “at-the-market” (“ATM”) equity offering program through which the Company may sell from time to time up to an aggregate of $25.0 million of its common stock. As of March 31, 2016, no shares of the Company’s common stock have been sold. Net (Loss) Income per Share Basic net (loss) income per share is computed by dividing the net (loss) income for the period by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income for the period by the weighted average number of common shares outstanding, increased by potentially dilutive securities. Potentially dilutive securities are calculated using the treasury stock method and represent incremental shares issuable upon exercise of outstanding stock options and warrants. However, potentially dilutive securities are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive. As a result, the denominator for diluted loss per share is the same as the weighted average common shares in periods when a net loss is reported. The following table sets forth the computation of diluted weighted average common and potential common shares outstanding for the years ended March 31, 2016, 2015 and 2014 (in thousands, except share and per share amounts):
Years Ended March 31,
2016
2015
2014
Numerator:
Net (loss) income
$
(11,620
)
$
4,747
$
(7,441
)
Denominator:
Weighted average common shares
73,469,571
64,350,893
63,757,395
Effect of dilutive share-based awards
—
425,806
—
Denominator for diluted net (loss) income per share
73,469,571
64,776,699
63,757,395
Net (loss) income per share:
Basic
$
(0.16
)
$
0.07
$
(0.12
)
Diluted
$
(0.16
)
$
0.07
$
(0.12
)
Anti-dilutive securities excluded from the computation of diluted (loss) income per share:
Outstanding options
7,934,507
7,034,897
7,644,948
Outstanding warrants
7,031,305
2,639,337
2,540,918
Stock-Based Compensation The Company records compensation expense associated with stock-based awards made to employees and directors based upon their grant date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is four years, except for grants to Board of Directors, which vest in one year. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, using the assumptions noted in Note 8 — Stock-Based Compensation. The expected life of the options is based on a number of factors, including historical exercise experience, the vesting term of the award, and the expected volatility of the Company’s stock. The expected volatility is estimated based on the historical volatility (using daily pricing) of the Company’s stock. The risk-free interest rate is determined based on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options. The Company reduces the calculated stock-based compensation expense for estimated forfeitures by applying a forfeiture rate, based upon historical pre-vesting option cancelations. Estimated forfeitures are reassessed at each balance sheet date and may change based on new facts and circumstances. See Note 8 — Stock-Based Compensation for additional information regarding the Company’s stock-based compensation plans. Comprehensive (Loss) Income Comprehensive (loss) income consists of net (loss) income and certain changes in equity that are excluded from net (loss) income. Accumulated other comprehensive loss represents net unrealized gains and losses from foreign currency translation adjustments. Restructuring and Severance Costs Restructuring and severance costs reflect changes resulting from cost reduction programs implemented by the Company. Restructuring and severance costs include severance benefits pursuant to an on-going arrangement, voluntary termination compensation under a defined program and exit costs. The Company recognizes expense for one-time benefits only after management has committed to a plan, the plan is sufficiently detailed to provide the number, classification, and location of employees to be terminated as well as the expected completion date, the plan has been sufficiently communicated to employees such that they are able to determine the type and amount of benefits they will receive if terminated, and it is unlikely that the plan will be significantly changed or withdrawn. If an employee is not required to render service beyond a minimum retention period, the Company recognizes expense once the aforementioned criteria have been met. If an employee is required to render service beyond a minimum retention period, the Company recognizes expense over the period that the employee is required to render future service. The Company recognizes expense for on-going benefit arrangements when the liability is reasonably estimable and considered probable. The Company recognizes other exit costs as incurred. Recently Issued Accounting Standards In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation, which amends several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows, with retrospective application required. In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. Generally Accepted Accounting Principles (“GAAP”), the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which removes the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Instead, the update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for public business entities for fiscal years beginning after December 15, 2016, with prospective or retrospective application allowed to all periods presented. Early application is permitted. The Company has elected to early adopt, prospectively, this guidance in the fourth quarter ended March 31, 2016. As a result, the deferred tax assets and deferred tax liabilities on the consolidated balance sheet as of March 31, 2015 have not been reclassified to conform to the March 31, 2016 presentation. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For public business entities, the ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Upon transition, entities must disclose the nature of and reason for the accounting change. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations. In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendment is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those annual periods with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations. 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 condition or results of operations. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU 2014-09 is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. ASU 2014-09 allows for two methods of adoption : (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance for the year of implementation. The Company has not yet selected an adoption method as it is currently evaluating the impact of ASU 2014-09 on the Company’s consolidated financial statements and related disclosures. |
