Mad Catz Interactive (MCZAF) 10-Q 2017 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended December 31, 2016

OR

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

For the Transition Period from to

Commission File No. 001-14944

MAD CATZ INTERACTIVE, INC.

(Exact name of Registrant as specified in its charter)

Canada	Not Applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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  ☒    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  ☒    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	☒

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

There were 73,469,571 shares of the registrant’s common stock issued and outstanding as of January 31, 2017.

MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2016

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets—December 31, 2016 and March 31, 2016	3
	Consolidated Statements of Operations—Three and Nine Months Ended December 31, 2016 and 2015	4
	Consolidated Statements of Comprehensive (Loss) Income—Three and Nine Months Ended December 31, 2016 and 2015	5
	Consolidated Statements of Cash Flows— Nine Months Ended December 31, 2016 and 2015	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4.	Controls and Procedures	23
PART II — OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosure	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
SIGNATURES		27

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

	December 31, 2016			March 31, 2016
ASSETS
Current assets:
Cash	$	1,603		$	2,436
Restricted cash		1,583			680
Accounts receivable, net		8,277			9,585
Other receivables		1,054			998
Inventories		15,370			23,005
Income taxes receivable		302			159
Prepaid expenses and other current assets		1,710			2,969
Total current assets		29,899			39,832
Deferred tax assets		8,177			9,449
Other assets		323			531
Property and equipment, net		1,799			2,921
Intangible assets, net		1,590			2,270
Total assets	$	41,788		$	55,003
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Bank loans	$	12,210		$	16,076
Accounts payable		19,141			25,354
Accrued liabilities		6,652			8,153
Notes and restructured payables		2,872			73
Income taxes payable		—			173
Total current liabilities		40,875			49,829
Notes and restructured payables, less current portion		2,925			145
Warrant liabilities		127			300
Deferred tax liabilities		9			10
Other long-term liabilities		526			699
Total liabilities		44,462			50,983
Shareholders’ (deficit) equity:
Common stock, no par value, unlimited shares authorized; 73,469,571 and 73,469,571    shares issued and outstanding at December 31, 2016 and March 31, 2016, respectively		63,694			63,552
Accumulated other comprehensive loss		(8,357	)		(5,695	)
Accumulated deficit		(58,011	)		(53,837	)
Total shareholders’ (deficit) equity		(2,674	)		4,020
Total liabilities and shareholders’ (deficit) equity	$	41,788		$	55,003

See accompanying notes to unaudited consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Net sales	$	19,061		$	65,038		$	44,716		$	116,930
Cost of sales		17,766			53,633			42,997			93,641
Gross profit		1,295			11,405			1,719			23,289
Operating expenses:
Sales and marketing		1,733			4,865			4,581			12,038
General and administrative		1,911			2,600			6,458			8,132
Research and development		436			1,007			1,653			2,869
Restructuring and severance costs		154			—			151			—
Amortization of intangible assets		92			112			314			332
Net loss (gain) on sale of Saitek assets		7			—			(8,170	)		—
Net operating expenses		4,333			8,584			4,987			23,371
Operating (loss) income		(3,038	)		2,821			(3,268	)		(82	)
Other income (expense):
Interest expense, net		(290	)		(657	)		(900	)		(1,278	)
Foreign exchange gain (loss), net		450			(657	)		1,270			(750	)
Change in fair value of warrant liabilities		170			1,200			173			283
Other income		26			18			49			40
Total other income (expense)		356			(96	)		592			(1,705	)
(Loss) income before income taxes		(2,682	)		2,725			(2,676	)		(1,787	)
Income tax expense		(779	)		(1,506	)		(1,498	)		(2,570	)
Net (loss) income	$	(3,461	)	$	1,219		$	(4,174	)	$	(4,357	)
Net (loss) income per share:
Basic	$	(0.05	)	$	0.02		$	(0.06	)	$	(0.06	)
Diluted	$	(0.05	)	$	0.02		$	(0.06	)	$	(0.06	)
Shares used in per share computations:
Basic		73,469,571			73,469,571			73,469,571			73,469,571
Diluted		73,469,571			73,902,905			73,469,571			73,469,571

See accompanying notes to unaudited consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Net (loss) income	$	(3,461	)	$	1,219		$	(4,174	)	$	(4,357	)
Foreign currency translation adjustments		(1,173	)		(295	)		(2,662	)		(89	)
Comprehensive (loss) income	$	(4,634	)	$	924		$	(6,836	)	$	(4,446	)

See accompanying notes to unaudited consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended December 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(4,174	)	$	(4,357	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,660			1,711
Amortization of deferred financing fees		179			262
(Gain) loss on disposal of assets		(23	)		4
Net gain on sale of Saitek assets		(8,170	)		—
Stock-based compensation		142			357
Change in fair value of warrant liabilities		(173	)		(283	)
Provision for deferred income taxes		1,271			2,096
Changes in operating assets and liabilities:
Accounts receivable		1,014			(19,150	)
Other receivables		(69	)		(825	)
Inventories		4,685			(12,277	)
Prepaid expenses and other current assets		909			(1,168	)
Other assets		16			114
Accounts payable		302			12,031
Accrued liabilities		(2,079	)		8,698
Deferred rent		(212	)		(71	)
Income taxes receivable/payable		(387	)		1,019
Net cash used in operating activities		(5,109	)		(11,839	)
Cash flows from investing activities:
Purchases of intangible assets		—			(125	)
Purchases of property and equipment		(700	)		(1,600	)
Net proceeds from sale of Saitek assets		10,654			—
Net cash provided by (used in) investing activities		9,954			(1,725	)
Cash flows from financing activities:
Borrowings on bank loans		35,226			103,629
Repayments on bank loans		(39,099	)		(84,047	)
Payment of financing fees		—			(818	)
Changes in restricted cash		(903	)		(5,780	)
Borrowings on notes payable		—			95
Repayments on notes and restructured payables		(775	)		(501	)
Payment of expenses related to issuance of common stock		—			(164	)
Net cash (used in) provided by financing activities		(5,551	)		12,414
Effects of foreign currency exchange rate changes on cash		(127	)		(6	)
Net decrease in cash		(833	)		(1,156	)
Cash, beginning of period		2,436			5,142
Cash, end of period	$	1,603		$	3,986
Supplemental cash flow information:
Income taxes paid	$	627		$	314
Interest paid	$	909		$	1,190
Supplemental disclosures of noncash operating and financing activities:
Restructuring of accounts payable	$	6,345		$	—

See accompanying notes to unaudited consolidated financial statements.

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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) and Tritton^® (audio) brands. Mad Catz products, which primarily include headsets, mice, keyboards, controllers, specialty controllers, and other accessories, cater to gamers across multiple platforms including in-home gaming consoles, handheld gaming consoles, PC and Mac computers, smart phones, tablets and other smart devices. Mad Catz distributes its products through many leading retailers around the globe. Mad Catz is incorporated in Canada and is 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, 2016 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”).

The Company has incurred recurring losses from operations in each of the years in the three-year period ended March 31, 2016 and generated negative cash flows from operations in the year ended March 31, 2016. The Company has also generated a loss from operations in the nine months ended December 31, 2016 and has negative working capital and shareholders’ equity as of December 31, 2016.  The Company believes it is unlikely that its available cash balances, anticipated cash flows from operations and available credit facilities will be sufficient to satisfy our operating needs for at least the next twelve months. To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, equity sales under its “at-the-market” (“ATM”) equity offering program, additional equity financings, debt financings and other funding transactions. There can be no assurance that the Company will be able to 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 its financial condition. The Company is also exploring other strategic alternatives including, but not limited to, the sale of the Company.  The Company has not made a decision at this time to pursue any specific strategic transaction or other strategic alternatives and has not set a specific timetable for the process. As such, there can be no assurance that the exploration of strategic alternatives will result in the sale of the Company or any other transaction.

Our primary operating subsidiary, Mad Catz, Inc. (“MCI”), maintains a Loan and Security Agreement (the “Loan Agreement”) with Sterling National Bank (“SNB”) to provide for a $20.0 million revolving line of credit subject to the availability of eligible accounts receivable and inventories, which changes throughout the year. The Loan Agreement expires on June 30, 2018. The Company is required to meet a monthly financial covenant based on a trailing twelve months’ adjusted earnings before income taxes, depreciation and amortization (“EBITDA”), as defined. Our trailing twelve months’ Adjusted EBITDA as of November 30 and December 31, 2016 were lower than the required threshold and, accordingly, we were not in compliance with this covenant as of December 31, 2016. On January 31, 2017, we received confirmation from SNB that a forbearance will be issued for this non-compliance through April 28, 2017. Once finalized, if applicable, the material terms of the forbearance will be set forth and filed as a current report on SEC Form 8-K. There can be no assurance that we will be able to meet the covenants subsequent to December 31, 2016 or that we would be able to obtain a waiver or forbearance from SNB to the extent we are not in compliance with the covenants. Additionally, Mad Catz Europe Ltd. (“MCE”), a wholly-owned subsidiary of the Company, maintains a Master Facilities Agreement (the “Facilities Agreement”) with Faunus Group International, Inc. (“FGI”) to provide for a $10.0 million secured demand credit facility subject to the availability of eligible accounts receivable and inventories, which changes throughout the year. The Facilities Agreement has a three-year term, although FGI may terminate the facility at any time upon at least three months’ notice. Our borrowing availability fluctuates daily, as it is subject to eligible accounts receivable and inventory amounts and we typically borrow all amounts available to us, less approximately $0.5 million.

The Company depends upon the availability of capital under the Loan Agreement and Facilities Agreement to finance operations. 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 facility immediately due and payable. 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

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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.

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, 2016. 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, 2017. 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 liabilities and income taxes. As future events and their effects cannot be determined with precision, actual results could differ from these estimates.

Sale of Saitek Assets

On September 15, 2016, the Company completed the sale of certain assets associated with the Company’s flight, space, and farm simulation product line (the “Saitek assets”) to certain subsidiaries of Logitech International S.A. (collectively, “Logitech”) (see Note 7).                

The Company followed the guidance in ASC 205-20, “Presentation of Financial Statements-Discontinued Operations,” as updated by Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” in recording the transaction and related gain on the accompanying consolidated statement of operations. The Saitek assets do not represent a component of an entity, and therefore, the sale of the Saitek assets has not been presented as discontinued operations.

Recently Issued Accounting Standards

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which amends guidance on the classification of restricted cash in the statement of cash flows. This ASU requires that a statement of cash flows explain the change during the period of the total cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted. The adoption of this guidance will change the presentation of restricted cash presented on our statement of cash flows; however, it will have no impact on our results of operations, financial condition or liquidity.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which addresses specific cash flow items with the objective of reducing existing diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the updated standard to have a material impact on the consolidated financial statements and related disclosures.

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In March 2016, the FASB issued 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 consolidated statement of operations 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. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements and related disclosures.

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. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method with early adoption permitted.  The Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

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 and entity must measure inventory at the lower of cost or market. The ASU does 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. The Company has elected to early adopt, prospectively, this guidance effective April 1, 2016.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial condition or results of operations.

In April 2015, the FASB issued ASU 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. In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debit Issuance Costs Associated with Line-of-Credit Arrangements. This ASU clarified the guidance in ASC 2015-03 stating that the SEC staff would not object to a company presenting debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there were any outstanding borrowings at period-end. This update is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those annual periods. The Company adopted these standards on a retrospective basis as of April 1, 2016. The Company will continue to defer and present the debt issuance costs related to its Loan Agreement and Facilities Agreement in Other assets and amortize them ratably over the term of the agreement.

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. As the requirements of this literature are disclosure only, adoption of this guidance is not expected to impact the Company’s financial condition or results of operations, but will change the Company’s disclosures.

In May 2014, the FASB issued 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. On July 9, 2015, the FASB agreed to defer by one year the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with early adoption as of the original effective date permitted. The Company does not intend to adopt this guidance early and it will become effective for the Company on April 1, 2018. The Company has not yet decided which implementation method it will adopt. Although management has completed its initial evaluation of this guidance as it pertains to the Company, management is still evaluating the impacts that this updated guidance may have on the Company’s consolidated financial statements, including the potential impacts of timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue.

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(2) Fair Value Measurements

The carrying values of the Company’s financial instruments, including cash, restricted 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 notes payable approximates their fair value as the interest rate and other terms are that which is currently available to the Company. The carrying value of the restructured payables are not measured at fair value (see Note 8).  

For a description of the fair value hierarchy, see Note 2 to the Company’s 2016 consolidated financial statements contained in the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2016.

The following tables provide a summary of the recognized assets and liabilities carried at fair value on a recurring basis (in thousands):

				Basis of Fair Value Measurements
	Balance as of December 31, 2016			Level 1		Level 2		Level 3
Liabilities:
Warrant liabilities (Note 5)	$	(127	)	$	—	$	—	$	(127	)
				Basis of Fair Value Measurements
	Balance as of March 31, 2016			Level 1		Level 2		Level 3
Liabilities:
Warrant liabilities (Note 5)	$	(300	)	$	—	$	—	$	(300	)

The following table provides a roll forward of the Company’s level three fair value measurements during the nine months ended December 31, 2016, which consist of the Company’s warrant liabilities (in thousands):

Warrant liabilities:
Balance at March 31, 2016	$	(300	)
Change in fair value of warrant liabilities		173
Balance at December 31, 2016	$	(127	)

(3) Inventories

Inventories consist of the following (in thousands):

	December 31, 2016		March 31, 2016
Raw materials	$	739	$	1,119
Finished goods		12,099		21,886
Inventory sold under extended payment terms		2,532		—
	$	15,370	$	23,005

Although the Company has sold all of the remaining inventory of products designed for the Rock Band 4 video game, a portion of the inventory was sold to a customer under extended payment terms that did not meet the criteria to be recognized as revenue in the current period under GAAP revenue recognition guidance. Therefore, $2.5 million of products designed for the Rock Band 4 video game is included in inventory as of December 31, 2016.

(4) Restricted Cash

Cash accounts that are restricted as to withdrawal or usage are presented as restricted cash. As of December 31, 2016, the Company had $1.6 million of restricted cash held by a bank in deposit accounts. This amount represents payments from customers into restricted bank accounts as of December 31, 2016 that were subsequently automatically swept to repay borrowings under our bank loans.

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(5) Securities Purchase Agreements

2015 Securities Purchase Agreement

On March 24, 2015, the Company entered into a Securities Purchase Agreement (the “2015 Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company sold (a) an aggregate of 8,980,773 shares of its common stock (the “2015 Shares”) and (b) warrants to purchase an aggregate of 4,490,387 shares of common stock of the Company (“2015 Warrants” and, together with the 2015 Shares, the “2015 Securities”). The 2015 Securities were issued at a price equal to $0.41 for aggregate gross proceeds of approximately $3,682,000. The 2015 Warrants became exercisable on September 24, 2015 at a per share exercise price equal to $0.61 and expire on September 24, 2020. The 2015 Warrants are subject to limitation on exercise if the Holder or its affiliates would beneficially own more than 9.99%/4.99% of the total number of the Company’s shares of common stock following such exercise. The 2015 Warrants also provide that in the event of a Company Controlled Fundamental Transaction (as defined in the 2015 Warrants), the Company may, at the election of the 2015 Warrant holders, be required to redeem all or a portion of the 2015 Warrants for cash in an amount equal to the Black-Scholes option pricing model value. As a result of this cash settlement provision, the 2015 Warrants are classified as liabilities and carried at fair value, with changes in fair value included in net income (loss) until such time as the 2015 Warrants are exercised or expire. The fair value of the 2015 Warrants decreased from $300,000 as of March 31, 2016 to $127,000 as of December 31, 2016, which resulted in a $173,000 gain recognized in the consolidated statement of operations from the change in fair value of warrant liabilities for the nine months ended December 31, 2016. The 2015 Warrants are not traded in an active securities market, and as such, the Company estimates the fair value of the of the warrant liability using the Black-Scholes option pricing model using the following assumptions:

	December 31, 2016			March 31, 2016
Expected term	3.75 years			4.5 years
Common stock market price	$	0.14		$	0.21
Risk-free interest rate		1.64	%		1.13	%
Expected volatility		73	%		71	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the 2015 Warrants. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of the 2015 Warrants. The Company currently has no reason to believe future volatility over the expected remaining life of the 2015 Warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the 2015 Warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is closest to the expected term of the 2015 Warrants.

Fluctuations in the fair value of the 2015 Warrants are impacted by observable inputs, most significantly the Company’s common stock market price. Significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.

2011 Securities Purchase Agreement

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

As a result of the March 2015 offering, described above, and pursuant to the terms of the 2011 Warrants, the exercise price of the 2011 Warrants was adjusted to $2.30 per share. All of the warrants expired, unexercised, on October 21, 2016.

(6) Restructuring and Severance Charges

2017 Restructuring Plan. During the third quarter of fiscal 2017, management initiated a restructuring plan in order to lower inventory warehousing costs in its U.S. subsidiary and better align the Company’s distribution process with the needs of the business (“2017 Restructuring Plan”). In connection with the restructuring plan, the Company incurred total restructuring and related charges of

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approximately $211,000 in the three months ended December 31, 2016, primarily related to severance and benefits provided to terminated employees. The restructuring activities under the 2017 Restructuring Plan were completed by January 31, 2017.

2016 Restructuring Plan. During the fourth quarter of fiscal 2016, management initiated a restructuring plan in order to lower operating costs, increase efficiencies and better align the Company’s workforce with the needs of the business (“2016 Restructuring Plan”). In connection with the restructuring plan, the Company incurred total restructuring and related charges of approximately $2,990,000 in fiscal 2016, primarily related to severance and benefits provided to terminated employees and officers. The restructuring activities under the 2016 Restructuring Plan were substantially complete as of March 31, 2016.

The following table summarizes the restructuring and severance costs for the nine months ended December 31, 2016 (in thousands):

	Employee-Related			Other			Total
Restructuring Liability as of March 31, 2016	$	1,745		$	162		$	1,907
Costs incurred		273			39			312
Amounts paid		(1,457	)		(124	)		(1,581	)
Accruals released		(98	)		(63	)		(161	)
Foreign exchange		2			(3	)		(1	)
Restructuring Liability as of December 31, 2016	$	465		$	11		$	476

Employee-related costs primarily include severance and other termination benefits and are calculated based on long-standing benefit practices, local statutory requirements and, in certain cases, voluntary termination arrangements.

Other costs consist primarily of costs to exit auto leases and other costs directly related to employee terminations in certain European locations.

(7) Sale of Saitek Assets

On September 15, 2016, the Company completed the sale of the Saitek assets to Logitech. Logitech acquired all of the specific trademarks, equipment and tooling, inventory, technical data and records, and other related documents necessary for the designing, manufacturing, marketing and distributing of interactive flight, space, and farm simulation controllers previously marketed and sold by the Company primarily under the “Saitek” brand. Additionally, at their option, eight Mad Catz research and development employees resigned from the Company and accepted employment offers with Logitech. The Company received $11.0 million in cash at closing and $2.0 million was deposited in escrow with Bank of America, National Association, to fund any post-closing adjustments or claims. The Company recognized a net gain of $8.2 million on the sale of the Saitek assets, which is reflected in “Net gain on sale of Saitek assets” in its unaudited consolidated statements of operations for the three and nine months ended December 31, 2016. Title to all assets acquired by Logitech transferred upon closing. The net gain recognized does not include the two $1.0 million deposits made into the tooling and general escrow accounts by Logitech. The $1.0 million deposited in the tooling escrow account is eligible to be released on April 30, 2017 pending the completion of specific contractual deliverables, including transfer, setup, and testing of tooling. Any amounts recognized from this escrow account will be decreased by any Logitech claims and external costs incurred to complete the tooling transfers. The Company has received claims against the tooling escrow account from Logitech of $26,770 to date and expects to incur a minimum of $325,000 in external costs to complete the tooling transfer. The Company believes that the fair value of the remaining obligation is less than the $1.0 million in escrow and is deferring the full amount as it is contingent upon completion of the specified deliverables in accordance with the transaction documents. The $1.0 million deposited in the general escrow account is eligible to be released on September 15, 2017. Any amounts from this account may be decreased by claims made by Logitech. The Company is not currently aware of any outstanding claims against the general escrow account.

Pursuant to the terms of the purchase agreement for the transaction, the Company and Logitech also entered into several ancillary agreements as part of the transaction, including an Escrow Agreement governing the terms of the $2.0 million in escrow and a Transition Services Agreement governing the delivery of certain services and deliverables by the Company after completion of the transaction.

(8) Restructuring of Accounts Payable

In October 2016, the Company negotiated to modify the terms of $6.3 million in accounts payable with two contract manufacturers to extend the payment terms into equal installments over the following 27 months. The restructuring only involves the extension of the time period in which to pay and, as such, the carrying value has not changed and the future cash payments will total $6.3 million. As part of the restructuring, $2.8 million was reclassified to notes and restructured payables and $3.5 million was reclassified to notes and restructured payables, less current portion. As of December 31, 2016 there is $2.8 million in notes and restructured payables and $2.8 million in notes and restructured payables, less current portion presented in the Consolidated Balance

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Sheets. The fair value of these restructured payables using the average borrowing rates currently available to the Company is $5.3 million. However, in accordance with ASC 470-60 and ASC 470-50, the Company determined that the restructuring of the payables resulted in a troubled debt restructuring and as such, the carrying value was not changed and there was no gain or loss recognized in the consolidated statement of operations.

(9) Basic and Diluted Net (Loss) Income per Share

Basic net (loss) income per share is calculated 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 includes the impact of potentially dilutive securities unless inclusion of such securities would be anti-dilutive.

Outstanding options to purchase an aggregate of 5,846,721 and 5,402,920 shares of the Company’s common stock for the three and nine months ended December 31, 2016, respectively, and 7,687,983 and 7,994,415 shares of the Company’s common stock for the three and nine months ended December 31, 2015, respectively, were excluded from the diluted net (loss) income per share calculations because of their anti-dilutive effect during these periods. Outstanding warrants to purchase an aggregate of 552,373 and 1,875,659 shares of the Company’s common stock for the three and nine months ended December 31, 2016, respectively, and 7,031,305 shares of the Company’s common stock for each of the three and nine months ended December 31, 2015, were excluded from the diluted net (loss) income per share calculations because of their anti-dilutive effect during these periods.

(10) Geographic and Product Line Data and Concentrations

Revenue is attributed to geographic regions based on the location of the customer. The Company’s net sales are attributed to the following geographic regions (in thousands):

	Three Months Ended December 31,				Nine Months Ended December 31,
	2016		2015		2016		2015
Americas	$	11,802	$	47,002	$	27,061	$	79,003
Europe, the Middle East and Africa ("EMEA")		6,236		16,702		13,900		32,000
Asia Pacific ("APAC")		1,023		1,334		3,755		5,927
	$	19,061	$	65,038	$	44,716	$	116,930

The Company’s sales by customer as a percentage of gross sales for all customers that accounted for greater than 10% of gross sales is as follows:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Customer 1		28	%		—	%		15	%		—	%
Customer 2		15	%		29	%		13	%		25	%
Customer 3		10	%		8	%		14	%		8	%
Customer 4		9	%		14	%		13	%		15	%

The Company’s accounts receivable as a percentage of total accounts receivable for all customers that accounted for greater than 10% of accounts receivable is as follows:

	December 31, 2016			March 31, 2016
Customer 1		20	%		26	%
Customer 2		19	%		—	%
Customer 3		13	%		3	%
Customer 4		6	%		12	%

During the three and nine months ended December 31, 2016 and 2015, no other customers accounted for greater than 10% of gross sales. At December 31, 2016 and March 31, 2016, no other customers accounted for greater than 10% of accounts receivable.

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The Company’s sales by platform as a percentage of gross sales were as follows (a):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Consoles		72	%		17	%		56	%		20	%
PC and Mac		15	%		7	%		14	%		9	%
Rock Band 4		10	%		67	%		18	%		58	%
Smart devices		3	%		2	%		3	%		3	%
Saitek		—	%		7	%		9	%		10	%
		100	%		100	%		100	%		100	%

The Company’s sales by product category as a percentage of gross sales were as follows (a):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Audio		71	%		16	%		51	%		18	%
Mice and keyboards		13	%		6	%		13	%		8	%
Rock Band 4		10	%		67	%		18	%		58	%
Specialty controllers		4	%		2	%		6	%		2	%
Controllers		2	%		1	%		2	%		2	%
Saitek		—	%		7	%		9	%		10	%
Accessories		—	%		1	%		1	%		1	%
Games and other		—	%		—	%		—	%		1	%
		100	%		100	%		100	%		100	%

The Company’s sales by brand as a percentage of gross sales were as follows (a):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Tritton		69	%		14	%		50	%		16	%
Mad Catz		21	%		11	%		23	%		14	%
Rock Band 4		10	%		67	%		18	%		58	%
Saitek		—	%		7	%		9	%		10	%
All others		—	%		1	%		—	%		2	%
		100	%		100	%		100	%		100	%

(a) Sales of products related to the Rock Band 4 video game and simulation products sold as part of the sale of Saitek assets are listed separately in each of the tables to provide comparable information for our ongoing product lines.  

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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, 2016 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, 2016.

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) and Tritton^® (audio) brands. Our products, which primarily include headsets, mice, keyboards, controllers, specialty controllers, and other accessories, cater to gamers across multiple platforms including in-home gaming consoles, handheld gaming consoles, PC and Mac computers, smart phones, tablets and other smart devices. We distribute our products through many leading retailers around the globe. Mad Catz is incorporated in Canada and is 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 the third quarter of fiscal 2017, approximately 38% of total net sales were transacted outside of the Americas. 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, 2016.

RESULTS OF OPERATIONS

Net Sales

For the three and nine months ended December 31, 2016, net sales decreased 71% and 62%, respectively, as compared to the three and nine months ended December 31, 2015. We experienced decreases in net sales in all regions driven primarily by decreased sales of products related to the Rock Band 4 video game, which launched in September 2015, as well as a decrease in sales of Saitek products due the sale of the Saitek product line to Logitech in September 2016. These decreases were partially offset by increases in sales of products designed for consoles, particularly audio. We increased our retail presence in the U.S. market and launched a new line of audio products designed for consoles for the fiscal 2017 holiday season, which has driven, and we believe will continue to drive, growth in audio sales. Declines in sales of our products designed for the PC and Mac, which represented 15% and 14% of our sales during the three and nine months ended December 31, 2016, respectively, compared to 7% and 9% during the same periods in prior year,are due primarily to an increase in aggressive pricing competition in mice and keyboards, particularly in EMEA, and an

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aging product line. We have started launching a refresh of our gaming mice, which we believe will drive growth in this category; however, supply constraints have limited our growth in this category. We also experienced a decrease in sales of products developed for smart devices, which represented 3% and 3% of our sales during the three and nine months ended December 31, 2016, respectively, compared to 2% and 3% during the same periods in prior year, driven primarily by controllers sold in APAC under a private label program in the prior year that did not recur in the current year.

From a geographical perspective, our net sales for the three and nine months ended December 31, 2016 and 2015 were as follows (in thousands):

	Three Months Ended December 31,
	2016					2015
	Net Sales		% of Total			Net Sales		% of Total			$ Change			% Change
Americas	$	11,802		62	%	$	47,002		72	%	$	(35,200	)		(75	)%
EMEA		6,236		33	%		16,702		26	%		(10,466	)		(63	)%
APAC		1,023		5	%		1,334		2	%		(311	)		(23	)%
	$	19,061		100	%	$	65,038		100	%	$	(45,977	)		(71	)%
	Nine Months Ended December 31,
	2016					2015
	Net Sales		% of Total			Net Sales		% of Total			$ Change			% Change
Americas	$	27,061		61	%	$	79,003		68	%	$	(51,942	)		(66	)%
EMEA		13,900		31	%		32,000		27	%		(18,100	)		(57	)%
APAC		3,755		8	%		5,927		5	%		(2,172	)		(37	)%
	$	44,716		100	%	$	116,930		100	%	$	(72,214	)		(62	)%

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

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Consoles		72	%		17	%		56	%		20	%
PC and Mac		15	%		7	%		14	%		9	%
Rock Band 4		10	%		67	%		18	%		58	%
Smart devices		3	%		2	%		3	%		3	%
Saitek		—	%		7	%		9	%		10	%
		100	%		100	%		100	%		100	%

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

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Audio		71	%		16	%		51	%		18	%
Mice and keyboards		13	%		6	%		13	%		8	%
Rock Band 4		10	%		67	%		18	%		58	%
Specialty controllers		4	%		2	%		6	%		2	%
Controllers		2	%		1	%		2	%		2	%
Saitek		—	%		7	%		9	%		10	%
Accessories		—	%		1	%		1	%		1	%
Games and other		—	%		—	%		—	%		1	%
		100	%		100	%		100	%		100	%

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

	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Tritton		69	%		14	%		50	%		16	%
Mad Catz		21	%		11	%		23	%		14	%
Rock Band 4		10	%		67	%		18	%		58	%
Saitek		—	%		7	%		9	%		10	%
All others		—	%		1	%		—	%		2	%
		100	%		100	%		100	%		100	%

(a) Sales of products related to the Rock Band 4 video game and simulation products sold as part of the sale of Saitek assets are listed separately in each of the tables to provide comparable information for our ongoing product lines.  

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, 2016 and 2015 (in thousands):

	Three Months Ended December 31,
	2016					2015
	Amount		% of Net Sales			Amount		% of Net Sales			$ Change			% Change
Net sales	$	19,061		100	%	$	65,038		100	%	$	(45,977	)		(71	)%
Cost of sales		17,766		93	%		53,633		82	%		(35,867	)		(67	)%
Gross profit	$	1,295		7	%	$	11,405		18	%	$	(10,110	)		(89	)%
	Nine Months Ended December 31,
	2016					2015
	Amount		% of Net Sales			Amount		% of Net Sales			$ Change			% Change
Net sales	$	44,716		100	%	$	116,930		100	%	$	(72,214	)		(62	)%
Cost of sales		42,997		96	%		93,641		80	%		(50,644	)		(54	)%
Gross profit	$	1,719		4	%	$	23,289		20	%	$	(21,570	)		(93	)%

Gross profit for the three and nine months ended December 31, 2016 decreased 89% and 93%, respectively, due to the decrease in net sales, as well as the decrease in gross profit margin to 7% and 4% in the three and nine months ended December 31, 2016 compared to 18% and 20% in the three and nine months ended December 31, 2015. The decrease in gross profit and gross margin over the prior year periods was due to a decrease in product margin as a result of product mix, an increase in freight due to air freight required to meet customer commitments, increased returns and an increase in distribution costs as a percentage of net sales due to certain fixed costs. These increases were offset partially by decreases in royalties and licenses due to product mix during the three and nine months ended December 31, 2016. We expect gross margin for the full year fiscal 2017 to decrease compared to fiscal 2016. We expect normalized gross margin for our ongoing Tritton and Mad Catz products to be between 15% and 24%, based on seasonality.  This range is due primarily to fixed distribution costs reflecting a higher percentage of net sales in seasonally low quarters and a lower percentage of net sales during seasonally higher quarters. The decrease over previous expectations is due to the loss of Saitek product sales, which historically generated higher gross margins than our other products, and a lower sales base to cover fixed distribution costs.

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Operating Expenses

Operating expenses for the three and nine months ended December 31, 2016 and 2015 were as follows (in thousands):

	Three Months Ended December 31,
	2016						2015
	Amount			% of Net Sales			Amount		% of Net Sales			$ Change			% Change
Sales and marketing	$	1,733			9	%	$	4,865		8	%	$	(3,132	)		(64	)%
General and administrative		1,911			10	%		2,600		4	%		(689	)		(27	)%
Research and development		436			2	%		1,007		1	%		(571	)		(57	)%
Restructuring and severance costs		154			1	%		—		—	%		154			100	%
Amortization of intangibles		92			—	%		112		—	%		(20	)		(18	)%
Net gain on sale of Saitek assets		7			—	%		—		—	%		7			(100	)%
	$	4,333			22	%	$	8,584		13	%	$	(4,251	)		(50	)%
	Nine Months Ended December 31,
	2016						2015
	Amount			% of Net Sales			Amount		% of Net Sales			$ Change			% Change
Sales and marketing	$	4,581			10	%	$	12,038		10	%	$	(7,457	)		(62	)%
General and administrative		6,458			14	%		8,132		7	%		(1,674	)		(21	)%
Research and development		1,653			4	%		2,869		3	%		(1,216	)		(42	)%
Restructuring and severance costs		151			—	%		—		—	%		151			(100	)%
Amortization of intangibles		314			1	%		332		—	%		(18	)		(5	)%
Net gain on sale of Saitek assets		(8,170	)		(18	)%		—		—	%		(8,170	)		(100	)%
	$	4,987			11	%	$	23,371		20	%	$	(18,384	)		(79	)%

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of payroll, commissions 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 during the three and nine months ended December 31, 2016 compared to prior year periods was primarily due to expense savings realized as a result of the 2016 Restructuring Plan, as well as lower cooperative advertising expense related to Rock Band 4 products. We expect sales and marketing expenses for the full year fiscal 2017, on an absolute dollar basis, to decrease compared to fiscal 2016 levels.

General and Administrative Expenses. General and administrative expenses include salaries and benefits for our executive and administrative personnel, facilities costs and professional services, such as legal and accounting. The decrease in general and administrative expenses during the three and nine months ended December 31, 2016 compared to prior year periods was primarily related to expense savings realized as a result of the 2016 Restructuring Plan. We expect general and administrative expenses for the full year fiscal 2017, on an absolute dollar basis, to decrease from fiscal 2016 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 during the three and nine months ended December 31, 2016 compared to prior year periods was primarily related to expense savings realized as a result of the 2016 Restructuring Plan. We expect research and development expenses for the full year fiscal 2017, on an absolute dollar basis, to decrease compared to fiscal 2016 levels.

Restructuring and Severance Costs. In fiscal 2017, we incurred $211,000 and $101,000 in restructuring and severance costs related to the 2016 Restructuring Plan and 2017 Restructuring Plan, respectively. These costs were partially offset by the release of $161,000 in restructuring and severance costs due to lower employer paid taxes on severance payments and lower car lease termination costs related to the 2016 Restructuring Plan.

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 2017, on an absolute dollar basis, to decrease compared to fiscal 2016 levels, due to the sale of the Saitek assets in the second quarter of fiscal 2017.

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Other Income (Expense)

Other income (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 Agreements entered into by the Company in 2011 and 2015, 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 income (expense) increased to $356,000 and $592,000 for the three and nine months ended December 31, 2016, respectively, from $(96,000) and $(1,705,000) for the three and nine months ended December 31, 2015, respectively. The increase is due to an increase in foreign exchange gain to $450,000 and $1,270,000 for the three and nine months ended December 31, 2016, respectively, from foreign exchange loss of $(657,000) and $(750,000) in the same periods last year due primarily to changes in the exchange rates between the Pound Sterling and the U.S. Dollar. Additionally, there was a decrease in interest expense, net, to $(290,000) and $(900,000) for the three and nine months ended December 31, 2016, respectively, from $(657,000) and $(1,278,000) in the same periods last year due to lower debt balances during the three and nine months ended December 31, 2016 compared to the same periods last year. These increases in other income (expense) were offset partially by decreases in the gains recorded for the change in fair value of warrant liabilities to $170,000 and $173,000 for the three and nine months ended December 31, 2016, respectively, from $1,200,000 and $283,000 for the three and nine months ended December 31, 2015, respectively.

Income Tax Expense

The income tax expense of $779,000 and $1,506,000, reflect effective tax rates of (29)% and 55% for the three months ended December 31, 2016 and 2015, respectively. Income tax expense of $1,498,000 and $2,570,000, reflect effective tax rates of (56)% and (144)% for the nine months ended December 31, 2016 and 2015, 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. The income tax expense in the three and nine months ended December 31, 2016 is the result of income tax expense recorded on the profitability of entities for which we no longer have valuation allowances against their deferred tax assets but not off setting income tax benefit for losses generated in our Hong Kong entity due to full valuation allowances against its deferred tax assets. 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. In addition, the income tax expense in the nine months ended December 31, 2016 includes tax expense related to the cancellations of stock options and the reversal of deferred tax assets related to the sale of the Saitek assets.

We do not record deferred income taxes on the approximate $19.9 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 carry forwards in Canada and the related valuation allowance, the deferred tax liability on our undistributed earnings would be no more than $0.7 million at December 31, 2016.

LIQUIDITY AND CAPITAL RESOURCES

The table below provides a summary of cash provided by (used in) operating, investing and financing activities during the nine months ended December 31, 2016 and 2015 (in thousands):

	Nine Months Ended December 31,
	2016			2015			Change
Net cash used in operating activities	$	(5,109	)	$	(11,839	)	$	6,730
Net cash provided by (used in) investing activities		9,954			(1,725	)		11,679
Net cash (used in) provided by financing activities		(5,551	)		12,414			(17,965	)
Effect of foreign currency exchange rate changes on cash		(127	)		(6	)		(121	)
Net decrease in cash	$	(833	)	$	(1,156	)	$	323

Our cash balance was $1.6 million and $2.4 million at December 31, 2016 and March 31, 2016, respectively. Additionally, our restricted cash balance was $1.6 million and $0.7 million at December 31, 2016 and March 31, 2016, respectively. Our primary sources of liquidity include borrowings under our Loan Agreement and Facilities Agreement (as discussed below under Financing Activities), cash on hand, cash flows generated from operations and net proceeds from the sale of the Saitek assets. We may also be able to supplement our cash flows from operations with proceeds from our at-the-market equity offering program (“ATM program”), although we have not done so to date. Due to the seasonality of our business (as discussed below under Operating Activities) cash provided by (used in) operating activities will fluctuate throughout our fiscal year.

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Equity Offerings

On November 4, 2015, the Company established an ATM program which allows us to sell from time to time up to an aggregate of $25.0 million of our common stock. During the twelve months ended March 31, 2016 and the nine months ended December 31, 2016, we issued no shares of common stock under the program.

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, 2016 primarily reflects the net loss for the period before non-cash items (i.e., net gain on sale of Saitek assets, depreciation, amortization, stock-based compensation and provision for deferred income taxes) and a net decrease in accounts payable and accrued liabilities of $1.8 million. During the third quarter of fiscal 2017, we negotiated to modify the terms of $6.3 million in accounts payable with two contract manufacturers to extend the payment terms into equal installments over the following 27 months. As a result, $2.8 million of the balance was reclassified to notes and restructured payables and $3.5 million of the balance was reclassified to notes and restructured payables, less current portion.  This net decrease was partially offset by a decrease in accounts receivable of $1.0 million and a decrease in inventory of $4.7 million. Net cash used in operating activities for the nine months ended December 31, 2015 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 $19.1 million increase in accounts receivable resulting from the increase in net sales and a $12.3 million increase in inventory due to sales of products related to the Rock Band 4 video game being less than originally forecasted during the holiday selling season. The decreases in operating cash flow were offset partially by a $20.7 million increase in accounts payable and accrued liabilities related to inventory purchases, accrued royalties and timing of payments. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses and inventory levels and managing our accounts receivable collection efforts.

Due to the seasonality of our business, we typically experience a large build-up in inventories beginning during our second fiscal quarter ending September 30, with corresponding increases in accounts payable and our bank loan balance. These increases are in anticipation of the holiday selling season, which occurs during our third fiscal quarter ending December 31. A large percentage of our annual sales are generated during our third fiscal quarter and, typically, our inventories decrease and accounts receivable increase as a result of the annual holiday selling. However, due to sales of products related to the Rock Band 4 video game being less than originally forecasted during the holiday selling season, inventory levels increased during the third fiscal quarter ending December 31, 2015. 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 provided by investing activities for the nine months ended December 31, 2016 of $10.0 million includes net proceeds from the sale of the Saitek assets of $10.7 million partially offset by capital expenditures to support our operations and were made up primarily of production molds, and to a lesser extent, computers and machinery and equipment. Net cash used in investing activities for the nine months ended December 31, 2015 of $1.7 million mostly consisted of capital expenditures to support our operations and were made up primarily of production molds, and to a lesser extent, computers and machinery and equipment.

Financing Activities

Net cash used in financing activities during the nine months ended December 31, 2016 of $5.6 million was primarily the result of net repayments under our Loan Agreement and Facilities Agreement. Net cash provided by financing activities during the nine months ended December 31, 2015 of $12.4 million was the result of net borrowings under our line of credit offset partially by repayments on a note payable. The changes in restricted cash of $903,000 represent the change in the payments from customers into a restricted bank account from March 31, 2016 to December 31, 2016 that were automatically swept to repay borrowings under our bank loans.

MCI maintains a Loan and Security Agreement (the “Loan Agreement”) with Sterling National Bank (“SNB”) to provide for a $20.0 million revolving line of credit subject to the availability of eligible accounts receivable and inventories, which changes throughout the year. The Loan Agreement expires on June 30, 2018. Pursuant to the Loan Agreement, SNB will advance MCI up to 85% of the value of eligible accounts receivables, depending on dilution rates. Also, MCI may borrow against eligible inventory,

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subject to an inventory sublimit amount and certain other conditions. The inventory sublimit amount will be the lesser of 85% of net orderly liquidation value of eligible inventory, 60% of the lower of cost or net realizable value of eligible inventory, or 2.3333 times (which can be modified from time to time with approval from SNB) eligible accounts receivable under the Loan Agreement. Borrowings under the Loan Agreement accrue interest on the daily outstanding balance at 4.5% plus 30-day LIBOR rate per annum, with a LIBOR floor of 1.0%. MCI is also required to pay a commitment fee equal to 1.0% of the facility upon entry into the Loan Agreement, an unused line fee equal to 0.25% per annum of the unused portion of the facility and a collateral monitoring fee of $1,500 per month. We are required to meet a monthly financial covenant based on a trailing twelve months’ Adjusted EBITDA, as defined. Our trailing twelve months’ Adjusted EBITDA as of November 30 and December 31, 2016 were lower than the required threshold and, accordingly, we were not in compliance with this covenant as of December 31, 2016. On January 31, 2017, we received confirmation from SNB that a forbearance will be issued for this non-compliance through April 28, 2017. Once finalized, if applicable, the material terms of the forbearance will be set forth and filed as a current report on SEC Form 8-K. There can be no assurance that we will be able to meet the covenants subsequent to December 31, 2016 or that we would be able to obtain a waiver or forbearance from SNB to the extent we are not in compliance with the covenants. Additionally, MCE maintains a Master Facilities Agreement (the “Facilities Agreement”) with Faunus Group International, Inc. (“FGI”) to provide for a $10.0 million secured demand credit facility subject to the availability of eligible accounts receivable and inventories, which changes throughout the year. The Facilities Agreement has a three-year term, although FGI may terminate the facility at any time upon at least three months’ notice. Pursuant to the Facilities Agreement, FGI will advance MCE up to 85% of the value of eligible accounts receivable, depending on dilution rates. Also, MCE may borrow against eligible inventory, subject to an inventory sublimit amount and certain other conditions.

We depend upon the availability of capital under our Loan Agreement and Facilities Agreement to finance our operations. We operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future sales and expenses. If we are 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 facility immediately due and payable. If we need 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. 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.

We have incurred recurring losses from operations in each of the years in the three-year period ended March 31, 2016 and generated negative cash flows from operations in the year ended March 31, 2016.  We also generated a loss from operations in the nine months ended December 31, 2016 and have negative working capital and shareholders’ equity as of December 31, 2016.  We believe it is unlikely that our available cash balances, anticipated cash flows from operations and available credit facilities will be sufficient to satisfy our operating needs for at least the next twelve months. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, equity sales under our “at-the-market” (“ATM”) equity offering program, additional equity financings, debt financings and other funding transactions. There can be no assurance that we will be able to complete financing transactions on acceptable terms or otherwise. If we are 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. We are also exploring other strategic alternatives including, but not limited to, the sale of the Company.  We have not made a decision at this time to pursue any specific strategic transaction or other strategic alternatives and have not set a specific timetable for the process. As such, there can be no assurance that the exploration of strategic alternatives will result in the sale of the Company or any other transaction.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes to our contractual obligations from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

As of December 31, 2016 and March 31, 2016, 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 loss before interest, taxes, depreciation and amortization, stock-based compensation, the gain/loss on the change in the fair value of the related warrant liabilities, and goodwill impairment, if any. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating or net loss as an indicator of operating performance and should not be

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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. We believe, however, that in addition to the performance measures found in our financial statements, Adjusted EBITDA is a useful financial performance measurement for assessing our operating performance. We use 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,
	2016			2015			2016			2015
Net (loss) income	$	(3,461	)	$	1,219		$	(4,174	)	$	(4,357	)
Adjustments:
Depreciation and amortization		491			673			1,660			1,711
Stock-based compensation		39			95			142			357
Change in fair value of warrant liabilities		(170	)		(1,200	)		(173	)		(283	)
Interest expense, net		290			657			900			1,278
Income tax expense		779			1,506			1,498			2,570
Adjusted EBITDA (loss)	$	(2,032	)	$	2,950		$	(147	)	$	1,276

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; the ability to meet the financial covenants under our existing loan agreements; 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.

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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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during the process.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In March 2016, Performance Design Products LLC (“PDP”), filed a complaint against MCI for patent infringement in the United States District Court for the Southern District of California.  The complaint is styled Performance Design Products LLC v. Mad Catz, Inc., Civil Action No. 16-cv-0629-GPC-RBB and it alleges that MCI has infringed and continues to infringe U.S. Patent No. D624,078 (the “’078 Patent”) by making, using, offering for sale, selling, and/or importing in the United States the Street Fighter V FightPad PRO covered by one of more claims of the ’078 Patent.  The complaint was formally served on MCI in March 2016.  In May 2016, MCI move to dismiss the complaint for failure to state a claim against MCI.  In June 2016, the Court granted MCI’s motion to dismiss, dismissed the complaint with prejudice, and entered judgment in MCI’s favor. On July 29, 2016, PDP filed its notice of appeal to the Federal Circuit Court of Appeals (“Federal Circuit”).  On October 11, 2016, the parties notified the Federal Circuit that they had reached an agreement to dismiss the appeal.  That same day, the Federal Circuit dismissed PDP’s appeal.  The outcome of these proceedings did not have any material adverse effect on the Company.

In addition to the foregoing matter, from time to time, the Company may become involved in various lawsuits and legal proceedings that arise 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.

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, 2016, except for the update to the risk factors set forth below.

We depend upon the availability of capital under our loan agreements to finance our operations. Any additional financing that we may need may not be available on favorable terms, or at all.

In addition to cash flow generated from sales of our products, we finance our operations with a Loan and Security Agreement (the “Loan Agreement”) provided to MCI by Sterling National Bank (“SNB”), formerly NewStar Business Credit LLC, an unrelated party and a Master Facilities Agreement (the “Facilities Agreement”) provided to MCE by Faunus Group International, Inc. (“FGI”), an unrelated party. The Facilities Agreement has a three-year term, although FGI may terminate the facility at any time upon at least three months’ notice. The Loan Agreement expires on June 30, 2018.

The Loan Agreement contains financial and other covenants that we are obligated to maintain. If we violate any of these covenants, we will be in default under the Loan Agreement. If a default occurs and is not timely cured or waived by SNB, SNB could seek remedies against us, including: (1) penalty rates of interest, (2) immediate repayment of the debt or (3) foreclosure on assets securing the Loan Agreement. The Loan Agreement is asset based and can only be drawn down in an amount to which eligible collateral exists in North America, and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow moving inventory, among other factors. We are required to meet a monthly financial covenant based on a trailing twelve months’ Adjusted EBITDA, as defined. The Company is required to meet a monthly financial covenant based on a trailing twelve months’ adjusted earnings before income taxes, depreciation and amortization (“EBITDA”), as defined. Our trailing twelve months’ Adjusted EBITDA as of November 30 and December 31, 2016 were lower than the required threshold and, accordingly, we were not in compliance with this covenant as of December 31, 2016. On January 31, 2017, we received confirmation from SNB that a forbearance will be issued for this non-compliance through April 28, 2017. Once finalized, if applicable, the material terms of the forbearance will be set forth and filed as a current report on SEC Form 8-K. There can be no assurance that we will be able to meet the covenants subsequent to December 31, 2016 or that we would be able to obtain a waiver or forbearance from SNB to the extent we are not in compliance with the covenants.

We depend upon the availability of capital under our Loan and Facility Agreements to finance our operations. Compliance with the monthly Adjusted EBITDA covenants in fiscal 2017, which are tied closely to our internal forecasts, depends on our ability to increase net sales excluding Rock Band 4 products and reduce operating expenses. Also, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future sales and expenses. If we are unable to comply with the Adjusted EBITDA covenants contained in the Loan Agreement, SNB may declare the outstanding borrowings under the agreement immediately due and payable. If we need to obtain additional funds as a result of the termination of the Loan 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. Our failure to promptly obtain alternate financing could limit our ability

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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.

We believe it is unlikely that our available cash balances, anticipated cash flows from operations and available credit facilities will be sufficient to satisfy our operating needs for at least the next twelve months.

We have incurred recurring losses from operations in each of the years in the three-year period ended March 31, 2016 and generated negative cash flows from operations in the year ended March 31, 2016.  We also generated a loss from operations in the nine months ended December 31, 2016 and have negative working capital and shareholders’ equity as of December 31, 2016.  We believe it is unlikely that our available cash balances, anticipated cash flows from operations and available credit facilities will be sufficient to satisfy our operating needs for at least the next twelve months. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, equity sales under our “at-the-market” (“ATM”) equity offering program, additional equity financings, debt financings and other funding transactions. There can be no assurance that we will be able to complete financing transactions on acceptable terms or otherwise. If we are 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. We are also exploring other strategic alternatives including, but not limited to, the sale of the Company.  We have not made a decision at this time to pursue any specific strategic transaction or other strategic alternatives and have not set a specific timetable for the process. As such, there can be no assurance that the exploration of strategic alternatives will result in the sale of the Company or any other transaction.

If we do not meet the New York Stock MKT Exchange (“NYSE MKT”) continued listing requirements, the NYSE MKT may delist our common stock.

Our common stock is listed on the NYSE MKT, which imposes both objective and subjective requirements for continued listing.  Continued listing criteria include standards relating to minimum average market capitalization, stockholder equity, average trading stock price, operating results, and other issues of financial condition.  On January 20, 2017, we received a notice from the NYSE MKT indicating that because our securities have been selling for a low price per share for a substantial period of time, pursuant to Section 1003(f)(v) of the NYSE MKT Company Guide (the “Company Guide”), the continued listing of our common stock on the NYSE MKT is predicated on us effecting a reverse stock split of our common stock or otherwise demonstrating sustained price improvement.  The NYSE MKT indicated that we have until July 20, 2017, to gain compliance with the NYSE MKT and Section 1003(f)(v) of the Company Guide. However, if we determine to remedy the non-compliance by taking action that will require shareholder approval, we must obtain shareholder approval by no later than our next annual meeting, and implement such action promptly thereafter.  At the present time, we anticipate that we will seek shareholder approval to effectuate a reverse stock split of our currently issued and outstanding common stock at our next annual meeting. In addition, if our common stock trades below $0.06 per share, the NYSE MKT will determine that our stock is no longer suitable for listing on the NYSE MKT and will halt trading in and commence proceedings to delist our stock from the NYSE MKT immediately.  The Company may appeal the delisting, but our stock will continue to be suspended from trading on the NYSE MKT during the appeal process and the appeal may be unsuccessful.

Further, the NYSE MKT also will consider suspending dealings in, or delisting, securities of an issuer that, among other criteria, has stockholders’ equity of less than: (A) $2 million, if that issuer has sustained losses from continuing operations and/or net losses in two of the last three most recent fiscal years; (B) $4 million, if that issuer has sustained losses from continuing operations and/or net losses in three of the last four most recent fiscal years; or (C) $6 million, if that issuer has sustained losses from continuing operations and/or net losses in its five most recent fiscal years.  The Company has had a loss from operations and net loss in three of its last four fiscal years and we expect to incur a loss from operations and net loss for fiscal 2017.  Furthermore, as of December 31, 2016, the Company’s stockholders’ equity was a negative $2.67 million.  Accordingly, in addition to the low selling price noted above (or any other failure to satisfy the various distribution or financial criteria set forth in the Company Guide), the NYSE MKT may determine that the Company is no longer suitable for listing and may commence delisting proceedings pursuant to one or more subsections of Section 1003(a) of the Company Guide.

Thus, there is no assurance that we will be able to obtain compliance with NYSE MKT continued listing standards and/or policies. A delisting of our common stock from the NYSE MKT, and our inability to list or transfer the stock to an alternate exchange or trading market, could negatively impact us by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees. While a delisting of our common stock would not constitute a specific event of default under the documents governing our credit facilities, our lenders could claim that a delisting would trigger a default under the material adverse change covenant or related provisions under such documents.  Further, our ability to issue common stock is currently limited by the NYSE MKT’s shareholder approval requirements. If our common stock is delisted from the NYSE MKT, we would no longer be subject to such shareholder approval requirements, and we could issue shares in acquisitions or financing transactions without shareholder approval. Any such issuance would dilute the

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ownership of our current stockholders. In addition, following a delisting of our common stock, we would no longer be subject to the NYSE MKT rules requiring us to meet certain corporate governance standards, which could decrease investor interest in our common stock.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAD CATZ INTERACTIVE, INC.
February 2, 2017	/s/ Karen McGinnis
	Karen McGinnis
	President and Chief Executive Officer
February 2, 2017	/s/ David McKeon
	David McKeon
	Chief Financial Officer

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