##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2008
 OR
 o
    
    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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)7480 Mission Valley Road, Suite 101San Diego, California
    
    92108(Address of principal executive offices)
    
    (Zip Code)
 (619) 683-9830
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2008
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended December 31,
2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   December 31,
    
    
    March 31,2008
    
    
    2008AssetsCurrent assets:Cash
    
    $
    2,961
    
    
    $
    5,230Accounts receivable, net of allowances of
$7,505 and $4,514 at December 31, 2008 and
March 31, 2008, respectively
    
    
    31,020
    
    
    
    14,567Other receivables
    
    
    1,033
    
    
    
    583Inventories
    
    
    21,459
    
    
    
    20,554Deferred tax assets
    
    
    1,753
    
    
    
    1,591Prepaid expense and other current assets
    
    
    1,156
    
    
    
    1,369Total current assets
    
    
    59,382
    
    
    
    43,894Deferred tax assets
    
    
    4,623
    
    
    
    978Other assets
    
    
    717
    
    
    
    324Property and equipment, net
    
    
    1,923
    
    
    
    2,101Intangible assets, net
    
    
    6,069
    
    
    
    8,320Goodwill
    
    
    4,529
    
    
    
    35,704Total assets
    
    $
    77,243
    
    
    $
    91,321Liabilities and Shareholders EquityCurrent liabilities:Bank loan
    
    $
    22,500
    
    
    $
    11,470Accounts payable
    
    
    21,429
    
    
    
    16,280Accrued liabilities
    
    
    7,889
    
    
    
    6,859Convertible notes payable, current portion
    
    
    4,500
    
    
    
    Income taxes payable
    
    
    465
    
    
    
    496Total current liabilities
    
    
    56,783
    
    
    
    35,105Convertible notes payable
    
    
    10,000
    
    
    
    14,500Note payable
    
    
    847
    
    
    
    Other long-term liabilities
    
    
    1,018
    
    
    
    401Total liabilities
    
    
    68,648
    
    
    
    50,006Shareholders equity:Common stock, no par value, unlimited shares
authorized; 55,098,549 and 54,973,549 shares
issued and outstanding at December 31, 2008
and March 31, 2008, respectively
    
    
    48,112
    
    
    
    47,717Accumulated other comprehensive income
    
    
    (1,267
    )
    
    
    2,923Accumulated deficit
    
    
    (38,250
    )
    
    
    (9,325
    )Total shareholders equity
    
    
    8,595
    
    
    
    41,315Total liabilities and shareholders equity
    
    $
    77,243
    
    
    $
    91,321
  3




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    40,817
    
    
    $
    34,274
    
    
    $
    89,872
    
    
    $
    65,704Cost of sales
    
    
    30,269
    
    
    
    21,613
    
    
    
    63,307
    
    
    
    43,411Gross profit
    
    
    10,548
    
    
    
    12,661
    
    
    
    26,565
    
    
    
    22,293Operating expenses:Sales and marketing
    
    
    3,851
    
    
    
    3,296
    
    
    
    10,816
    
    
    
    6,975General and administrative
    
    
    3,783
    
    
    
    3,102
    
    
    
    12,307
    
    
    
    7,379Research and development
    
    
    223
    
    
    
    366
    
    
    
    1,161
    
    
    
    980Goodwill impairment
    
    
    28,513
    
    
    
    
    
    
    
    28,513
    
    
    
    Amortization of intangible assets
    
    
    597
    
    
    
    374
    
    
    
    1,811
    
    
    
    374Total operating expenses
    
    
    36,967
    
    
    
    7,138
    
    
    
    54,608
    
    
    
    15,708Operating income (loss)
    
    
    (26,419
    )
    
    
    5,523
    
    
    
    (28,043
    )
    
    
    6,585Interest expense, net
    
    
    (521
    )
    
    
    (372
    )
    
    
    (1,512
    )
    
    
    (581
    )Foreign exchange gain, net
    
    
    1,032
    
    
    
    251
    
    
    
    859
    
    
    
    587Other income
    
    
    112
    
    
    
    177
    
    
    
    251
    
    
    
    328Income (loss) before income taxes
    
    
    (25,796
    )
    
    
    5,579
    
    
    
    (28,445
    )
    
    
    6,919Income tax expense
    
    
    1,113
    
    
    
    2,269
    
    
    
    480
    
    
    
    2,919Net income (loss)
    
    $
    (26,909
    )
    
    $
    3,310
    
    
    $
    (28,925
    )
    
    $
    4,000Basic net income (loss) per share
    
    $
    (0.49
    )
    
    $
    0.06
    
    
    $
    (0.53
    )
    
    $
    0.07Diluted net income (loss) per share
    
    $
    (0.49
    )
    
    $
    0.06
    
    
    $
    (0.53
    )
    
    $
    0.07Weighted average shares  basic
    
    
    55,098,549
    
    
    
    54,973,549
    
    
    
    55,085,822
    
    
    
    54,767,883Weighted average shares  diluted
    
    
    55,098,549
    
    
    
    55,949,760
    
    
    
    55,085,822
    
    
    
    55,858,459
  4




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine Months EndedDecember 31,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (28,925
    )
    
    $
    4,000Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    3,138
    
    
    
    1,788Amortization of deferred financing fees
    
    
    56
    
    
    
    25Foreign exchange gain
    
    
    
    
    
    
    (1,041
    )Goodwill impairment
    
    
    28,513
    
    
    
    Provision (benefit) for deferred income taxes
    
    
    (298
    )
    
    
    1,278Stock-based compensation
    
    
    339
    
    
    
    250Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    (19,024
    )
    
    
    (9,146
    )Other receivables
    
    
    (386
    )
    
    
    856Inventories
    
    
    (1,024
    )
    
    
    (744
    )Prepaid expense and other current assets
    
    
    184
    
    
    
    933Other assets
    
    
    (36
    )
    
    
    (44
    )Accounts payable
    
    
    4,469
    
    
    
    5,313Accrued liabilities
    
    
    1,334
    
    
    
    (149
    )Income taxes payable
    
    
    (35
    )
    
    
    433Net cash used in operating activities
    
    
    (11,695
    )
    
    
    3,752Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,127
    )
    
    
    (760
    )Cash paid for Joytech acquisition
    
    
    
    
    
    
    (2,983
    )Cash paid for Saitek acquisition
    
    
    
    
    
    
    (10,214
    )Net cash used in investing activities
    
    
    (1,127
    )
    
    
    (13,957
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    56
    
    
    
    345Proceeds from bank loan, net
    
    
    11,030
    
    
    
    17,812Net cash provided by financing activities
    
    
    11,086
    
    
    
    18,157Effects of foreign exchange on cash
    
    
    (533
    )
    
    
    (9
    )Net increase (decrease) in cash
    
    
    (2,269
    )
    
    
    7,943Cash, beginning of period
    
    
    5,230
    
    
    
    2,350Cash, end of period
    
    $
    2,961
    
    
    $
    10,293Supplemental cash flow information:Income taxes paid
    
    $
    569
    
    
    $
    295Interest paid
    
    $
    589
    
    
    $
    235Supplemental disclosure of non-cash investing and financing activities:Lease incentives recorded as deferred rent
    
    $
    109
    
    
    $
    Note payable issued for final Saitek acquisition working capital purchase price adjustment
    
    $
    847
    
    
    $
    14,500Fair value of assets acquired in Joytech and Saitek acquisitions:Accounts receivable and other current assets
    
    $
    
    
    
    $
    13,135Other assets
    
    
    
    
    
    
    899Inventories
    
    
    
    
    
    
    7,902Assumed liabilities
    
    
    
    
    
    
    (13,221
    )Intangible assets
    
    
    
    
    
    
    8,132Goodwill
    
    
    
    
    
    
    18,092$
    
    
    
    $
    34,939
  5




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MAD CATZ INTERACTIVE, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation
    (2) Fair Value Measurements
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115
 (3) Fiscal 2008 Acquisitions
 Saitek
  6




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Severance
    
    
    Lease Exit
    
    
    TotalBalance at March 31, 2008
    
    $
    830
    
    
    $
    80
    
    
    $
    910Payments
    
    
    (786
    )
    
    
    (80
    )
    
    
    (866
    )Reversals
    
    
    (44
    )
    
    
    (0
    )
    
    
    (44
    )Balance at December 31, 2008
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 Pro forma information
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2007
    
    2007Revenue
    
    $
    46,226
    
    
    $
    91,086Net income
    
    
    2,358
    
    
    
    1,275Net income per share  basic and diluted
    
    $
    0.04
    
    
    $
    0.02
  Joytech
  (4) Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock-based compensation expense before tax
    
    $
    178
    
    
    $
    202
    
    
    $
    339
    
    
    $
    250Related income tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense, net of tax
    
    $
    178
    
    
    $
    202
    
    
    $
    339
    
    
    $
    250
  7




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Weighted-AverageStock options outstanding:
    
    Options
    
    
    Exercise PriceBalance at April 1, 2008
    
    
    3,835,334
    
    
    $
    0.80Options granted
    
    
    3,925,000
    
    
    $
    0.46Options exercised
    
    
    (125,000
    )
    
    $
    0.45Options expired/cancelled
    
    
    (233,785
    )
    
    $
    0.91Balance at December 31, 2008
    
    
    7,401,549
    
    
    $
    0.59Exercisable at December 31, 2008
    
    
    2,399,552
    
    
    $
    0.64
 (5) Inventories
  December 31,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    898
    
    
    $
    816Finished goods
    
    
    20,561
    
    
    
    19,738Inventories
    
    $
    21,459
    
    
    $
    20,554
 (6) Goodwill
  Goodwill at March 31, 2008
    
    $
    35,704Purchase price adjustments
    
    
    (2,662
    )Goodwill impairment
    
    
    (28,513
    )Goodwill at December 31, 2008
    
    
    4,529
   8




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##### Table of Contents



(7) Note Payable
  (8) Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (26,909
    )
    
    $
    3,310
    
    
    $
    (28,925
    )
    
    $
    4,000Foreign Currency translation adjustment
    
    
    (2,700
    )
    
    
    (1,417
    )
    
    
    (4,190
    )
    
    
    (1,050
    )Comprehensive income (loss)
    
    $
    (29,609
    )
    
    $
    1,893
    
    
    $
    (33,115
    )
    
    $
    2,950
 Accounting for
Income Taxes  Special Areas
 (9) Basic and Diluted Net Income (Loss) per Share
  9




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Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (26,909
    )
    
    $
    3,310
    
    
    $
    (28,925
    )
    
    $
    4,000Weighted average common shares outstandingbasic
    
    
    55,099
    
    
    
    54,974
    
    
    
    55,086
    
    
    
    54,768Plus dilutive equity instruments
    
    
    
    
    
    
    976
    
    
    
    
    
    
    
    1,090Weighted average common shares outstandingdiluted
    
    
    55,099
    
    
    
    55,950
    
    
    
    55,086
    
    
    
    55,858Net income (loss) per common sharebasic
    
    $
    (0.49
    )
    
    $
    0.06
    
    
    $
    (0.53
    )
    
    $
    0.07Net income (loss) per common sharediluted
    
    $
    (0.49
    )
    
    $
    0.06
    
    
    $
    (0.53
    )
    
    $
    0.07
 (10) Geographic Data
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales:United States
    
    $
    23,956
    
    
    $
    19,440
    
    
    $
    51,069
    
    
    $
    40,258Europe
    
    
    14,548
    
    
    
    13,342
    
    
    
    34,050
    
    
    
    22,574Canada
    
    
    787
    
    
    
    1,007
    
    
    
    1,349
    
    
    
    2,356Other countries
    
    
    1,526
    
    
    
    485
    
    
    
    3,404
    
    
    
    516$
    40,817
    
    
    $
    34,274
    
    
    $
    89,872
    
    
    $
    65,704
  (11) Leases
  (12) Credit
Facility, Liquidity and Subsequent Event
     10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 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, 2008 and in Part II Other Information  Item 1A. Risk
Factors in this Quarterly Report on Form 10-Q . The following discussion should be read in
conjunction with our condensed consolidated financial statements and related notes included in this
Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.
 Overview
 Our Business
  Economic Environment
  Comparability of Prior Year to Current Year due to Acquisitions
  Seasonality and Fluctuation of Sales
  Current Generation Consoles
  11




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Potential Fluctuations in Foreign Currency
  Material Weakness in our Internal Control over Financial Reporting
  
    
    Developing and implementing new reporting instructions and checklists for the
newly-acquired foreign subsidiaries accounting functions.
    
    Pursuing alternatives to upgrade our information technology tools to minimize the manual
process currently required to record, process, summarize and report information required to
be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended.
    
    Retaining additional senior accounting personnel with specific responsibilities to
improve the oversight and review of financial reporting.
    
    Implementing additional management reviews of manually prepared schedules.
   Critical Accounting Policies
  12




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Revenue Recognition
 Revenue Recognition.
 Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
 Customer Marketing Programs
      Allowance for Doubtful Accounts
   13




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Inventory Reserves
   Valuation of Goodwill
 Goodwill and Other Intangible Assets
 Share-Based Payments
  14




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##### Table of Contents



RESULTS OF OPERATIONS
 Net Sales
  Three months ended December 31,
    
    
    $
    
    
    %2008
    
    
    % of total
    
    
    2007
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    23,956
    
    
    
    59
    %
    
    $
    19,440
    
    
    
    57
    %
    
    $
    4,516
    
    
    
    23.2
    %Europe
    
    
    14,548
    
    
    
    35
    %
    
    
    13,342
    
    
    
    39
    %
    
    
    1,206
    
    
    
    9.0
    %Canada
    
    
    787
    
    
    
    2
    %
    
    
    1,007
    
    
    
    3
    %
    
    
    (220
    )
    
    
    (21.8
    )%Other countries
    
    
    1,526
    
    
    
    4
    %
    
    
    485
    
    
    
    1
    %
    
    
    1,041
    
    
    
    214.6
    %Consolidated net sales
    
    $
    40,817
    
    
    
    100
    %
    
    $
    34,274
    
    
    
    100
    %
    
    $
    6,543
    
    
    
    19.1
    %
 Nine months ended December 31,
    
    
    $
    
    
    %2008
    
    
    % of total
    
    
    2007
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    51,069
    
    
    
    57
    %
    
    $
    40,258
    
    
    
    61
    %
    
    $
    10,811
    
    
    
    26.9
    %Europe
    
    
    34,050
    
    
    
    38
    %
    
    
    22,574
    
    
    
    34
    %
    
    
    11,476
    
    
    
    50.8
    %Canada
    
    
    1,349
    
    
    
    1
    %
    
    
    2,356
    
    
    
    4
    %
    
    
    (1,007
    )
    
    
    (42.7
    )%Other countries
    
    
    3,404
    
    
    
    4
    %
    
    
    516
    
    
    
    1
    %
    
    
    2,888
    
    
    
    559.7
    %Consolidated net sales
    
    $
    89,872
    
    
    
    100
    %
    
    $
    65,704
    
    
    
    100
    %
    
    $
    24,168
    
    
    
    36.8
    %
   15




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##### Table of Contents



Three months endedDecember 31,2008
    
    2007PC
    
    
    27
    %
    
    
    15
    %Xbox 360
    
    
    21
    %
    
    
    16
    %Wii
    
    
    17
    %
    
    
    6
    %Handheld Consoles(a)
    
    
    9
    %
    
    
    21
    %PLAYSTSTION 3
    
    
    5
    %
    
    
    11
    %PLAYSTATION 2
    
    
    3
    %
    
    
    12
    %GameCube
    
    
    2
    %
    
    
    6
    %Xbox
    
    
    1
    %
    
    
    4
    %All others
    
    
    15
    %
    
    
    9
    %Total
    
    
    100
    %
    
    
    100
    %
 Nine months endedDecember 31,2008
    
    2007PC
    
    
    29
    %
    
    
    8
    %Xbox 360
    
    
    18
    %
    
    
    18
    %Wii
    
    
    18
    %
    
    
    6
    %Handheld Consoles(a)
    
    
    10
    %
    
    
    19
    %PLAYSTATION 3
    
    
    7
    %
    
    
    15
    %PLAYSTATION 2
    
    
    4
    %
    
    
    14
    %GameCube
    
    
    2
    %
    
    
    7
    %Xbox
    
    
    1
    %
    
    
    5
    %All others
    
    
    11
    %
    
    
    8
    %Total
    
    
    100
    %
    
    
    100
    %
 
 (a)
    
    Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS
Lite, and Micro.  Three months endedDecember 31,2008
    
    2007Control pads
    
    
    26
    %
    
    
    26
    %Accessories
    
    
    24
    %
    
    
    12
    %Personal computer products
    
    
    21
    %
    
    
    13
    %Batteries
    
    
    9
    %
    
    
    4
    %Cables
    
    
    7
    %
    
    
    12
    %Bundles
    
    
    7
    %
    
    
    17
    %Games(b)
    
    
    1
    %
    
    
    3
    %Steering wheels
    
    
    2
    %
    
    
    4
    %All others
    
    
    3
    %
    
    
    9
    %Total
    
    
    100
    %
    
    
    100
    %
 Nine months endedDecember 31,2008
    
    2007Personal computer products
    
    
    24
    %
    
    
    7
    %Control pads
    
    
    23
    %
    
    
    32
    %Accessories
    
    
    22
    %
    
    
    14
    %Batteries
    
    
    9
    %
    
    
    4
    %Cables
    
    
    8
    %
    
    
    12
    %Bundles
    
    
    7
    %
    
    
    15
    %Steering wheels
    
    
    2
    %
    
    
    3
    %Games(b)
    
    
    1
    %
    
    
    5
    %All others
    
    
    4
    %
    
    
    8
    %Total
    
    
    100
    %
    
    
    100
    %
 
 (b)
    
    Games include GameShark videogame enhancement products in addition to videogames with related
accessories. 16




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##### Table of Contents



Gross Profit
   Three months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    40,817
    
    
    
    100.0
    %
    
    $
    34,274
    
    
    
    100.0
    %
    
    $
    6,543
    
    
    
    19.1
    %Cost of sales
    
    
    30,269
    
    
    
    74.2
    %
    
    
    21,613
    
    
    
    63.1
    %
    
    
    8,656
    
    
    
    40.1
    %Gross profit
    
    $
    10,548
    
    
    
    25.8
    %
    
    $
    12,661
    
    
    
    36.9
    %
    
    $
    (2,113
    )
    
    
    (16.7
    )%
 Nine months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    89,872
    
    
    
    100.0
    %
    
    $
    65,704
    
    
    
    100.0
    %
    
    $
    24,168
    
    
    
    36.8
    %Cost of sales
    
    
    63,307
    
    
    
    70.4
    %
    
    
    43,411
    
    
    
    66.1
    %
    
    
    19,896
    
    
    
    45.8
    %Gross profit
    
    $
    26,565
    
    
    
    29.6
    %
    
    $
    22,293
    
    
    
    33.9
    %
    
    $
    4,272
    
    
    
    19.2
    %
    Operating Expenses
  Three months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    3,851
    
    
    
    9.4
    %
    
    $
    3,296
    
    
    
    9.6
    %
    
    $
    555
    
    
    
    16.8
    %General and administrative
    
    
    3,783
    
    
    
    9.3
    %
    
    
    3,102
    
    
    
    9.0
    %
    
    
    681
    
    
    
    22.0
    %Research and development
    
    
    223
    
    
    
    0.5
    %
    
    
    366
    
    
    
    1.1
    %
    
    
    (143
    )
    
    
    (39.1
    )%Goodwill impairment
    
    
    28,513
    
    
    
    69.9
    %
    
    
    
    
    
    
    0.0
    %
    
    
    28,513
    
    
    
    100.0
    %Amortization
    
    
    597
    
    
    
    1.5
    %
    
    
    374
    
    
    
    1.1
    %
    
    
    223
    
    
    
    59.6
    %Total operating expenses
    
    $
    36,967
    
    
    
    90.6
    %
    
    $
    7,138
    
    
    
    20.8
    %
    
    $
    29,829
    
    
    
    417.9
    %
 Nine months ended December 31,% of Net
    
    
    
    
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    10,816
    
    
    
    12.0
    %
    
    $
    6,975
    
    
    
    10.6
    %
    
    $
    3,841
    
    
    
    55.1
    %General and administrative
    
    
    12,307
    
    
    
    13.7
    %
    
    
    7,379
    
    
    
    11.2
    %
    
    
    4,928
    
    
    
    66.8
    %Research and development
    
    
    1,161
    
    
    
    1.3
    %
    
    
    980
    
    
    
    1.5
    %
    
    
    181
    
    
    
    18.5
    %Goodwill impairment
    
    
    28,513
    
    
    
    31.7
    %
    
    
    
    
    
    
    0.0
    %
    
    
    28,513
    
    
    
    100.0
    %Amortization
    
    
    1,811
    
    
    
    2.0
    %
    
    
    374
    
    
    
    0.6
    %
    
    
    1,437
    
    
    
    384.2
    %Total operating expenses
    
    $
    54,608
    
    
    
    60.7
    %
    
    $
    15,708
    
    
    
    23.9
    %
    
    $
    38,900
    
    
    
    247.6
    %
 17




---



##### Table of Contents



Sales and Marketing.
 General and Administrative.
 Research and Development.
 Goodwill Impairment .
 Amortization.
 Interest Expense, Foreign Exchange Gain and Other Income
  Three months ended December 31,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2008
    
    Sales
    
    2007
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (521
    )
    
    
    1.3
    %
    
    $
    (372
    )
    
    
    1.1
    %
    
    $
    (149
    )
    
    
    40.1
    %Foreign exchange gain
    
    $
    1,032
    
    
    
    2.5
    %
    
    $
    251
    
    
    
    0.7
    %
    
    $
    781
    
    
    
    311.2
    %Other income
    
    $
    112
    
    
    
    0.3
    %
    
    $
    177
    
    
    
    0.5
    %
    
    $
    (65
    )
    
    
    (36.7
    )%
 Nine months ended December 31,% of Net
    
    
    
    
    
    % of Net
    
    $
    
    %2008
    
    Sales
    
    2007
    
    Sales
    
    Change
    
    ChangeInterest expense
    
    $
    (1,512
    )
    
    
    1.7
    %
    
    $
    (581
    )
    
    
    0.9
    %
    
    $
    931
    
    
    
    160.2
    %Foreign exchange gain
    
    $
    859
    
    
    
    1.0
    %
    
    $
    587
    
    
    
    0.9
    %
    
    $
    272
    
    
    
    46.3
    %Other income
    
    $
    251
    
    
    
    0.3
    %
    
    $
    328
    
    
    
    0.5
    %
    
    $
    (77
    )
    
    
    (23.5
    )%
   18




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##### Table of Contents



Income Tax Expense
  Three months ended December 31,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2008
    
    Tax Rate
    
    2007
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense
    
    $
    1,113
    
    
    
    (4.3
    )%
    
    $
    2,269
    
    
    
    40.7
    %
    
    $
    (1,156
    )
    
    
    (50.9
    )%
 Nine months ended December 31,Effective
    
    
    
    
    
    Effective
    
    $
    
    %2008
    
    Tax Rate
    
    2007
    
    Tax Rate
    
    Change
    
    ChangeIncome tax expense
    
    $
    480
    
    
    
    (1.7
    )%
    
    $
    2,919
    
    
    
    42.2
    %
    
    $
    (2,439
    )
    
    
    (83.6
    )%
  Liquidity and Capital Resources
 Sources of Liquidity
 As of and for thenine months endedDecember 31,(in thousands)
    
    2008
    
    
    2007
    
    
    ChangeCash
    
    $
    2,961
    
    
    $
    10,293
    
    
    $
    (7,332
    )Percentage of total assets
    
    
    3.8
    %
    
    
    9.0
    %Cash provided by (used in) operating
activities
    
    $
    (11,695
    )
    
    $
    3,752
    
    
    $
    (15,447
    )Cash used in investing activities
    
    $
    (1,127
    )
    
    $
    (13,957
    )
    
    
    12,830Cash provided by financing activities
    
    
    11,086
    
    
    
    18,157
    
    
    
    (7,071
    )Effects of foreign exchange on cash
    
    
    (533
    )
    
    
    (9
    )
    
    
    (524
    )Net increase (decrease) in cash
    
    $
    (2,269
    )
    
    $
    7,943
    
    
    
    (10,212
    )
   Cash Flows from Operating Activities
  19




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##### Table of Contents



th st st
  Cash Flows from Investing Activities
  Cash Flows from Financing Activities
     20




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##### Table of Contents



Contractual Obligations and Commitments
     EBITDA
  Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (26,909
    )
    
    $
    3,310
    
    
    $
    (28,925
    )
    
    $
    4,000Adjustments:Interest expense
    
    
    521
    
    
    
    372
    
    
    
    1,512
    
    
    
    581Income tax expense
    
    
    1,113
    
    
    
    2,269
    
    
    
    480
    
    
    
    2,919Goodwill impairment
    
    
    28,513
    
    
    
    
    
    
    
    28,513
    
    
    
    Depreciation and amortization
    
    
    973
    
    
    
    904
    
    
    
    3,138
    
    
    
    1,788Adjusted EBITDA
    
    $
    4,211
    
    
    $
    6,855
    
    
    $
    4,718
    
    
    $
    9,288
 21




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##### Table of Contents



Recent Accounting Pronouncements
 Fair
Value Measurements
 Business Combinations
  Forward-Looking Statements
   22




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
   
    
    Developing and implementing new reporting instructions and checklists for the newly-acquired
foreign subsidiaries accounting functions.
 
    
    Pursuing alternatives to upgrade our information technology tools to minimize the manual
process currently required to record, process, summarize and report information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as amended.
 
    
    Retaining additional senior accounting personnel with specific responsibilities to improve
the oversight and review of financial reporting.
 
   23




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Current economic, political and market conditions may adversely affect our revenue growth and
operating results.
   Our last four quarters EBITDA is below the minimum required in our Credit Facility.
   24




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##### Table of Contents



We have a substantial amount of goodwill on our balance sheet that may have the effect of
decreasing our earnings or increasing our losses in the event that we are required to recognize an
impairment charge to goodwill.
   Funding for our future growth may depend upon obtaining new financing, which may be difficult to
obtain given prevalent economic conditions and the general credit crisis.
  25




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##### Table of Contents



Item 6. Exhibits
 31.1
    
    Certification of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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.
 26




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.February 13, 2009
    /s/ Darren RichardsonDarren RichardsonPresident and Chief Executive OfficerFebruary 13, 2009
    /s/ Stewart A. HalpernStewart A. HalpernChief Financial Officer 27