##### 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 June 30, 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)7480 Mission Valley Road, Suite 101
San Diego, California
    
    92108(Address of principal executive offices)
    
    (Zip Code)
 (619) 683-9830
(Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not
check if a smaller reporting company)Smaller reporting
company þ
 o þ




---



##### 



MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2008
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2008 and March 31, 2008
    
    3Condensed Consolidated Statements of Operations for the three months ended June 30, 2008 and 2007
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2008 and 2007
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    10Item 4.
    
    Controls and Procedures
    
    16PART II  OTHER INFORMATION
    
    16Item 1.
    
    Legal Proceedings
    
    16Item 6.
    
    Exhibits
    
    16SIGNATURES
    
    17EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    March 31,2008
    
    
    2008(Unaudited)AssetsCurrent assets:Cash
    
    $
    1,950
    
    
    $
    5,230Accounts receivable, net of allowances of $4,775 and $4,514 at June 30, 2008 and March 31, 2008, respectively
    
    
    16,833
    
    
    
    14,567Other receivables
    
    
    651
    
    
    
    583Income tax receivable
    
    
    419
    
    
    
    Inventories
    
    
    21,556
    
    
    
    20,554Deferred tax assets
    
    
    1,591
    
    
    
    1,591Prepaid expense and other current assets
    
    
    1,262
    
    
    
    1,369Total current assets
    
    
    44,262
    
    
    
    43,894Deferred tax assets
    
    
    1,894
    
    
    
    978Other assets
    
    
    549
    
    
    
    324Property and equipment, net
    
    
    2,051
    
    
    
    2,101Intangible assets, net
    
    
    7,561
    
    
    
    8,320Goodwill
    
    
    35,007
    
    
    
    35,704Total assets
    
    $
    91,324
    
    
    $
    91,321Liabilities and Shareholders EquityCurrent liabilities:Bank loan
    
    $
    12,876
    
    
    $
    11,470Accounts payable
    
    
    16,165
    
    
    
    16,280Accrued liabilities
    
    
    6,808
    
    
    
    6,859Income taxes payable
    
    
    364
    
    
    
    496Total current liabilities
    
    
    36,213
    
    
    
    35,105Convertible notes payable and accrued interest
    
    
    15,224
    
    
    
    14,901Total liabilities
    
    
    51,437
    
    
    
    50,006Shareholders equity:Common stock, no par value, unlimited shares authorized; 55,098,549 and 54,973,549 shares issued and
outstanding at June 30, 2008 and March 31, 2008, respectively
    
    
    47,841
    
    
    
    47,717Accumulated other comprehensive income
    
    
    2,148
    
    
    
    2,923Accumulated deficit
    
    
    (10,102
    )
    
    
    (9,325
    )Total shareholders equity
    
    
    39,887
    
    
    
    41,315Total liabilities and shareholders equity
    
    $
    91,324
    
    
    $
    91,321
  3




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedJune 30,2008
    
    
    2007Net sales
    
    $
    23,226
    
    
    $
    14,578Cost of sales
    
    
    15,129
    
    
    
    9,899Gross profit
    
    
    8,097
    
    
    
    4,679Operating expenses:Sales and marketing
    
    
    3,130
    
    
    
    1,733General and administrative
    
    
    4,775
    
    
    
    2,800Research and development
    
    
    464
    
    
    
    314Amortization
of intangible assets
    
    
    612
    
    
    
    Total operating expenses
    
    
    8,981
    
    
    
    4,847Operating loss
    
    
    (884
    )
    
    
    (168
    )Interest expense, net
    
    
    (467
    )
    
    
    (99
    )Foreign exchange gain (loss), net
    
    
    (72
    )
    
    
    30Other income
    
    
    137
    
    
    
    91Loss before income taxes
    
    
    (1,286
    )
    
    
    (146
    )Income tax expense (benefit)
    
    
    (509
    )
    
    
    35Net loss
    
    $
    (777
    )
    
    $
    (181
    )Basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.00
    )Shares used in calculating basic and diluted net loss per share
    
    
    55,060,087
    
    
    
    54,355,326
  4




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##### Table of Contents



MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (777
    )
    
    $
    (181
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,102
    
    
    
    440Amortization of deferred financing fees
    
    
    20
    
    
    
    8Foreign exchange (gain) loss
    
    
    
    
    
    
    (30
    )Benefit for deferred income taxes
    
    
    (219
    )
    
    
    (70
    )Gain on disposal of assets
    
    
    (18
    )
    
    
    Stock-based compensation
    
    
    68
    
    
    
    24Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,678
    )
    
    
    3,300Other
receivables
    
    
    (78
    )
    
    
    (526
    )Income tax receivable
    
    
    (483
    )
    
    
    Inventories
    
    
    (1,156
    )
    
    
    (1,001
    )Prepaid expense and other current assets
    
    
    91
    
    
    
    (825
    )Other assets
    
    
    (283
    )
    
    
    Accounts payable
    
    
    (133
    )
    
    
    (3,158
    )Accrued liabilities
    
    
    230
    
    
    
    803Income taxes payable
    
    
    (152
    )
    
    
    (230
    )Net cash used in operating activities
    
    
    (4,466
    )
    
    
    (1,446
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (275
    )
    
    
    (219
    )Net cash used in investing activities
    
    
    (275
    )
    
    
    (219
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    56
    
    
    
    301Borrowing on bank loan
    
    
    1,406
    
    
    
    948Net cash provided by financing activities
    
    
    1,462
    
    
    
    1,249Effects of foreign exchange on cash
    
    
    (1
    )
    
    
    5Net decrease in cash
    
    
    (3,280
    )
    
    
    (411
    )Cash, beginning of period
    
    
    5,230
    
    
    
    2,350Cash, end of period
    
    $
    1,950
    
    
    $
    1,939Supplemental cash flow information:Income taxes paid
    
    $
    178
    
    
    $
    81Interest paid
    
    $
    177
    
    
    $
    111
  5




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##### Table of Contents



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) Acquisitions
 Saitek
   6




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##### Table of Contents



Recognition of Liabilities in
Connection with a Purchase Business Combination
  Severance
    
    
    Lease Exit
    
    
    TotalBalance at March 31,2008
    
    $
    830
    
    
    $
    80
    
    
    $
    910Payments
    
    
    (320
    )
    
    
    
    
    
    
    (320
    )Balance at June 30, 2008
    
    $
    510
    
    
    $
    80
    
    
    $
    590
 Pro-forma information
  Three Months EndedJune 30,2007Revenue
    
    $
    21,612Net loss
    
    
    (2,149
    )Net loss per share  basic and diluted
    
    $
    (0.04
    )
  Joytech
  (4) Stock-Based Compensation
 Share-Based Payment
   Three Months Ended June 30,2008
    
    
    2007Stock based employee compensation before tax
    
    $
    68
    
    
    $
    24Related income tax benefits
    
    
    
    
    
    
    Stock-based employee compensation, net of tax
    
    $
    68
    
    
    $
    24
    Weighted-AverageStock options outstanding:
    
    Options
    
    
    Exercise PriceBalance at April 1, 2008
    
    
    3,835,334
    
    
    $
    0.80Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (125,000
    )
    
    $
    0.46Options expired/cancelled
    
    
    (25,000
    )
    
    $
    1.06Balance at June 30, 2008
    
    
    3,685,334
    
    
    $
    0.87Exercisable at June 30, 2008
    
    
    2,119,792
    
    
    $
    0.73
 7




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##### Table of Contents



(5) Inventories
  June 30,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    799
    
    
    $
    816Finished goods
    
    
    20,757
    
    
    
    19,738Inventories
    
    $
    21,556
    
    
    $
    20,554
 (6) Intangible Assets and Goodwill
  Net Book
    
    
    Net BookAccumulated
    
    
    Value at
    
    
    Value atAmortization at
    
    
    June 30,
    
    
    March 31,
    
    
    Useful lifeCost
    
    
    June 30, 2008
    
    
    2008
    
    
    2008
    
    
    (years)Trademarks
    
    $
    5,469
    
    
    $
    3,182
    
    
    $
    2,287
    
    
    $
    2,467
    
    
    
    4 - 15Customer relationships
    
    
    3,402
    
    
    
    415
    
    
    
    2,987
    
    
    
    3,141
    
    
    
    3 - 6Product lines
    
    
    3,261
    
    
    
    1,019
    
    
    
    2,242
    
    
    
    2,647
    
    
    
    2 - 3Copyrights
    
    
    514
    
    
    
    514
    
    
    
    
    
    
    
    
    
    
    
    5Website
    
    
    457
    
    
    
    457
    
    
    
    
    
    
    
    
    
    
    
    4Other
    
    
    112
    
    
    
    67
    
    
    
    45
    
    
    
    65
    
    
    
    1 - 3Intangible assets
    
    $
    13,215
    
    
    $
    5,654
    
    
    $
    7,561
    
    
    $
    8,320
   (7) Bank Loan
  (8) Convertible Notes Payable
  (9) Comprehensive Loss
 Reporting Comprehensive Income,
  Three Months EndedJune 30,2008
    
    
    2007Net loss
    
    $
    (777
    )
    
    $
    (181
    )Foreign currency translation adjustment
    
    
    (775
    )
    
    
    (30
    )Comprehensive loss
    
    $
    (1,552
    )
    
    $
    (211
    )
 Accounting for
Income Taxes  Special Areas
 8




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##### Table of Contents



(10) Basic and Diluted Net Loss per Share
   (11) Geographic Data
  Three months endedJune 30,2008
    
    
    2007Net sales:United States
    
    $
    12,726
    
    
    $
    9,715Europe
    
    
    9,504
    
    
    
    4,171Canada
    
    
    240
    
    
    
    686Other countries
    
    
    756
    
    
    
    6$
    23,226
    
    
    $
    14,578
  9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This section contains forward-looking statements 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
  Seasonality and Fluctuation of Sales
  Transition to Next-Generation Consoles
  Potential Fluctuations in Foreign Currency
  Critical Accounting Policies
  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
   10




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##### Table of Contents



Allowance for Doubtful Accounts
    Inventory Reserves
   Valuation of Goodwill
 Goodwill and Other Intangible Assets
 Share-Based Payments
 Share-Based Payment,
  11




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##### Table of Contents



RESULTS OF OPERATIONS
 Net Sales
  June 30,
    
    
    
    
    
    
    June 30,
    
    
    
    
    
    
    $
    
    
    %2008
    
    
    % of total
    
    
    2007
    
    
    % of total
    
    
    Change
    
    
    ChangeUnited States
    
    $
    12,726
    
    
    
    55
    %
    
    $
    9,715
    
    
    
    67
    %
    
    $
    3,011
    
    
    
    31
    %Europe
    
    
    9,504
    
    
    
    41
    %
    
    
    4,171
    
    
    
    29
    %
    
    
    5,333
    
    
    
    128
    %Canada
    
    
    240
    
    
    
    1
    %
    
    
    686
    
    
    
    4
    %
    
    
    (446
    )
    
    
    (65
    )%Other countries
    
    
    756
    
    
    
    3
    %
    
    
    6
    
    
    
    0
    %
    
    
    750
    
    
    
    12,500
    %Consolidated net sales
    
    $
    23,226
    
    
    
    100
    %
    
    $
    14,578
    
    
    
    100
    %
    
    $
    8,648
    
    
    
    59
    %
   Three months endedJune 30,2008
    
    
    2007PlayStation 3
    
    
    11
    %
    
    
    25
    %Handheld Consoles(a)
    
    
    12
    %
    
    
    18
    %PlayStation 2
    
    
    4
    %
    
    
    15
    %Xbox 360
    
    
    11
    %
    
    
    15
    %GameCube
    
    
    3
    %
    
    
    7
    %Xbox
    
    
    1
    %
    
    
    6
    %Wii
    
    
    18
    %
    
    
    6
    %PC
    
    
    35
    %
    
    
    All others
    
    
    5
    %
    
    
    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 endedJune 30,2008
    
    
    2007Control pads
    
    
    15
    %
    
    
    41
    %Accessories
    
    
    21
    %
    
    
    18
    %Personal computer products
    
    
    33
    %
    
    
    Cables
    
    
    11
    %
    
    
    13
    %Bundles
    
    
    7
    %
    
    
    11
    %Games(b)
    
    
    2
    %
    
    
    10
    %Steering wheels
    
    
    2
    %
    
    
    Batteries
    
    
    9
    %
    
    
    All others
    
    
    
    
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
 
 (b)
    
    Games include GameShark videogame enhancement products in addition to videogames with related accessories. 12




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##### Table of Contents



Gross Profit
   June 30,
    
    
    % of Net
    
    
    June 30,
    
    
    % of Net
    
    
    $
    
    
    %2008
    
    
    Sales
    
    
    2007
    
    
    Sales
    
    
    Change
    
    
    ChangeNet sales
    
    $
    23,226
    
    
    
    100
    %
    
    $
    14,578
    
    
    
    100
    %
    
    $
    8,648
    
    
    
    59
    %Cost of sales
    
    
    15,129
    
    
    
    65
    %
    
    
    9,899
    
    
    
    68
    %
    
    
    5,230
    
    
    
    53
    %Gross profit
    
    $
    8,097
    
    
    
    35
    %
    
    $
    4,679
    
    
    
    32
    %
    
    $
    3,418
    
    
    
    73
    %
  Operating Expenses
  June 30,
    
    
    % of
    
    
    June 30,
    
    
    % of
    
    
    $
    
    
    %2008
    
    
    Net Sales
    
    
    2007
    
    
    Net Sales
    
    
    Change
    
    
    ChangeSales and marketing
    
    $
    3,130
    
    
    
    13
    %
    
    $
    1,733
    
    
    
    12
    %
    
    $
    1,397
    
    
    
    81
    %General and administrative
    
    
    4,775
    
    
    
    21
    %
    
    
    2,800
    
    
    
    19
    %
    
    
    1,975
    
    
    
    71
    %Research and development
    
    
    464
    
    
    
    2
    %
    
    
    314
    
    
    
    2
    %
    
    
    150
    
    
    
    48
    %Amortization
    
    
    612
    
    
    
    3
    %
    
    
    
    
    
    
    
    %
    
    
    612
    
    
    
    100
    %Total operating expenses
    
    $
    8,981
    
    
    
    39
    %
    
    $
    4,847
    
    
    
    33
    %
    
    $
    4,134
    
    
    
    85
    %
 Sales and Marketing Expenses.
 General and Administrative.
 Research and Development.
 Amortization.
 Interest Expense, net, Foreign Exchange Gain (Loss) and Other Income
  June 30,
    
    June 30,
    
    $
    
    %2008
    
    2007
    
    Change
    
    ChangeInterest expense, net
    
    $
    (467
    )
    
    $
    (99
    )
    
    $
    368
    
    
    
    372
    %Foreign exchange gain (loss)
    
    $
    (72
    )
    
    $
    30
    
    
    $
    (102
    )
    
    
    (340
    )%Other income
    
    $
    137
    
    
    $
    91
    
    
    $
    46
    
    
    
    50
    %
    Income Tax Expense (Benefit)
  June 30,
    
    
    
    
    
    June 30,
    
    Effective
    
    $
    
    %2008
    
    Effective Tax Rate
    
    2007
    
    Tax Rate
    
    Change
    
    Change$
(509)
    
    
    39.6
    %
    
    $
    35
    
    
    
    24.0
    %
    
    $
    (544
    )
    
    
    1,554
    %
  13




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##### Table of Contents



Liquidity and Capital Resources
 Sources of Liquidity
 As of and for theThree months ended June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    ChangeCash
    
    $
    1,950
    
    
    $
    1,939
    
    
    $
    11Percentage of total assets
    
    
    2.1
    %
    
    
    3.6
    %Cash used in operating activities
    
    $
    (4,466
    )
    
    $
    (1,446
    )
    
    $
    (3,020
    )Cash used in investing activities
    
    
    (275
    )
    
    
    (219
    )
    
    
    (56
    )Cash provided by financing activities
    
    
    1,462
    
    
    
    1,249
    
    
    
    213Effect of foreign exchange on cash
    
    
    (1
    )
    
    
    5
    
    
    
    (6
    )Net increase (decrease) in cash
    
    $
    (3,280
    )
    
    $
    (411
    )
    
    $
    (2,869
    )
  Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  Cash Flows from Financing Activities
    Contractual Obligations and Commitments
    14




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##### Table of Contents



EBITDA
  Three months endedJune 30,2008
    
    
    2007(in thousands)Net loss
    
    $
    (777
    )
    
    $
    (181
    )Adjustments:Interest expense, net
    
    
    467
    
    
    
    99Income tax expense (benefit)
    
    
    (509
    )
    
    
    35Depreciation and amortization
    
    
    1,102
    
    
    
    448EBITDA
    
    $
    283
    
    
    $
    401
 Recent Accounting Pronouncements
 Fair
Value Measurements
 Business Combinations
   Forward-Looking Statements
   15




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##### 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.
 
    
    Implementing additional management reviews of manually prepared schedules.
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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.
 16




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MAD CATZ INTERACTIVE, INC.August 19, 2008
    /s/ Darren RichardsonDarren RichardsonPresident and Chief Executive OfficerAugust 19, 2008
    /s/ Stewart A. HalpernStewart A. HalpernChief Financial Officer 17