SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period Ended December 31, 2012
For the Transition Period from to
Commission File No. 001-14944
MAD CATZ INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 63,477,399 shares of the registrants common stock issued and outstanding as of February 6, 2013.
FOR THE PERIOD ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars, except share and per share data)
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands of U.S. dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated balance sheets and related condensed consolidated statements of operations, comprehensive income (loss) and cash flows contained in this Quarterly Report on Form 10-Q, which are unaudited, include the accounts of Mad Catz Interactive, Inc. (the Company) and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such condensed consolidated financial statements have been included. These entries consisted only of normal recurring items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company generates a substantial percentage of net sales in the last three months of every calendar year, its fiscal third quarter. These condensed consolidated financial statements refer to the Companys fiscal years ending March 31 as its Fiscal year.
The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Please refer to the Companys audited consolidated financial statements and related notes for the fiscal year ended March 31, 2012 contained in the Companys Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (the SEC).
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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, contingent consideration, warrant liability and income taxes. Illiquid credit markets, volatile equity markets, volatility of foreign currency exchange rates, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ from those estimates.
(2) Correction of Immaterial Errors Related to Prior Periods
During the first quarter of fiscal year 2013, the Companys management determined that its previously issued financial statements contained immaterial errors related to the omission of an accrual of a customers contractually agreed upon defective allowance. The Company corrected the errors by revising the fiscal 2012 balances. The total effect of this revision to prior period financial statements was a decrease to shareholders equity and accounts receivable of $253,000 over the amounts previously reported in the consolidated financial statements for the year ended March 31, 2012. The revision applicable to the three and nine month period ended December 31, 2011 was a decrease of $7,000 and $14,000, respectively, to net sales.
(3) Recently Issued Accounting Standards
The Company has adopted the following new accounting standard:
Presentation of Comprehensive Income: In June 2011, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, requiring entities to report components of other comprehensive income in either a single continuous statement or in two separate statements. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in ASU 2011-12 defer the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. The amendments in ASU 2011-12 are effective at the same time as ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that ASU 2011-12 is deferring. The amendments in ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of these amended standards affected the presentation of the Companys other comprehensive income but not the Companys financial position or results of operations.
(4) Fair Value Measurement
For a description of the fair value hierarchy, see Note 2 to the Companys 2012 consolidated financial statements contained in the Companys Annual Report on Form 10-K for its fiscal year ended March 31, 2012.
The carrying values of the Companys financial instruments, including cash, accounts receivable, other receivables, accounts payable, accrued liabilities and income taxes receivable/payable approximate their fair values due to the short maturity of these instruments. The carrying value of the bank loan approximates its fair value as the interest rate and other terms are that which is currently available to the Company.
The following tables provide a summary of the recognized assets and liabilities carried at fair value on a recurring basis as of December 31, 2012 and March 31, 2012 (in thousands):
The following tables provide a roll forward of the Companys level three fair value measurements during the nine months ended December 31, 2012, which consist of the Companys contingent consideration liability and warrant liability (in thousands):
(5) Contingent Consideration
In connection with the fiscal year 2011 acquisition of Tritton Technologies Inc. (Tritton), the Company has a contingent consideration arrangement that requires the Company to pay the former owners of Tritton additional consideration based on a percentage of future sales of Tritton products over a five year period, subject to maximum annual amounts, up to an aggregate of $8.7 million. The fair value of the contingent consideration arrangement has been determined primarily by using the income approach and using a discount rate of approximately 14 percent. The amount paid for contingent consideration has been reduced by the amount of any working capital adjustment. In May 2011, the Company paid $1,546,000 under this arrangement. The maximum earn out for fiscal year ended March 31, 2012 of $1,600,000 was achieved, and $1,592,000, which is net of the $8,000 working capital adjustment, of this amount has been paid as of December 31, 2012. The remaining annual payments are required to be made in May of each year through 2015.
Fluctuations in the fair value of contingent consideration are impacted by unobservable inputs, most significantly estimated future sales of Tritton products and the estimated discount rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for estimated future sales of Tritton products is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption used for the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.
Inventories consist of the following (in thousands):
(7) Securities Purchase Agreement
In April 2011 the Company entered into a Securities Purchase Agreement (the 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 Shares) and (b) warrants to purchase an aggregate of 2,540,918 shares of common stock of the Company (Warrants and, together with the Shares, the Securities). On May 3, 2011 the Company filed a Registration Statement registering up to 8,893,211 common shares of the Company comprised of: (i) 6,352,293 common shares and (ii) 2,540,918 common shares issuable upon exercise of 2,540,918 warrants. The Securities were issued at a price equal to $1.92 for aggregate gross proceeds of approximately $12,196,000. The Warrants became exercisable on October 21, 2011 at a per share exercise price equal to $2.56. The 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 Warrants. The Warrants will remain exercisable until October 21, 2016.
The Company accounts for the Warrants with exercise price reset features in accordance with the applicable FASB guidance. Under this guidance, warrants with these reset features are accounted for as liabilities and carried at fair value, with changes in fair value included in net earnings (loss) until such time as the Warrants are exercised or expire.
The fair value of the Warrants decreased from $693,000 as of March 31, 2012 to $350,000 as of December 31, 2012, which resulted in a $343,000 gain from the change in fair value of warrants for the nine months ended December 31, 2012.
These Warrants are not traded in an active securities market, and as such, the Company estimates the fair value of the Warrants using the Black-Scholes option pricing model using the following assumptions:
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 Warrants. The Company believes this method produces an estimate that is representative of the Companys expectations of future volatility over the expected term of these Warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these Warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the 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 Warrants.
Fluctuations in the fair value of the Warrants are impacted by unobservable inputs, most significantly the assumption with regards to future equity issuances and their impact to the down-round protection feature. Significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.
(8) Basic and Diluted Net Income (Loss) per Share
Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share includes the impact of potentially dilutive securities.
Outstanding options to purchase an aggregate of 8,521,487 and 7,861,030 shares of the Companys common stock for the three and nine months ended December 31, 2012, respectively, and 5,408,165 and 6,335,314 shares of the Companys common stock for the three and nine months ended December 31, 2011, respectively, were excluded from diluted net loss per share calculations because inclusion of such options would have an anti-dilutive effect during these periods. Outstanding warrants to purchase an aggregate of 2,540,918 shares of the Companys common stock for each of the three and nine months ended December 31, 2012, and 2,540,918 and 2,236,008 shares of the Companys common stock for the three and nine months ended December 31, 2011, respectively, were excluded from the diluted net loss per share calculations because of their anti-dilutive effect during the period. Weighted average shares of 631,642 related to the convertible notes payable were excluded from the calculation for the nine month period ended December 31, 2011 because of their anti-dilutive effect during the period.
(9) Geographic Data and Concentrations
The Companys sales are attributed to the following geographic regions (in thousands):
Revenue is attributed to geographic regions based on the location of the customer. During the three and nine months ended December 31, 2012, one customer individually accounted for approximately 25% and 26% of the Companys gross sales, respectively, and one other customer individually accounted for approximately 10% and 8% of the Companys gross sales, respectively. During the three and nine months ended December 31, 2011, one customer individually accounted for approximately 22% and 21% of the Companys gross sales, respectively, and one other customer individually accounted for approximately 12% of the Companys gross sales, in each period. At December 31, 2012, one customer represented approximately 29% of accounts receivable. At December 31, 2011, one customer represented 32% of accounts receivable and another customer represented 16% of accounts receivable. At December 31, 2012 and 2011, there were no other customers which accounted for greater than 10% of accounts receivable or gross sales.
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 which involve 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, 2012 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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
We design, manufacture (primarily through third parties in Asia), sell, market and distribute products for all major videogame platforms, the PC and Mac and, to a lesser extent, the iPod and other audio devices. Our accessories are marketed primarily under the Mad Catz, Tritton, Saitek, GameShark and AirDrives brands; we also produce for selected customers a limited range of products which are marketed on a private label basis. Our products include videogame, PC and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also develop flight simulation software through our internal ThunderHawk StudiosTM. We also publish and distribute videogames.
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; the need to increase inventories in advance of our primary selling season; and timing of introductions of new products.
Potential Fluctuations in Foreign Currency
During the three and nine month periods ended December 31, 2012, approximately 62% and 60% of total net sales were transacted outside of the United States, respectively. 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 currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. To date we have not hedged against foreign currency exposure.
Critical Accounting Policies
Our critical accounting principles and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended March 31, 2012, as filed with the SEC.
RESULTS OF OPERATIONS
From a geographical perspective, our net sales for the three and nine months ended December 31, 2012 and 2011 were as follows (in thousands):
For the three months ended December 31, 2012, consolidated net sales decreased 3% as compared to the three month period ended December 31, 2011. In the United States, the decrease in net sales was primarily attributable to lower sales of accessories compatible with the Rock Band 3 game. In Europe and Canada, the increase in net sales was primarily driven by increased sales of audio products. Net sales in other countries in the third quarter of fiscal year 2013 increased primarily due to sales of the R.A.T. line of products.
For the nine months ended December 31, 2012, consolidated net sales increased 11% as compared to the nine months ended December 31, 2011. In the United States, the decrease in net sales was primarily attributable to lower sales of accessories compatible with the Rock Band 3 game, partially offset by increased sales of audio products. In Europe and Canada, the increase in net sales was primarily driven by increased sales of audio products. Net sales in other countries in the third quarter of fiscal year 2013 increased primarily due to sales of the R.A.T. line of products.
Our sales by platform as a percentage of gross sales for the three and nine months ended December 31, 2012 and 2011 were as follows:
Sales of PC and Mac products increased during the three and nine month periods ended December 31, 2012 primarily due to sales of the R.A.T. and Strike line of products. Sales of products designed for use with the PlayStation 3 platform increased during the three and nine month periods ended December 31, 2012 primarily due to software sales for this platform. Sales of products designed for use with the Wii platform continued to decline as a result of the release of a successor platform in November 2012.
Our sales by product category as a percentage of gross sales for the three and nine months ended December 31, 2012 and 2011 were as follows:
The increase in audio products during the three and nine month periods ended December 31, 2012 is primarily related to sales of Tritton-branded products. The increase in PC and Mac devices is primarily related to sales of the R.A.T. and Strike line of products. The decrease in specialty controllers as a percentage of total gross sales primarily related to the decrease in sales of our accessories compatible with the Rock Band 3 game. The decrease in controllers was primarily related to products compatible with the Xbox 360 and Wii. The decrease in games during the three month period ended December 31, 2012 reflects that while new video game software titles were released during the three month period ended December 31, 2011, no corresponding releases occurred during the three months ended December 31, 2012.
Our sales by brand as a percentage of gross sales for the three and nine months ended December 31, 2012 and 2011 were as follows:
During the quarter ended June 30, 2012, products previously offered under our Cyborg brand began a transition to our Mad Catz brand, which was completed during the second quarter of fiscal 2013. As a result, the sales reported in the prior period under the Cyborg brand have been reclassified as sales of our Mad Catz brand. In addition, sales previously reported as Eclipse have been reclassified as Other.
The decrease in Mad Catz products primarily related to the decrease in sales of our accessories compatible with the Rock Band 3 game, partially offset by an increase related to sales of the R.A.T. branded line of products and software offerings. The increase in Tritton as a percentage of total gross sales primarily related to strong audio headset demand.
Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including depreciation and other overhead.
The following table presents net sales, cost of sales and gross profit for the three and nine months ended December 31, 2012 and 2011 (in thousands):
Gross profit for the three months ended December 31, 2012 increased 15%, while gross profit as a percentage of net sales, or gross profit margin, increased from 24% to 29%. Gross profit for the nine months ended December 31, 2012 increased 25%, while gross profit margin, increased from 26% to 29%. The main driver of the increase in gross profit margin was decreased inventory write-downs recorded in the fiscal 2013 periods compared to the fiscal 2012 periods. We expect the gross profit margins to remain in the current range, although the gross profit margins may fluctuate due to factors such as changes in product mix, inventory write-downs, and exchange rate fluctuations.
Operating expenses for the three and nine months ended December 31, 2012 and 2011 were as follows (in thousands):
Sales and Marketing. Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising expense and costs of operating our websites. The decrease in sales and marketing expense was primarily due to a reduction in headcount and exchange rate fluctuations. We expect sales and marketing expenses as a percentage of net sales in fiscal 2013 to approximate fiscal year 2012 levels.
General and Administrative. 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 for the nine month period was primarily related to decreased legal fees related to defending the Company in legal actions arising in the ordinary course of its business. We expect general and administrative expenses in fiscal 2013 to be slightly lower than fiscal year 2012 levels.
Research and Development. Research and development expenses include the costs of developing and enhancing new and existing products. The decrease in research and development expenses primarily relates to the completion of activities related to audio products and software development that were ongoing in fiscal 2012. We expect research and development expenses in fiscal 2013 to be lower than fiscal year 2012 levels.
Acquisition related items. Acquisition related items relate to accounting for the Tritton acquisition, which include transaction costs and adjustments to the liability for contingent consideration, which will continue to be adjusted through fiscal 2015 when the contingent consideration will be fully paid.
Amortization Expenses. Amortization expenses consist of the amortization of the acquired intangible assets from Saitek, Joytech and Tritton. The slight decrease in amortization expenses was due to intangibles acquired in the Joytech and Saitek acquisitions that have become fully amortized.
Interest Expense, net, Foreign Exchange (Loss) Gain, Change in Fair Value of Warrant Liability and Other Income
Interest expense, net, foreign exchange (loss) gain, change in fair value of warrant liability and other income for the three and nine months ended December 31, 2012 and 2011 were as follows (in thousands):
The decrease in interest expense during the three and nine month periods ended December 31, 2012 is related to lower interest rates as a result of the loan amendment.
The foreign exchange gain in the three and nine month periods ended December 31, 2012 is due primarily to the rise in value of the U.S. dollar and Hong Kong dollar versus the Great British Pound and the Euro during those periods. The foreign exchange losses in the three and nine month periods ended December 31, 2011 are due primarily to the decrease in value of the U.S. dollar and Hong Kong dollar versus the Great British Pound and the Euro during those periods.
The change in fair value of warrant liability recorded in all periods represents the change in fair value of the Warrants issued in connection with the Securities Purchase Agreement. Specifically, the change in the Companys stock price changes the value of the warrant liability and resulted in income during the three and nine month periods.
Other income during the three and nine month periods ended December 31, 2012 primarily consists of a recovery of accrued goods and service taxes in Canada and to a lesser extent, advertising income from our GameShark.com website.
Income Tax Expense (Benefit)
Income tax expense (benefit) for the three and nine months ended December 31, 2012 and 2011 was as follows (in thousands):
The Companys effective tax rate is a blended rate for different jurisdictions in which the Company operates. The effective tax rate fluctuates depending on the taxable income in each jurisdiction and the statutory income tax rates in those jurisdictions in which we do business, including our U.S. operating company, and our Canadian parent company for which we continue to provide a full valuation allowance against its losses. The Company will continue to evaluate the realizability of its net deferred tax asset on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets and will release the valuation allowance if there is sufficient positive evidence, including but not limited to cumulative earnings in successive recent periods, to overcome such negative evidence. The change in the effective tax rate in the third quarter of fiscal 2013 versus the third quarter of fiscal 2012 was primarily due to discrete tax benefits booked in the second quarter of fiscal 2012.
For fiscal 2013, we project a 25% effective tax rate for our subsidiaries that do not have a full valuation allowance and a 103% effective tax rate for all entities. Our current projected tax rate for fiscal 2013 could change significantly if actual results differ from our current outlook-based projections.
Liquidity and Capital Resources
Sources of Liquidity
At December 31, 2012, available cash was approximately $4.5 million compared to cash of approximately $2.5 million at March 31, 2012 and $3.4 million at December 31, 2011. Our primary sources of liquidity include a revolving line of credit (as discussed below under Cash Flows from Financing Activities), cash on hand at the beginning of the year and cash flows generated from operations during the year.
Cash Flows from 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. For the nine months ended December 31, 2012, cash provided by operating activities was $2.6 million compared to cash used of $7.0 million for the nine months ended December 31, 2011. Cash provided by operating activities for the nine months ended December 31, 2012 primarily resulted from a decrease in inventory and accounts payable. Cash used in operating activities for the nine months ended December 31, 2011 primarily resulted from an increase of accounts receivable partially offset by a decrease in inventory. We are focused on effectively managing our overall liquidity position by continuously monitoring expenses, 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. During the third quarter our inventories decrease and accounts receivable increase as a result of the annual holiday selling. A large percentage of our annual revenue is generated during our third quarter. During our fourth 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.
Cash Flows from Investing Activities
Cash used in investing activities was $0.9 million during the nine months ended December 31, 2012 and $2.1 million during the nine months ended December 31, 2011. In the nine months ended December 31, 2012, net cash used in investing activities consisted of capital expenditures to support our operations and primarily included production molds, and to a lesser extent, computers and furniture and fixtures. In the nine months ended December 31, 2011, net cash used in investing activities consisted of capital expenditures to support our operations and primarily included production molds, and to a lesser extent, computers and machinery and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities during the nine months ended December 31, 2012 of $0.3 million was a result of net borrowings under our line of credit, partially offset by payment of the contingent consideration. For the nine months ended December 31, 2011, cash provided by financing activities of $8.8 million was a result of net borrowings under our line of credit and net proceeds received for the issuance of common stock, partially offset by repayment of the convertible notes.
We maintain a Credit Facility with Wells Fargo Capital Finance, LLC to borrow up to $30 million under a revolving line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. On August 1, 2012, we amended the line of credit to extend the maturity date to October 31, 2015. Prior to August 1, 2012, the line of credit accrued interest on the daily outstanding balance at the U.S. prime rate plus 2.0% per annum. Under the amended line of credit, interest accrues on the daily outstanding balance at an interest rate that ranges from U.S. prime rate plus 0.25% to U.S. prime rate plus 1.0% per annum depending upon the fixed charge coverage ratio. At December 31, 2012, the interest rate was 3.75%. We are also required to pay a monthly service fee of $1,500 and an unused line fee equal to 0.25% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority security interest in the inventories, equipment, and accounts receivable of certain of our subsidiaries and by a pledge of all of the capital stock of our subsidiaries and is guaranteed by the Company. We are required to meet a quarterly covenant based on our trailing four quarters coverage of fixed charges, which we were in compliance with as of December 31, 2012. Effective November 30, 2012, the Credit Facility agreement has been amended to remove a monthly year-to-date EBITDA covenant.
In connection with the Companys acquisition of Tritton, the Company is obligated to make certain payments to former Tritton shareholders of up to $8.7 million based on the achievement of certain specific performance measures. In May 2011, the Company made the first payment for $1.5 million. The maximum earn out for fiscal year ended March 31, 2012 of $1.6 million was achieved, and has been fully paid, net of the $8 thousand working capital adjustment, as of December 31, 2012. The aggregate fair value of the remaining payments was $3.8 million as of December 31, 2012, and is reflected in the Companys consolidated balance sheet.
We believe that our available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy our operating needs for at least the next twelve months. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.
Contractual Obligations and Commitments
There have been no other material changes to our contractual obligations from the information provided in Item 7, Managements 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, 2012.
As of December 31, 2012 and March 31, 2012, 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.
EBITDA, and Adjusted EBITDA
EBITDA, a non-GAAP financial measure, represents net income before interest, taxes, depreciation and amortization. To address the Warrants issued in the first quarter of fiscal 2012 and the resulting gain/loss on the change in the related warrant liability, we have excluded this non-operating, non-cash charge and defined the result as Adjusted EBITDA. We believe this to be a more meaningful measurement of performance than the previously calculated EBITDA. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating or net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 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 Companys operating performance. Our management uses Adjusted EBITDA as a measurement of operating performance in comparing our performance on a consistent basis over prior periods, as it removes from operating results the impact of our capital structure, including the interest expense resulting from our outstanding debt, and our asset base, including depreciation and amortization of our capital and intangible assets. In addition, Adjusted EBITDA is an important measure for our lender. We calculate Adjusted EBITDA as follows (in thousands):
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 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 seasonal fluctuations in the Companys sales, inventories, receivables, payables and cash; the effect of currency exchange rate fluctuations; the sufficiency of funds available to meet operational needs; and our expectations for fiscal 2013 in respect of our gross profit margin, operating expenses and effective tax rate.
The forward-looking statements contained herein reflect managements 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 in this quarterly report on Form 10-Q. 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.
Evaluation of Disclosure Controls and Procedures
For the third quarter of fiscal 2013, our management with the participation of our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 2012. In designing and evaluating the disclosure controls and procedures, management recognized 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 is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC.
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, 2012 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.
On July 6, 2012, the Companys subsidiaries Mad Catz Inc., and Mad Catz Interactive Asia Limited filed a complaint styled Mad Catz, Inc. et. al. v. KnowledgeTech Corp., Case No. 37-2012-00100125-CU-BC-CTL, in the Superior Court of California, County of San Diego. The complaint alleges that KnowledgeTech Corp. breached its contract with the plaintiffs for failing to issue credits for defective and returned product. The plaintiffs are seeking damages in the amount to be determined at trial. Since the filing of the complaint, KnowledgeTech filed a cross-complaint against Mad Catz Interactive Asia Limited and Mad Catz, Inc., and a complaint against Mad Catz Interactive, Inc., Tritton Technologies, Inc., and Mad Catz Europe Limited seeking payment for good produced without any set off for defective goods. Discovery in the case is proceeding. No trial date has been set.
On August 21, 2012, a complaint was filed in the United States District Court for the Southern District of New York, styled, Humanscale Corporation v. Mad Catz Interactive, Inc., et. al. Case No. 12 Civ. 7160, alleging that certain of Mad Catz R.A.T. branded gaming mice violated the claims of United States patent number 6,157,370 (the 370 patent). The complaint was never served on Mad Catz. Subsequent to the filing of the complaint, Mad Catz and Humanscale executed a Settlement and Exclusive License Agreement, which settled the case and which allows Mad Catz the exclusive right to enforce the 370 patent against third parties.
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in managements 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 managements attention from our business and operations. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of any current pending matters will not have a material adverse effect on our business, financial condition, results of operations or liquidity taken as a whole.
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
Effective November 30, 2012, we, Mad Catz, Inc. and our other subsidiaries entered into an Amendment (the Amendment) to the Fourth Amended and Restated Loan Agreement (as amended, the Loan Agreement) between Mad Catz, Inc. and Wells Fargo Capital Finance, LLC. The Amendment removes the monthly EBITDA requirement from the Loan Agreement and revises the Excess Availability requirement to a constant $3,000,000.
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.