Peripheral manufacturer Mad Catz reports $26.9 million loss

Peripheral manufacturer Mad Catz has reported a net loss of $26.9 million for its latest financial quarter, despite a 19 percent increase in sales to $41 million.

Losses from Q3, ending December 31, stemmed from higher royalty and shipping costs, as well as new product development hires, the company said.

Mad Catz recently revealed the new Limited Edition Street Fighter IV arcade and fightsticks for PS3 and Xbox 360, which are something akin to gold dust at the moment.

Press release after the jump.

Mad Catz Interactive, Inc. (“Mad Catz” or “the Company”) (AMEX/TSX: MCZ), a leading third-party interactive entertainment accessory provider, today announced financial results for the fiscal 2009 third quarter ended December 31, 2008.

Mad Catz reported net sales for the fiscal third quarter ended December 31, 2008 of $40.8 million, a 19.0% increase from $34.3 million in the fiscal 2008 third quarter. Gross profit for the quarter declined 16.7% to $10.5 million, from $12.7 million in the fiscal 2008 third quarter. Gross profit margin for the third quarter of fiscal 2009 decreased to 25.8% from a record 36.9% in the prior year period. Net loss for the quarter ended December 31, 2008 was $26.9 million, or ($0.49) per diluted share, compared to net income of $3.3 million, or $0.06 per diluted share, for the third quarter of fiscal 2008. Adjusted net income, a non-GAAP measure (defined as net income excluding the impact of an estimated pre-tax non-cash charge of $28.5 million related to goodwill impairment, amortization of intangible assets and stock-based compensation) for the fiscal third quarter was $2.2 million, or $0.04 per diluted share. Adjusted EBITDA, a non-GAAP measure (defined as earnings before interest, taxes, depreciation, amortization and goodwill impairment), was $4.2 million in the fiscal 2009 third quarter, compared to adjusted EBITDA of $6.9 million in the fiscal 2008 third quarter. Reconciliations of adjusted net income and adjusted EBITDA to the Company’s net income are included in the financial tables accompanying this release.

Mad Catz’ also reported that its adjusted EBITDA as of December 31, 2008 on a trailing 4 quarter basis fell below the agreed level required by the Company’s Credit Facility with Wachovia Capital Finance Corporation. Wachovia has agreed to waive the covenant violation at December 31, 2008 and the Company is working with Wachovia to amend the Credit Facility to establish financial covenants that will apply to future periods and complete the waiver.

Selling, general and administrative expenses totaled $7.6 million, or 18.7% of net sales in the fiscal 2009 third quarter, compared with $6.4 million, or 18.7% of net sales in the prior year period. Research and development expenses decreased to $0.1 million during the third quarter of fiscal 2009. Reflecting the impact of the estimated non-cash impairment charge, loss before income taxes for the quarter ended December 31, 2008 was $25.8 million, as compared to income before income taxes of $5.6 million in the prior year fiscal third quarter.

Fiscal 2009 Third Quarter and Recent Highlights:

* Benefitting from a full quarter of sales from Saitek which was acquired in November 2007, net sales increased 19.0% From The prior year period to $40.8 million despite the challenging economic environment;
o North American net sales increased approximately 21.0% to $24.7 million;
o European net sales increased 9.0% to $14.5 million;
o Net sales to other countries increased over 200%, or approximately $1 million over the prior year, representing 3.7% of total net sales in the third quarter of fiscal 2009 as compared to approximately 1.4% in the comparable prior year period;
* Continued to expand the Company’s presence on current generation consoles as sales for these consoles represented approximately 43.0% of total net sales in the quarter and surpassed sales for prior generation consoles for the third consecutive quarter;
* Further diversified and expanded product lines and brand license portfolio:
o Began shipping full range of Rock Band™ accessories for the Xbox® 360 including the Fender™ Precision Bass guitar, Cymbal Expansion Pack, Portable Drum Kit and Premium M.I.C. (Microphone with Integrated Controller) throughout North America and Europe;
o Entered into license agreement with Nintendo to bring the full line of Rock Band peripherals to the popular Wii™ system;
o Introduced to strong critical acclaim a full range of branded controllers and accessories based on the classic Street Fighter® IV game;
o Further established our European presence by launching our GameShark™ online store in the U.K., a comprehensive Internet shopping boutique offering customers a wide variety of interactive entertainment accessories online;
o Began shipping two dual-platform flight sticks, the Saitek™ Aviator Flight Stick for Xbox® 360 and Playstation®3 and the Cyborg™ X Flight Stick for Xbox® 360 and PC;
* Introduced AirDrives FIT Interactive Earphones and AirDrives FIT Interactive Earphones for iPhone™, the latest models in the AirDrives™ range designed for use while cycling, running or playing sports; and,
* Reported net position of bank loan less cash at December 31, 2008 of $19.5 million compared to $8.9 million as of December 31, 2007.

Commenting on the results, Darren Richardson, President and Chief Executive Officer of Mad Catz, stated, “Mad Catz’ organic quarterly revenue growth in this challenging consumer environment reflects solid demand for our products, progress against our initiatives to diversify our offerings and geographical presence, as well as the relative strength of the video game industry. Throughout the 2008 holiday season, Mad Catz further strengthened its presence on the current generation of consoles with net sales for these consoles in the third quarter increasing approximately 57% from prior year levels. These gains reflect the positive consumer response to our full range of Rock Band accessories and portfolio of products for Nintendo’s Wii Fit. In addition to the positive sales momentum of core console videogame accessory offerings, the results reflect a full quarter of revenue contributions related to our November 2007 acquisition of PC peripheral provider Saitek.

“Third quarter net sales in North America rose 23.2% and Mad Catz’ fiscal 2009 third quarter and holiday sales season results also clearly highlight the Company’s expanded geographic diversity as 41.3% of total sales in the quarter occurred outside of North America. In addition to the continued strength of our PC products throughout Europe, Mad Catz expanded the penetration of its core video game console product lines in this market with the November launch of Rock Band accessories to select European territories. Fiscal 2009 third quarter net sales also reflect continued progress with our strategies to address other countries as $1.5 million of net sales came from these markets compared with approximately $0.5 million in the comparable prior year period.

“While Mad Catz generated healthy top line growth, the quarterly gross margin declined to 25.8% from a record level a year ago. The decline was largely related to provisions for increased inventory reserves, higher royalty expenses, increased costs due to added product development staff and higher shipment costs. The inventory reserve provisions were necessary due to the uncertain state of the economy and the retail industry. Going forward, we expect gross profit margins to be no lower than the range of those experienced in our latest three and nine month periods.

“Mad Catz entered calendar 2009 focused on leveraging our robust portfolio of licenses to deliver high-quality accessories to our worldwide customer base while building a foundation for sustained profitability. We launched to critical industry and consumer acclaim several premium Rock Band accessories and during the fiscal fourth quarter we’ll expand these offerings to make these popular products available for the Nintendo Wii in North America and Europe. We recently launched our full line of Street Fighter® IV branded controllers and accessories, which simulate a classic arcade experience and utilize the highest quality components. These limited edition collector’s items were introduced to extraordinary industry reviews and consumer demand, demonstrating Mad Catz’ ability to leverage its portfolio of attractive brand licenses to deliver in-demand, high-performance accessories.”

Mr. Richardson concluded, “Going forward, identifying additional operating cost efficiencies is one of management’s highest priorities, particularly in light of the very difficult worldwide economic environment. While operating expenses excluding the preliminary goodwill impairment charge and amortization expense increased by 16.2%, total operating costs as a percentage of net revenues were in line with the prior year period. We are aggressively pursuing additional efficiencies to effect further reductions in our cost structure while maintaining the necessary infrastructure to support a much larger revenue base as we deliver more entertaining products for gamers with the goal of enhancing shareholder value.”