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Mad Catz investors pour water on strategy to avoid delisting

Rock Band 4's legacy looms large as shareholders question the company's financial stability

Mad Catz' shareholders have voiced strong concerns about the company's proposed strategy to avoid being delisted from the New York Stock Exchange: a reverse stock split that some investors believe requires a stronger financial position to be successful.

The news that Mad Catz was under threat of delisting broke at the end of January, at which point its stock was trading at just $0.15 a share. Now, less than a full week later, that price has fallen to $0.13.

Speaking in a shareholder Q&A following the publication of Mad Catz' Q3 results - a quarter in which revenue dropped 71% year-on-year, and it made a net loss of $3.5 million - CEO Karen McGinnis made no attempt to obscure the difficulty the company faced in raising its share price to comply with NYSE rules.

According to McGinnis, the delisting notice was triggered by Mad Catz stock "continuing to stay under $0.20 for an extended period of time," but where the NASDAQ requires the share price to rise to $1 for 30 consecutive days to avoid being delisted, the NYSE asks only for a marked improvement - one shareholder offered a value of between $0.30 and $0.40 as a target, which McGinnis agreed would be sufficient.

"What we didn't anticipate a year ago was just how much more of a burden Rock Band 4 was going to be"

"Well, we say that that we are currently anticipating requesting a reverse stock split, because our stock is... it's been trading the last few days at $0.13 or $0.14, so we're pretty far away from the $0.20," she said. "So that would be the only way to rectify that, if the stock doesn't start to go up. And it would need to stay up for a 30-day average for that to rectify that deficiency."

That was a response to one of a sequence of questions in which the possibility of a reverse stock split - which Mad Catz itself has stated as the likeliest way forward - was cast as unwise by shareholders. One participant said that a reverse split works, "because the company was in good financial condition. When the stock is in distress and a reverse split, I've never seen this workout.

Another participant in the call - a self-described "big shareholder" in the company - admitted he "had hope" a year ago. At that time, the company's chairman, CEO and general counsel all stepped down, leaving then-CFO McGinnis to take control of a company in turmoil. However, a plan toward stability was laid out, including a restructuring process that would result in the loss of 38% of the company's total workforce.

Speaking yesterday, McGinnis revealed that the cuts had been even deeper: the headcount before restructuring was 225 people; it is now 111, making it just over 50% of all staff gone in the space of a year. This move was a key factor in some $10 million in cost savings made in that period. Nevertheless, current CFO David McKeon said that the company finished Q3 with negative working capital of $11 million - "$41 million in current liabilities and $30 million of current assets, of which $15 million was in inventory" - and a net position of $3.2 million in restricted cash and $12.2 million in borrowings on its credit facilities.

"Working capital remains our biggest constraint, and improving working capital will be key to successfully executing many of our other objectives," McKeon said, later adding that, "negative working capital creates a continued uphill battle for profitability."

Throughout the discussion, Rock Band 4 loomed large. As far back as July 2015, Mad Catz was pointing to the resurgence of Harmonix' franchise as vital to its future. As both the game's co-publisher and the manufacturer of its peripherals, Mad Catz had a lot riding on Rock Band 4, but its commercial performance was deemed "incredibly disappointing" by McGinnis.

"Working capital remains our biggest constraint, and improving working capital will be key to successfully executing many of our other objectives"

PDP took over as co-publisher of Rock Band 4 in March last year, and Mad Catz sold its remaining inventory by Spetember 6. McKeon pointed out that "extended payment terms" had been granted to one customer, so not all revenue from the sale had been recorded yet. Mad Catz received $2 million in sales of Rock Band 4 products in Q3, with a further $2.5 million still on the balance sheet, "at its net realisable value."

"While we did not incur additional charges related to Rock Band 4 during the quarter, if suppliers cannot sell through at the current expected prices, we may have to take additional charges in the future related to funding additional price adjustments at retailers in order to improve the sell through to consumers." McKeon also added, "the ability to generate profitability and positive cash flow this year has been severely limited by continued charges related to Rock Bank 4 and our working capital challenges."

In light of this information, the once hopeful "big shareholder" admitted that he saw little progress in the past year, questioning whether Mad Catz has enough money to make it beyond the next six months without the company being sold.

"I think long term we will struggle," McGinnis responded. "If we don't figure out some strategic alternatives, some additional financing, we're looking at all different options

"I would say we have made progress, but we started out with a really big hole. We were able to sell all the Rock Band 4 inventory, we were able to sell a product line for $13 million and that got some much-needed cash in. But again, since it didn't correct everything, the biggest constraint is supply, and if you don't have enough product to sell it makes it really hard to generate profits.

"What we didn't anticipate a year ago was just how much more of a burden Rock Band 4 was going to be. We've taken about $6 million of charges just this year on things like price protection, with retailers related to Rock Band 4. And so although we had a lot of things that I would say went our way this year, we had a lot of things that didn't. And when you start out with a big hole, it makes it really challenging."

Mad Catz is still in the process of deciding the best path forward. It opened its investor call by stating that, "we cannot make any assurances that the exploration of strategic alternatives will result in the sale of the company or any other transaction."

Seeking Alpha has the full transcript of the investor call.

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