Mad Catz Interactive's (MCZ) CEO Karen McGinnis on Q3 2017 Results - Earnings Call Transcript

| About: Mad Catz (MCZ)

Mad Catz Interactive, Inc. (NYSE:USA) (NYSEMKT:MCZ)

Q3 2017 Earnings Conference Call

February 2, 2017 05:00 PM ET

Executives

Norberto Aja - IR

Karen McGinnis - President and CEO

Dave McKeon - CFO

Analysts

Ed Woo - Ascendiant

Edward Ericson - Private Investor

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Mad Catz Fiscal 2017 Third Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, February 2, 2017.

And now I'd like to turn the conference over to Norberto Aja, Investors Relations. Please go ahead.

Norberto Aja

Thank you, operator, and good afternoon, everyone. Welcome to Mad Catz's fiscal 2017 third quarter results conference call. With me on the call today are Karen McGinnis, Mad Catz's President and Chief Executive Officer and David McKeon, Mad Catz's Chief Financial Officer. Karen will provide an overview of the results and the principal drivers behind them for the quarter. Afterwards Dave will review the financial results in greater detail, before we return the call back to Karen for some closing remarks and then open the call to your questions.

Before we begin however, let me just take a few minutes to read the Safe Harbor language as today's discussion will contain forward-looking statements about the Company's financial results, estimates, and business prospects that involve substantial risk and uncertainties. The Company assumes no obligation to update the forward-looking statements contained in this conference call as a result of any new information, future events or developments, except as required by applicable law. You can identify these statements by the fact that they use words such as anticipate, estimate, expect, project, intend, should, plan, goal, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause actual future results to differ materially are the following; the ability to fund operations, continuing demand by consumers for video games and video game accessories, continued financial viability of our largest customers, the ability to maintain or renew the Company's licenses; competitive developments affecting the Company's current products; first-party price reductions; availability of capital under our credit facilities; the ability to successfully market both new and existing products, domestically and internationally; difficulties or delays in manufacturing; unanticipated product delays or downturn in the market or industry. A further list and description of these risks, uncertainties and other matters can be found in the Company's reports filed with the appropriate regulatory authorities.

Today's call and webcast taking place on February 2, 2017, do include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release.

With that, I would now like to introduce Karen McGinnis, President and Chief Executive Officer of Mad Catz. Please go ahead, Karen.

Karen McGinnis

Thank you, Norberto, and good afternoon everyone. We appreciate you joining us on the call today to review our fiscal 2017 third quarter financial results. I'm going to start by discussing the activities that have taken place since our last call. Then Dave will review the financial results and I'll end the call by reviewing the progress we have made against our fiscal 2017 objective. Before doing so I want to quickly address a future housekeeping with respect to the note in today's earning release that the Company's Board of Directors formed a special committee to explore and evaluate strategic alternatives intended to maximize shareholder value, a process that began last year and resulted in us selling our Saitek product line on September 15th 2016.

At this time the special committee continues to work with its financial advisor, Wedbush Securities to explore strategic alternatives including but not limited to the sale of the company. We have not made a statement [ph] at this time to pursue any specific strategic transaction or other strategic alternatives and have not yet set a specific timeline for the process. As such we cannot make any assurances that the exploration of strategic alternatives will result in the sale of the company or any other transaction.

As indicated in our earnings release, we do not intend to disclose developments with respect to the strategic review process until such time as the Board has approved a transaction or otherwise being felt appropriate. As such we will not be taking any questions related to this subject on today's call. However, I do want to assure you that we will review all strategic options to enhance shareholder value as we continue to focus on improving working capital and our long-term strategy for growth.

With that let me offer some comments around the quarter itself. There were certainly some positives in the quarter, but ultimately, we were disappointed with the lack of profitability and cash flow generation. Taking a platform by platform look, let me give you an update on our sales starting with console gaming, which is centered on our exciting brand of audio products. Starting in September, we began shipping the Tritton ARK 100, which is the first headset in our new exciting Tritton ARK series audio range.

The new ARK series is an impressive lineup of headsets built on three key innovations, first audionomics. The ARK series features a unique dynamic mono-curve design that unifies audio fidelity and ergonomics to achieve the ultimate experience in sound and comfort. Second, R:Drive. In a world first for gaming headsets, the ARK series headsets feature multiple frequency-specific speakers in each earcup, just like hi-fi speakers, where each driver handles specific frequency ranges, thus providing users with a powerful, immersive sound experience. And third, Kameleon. This unique Motion-dynamic RGB backlighting allows users to easily customize the illumination of each ARK headset. Audionomics and R-Drive provide gamers a superior audio performance and comfort to improve their game play, while Kameleon elevates the trend of customization and lighting in gaming peripherals in a way that’s fun and engaging.

We believe the ARK series brings innovation back to gaming audio, and that gamers will love both the aesthetic and the functionality these new headsets provide. We have received very positive response to our entire Tritton audio line, including its new refreshed packaging from retailers and consumers alike. We also shipped fixed Tritton headsets, which included both Xbox One and PS4 compatible versions of the ARK 100 [indiscernible] 9:10 to Walmart for the fall lineup in over 3,000 U.S. based store locations and we showcased ARK 100, both the Xbox One and PS4 compatible versions on listening stations in 2,000 other stores.

As a result, sales of audio products increased an impressive 39% during the quarter compared to the prior year third quarter. However working capital constraints required us to focus our production and launch quantities on the U.S. Market, which meant our ARK 100 shipped in very limited quantities in Europe and the ARK 300 is not expected to ship until March or April.

Tritton has strong market share and retail placements throughout Europe. So the lack of supply certainly resulted in missed sales opportunities. Additionally, in order to meet customer deadline, we incurred almost $1 million in inter-freight, charges, which significantly lowered our gross margin during the quarter. And although selling was strong, it was overall a tough holiday season for many of our retail partners, and sell through was not as robust as we had hoped. This resulted in lower replenishment orders and increased promotional activities, which further drove down profitability. Given the expanded Tritton audio portfolio and retail presence, we believe Tritton gained back some market share in the U.S. which we hope to leverage into a further expansion into other retail locations in the U.S. over the next few quarters.

Within console gaming, we also continue our commitment to the fighting games community by offering an unrivaled range of specialty controllers, designed to make gamers of all skill levels better fighters. Because of our commitment to quality, Mad Catz remains the FightStick of choice for many professional gamers in the fighting game community, serving as a great reference point for casual gamers in the space. As a result, we continue to see strong FightStick sales during the quarter. In addition, just last week we announced that we were teaming up with [Indiscernible] to produce a new range of licensed fighting game controllers for the highly-anticipated Tekken 7 video game, expected to be available when the game launches in June.

Moving on to PC gaming. Last quarter, we announced the details of our entirely upgraded line of RAT mice, which includes newly installed sensors to improve the overall performance of user commands, including faster reaction time and new button configuration, designed to better engage in game play and further enhance the feel and comfort of each mouse.

Additionally, the new RAT line includes the following features. First dynamic ergonomics. Each RAT provides various adjustments and customizations of key mouse components designed to accommodate different hand shapes and grip styles and improve the gaming experience and overall comfort of play. Second, Kameleon RGB technology. Integrated intelligent lighting provides multiple illumination zones, enabling you to deflect up to 16.8 million color variations and apply various illumination effects. And third our FlexIt software interface. This integrated software enables users to quickly and intuitively tune all aspects of the sensor, macro buttons and RGB lighting to meet their specific needs. The steady increment of price, features and performance throughout the new range from the RAT 1 at an entry price of $29.99, all the way to the most advanced the RAT Pro X Plus at $199.99 provides gamers of all levels a choice of peripherals to match the overall participation of their gaming gear and their price point preference.

The new RAT 1, RAT 4, RAT 6 and RAT 8 all shipped during the quarter. However, our working capital constraints once again limited the launch quantities we could provide to our retail partners and thus suppressed sales in the quarter. As a result, we experienced a 35% decline in sales of product designed for the PC and Mac compared to the third quarter last year. The new line of RAT mice has received very strong reviews and we expect the RAT Pro S Plus and the RAT Pro X Plus to ship by the end of the fiscal year. We remain optimistic about the consumer appeal and overall success of the RAT line.

In terms of the gaming mice market, we seek continued expansion and opportunity for growth. As more and more gamers are attracted to PC gaming having a mouse that's specifically designed and engineered for gaming can make a big difference. Since most PC games rely on mouse movements it's important that the precision optics provide as much accuracy as possible. Having extra buttons available is also a key feature of gaming mice. On top of the typical left button, right button and mouse scroll wheel, gaming mice often come equipped with extra buttons that can mapped to particular functions. And of course, there's comfort. From the design of where you rest your palm to the palm finger design and the weight of the mouse. Lightweight mice are good for games of frantic movement while heavyweight mice are good for games that require precision aiming.

That brings me to gaming on smart devices, which currently represents less than 3% of our sales. While we still believe, this category represents a growth opportunity without the need for significant additional development resources, just given our current product range, our focus and our resources are primarily directed at the larger growth opportunities we see in console and PC gaming.

Moving on, I want to briefly touch upon the announcement from last week regarding the notice we received from the New York Stock Exchange market, that due to our current low stock price, continued listing on the exchange, it’s partly on [ph] affecting a share consolidation or otherwise demonstrating sustained price improvement within the required timeframe. If we are not compliant with the continued listing standards or do not make progress on increasing the share price per share, the exchange may decide to initiate delisting proceedings.

At the present time, we anticipate that we will seek shareholder approval to effectuate a reverse stock split of our issued and outstanding common stock at our next annual meeting. The board is assessing which split ratio would best serve shareholders while allowing the Company to remain complaint with the Exchange's continued listing assignments.

In summary, we're very pleased to see the strong sales growth in Tritton Audio products despite ongoing supply constraints. However, the company was negatively impacted by a number of factors during the quarter. Supply constraints limited additional sales growth in audio and negatively affected the launch of our new RAT gaming mice. Gross margin was negatively affected by various factors including substantial amount of air freight and working capital continues to pose a significant challenge for us, negatively impacting our supply our product launch timing and the ability of negotiating more favorable pricing.

We ended the quarter on December 31st with negative working capital of $11 million. This results in $41 million in current liabilities and $30 million of current assets, of which $15 million was in inventory. Although all Rock Band 4 inventory was sold prior to September 6, we did provide extended payment terms to a customer on a portion of the sales, precluding us from recognizing revenue under U.S. GAAP until the product actually sold through.

As such we recognized $2 million in net sales of Rock Band 4 products during the third quarter and we have $2.5 million of Rock Band 4 inventory remaining on our balance sheet at December 31, at its net realizable 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 prices adjustments at retailers in order to improve the sell through to consumers. Finally, on a more positive note, our execution of the restructuring plan earlier this fiscal year and continued tight control of operating expenses has allowed us to realize cost savings of over $10 million year-to-date, which is better than we originally anticipated.

With that I would like to turn the call over to Dave to provide an overview of our third quarter financial results. Dave?

Dave McKeon

Thanks Karen. I'll begin with a review of our income statement. Net sales for the third quarter were $19.1 million, which represents a 71% decrease from the third quarter last year. In order to make it easier to understand fluctuations in our ongoing product line, we have separated Rock Band 4 and Saitek in our sales data for both the current and prior year periods.

The overall decrease in net sales was driven primarily by the decrease in sales of Rock Band 4 and Saitek products, and to a lesser extent the decrease in sales of mice and keyboards. These were offset by a 39% increase in sales of Tritton audio products, as we continued strong holiday shipments into our U.S. customer, including Walmart and funded the launch of the ARK 100 headsets in EMEA.

Sales of console products, which no longer include Rock Band 4 as I noted before increased 35% in the third quarter, driven by the growth in audio. Overall sales of products designed for consoles represented 72% of our third quarter sales, compared to 17% of the sales in the third quarter of the prior year. We expect this category to remain a high percentage of our business as the installed base of Xbox One and PlayStation 4 consoles continues to grow.

This console generation has an installed base of around 75 million units, which represents 50% of the projected installed base of over 150 million units by the end of 2018, highlighting the significant opportunity ahead for our console products. Additionally, the launch of Nintendo Switch should open up additional opportunities, particularly for sales of our audio products.

Outside of console gaming products, sales of products designed for the PC and MAC, which no longer include Saitek represented 15% of third quarter sales this year, and 7% of sales in the third quarter last year. As Karen noted, our working capital constraints limited the launch quantities of our new RAT range and thus impacted our ability to maximize sales and leverage the appeal of the new RAT range in the quarter. As a result, we experienced a 35% decline in sales of products designed for the PC and MAC compared to the third quarter last year. Sales of products designed for smart devices represented 3% of third quarter sales and 2% of sales in the third quarter last year.

Looking at the results by geography, third quarter net sales in the Americas decreased 75% to $11.8 million, and represented 62% of total net sales, compared to 72% a year ago, The decrease in net sales in the Americas was driven primarily by a decrease in Rock Band 4 products, offset partially by an increase in sales of audio products. Third quarter net sales in EMEA declined 63% to $6.2 million, and represented 33% of total net sales. The decrease in net sales in EMEA was driven primarily by a decrease in Rock Band 4 products, although delayed launch of our audio and PC products in EMEA resulted in decreased sales in these categories as well.

Third quarter net sales in Asia Pacific decreased 23% to $1 million and represented 5% of total net sales, compared to 2% in the third quarter last year, due primarily to a decrease in Rock Band 4 products. Overall, the strengthening of the dollar against the currencies of our foreign operations had a negative impact on sales growth, as sales in local currencies are converted to fewer U.S. dollars than they were a year ago.

Excluding the effect of changes in foreign currency rate, our net sales for the quarter would have decreased 69% rather than 71% compared to the prior year. Gross margin was 6.8%, compared to 17.5% in the third quarter last year. This decrease in gross margin was due to product mix, airfreight charges required to meet customer commitments, increased returns and an increase in distribution cost as a percentage of net sales. These increases were offset partially by a decrease in royalties and licenses.

We expect to normalized gross margin for our ongoing Tritton and Mad Catz products to be between 15% and 24% based on seasonality. This range is due primarily to fixed distribution cost, reflecting a higher percentage of net sales in seasonally in lower quarters and a lower percentage of net sales during seasonally higher quarters. The decrease over previous expectations is due to the loss of Saitek product sales, which historically generated higher gross margins than our other products and a lower sales base to cover fixed distribution cost.

Total sales and marketing, general administrative and research and development expenses decreased $4.1 million in the third quarter, or 52% from the third quarter last year. The decrease in these expenses was due to the realization of restructuring related cost savings, and lower cooperative advertising expenses due to Rock Band 4 shipments in the third quarter last year.

During the third quarter, we initiated a restructuring plan in order to lower inventory warehousing cost in the U.S. and to better align the Company's distribution process within each of the business. We outsource our U.S. warehousing and distribution to a third-party logistics provider and recorded approximately $211,000 in severance and benefits provided to terminated employees. For the third quarter of fiscal 2017, we generated an operating loss of $3 million, compared to operating income of $2.8 million last year.

Other income and expense, which primarily represents interest expense on our outstanding debt, foreign currency exchange gains and losses, and changes in the fair value of our warrant liability generated income of $356,000 in the third quarter this year, compared to an expense of $96,0000 in the third quarter last year. The income for the third quarter was due to foreign exchange gains associated primarily with the British pound, the change in the fair value of our warrant liabilities due to the decrease in our stock price and lower interest expense due to the decrease in the outstanding balances under our credit facilities.

During the third quarter, we recorded income tax expense of $779,000, compared to $1.5 million income tax expense last year, reflecting effective income tax rate of a negative 29% and 55% respectively. As we have mentioned previously, our income taxes and effective income tax rate, can fluctuate greatly depending on which jurisdictions generate taxable income or losses.

For entities that generate taxable losses, we may not always be able to record a tax benefit for those losses, if we cannot reasonably predict the ability to use the loss carry forwards in the future. Overall, we generated net loss in the third quarter of $3.5 million or $0.05 per share as compared to a net income of $1.2 million or income of $0.02 per share in the third quarter last year.

Moving on to our cash flow statement and balance sheet; net cash used in operating activities year-to-date was $5.1 million, compared to net cash used by operating activities of $11.8 million last year. The cash used year-to-date primarily reflects the net loss for the period and a $1.8 million decrease in accounts payable and accrued liabilities. During the quarter, we negotiated the modification of the terms of $6.3 million of accounts payable with contract manufacturers to extend the payment terms into equal installments over the following 27 months.

As a result, balance was reclassified to note and restructure payables with $3.5 million of the balance reclassified as long term. These decreases were partially offset by a $1 million decrease in accounts receivable and a $4.7 million decrease in inventory. Our DSOs for the quarter were 67 days compared to 45 days in the third quarter a year ago, and our inventory turns on a trailing four quarter basis decreased to 2.8 times this quarter, compared to 4.6 times last year. The decrease in inventory turns is due to the launch of Rock Band 4 in the third quarter of fiscal 2016.

As of December 31, 2016, we had a cash balance including restricted cash of $3.2 million and borrowings under our credit facilities of $12.2 million. As a result, we ended the quarter with a net position of banks loans less cash of $9 million, compared to $17.7 million a year ago, and $9.2 million last quarter.

With that, I would now like to turn the call back to Karen, so that she can provide you with our progress on our fiscal 2017 objectives, as well as closing remarks, after which we will open the call for questions. Karen.

Karen McGinnis

Thanks, Dave. In fiscal 2017, our primary focus is on improving working capital, generating sales growth in our ongoing product lines, which exclude Rock Band 4 and Saitek and improving operating profitability. To accomplish this, the global team focused on the five strategic and operational objectives which I reviewed with you last three quarters, and I would like to offer a status update on how we are doing.

Number one, designing innovative products for gamers. We have developed a well-reviewed line of products to target all gamers across price points, features and gameplay. As reflected in our announced product launches and new retail placements, we have an innovative product roadmap this year that appeals to a broader audience. We also made strategic changes around our product offering such as releasing the vast majority of new products in only one color and sun setting older products as necessary, to optimize working capital investment and simplify the supply chain.

Number two, executing global launch of the new product on time and on budget with appropriate assets, marketing plans and retail placements. And we all know having an amazing product is only valuable if we properly execute our product launches, and our teams all over the globe are focused on making this happen. As I mentioned earlier, due to capital constraints, we continue to encounter supply constraints, and our product launches, particularly our Tritton products in Europe have encountered delays. I'm confident in saying this is not a planning or execution issue, but instead resulted from a lack of cash to pay down over due payables to acceptable levels, or procure additional manufacturing partners and tooling earlier in the year to respond to increased demand for our new product launches.

Number three, expanding retail placement of products, particularly in the U.S. I'm pleased that our strong product offerings resulted in increased retail presence of our core products this holiday season. However, we still have retailers, that do not carry our products in their stores, which provides us additional opportunities to expand our retail distribution, both in the US and abroad.

Number four, optimizing working capital and continuing tight control over discretionary expenses. As I noted earlier, our execution and the restructuring planning, continued tight control over operating expenses, has already resulted in cost savings of over $10 million year-to-date, which is better than we originally anticipated. However working capital remains our biggest constraint and improving working capital will be key to successfully executing many of our other objectives.

Five, identify opportunity for the expansion of products in adjacent and compatible categories. Although we have no new announcements this quarter, we have had success leveraging our capabilities in the half and early to open to evaluating similar opportunities. Although I am pleased to say that we have made progress across these five objectives, 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. The sales of Rock Band 4 inventory and the Saitek product lines provided much needed cash. However, negative working capital creates a continued uphill battle for profitability.

Before opening the call to questions, I do want to take this opportunity to thank our amazing team of employees, who have been working incredibly hard on the objective we set for ourselves in fiscal 2017. I am truly grateful for everyone's dedication, teamwork and passion. I also want to thank our shareholders for their continued support.

I’ll now turn the call back to the operator so we can answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ed Woo with Ascendiant. Please go ahead with your question.

Ed Woo

I had a question regarding Europe. You mentioned that I guess the capital constraints impacted your ability to launch some products in Europe. How does the outlook for I guess this quarter next quarter or this year for European product launches?

Karen McGinnis

Particularly for the ARK 100 because we had some U.S. commitment, most of our initial product launch and September October went to the U.S. retailers. And so we started launching the ARK 100 in November in limited quantities in Europe. So we are starting to see some flow into there. It also delayed the launch of our ARK 300 and Tritton has really some brand recognition in Europe and that’s what we know it negatively affected the sales opportunities that we have there. We still have supply constraint, again because we are at negative working capital. We can continue to have manufacturers that ship but in particularly with our RAT mice and with some of the ARK 100 and 300 products. We would take more product if we could get it. But these are also seasonally low quarters from a sales perspective, Q4 and Q1 trying off.

Ed Woo

Then the other question I have is in terms of cost. I know you mentioned that U.S. recognized I guess over $10 million in year-to-date cost savings. Is there opportunity for further cost savings?

Karen McGinnis

We are continuing it look like we did a restructuring plan, where this quarter we moved from our warehouse in California to a third-party logistics provider and that will give us some additional savings opportunities. But certainly, the opportunity to get material savings, we have done this year, we had about 225 employees here before we did restructuring plan. We've got about 111 employees today. And headcount typically as one of your largest expenses, but we don’t have any room to do additional headcount reductions. And we are always looking at other minor opportunities, but they won't be substantial for this year for sure.

Ed Woo

And then my last question just on the overall industry. I know you mentioned some of your retail partners had challenging holidays. Has that continued through into the beginning part of this year and what are some of the expectations. I know there's some excitement in the industry because of the Nintendo Switch, but I don't know if people are holding back. I don't know if it’s going to be able to turn things around in retail space. What's your opinion?

Karen McGinnis

I think it is a little bit too early to tell. Certainly, another console out on the market, because that takes an audio with a 3-millimeter jack, provide us some additional opportunities on audio for those consoles to be out, when they come out on the market. January continues to be slow but January would also typically be slow and so it's a little bit too early to tell.

Operator

Our next question comes from the line of Edward Ericson, Private Investor. Please go ahead with your question.

Edward Ericson

Hey Karen, how you doing guys?

Karen McGinnis

Good how are you?

Edward Ericson

I'm okay. I'm curious, are the Mad Catz products going to remain in the Walmart stores throughout the year?

Karen McGinnis

Yes, we have six audio products and we have one of the RAT product. We have the RAT 1, which is the entry level, and then we have the ARK 100, both versions, the comet [ph] and the [indiscernible]. And we continue to be on the listening stations as well.

Edward Ericson

Okay and at least throughout the year. Also I noticed that on the Walmart, I guess online shopping, all your products are listed on it. That's going to remain also?

Karen McGinnis

Yes, we continue to look at our opportunities for not only online through Amazon. We also just started -- our guys have called it part of our instruction playing masters, we've shut down all of our global ecommerce sites. We didn't have our own online stores and due to the administrative cost and just the way they were structured and so we just recently launched a new U.S. store and so we'll have the opportunity to do some promotional activities of our own online store again in the U.S. And then we look at different retail partners that have online presence that how best to maximize those opportunities as well.

Edward Ericson

Okay, and last but not least, I'm just curious, I know we have to try to get the share price up, so we don't get delisted, but why is it, always the first move is to do a reverse split, which is almost always disastrous in the end? Why isn't there some more creative thinking, like if you mentioned that say by trying to get to a strategic partner or a sale of the company. But it always seems to me there could be, I mean if you get the price of the company up, the price per share, then a reverse split is no longer necessary. Is it?

Karen McGinnis

That's correct, and so that's why we say we currently anticipate. So we're looking at, like we said all different types of strategic options and we'll also look at how to respond that later. Our shareholder meeting is typically in September. [indiscernible] December, so we got a little bit of time to figure out what the best reaction is.

Edward Ericson

Okay, good luck. And when's the ARK 300 going to come out in the big supply?

Karen McGinnis

Yes, so we're expecting that in March or April.

Operator

[Operator Instructions] our next question comes from the line of Richard [indiscernible], private investor. Please go ahead with your question.

Unidentified Analyst

Okay, well actually the last person stole my thunder. So, let me rephrase the question a little differently then, about the notice you got from the exchange. What triggered this notice? Was it a surge [ph] price, because I know that like sometimes you have to have the price at $1 per share for the bit. And I know obviously, this stock has been under $1 for a long period of time. What price triggered this notice?

Karen McGinnis

Yes, I don’t think it's specifically written in their rules, but in the sessions with them, the price that they were looking at is the fact that it continued to stay under $0.20 for an extended period of time. Yes, the New York Stock Exchange market does not have the same dollar limit like the NASDAQ have.

Unidentified Analyst

Okay, so than this is -- okay. Than let me ask you this. If the stock doesn’t have to go to $1, let's just say hypothetically if this stock went back to $0.30 or $0.40, would that be sufficient not to be delisted?

Karen McGinnis

It would on this valuation [ph] of the stock-price. Correct.

Unidentified Analyst

Okay.

Karen McGinnis

And we're getting six months to rectify that, or if the method of rectifying, it needs shareholder approval, like a reverse stock split, then we've been giving this opportunity to do that at our Annual Meeting which is in, I guess in December.

Unidentified Analyst

Now let me ask you this. The way it was phrased in the press release, have you already resigned yourself to the fact that you are going to do a reverse split or are you going to try to hold off on that?

Karen McGinnis

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. So that would be the only way to rectify that, if the stock isn’t start to go up. And it would need to stay up for a 30-day average for that to rectify that deficiency.

Unidentified Analyst

Have you -- not that I am suggesting this, but have you ever thought about just listing -- like to avoid a on reverse split, have you ever thought of listing your stock on the over the counter?

Karen McGinnis

Yes, I think we'll consider all options. If you get delisted, then we need to look at what are other options are as far as what exchange we could continue to stay traded under.

Unidentified Analyst

Right, because I also agree with the previous caller that most of the time reverse splits never end well, only if the company is in a position of strength. I've seen companies that have done a reverse split and then the stock goes up higher but that's because the Company was in good financial condition. When the stock is in distress and a reverse split, I've never seen this workout. So I'm just hoping that we won't have to do this. But anyway, my next question is a couple of quarters ago you mentioned about the double-digit revenue growth. Is the fourth quarter going to do that? Are we going to have double digit revenue growth by the end of the fiscal year?

Karen McGinnis

No. This is seasonally a low quarter. I don’t think we'll see that actually in the fourth quarter. We were really hoping for that in the third quarter, and had we not have the supply constraints, I believe we would have got them, and you see that with the fact that we get just 39% growth in our audio, which was pretty impressive and higher than what I believe the market was growing in audio for that, which means we did -- we were able to take back some market share, particularly in the U.S. and that was with supply constraints. But we didn’t get enough quantity in Europe and we certainly didn’t get sufficient quantity of the new RAT line out anywhere.

Unidentified Analyst

Okay, and my last question is there -- I mean it doesn't -- right now it doesn’t -- I'm a big investor here, I mean shareholder, and I don’t see that much optimization. I have hope a year ago, when I heard the conference call, I had hope. I saw that you were going to do the restructuring but it seems like we really haven’t made that much progress. My concern is, let's say you don’t put up the sale, so let's say the Company doesn’t get sold. Are you going to have enough money to go to the next six months? Do you still see this as a going concern?

Karen McGinnis

I think long term we will struggle. We will have a -- if we don’t figure out some strategic alternatives, some additional financing, we're looking at all different options, Q4 and Q1 are both seasonally low quarters. They typically aren’t profitable even in big years. And so you continue usually to incur losses. And so that will just add to the negative working capital. And you'd have to get cash in to rectify that. And so that will be a challenge for us. And it's -- you know why -- although we started a strategic alternative process a while back, and it did -- 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.

And or if you don’t get the product in the timelines that you want, and you're having to air freight it, then air freight eats into a lot of your profitability as well. And what we didn’t anticipate a year ago was just how much more of a burden Rock Bank 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.

Unidentified Analyst

Right, now Karen you mentioned a couple of quarters -- you said that you were very confident. You still feel that way?

Karen McGinnis

I'm very confident that Mad Catz has exceptional products. And I think we proved that. Every time we put something out in the market, it gets good reviews. Where it gets placed, it gets sold. Our Tritton audio line is a great brand, particularly in Europe. Its gaining traction again in the U.S., because we’re getting more placements for it. I was hoping for a much better holiday quarter not unlike I'm sure the rest of the ambassadors were, of which I'm also a shareholder. And so I'm incredibly disappointed with the Q3 and the profitability. It should have been -- we needed that to be profitable quarter. So I'm still optimistic that we’ve got good products. I think, we've got good things. We're looking at lots of different strategic alternatives. And so I'm still optimistic that there is a path forward. But probably a little bit less optimistic than maybe I would have been six months ago.

Unidentified Analyst

Okay, Karen do you see, this is just [indiscernible]. Do you see is that -- do you think that there's a chance that we could go along without being sold. Is there any hope with that or do you see really like the end of -- the sales is going to be probably -- what's going to be the final thing. So do you see any -- like we can continue without selling the company?

Karen McGinnis

I mean we will -- unless we get some type of financing or there's some other way to get cash into the Company. I think that becomes a little bit more difficult, because our ability to raise capital is very limited, also because the market cap has been suppressed so much. We haven’t sold any shares under the ATM. And doing nothing, which is why we have a process to look at strategic alternatives, I don’t think would be prudent, because I do think you just can't continue to expect manufacturers to ship products without making payments as they become due.

Unidentified Analyst

Karen I mean I know that you were brought in to -- it's not like you started, this I know that. You got landed into a mess here from the prior management, but so I do appreciate your hard work and your diligence, but it's just very disappointing, like now I'm looking at the ticker, the stock is going for $0.10 and there is bid of $0.08 and an ask at $0.10. So I'm just trying to be very realistic here, and it’s very painful to see. So I want to -- I hope that you do the best you can for our shareholders, because right now I am not very happy with what's going on here. But I do appreciate -- I know that you got put into this situation. So anyway, I want to thank you for your hard effort.

Operator

There are no further questions at this time. I will now turn the call back to Karen McGinnis. Please continue with your presentation or closing remarks.

Karen McGinnis

Great, thank you operator, and thank you all for joining us on the call today. We look forward to updating you on our progress when we host our fiscal 2017 fourth quarter call in early June. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask you that you please disconnect your lines.

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