Game Informer has reported an audit opinion letter for Mad Catz business operations, which contains some very worrying statements on the financial future of the company.
The audit opinion letter is the statement from an independent auditor, in this case KPMG, accompanying their financial assessment. It doesn’t contain good news. Mad Catz need to increase net sales and gross profit “considerably” to comply with the terms of their loans, an increase that relies upon “significant contributions from anticipated sales of products related to the Rock Band 4 video game”.
Should they fail to comply with the terms of their debt funding the entire debt could be called in, essentially bankrupting the company. This is at the lenders discretion (in this case American financial institution Wells Fargo) and while Mad Catz CFO Karin McGinnis told Game Informer that previous violations of their debt covenant with Wells Fargo have not resulted in the full amount being called in, the risk existing at all is a very scary proposition for a business and its investors and the KPMG assessment reflects that.
The final paragraph of the audit opinion letter drills home how serious the situation is: “These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.” There is no positive spin that can be put on that. Mad Catz needs to meet its sales projections this fiscal year to continue to meet its debt obligations, and those sales projections hinge on the success of Rock Band 4. If it doesn’t, that “significant doubt” about its ability to continue business will be proven well founded.
Can they survive? There is already discontent about the cost of new Rock Band 4 hardware and compatibility with the old instrument sets is deemed critical to the success of Rock Band 4 software. Will high software sales be enough to save Mad Catz? That seems unlikely. Even if they do hit their targets with Rock Band 4 hardware, where does Mad Catz go from there? Third party hardware markets have shifted from cheap (and often nasty) alternatives to official controllers to specialised hardware for fighting games and simulations that cost several hundred dollars, a niche market. It will be interesting to see if Mad Catz can adapt and return to profitability or if Rock Band 4 is the last hurrah for the long standing peripheral maker.
You can read the full letter and statement over at Game Informer.