Over the last couple weeks IndustryGamers had heard whispers from sources that Two Worlds publisher SouthPeak Interactive might be in trouble. Indeed, today those suspicions were confirmed as SouthPeak's recent 10-Q SEC filing has revealed that the business is now operating on a "going-concern basis."
The filing reads, "The ability of the Company to continue as a going concern is predicated upon, among other things, continuing to generate positive cash flows from operations, curing the default on the production advance payable, renewing its line of credit with SunTrust Banks, Inc. and/or obtaining alternative or additional financing, and the resolution of various contingencies."
Management said that it's looking not only to reduce or eliminate quarterly losses, but it's also hoping "to expeditiously resolve its contingencies for amounts significantly less than currently accrued for." The filing continues, "While the Company is committed to pursuing these options and others to address its viability as a going concern, there can be no assurance that these plans will be successfully completed; and therefore, there is uncertainty about the Company’s ability to realize its assets or satisfy its liabilities in the normal course of business."
One of these liabilities is apparently a lawsuit with a video game distributor in the U.K. A court ruled against a subsidiary of SouthPeak last November, which led to litigation costs of more than $4.3 million.
Today, SouthPeak also announced its second-quarter fiscal results for the holiday period ended December 31. Net loss totaled $2.6 million as sales fell from $17.3 million to $10.1 million. On the bright side, the publisher's My Baby unit sales were up 45% and SouthPeak also secured a strategic partnership agreement with Koch Media’s Deep Silver to exclusively distribute Deep Silver’s games in North America.
Melanie Mroz, CEO of SouthPeak, commented, “Given the challenging and crowded retail market that continues to operate under unprecedented inventory controls, we shipped only two new titles as a strategic decision to release those games that we knew would succeed during the peak fourth calendar quarter selling season. We believe this defensive posturing has allowed us to fare relatively well against strong industry headwinds as we continue to execute on our proven business strategy. Among our shipments was My Baby First Steps, to further capitalize on our popular series. Our My Baby franchise continues to be among our top sellers and was a clear standout in the holiday season. Unit sales from this franchise have increased 45% compared with last holiday season when we introduced the first title in this series."
She continued, “From an operational standpoint, we also made significant expense reduction gains and generated positive operating cash flow. During the quarter, we reduced our operating expenses by 32% year-over-year based largely on a $3.3 million gain on the settlement of trades payables, which was primarily related to the termination of a distribution and co-publishing agreement, and a 44% reduction in sales and marketing due to lower spending based on our decision to release fewer titles in the period in order to best align our cost structure with our anticipated revenue stream.”
Terry Phillips, Chairman of SouthPeak, added, “Our unique business model allows us to leverage our relationships with independent developers to optimize our risk-return profile and substantially control costs. We are seeing an increasing market shift of larger publishers focusing on their owned and branded games, which offers SouthPeak increasing access to new titles at nominal fees from emerging developers. Partnerships such as our recent Deep Silver agreement also provide us with access to exciting new titles to capture additional revenue streams and enhance our global brand. Under this agreement we plan to release popular titles such as Prison Break for the Xbox 360 and PS3, and Risen for Xbox 360 in March. To further diversify our offering, later this year we plan to enter the social gaming sector, where we see a significant opportunity to grow our business through new and relevant titles introductions for this growing platform. We are confident that this strategy will continue to serve us well and lend SouthPeak a considerable advantage as we work to introduce new titles and improve our sales to stay ahead of industry trends. We believe we can gain additional traction with our existing game titles, as well as introduce new games that broaden our exciting portfolio."
