EX-99.1 2 v198910_ex99-1.htm
PRESS RELEASE
 
SouthPeak Interactive Corporation Reports
Financial Results for Fiscal 2010
 
Annual Net Revenues of $40.3 Million, Operating Expenses Decrease by 32%;
Strategic Release of New and Popular Sequel Titles to Accelerate Growth in
Fiscal 2011
 
 
MIDLOTHIAN, VA – October 13, 2010 – SouthPeak Interactive Corporation (OTC Bulletin Board: SOPK) today announced financial results for the fiscal 2010 full year ended June 30, 2010.
 
Fiscal 2010 and Recent Financial Highlights
 
·  
Net revenues of $40.3 million, compared with $47.3 million in fiscal 2009.
 
·  
Gross profit improved 2% to $11.8 million, compared with $11.7 million in fiscal 2009.
 
·  
Total operating expenses decreased by 32% to $16.1 million, compared with $23.5 million in fiscal 2009.
 
·  
Net loss attributable to common shareholders improved to ($5.8) million, or ($0.12) per share, compared with a net loss of ($13.3) million, or ($0.36) per share, in fiscal 2009.
 
·  
Adjusted EBITDA1 loss was ($1.7) million, compared with an adjusted EBITDA loss of ($5.3) million in fiscal 2009.
 
·  
Secured $7.5 million in capital through the issuance of senior convertible notes and warrants in July and August 2010.
 
·  
Strengthened cash position by entering into a factoring agreement in July 2010 with Rosenthal & Rosenthal, Inc. for up to $10.0 million and a master purchase order assignment agreement in September 2010 with Wells Fargo Bank, National Association for up to $2.0 million.
 
 
Fiscal 2010 and Recent Business Highlights
 
·  
Increased total units sold to 2.6 million from 2.4 million in fiscal 2009.
 
·  
Secured exclusive North American distribution license and strategic partnership agreement with Koch Media’s Deep Silver as a minority shareholder in SouthPeak.
 
·  
In conjunction with Deep Silver, completed first exclusive publishing agreement (in North America) in September for Playstation®Move game Get Fit with Mel B.
 
_______________________________________
 
 
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·  
Acquired rights to publish Stronghold 3, Firefly Studio’s franchise that has sold over 5 million units, via retail channels and digital distribution.
 
·  
Resolved litigation with CDV and distribution dispute with Paradox Interactive AB.
 
·  
Improved internal and financial control measures including appointing a Chief Financial Officer and implementing a closing calendar schedule and financial reporting consolidation processes and procedures.
 
·  
Released 29 titles compared with 18 in fiscal 2009. Leading titles included: Popular sequels My Baby First Steps (Nintendo DS™ and Wii™) and Dementium II (Nintendo DS), as well as Brave: A Warrior’s Tale (Xbox 360® and Wii), Fast Food Panic (Nintendo DS), Horrid Henry (Nintendo DS, Wii and Windows PC), Prison Break (PS3™, Xbox 360 and Windows PC), Risen (Xbox 360), Section 8 (Xbox360 and Windows PC), TNA Impact! Cross the Line (Nintendo DS and PS3™), and 3D Game Heroes (PS3).
 
·  
Approximately 18 titles currently under development for intended release in fiscal 2011. As of June 30, 2010, SouthPeak had approximately $15.8 million invested in game development and intellectual property for future title releases.
 

“While fiscal 2010 was a challenging year, we made critical improvements to our infrastructure and carefully controlled our costs to better align our operations with our revenue stream. We are now better positioned to execute our strategic initiatives and grow our business in fiscal 2011,” said Melanie Mroz, CEO of SouthPeak. “We effectively concluded our outstanding legal disputes, as well as improved our internal controls and financial reporting procedures. Following the close of the fiscal year we strengthened our balance sheet securing access of up to $12 million in working capital, which allows us additional flexibility to accomplish our growth objectives. While our top line was impacted by the volatile retail environment in fiscal 2010, based on our strategy of releasing fewer next generation titles while implementing strict expense control, we demonstrated significant year-over-year improvement to our bottom line.

“During the fiscal year, our leading revenue generating titles were Section 8, My Baby Girl & First Steps, Paradox distribution titles and Horrid Henry. Our Deep Silver title releases, Risen and Prison Break, were also top contributors to our revenue growth, generating positive margin contribution. Through our important strategic alliance with Deep Silver, during the year we gained a sizable stakeholder as well as access to a catalogue of new titles where we see considerable upside potential. We have a number of additional titles planned for release under this partnership for the 2011 fiscal year, including our first title for the next generation PlayStation Move platform, Get Fit with Mel B.

“Fiscal 2011 will be a continuation of controlled expense and a carefully managed title release schedule. Our focus remains on increasing sales with new titles that address gaming in a way that separates us from our competition, and popular sequels that offer a built-in user base. Enhancing our sales through titles that we can leverage through both retail and digital offerings will be increasingly important as we seek to maximize our digital portfolio. During fiscal 2010 we introduced our first games for the iPhone, and we see a sizeable opportunity to expand our digital offering to realize even greater margin contributions and increase our return on invested capital. With this foundation in place we believe we are well positioned to meet our goals for the 2011 fiscal year to grow our revenue, reduce our costs as a percent of revenue, and demonstrate additional bottom line improvement.”

 
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Terry Phillips, Chairman of SouthPeak, added, “We are actively generating momentum for some of our games designed for the hardcore gamer, such as Two Worlds II and Stronghold 3. We are particularly excited about releasing the long awaited third installment of FireFly Studios’ popular global franchise Stronghold, which we expect to be a hit among both retail and digital platforms. Through our Deep Silver partnership, we also signed our first publishing agreement for exclusive North American publishing rights to PlayStation’s new Move platform for Get Fit With Mel B, which we expect to release in the Fall. Being at the forefront of new platforms and expanding digital market opportunities remains an important competitive tool to help build our brand, grow our business and increase shareholder value.”
 
Fiscal 2010 Financial Summary
 
For the fiscal year ended June 30, 2010, SouthPeak reported net revenues of $40.3 million, compared with $47.3 million for the fiscal year ended June 30, 2009. The decrease in revenues was primarily due to a decrease in the number of titles released for next generation platforms and fewer units sold for next generation platforms Xbox 360 and PS3, which sell at a higher MSRP compared with Nintendo DS and Wii.

For fiscal 2010 gross profit increased to $11.8 million, or 29% of revenues, from $11.7 million, or 25% of revenues, for fiscal 2009. The increase in gross profit is attributable to prior period write offs of acquired game sequels from SouthPeak’s acquisition of Gamecock in October 2008.

Total operating expenses for fiscal 2010 decreased by 32% to $16.1 million, compared with $23.5 million in fiscal 2009. The significant improvement in operating expense was due primarily to a $3.3 million gain on settlement of trade payables associated with the termination of a co-publishing and distribution agreement. SouthPeak also reduced its sales and marketing expenses by 33% to $7.9 million as a result of SouthPeak’s effective cost reduction strategy. These gains were partially offset by a 16% increase in general and administrative expenses of $11.3 million during fiscal 2010, primarily due to an approximately $1.5 million increase in professional fees comprised primarily of increased Sarbanes-Oxley compliance consulting fees, and increased legal costs associated with increased litigation during the year, and costs associated with being a public company. SouthPeak expects its general and administrative costs to decrease in fiscal 2011.

Net loss attributable to common shareholders improved to ($5.8) million, or ($0.12) per share based on 47.9 million weighted average shares outstanding, compared with a net loss of ($13.3) million, or ($0.36) per share based on 37.0 million weighted average shares outstanding, in fiscal 2009.
 
 
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Adjusted EBITDA loss for fiscal 2010 was ($1.7) million, compared with an adjusted EBITDA loss of ($5.3) million in fiscal 2009.

SouthPeak’s annual financial results for the period ended June 30, 2010 were prepared on a going concern basis. SouthPeak has taken steps to maintain its viability as a going concern by entering into a factoring agreement with Rosenthal & Rosenthal, Inc. and is currently in the process of expeditiously resolving its contingencies for amounts significantly less than currently accrued for in order to reduce aggregate liabilities on its balance sheet on payments terms manageable by the Company. In addition SouthPeak is actively controlling its cost structure to better align with its revenue stream. 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.

Conference Call
 
SouthPeak will hold an investment community conference call to discuss its financial results for the period, its latest game sales and prospects today, Wednesday, October 13, 2010, at 5:00 p.m. Eastern time.

To participate in the conference call, please dial (877) 407-8033 in the United States, or (201) 689-8033 internationally. Investors may also access a live audio webcast of the conference call on the events page of the Company’s investor relations website at http://investor.southpeakgames.com/southpeakgames/events.asp.

A replay of the webcast will be available approximately two hours after the conclusion of the live call and will remain available for one year following the live event. An audio replay will be available beginning approximately one hour after the conclusion of the call and will be made available until October 27, 2010. The audio replay can be accessed by dialing (877) 660-6853 or (201) 612-7415. When prompted, enter account number: 286 followed by access ID number: 358795.

Use of Non-GAAP Financial Information
To supplement SouthPeak's consolidated condensed financial statements presented on a GAAP basis, SouthPeak also presents certain non-GAAP measures including adjusted EBITDA information in this press release. The Company presents non-GAAP measures of the following results: operating income and earnings per share.  Each is adjusted to exclude special items.
 
The Company's management believes these non-GAAP measures provide investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because they exclude losses that management believes are not indicative of the ongoing operating results of the business.  In addition, these non-GAAP measures are used by management to evaluate the operating performance of the Company.  The presentation of this additional information is not meant to be considered in isolation or as a substitute for operating income or earnings per share as determined in accordance with GAAP.
 
 
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The Company uses adjusted EBITDA as a measure of the Company's operating trends. Adjusted EBITDA is a non-GAAP measurement that the Company uses as a metric to provide information about SouthPeak’s operating trends. SouthPeak defines adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and certain non-cash and cash costs that do not reflect charges related to the Company’s core operations.
 
   
12 Months Ended June 30,
  
   
2010
    
2009
  
Net Income
   $ (5,827,525 )     (12,206,652 )
Depreciation and Amortization
     269,235       378,287  
Income Taxes (in G&A expense)
     -       (50,332 )
Interest
     1,622,225       399,249  
Amortize Intellectual Property
     410,996       454,436  
EBITDA
   $ (3,525,069 )   $ (11,025,012 )
Noncash Compensation
     690,706       741,433  
Stock Issued to Seller
     245,000       -  
Advance Royalty Impairment
     36,000       -  
Restructuring costs
     -       639,210  
Transaction Costs in P&L
     -       64,628  
Registration Statement Penalty
     -       196,511  
Bad Debt Expense
     -       596,226  
Contingent Liability
     -       56,625  
Certain Non-recurring Costs Associated with the CDV Litigation
     866,032       296,644  
Advance Royalty Impairment
     -       2,017,294  
Sequel Game Title Impairment
     -       1,142,000  
Adjusted EBITDA
   $ (1,687,331 )   $ (5,274,441 )

About SouthPeak Interactive Corporation
SouthPeak Interactive Corporation develops and publishes interactive entertainment software for all current hardware platforms including: PlayStation®3 computer entertainment system, PSP® (PlayStation®Portable) system, PlayStation®2 computer entertainment system, PSP®go system, Xbox 360® videogame and entertainment system, Wii™, Nintendo DS™, Nintendo DSi™ and PC. SouthPeak’s games cover all major genres including action/adventure, role playing, racing, puzzle strategy, fighting and combat. SouthPeak’s products are sold in retail outlets in North America, Europe, Australia and Asia. SouthPeak is headquartered in Midlothian, Virginia, and has offices in Grapevine, Texas and Leicester, England.

SouthPeak’s extensive portfolio of over 60 interactive entertainment games spans a variety of platforms and genres including RPG, simulation, FPS, sports, strategy, puzzle and fighting.

 
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For additional information, please visit SouthPeak’s corporate website: www.southpeakgames.com.

If you would like to be added to SouthPeak’s email list to receive news directly, please send your request to southpeak@tpg-ir.com.
 
Forward-Looking Statements
 
This release contains “forward-looking” statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These are statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “expects,” “projects,” “anticipates,” “estimates,” “believes,” “intends,” “plans,” “should,” “seeks,” and similar expressions. This press release contains forward-looking statements relating to, among other things, SouthPeak’s expectations and assumptions concerning future financial performance. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual future results to differ materially from those projected or contemplated in the forward-looking statements. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in SouthPeak’s filings with the Securities and Exchange Commission.
 
The risks and uncertainties referred to above include, but are not limited to, risks associated with SouthPeak’s potential inability to compete with larger businesses in its industry, the limitations of SouthPeak’s business model, SouthPeak’s potential inability to anticipate and adapt to changing technology, the possibility that SouthPeak may not be able to enter into publishing arrangements with some developers, SouthPeak’s dependence on vendors to meet its commitments to suppliers, SouthPeak’s dependence on hardware manufactures to publish new videogames, SouthPeak’s potential inability to recuperate the up-front license fees paid to console manufacturers, SouthPeak’s dependence on a limited number of customers, SouthPeak’s potential dependence on the success of a few videogames, SouthPeak’s dependence on developers to deliver their videogames on time, the potential of litigation, interference with SouthPeak’s business from the adoption of governmental regulations; and the inability to obtain additional financing to grow its business.
 

 
Investor Contact:
Brandi Floberg or Lee Roth
212-481-2050
southpeak@tpg-ir.com
 
 
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SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2010
    
June 30, 2009
  
             
Assets 
            
             
Current assets:
            
Cash and cash equivalents
  
$
92,893
    
$
648,311
  
Restricted cash
    
-
      
1,245,582
  
Accounts receivable, net of allowances of $5,700,931 and $7,214,984 and at June 30, 2010 and 2009, respectively
    
3,703,825
      
4,972,417
  
Inventories
    
1,211,301
      
4,459,837
  
Current portion of advances on royalties
    
12,322,926
      
8,435,415
  
Current portion of intellectual property licenses
    
383,571
      
410,995
  
Related party receivables
    
34,509
      
33,207
  
Prepaid expenses and other current assets
    
695,955
      
573,145
  
                 
Total current assets
    
18,444,980
      
20,778,909
  
                 
Property and equipment, net
    
2,667,992
      
2,754,139
  
Advances on royalties, net of current portion
    
1,511,419
      
1,556,820
  
Intellectual property licenses, net of current portion
    
1,534,286
      
1,917,858
  
Goodwill
    
7,911,800
      
7,490,065
  
Intangible assets, net
    
17,025
      
43,810
  
Other assets
    
11,280
      
11,872
  
                 
Total assets
  
$
32,098,782
    
$
34,553,473
  
                 
Liabilities and Shareholders’ Equity
                
                 
Current liabilities:
                
Line of credit
  
$
3,830,055
    
$
5,349,953
  
Current maturities of long-term debt
    
65,450
      
50,855
  
Production advance payable in default
    
3,755,104
      
-
  
Accounts payable
    
12,663,788
      
19,649,441
  
Accrued royalties
    
2,530,253
      
414,696
  
Accrued expenses and other current liabilities
    
3,781,711
      
2,419,100
  
Secured subordinated convertible promissory notes
    
950,000
      
-
  
Deferred revenues
    
325,301
      
2,842,640
  
Due to shareholders
    
-
      
232,440
  
Due to related parties
    
2,200
      
125,045
  
Accrued expenses - related parties
    
322,281
      
221,493
  
Total current liabilities
    
28,226,143
      
31,305,663
  
                 
Long-term debt, net of current maturities
    
1,541,081
      
1,538,956
  
Total liabilities
    
29,767,224
      
32,844,619
  
                 
Commitments and contingencies
    
-
      
-
  
                 
Shareholders’ equity:
                
                 
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at June 30, 2010 and 2009
    
-
      
-
  
Series A convertible preferred stock, $0.0001 par value; 15,000,000 shares authorized; 5,503,833 and 5,953,833 shares issued and outstanding at June 30, 2010 and 2009, respectively; aggregate liquidation preference of $5,503,833
    
550
      
595
  
Common stock, $0.0001 par value; 90,000,000 shares authorized; 59,774,370 and 44,530,100 shares issued and outstanding at June 30, 2010 and 2009, respectively
    
5,976
      
4,453
  
Additional paid-in capital
    
31,154,835
      
25,210,926
  
Accumulated deficit
    
(28,973,325
)
    
(23,145,800
)
Accumulated other comprehensive income (loss)
    
143,522
      
(361,320
) 
                 
Total shareholders’ equity
    
2,331,558
      
1,708,854
  
Total liabilities and shareholders’ equity
  
$
32,098,782
    
$
34,553,473
  
 
 
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SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
For the years ended June 30,
  
   
2010
    
2009
  
             
Net revenues
  
$
40,299,139
    
$
47,279,694
  
                 
Cost of goods sold:
                
Product costs
    
15,655,261
      
24,377,621
  
Royalties
    
12,383,362
      
9,654,810
  
Write-off of acquired game sequel titles
    
-
      
1,142,000
  
Intellectual property licenses
    
411,243
      
454,437
  
                 
Total cost of goods sold
    
28,449,866
      
35,628,868
  
                 
Gross profit
    
11,849,273
      
11,650,826
  
                 
Operating expenses (income): 
                
Warehousing and distribution
    
1,149,338
      
1,254,947
  
Sales and marketing
    
7,882,584
      
11,778,958
  
General and administrative
    
11,251,764
      
9,720,488
  
Restructuring costs
    
-
      
639,210
  
Transaction costs
    
-
      
64,628
  
Litigation costs
    
3,075,206
      
-
  
Loss on settlement of registration rights penalty
    
111,497
      
-
  
Gain on settlement of contingent purchase price obligation
    
(908,210
)
    
-
  
Gain on extinguishment of accrued litigation costs
    
(3,249,610
)
    
-
  
    Gain on settlement of trade payables
    
(3,257,996
) 
    
-
  
                 
Total operating expenses
    
16,054,573
      
23,458,231
  
                 
Loss from operations
    
(4,205,300
)
    
(11,807,405
) 
                 
Interest expense, net
    
1,622,225
      
399,247
  
                 
Loss before income tax expense
    
(5,827,525
)
    
(12,206,652
)
Income tax expense
    
-
      
-
  
                 
Net loss
    
(5,827,525
)
    
(12,206,652
) 
                 
Deemed dividend related to beneficial conversion feature on Series A convertible preferred stock
    
-
      
1,142,439
  
                 
Net loss attributable to common shareholders
  
$
(5,827,525
)
  
$
(13,349,091
)
                 
Basic loss per share: 
  
$
(0.12
)
  
$
(0.36
)
Diluted loss per share: 
  
$
(0.12
)
  
$
(0.36
)
                 
Weighted average number of common shares outstanding - Basic
    
47,906,342
      
36,978,758
  
Weighted average number of common shares outstanding - Diluted
    
47,906,342
      
36,978,758
  

 
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