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SouthPeak Interactive Corporation Reports Fiscal 2011 Second Quarter Financial Results
Feb 17, 2011 (06:02 PM EST)


MIDLOTHIAN, Va., Feb. 17, 2011 /PRNewswire/ -- SouthPeak Interactive Corporation (OTC Bulletin Board: SOPK), today announced financial results for the fiscal 2011 second quarter which ended December 31, 2010.

Second Quarter Fiscal 2011 Financial Highlights

  • Net revenues of $7.5 million, compared with $10.1 million in the comparable period in fiscal 2010
  • Total operating expenses decreased by 37% to $3.3 million, compared with $5.3 million in the second quarter of fiscal 2010
  • Net loss was ($2.1) million, or ($0.04) per share, compared with a net loss of ($2.6) million, or ($0.06) per diluted share in the comparable period in fiscal 2010
  • Adjusted EBITDA(1) was ($615,000), compared with an adjusted EBITDA of $1.3 million in the prior fiscal year period

Second Quarter Fiscal 2011 and Recent Business Highlights

  • Successfully won the legal dispute with Nobilis, regaining our rights to My Baby First Steps
  • Announced a strategic relationship with NVIDIA to pursue mobile and tablet gaming
  • Released our first educational product, Tap & Teach: The Story of Noah's Ark (Nintendo DS)
  • Increased catalog sales to approximately 29% of total sales
  • Commenced marketing campaign for the January release of Two Worlds II (Xbox 360, PS3 and PC)

"In regaining our rights to the highly popular My Baby First Steps we experienced a significant legal victory. We capitalized upon this returning My Baby to the retail channel, where we hope to continue the phenomenal sales initiated by our innovative marketing and PR strategies," said Melanie Mroz, President and CEO of SouthPeak. "In addition, the quarter saw excellent progress as we look to the future and our digital strategy, which included the acquisition of an industry veteran to lead this important part of our business model. Furthermore, our operational strategy delivered positive changes including continued and substantial expense reductions, effectively aligning our cost structure with our anticipated revenue stream."

Terry Phillips, Chairman of SouthPeak, added, "During this quarter, our substantial investment in the release of Two Worlds II delivered terrific momentum and broad-scale consumer anticipation and excitement. We are also thrilled by our new relationship with NVIDIA; we believe that they are an ideal partner as we head toward our goal of becoming a market leader in mobile and tablet gaming."

Second Quarter Fiscal 2011 Financial Summary

For the second quarter that ended December 31, 2010, SouthPeak reported net revenues of $7.5 million, compared with $10.1 million in the second quarter ended December 31, 2009. The decrease in revenues was primarily due to a 28% decrease in the number of units shipped in the fiscal 2011 period. Average net revenue per videogame unit sold increased 3%, from $15.60 to $16.10 for the three months that ended December 31, 2009 and 2010, respectively. This increase in revenue per unit shipped was attributed to the fact that titles released in the fiscal 2011 period included games for the Xbox 360 and PS3, which sell at a higher MSRP, whereas the releases in the fiscal 2010 period only included Nintendo DS and Wii product, which sell at a lower MSRP.

For the three months that ended December 31, 2010, gross profit decreased to $978,000, or 13% of revenues, from $3.2 million, or 32% of revenues, in the comparable period in 2009. The decrease in gross profit was due primarily to increased royalty expense associated with the sale of co-publishing titles during the three months ended December 31, 2010 versus the prior period.

Total operating expenses for the second quarter of fiscal 2011 decreased by 37% to $3.3 million, compared with $5.3 million in the second quarter of fiscal 2010. The decrease in operating expenses for the fiscal 2011 period was due primarily to a 56% reduction in sales and marketing expense to $974,000, compared with $2.2 million in the comparable prior year period. The reduction in sales and marketing costs was due to lower direct spending as a result of releasing fewer titles and operational cost reductions. The decrease in operating expenses was also attributed to $3.1 million in litigation costs associated with legal fees and a UK judgment associated with SouthPeak's legal proceedings with CDV Software Entertainment A.G during the three months ended December 31, 2009.

GAAP net loss for the second quarter of fiscal 2011 was ($2.1) million, or ($0.04) per share based on 57.3 million weighted average shares outstanding, compared with GAAP net loss of ($2.6) million, or ($0.06) per diluted share, based on 45.0 million weighted average shares outstanding in the second quarter of fiscal 2010.

Adjusted EBITDA for the second quarter of fiscal 2011 was ($615,000), compared with adjusted EBITDA of $1.3 million in the prior fiscal year period.

SouthPeak's financial results for the period that ended December 30, 2010 were prepared on a going concern basis. SouthPeak has taken steps to maintain its viability as a going concern and improve its prospects by attempting to expeditiously resolve its contingencies for amounts significantly less than currently accrued for, in order to reduce aggregate liabilities on the Company's condensed consolidated balance sheet and on payment terms manageable by the Company, reducing costs and expenses, selling additional product, and raising additional capital. SouthPeak has also invested in key new titles from which the anticipated profits should help improve its financial prospects.

While the Company is committed to pursuing options to continue to address its viability as a going concern, there can be no assurance that the Company's efforts will prove successful.

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 non-GAAP net income (loss) and adjusted EBITDA information in this press release. The company presents the following non-GAAP measures of 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.

The Company uses the non-GAAP measure of EBITDA as an indication of the Company's operating trends. SouthPeak defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization.




Three Months Ended

December 31,




2010


2009








Net Loss


$ (2,082,835)


$ (2,642,266)


Depr & Amort


67,031


65,095


Amort intellectual property


95,893


99,551


Income taxes


-


-


Interest


1,244,436


508,858


EBITDA


$ (675,475)


$ (1,968,762)


Noncash stock compensation


60,681


203,724


Reserve adjustments:






Loss reserved for CDV litigation


-


3,075,206


Adjusted EBITDA


$ (614,794)


$ 1,310,168











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 50 interactive entertainment games spans a variety of platforms and genres including RPG, simulation, FPS, sports, strategy, puzzle and fighting.  

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.

(1) 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 and amortization.

SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)




For the three months ended

December 31,



For the six months ended

December 31,




2010



2009



2010



2009



















Net revenues


$

7,470,053



$

10,063,952



$

8,901,912



$

26,773,601



















Cost of goods sold:

















   Product costs



3,097,437




5,149,597




3,858,719




8,696,283


   Royalties



3,298,538




1,618,962




3,231,430




6,619,633


   Intellectual property licenses



95,893




99,797




191,786




219,457



















       Total cost of goods sold



6,491,868




6,868,356




7,281,935




15,535,373



















Gross profit



978,185




3,195,596




1,619,977




11,238,228



















Operating expenses (income):

















   Warehousing and distribution



282,327




320,723




348,416




607,234


   Sales and marketing



974,498




2,215,620




1,871,169




5,870,676


   General and administrative



2,091,082




2,973,944




4,023,397




6,088,712


   Litigation costs



-




3,075,206




-




3,075,206


   Gain on settlement of trade payables



-




(3,256,489)




(585,122)




(3,256,489)



















       Total operating expenses



3,347,907




5,329,004




5,657,860




12,385,339



















Loss from operations



(2,369,722)




(2,133,408)




(4,037,883)




(1,147,111)



















Other expenses (income):

















   Change in fair value of warrant liability



(1,531,323)




-




(3,062,646)




-


   Interest and financing costs, net



1,244,436




508,858




2,308,532




808,174




































Net loss



(2,082,835)




(2,642,266)




(3,283,769)




(1,955,285)



















Basic loss per share:


$

(0.04)



$

(0.06)



$

(0.06)



$

(0.04)


Diluted loss per share:


$

(0.04)



$

(0.06)



$

(0.06)



$

(0.04)



















Weighted average number of common shares outstanding - Basic



57,252,122




45,039,292




57,140,971




44,930,125


Weighted average number of common shares outstanding - Diluted



57,252,122




45,039,292




57,140,971




44,930,125





SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS





December 31, 2010



June 30, 2010




(Unaudited)





Assets














Current assets:







Cash and cash equivalents


$

78,631



$

92,893


Accounts receivable, net of allowances of $928,451 and $5,700,931 at December 31, 2010 and June 30, 2010, respectively



1,150,873




3,703,825


Inventories



1,131,915




1,211,301


Current portion of advances on royalties



11,911,559




12,322,926


Current portion of intellectual property licenses



353,571




383,571


Related party receivables



16,260




34,509


Prepaid expenses and other current assets



457,836




695,955











Total current assets



15,100,645




18,444,980











Property and equipment, net



2,559,579




2,667,992


Advances on royalties, net of current portion



1,920,978




1,511,419


Intellectual property licenses, net of current portion



1,237,500




1,534,286


Goodwill



7,911,800




7,911,800


Deferred debt issuance costs, net



532,681




-


Intangible assets, net



10,358




17,025


Other assets



10,955




11,280











Total assets


$

29,284,496



$

32,098,782











Liabilities and Shareholders' Equity


















Current liabilities:









Line of credit


$

-



$

3,830,055


Due to factor in default



864,902




-


Secured convertible debt in default, net of discount



3,884,377




950,000


Warrant liability



1,276,102




-


Current portion of long-term debt



67,334




65,450


Production advance payable in default



3,755,104




3,755,104


Accounts payable



9,951,665




12,663,788


Accrued royalties



4,455,312




2,530,253


Accrued expenses and other current liabilities



4,877,623




3,781,711


Deferred revenues



77,312




325,301


Due to related parties



4,425




2,200


Accrued expenses - related parties



341,618




322,281


Total current liabilities



29,555,774




28,226,143











Long-term debt, net of current portion



1,507,310




1,541,081


Total liabilities



31,063,084




29,767,224











Shareholders' equity (deficit):


















Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2010 and June 30, 2010



-




-


Series A convertible preferred stock, $0.0001 par value; 15,000,000 shares authorized; 5,503,833 shares issued and outstanding at December 31, 2010 and June 30, 2010, respectively; aggregate liquidation preference of $5,503,833 at December 31, 2010



550




550


Common stock, $0.0001 par value; 190,000,000 and 90,000,000 shares authorized at December 31, 2010 and June 30, 2010, respectively; 60,181,870 and 59,774,370 shares issued and outstanding at December 31, 2010 and June 30, 2010, respectively



6,018




5,976


Additional paid-in capital



30,559,705




31,154,835


Accumulated deficit



(32,257,094)




(28,973,325)


Accumulated other comprehensive income (loss)



(87,767)




143,522











Total shareholders' equity (deficit)



(1,778,588)




2,331,558


Total liabilities and shareholders' equity (deficit)


$

29,284,496



$

32,098,782





SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)




For the six months ended

December 31,




2010



2009


Cash flows from operating activities:







Net loss


$

(3,283,769)



$

(1,955,285)


Adjustments to reconcile net loss to net cash (used in) provided by operating activities:









Depreciation and amortization



132,142




129,972


Allowances for price protection, returns, and defective merchandise



(2,463,231)




(531,050)


Bad debt expense, net of recoveries



(49,161)




(35,321)


Stock-based compensation expense



214,283




359,920


Common stock and warrants issued to vendor



-




104,500


Amortization of royalties and intellectual property licenses



960,543




5,443,825


Loss on disposal of fixed assets



-




4,839


Amortization of debt discount and issuance costs



924,403




-


Change in fair value of warrant liability



(3,062,646)




-


Fair market value adjustment to common stock issued for advances on royalties



(2,112)




-


Gain on settlement of trade payables



(585,122)




(3,256,489)











Changes in operating assets and liabilities:









Due to/from factor, net



(1,395,186)




-


Accounts receivable



7,325,432




(1,788,962)


Inventories



79,386




749,689


Advances on royalties



(1,575,876)




(3,651,309)


Related party receivables



18,249




(27,635)


Prepaid expenses and other current assets



238,119




42,696


Production advance payable



-




3,755,104


Accounts payable



(2,127,001)




(4,318,114)


Accrued royalties



1,925,059




1,279,109


Accrued expenses and other current liabilities



1,230,912




1,988,225


Accrued litigation costs



-




4,308,035


Deferred revenues



(247,989)




(2,547,339)


Accrued expenses - related parties



19,337




(47,478)











Total adjustments



1,559,541




1,962,217











Net cash (used in) provided by operating activities



(1,724,228)




6,932











Cash flows from investing activities:









Purchases of property and equipment



(16,737)




(65,544)


Change in restricted cash



-




395,982


Net cash (used in) provided by investing activities



(16,737)




330,438











Cash flows from financing activities:









Proceeds from line of credit



-




16,557,571


Repayments of line of credit



(3,830,055)




(16,596,792)


Proceeds from inventory financing



1,710,281




-


Repayments of inventory financing



(1,710,281)




-


Repayments of long-term debt



(31,887)




(25,013)


Net proceeds from (repayments of) amounts due to shareholders



-




(232,440)


Net proceeds from (repayments of) amounts due to related parties



2,225




(120,645)


Proceeds from the issuance of subordinated convertible promissory notes



7,000,000




-


Payment of debt issuance costs



(733,959)




-


Repayment of subordinated convertible promissory notes



(450,000)




-


Proceeds from the exercise of common stock warrants



1,668




-











Net cash provided by (used in) financing activities



1,957,992




(417,319)











Effect of exchange rate changes on cash and cash equivalents



(231,289)




90,247











Net increase (decrease) in cash and cash equivalents



(14,262)




10,298


Cash and cash equivalents at beginning of the period



92,893




648,311











Cash and cash equivalents at end of the period


$

78,631



$

658,609











Supplemental cash flow information:









Cash paid during the period for interest


$

514,642



$

243,011











Supplemental disclosure of non-cash activities:









Fair value of common stock warrant liability at issuance date


$

4,338,748



$

-


Fair market value adjustment to common stock issued for advances on royalties


$

811,039



$

-


Conversion of junior secured subordinated convertible promissory note to senior secured convertible note


$

500,000



$

-


Issuance of vested restricted stock


$

40



$

-


Contingent purchase price payment obligation related to Gamecock acquisition


$

-



$

597,124


Decrease in goodwill with respect to finalizing purchase price allocation


$

-



$

55,423


Purchase of vehicle through the assumption of a note payable


$

-



$

73,459





Media Contact: Richard Iggo, +1-817-305-0055;

Investor Contact: investorrealations@southpeakgames.com

SOURCE SouthPeak Interactive Corporation