Attached files
| file | filename |
|---|---|
| 8-K - SouthPeak Interactive CORP | v174835_8k.htm |
| EX-99.1 - SouthPeak Interactive CORP | v174835_ex99-1.htm |
Transcript
of
SouthPeak
Interactive Corporation (SOPK)
Second
Quarter Fiscal 2010 Earnings Conference Call
February
17, 2010
Participants
Melanie
Mroz, President and Chief Executive Officer
Reba
McDermott, Interim Chief Accounting Officer
Terry
Phillips, Chairman of the Board
Scott
Silverman, Vice President of Corporate Development
Presentation
Operator
Greetings
and welcome to the SouthPeak Interactive Corporation Second Quarter Fiscal 2010
Earnings Conference Call. At this time, all participants are on a
listen-only mode. A brief question and answer session will follow the
formal presentation. If anyone should require operator assistance
during the conference, please press *0 on your telephone keypad. As a
reminder, this conference is being recorded.
It is now
my pleasure to introduce your host, Mr. Scott Silverman, Vice President of
Corporate Development. Thank you, Mr. Silverman, you may now
begin.
Scott Silverman – SouthPeak
Interactive Corporation – Vice President of Corporate
Development
Thank you
and good morning, everyone, and welcome to SouthPeak Interactive Corporation’s
Fiscal 2010 Second Quarter Earnings Conference Call.
On the
call today will be our CEO, Melanie Mroz, to provide a brief overview; our
Interim Chief Accounting Officer, Reba McDermott, will discuss our fiscal 2010
second quarter financial results; and our Chairman, Terry Phillips, will discuss
our product lineup.
Before we
begin, I would first like to quickly review on Safe Harbor statement by
reminding everyone that statements made during this call that are not historical
facts are considered forward-looking statements under the Federal Securities
Laws. These forward-looking statements are based on the beliefs of
our management as well as assumptions made by information currently available to
us. We assume no duty or obligation to update these forward-looking
statements even though our situation may change in the future. Actual
operating results may vary significantly from these forward-looking statements
based on a variety of factors. We encourage you to review our filings
with the Securities and Exchange Commission which are available at www.sec.gov. For
additional information on risk factors that could cause actual results to differ
materially from our current expectations, please read our annual and quarterly
reports filed with the SEC.
We also
intend to discuss non-GAAP measures. Our reconciliation of GAAP and
non-GAAP results is available in the press release we issued today which is
available on our website at www.southpeakgames.com.
I would
now like to take the time to turn the call over to our CEO, Melanie
Mroz.
Melanie Mroz – SouthPeak
Interactive Corporation – President and Chief Executive
Officer
Thank
you, Scott, and thank you all for joining us today.
This
morning we reported our quarterly financial results for the period ended
December 31, 2009. Given the challenging and crowded retail market
that continues to operate under unprecedented inventory controls, we released
only two new titles during this period since it is a strategic decision to
release those games that we knew would succeed during the peak holiday
season. We believe this defensive posturing has allowed us to fare
relatively well against strong industry headwinds. To this end, we
have taken what we believe to be the appropriate steps to manage our business
during a challenging time.
In the
December quarter, we were vigilant on managing our expenses and generated
positive operating cash flow. Specifically, we decreased our
operating expenses by 29% year-over-year which included a 44% reduction in sales
and marketing due to a 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. We also recognize a $3.3 million gain on
the settlement of the trade’s payables, which was primarily related to the
termination of a distribution and co-publishing agreement.
Overall,
we are pleased with the progress we have made given the difficult
environment. On a year-to-date basis, our revenues are up
approximately 4% over last year. We attribute much of our ability to
succeed to the proven strength of our business model which allows us to leverage
our relationships with independent developers, to optimize our risks return
profile, and substantially control cost.
As I
mentioned, we introduced two new titles during the holiday
season. These included Horrid Henry for Nintendo DS, Wii, and PC and
My Baby First Steps for Nintendo DS and Wii. We also began shipping
Fast Food Panic at the very end of the quarter so to reach the store shelves for
the January 7th launch date.
My Baby
First Steps marks our newest addition to our popular My Baby
franchise. This game series continues to be among our top sellers and
was a clear standout in the recent holiday season. Including the
addition of this game, we increased the number of My Baby franchise unit shipped
by 45% this holiday season compared with the same period last year when the
original My Baby game was released.
We plan
to continue to leverage our popular games to introduce sequels which provide us
with a built-in user base as well increase the longevity of our most successful
titles. We believe we can gain additional traction with our existing
game titles as well as introduce new games that broaden our exciting
portfolio.
Horrid
Henry which we launch at the end of October for Nintendo DS, Wii, and PC in the
UK and several other territories also performed well in this
period. We remained on the top 15 DS chart in the UK throughout the
holiday season.
We’re
also continuing to penetrate the digital download market. Increasing
digital download content for our games is in line with our strategy to make our
content readily accessible to further broaden our reach and capture an
additional revenue stream from our existing content. In this same
vein, we have realized an opportunity to broaden our direct to consumer titles
and plan to further diversify our offering; we enter into the social gaming
sector. We see a significant opportunity to extend our business to a
new and relevant title introduction to this growing platform.
As an
additional means to broadening our offering, in December we launched
Schrodinger’s Rat for the iPhone and iPod. This marks our entry into
the mobile marketplace and while still early, we are pleased with the initial
performance of this title.
In line
with our growth strategy, we are on track to release new titles this year for
all the major platforms including Blood Bowl, Crime Scene, Dementium 2, Sushi Go
Round, 3Dot Heroes, and TNA iMPACT: Cross the Line.
Importantly,
we are now beginning to see positive signs of market recovery and increased
consumer spending. Industry pundits agree that the sector is on the
steady track to recovering in calendar 2010. Having weathered what we
believe to be the worst of the storm, we are well positioned in uptick and
growth for the remainder of the year.
With that
overview, I would now like to turn the call over to Reba McDermott, our Chief
Accounting Officer, to provide a summary of our financial results for the
period. Reba?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
Thank
you, Melanie, and good morning everyone.
On
today’s call, I will review SouthPeak’s financial performance for the fiscal
2010 second quarter ended December 31, 2009. Revenue for the quarter
was approximately $10.1 million, a decrease of 42% from revenue of $17.3 million
for the comparable period in fiscal year 2009. The decrease in
revenue was primarily driven by a decrease in the number of new titles we’ve
released. Additionally, last year’s quarter included releases of
titles for the Xbox 360 and PS3, which have a higher MSRP, whereas this year we
shipped predominantly Nintendo Wii and DS products.
For the
three months ended December 31, 2009, gross profit decreased to $3.2 million, or
32% of revenues, from $8.8 million, or 51% of revenues, in the
2008. The year-over-year decrease in gross profit was due primarily
to selling fewer units for next generation platforms which have a higher MSRP
and an overall lower royalty rate as the percentage of wholesale
prices.
Total
operating expenses for the second quarter of fiscal 2010 decreased by 29% to
$5.3 million compared with $7.5 million in the second quarter of fiscal
2009. The decrease in operating expenses for the fiscal 2010 period
was due primarily to a $3.3 million gain in the settlement of trade
payables resulting from the termination of a distribution and co-publishing
agreement. This includes the recognition of certain profits relating
to items that were expensed in prior periods as well as benefit for assuming
certain future liabilities relating to field inventory and price protections
going forward. We recorded no gain or loss for the settlement of
trades payable in the fiscal 2009 period.
Additionally,
we reduced our sales and marketing expenses by 44% to $2.2 million compared with
$4.0 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 benefiting from past marketing investment in the My
Baby brand.
These
gains were partially offset by a 19% year-over-year increase in our warehousing
and distribution expenses. This increase was primarily attributed the
sales in the quarter being predominantly for Nintendo DS and Wii products which
have a lower MSRP and certain shipping costs that are the same whether the unit
being shipped was a $59.99 MSRP or a $29.99 MSRP.
Also
offsetting our gains in operating expenses was a $3.1 million charge in
litigation costs and a reserve associated with our legal proceedings with CDV
Software Entertainment. Although we believed our true financial
exposure is substantially less than this, we continue to diligently pursue a
reasonable settlement with the party.
GAAP net
loss for the second quarter of fiscal 2010 was $2.6 million including a charge
of $3.1 million relating to our litigation with CDV, or $0.06 per share based on
45 million weighted average shares outstanding. This compares with a
GAAP net income of $1.2 million or $0.02 per diluted share in the second quarter
of fiscal 2009 based on 53.2 million weighted average shares
outstanding.
On a
non-GAAP basis, we reported net income of $433,000, or $0.01 per diluted share
for the three months ending December 31, 2009 which exclude the $3.1 million
charge attributed to our CDV litigation. This compares with a
non-GAAP net income of $1.7 million or $0.05 per diluted share for the three
months ended December 31, 2008 which excludes a $561,000 charge in restructuring
expenses.
Earnings
before interest, taxes, depreciation, and amortization or adjusted EBITDA for
the second quarter for fiscal 2010 was $1.4 million compared with adjusted
EBITDA of $2.9 million in the prior fiscal year period.
Turning
to our cash flow statement, our cash flow from operations for the fiscal 2010
second quarter was $7000 compared with a cash flow deficit of $6.8 million for
the fiscal 2009 second quarter.
Our
quarterly report for the period ended December 31, 2009 indicates a going
concern from our independent auditor, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of
business. Our ability 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 the
credit line with SunTrust Banks, and/or obtaining alternative or additional
financing and the resolution of various contingencies. We are
currently in the process of renewing our line of credit with SunTrust as well as
attempting to expeditiously resolve our contingencies for amounts significantly
less than currently accrued for in order to reduce our aggregate liabilities on
our balance sheet as well as actively controlling our cost structure to better
align with our revenue stream. We are committed to pursuing these
options and others to address our viability as a going concern but there can be
no assurance that these plans will be successfully completed.
That
concludes my comments on the financial results so I would like to turn the call
over to our Chairman, Terry Phillips.
Terry Phillips – SouthPeak
Interactive Corporation – Chairman of the Board
Thank
you, Reba, and good morning, everyone.
With that
overview of the quarter and before we open the call for your questions, I would
like to take a moment to discuss the progress with several of our newest titles
as well as our growth initiatives including some of our upcoming
titles.
Our
recent new title launches are performing well and we are beginning to see an
increase in consumer demand for our products. Blood Bowl to PC and
Xbox 360 is among our newest titles. We launched this game at the end
of January and are pleased with initial results. This game brings to
life the popular Fantasy Football board game using creative characters and
smooth animations and was developed in conjunction with Games Workshop and based
on the successful Warhammer brand.
To expand
on our digital opportunity, as Melanie has mentioned, we are turning our
attention to the social gaming market. With social gaming’s
increasing popularity, we see significant opportunity here to expand our
offering and our brand among direct to consumer market. We are
excited to announce that we plan to enter this phase in the near term with our
first game planned for launch this year for Facebook, one of the most traffic
social networking sites, where we believe we can gain immediate
traction.
In terms
of our pipeline, we are also on track to launch approximately 20 new titles this
calendar year. This summer, we plan to launch Two Worlds 2 for Xbox
360, PlayStation 3, and PC. With the inclusion of the PS3 in this
launch, we will be expanding this title to a new platform as the original was
only available for Xbox 360 and PC. We had tremendous success with
Two Worlds and expect that the enhancements to the sequel will provide
additional interests to gamers who loved the first version as well as new
players.
We are
also on track to launch our branded products including Sushi Go Round for the
DS, the Wii, and the iPhone this winter and TNA iMPACT: Cross the
Line for PSP and PSPgo this summer.
We are
seeing an increasing market shift of larger publishers focusing on their own
core IPs and branded products which offer us escalating access to new titles in
emerging brands at price points that were historically much
higher. We are confident that this strategy will continue to serve us
well and lend SouthPeak a considerable advantage as we begin work to introduce
new titles and improve our sales with products that are attached to a consumer
brand which will allow us 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.
Partnerships
such as our recent agreement with Koch Media’s Deep Silver align us with
well-respected and established companies and also provide us with access to an
exciting product lineup on all current generation platforms. We are
pleased to announce that we will soon launch our first two games under this
agreement with the popular titles Risen for the Xbox 360 and Prison Break for
the Xbox 360 and the PS3. This deal is a result of our continued
investment in our infrastructure to further develop a robust publishing
platform.
We
currently have approximately 30 intellectual products under development in new
exciting titles scheduled for introduction later this year. Our
pipeline in new release represents a variety of games designed to capture
audiences across the board as we are seeing an exciting demographic shift that
it doesn’t rely solely on hardcore gamers. This opens new avenues for
us as we look to introduce additional titles that appeal to families, women, and
casual gamers across all major platforms.
We
currently have an extensive portfolio of over 50 interactive entertainment games
that stand a variety of platforms and genres including RPG, simulation, first
version shooters, sports, strategy, puzzle, and fighting which allows us the
ability to appeal to all ages and interests.
We are
confident that SouthPeak is positioned from impressive growth in 2010 and beyond
and we look forward to keeping you updated with our progress. To keep
you up to date with our latest developments, you can visit our website www.southpeakgames.com.
Thank you
for your attention and this time, I would now like to open the call for
questions. Operator?
Operator
Thank
you. We will now be conducting a question and answer
session. If you would like to ask a question, please press *1 on your
telephone keypad. A confirmation tone will indicate your line is in
the question queue. You may press *2 if you would like to remove your
question from the queue. For participants using speaker equipment, it
may be necessary to pick up your handset before pressing the *
keys. Again, if you would like to ask a question, please press *1 on
your telephone keypads at this time. One moment please while we pool
for questions.
Again,
ladies and gentlemen, if you would like to ask a question, please press *1 on
your telephone keypads at this time.
Thank
you. Our first question is coming from Adam
Hershey. Please state your affiliation and proceed with your
question.
Adam Hershey – SIAR
Capital
Hi. Good
morning. Adam Hershey, SIAR Capital. How are
you?
Well, I
just wanted to get a little more clarification on the $3.1 million in litigation
cost associated with the legal fees and the UK judgment associated with the
legal proceedings with CDV Software Entertainment. Could you just
give me some background on that situation and some additional color
there?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
Okay,
Adam. Excuse me. So the $3.1 million is as is with the
judgment that we have right now. We don’t have a final final but we
do have a preliminary judgment so we had to book… per GAAP, we needed to book
that judgment. We are still talking with CDV and expect to be able to
settle with them favorably.
Terry Phillips – SouthPeak
Interactive Corporation – Chairman of the Board
Yes,
Adam, this was a… This is Terry. Hi. The CDV was part of
an arrangement when we purchase Gamecock last year. (inaudible)
something that we’ve been working on for a while and hope to have a resolution
on, but something that we had to book at this time.
Adam Hershey – SIAR
Capital
Okay. The
other thing is you had gone through the going concern statement in the both in
the press release and on the call. Can you just talk about what are
the items that you are currently dealing with? I think curing the
default of the production advance payable, renewing the line of credit with
SunTrust, and obtaining additional financing. Could you touch on each
of those different items, what you’re doing on each of those, and your strategy
surrounding that?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
Well, on
the bank line, the line of credit, we are hoping to get that settled here
hopefully this week. That is in the works right now. So we
don’t expect that for the next Q. The production advance payable, we
are still working on that one and right now, we don’t really have much of an
update on that one. Terry, you can…
Terry Phillips – SouthPeak
Interactive Corporation – Chairman of the Board
Yes. That’s
actually tied to another issue which we are trying to resolve as an overall…
with the particular group and overall plan to resolve that had something to do
with some gains that we work with them with that company also. So
we’re trying to work on an overall settlement on that
one. Predominantly, we didn’t have a bank line in place at the
moment; that was the primary issue and we think we‘ll have that resolve pretty
quickly.
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
Because
our bank line right now, Adam, has… it’s one that we’ve had in place since 2005
and we basically have had it on a month-to-month basis and so we’re getting it
more formalized now.
Adam Hershey – SIAR
Capital
What does
that line give you today?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
Today at
12:31, it gave us a $7.5 million line with… based on receivables with usually
about $0.5 million over… overdraft and it capped off at 8 and we had a 65%
receivables where you can borrow again 65%.
Adam Hershey – SIAR
Capital
So just
looking at the liability, the line of credit right now is $5.3 million on that
line of $7.5 million?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
That is
correct. Yes.
Adam Hershey – SIAR
Capital
So you
still have some room on the line in the event that you needed to grow the
overall business, is that correct?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
That is
correct. Yes.
Adam Hershey – SIAR
Capital
The other
item I just wanted to touch on very quickly is the… in the accounts of
receivable section, the net of allowance is $6.648 million. Could you
just give me some clarity on what that is pertaining to and what are you doing
as it relates to collection of that receivable?
Reba McDermott – SouthPeak
Interactive Corporation – Interim Chief Accounting Officer
So the
net of allowance is typically in our business, we have price protections, we
MDF, and it’s just a normal course of what we do and this is our receivables in
our business… your receivables are usually about a 30- to 60-day collection and
so right now, the receivables are pretty much in line with where we would expect
them to be. But that is typically the price deductions or any sales
deductions, MDF, marketing development fund, defective allowance, just the
different types of deductions from your gross sales.
Adam Hershey – SIAR
Capital
Okay. Great. And
then just one other note, you had mentioned 20 new titles that you’re going to
be releasing this year, could you just talk about the opportunities that you
see? Just highlight some of the key games of those 20 and how you are
going to market with those?
Terry Phillips – SouthPeak
Interactive Corporation – Chairman of the Board
Yes. Sure. As
we had mentioned, I think Mel and I both mentioned, Two Worlds 2 is one of the
ones we're most excited about. This is the game that we had original
launched in 2008, I believe, and was very successful for us. We’ve
expanded it now to PlayStation 3. With the growth of PlayStation 3
right now, we’re pretty excited about that one. That’s one of our
bigger ones that we’re excited about.
And the
TNA wrestling I think we mentioned that. We have two PSP and a DS
game that we’re pretty excited about on that. We’re working with the
TNA group and with marketing and that brand is very strong… should be very
strong for us.
Dementium
2 is a game that we had done the original game and it was very well received and
we had a sequel for that one coming out again this spring.
Sushi Go
Round is a product that we’re working in conjunction with Miniclip, the download
site for this game. You can download it millions of times and we’re
bringing it to the DS and we seem to have a lot of excitement
there.
We’ve
just launched Crime Scene this week. It’s probably our best
prebooking DS game we’ve ever done. So that’s just hit shelves this
week so were excited to see how that one will perform.
I also
mentioned that were working with Koch Deep Silver and launching the game Risen,
an RPG for the Xbox 360. That’s hitting stores, I think, on the
23rd
of this month and then Prison Break will hit stores this
spring. That’s on the PlayStation 3 and 360.
Somebody
else might help me some other titles. I’m doing it for memory
here.
Melanie Mroz – SouthPeak
Interactive Corporation – President and Chief Executive
Officer
Right. Well,
those are the titles that we’ve announced to date. We have quite a
few titles that we’ll be announcing in the next couple of months.
Adam Hershey – SIAR
Capital
Okay. Great. I
appreciate it. Thank you.
Operator
Thank
you. As a reminder, ladies and gentlemen, if you would like to ask a
question please press *1 on your telephone keypads at this time. If
you are on a speakerphone, you may need to pick up the handset before pressing
the * keys.
Thank
you. There are no further questions at this time. I would
like to hand the floor back over to management.
Terry Phillips – SouthPeak
Interactive Corporation – Chairman of the Board
Okay. Well,
thank you very much for joining the call today. We appreciate you
coming on.
Operator
Thank
you. This concludes today’s teleconference. You may
disconnect your lines at this time. Thank you all for your
participation.