SouthPeak Interactive Corporation Reports Fiscal 2011 Third Quarter Financial Results

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Three Months Ended

March 31,

2011

2010

Net Income (Loss)

$ 3,212,763

$192,140

Depreciation& Amortization

63,288

70,219

Amortization of intellectual property

88,393

95,892

Income taxes

-

-

Interest

1,430,834

393,405

EBITDA

$ 4,795,278

$ 751,656

Noncash stock compensation

118,855

436,405

Adjusted EBITDA

$ 4,914,133

$ 1,188,061

SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended

March 31,

For the nine months ended

March 31,

2011

2010

2011

2010

Net revenues

$

16,118,896

$

7,538,840

$

25,020,808

$

34,312,441

Cost of goods sold:

Product costs

4,975,572

3,778,704

8,834,291

12,474,987

Royalties

2,721,656

3,251,395

5,953,086

9,871,028

Intellectual property licenses

88,393

95,893

280,179

315,350

Total cost of goods sold

7,785,621

7,125,992

15,067,556

22,661,365

Gross profit

8,333,275

412,848

9,953,252

11,651,076

Operating expenses:

Warehousing and distribution

328,669

327,286

677,085

934,520

Sales and marketing

1,633,499

988,226

3,504,668

6,858,902

General and administrative

1,350,875

2,665,494

5,374,272

8,754,206

Litigation costs

-

-

-

3,075,206

Gain on settlement of contingent purchase price obligation

-

(908,210)

-

(908,210)

Gain on extinguishment of accrued litigation costs

-

(3,249,610)

-

(3,249,610)

Loss (gain) on settlement of trade payables

(261,416)

4,118

(846,538)

(3,252,371)

Total operating (income) expenses

3,051,627

(172,696)

8,709,487

12,212,643

Income (loss) from operations

5,281,648

585,544

1,243,765

(561,567)

Other expenses (income):

Change in fair value of warrant liability

638,051

-

(2,424,595)

-

Interest expense, net

1,430,834

393,404

3,739,366

1,201,578

Net income (loss)

$

3,212,763

$

192,140

$

(71,006)

$

(1,763,145)

Basic income (loss) per share:

$

0.06

$

0.004

$

(0.001)

$

(0.04)

Diluted income (loss) per share:

$

0.05

$

0.004

$

(0.001)

$

(0.04)

Weighted average number of common shares outstanding - Basic

57,429,675

45,356,744

57,240,695

45,069,852

Weighted average number of common shares outstanding - Diluted

68,653,293

53,297,317

57,240,695

45,069,852

SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2011

June 30, 2010

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

529,836

$

92,893

Accounts receivable, net of allowances of $1,567,911 and $5,700,931 at March 31, 2011 and June 30, 2010, respectively

2,680,675

3,703,825

Due from factor

1,705,336

-

Inventories

1,197,008

1,211,301

Current portion of advances on royalties

9,479,698

12,322,926

Current portion of intellectual property licenses

353,571

383,571

Related party receivables

7,895

34,509

Prepaid expenses and other current assets

622,795

695,955

Total current assets

16,576,814

18,444,980

Property and equipment, net

2,502,102

2,667,992

Advances on royalties, net of current portion

2,099,160

1,511,419

Intellectual property licenses, net of current portion

1,149,107

1,534,286

Goodwill

7,911,800

7,911,800

Deferred debt issuance costs, net

412,550

-

Intangible assets, net

7,025

17,025

Other assets

10,796

11,280

Total assets

$

30,669,354

$

32,098,782

Liabilities and Shareholders' Equity

Current liabilities:

Line of credit

$

-

$

3,830,055

Secured convertible debt in default, net of discount

4,245,940

950,000

Warrant liability

1,914,153

-

Current portion of long-term debt

67,764

65,450

Production advance payable in default

3,687,177

3,755,104

Accounts payable

9,933,788

12,663,788

Accrued royalties

2,152,917

2,530,253

Accrued expenses and other current liabilities

5,192,308

3,781,711

Deferred revenues

151,152

325,301

Due to related parties

-

2,200

Accrued expenses - related parties

200,809

322,281

Total current liabilities

27,546,008

28,226,143

Long-term debt, net of current portion

1,493,096

1,541,081

Total liabilities

29,039,104

29,767,224

Commitments and contingencies

-

-

Shareholders' equity:

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2011 and June 30, 2010

-

-

Series A convertible preferred stock, $0.0001 par value; 15,000,000 shares authorized; 5,503,833 and 5,503,833 shares issued and outstanding at March 31, 2010 and June 30, 2010, respectively; aggregate liquidation preference of $5,503,833 at March 31, 2011

550

550

Common stock, $0.0001 par value; 90,000,000 shares authorized; 60,188,536 and 59,774,370 shares issued and outstanding at March 31, 2011 and June 30, 2010, respectively

6,019

5,976

Additional paid-in capital

30,848,266

31,154,835

Accumulated deficit

(29,044,331)

(28,973,325)

Accumulated other comprehensive income (loss)

(180,254)

143,522

Total shareholders' equity

1,630,250

2,331,558

Total liabilities and shareholders' equity

$

30,669,354

$

32,098,782

SOUTHPEAK INTERACTIVE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the nine months ended

March 31,

2011

2010

Cash flows from operating activities:

Net loss

$

(71,006)

$

(1,763,145)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

195,430

200,191

Allowances for price protection, returns, and defective merchandise

(598,135)

(573,870)

Bad debt expense, net of recoveries

(72,557)

(23,364)

Stock-based compensation expense

333,138

551,325

Common stock issued to seller for settlement of contingent purchase price obligation

-

245,000

Common stock and warrants issued to vendor

-

104,500

Amortization of royalties and intellectual property licenses

3,508,174

6,235,905

Loss on disposal of fixed assets

-

4,839

Amortization of debt discount and issuance costs

1,406,096

-

Change in fair value of warrant liability

(2,424,595)

-

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

(2,964)

-

Gain on settlement of trade payables

(846,538)

(3,252,371)

Gain on settlement of contingent purchase price obligation

-

(908,210)

Gain on extinguishment of accrued litigation costs

-

(3,249,610)

Changes in operating assets and liabilities:

Due to/from factor, net

(5,167,664)

-

Accounts receivable

5,156,170

582,233

Inventories

14,293

2,060,950

Advances on royalties

(1,610,876)

(5,600,173)

Related party receivables

26,614

(29,404)

Prepaid expenses and other current assets

73,160

(297,519)

Production advance payable

-

3,755,104

Accounts payable

(1,883,462)

(5,420,220)

Accrued royalties

(377,336)

2,477,615

Accrued expenses and other current liabilities

1,545,597

7,153,737

Deferred revenues

(174,149)

(2,547,339)

Accrued expenses - related parties

(121,472)

36,163

Total adjustments

(1,021,076)

1,505,482

Net cash used in operating activities

(1,092,082)

(257,663)

Cash flows from investing activities:

Purchases of property and equipment

(19,056)

(83,225)

Change in restricted cash

-

739,799

Net cash provided by (used in) investing activities

(19,056)

656,574

Cash flows from financing activities:

Proceeds from line of credit

-

23,538,071

Repayments of line of credit

(3,830,055)

(24,143,833)

Proceeds from inventory financing

3,528,237

-

Repayments of inventory financing

(3,528,237)

-

Repayments of long-term debt

(45,671)

(40,943)

Net proceeds from (repayments of) amounts due to shareholders

-

(232,440)

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

(2,200)

(111,845)

Proceeds from the issuance of subordinated convertible promissory notes

7,000,000

-

Payment of debt issuance costs

(733,959)

-

Repayments of subordinated convertible promissory notes

(450,000)

-

Proceeds from the exercise of common stock warrants

1,668

-

Advances from related parties

-

-

Proceeds from the issuance of Series A convertible preferred stock, net of cash offering costs

-

-

Net cash (used in) provided by financing activities

1,939,783

(990,990)

Effect of exchange rate changes on cash and cash equivalents

(391,702)

267,186

Net decrease in cash and cash equivalents

436,943

(324,893)

Cash and cash equivalents at beginning of the period

92,893

648,311

Cash and cash equivalents at end of the period

$

529,836

$

323,418

Supplemental cash flow information:

Cash paid during the period for interest

$

1,224,851

$

383,105

Cash paid during the period for taxes

$

-

$

-

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

$

(641,332)

$

-

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

$

500,000

$

-

Issuance of vested restricted stock

$

41

$

-

Intellectual property licenses included in accrued expenses and other current liabilities

$

-

$

135,000

Contingent purchase price payment obligation related to Gamecock acquisition

$

-

$

477,158

Decrease in goodwill with respect to finalizing purchase price allocation

$

-

$

55,423

Purchase of vehicle through the assumption of a note payable

$

-

$

73,459

Advances on royalties paid with common stock

$

-

$

1,035,000

Purchase of videogame development contract paid with common stock

$

-

$

4,000,000